Morrison Supermarket PLC
Morrison’s is the fourth largest supermarket chain in UK. The company was founded in 1899 and it currently runs over 370 stores across the country. Unlike its main competitors, the retailer chose to focus on groceries and homewares and leave behind other products such as clothes and furnishings. Its strategy is centered on being efficient while providing basic products (e.g. food) and sell only in large stores.
At year end 2007, the company declared a Â£12,462 million revenue and Â£248 million in net income. At the end of the same year the company’s personnel was hiring over 118,000 employees nationwide (Morrison’s corporate website, Accessed April 2008).
The retailer’s operations are split on six major areas: Midlands – with 75 supermarkets, North – with 72 supermarkets, South East – with 63 supermarkets (one of which in Gibraltar), South Central – with 62 supermarkets, South West – with 51 supermarkets and Scotland – with 51 supermarkets.
II.1. The theory of swift even flow
The original theory of swift even flow (Schmenner & Swink, 1998) suggests that a process’ productivity increases as materials flow through the process and decreases with either the steps in the process or the demand on it. Without underestimating the capital -intensive character of those factories that have adopted a continuous flow process, these authors argue that productivity stems from the speed to which materials flow in the process and it falls when factors such as variability enter the equation.
In a later study, Schmenner (2001) hypothesized that those companies that had adopted a swift even flow should have performed better than those who hadn’t. Indeed, major companies such as: Procter & Gamble, Standard Oil or Ford Motors stand as an example of swift even flow’s success, whereas U.S. Steels’s failure points out how rejecting this productivity method could lead to the failure of a giant as such.
Some of the basic issues related to swift even flow that need to be addressed refer to either swiftness or variability as follows (Schmenner, 2002):
Reason and place where materials lose time in the process
Inventories and bottlenecks reduction
Waste reduction in the materials/information flow
Ensure “once in motion, always in motion”
Reason for flow interruption or disconnection
Identification of problems with materials and service be Orders’ irregularity arrival/size
Number of product/service irregularities
Added complexity cost attached to volume and product variability
Time spent by people/machines on variable time consuming products/services
II.2. The theory of performance frontiers
The theory of performance frontiers defines the performance of a given firm as the position of in an n-dimensional space of possible performance levels. The performance in this space is limited by the performance frontier (Schmenner & Swink, 1998), which may well be an extension of the production possibility frontier (Holmstrom, et.al., 2006). The ultimate performance frontier as generally quoted by the economic theory is the available technology, although Schmenner & Swink (1998) argue that other factors other than this one may limit performance before technology.
Performance optimization can be seen as either the attempt to get closer to the performance frontier or as the frontier’s shift further in order to achieve a competitive benefit (Hayes, et.al., 2005). However, Holmstrom, et.al. (2006) argue that a productivity frontier shift is the case of extraordinary productivity drivers, such as the emergence of Internet or usage of radio frequency identification (RFID) chips.
FIG. 1 – PERFORMANCE IMPROVEMENT PATH
Source: Lapre & Scudder (2004)
The so called performance improvement path introduced by Hayes & Pisano (1996) and Clark (1996) refers to the actions undertaken by companies while attempting to improve their performance. Lapre & Scudder (2004) picked up from the former and raised a key question: should improvement attempts be approach on several dimensions simultaneously or separately (e.g. cost or quality/cost and quality).
II.3. Morrison’s operations strategy and service delivery system
The UK supermarket industry is a mature one in which the following can be considered success determinants: value chain integration, value for money, customer experience, cost management and marketing power. Morrison’s excels in the first four categories, but needs improvement in the last two. In fact, its superior value chain integration and the ability to provide cost benefits to its customers differentiated its services from those of its competitors.
In terms of operations management, the company has a well developed internal system which integrates production, logistics and marketing in the house. Thus:
The retailer is the largest in UK to produce and sell its own food – almost 80% of the fresh fruits and vegetables. For the customer this is translated into fresh food of good quality. Furthermore, because there is no middleman between buyers and the retailer, the products are sold at lower prices. Other retail products are provided in the same way through the company’s inbound logistics system.
In terms of operations, the retailer considers its supermarkets its shop floors. Customers are provided with a unique shopping experience and the company managed to develop successful concepts such as the Market Street, which stands for natural, fresh products. In this section, the buyers get to see how the products are processed for several food categories, such as: cakes (the Cake Shop), fish (Fishmonger), bakery (Oven Baked), meat (Family Butcher), grocery (Greengrocer) and more sophisticated food (the Delicatessen).
The customer-related outbound logistics still needs improvement despite checking out and parking facilities that the company offers to its customers. The other large supermarket players, such as Tesco and Sainsbury offer better services in this area.
The distribution from production place to the selling one is done through a sophisticated distribution system, which uses third-party contractors for some activities. The largest contractor is DHL Exel Supply Chain, which currently runs eight distribution centers. For other activities, such as flowers, the retailer is using one of its own subsidiaries called Wm Morrison Produce Ltd., which ensures transportation in special conditions meant to preserve the products at a given temperature and humidity. The meat production, transportation and selling is also completely integrated in its value chain.
The company’s operations strategy is focused on vertical integration along the value chain. The vertical integration refers to the control of one owner over several stages in the value chain. More specifically, a company is vertically integrated when the business units owned by it are organized in a hierarchical manner and they produce different goods/services, which are all contributing to the company’s goals. Morrison’s is running complex production and logistics systems that enable it to deliver medium quality goods in an efficient manner (low cost and high speed). The retailer’s latest acquisition, Safeway, allowed it to compete with larger players in the UK supermarket industry, such as Tesco. One of the most post-acquisition challenging steps to be undertaken had to do with implementing its traditional uniformity policy in the Safeway network, as the latter was used to flexibility in terms of price setting, promotions, stocking and recruiting additional staff. At one point, the company was faced with a general dissatisfaction of all Safeway employees, when the company decided to shut down Safeway’s supply chain system, which was far more complex than its own and use its old system, thus reverting from automatic to manual activities in many areas. The positive aspect of this event is that Morrison’s flaws in terms of it endowments were highlighted.
The retailer is a perfect example of a company successfully adopting a swift even flow strategy. Since the very beginning, uniformity was seen as a key to success and most decisions were made to insure it. The positive side here is that, by doing so, the retailer provided its customers with a very good shopping experience and a good cost/quality ratio. The negative side of uniformity is that it inhibits innovation and given that the industry is very dynamic and competitive, technology is a crucial factor for all firms to reach a better point on their performance frontier.
Although the UK supermarket industry is a mature one, Morrison’s has plenty opportunities to grow as there are many options that are underexplored by the company, such as online activity or complex logistics solutions that are able to automate many of the currently manual activities. The online retail is a segment that is expected to increase to a large extent in the future. However, Morrison’s lacks both the it infrastructure to enable it and the market share for this segment. The complex logistics solutions can either be developed in-house or adopted from one of the acquisitions, such as Safeway’s system. According to Martin White, retail specialist and former Sainsbury’s supply chain manager, Safeway logistics system “allow it to do real-time store stock management, and fingerprint scanning technology for monitoring performance management” (Knits, 2005). However, Morrison’s lacked all these utilities and after struggling to integrate this superior technology, it was decided that is better to remove it completely.
Summarizing, the company has gained a competitive edge on its uniformity strategy, becoming a label for good value for money and shopping experience over the time. However, given the dynamics of the industry, the retailer needs to take a step forward and innovate around its process to stretch more on its performance frontier space.
III.1. Value innovation and Blue Ocean Strategy
The Blue Ocean Strategy was developed by Kim and Mauborgne (2005) and it’s the result of long-term strategy study over 30 industries covering 120 years. The core idea of this theory is to create value for the firm and its buyers by taking the differentiation-cost trade-off to a different level. Successful firms may want to create “blue oceans,” which represent the new/innovative solution in order to become more competitive, rather than compete in “red oceans’, which stand for the existing market place (see table 1).
TABLE 1 – RED and BLUE OCEAN STRATEGIES
RED OCEAN STRATEGY
BLUE OCEAN STRATEGY
Compete in existing market space
Create uncontested market space
Beat the competition
Make the competition irrelevant
Exploit existing demand
Create and capture new demand
Make the value-cost trade-off
Break the value-cost trade-off
Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost
Align the whole system of a firm’s activities in pursuit of differentiation and low cost
www.blueoceanstrategy.com, Accessed April 2008
The authors define the notion of ‘value strategy’, which is the key to achieve a blue ocean. Thus, companies need to innovate in order to create value for them and for their buyers. Furthermore, the same authors argue that Michael Porter’s (1980) suggested keys to success – low cost or niche penetration – are not the only options. Firms should try to offer both increased value and low cost by creating new value that is stretching beyond conventional limits.
Whereas the theory of swift even flow focuses on minimizing variability and standardizing processes to increase productivity, the blue ocean strategy is taking a different approach of “stepping outside the box” and increase productivity by increasing value through innovation. The second theory implies that variability is not undesirable as long as it’s translated into value innovation. In terms of performance frontiers, the blue ocean strategy corresponds to a direct shift from one curve to another without increasing costs.
III.2. Morrison’s value innovation
The takeover bid made by Morrison’s to Safeway made business sense as the former, unlike the latter, didn’t have a strong national presence before making this step. The result was a worthier competitor for the supermarket giants in the UK industry (see fig.2).
FIG. 2 – UK INDUSTRY CONCENTRATION BEFORE and AFTER SAFEWAY’S ACQUISITIONS by MORRISON’S
Note: as of January 2004; Source: internet data
Fig. 2 shows how Morrison’s market share increased from 6% to 15.8% after acquiring the Safeway supermarket chain. The figure also depicts a rather concentrated oligopoly market structure in which the four largest retailers dominate 75.4% of the business.
Prior to the acquisition, the retailer’s market growth strategy was an organic one focused on the grocery segment. The organic growth refers to the situation in which a company expands through internal means and by using the profit generated by its current activities. The company also used to resort to vertical integration to internalize more and more activities along the value chain, thus saving third-party related costs, reducing production to consumer time and also reducing the dependence to external suppliers.
Safeway’s acquisition was translated into a horizontal acquisition. Horizontal acquisitions refer to the situation in which a company expands in the same industry and same products and its purpose is to increase market share. Additionally, Morrison’s increased its geographical diversification and achieved considerable economies of scale, which enabled it to compete better in its industry.
In terms of blue ocean strategy and value innovation, there are a number of opportunities for Morrison’s to improve its service, growth and profitability, such as:
Create uncontested market space. The retailer expanded its market space when it bought Safeway supermarket chain. The corporate decision was to transform the large Safeway stores into Morrison’s ones and leave the rest to function under the Safeway brand. Nevertheless, the company increased its market share substantially. Given that the UK Competition Commission had to approve the acquisition, similar mergers/acquisitions in exactly the same industry are not likely to take place. Thus, to create further uncontested market space, Morrison’s would have to take under consideration other options, such as diversifying the product/service portfolio by acquiring business in a different industry. One good example for this situation is Dell’s application of call-center and it meant to sell mass customized computers. Shortly, the computer manufacturer engaged in a build-to-order strategy that led to more efficiency (by eliminating the obsolete) and a better customer experience (products were customized). Morrison’s could move in the same direction and get closer to its customers to sell products and provide services that fit better the buyers’ needs and wants.
Make the competition irrelevant. This task is very challenging as technology development made it almost impossible for firms to find unique assets or capabilities that enable them to make the competition irrelevant. Nevertheless, Morrison’s can rely on a number of buyers that don’t typically shop from the large supermarkets, but from smaller shops. The retailer inherited some of these customers from Safeway and could try to grow in that direction.
Create and capture new demand. Morrison’s already has some experience in this area through its Market Street concept, which determined customers that otherwise bought from the market to buy from the supermarket. Similar products can be introduced to attract buyer that otherwise buy from specific shops, such as pharmacies for cosmetic products.
Break the value-cost trade-off. Morrison’s is already providing a very good value-cost ratio to its customers. The cost can be reduced by taking further advantage of its scale and scope economies and the value can be increased by maintaining close relationships with its customers and flexibility to adapt to its needs.
Align the whole system of a firm’s activities in pursuit of differentiation and low cost. Morrison’s can make major it related improvements that could enable the company to be more efficient in terms of speed, costs and quality. Thus, an integrated logistics system would improve both production and distribution in a direct manner, in terms of costs and speed and customer service indirectly in terms of costs, speed and quality. Moreover, concentrated marketing campaigns focused on one concept at the time, such as the Market Street should differentiate the retailer from its competitors in the customer’s mind and increased its mind share.
Blue Ocean Strategy official website, Accessed April 2008, www.blueoceanstrategy.com
Clark, K. 1996. Competing Through Manufacturing and the New Manufacturing Paradigm: Is Manufacturing Strategy Passe’? Production and Operations Management, vol. 5(1): pp. 42-58.
Hayes, R.H. & Pisano, G.P. 1996. Manufacturing Strategy: At the Intersection of Two Paradigm Shifts, Production and Operations Management, vol. 5(1): pp. 25-41.
Hayes, R.H., Pisano, G.P., Upton, D.M. & Wheelwright, S.C. 2005. Operations, Strategy, and Technology: Pursuing the Competitive Edge. Wiley: New York.
Knits, M. 2005. Morrison’s Turns off Safeway Supply Chain Systems. Computing, 29th of June issue, www.computing.co.uk
Holmstrom, J., Hameri, a.P. & Ketokivi, M.K. 2006. Operations Management as a Problem Solving Discipline: A Design Science Approach, Teknillinen korkeakoulu – Department of Industrial Engineering and Management, Working Paper No 2006/1.
Kim, W.C. & Mauborgne, R. 2005. Blue Ocean Strategy – How to Create Uncontested Market Space and Make the Competition Irrelevant. Harvard Business Press School.
Lapre, M.A. & Scudder, G.D. 2004. Performance Improvement Paths in the U.S. Airline Industry: Linking Trade-offs to Asset Frontiers. Production and Operations Management, vol. 13(2): pp. 123-134.
Morrisons’ corporate website, Accessed April 2008, www.morrisons.co.uk
Porter, M.E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press.
Schmenner, R.W. & Swink, M.L. 1998. On Theory in Operations Management. Journal of Operations Management, vol. 17(1): pp. 98-113.
Schemenner, R.W. 2001. Looking Ahead by Looking Back: Swift, Even Flow in the History of Manufacturing. Productions and Operations Management, vol. 10(1): pp. 87-96.
Schemenner, R.W. 2002. Looking Ahead by Looking Back: The Power of Swift, Even Flow in Operations. International Institute for Management Development – IMD – Perspectives for Managers.
Fig. 1 shows that an improvement in quality leads to higher costs as the firm moves from a to B. An effort to reduce costs, will lead to a better performance frontier, from B. To C. Moving from a directly to C. would mean that the company is improving both costs and quality.