Strategy has always been concerned with matching a firm’s resources and competences to the external environment in order to achieve strategic capabilities. At first, many business and management research have emphasised the effect of external factors on firms. They stated that companies had to establish their strategy primarily according to the key drivers of the macro-environment.
However, the positioning approach fails to explain adequately what determines an organization’s effectiveness. History has showed that some firms were earning money while others not. Hence researchers wondered why companies within the same industry were performing differently.
J. B. Barney and his ‘resource-based view of the firm’ (1991) described the critical role of resources and capabilities in a firm’s strategy and success. Afterwards the importance of strategic capability became a focus for many writers.
To understand and illustrate some of the main theories on resources and capabilities I will apply the case of Tesco and answer the question ‘Why and how Tesco is outperforming its competitors?’
To do so, I will firstly identify Tesco’s resources, capabilities and core competences. Secondly I will explain how Tesco develops those over time.
It is important to distinguish between the resources and the capabilities of a firm. The resources are the firm’s productive assets whereas capabilities are what a firm can do.
According to Grant (2005) an organisation’s resources can be considered as two broad categories: tangible and intangible. Tangible resources are the easiest to identify and evaluate since they are the physical and financial assets of the organisation. Tesco’s tangible resources are, for instance, 3700 stores, 440,000 employees, £60 billion turnover, and £3 billion operating income. Grant (2005) addressed two key questions: ‘what opportunities exist for economizing on their use?’ and ‘what are the possibilities for employing existing assets more profitably?’.
Although they are the most convenient for firms to manage, they stay for the most part threshold resources and Hall (1992) stated that they were not the resources that contribute the most to achieve sustainable competitive advantage. This is why we will focus essentially on the intangible resources.
The intangible resources are invisible assets or skills such as a particular technology, accumulated consumer information, brand name, reputation and corporate culture. Grant (2005) described them as invaluable to the firm’s competitive power due to their potential uniqueness and sustainability. Tesco’s intangible resources are, for instance, a wide knowledge of the retailing industry, a wide customer information, a good brand awareness, a reputation for promoting big brand and service innovations such as 24 hour opening. According to a report presented by Hall (1992), the three most valuable intangible resources are the company reputation, the product reputation and the employee know-how. In order to sustain competitive advantage a firm must have valuable and unique resources, that is, rare, non-imitable and non-substitutable: ‘A firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors’ (Barney, 1991:102).
Thereby what resources a company possesses play an essential role in its strategy and outcomes. However, even if the nature of an organisation’s resources is important, the way it manages them has a significant role too. These organisational competences are the skill to deploy and combine resources effectively in order to achieve strategic capabilities.
Johnson, et al., (2008) stated that a distinction has to be made between threshold capabilities and core competences. Threshold capabilities represent what a company need to do in order to survive in its industry; they are directly linked to the critical success factors. They aim to follow a particular strategy and respond to customer needs by using some resources. For instance, grocery retailers such as Tesco and Sainsbury’s have to present a customer-friendly environment in order to attract a maximum of potential consumers, thus Tesco requires its staff to be helpful toward the customers. These threshold capabilities help an organisation to survive in its industry. Sometimes trade-offs have to be made; the organisation has to keep responding customer basic requirements.
On the other hand, core competences are the ability to create a chain in an organization’s activities by combining resources and capabilities that will be strong enough to lock out imitators.
Porter (1996) noticed that core competences, critical resources and key success factors were the essential components for organisations to achieve competitive advantage. One of Tesco’s key strategic capabilities is its cost efficiency. Perman & Scouller (1999) informed that scale economies are important in distribution and marketing for food industries. Tesco’s 31 per cent of market share has a strategic influence on costs through economies of scale and the experience effect. Thanks to a large volume of sales Tesco has a strong bargaining power, the ability of spreading its overheads as well as specialising and dividing its labour. Having a larger volume of sales than its competitors, Tesco benefits from the Experience Curve, that is, labour efficiency improvement, standardisation, specialisation, a better use of equipment and a technology-driven learning.
Hamel and Prahalad stated that core competences make a disproportionate contribution to ultimate customer value, or to the efficiency by witch this value is delivered and provide a basis for entering new markets.
In short, the challenge of core competences is to fit its strategy between what customers appraised and what the company is good at.
In order to identify more clearly Tesco’s main organisational capabilities, we have established an activity system map:
Exhibit 1 – Tesco’s activity system map*
* This is an extract from an activity map
Tesco has always known that it must have capabilities that are valuable to its customers if it wants to build competitive advantage. This is why its core competences are based on product value, customer service and product range.
Regarding Tesco’s Service, it emphasises on its logistic and customer-friendly environment.
For the former, Tesco’s relationship with its suppliers has evolved from an old deal-based procurement to an Integrated Supply Chain Management. The balance of power has changed; retailers became stronger. The production lines are driven directly by Tesco’s EPOS systems and the suppliers have to carry the stocks. Furthermore, from the supplier side, this is often a unique relationship.
About the customer-friendly environment focus, Tesco trained its employees well, teaching them how to behave in front of customers and to be always helpful. The checkout is a plus for Tesco, something that other grocery retailers do not usually have.
Concerning the product range, Tesco has a control over its supplier’s New Product Development (NPD), thanks to its Integrated Supply Chain Management, that helps to direct innovations toward new or untapped market segments. Furthermore, its wide supplying network enables the firm to be more flexible to market changes.
Concerning the product value, as stated earlier Tesco focuses on selling large volume of merchandise in order to benefit of purchasing buying power and experience learning. This will help in a first time to reduce its unit costs and in a second time to reduce its price without damaging its unit margin. However what we did not develop is how Tesco is achieving simultaneously cost leadership and differentiation. Indeed Tesco is combining low price with perceived value added products. Tesco managed its resources and capabilities through a profound understanding of customer need and value with a low cost base that permits high sales volume with profits for reinvestment to further develop source of differentiation.
Exhibit 2 – The Strategy Clock*
High Waitrose Harrods
Tesco Mark & Spencer
Low Aldi High
* Adapted from Johnson & Scholes
Tesco’s capability for achieving cost leadership and differentiation simultaneously gives it great rewards. Indeed the benefits are additive. According to Porter (1985), achieving differentiation and cost leadership at the same time leads to premium prices combined with lower costs. Hence Tesco generates great profits, so it will be able to invest more financial resources into other strategic capabilities. This’ ideal’ position provides a competitive advantage for Tesco.
So far, by explaining what kind of resources and capabilities Tesco possesses and how it manages them, we have showed that Tesco has settled its strategy around what it is good at and what its consumers consider as valuable.
2. Developing strategic capabilities
Now we are going to see the different ways Tesco has developed its strategic capabilities over time in order to create new competitive advantages.
So far we have assumed that once competitive advantages established they were durable over time, however due to the shifting character of the environment, this statement would be flawed. Indeed customer trend, increasing competition, new technologies cause continuously changes in many industries. Technological changes have caused well established firms to loose their leadership and help new entrants to prosper.
Tesco’s capability to innovate, to be flexible and to adapt rapidly and continuously to this changing environment has been one of its key sustainable comparative advantages. Teece et al. (1997) referred to the firm’s ability to achieve new form of competitive advantages as ‘dynamic capabilities’.
On this matter Tesco has employed two main tools.
Firstly Tesco launched its ‘Clubcard’ in 1995, this functioned more than just a pure marketing offer, it allowed Tesco to collect a wide information about its customers’ interest and to strike to their need using card data. Sainsbury’s refusing at first to adopt this method; Tesco’s success could be attributed to this invention.
Secondly Tesco places emphasis on knowledge integration. Knowledge integration plays an important role in strategic capabilities. According to Grant (2005), knowledge integration is one of the greatest challenges of any organisation since it aims to organise the essential task of almost all organisational processes. Its main goal is to integrate the key knowledge elements across the whole organisation. This is why Tesco has developed an efficient IT integration system. Besides using systems that keep all the stock and deliveries records and analyse business transactions, Tesco has also employed an extranet system. This helps Tesco to create proprietary and customised information flows between the company and its business partners. This system enables business partners to interact safely online thanks to virtual firewalls, improving flexibility, scalability, extensibility and integration across the organisation. Furthermore the key information can be easily extended and shared with business partners. This will help extending Tesco’s reach by delivering buyers to their virtual doorstep from around the world. But this is not the only efficient technological advances that support daily business operations at Tesco. Indeed there are also wireless devices, intelligent scale, electronic shelf labelling, self check-out machine and radio frequency identification (RFID) systems. This technology will enable Tesco to maintain its ability to handle an increase in product and service volume while controlling costs; it also enables to be innovative and market oriented.
Besides thanks to its experience accumulated over time, Tesco has a wide knowledge of the retailing industry. This helps Tesco in terms of strategic direction and decision-making.
In order to analyse where Tesco is placing emphasis from the creation to the delivery of products and services, we have established a value chain:
Exhibit 3 -The Value Chain
Regarding the inbound logistics, Tesco aims to provide wide product lines in order to maintain the level of customer choice. Tesco is also trying to improve the efficiency of its distribution system.
Furthermore, Tesco wants to prevent damaged good s by implementing a better quality control procedure, those costs are unfairly passed on to customers. Tesco focuses on its relation with suppliers. Its distribution network and warehousing are outsourced.
Concerning the operations, Tesco’s activities are service oriented. Tesco emphasises on maintaining the shelves and the stocks, opening seven days a week and according to trading hours. Tesco launched tesco.com in 2000, now the world’s largest grocery online retailer.
In terms of outbound logistics, Tesco currently adds value in its home delivery service. There is a strict customer management policy inside Tesco; its well trained employees have to be friendly and helpful. Tesco tries to improve its parking facilities, trolley collectors and till staff in order to increase the turnaround and thus achieving competitive advantage.
Concerning marketing and sales, Tesco’s ‘Clubcard’ gives further discounts and loyalty for its customers. Tesco currently emphasises on its advertising campaign to enhance its brand awareness.
In terms of service, Tesco focuses on resolving problems with unsatisfied customers by improving ‘Complaint follow up department’. It is known that an unsatisfied customer will most likely speak of its experience than a satisfied one, this could damage Tesco’s brand name.
Concerning the infrastructure, Tesco has reinforced its anti-fraud software in order to reduce internal theft. Planning and control functions focus on the costs and cash control of the company’s operations. The profit protection department aims to reduce shrink.
In relation to Tesco’s Human resource management, the firm wants to increase the number of training schemes, to enhance knowledge learning, which is really important in terms of strategic capabilities. The organisation continues to invest in customer service. Tesco has settled a rewarding system across many functions.
In terms of technology development Tesco has a control over its supplier’s New Product Development, that is, Tesco can direct product innovations toward its customer interest, well identified thanks to its important customer data.
Finally, about Tesco’s procurement, the organization focuses on its information technology communication, which enables Tesco to improve its knowledge integration.
Tesco has created a complex value network. Its ‘unique’ relationship with its suppliers and its ‘interorganisational’ links with other businesses, for instance when the company tied up with Safeway Inc in order to launch its online grocery shopping services, have allowed Tesco to create a complex organisational structure.
Tesco follows a business unit strategy for developing its capabilities. The firm’s activities are organised under four strategic business units (SBUs): ‘Core-UK’, which handles domestic grocery activities; ‘International’, which handles international holdings; ‘Non-Food’, which handles sales of electronics, home goods and other non-food items; and ‘Retailing Services’, which manages financial services, tesco.com website, and Tesco Telecoms services (Tesco, 2008). This organisational structure helps Tesco to be more flexible and to expand its operations in many different directions, continuously exploring new potential markets. For instance, Tesco is able to expand its home furnishing line in the Non-Food strategic business unit without disturbing the resources, policies and practices of the ‘Core-UK’ strategic business unit.
Companies within the same industry follow distinct path to different outcomes. By comparing Tesco and Sainsbury’s over time, we can see that the two companies made many different choices in terms of strategy, managing their resources and capabilities in two distinctive ways.
Many well-positioned firms failed by abandoning their core competences in pursuit of attractive other activities. Every firm’s capability has got boundaries. Tesco seems to know that. Hence, its strategy is settled around what it is good at and what customers consider as valuable.
Tesco’s threshold capabilities and resources help it to cope with the critical success factors of the retailing industry, which include food and non-food products. It is currently the third largest global retailer based on revenue.
Tesco has been able to pursue a hybrid strategy that allow it to outperform the ones adopting one generic strategy such as Morrison and ASDA or the ones who are stuck in the middle such as Sainsbury’s.
Furthermore, the firm has created a complex organisational structure, which provides Tesco sustainable competitive advantages.
In short, Tesco’s success is due to its understanding of resources and capabilities and its correct use for driving its business. Thanks to its strategic capabilities Tesco is now able to expand geographically and launching new products and services.
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