Operations management in Toyota

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. 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) 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 Tescos 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, Tescos current logistics
strategy is evaluated. The development of a suitable logistics strategy follows using the findings of the prior
evaluation. Also, SWOT and Porters 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 organizations 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
makeorbuy 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.

PEST Analysis
Political
Tescos 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 Tescos 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.

Ansoffs 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 nonfood 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 Tescos
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.

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
Tescos 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-datainterchange (EDI) tools with Internet-based ones that facilitate product comparisons, streamline logistics, and help
business-to-business vendors (Calkins et al. 2000, 140). Tescos 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.