Case on Study of the Relationship between Retail Value Propositions and Supply Chains

Description
Retailers face many challenges: time-to-market reductions are necessary due to shorter and shorter product life cycles, greater product variety causing more fluctuation in demand calls for high responsiveness in supply chains, and the ever increasing need for shorter lead times continues.

International Management
Master Thesis No 2003:18

Retail Supply Chain Management

-A case study of the relationship between retail
value propositions and supply chains

Martin Gullberg & Peter Lundvall

Graduate Business School
School of Economics and Commercial Law
Göteborg University
ISSN 1403-851X
Printed by Elanders Novum

iii

Abstract
Retailers face many challenges: time-to-market reductions are necessary due to
shorter and shorter product life cycles, greater product variety causing more
fluctuation in demand calls for high responsiveness in supply chains, and the
ever increasing need for shorter lead times continues. However, as a result of
the power that comes with control over consumer contacts, retailers today have
the opportunity to organize the work in their supply chains in suitable ways.

This thesis focus on how retailers organize their supply chains in light of how
they choose to compete in consumer markets, and asks the question: how are
supply chains affected by retail value propositions? Three case studies have
been conducted in order to answer this question. Two of the case companies
were considered to utilize cost-based competition, and it was investigated how
they had organized activities in order to deliver their specific value
propositions. Equivalent research of a third case company utilizing time-based
competition was conducted. The study’s findings are in line with theories in
this field, i.e. that the nature of products’ demand pattern is crucial for that
which should be focused on, and that physical efficiency is important in cost-
based competition and market responsiveness in time-based competition.

Keywords: Supply chain management, retail, strategy
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Table of contents

1 Introduction.............................................................................................................. 1
1.1 Background....................................................................................................................1
1.2 Problem area and research purpose................................................................................2
1.3 Research questions.........................................................................................................3
1.4 Methodological issues....................................................................................................4
1.5 Thesis outline..................................................................................................................6
2 Supply chain management....................................................................................... 7
2.1 What is a supply chain?..................................................................................................7
2.2 Different supply chains for different products.............................................................10
2.3 Strategy: delivering the value proposition....................................................................13
2.4 Summing up.................................................................................................................16
3 Cost-based competition.......................................................................................... 17
3.1 J ust-in-time logistics.....................................................................................................17
3.2 Efficient consumer response.........................................................................................18
3.3 Activity map with a cost-based theme..........................................................................19
4 Case 1: Ge-kås ........................................................................................................ 21
4.1 Introduction..................................................................................................................21
4.2 Ge-kås’ value proposition............................................................................................22
4.3 How Ge-kås deliver its value proposition....................................................................24
4.4 Ge-kås’ strategic position.............................................................................................28
5 Case 2: Ica............................................................................................................... 31
5.1 Introduction..................................................................................................................31
5.2 Ica’s value proposition.................................................................................................33
5.3 How Ica deliver its value proposition...........................................................................35
5.4 Ica’s strategic position..................................................................................................38
6 Time-based competition......................................................................................... 41
6.1 Why time is important..................................................................................................41
6.2 The lead-time gap.........................................................................................................42
6.3 Quick response.............................................................................................................44
6.4 Product flow analysis...................................................................................................45
6.5 Activity map with a time-based theme.........................................................................48
7 Case 3: Lindex ........................................................................................................ 49
7.1 Introduction..................................................................................................................49
7.2 Lindex’ value proposition............................................................................................50
7.3 How Lindex delivers its value proposition...................................................................55
7.4 Lindex’ strategic position.............................................................................................61
8 Conclusions ............................................................................................................. 65
8.1 Main findings................................................................................................................65
8.2 Reflections upon applied theories................................................................................70
8.3 Recommendations for further research........................................................................71
References .................................................................................................................. 73
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Figures
Figure 1: Thesis outline............................................................................................................ 6
Figure 2: Flows in a marketing channel ................................................................................... 8
Figure 3: Matching supply chains with products................................................................... 12
Figure 4: Activity map of Ikea............................................................................................... 20
Figure 5: Ge-kås’ total sales 1963-2002................................................................................ 22
Figure 6: Activity map of Ge-kås........................................................................................... 29
Figure 7: Organizational chart of Ica Sweden AB................................................................. 32
Figure 8: Ica’s distribution system......................................................................................... 36
Figure 9: The product’s way at Ica’s distribution centre in Kungälv..................................... 37
Figure 10: Activity map of Ica............................................................................................... 39
Figure 11: The lead-time gap................................................................................................. 42
Figure 12: Closing the lead-time gap..................................................................................... 43
Figure 13: Functional view of supply chains......................................................................... 45
Figure 14: Process view of supply chains.............................................................................. 46
Figure 15: Network view on supply chains............................................................................ 47
Figure 16: Cost-adding versus value-adding time.................................................................. 47
Figure 17: Activity map of Zara............................................................................................. 48
Figure 18: Organizational chart of Lindex group................................................................... 50
Figure 19: Activities in Lindex’ supply chain........................................................................ 56
Figure 20: Product branding strategies................................................................................... 57
Figure 21: Classification of Lindex’ suppliers....................................................................... 58
Figure 22: Product lead times................................................................................................ 59
Figure 23: Activity map of Lindex......................................................................................... 61
Figure 24: Division of the cost of activities........................................................................... 69

Tables
Table 1: Functional versus innovative products: differences in demand............................... 10
Table 2: Physically efficient versus market responsive supply chains.................................. 11
Table 3: Product flow comparison......................................................................................... 16

1

1 Introduction
1.1 Background
Our time is extraordinary - competition has never been fiercer and changes
never more revolutionary! The message is always the same, but nevertheless
hard to argue against. Globalization, deregulations of markets, and IT-
developments are major changes that clearly affect our societies, and the
environment wherein companies operate.

In his high-ranking work “The Rise of the Network Society” sociologist Manuel
Castells (2000) depicts what he consider the crisis of the traditional corporate
model of organization, based on vertical integration, hierarchy, and functional
management. During the last century, when demand became unpredictable in
both quantity and quality, when international markets became too diversified
and thereby difficult to forecast, and when the pace of technological change
made single-purpose production equipment obsolete, the mass-production
system became too costly and too rigid. Emerging technologies now allow for
the transformation of assembly lines characteristic of the large corporation into
easy-to-program production units with product flexibility sensitive to market
variations, and process flexibility sensitive to changes in technology.

Organizations have adapted to the new environment and the main shift is char-
acterized as the shift from vertical bureaucracies to horizontal corporations.
Seven major trends characterize such corporations:

“organizing around process, not tasks; a flat hierarchy; team management; measuring
performance by customer satisfaction; rewards based on team performance; maxi-
mization of contacts with suppliers and customers; information, training, and retraining
of employees at all levels” (Castells, 2000, p.176).

Contemporary business life is process driven and chain oriented; thereby
integration has become a core-question for companies. The problems with the
traditional vertical cooperation between organizations are extensive, instead of
cooperating, actors dependent on each other have been seeking to achieve cost
reductions or profit improvements at the expense of someone else in the supply
chain. Companies engaging in transferring costs upstream or downstream
arguably do not realize that such strategies will not make them more
2

competitive as all costs will ultimately make their way to the market in form of
increased end consumer prices. Corporations which over the years typically
have focused on physical efficiency in order to obtain cost cutting have now
started to experience diminishing returns within their own company. It is
therefore believed that increased coordination across company borders alleges
the greatest opportunities for the future. (Fisher, 1997)

1.2 Problem area and research purpose
Due to the power that comes with control over consumer contacts, retailers are
often dominant in a supply chain. Closeness to end consumer markets gives
retailers fast and precise information about matters such as shifting fashion
preferences and attractiveness of competitor’s offerings, comparable to
continuous market research. Even though power is no end in itself, it does
include the opportunity to organize the supply chain in a suitable way. Many
challenges face retailers today. Expanding product variety, greater fluctuations
in demand, and shorter and shorter product life cycles make time-to-market
reductions essential. The ever-increasing need for reduced lead times continues.
Maximum coordination of work in and between companies is therefore neces-
sary, as otherwise it will lead to higher costs as well as to longer lead times.

There is however no single best way to manage a supply chain; the way
retailers compete in consumer markets influence what should be focused on. As
no company can be everything for everyone, there is interdependence between
what a company sets out to be for a consumer, i.e. the company’s value
proposition, and that company’s supply chain. According to Christopher
(1997), a value proposition concerns how, where, and when a company creates
value for its customers, and that all activities - from product development to
order fulfillment - should be based upon it. This thesis’ research purpose is to
investigate the relationship between retailers’ value propositions and their
supply chains.

A prerequisite for sustainability is that there is a match between what is offered
to consumers and the organization of the supply chain activities. It is not
enough to be knowledgeable about competitors and customers’ preferences to
perform well. Supplying consumer goods in a disorganized or inefficient
manner will wipe away the chances of making profits. This was evident in the
dot com death where so called e-retailers lacking logistical expertise were
3

driven out of business; left are more or less traditional and experienced store-
based retailers and mail order companies who have added just another sales
channel - the web. Profound understanding about how factors such as type of
product, fashion content, demand pattern, assortment width, service level, and
location is related to supply chain work, are therefore crucial.

1.3 Research questions
The overall research question is as follows: how are supply chains affected
by retail value propositions? There are two sides on this question; one that
has got to do with what retailer are vis-à-vis its customers, and one that has got
do with how retailers organize their supply chains. The connections between
these two parts are central in this study.

A good framework to use for this purpose is Porter’s (2003) “Tests of a
strategy”; on that base, we set out to analyze how different retailers’ supply
chains are tailored to deliver their specific value propositions. The following
sub questions will be used for this purpose:

• What is the company’s value proposition?
- What kinds of needs are being satisfied?
- Who are the customers?
- What product assortment is offered?
- What does the company-customer interface look like?
- What is the relative price level?

• How is the supply chain tailored to deliver the value proposition?
- What is the configuration of activities?
- How do activities fit together?
- What tradeoffs are made?

The research questions provide the structure of the research, but they will not
be explicitly answered. Important to keep in mind is that with this framework,
comparisons of companies in different industries are not really meaningful,
since the fundamental unit of analysis is the industry itself. The industry
structure lays out the overall rules of competition and the relative position
within the industry is the source of competitive advantage (Porter, 2003).

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1.4 Methodological issues
Being aware of the latent criticism of management research in general, and case
studies in particular (e.g. Gill & J ohnson, 1997), we are undoubtedly aware of
the fact that our individual subjectivity does intervene, therefore we consider
ourselves as a variable in this paper’s research design, which should be kept in
mind by the reader. However, we have tried to exercise subjective judgments
and critical reflections in all our observations and analyses, while trying to
realize our own consciousness, paradigms and selective perceptions at all
times.

1.4.1 Research perspective
Contrary to traditional supply chain literature, which often has a manufacturer
perspective that looks upon supply chains as means of reaching targeted market
segments, we have had a retail perspective throughout this thesis, investigating
the interdependence between supply chains and retailers’ value propositions.

1.4.2 Research design
In this part we will go trough the steps we have taken to get from our research
questions to our conclusions, via theoretical frame of reference, empirical data,
and analysis. Setting out to design this thesis research endeavor, we relied upon
the guidelines for case studies in management research by Patton and
Appelbaum (2003), describing case studies as empirical inquiries investigating
contemporary phenomenon within real-life contexts, where perhaps the
boundaries between phenomenon and context are not yet clearly defined.
Following our chosen area of research - supply chain management - and our
descriptive purpose, we believe the described view to be the most beneficial
one for the purpose of this study.

Determining the object of study
This process has been presented in the introductive part, where problem area,
research purpose, and research questions makes up the object of study.

Selecting the cases
Following the needs for our study regarding relevancy, our choices of case
companies are in line with our decision of investigating a small number of
companies representing different branches of retailers as well as having
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substantially different value propositions. According to this idea, we chose
Lindex to cover a supply chain offering fashion clothing. Ica was chosen to
represent the retail segment offering mainly groceries, which are goods whose
outline patterns very different from clothing. As an outsider representing both
branches mentioned, Ge-kås was chosen due to their status as a multi-retailer,
and for their, to say the least, rather untraditional structure. As our case
companies are different, and hence not competing with each other in the same
industry, it is important to mention that we will not compare them with each
other. What is focused on is the connection between each and every retailer’s
value proposition and its associated supply chain.

Building initial theory through a literature review
The theoretical frameworks have been built through a literature review within
the area of study, consisting of secondary sources from academic articles and
books. In order to make it easier for the reader, the relevant theories are
presented as close to the case’s empirical findings as possible.

Collecting and organizing the data gathering
The case specific empirical data gathering has been performed through semi
structured expert interviews with key personnel at our case companies. The
interviews have all been quite long, about two to three hours, and during that
time we have managed to cover all areas of interest. The people interviewed at
the different companies have been holding somewhat similar positions,
enabling us to structure the interviews accordingly. All interviews were
conducted at the interviewee’s work places. After gathering this information we
have had the opportunity to, via e-mail and telephone, get questions answered
and also get additional information. Each case company’s premises have also
been visited in order for us to observe the activities on site, and so also get a
deeper understanding of the work that is being performed. The primary data
that has been collected through the expert interviews has been complemented
with other relevant secondary information sources, such as annual reports,
websites, and magazines.

Analyzing the data and reaching conclusions
The gathered data is then discussed and analyzed throughout each case chapter,
which means that there are no separate results or analysis parts. The material
presented in the case chapters is a combination of interview findings and the
complementary sources of information, as interpreted by us. It will also be
6

evident, without over-clarifying headings, when it is our own analysis and
when the text is based upon empirical findings. In the concluding chapter we
will bring the analysis to a higher level, where we relate the findings of the
study to the theories used.

1.4.3 Validity and reliability concerns
Some aspects need to be brought up concerning this study’s validity and
reliability. We believe that the connection between the theoretical framework
and the empirical data is strong and that our study measures what it is supposed
to measure; hence we consider the internal validity to be high. Regarding the
external validity, we believe that it is difficult to generalize some of our
findings to other cases, as we consider them to be very case specific dependent
upon each company’s way of competing. We do however believe that it is
possible to generalize the findings about connections between type of products
and supply chain management, but all in all, the external validity is quite low.

Whether another study conducted in the same way would generate the same
results is difficult to say. Our study has a qualitative approach where our own
interpretation and analysis of data is a major factor; subjectivity is thus an issue
here. Another study conducted by other researchers would perhaps reach a
slightly different result. However, the demands for high reliability is lower in a
qualitative study than in a quantitative, as a qualitative study focus more on
exemplifying than generalizing (Svenning, 1996).

1.5 Thesis outline

Figure 1: Thesis outline
Empirical findings and analysis Theoretical framework
Chapter 1
Problem area
Research
purpose
Chapter 2

Supply chain
management
Chapter 3
Cost-based
competition
Chapter 6
Time-based
competition
Chapter 4-5
Case 1: Ge-kås
Case 2: Ica
Chapter 7
Case 3: Lindex
Chapter 8

Conclusions

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2 Supply chain management

The phrase supply chain management (SMC) lacks a clear definition. A
literature review reveals that it has become an expression in business literature
used to incorporate almost anything within the field of marketing and logistics.
To give one example: Ross (1997) considers SCM to be no less than a method,
a concept, a philosophy, a system, a process, a strategy, and a state of mind.
With such an all-embracing depiction it is hard to grasp what it really is;
below we will look into what we consider to be the constituent parts of SCM.

2.1 What is a supply chain?
“A supply chain is the set of entities that collectively manufactures a product
and sells it to an endpoint.” (Stern et al, 2001, p.513) The ultimate beginning
point is where raw materials are being extracted and the end point would be
where goods and services are being consumed, or perhaps even recycled.
However, this view is extremely comprehensive (read theoretic) and obviously
very difficult to put into a practical context. Therefore, the business view on
supply chains is somewhat arbitrary, leaving managers to decide their own
boundaries of the supply chain. (Ibid) The alignment of firms is in the literature
alternating called a supply chain, a demand chain, a value chain, or a marketing
channel.

2.1.1 What is the work in a supply chain?
The work in a supply chain includes the performance of what Stern et al (2001)
label marketing flows. Nine generic flows between channel members are
identified and illustrated in figure 2 below. Some of the flows move forward
through the channel (physical, ownership, promotion), some move backwards
(ordering and payment), whereas other flows move in both directions
(negotiation, financing, risking, information).
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Figure 2: Flows in a marketing channel
(Stern et al, 2001, p.89)

The activities in figure 2 need to be matched to the demands of the targeted
market segment. Stern et al (2001) refer to early distribution channel researcher
Louis P. Bucklin’s theory for end-user preference. Even though this framework
is almost 40 years old, we consider it to be highly relevant for our case studies,
as it can be used to describe a retail-customer interface in a structured way.
Bucklin specified four generic service outputs for a marketing channel: bulk-
breaking, spatial convenience, waiting or delivery time, and product variety.

• Bulk-breaking refers to the opportunity for consumers to buy in small
lot-sizes, allowing them to transform purchases easily into consumption,
thus reducing the need for consumers to carry unnecessary inventory.
• Spatial convenience denotes that products are being supplied close to the
consumer, thereby reducing transportation and search costs. Examples of
channel forms with spatial convenience are neighborhood supermarkets
and vending machines.
• The longer the waiting or delivery time, the more inconvenient it is for
consumers, who are required to plan consumption in advance.
• Finally, the greater the product variety available to the consumer, the
higher is the service output. Greater assortment usually entails carrying
more inventories, which is reflected in higher distribution costs.

Physical

Ownership

Promotion

Negotiation

Financing

Risking

Ordering

Payment

Information

Physical

Ownership

Promotion

Negotiation

Financing

Risking

Ordering

Payment

Physical

Ownership

Promotion

Negotiation

Financing

Risking

Ordering

Payment

Manu-
facturer

Whole-
saler

Retailer

Con-
sumer
9

All things being equal, consumers will choose products with higher service
level. But all things are normally not equal, instead it is a matter of making a
tradeoff between price and service level. The higher the service output, the
higher is the value for consumers, but the higher are the costs for channel
members and, consequently, the higher is the price for consumers.

2.1.2 Putting it together: what is supply chain management?
The actual term SCM was introduced by consultants in the early 1980s, and
picked up by academics at the end of that decade (Stock and Lambert, 2001).
Since then, the confusion around the two terms SCM and logistics has been
immense; some even seem to use the terms as synonyms, and one can wonder
what the differences really are. Stern et al (2001) consider logistics, which they
define as “the management of the flow of physical material” (p.503), to have
metamorphosed into the concept of SCM which, in turn, has come to include
every element of the supply chain. Christopher (1998) has a similar
understanding, also explaining the concept of SCM to be an extension of the
logic of logistics. The US Council of Logistics Management defines logistics
management as:

“that part of the supply chain process that plans, implements, and controls the efficient,
effective forward and reverse flow and storage of goods, services, and related information
from the point-of-origin to the point of consumption in order to meet customers’
requirements” (www.clm1.org).

The roots from logistics are obvious. Still, SCM can be considered more
extensive than logistics management as it attempts to integrate not only
logistical activities, such as material, value, and information flows, but all key
business processes that companies perform across the supply chain. SCM
integrates supply and demand management within and across companies and
coordinate processes and activities across functions such as product design,
manufacturing, marketing, and sales. (www.clm1.org) Advocates definitely
regard SCM to be more than a new name for logistics. Implementation of SCM
involves identifying important supply chain members with whom it is critical to
link, what processes need to be linked to each of these members, and what type
or level of integration to apply for each process link. Process integration should
aim at increasing total process efficiency and effectiveness across all members
of the supply chain, not only across functions within single companies. (Stock
and Lambert, 2001)
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2.2 Different supply chains for different products
2.2.1 Aspects of demand
Fisher (1997) argues than managers lacking a clear understanding for which
SCM ideas and technologies are best suited for their company, risk end up in a
mismatch between their type of product and their supply chain. He suggests
that the first step to take is to examine the nature of the demand of a company’s
products. According to Fisher (1997), products fall into two categories when
based upon their demand patterns:
• primarily functional products having stable and predictable demand as
well as long life cycles (e.g. groceries)
• primarily innovative products supposed to satisfy additional needs, thus
demand and life cycles becomes unpredictable. (e.g. fashion apparel,
computers)

Aspects of demand Functional Innovative
Product life cycle More than 2 years 3 months to 1 year
Contribution margin (price minus
variable cost divided by price)
5% to 20% 20% to 60%
Product variety
Low (10-20 variants per
category)
High (often millions of
variants per category)
Average margin of error in the
forecast at the time production is
committed
10% 40% to 100%
Average stockout rate 1% to 2% 10% to 40%
Average forced end-of-season
markdown as percentage of full
price
0% 10% to 25%
Lead time required for made-to-
order products
6 months to 1 year 1 day to 2 weeks
Table 1: Functional versus innovative products: differences in demand
(Fisher, 1997, p.107)

As noticed in Table 1, innovative products are synonymous with high
contribution margins and inconsistent demand in comparison with functional
products, which are stable and have low margins. Therefore, these two
categories are said to require fundamentally different supply chains.

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2.2.2 Physical vs. market mediation costs
Fisher (1997) proposes that a supply chain accomplishes two distinct types of
functions: a physical function and a market mediation function. The physical
function includes converting raw materials into products and transportation
from one point in the supply chain to the next; the costs lie within production,
transportation and inventory storage. The market mediation function is less
visible since its purpose is to make sure that the products reaching the market
place matches consumer demand; cost will appear when supply exceeds
demand and the price has to be marked down, or the opposite, when demand is
greater than supply, resulting in lost sales opportunities and dissatisfied
customers. Table 2 gives an overview of the different approaches.

Physically efficient process Market responsive process
Primary purpose
Supply predictable demand
efficiently at the lowest possible
cost
Respond quickly to unpredictable
demand in order to minimize
stockouts, forced markdowns and
obsolete inventory
Manufacturing
purpose
Maintain high average
utilization rate
Deploy excess buffer capacity
Inventory
strategy
Generate high turns and
minimize inventory throughout
the chain
Deploy significant buffer stocks of
parts or finished goods
Lead-time focus
Shorten lead-time as long as it
doesn’t increase cost
Invest aggressively in ways to
reduce lead-time
Approach to
choosing
suppliers
Select primarily for cost and
quality
Select primarily for speed,
flexibility, and quality
Product-design
strategy
Maximize performance and
minimize cost
Use modular design in order to
postpone product differentiation for
as long as possible
Table 2: Physically efficient versus market responsive supply chains
(Fisher, 1997, p.108)

Since the demand of functional products is assumed to be predictable, market
mediation is relatively easy and a good match should be achieved. Companies
producing such products are therefore able to mainly focus on minimizing
physical costs within the supply chain in order to meet demand at the lowest
cost, creating a physically efficient process. That approach is not suitable for
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innovative products since the uncertain market reaction to innovation multiplies
the risk and possible costs of shortages or excess supplies. As market mediation
dominates costs for innovative products, they should be given priority.
Important in such supply chains is information about the marketplace to
become as responsive as possible. By plotting the nature of the demand for
each product family and its supply chain priorities in figure 3, possible matches
and mismatches might be discovered. (Fisher, 1997)

Figure 3: Matching supply chains with products
(Fisher, 1997, p.109)

As functional products require an efficient process and innovative products
require a responsive process, companies positioning themselves in the upper
right-hand or the lower left-hand cells in figure 3 are the ones more likely to
experience problems.

When put this way, it appears as if there only exists these extremes with
functional supply chains on the one hand, and responsive supply chains on the
other. The divisions are probably not that obvious and the boarders not that
clear. We think that the main point to be made is that supply chains need to be
thoroughly designed and adjusted to a company’s specific value proposition. If
the value proposition is based on high fashion content, speed is important
(responsiveness) and if it is based on low prices, low distribution costs
(efficiency) are important. Even though the above presented uncertainty
framework deals more with how supply chains should be devised than how
they actually are devised, Fisher’s (1997) rather normative writings do seem
sound. It would be interesting to see how well this theory is rooted in reality.
Selldin and Olhager (2002) investigated how Swedish manufacturing
companies managed the design of supply chains with respect to Fisher’s (1997)
R
e
s
p
o
n
s
i
v
e

s
u
p
p
l
y

c
h
a
i
n

E
f
f
i
c
i
e
n
t

s
u
p
p
l
y

c
h
a
i
n

Match

Mismatch

Functional
Product
Innovative
Product

Match

Mismatch

13

product characteristics. Although Fisher (1997) focused on consumer goods,
Selldin and Olhager’s (2002) 128 responses consists of only 31 % consumer
goods manufacturers while the other respondents were producing towards other
producers. Hence, in their research, the uncertainty framework is assumed to be
viable for producer goods as well. Selldin and Olhager tested two things: (1) if
Fisher’s framework is appropriate for distinguishing between products and
between supply chains, and (2) if companies with a good product-supply chain
fit were better performers than those firms having a poor fit between product
and supply chain. Their results provide support for both the division of
products into being primarily functional or primarily innovative, and also for
the division of supply chains into primarily physically efficient or primarily
market responsive. The results also show that many firms do not follow the
prescriptive fit between products and supply chains and, more interesting, that
these “mismatches” do not appear to lead to lower performance. However,
Selldin and Olhager (2002) conclude that firms with innovative products
generally benefit from having responsive supply chains, while functional
products can also benefit from responsive supply chains in some areas.

2.2.3 Demand uncertainties
A slightly broader angle is put forward by Lee (2002) in which Fisher’s (1997)
framework is widened to include also supply uncertainties. In a “stable” supply
process, the underlying technology and the manufacturing process are mature,
and the supply base relatively well established. The opposite of a stable supply
process is an “evolving” process where the technology is still under intense
development; the supply base may therefore be limited both in size and
experience. Examples of products with stable supply sources are groceries and
apparel, while hydroelectric power and telecom products are examples of
evolving supply sources. This widened framework is not really suitable here, as
our case companies fall into the category having stable supply sources.

2.3 Strategy: delivering the value proposition
The literature in business strategy is extensive and a review of the different
schools of thought in this field is not necessary for the purpose of this paper.
Here we will only briefly justify our choice of strategy literature. One
distinction can be made between those schools that focus on the strategy
process, i.e. the manner in which strategies come about, and on those schools
14

that focus on the strategy content, i.e. the product of the strategy process (de
Wit and Meyer, 1998). As the purpose of this thesis is to describe and analyze
connections between retail value propositions and supply chains, it becomes
natural that literature on strategy content is most relevant here. One of the most
influential writers in this field is Michael Porter, and as we find his framework
sound and credible, we chose that for our study. Still, we are aware of some of
the critics that has been put forward against Porter, arguing that his writings are
too top-down focused and prescriptive in nature, focusing more on the content
and how strategies should be formulated than on how they actually emerge (see
for example Mintzberg, 2000).

Porter’s (1996) article “What is strategy?” actually starts with what strategy is
not, as he argues that operational effectiveness is too often mistaken for
strategy. Operational effectiveness is about achieving excellence in individual
activities thus moving closer to the productivity frontier, i.e. the state of best
practice. Focusing too much on this is what Porter calls the exercise of
mutually destructive competition, as the homogeneity leads to decreasing
margins for all companies.

According to Porter (2003) there are two main types of competition: optimizing
and strategic. Accordingly, companies can reach competitive advantage either
through lowest costs or through differentiation; “companies can run the same
race faster” or “choose to run a different race” (p.26). The essence of Porter’s
(1996, 2003) thinking about strategy is that strategy rests on uniqueness, i.e.
delivering a unique value proposition versus competitors. This is achieved
either by choosing to perform activities differently than competitors, or by
performing different activities.

A strategic position is a unique position, one that competitors do not occupy
and hopefully cannot copy. As no company can be everything for everybody,
choosing what not to do is as important as choosing what to do. Because of the
threat of imitation it is vital that companies make tradeoffs, defined as
“incompatibilities between strategic positions that create the need for choice”
(Porter, 2003, p.34). Sources of such incompatibilities are:
• incompatible product and service attributes
• differences in the best configuration of activities in the value chain
• inconsistencies in image
• limits on internal coordination, measurement, motivation, and control
15

Furthermore, strategy is also about creating fit among a company’s activities.
The best fit occurs when mutually reinforcing activities are combined. If cost of
performing one activity is lowered because of the manner in which other
activities are performed, then fit exists. This can ensure that companies keep
their position by making a whole chain of activities hard to imitate. (Ibid)

The following paragraph is an excerpt from an interview with Kevin Rollins,
Vice Chairman at Dell Computer (Forbes, 1999), that we believe exemplifies
the interdependences between strategy and all supply chain activities.

Question: “What is it about the directs sales model and mass customization that has
been difficult for competitors to replicate?”
Answer: “It's not as simple as just having a direct sales force. It's not as simple as just
having a mass customization in-plant or manufacturing methodology. It's a whole
series of things in the value chain: from the way we procure, the way we develop
product, the way we order and have inventory levels, and manufacturer and service
support. The entire value chain has to work together to make it efficient and effective.”
Question: “What is the competition looking at?”
Answer: “So many of our competitors are really looking at our business and saying
‘Oh, its the asset management model - seven days of inventory. That's what we're
going to do’, rather than looking at every one of 10 things and replicate those.”

Support for this way of perceiving strategy is also found in Gary Hamel’s
(2000) writings as he also highlights the value of uniqueness and fit. A central
theme in Hamel’s writings is the importance of creating a unique business
model with internal fit, in the sense of internal consistency, in order to reinforce
all elements to make profits.

2.3.1 Implications for logistics
Dvorak and van Paasschen (1996) highlight the importance of tailoring
logistics to each company’s distinct strategy. They outline three different retail
strategies: “fast-to-market”, “waves of fresh assortment”, and “low cost”.
Table 3 contains a product flow comparison with these strategies that is
declared to be drawn from how successful retailers have configured their
supply chains.

16

Fast to market
Waves of fresh
assortment
Low cost
Manufacturer cost Trade off some cost
for speed and
flexibility
Live with longer lead
times in order to
drive lower purchase
cost
Drive lowest
purchase cost and
off-load as much
work as possible to
manufacturers
Transportation
from manufacturer
to distribution
centre (DC)
Frequently use
highest cost
transportation mode
(airfreight) to gain
speed
Balance speed and
cost using low cost
transportation mode
to small number of
regional DCs
Maximize use of
transportation modes
by establishing many
local DCs close to
stores
Distribution centre
cost
Look for speed Balance speed and
cost in handling new
product waves
Operate DCs to
minimize work done
in stores
Transportation
from distribution
centre to store
Small, fast, and
expensive store
deliveries
More cost effective
small store deliveries
Most cost effective
full truckload
delivery to stores
Store operation Full service Full service Self service

Table 3: Product flow comparison
(Dvorak and van Paasschen, 1996, p.126)

There are many similarities between Dvorak and van Paasschen’s (1996) and
Fisher’s (1997) writings about supply chain design. Here one can see that it
also finally comes down to a tradeoff between speed and cost, between high
fashion content and low consumer prices. The consensus about this appears
extensive; we have not been able to find any research that disagrees with this.

2.4 Summing up
What should be focused on in a supply chain is determined by the nature of the
demand for the products that are being supplied. For functional products the
basis for competition is physical efficiency; focus should be on building
“efficient supply chains” with the help of effective logistics systems creating
economies of scale and high cost efficiencies. In chapter 3-5, including case 1
and 2, cost-based competition and efficient supply chains will be investigated.
Chapter 6-7, including case 3, deals with time-based competition and
innovative products that are best managed with “responsive supply chains”,
flexible to changing customer demands.

17
3 Cost-based competition

Before going into the study’s two cost-based case studies, this chapter will
bring in logistics related just-in-time management and the umbrella term for
supply chain cooperation in the grocery sector efficient consumer response.

3.1 Just-in-time logistics
One of the most significant concepts in business management in past decades
has been just-in-time (J IT), originating in J apan, it is a philosophy as much as a
technique based upon the idea that wherever possible no activity should take
place until there is a need for it, i.e. no products should be made or ordered
until there is a requirement for them. According to this requirement, J IT is a
pull concept where demand pulls goods towards the market. In contrast,
traditional push systems carry manufactured goods in batches in anticipation of
demand, and are stored in the supply chain as buffers between various
functions. In such a conventional approach, reordering takes place when
inventory falls to a certain predetermined point - the reorder point - which is
based upon the expected length of the replenishment lead time. At this point,
the amount to be ordered may be based upon the economic order quantity
(EOQ) principle, hence balancing the cost of holding inventory against the
costs of placing replenishment orders. The dilemma with the EOQ model is that
it is assumed that there is an optimum amount to order (amount to hold in
inventory), thus arriving at the core problem as the reorder quantity force a
corporation to carry more inventory than is actually demanded per day over the
entire order cycle. (Christopher, 1998)

As maximized batch quantities were conventional insights in production before
the introduction of J IT, similar insights could be found in the rest of the supply
chain. For example, companies used to ship by container or truck load and
therefore customers who ordered smaller quantities faced price penalties, as
well as delivery schedules that were expected to be optimized through
efficiency of routes. Contradicting this approach, J IT favors small shipments to
be made more frequently and to meet time requirements of the customer;
without uneconomic escalations of cost of course, which in itself argues there
may have to be certain tradeoffs in order to achieve total supply chain cost
effectiveness. The greater the demand for variety and the higher the value, the
18

more J IT and synchronized delivery becomes preferable. Therefore, according
to Christopher (1998), the prerequisites for successful J IT logistics would be:
• A disciplined approach to planning and scheduling of inbound require-
ments.
• A high degree of communication and planning linkage between supply
chain partners.
• More often than not the use of third parties or logistics partners to
manage the inbound consolidation and sequencing of deliveries.
• The design of vehicles and physical facilities to make small shipment
quantities easy to load and unload rapidly.
• The value and variety of the materials tend to be higher than average.

Summarizing this, the basic requirement for J IT logistics to function properly is
to make sure that all activities and involved parties of the supply chain are
synchronized, with each and everyone receiving early information about
shipping and replenishment requirements. With the emergence of enterprise
resource planning (ERP) systems, it is possible to have integrated logistics
systems linking replenishment of products in the marketplace with their own
and their supplier’s activities through the use of shared information. This way it
is possible to convert the supply chain from a push to a pull system, enabling
companies to respond to known demand rather than having to anticipate that
demand through forecasting. (Christopher, 1998)

3.2 Efficient consumer response
Efficient consumer response (ECR) has become the umbrella term for supply
chain cooperation the grocery sector. It began in the US in the beginning of the
1990’s, focusing on four main areas that had great improvement potential:
• Continuous replenishment programs, passing point-of-sales data back to
suppliers. This requires standardization of bar codes and methods and
implementation of EDI.
• Efficient pricing and promotion, aiming at reducing self caused demand
spikes and inventory swings.
• Changes in product introduction. Combined market research by channel
members in order to forecast new-product success better.
• Changes in merchandising for the purpose of finding better ways to
merchandise brands and categories of products. (Stern et al, 2001)
19

One operational practice that has developed from the J IT and ECR ideas is
continuous replenishment. The idea is that consumer’s purchases, or
withdrawals, of goods are the base for that which should be delivered. Point-of-
sales data turns the supply chain into a pull system, as retailer’s stock is
replenished based on actual sales. By automating the replenishment system the
goal is also to reduce errors and processing costs.

3.3 Activity map with a cost-based theme
At the beginning of this paper we set out to investigate how supply chains are
affected by retail strategies and how the value chain is tailored to deliver a
company’s value proposition, to see how activities fit together and what
tradeoffs companies need to make. We believe that a good way to analyze the
configuration of activities that companies perform is by drawing activity maps.
Such maps show how a company’s value proposition is contained in a set of
tailored activities designed to deliver it (Porter, 1996). A good example to
illustrate a cost-based activity map would be Ikea, since most people have a
fairly good picture of what Ikea’s value proposition is: “Ikea targets young
furniture buyers who want style at low cost” (Porter, 1996, p.65). Figure 4 is an
activity map of Ikea.

20

Figure 4: Activity map of Ikea
(Porter, 1996, p.71)

Without going too deeply into this single case, one can see that many supply
chain activities are tailored to deliver Ikea’s value proposition. The higher-
order strategic themes in grey bubbles in figure 4 above are linked together and
reinforced through all other activities. Necessary tradeoffs to be able to have
such low prices are, for example, limited sales staffing and a minor possibilities
to customize products.

Low manu-
facturing
cost
Limited
sales
staffing

In-house
design focused
on cost of
manufacturing
Self-
selection
by
customers

Modular
furniture
design
Ample
inventory
on site

Self
transport by
customers
Explanatory
catalogues,
informative
displays and
labels

High-traffic
store layout
Increased
likelihood of
future
purchase

Self-
assembly by
customers

100%
sourcing from
long-term
suppliers

Wide variety
with ease of
manu-
facturing
Ease of
transport
and
assembly

Limited
customer
service
Suburban
locations
with ample
parking

More
impulse
buying
Most
items in
inventory
Year-
round
stocking
“Knock-
down”
packaging

21
4 Case 1: Ge-kås

In order to enlighten a non-traditional retail structure we chose the multi
retailer Ge-kås that within Sweden is a legendary company in the small,
somewhat remote hamlet of Ullared. What really drew our attention to this
outsider was their unique formula for sustainable competition, coming from the
ability of keeping their costs down.

4.1 Introduction
The story behind Ge-kås as a business success phenomena began in 1963, when
the entrepreneurial soul of Göran Karlsson rented a basement in Ullared, in
which he offered small obsolete clothing lots bought from the textile giants in
Borås. Göran’s strategic business philosophy was to buy cheap and sell cheap,
letting the amount generate the profit. Through the experiences as a travelling
salesman, Göran had learned there was a need for low price products, realizing
that almost anything could be sold if the price is low enough. The first few
years the business was slowly moving and days could pass without having any
customers at all. This situation changed and as time went by, additional
employees were employed according to direct need due to increased demand,
and the same could be said about the numerous expanding activities.
Advertisements in local newspapers drew some attention during the first years
but once customers started to find their way to the simple store with the low
prices; word of mouth took over increasing customer awareness rapidly. And
so the business started to really take off. (Andersson, 2003)

According to our interviewees, this way of thinking, buying cheap and selling
cheap, has remained in the business even after Göran sold the company in
1991. The new owners immediately started to transform the essence of Ge-kås,
raising the importance of quality. When asked about this, our interviewees
stated the phrase “quality goods at the lowest price” in a sense these words
would represent what Ge-kås today want to be for their customers, and as
something every process and function within the whole corporate structure
should be permeated with. The assortment of today differs as well, as three
main segments can be found: 50% clothing/textile, 25% electronics/tools/toys
and 25% chemical/food products, compared to the clothing/textile focus Ge-kås
had in the beginning.
22

Today, the company employs about 430 people full-time (Ge-kås Annual
Report 2002) and the average number of visitors is about 11,000 per day.
Figure 5 presents an overview over Ge-kås expansion from the first year until
2002.

Figure 5: Ge-kås’ total sales 1963-2002 (SEK including VAT)
()

In this context, Ge-kås growth and position is very impressive when compared
to the ten biggest clothing chains in Sweden, which place the company in sixth
place based on total sales. This comparison might not be really accurate since
only about 50% of Ge-kås’ sales come from clothing; still we believe these
circumstances do contrast Ge-kås’ strength, especially since all sales come
from one location. (Andersson, 2003) This fact has meant that Ge-kås differ
significantly from most other retailers in the present Swedish market as they do
not cooperate with or belong to a national or multinational company or chain.

Here, we present a few financial figures in order to disclose the economic
performance of Ge-kås, the financial result in 2002 was 68.4 Million SEK, with
a ROE of 21% and a solidity of 68% (Ge-kås Annual Report, 2002). The sales
of each employee were 3.7 million SEK excluding VAT (Affärsdata).

4.2 Ge-kås’ value proposition
By using Porter’s (2003) framework Tests of a Strategy, we will try to reveal
Ge-kås’ value proposition, and at the same time Bucklin’s theory for end-user
preference will help us to determine what Ge-kås is to their customers.

23

Ge-kås’ total product assortment is divided into three main segments: 50%
from clothing/textiles, 25% from home electronics/tools and toys, and the final
25% consists of chemical/food products. From this point of view, Ge-kås do
offer a great product variety, thus if relying upon Bucklin, the greater the
product variety, the greater is the service output presented. Basically, the
different needs that are being satisfied range from daily life nutritional and
physical needs (food, clothes and chemical products) and additional needs
satisfied by home electronics, tools, and toys. Supporting the essence of Ge-kås
business philosophy “quality goods to the lowest price”, the company’s relative
price level is extremely low and prices on all products are aimed at being in the
range between 1/3 and 1/2 below market standards (Andersson, 2003).
Interesting is the fact that some well recognized food brands that can be found
at any major grocery chain are also being sold at Ge-kås, at least 1/3 below
prices offered by national chains. Additionally, we have no reasons to
disbelieve the quality standards of Ge-kås products, perhaps the level of
fashion of some of their clothes is not what we ourselves would perceive as
high end, but the statement regarding the lowest price is definitely true. Relying
upon Fisher’s (1997) framework regarding different demand patterns, we refer
to Ge-kås’ clothing assortment as mainly functional, due to lower levels of
fashion, thus having longer life cycles and more stable demand.

Discussing price levels naturally leads us into Bucklin’s idea regarding bulk
breaking, which is often the case at Ge-kås. Big packages cost less according to
basic economic laws, and at Ge-kås most dry food are offered in packages
bigger than those you might find in stores situated closer to the customer. In
some instances, when customers travel long distances, big packages are more
convenient as these customers do not visit Ge-kås more than maybe twice a
year, which in itself argues for customers wanting to stock basic products for
longer periods at the lowest price possible.

Discussing the customer interface at Ge-kås, it seems to stand out from
traditional concepts in several ways. According to Bucklin’s discussion
regarding spatial convenience, this is distinctly low for Ge-kås as the store is
situated in a remote location far from most customers. This means that
customers coming to Ge-kås are aware of the high transportation and search
cost, still these costs do not exceed the satisfaction customers receive when
shopping at Ge-kås, even though they might have travelled more than 400 km
one way. Also, the size of the store is 15.000 m
2
, equivalent to three soccer
24

fields, and therefore designed with practical reasons in mind; the store is able to
swallow up to 20.000 people on one day and to replenish all products in a
convenient way without decreasing existing service levels.

Answering the question regarding who shops at Ge-kås, we know from internal
customer surveys that the average customer is a 42 year old female coming to
Ge-kås two to three times a year, travelling an average of 180 kilometres one
way, spending about 2.600 SEK each time. The total number of customers each
year is 3.3 million, which also makes Ge-kås Sweden’s most visited tourist
attraction since many people come each year as a part of their annual holiday
trip. The female/male percentage rate is 65/35 but according to Ge-kås, the
male rate is steadily increasing and so is the number of younger people visiting
the store. According to this information, Ge-kås is targeting any person, no
matter sex, age or home location, who is willing to pay the high transportation
and search cost in order to get the possibility to shop quality products, ranging
from food to home electronics, to the lowest price.

4.3 How Ge-kås deliver its value proposition
In regards to the discussion above, we assume Ge-kås’ value proposition as
follows: “Targeting any person who is willing to pay a higher than ordinary
transportation and search cost in order to buy quality goods to the lowest
price”. In accordance with this declaration, this part will discuss how Ge-kås’
value chain is tailored; the arrangement of activities, and how the activities fit
together.

Referring to the fact that one single person was managing Ge-kås completely
on his own until he sold the company in 1991, it was not until the new owner
group took charge of the business that Ge-kås started to introduce computer-
based systems. The aim of this introduction was to increase the level of control
and make functions and processes more efficient, especially since all previous
administrative operations had been handled manually with pens and papers.
One could see the computerization as a crucial step towards Ge-kås future
ability to deliver their value proposition. The computer related investment has
proven to pay-off quickly and mentioning one example, the introduction of a
computer-based sales system with scanners has been said to save 140 labour
hours a day if one second is saved in handling time for each article sold
(Andersson, 2003, pp.95-96). The benefits from using EDI are many and as this
25

system signalizes when a product is about to be sold out, in store replenishment
activities are immediately activated at the same time as total inventory is
controlled. According to one of our interviewees, the company is working hard
with introducing a registration system that will keep track of each product
starting with the moment of purchase. This will enable an increased control of a
products entire life within Ge-kås; from purchasing, shipment from the supplier
until the arrival at Ge-kås, inventory control, replenishment activities, and the
actual moment of sales when the products are being bought by customers. Ge-
kås’ need for increased product life-cycle control backwards is probably then
fully capitalized, as if they were to control even more levels they would have to
be directly involved in production stages, which we believe is not the strategic
aim.

4.3.1 Purchasing and distribution activities
As already mentioned, Ge-kås do not design or produce any products
themselves. Instead, a division with purchasers is handling all acquisitions of
products, and one could probably go as far as to say that this process is the
heart of the company. Ge-kås would probably have a hard time delivering their
value proposition if the enormous amounts of products could not be obtained at
extremely low prices, which in turn also argue for Ge-kås need to have a really
good relationship with their suppliers. According to our interviewees, Ge-kås
have 600-700 active suppliers and about 100 partly active. The contacts with
these suppliers are organized through agents, which also mean Ge-kås do not
have any purchasing offices anywhere in the world, and that there is only one
stage between Ge-kås and the producers.

The purchasing activities start with agents coming to Ge-kås in order to show
existing collections and product lines and 75-80% of regular season products
are bought at such appointments (5-6 months in advance). This means that
Ge-kås buy about 20% of their total product need during seasons from the “spot
market”, either through agents or straight from suppliers by themselves. Our
interviewees stated that most suppliers have a very positive attitude towards
Ge-kås as a business partner, and one of the main reasons Ge-kås is buying
products at lower prices would be that they buy immense amounts at each
purchase opportunity, thereby receiving large discounts. This has also meant
that Ge-kås have improved their position as a trustworthy customer; buying
huge obsolete stocks from suppliers that otherwise would experience financial
26

difficulties. Also, the fact that a supplier only has to deliver products to one
location seems to have increased Ge-kås’ popularity. Providing such benefits
for suppliers has also led to possibilities of buying obsolete stocks from well-
known high end clothing brands as these producers believe selling to Ge-kås
will not disturb the “ordinary” market. Reasons for this would be the off side
location of the store as well as the fact that Ge-kås never advertise their
products, which mean these clothes will add value unnoticed from traditional
and ordinary marketing channels. This fact explains the reason one might find
popular brands with a high level of fashion, which we indeed believe is
something that adds to the common perception of Ge-kås as a place where one
can do bargain deals from time to time.

Continuing on the discussion regarding Ge-kås’ non-involvement in production
processes or pre ordering of any clothing lines, we believe this set up provides
Ge-kås with a high level of flexibility, affecting purchasing prices positively.
The specific costs related to the initial part of a product’s life cycle is more
likely to be overpowered this way, as the costs for market intelligence
activities, planning, design, forecasting of demand, and production might be
transferred either upwards or downwards in a supply chain. By just buying, Ge-
kås has power and ability to negotiate purchase prices on products in a way that
they do not have to “share” the additional costs mentioned. Instead, any
postproduction costs for obsolete stocks due to forecasting errors might instead
be beneficial for Ge-kås, as the level of negotiability on such stocks increases.

Regarding logistics and distribution, Ge-kås are in such a strong position, much
due to their good relationships with suppliers that many times when the
company buy products; the already paid-for goods are being stored at the
supplier, thus decreasing Ge-kås own inventory costs. And, as soon Ge-kås is
in need of these products, the delivery time can be as short as one to two days,
which according to Ge-kås thereby turn into a powerful lead time strategy as
they themselves can decide when to have the products delivered. Another cost
saving strategy would be that Ge-kås always persuade the supplier to pay the
costs for shipment and delivery, which according to our interviewees is saving
the company lots of money each year. Unfortunately, we have no findings from
suppliers supporting this statement as suppliers might place the price for
shipping into the total price from the beginning, claiming the initial negotiated
price was without shipping costs.

27

Ge-kås’ drive for low costs throughout all activities could be linked to Dvorak
and van Paasschen’s (1996) framework highlighting the importance of tailoring
logistics to each company’s distinct strategy. Their “low cost” retail strategy
(See Table 3) do have a product flow similar to how Ge-kås have configured
their supply chain as the company attempt to pursue the lowest purchase costs
possible and off-load as much work as possible to manufacturers (all steps in
production plus in some cases storage of purchased goods). The only
indifference between Ge-kås supply chain and the “low cost” strategy would be
that Ge-kås only exist in one location, thus they do not have the proposed
transportation dilemma from regional distribution centers to stores.

4.3.2 In-store activities
Regarding assortment variety, pricing strategies and advertisement, Ge-kås has
a clear strategy of never promoting or advertising any of their products in any
medium, nor do they use seasonal campaigns or any form of discounts. This
way Ge-kås do not need to have any guarantees towards the customers and
their expectations on any products or prices, at any time, which leaves the
purchasing department with a great deal of flexibility necessary for the
environment they operate in. This fact enables the purchasers in the company to
buy whatever product they want, from any supplier, at any price and at any
time, and backwards; Ge-kås can in the store offer any product, at any price, at
any time, which also means the traditional “four season” thinking can be
stretched and remodelled. This is perhaps also the reason customers do not
mind buying winter gear in the middle of the summer, as long as the expected
customer satisfaction outweighs the cost.

According to our interviewees this means that Ge-kås is way ahead of
competitors when it comes to introducing for example winter collections
already in J uly, even though we ourselves would argue this has probably
happened by coincidence and is therefore less likely to be a strategic decision.
To support our belief, the question is whether people who do not shop at Ge-
kås would buy winter clothing in the middle of the summer just because they
are being offered earlier than usual? The answer is more likely to be no, thus
Ge-kås’ ability to sell winter gear in the middle of the summer is probably
related to the “none-existing” expectations people have when shopping at Ge-
kås. If we assume that a customer coming to the store have a certain
expectation of buying a jacket, but not a specific model, then the choice of
28

model will not be decided until he or she see the different offerings in the store,
and once this person finds something close to what was expected, he or she will
buy this jacket without hesitation related to whether it is the “right” model or
not. This way a customer will more likely never experience the trade off
customers obtain in ordinary stores when a certain product is sold out, thus
adding to overall customer satisfaction.

A flexible purchase and offering system like this means the assortment width
and variety might fluctuate a great deal, but since Ge-kås do not advertise,
customers will have no specific expectations, in other words, what you see is
what you get. Accordingly, Ge-kås pricing strategy also includes a similar way
of handling obsolete products as no traditional “sale mark downs” are being
used. Products that do not perform well are instead marked down unnoticed
until a price level is reached where the product is being sold out, which in itself
is an argument for why obsolete products are never brought back to the
inventory stage as the inventory cost of these products will quickly rise, and as
no product will sell itself while hidden from exposure. These strategies give
customers a signal completely in line with Ge-kås strategy of never creating
any specific expectations among customers, thus one should never come to
Ge-kås at a certain time period as the same price levels are being kept intact
throughout the year thus adding to an even customer flow.

4.4 Ge-kås’ strategic position
Summarizing this discussion, we believe Ge-kås’ supply chain is tailored
accordingly with their value proposition, meaning that their low price focus
benefit from an efficient supply chain, thus supporting Fisher’s (1997)
framework. If one considers operational effectiveness as achieving excellence
in individual activities, strategy is about the combination of all these activities
(Porter, 1996), thus we will attempt to disclose Ge-kås’ strategic position
regarding the revealed information in this chapter.

Using Porter’s (1996) ideas of how to analyze the configuration of activities,
figure 6 is developed in order to visualize our assumption regarding how
Ge-kås’ value proposition is contained in their company specific set of tailored
activities designed to deliver it.

29

Figure 6: Activity map of Ge-kås

Referring to Ge-kås’ way of differentiating the company from competitors, our
interviewees stated that in order for them to be low on price, they need to have
a superior cost structure, hence we believe the foundation for this declaration is
shown by the three higher-order strategic themes (grey shaded). According to
our configuration analysis, all the activities in the figure are reinforced through
all other activities, thereby enabling Ge-kås to deliver their value proposition.
However, Ge-kås strategic position would not be sustainable unless they had
made tradeoffs with other positions. These tradeoffs refer to activities or
strategic decisions that are interconnected in a manner that if changing them,
the effect will be opposed to what is expected from the existing supply chain, in
other words the value proposition will fail to deliver what is expected.

Starting with the higher-order strategic theme of location, Ge-kås would more
likely experience difficulties if one or more stores were to be established, as all
the benefits from having all activities in just one remote location would
diminish. For example, Ge-kås would loose their attractiveness among high-
recognition brands, as Ge-kås would not be able to sell obsolete stocks without
No
involvement
in design or
production
No
coordination
cost between
advertising and
logistics

No promise
of specific
assortment
Constant
and even
customer
flow

Word of
mouth
No
advertising
or discount
activities

Supplier
agents come
to Ge-kås

High
customer
loyalty

High-traffic
store layout

Remote
location
Attractive
customer for
branded
goods
More
impulse
buying

Wide
assortment

All sales and
activities at
one location

No foreign
purchase
offices
Free and
ample
parking

Something
for
everyone

Increased
customer
satisfaction

No specific
customer
expectations

Low costs
for real
estates
30

disturbing the ordinary market as well as this brand would loose the expected
level of exclusivity (as such goods today disappear unnoticed “in the woods”).
Also, probably more important, the cost of having two or more stores would
increase running costs, thus forcing Ge-kås to increase prices and thereby
loosing peoples common perception of offering the lowest prices. One can
imagine how Ge-kås’ mass of cost would increase if buying land and building a
store similar in size, which is a requirement for the ability to offer the great
product assortment offered in Ullared. Also, as the situation is today with
customers coming from all over the country, an additional store would interfere
on the existing store’s trade area, and thereby generate a number of
disadvantages. The existing store would get fewer customers and a possible
response to this would be to offer fewer products as demand would decrease.
Even though the products could be divided between these two stores, costs for
distribution would increase dramatically, thus Ge-kås’ would not be able to
deliver their existing value proposition.

If Ge-kås’ were to begin advertising their products, the fit between activities
would more likely be disturbed as well. Ge-kås would have to pay a lot of
money for this service, which would lead to a higher mass of cost as well as the
beneficial consumer behaviours of today would more likely fall apart. Costs for
coordination between advertisements and logistics would suddenly appear as
well as forecasts would have to be practiced in order to match demand. Every
increase in the mass of cost would lead to an increase in price, and if Ge-kås
would increase their prices they would no longer attract the huge numbers of
customers coming today. The level of customer satisfaction would more likely
decrease as people would get annoyed if they drove long distances only in
order to find out that the product they expected to buy was sold out.

If Ge-kås were to design and produce their own clothing, they would have to
establish new divisions performing all activities related to such operations.
Purchasing offices would be needed in strategic locations around the world, as
well as design teams producing all clothing models. Factories that were to
manufacture the clothing lines would have to be contracted as well as logistics
companies for transportation. All these activities would increase costs
enormously, which in turn would mean higher prices on the products offered,
thus the value proposition would by no means be delivered, thus breaking the
virtuous circle existing today.

31
5 Case 2: Ica

The second case company is the grocery retailer Ica, operating in a sector that
according to theories is highly characterized by physical efficiency.

5.1 Introduction
The grocery company Ica Group’s operations are extensive, with subsidiary Ica
Sverige AB, Ica Menyföretagen AB, Etos AB, and Ica Banken AB in Sweden;
Ica Norge in Norway; Ica Baltic in Estonia, Latvia, and Lithuania; ISO-ICO
A/S in Denmark; and the 50:50 owned entities Statoil Detaljhandel
Skandinavia AS and Netto Marknad AB. Total store sales including taxes for
the entire group amounted to slightly more than 150 SEK billion in 2002. The
parent company Ica AB, owned by Dutch Royal Ahold 50%, Swedish Ica
Förbundet Invest 30%, and Norwegian Canica 20%, houses finance, legal,
human resource, and IT staff units plus procurement and private label
coordination functions. Ica is one of Sweden’s most famous brands with brand
recognition of almost 100%. (Ica Ahold Report, 2002)

We have focused on Ica’s Swedish grocery store concepts operated under Ica
Sverige AB; these are Maxi Ica Stormarknad, Ica Kvantum, Ica Supermarket,
Ica Nära, hence excluding foreign operations and operations outside grocery
retail. One limitation is to be pointed out here. There is one more store concept
in Sweden carrying the Ica brand, namely Ica Express, but that concept is
operated under Statoil Detaljhandel Skandinavia AS with grocery supplies
coming from Ica Menyföretagen AB. Due to time and resource limitations we
focused on the other concepts, generating about 98 % of total sales.

Ica’s history begins in 1917 as a wholesale company in the grocery trade. The
“Ica-idea” was to gather independent retailers for profitable cooperation,
combining local adjustments with economies of scale. This can be seen as a
horizontal integration between retailers who then integrated vertically in the
supply chain to include also wholesale and distribution activities.

The grocery market developed well in 2002. Ica stores in Sweden experienced
a positive trend with a sales growth of 6.4%, compared to industry growth of
4.9 %. A market share of 36.4% makes Ica market leader. (Ica Ahold Annual
32

Report, 2002) An organizational chart of Ica Sverige AB is illustrated in figure
7. Hereafter, we refer to Ica Sverige AB simply as Ica.

Figure 7: Organizational chart of Ica Sweden AB
(Ica information material, our translations)

Ica’s structure in Sweden is somewhat different from competitors and from
their own operations abroad, as Ica stores in Sweden are operated by individual
retailers as their own companies. The economies of scale are achieved through
cooperation in central activities such as purchasing, marketing, finance and
legal departments, business development and IT, as illustrated in figure 7.
Under the box “Store operations” one can also find the different store concepts.
The actual concepts and the brand names are owned and controlled by Ica, but
having independently owned stores are stressed as being the core of the Ica
idea. (Ica Ahold Report, 2002) Although very interesting and probably
important for Ica’s success, these organizational matters fall outside the scope
of this thesis and will not be further discussed.
CEO
Business
development
Market
analysis
Human resources Information
IT Real estates
Market Store operations Goods supplies
Economy &
Administration
CRM, Custo-
mer specific
marketing
Market com-
munication
Consumer &
Quality
Perishables
Maxi Ica
Stormarknad
Fruits &
Vegetables
Security
Ica Kvantum
Ica
Supermarket
Ica Nära
Maxi Special
Establishment
Store support
Purchase &
Assortment
Logistics
Home &
Leisure
Colonial &
Frozen
Store
technology
Logistics
operations
Procurement
Order service
Transport
Controlling
Administra-
tive centre
Advertisement
productions
33

5.2 Ica’s value proposition
Most people have a fairly good idea of what the value proposition of a typical
grocery retailer is. There are not any radically divergent business models; the
resemblances between different retailers are quite extensive, carrying a rather
large assortment satisfying the needs of people’s nutritional requirements. This
is the base connecting retailers in this branch, the opportunities to differentiate
from this is then great. A typical mean of differentiation is assortment depth
and width, i.e. the number of grocery articles and also the other assortment
lines such as light bulbs, CD-records, and clothes. This kind of differentiation
can be complemented with others such as opening hours, personal service, and
communication strategies. It is difficult to examine the more intangible aspects
of a value proposition, as it is highly subjective in nature depending on the
perception of individuals. Anyhow, as expressed by Ica, their mission is: “to be
the leading retail company with a focus on food” and the “core values” are:
“personal, simple, inspiring, safe, and modern” (Ica Ahold Report). We will
hereafter focus on supply chain related aspects of the value proposition; some
hard data for stores in each format is therefore required.

Maxi Ica Stormarknad
Number of articles: 35.000
Store surface area: 10.000 m
2

Sales, average: 339 million SEK
Sales, total: 11.2 billion SEK
Number of stores: 33

Ica Supermarket
Number of articles: 6.000-10.000
Store surface area: 500-2.000 m
2

Sales, average: 46 million SEK
Sales, total: 24.8 billion SEK
Number of stores: 543

Ica Kvantum
Number of articles: 12.000
Store surface area: 3.000-4.000 m
2

Sales, average: 166 million SEK
Sales, total: 20.8 billion SEK
Number of stores: 125

Ica Nära
Number of articles: 4000-6000
Store surface area: