Case Study Analysis: International Strategic Management of Aldi Stores
1. Introduction
Aldi stores is a large food retailer established in Germany that succeeded in entering the Australian market in 2001 and grew with 72 stores in the states of New South Wales, Victoria and Queensland. It has 4-5 employees per store. Its core marketing strategy is to provide a limited range of high quality food and non-food products at low prices.
2. Macro Environment
Aldi operates in a highly saturated market and its sustainability depended its understanding of the macro environment of Australia as its new market for expansion. Australia has a developed economy, which means that it has a number of mature industries providing employment to the population. This translated into purchasing power that supports the uptake of Aldi stores. The country also has a big population of middle-income earners, which means a huge market for price conscious customers. There are also big household communities in Australia to support demand for Aldi’s products. With Australia’s consumption economy emerged a mature food retail industry in the country with many industry players competing to gain and maintain a market share. (Moore & Wen 2007)
As a developed country, Australia benefits from technological changes permeating to the food retail industry. Technology applies throughout the supply chain process of individual firms as well as corporate communications within the organisation as well as with external stakeholders. Technological changes applicable to the food retail industry support marketing activities online as well as cost-efficiency in operations. Unlike its competitors, Aldi operates with autonomous business units with a lean organisational structure allowing the company to achieve more with its supply chain even by engaging only in basic technological tools.
Australia’s food market enthralled with work gives a high premium for convenience that gave rise to complete service stores, which is the operating format of the two national stores Woolworths and Coles-Meyer. However, practicality also gave way to the importance of value for price, resulting to the immediate uptake of high quality and low priced strategy of Aldi stores in Australia. On one hand, the Australian market demands both complete service and low prices for quality products as sources of value. Aldi has the second source of value and is constantly working to provide all that most customers need in a retail store. On the other hand, the national and regional retail stores have complete service even collaborating with gas companies to establish stores in gas stations.
Global forces also affect the food retail industry and the individual players. Overseas competition is imminent, especially with the saturation of key global markets. The American company Wal-Mart could expand into Australia by buying established small to medium retail stores. The same could be true for Tesco, a large retail chain based in the United Kingdom. Aldi’s closest competitor in Germany and Europe, Lidl, which copied its high quality with low price operating structure, could also expand into Australia.
The macro environment of the food retail industry in Australia, within which Aldi is part, supports the fierce competition in the industry as well as the need to develop effective long-term strategies to strengthen relative competitive positions with expectations of possible new players and the impact of economic and technological changes.
3. Porter’s Five Forces
Based on Porter’s Five Forces, the competitive environment in the industry is fierce. A number of large companies and many small specialty shops comprise the industry. The large companies are the changers and movers of the industry. There are two national complete service companies dominating the Australian market and three regional companies.
There is an imminent threat of entry from newcomers (Porter 1998a), especially Wal-Mart, an American retail store chain, Tesco, a British retail store chain, and Lidl, Aldi’s competitor in Germany. These companies have the capital and means to enter successfully the Australian market, which would further heighten competition. There are substitutes such as retail stores in gas stations and convenience stores. Aldi has to consider these potential competitors in developing its long-term strategy.
The threat of substitutes (Porter 1998a) positively affected the moves of the two national retailer companies to expand stores in gas stations. Even if convenience stores are open 24 hours, the higher prices are unable to draw a sizable number of regular customers. This gives low-cost stores such as Aldi an edge.
The bargaining power of suppliers (Porter 1998a) of the food retail industry is low and kept at bay by the competition among suppliers allowing food retail companies options for suppliers, which enables the companies to obtain retail items at low prices. The edge of Aldi is that it is also able to decrease cost in other way allowing it to offer lower prices for some high-grade products.
The bargaining power of buyers (Porter 1998a) moderately affects food retail companies. The greater demand for high quality but low-priced products has challenged the large companies to seek ways of decreasing costs with the common solution being the rationalization of the firms’ supply chain processes.
As such, the intensity of rivalry (Porter 1998a) is high because the large industry players hold equal capabilities. Aldi has a relatively lower fixed cost but competitors are seeking ways to operate with a lower cost structure. Differentiation (Porter 1998b) is also a constant challenge. Aldi established the company as a high-quality low-cost company similar to the ‘fresh food people’ differentiating strategy of Woolworths but the convergence of product diversity and quality-price balance emerging from other competitors could easily erode these distinctions. Switching is a risk that all industry players face because of the erosion in distinctive points and the limitations of the companies, much like Aldi’s limited product range. All large industry players in the food retail industry are pursuing aggressive growth strategic objectives intensifying the degree of rivalry. Exit barriers are also high. These highlight the need for effective strategy development for the industry players, including Aldi to maintain its position and support further growth and expansion.
4. Key Successful Factors
Critical success factors comprise the means through which the company achieves its goals. The critical success factors should involve four elements, which are internal actions, external factors, monitoring of existing situations, and building for the future. (Thompson & Strickland 2003) Aldi targeted the goal of a store providing high quality products at the lowest price to consumers. To achieve this, the company focused on a number of critical success factors, including decreasing its cost structure, offering the lowest cost and discounting of products, maintaining the quality of its products through quality control and monitoring, and keeping track of changes in customer demands. The combination of these critical success factors express consideration of its internal capabilities, external concerns, monitoring of its activities, and orientation towards the future. These would propel Aldi’s growth in the long-term.
To support these key success factors, Aldi exercises cost consciousness in its key resources and in developing its capabilities. The company’s physical resources are its stores, which are smaller than the store space of its competitors. It also employs a very functional store design to support not only ease for customers but also for employees stocking the shelves. The company invests in basic IT tools but its small workforce does not require much ICT tools. These apply only to coordination with suppliers and headquarters. Aldi highly invests in its human resources. Although the company maintains a lean labour force, the company promotes and trains its influence to absorb its cost conscious culture. Training ranges from mentoring to hands-on experience. It also pays its employees higher than the average industry wage. Decentralised management also provides employees with opportunities for growth. These comprise effective motivating factors for human resources to support positive performance and growth. Aldi has a traditional but effective strategy of giving importance to cash flows. It invests in new stores when cash is available resulting to lesser risks. Achieving accountability is also easy with a lean workforce using spot checks. The intangible resource, which enhances the firm’s competitive strength, is its excellent market reputation. These capabilities differentiate Aldi from its competitors, which commonly employ centralised and complex management systems.
5. Competitor Advantage (subsistence or not)
Aldi’s overall competitive strategy is cost leadership (Porter 1998b), which the company maintains through its hard discounter strategy involving its commitment towards cost consciousness, which also formed part of its corporate culture. In support of its cost leadership strategy, the company focused only on a limited range of goods of high quality and sold at low prices as well as developed store brands to facilitate the firm’s control over quality and production cost.
Ordinarily, operating with a low-cost structure while providing high quality products with low prices leads to a low profit margin (Thomson & Strickland 2003) so that this constitutes a struggle for the industry players seeking to decrease their cost structures. However, in the case of Aldi, it was able to achieve a relatively higher profit margin because it maintains low costs in a number of ways, from its narrow product line and small store space, human resource management, and market driven range of products.
To support its cost-based competitive advantage, Aldi implemented a participative management strategy (Crossan, Fry & Killing 2005), which values the role of frontline employees. All its personnel play equally important roles so that there are no staff positions. This places high value for human resources. The company also exercised the leadership strategy of delegation (Crossan, Fry & Killing 2005), which that fits the autonomous operations of its various business units and achieve flexibility.
As such, Aldi is far from operating in a subsistence manner. The company has opportunities for expansion and growth but it has to strengthen its commit towards its key success factors and exercise vigilance in pointing at environmental changes to maintain its cost leadership.
References
Crossan, M., Fry, J. & Killing, J., 2005. Strategic analysis and action. 6th ed. New York: Prentice Hall.
Moore, S. & Wen, J.J., 2007. Strategic management in Australia and China: The Great Leap forward or an Illusion?. Journal of Technology Management in China, 2 (1), p.10-21.
Porter, M.E., 1998a. Competitive strategy: Techniques for analyzing industries and competitors. New York: Free Press.
Porter, M.E., 1998b. Competitive advantage: Creating and sustaining superior performance. New York: Free Press.
Thompson, A.A. & Strickland, A.J. (2003). Strategic Management, 13th Edition,
McGraw-Hill, N.Y.
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