Logistics Strategy: the case of Tesco
Operating in a global market requires the formulation and implementation of effective strategies to establish and sustain competitive advantage. Logistics is among the most fundamental aspects that every organization should effectively manage because it includes the essential flow of goods, information, and other resources. Many empirical and theoretical works acknowledge its all-purpose role in accomplishing tasks in all industries by supporting the integration of information, transportation, inventory, warehousing, material handling, and packaging of products and services (Dennis et al. 2004; Fernie and McKinnon 2003; Harris and Dennis 2002; Vernon 2002; Calkins et al. 2000; Smaros et al. 2000). In the retail grocery industry, logistics do not only function in terms of its usual applications but also an important factor that is integrated in the overall business strategy. Meanwhile, the retail grocery industry particularly in the UK was challenge by various changes for the past decades that affect every organizational operation and other relevant aspects. It is believed that “noticeable issues concerning the development of new forms of competition (discount firms), the increased use of information technology in the management and logistics of groceries, and the diversification of the operating activities of various firms (high proportion of non-food sales)” (Athanassopoulos 2003, 932-33) prompted strategic shift towards alterations of the traditional business strategies employed by the leaders of this industry segment.
Meanwhile, Tesco is among the leading international retailers with a total of more than 3,000 outlets and approximately 600 planned store openings in more than 10 countries (Kumar 2005). Its remarkable expansion since its establishment in mid 1920s from a diversity of formats, markets, and sectors resulted to its satisfactory industry position. Tesco is committed to its long term strategy for growth as based on its four key parts: Core UK, International, Non-food, and Retailing services. According to Tesco’s corporate website (www.tesco.com 2008), their employees accounted to over 450,000 in all its stores around the world. They aim for a consistent delivery of “a strong customer offer on every visit and every transaction by focusing on the Group’s core purpose: to create value for customers to earn their lifetime loyalty”. Furthermore, “this core purpose is delivered through the Tesco values: no-one tries harder for customers and treat people how we like to be treated”. With the current market status of Tesco, this paper intends to explore its strategic position in terms of logistics context. First, this paper reports on the importance of logistics in organizations. After which, Tesco’s current logistics strategy is evaluated. The development of a suitable logistics strategy follows using the findings of the prior evaluation. Also, SWOT and Porter’s Value Chain Management Analyses of Tesco are included.
Importance of logistics in organizations
Logistics plays major strategic roles in organizational operations as well as the environment of the business. Over a number of years, it has been a fundamental component in coming up with a competitive business strategy resulting to a similarly competitive profit edge (Whittington 2001; Heskett 1977). According to Vernon (2002), logistics is a major management task involving the most effective management of the flow of goods and services from origin to the point of delivery particularly to the purchasing outlets and the consumers. Specifically, it consist of a systematic process from inventory holding to product distribution including the aspects of the financial and human resource, which are considered as among the building block of a successfully functioning business (Vernon 2002). Earlier researches found out that increased attention on logistics and its management can contribute to the improvement of an organization’s competitive position particularly among those that operate globally (e.g. Andraski and Novack 1996; Morash et al. 1996; Fawcett and Gloss 1993) like Tesco having stores in other European and Asian countries. In relation to competitive advantage, logistics provide competence in the excellent delivery of products and services through speed, reliability, responsiveness, and low cost distribution (Morash et al. 1996). While organizations exhaust research and development (R&D) efforts in attempting to look over strategic issues such as a close scrutiny and tightening of operational concerns particularly logistics (Vernon 2002), the integration into its operations or even into overall corporate strategy offers considerable impact on customer value as compare to any other process related to operations (Andraski and Novack 1996). Williams and colleagues (1997) identify the benefits of integrating logistics into overall corporate strategy. According to them, the usual costs of operations are reduced, opportunity for new markets is present, customer service is enhanced, and competitive advantage is eventually established and sustained if logistics works in harmony with the overall business strategy.
Furthermore, the fundamental role of logistics in both organizational strategy and organizational environment (Kohn and McGinnis 1997) supports the marketing and customer service relationship strategies implemented by managers (Sautter et al. 1999). It must be understood that logistics is a supportive and complementary element to the marketing function of any organization (Sauter et al. 1999; Lambert and Stock 1993; Rinehart et al. 1989). For example, some businesses like Wal-Mart, another retail grocery business and Levi Strauss, a clothing business pay special amount of attention on their distinctive logistics capabilities with the purpose of maintaining their marketing and customer service aspects as a part of their competitive advantage (Lynch et al. 2000). In terms of marketing particularly on electronic retailing or e-tailing that is also being used by Tesco, the effective in application of logistics is considered as a competitive weapon to survive the unstable environment of online marketing (Dvorak and Van Paasschen 1996). E-tailing or online grocery retailing still uses the standard functions of logistics with the addition of the convenience of the Internet in terms of automation of many – if not all – processes and operations and creates a wide-reaching, 24-hour/day presence at a very reasonably low cost (Guttman 2002; Castells 2001). Logistics in online grocery retailing is a tool for increased efficiency and convenience (Dennis et al. 2004). It augmented the growth of retailer power to control their supply chains (Boyer and Hult 2005). The physical involvement of retailers is reduced but the supply chain management become more effective with the use of modernized equipment for operations (supplier and retailer linked) (Dennis et al. 2004). In customer service, the Internet contains profound effect on strategic thinking because of its expected ability to transform organizational cost structures and modify communication patterns with customers (Boudreau and Watson 2006). In general, logistics plays a strategic role in many companies (Mentzer et al. 2001; Mentzer and Williams 2001). Marketing and logistics must work in tandem for the customer to be satisfied particularly in both physical service factors (logistics) and intangible service factors (marketing).
Strategic position of Tesco: an evaluation from a logistics context
It must be considered that businesses respond to various conditions that occur and affect their immediate niche market and environment. There common responses include the modification of business competencies including their internal capabilities and linkages with suppliers and associates and the distinct ways in which they position themselves in relation to their competitors specifically on the case of strategic direction. The value chain also is useful in retailing decision-making. Understanding the linkages between activities can lead to more optimal make–or–buy decisions that can result in either a cost advantage or a differentiation advantage. The goal of these activities is to create value that exceeds the cost of providing the product or service, thus generating a profit (Del Vecchio 2000). In the case of Tesco, the entire operation of the business should be examined and evaluated in relation to the current trends in the UK as well as global retail grocery market. According to Gurdjian and group (2000), it is important to understand local market conditions especially consumer behavior, competitive environments, management styles, and legal regulations because there are different variations across Europe and also globally. Considering Tesco operates in other European countries and Asian regions, understanding contributing factors help in determining the service delivery processes that strengthen as well as weaken the entire business operations. This will result to managerial options to eliminate the liabilities that detract the business or the need to developed and intensify some aspects of the operations.
SWOT Analysis
Strengths
Its management provided its historic stay in the business is tantamount to having a wide knowledge of the retail industry that makes Tesco a market leader.
Tesco has its distinctive long term growth strategy focused on four key parts: Core UK, International, Non-food, and Retailing services.
Tesco’s competent top management and orderly rank and file for operation and maintenance support its entire business in all levels. Tesco’s Board comprises six Executive Directors and seven independent Non-Executive Directors plus a Non-executive Chairman.
Considering its long stay in the retail industry, it has its existing customer base and a market leader in five countries.
Financial investment backing is substantial.
Tesco is also among the most frequently visited online retailers as supported by strong returns of investment through building sales in internet shopping.
Weaknesses
With almost over 3,000 stores operating internationally and for more than 500 planned store openings, low supervision on international market is perceptible.
There is a high turnover of employee that could be possibly attributed to their inability to manage human resources.
Since Tesco is an international retail business, it requires the presence of local partners.
Opportunities
Tesco is able to extend its target market in relation to their more than 500 intended store openings last year up to now.
It is considered that Tesco is given the opportunity to have a healthy market environment like any other business and industry.
The opportunity to come up with the most effective resource-based strategy to compete with its rivals is always at hand.
Threats
Economic restructuring is always a threat in any other business and area of industry.
Operating in the most competitive marketplace especially in the retail industry, Tesco faces the inevitable threat of rapid and hyper competition.
Tesco faces the threat of variation and compliance to government regulations especially that there are stores in other countries in Europe and Asia.
PEST Analysis
Political
Tesco’s case in compliance with the existing government regulations and relevant legislations is unquestionable. Most Tesco store outlets within UK operate under specific national legislative and entrepreneurial provisions and same us true to other store outlets outside UK. The intended business expansion on other locations, however, is crucial provided that the senior management must be able to evaluate national environment particularly on the case of political systems, security, and stability (e.g. China). For example, Tesco cannot easily open up a store in countries that are prone with political risks resulting to economic problems and uncertainty. It is because the political environment of any business plays a significant function particularly in the process of production and generation of revenues.
Economic
It could be considered that all businesses are directed to revenue-making, reflecting that the economic conditions of a business environment are as good as the financial performance of the organization. On the case of Tesco, economic trends influence its operations. The currency rates, inflation rates, and consumer purchasing power are among the trends that the senior management must anticipate and appropriately provide remedies. This applies to Tesco’s current markets as well as the intended openings of store outlets in other parts of the world.
Social
Social considerations are related on the aspects that describe the society, people, culture, and circumstances surrounding the organization and might create significant impacts on its operations. For example, Tesco are able to easily relate on environments that are similar to the UK, wherein social conditions and people and their cultures do not differ considerably. It must be considered that some Western brands are prohibited on some regions (e.g. Japan). The social environment is where the business is bound for.
Technological
Technology for Tesco is an indispensable factor in its overall operations. The advancements in technology benefits Tesco especially because Tesco maintains a strong online customer base. Technological innovations create new market opportunities for Tesco to strengthen their current competitive advantage. Technology and innovations are synonymous. This is the reason why Tesco invests on technological infrastructures to stay innovative in all the ways they do business.
Ansoff’s Product/Market Matrix
Market Penetration
Tesco perfected its long term growth strategy based on four key parts. The openings on other locations are supported by their purpose of growth in the Core UK, expansion of international retail industry, strong non-food and food services, and outstanding customer services. Tesco uses competitive pricing strategies, advertising, and other sales promotions to sell existing products and services to existing markets.
Market Development
The intention of Tesco to expand beyond its current business environment is supported with coming up with new product dimensions, distribution channels, and other strategies (e.g. pricing) with exclusive purpose of attracting customers to build a new market. On the case of Tesco Malaysia, producers are mainly Malaysians because they understand the needs of the Malaysian market. This is one unique strategy that developed Tesco’s new market for theie existing products and services.
Product Development
The risks of introducing a new product or service in an existing market are countless. For Tesco, their growth strategy on the expansion of non-food is an example. Tesco introduces other services aside from food to their existing market. Like in market penetration, various strategies (e.g. pricing, advertising, and sales promotions) are significantly considered.
Diversification
Diversification is investing on new markets using new products or services. Tesco should understand the presence of risks on this process. The use of intensive research and development (R&D) efforts is necessary.
Porter’s Generic Strategy Analysis – Differentiation
It is acknowledge that Tesco generally uses the differentiation business level strategy. Tesco is always on the look out for new products and services that is characterized as being different in ways that are different to the customers. Value is added in Tesco’s products and services. Accordingly, a successful differentiation strategy are evident on the capability of the organization to come up with matchless attributes including design, brand image, reputation, technology, product features, networks, and differentiated customer service. Differentiation is resource-based competitive advantage. The effectiveness of differentiation business level strategy is reflected on the progressive performance of Tesco during the recent years. However, there is a call for integration of differentiation and cost leadership strategies because of various conditions and differences on their markets and customers.
Value Chain Management Analysis
Tesco has distinctive characteristics such as more than just a grocery store, strong loyalty Clubcard Programme, growing non-food market share (e.g. Tesco direct), retailing services (i.e. tesco.com, Personal Finance, and Telecoms), cause related marketing, enhancing quality, and efficiency enhancement in products and services. Tesco is not just a grocery but considered as a shopping mall as it offers a wide assortment of products and services to consumers. Aside from grocery products, it sells books, CDs, digital music, videos, flowers, games, gardening, gas, holidays and flights. They also provide financial, insurance, telecoms, and healthy living services. Its Clubcard Programme enhances strong loyalty and stimulates brand awareness. It also allows Tesco to know its customers and comply with their interests and products using card data (Humby et al. 2003). The growing non-food market share (e.g. Tesco direct) supports its financial performance because sales are growing faster than core operations. Similarly, the retailing services (i.e. tesco.com, Personal Finance, and Telecoms) are significant building blocks of its marketing strategy resulting to competitive advantage. In terms of cause related marketing, Tesco have its committed corporate social responsibility to people, organizations, and the environment. Also, Tesco holds the ability of enhancing quality as shown in the daily one and a half hour meeting of top managers to look over that week’s performance statistics. Lastly, efficiency enhancement reflects Tesco’s efforts of doing things the “better, simpler and cheaper” ways for both employee and customer levels.
For Tesco, since it uses the differentiation business level strategy, there is a need to change to cost leadership business level strategy. The Value Chain Analysis points out on its primary activities particularly of inbound and outbound logistics. In inbound logistics including material handling, warehousing, and inventory control and outbound logistics including collecting, storing, and distributing products to customers, Tesco uses considerable amount of financial resources to the total cost to produce some goods and services. Achieving competitive advantage through logistics and its effective management creates value when integrated with cost leadership business level strategy rather than on the case of differentiation business level strategy (Lynch et al. 2000). To do this, Tesco must be able to come up with valuable ways to reduce costs particularly on primary activities like inbound and outbound logistics.
Superior effectiveness of the computer-controlled logistics schemes is seen in Tesco (Fernie and McKinnon 2003). In terms of its e-tailing, the process of placing grocery orders over the Internet that utilise highly automated centralized warehouses and computerized logistics structures is more efficient as to compare with groceries in the supermarket. On this case, Tesco should be able to establish contact to prospective customer and achieve an exchange of merchandise for payments not always requiring a visit to a physical store (Dennis et al. 2004). Some retailers saved a significant amount of their resources in operations “by replacing electronic-data-interchange (EDI) tools with Internet-based ones that facilitate product comparisons, streamline logistics, and help business-to-business vendors” (Calkins et al. 2000, 140). Tesco’s challenge is to look over the existing strategies in e-tailing in accordance to the varying trends in online retailing, consumer buying behaviors, marketing communications, needs and demands, and so on. In connection, implementing marketing strategies requires the need for continuing optimization or the ability to assess a myriad of possibilities in order to find the best one or near best one (Hoctor and Thierauf 2003). Strategies must be evaluated and improved by integrating other elements of marketing and management. Tesco must reach out to a broader target market and must project an image relevant to every members of the society. Its corporate social responsibility must be defined.
Meanwhile, the service delivery is an interactive and dynamic process that from the consumer’s point of view is much more than a passive exchange of money for a particular service. Tesco needs to strengthen its relationship with suppliers and increase market share based on the characteristics of services (e.g., intangibility, heterogeneity, simultaneity, and perishability) (Thompson and Strickland 2003). This effort will result to parallel business interests that will contribute to the beneficial effects to Tesco and its management as well as the suppliers’ business objectives. Contract agreements and other business transactions should present advantages and benefits for both parties. Efficient delivery of products and services through premeditated and tactical supply chain management initiatives should be prioritized.
For Tesco, the management is prompted to take means based on current market conditions implied in research and development (R&D). Goal-setting is always elementary and crucial. There is a need to identify the key stakeholders and their priorities, understand and incorporate their perspectives to the future plans of the company. The conflicting interests of various stakeholders are perceived to be barriers for effectiveness and among the most primary management issue. On this case, Tesco should be able to unite stakeholders’ and organization’s interests and wellbeing by having a strong will of central leadership and administration that is supplemental to the overall mechanisms in the workforce. Moreover, Tesco should cultivate growing consumer markets to promote growth and development of the business instead of debating over catering to all the needs of the stakeholders. This action will deliberately provide rationale on the expansion opportunities of the organization to serve not only the current target market and local customers but to a larger target market and customer base. As such, international relations and the overall business practices and trends should be individually investigated so as to make sound decisions that will realize the goals set by the management. Furthermore, Tesco should continue cultivating community relations and environmental efforts to increase market visibility and improve brand strength. The existing cause related marketing should use cost leadership strategy, which targets a broad market and aims to present customers with products at a low cost for a given level of quality (Hitt et al. 2003). Community programs that will advertise the humanitarian causes Tesco, charity and scholarship programs, and advertising messages that translates the environmental concerns of the business will sufficiently stand in support to the overall business strategy. In this case, Tesco may be able to sustain a competitive advantage based on cost leadership strategy when its rivals are unable to lower their costs by a similar amount used to finance these cause related marketing actions.
As for the nature of managing Tesco’s financial resources, finance managers face a wide array of challenges, opportunities and options enhance the investing and financing activities of the business as well as the inherent risks and circumstances of the decisions that will be made. Today, the challenge for every company is to explore the options and take advantage of the opportunities while taking caution in managing the risks (Macmenamin 1999). Tesco, with the recommendation of shifting to cost leadership business level strategy, needs to keep its operational expenses within a specified budget allocation in order to devote the necessary financial resources to both exploration and marketing activities of the company. Financial management decisions that will supply for the internal and external business operations Tesco should be closely monitored to be able to control the flow of cash. Investing on profit-generating projects as well as training-specific programs for the human resources will also ensure an extended success.
Lastly, Tesco must be able to recognize technological changes and innovations particularly on its e-tailing business. Tesco should enhance marketing campaigns and take advantage of the opportunity to control its defined online customer base. It should initiate efforts to come up with sound advertising and promotional strategies that will bring the people closer. Tesco is required to improve technological infrastructures through innovations to increase efficiency as well as quality of the products and services. This includes investments on machineries and equipment that will necessitate the increased and efficient operation of the business organization’s management system. Financial assistance on human resources particularly to knowledgeable and skilled individuals should be accorded in order to improve the overall business operation as well as the engineering, monitoring, and control aspects of the business. Technology management that is rooted on the idea of effective application of technology to create maximum profitability and performance should be perfected. It is necessary for Tesco to extend its technology management not only on the aspect of technology but also on the role of human labor force and their intervention and most especially in logistics context. All in all, Tesco’s senior executives who think about how to establish and sustain competitive advantage using logistics strategy should consider how to tailor their own logistics. To do so, they will need a sound understanding of the fundamental principles of good logistics as well as exploring new logistics capabilities.
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