Describe about the ALDI Operations for Business Store Chains.
ALDI operates more than 7000 stores in Germany, Australia and the U.S. The company is in phase to expand its operations. The company has established stores that are recognized as the best value among the store chains. The company believes in getting competitive advantage through efficiency. The Supermarket industry is highly competitive and the customers are price sensitive. The customers seek value for money, i.e. the best product at the cheapest price possible. The company understands this competition and has a lean approach in its business operations. They offer their customers quality products at competitive prices. The target strategy of the company is such that they reduce the price of the product without reducing its quality, this gives ALDI advantage over its competitors. The company believes in eliminating wastes and reducing costs in all the business areas such as time, energy, space, and effort. The company has a culture where they improve continuously and has Just-in-time production that reduces their need to maintain large stock levels. The time-based management allows the company to have operations in time and reduce wastage. The company has flexible multi-skilled workforce. The company has quality assurance ideals where the workers have the responsibility to get it right in the first time (Mckeown, 2015).
Expansion of ALDI in the selected market
The company should expand its operations in Czech Republic. It is a country located in Central Europe with the population of 10.5 million and estimated nominal GDP of $189.882 bn.
Industry Analysis: PESTLE FRAMEWORK
Political Factors
The company has operated in a globalized environment with its stores being in Germany, Australia and the U.S. Aldi’s performance is influenced by the political and legislative conditions of the country in which it operates. The company has to give mix job opportunities that are flexible and range from lower to high pay, local based as well as skilled and for this the company needs employment legislations. It is often considered that once a new retail store is developed it usually destroys the traditional stores business and they are compelled to cut costs, so Aldi has to understand its impact on the people and their job since it is operating in a labor-intensive sector. The country is a member of the U.N., the European Union and Organization for Economic Co-Operation and Development. The overall political framework would work in the favor of the company in expanding its operations (Sharma, 2015).
Economic Factors
Economic factors are of a major concern for the company. They are majorly out of the control of the company but they affect the performance largely. Czech Republic has shown a growth rate of 2% in grocery retail in 2014 due to improved economic conditions of the country. Hypermarkets beings the highest channel accounts for thirty eight per cent of the total value share of retail. Aldi operates at very competitive price offering discounts and has competition with two major players, Penny market and Lidli. The advantages that ALDI has are the improved economic conditions are expected to increase consumption. The country has good and developed infrastructure and also highly developed distribution system but to the disadvantage the company has to face some heavy competition (Riholdi, 2013).
Aldi targets customers, who want products of quality at a decent price. The general tendency of most Czech customers is that they are price-sensitive. Though there is a growing demand of people who would pay for good quality a little extra price but most customers would prefer quality at a nominal rate.
To top this type of clientele the company has to continue its policy of offering discounts and giving quality product at a competitive price.
Major factors that influence the development of any company are the technological factors. The company has been an efficient company and used technology to its advantage in cutting costs. Czech will continue to provide such technological benefits to the company since the country is technologically developed.
Legislative policies have a direct impact. The country has laws and policies in place and the company has to abide by them to work in Czech. The policy for monopoly controls and reduction of buyers’ power might carry stringent rules to enter the market.
The environmental factors will not be an issue for the company. The country provides good working conditions environment both in terms of temperature and working conditions.
The overall analysis suggests that ALDI should expand its operations in Czech Republic due to its growing economy, stable political framework, supporting economic and technological factors and supportive legislature policies. The overall environment to conduct business in Czech will be more beneficial for the company than expanding into New Zealand or Mexico.
1. Threat of New Entrants
The modern grocery store dominates grocery market in terms of value share of the retail, whereas traditional retailors dominate in terms of the number of outlets. The threat of new entrants is high in this type of industry. Czech has free trade within European union, so the retail chains can seek their suppliers from more economical sources within the European zone, this makes setting up a retail unit easier as good quality supply can be sourced at a cheaper price. The barriers to entry are not any legal barriers but only that the competition is severe and cost of capital investment is high in setting up, but for a company like ALDI investing capital and competing with big players is not a difficult situation (ALDI, swot analysis, Usp & competitors, 2016).
Economies of scale: The retail industry has to make use to economies of scale to sustain in the market. Power lies with Aldi because the company is using economies to scale to a great extent it in its operations.
Capital Requirement of entry: to enter the market the capital requirement is high. There is no entry and exit cost but cost of setting up is high, the company can face competition from small competitors but they will not be a major threat.
Customer or supplier loyalty: Customers are price sensitive and can shift from one retail brand to another if the prices are low.
Supply chain – the distribution system has to be well developed.
Experience – to compete with existing market leader a new entrant needs an experience in the industry.
Differentiation- the opportunity lies in differentiation but the company cannot offer differentiated products because it will lead to rise in price.
This force represents the power that lies with the suppliers. The supplier has a fear of losing their business to big retail stores or supermarkets. This puts them in not a very strong position to bargain with the supermarkets. The supermarkets in this case have the options to source good quality material at cheaper prices from anywhere in the European Union since the country has no trade barriers in the zone. This gives supermarkets all the more powers to bargain with the suppliers and get good prices. The supermarkets are forced to get products at cheaper price due to severe competition. They have been forced to reduce their profit margins and this affects their relationship with the supplier that is under constant tension. Aldi ensures to meet the standards with their products. Along with the company also has a just in time approach which only allows the company to hold onto the stock that is essential.
Bargaining Power of Customers
The bargaining power of the customer is high if the company is catering to individual clients and is service based. Aldi being in one such industry realizes that the customer is price sensitive and switches because of costs since there is no transfer cost involved. Aldi as a seller has to be more persuasive to sell its product since the bargaining power of the customer is high. Since it is entering the market as has severe competition, there is no brand loyalty as of now for the company in the market of Czech, so the company has to develop brand loyalty of the customer by giving them discounts and offers that they are tempted to be loyal towards ALDI.
Threat of substitutes
Generic substitution reduces the demand for a certain product. The threat of customer switching to another brand or substitute will always be high for the company. The company is also threatened by the change in trend as this will also lead to change in the demand pattern for the product. In this industry there is a product for product or there is a substitute for every product. Aldi also has to face such threats in their business.
Bargaining Power of Competitors
The industry is very significant in its size. It is huge; there are lots of existing players in the market, the large players as well as the small players. The large players will always dominate the market with their prices and variety; the small players might be dominating in the area of ease and convenience. To operate in such a competitive market the company has to operate on its full potential. Aldi is a sophisticated large chain, and they can capture the client information well and can make relevant use of such information in a way that they can communicate with the client and can use it to their advantage. Aldi as a large market player will always have to focus on low price and value but also provide quality product along with the value element of service.
The opportunity for the company lies in bargaining power with the suppliers. The company can bargain with the supplier on their own terms since the company is a big market player and a supplier would not like to lose on to such a big key player. The threats would always hover like threats of new entry in the market, threats of substitute, and threats of increasing the customer bargaining power and most importantly threat of rivalry. A company has to analyze all its opportunities and threats.
Aldi enjoys a sustained competitive advantage. The company has its strength and weaknesses in the internal environment. The strength of the company lies in its product diversity and size. The weakness is that the products are easily substituted and there is no difficulty in imitating the products.
VRIO analysis is a framework where several elements are considered for evaluation. V is for value, i.e., what is the value of the resource and how easy it is to obtain the resource from the market. R is for Rare, whether the resource is limited or rare. I is for imitability, is it difficult to imitate the product or not and O is for organization in respect to its arrangements, whether the organization has properly supported the resources with the arrangements or not.
This analysis is done considering all the elements. The result is usually in terms of competitive advantage to the firm. It could be;
No value would result in competitive disadvantage to the firm.
Value but not rare would result in competitive equality.
Value, rare but could be imitated would result in temporary competitive advantage.
Value, rare and not easily imitated but the organization is not using it properly to the advantage would result in the unused competitive advantage.
Value, rare, not easy to imitate, and organization is using the resource properly would result in long-term competitive advantage to the company (Jurevicious, 2013).
|
Resource |
Value |
Rare |
Imitable |
Organization |
Impact |
|
Diversity of products |
Yes |
No |
Yes |
Yes |
Temporary Competitive equity |
|
Size of the company |
Yes |
No |
No |
Yes |
Temporary Competitive equity |
|
Brand Name |
Yes |
Yes |
Yes |
Yes |
Long term Competitive Advantage |
|
Guest Service |
Yes |
Yes |
Yes |
Yes |
Long term Competitive Advantage |
The analysis of this table shows that Aldi has value for money products, but they are not rare and are easily imitable, but the organization makes full use to the products and showcases the diversity. The impact of this on the organization results in temporary competitive advantage, reason being that the products are from different category, but could be easily found anywhere since they are not rare and are imitable.
The size of the company is of value, since it is large, is not rare though because similar scale operations are there in the industry who serve the similar kind of products, the size of the organization is imitable but the organization is using its full potential to showcase the products and make use of its resources.
The brand name of the company is a value for it, since the name involves discount it adds value and is rare for the company. It is not imitable and the organization stands true on its name and offers the products at a very competitive price to its customers.
The guest service at the stores are of value, since Aldi has a no nonsense store policy and they do not believe in elaborate store displays but they rather believe in good customer service by offering at a cheaper price. It is rare for the company and not easily imitable. The organization justifies the use of the resources with its guest service.
The strength of the company lies in its brand name, size of the company, value for money approach. But the weakness of the internal environment is that the products are easily imitable and there are several others in the industry with the same pattern of business model. The diversity of products is strength but it is does not give the company a long term competitive advantage, since the products are not rare. The long term competitive advantage is in the discounts the company offers which is possible due to the collective power company has over their supplier that helps them in reducing the cost of the products and giving the best price to their customers (luo, 2014).
The retail stores operating on a large-scale level that serve in various countries have their own supply chain. They procure the material from one major source that helps them achieve economies of scale. However in Czech, due to the free trade the retail chains have the liberty to source materials from the local vendors in large quantities and save on the cost of transporting materials from their headquarters to the retail outlet. The most common types on entry available to the international retail stores are, non-controlling interest, Setting up international stores as a part of internal expansion, merger or takeover, franchise model, joint venture and green field investment.
Non-controlling interest- this approach is for the companies who are in their initial years of expansion. When the company is evaluating its expansion options in the international market but lacks the market understanding and has the option of putting in the money in an established brand of the country in question. The companies then usually put their interest in a company operating aboard but they do not get any direct control of the management or over the operations.
International stores set up as a part of internal expansion process- when a company is interested in the global presence and has analyzed the potential market for their product, they open a store under their direct brand name. the resources are put in branding and marketing the new operations of the company. This is usually done by the most established brands that are aware of their brand equity.
Takeovers – when a big company buys out a smaller company. This is done when an existing business is either in needs of funds or management expertise to sustain in the market. The big company takes over the control and operations of the smaller business. The business is taken over and the company who has taken over decides the operational process of the smaller company.
Merger is when two company forms an alliance, it is either a partnership of a said percentage or complete merger. One of the company is either dissolved or both the companies form an alliance to become one. Either way, the footprints of the larger company are more visible in the market. This model is adapted by a lot of big companies who plan to expand their operations internationally but have certain barriers either in terms of market understanding, legislative or process of the country.
Franchise model – this is the most common and favored model of the expansion. The business which is a established name in the market, when it decides to enter the international market but does not want to merge with the local business or has no willingness to take over any smaller business and does not directly wants to invest resources in setting up operations abroad, they form a franchisee agreement. A franchisee agreement enables a brand to lease out its name and operations process to the person they decide to form an agreement with. The liability to invest in the business is of the second person. Under this model, the parent company guides the franchisee for its operations and functioning. This model is highly successful model but it also depends on the right entity that forms an agreement with the established brand.
Joint venture is when partners form an alliance to expand their operations and work for the benefit of both the companies. A brand of one country might form an alliance with the brand of another country to establish its outlets there.
Greenfield investment – in this form the company directly invests in the foreign country and starts its operations from the ground. The company builds every possible necessity required to undertake its operations. This is done when the companies usually have competitive advantages and are on the willingness to achieve economies of scale.
The most appropriate or suitable mode of entry for Aldi would be Green Field Investment model. In this model Aldi would build its facilities in Czech, would establish distribution hubs and all the other required amenities. The company believes in achieving economies of scale and thrives on competitive advantage. The company would have maximum design flexibility to meet the requirements of the project. The new facility would also reduce the maintenance cost for the company and it could be designed and build accordingly to meet the current as well as future needs. The company would also get a chance to improve its corporate image in the establishing country. The drawbacks might be that the sites may not be fully operational for quite a while till all the operations are completed and it might take considerate time frame to get the approvals from the concerning councils. The company might have to meet some difficulties while setting up the sites in terms of ground conditions, approvals and permissions, and lack of site availability, high costs incurrence (Dudovskiy, 2012).
Conclusion
The company should expand its business operations In Czech Republic because of the political stability, good legal, economical and technological environment of the country. The company has its strengths in offering the low price along with quality to its clients. The company believes on attaining economies of scale. The company should take the Greenfield mode of investment in the country while planning to set up its operations that will help them achieve economies of scale in their operations.
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