ALDI IN AUSTRALIA CASE ANALYSIS - PART 2

Strategy Identification and Implementation

Name: Chrishan Smith

Student No.: 10220458

Due Date: 31 May, 2011

Lecturer’s Name: Mr. T.M. Jayasekera

Unit Code: MAN3503

Unit Title: Strategic Management

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EXECUTIVE SUMMARY

Aldi is known as the world’s lowest cost grocery retailer and acts as a category killer in core

grocery lines and it owns 72 stores in New South Wales, Victoria and Queensland. This

document provides the current business strategy of Aldi, evaluation of the appropriateness of

its current organizational structure, reasons for Aldi Australia to expand globally and

recommendations for Aldi Australia to implement its global strategy.

Aldi Australia is a typical ‘hard discounter’ pursuing a cost leadership strategy (justification

are provided by using Aldi’s value chain). It focuses on selling no-frill goods and services,

but with features that are accepted to the customers (competitive levels of differentiation) at

the lowest cost, relative to that of competitors.

Furthermore, based on the organizational structure analysis, it is determined that Aldi is

currently following “a mix of a Functional and Geographical Divisional Structure with a

decentralized delegating system”. The reasoning for this and its advantages and

disadvantages are provided in detail in this document.

Next the report discusses about expanding Aldi Australia globally. Based on the analysis of

the incentives used in an international strategy and the Porter’s Diamond model we have

determined new opportunities in the global expansion which also provides strategic

competitiveness and above-average returns to Aldi.

Finally the report provides the recommendations for Aldi when implementing a global

strategy which mainly includes becoming a “Best cost provider”, Slight change in the

organizational structure to a “SBU form of a multi-divisional structure” and using a “new

wholly owned subsidiary” type of global entry.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY.............................................................................................................. 1

1.0 INTRODUCTION ..................................................................................................................... 3

2.0 OVERVIEW OF ALDI AUSTRALIA’S CURRENT BUSINESS STRATEGY ..................... 4

2.1 Porter’s Generic Strategy Analysis ........................................................................................... 5

2.1.1 The provision for its justification through the value chain analysis ..................................... 5

3.0 ALDI’S ORGANIZATIONAL STRUCTURE ......................................................................... 7

4.0 EVALUATION – ALDI AUSTRALIA SHOULD EXPAND GLOBALLY............................. 8

4.1 Incentives to use an international strategy ................................................................................. 8

4.2 Porter’s Diamond Model .......................................................................................................... 9

5.0 CONCLUSION ........................................................................................................................ 10

6.0 RECOMMENDATIONS ......................................................................................................... 11

REFERENCES .............................................................................................................................. 13

APPENDICES ............................................................................................................................... 14

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1.0 INTRODUCTION

Aldi is known as the world’s lowest cost grocery retailer and acts as a category killer in core

grocery lines. (Coriolis Research, 2000) Currently it operates in 17 countries which are

considered as separate SBUs (refer appendix 1, figure 6) and we focus on Aldi Australia as

instructed in the case study. This document provides the overall current business strategy of

Aldi Australia and it contains the details as stated in the model in appendix 1, figure 7.

In the first section, the case study illustrates the factors which are considered in a business

level strategy. It answers the questions “who will be served”, “what needs those target market

have that will be satisfy” and “how those needs will be satisfied”. Moving on, I have

discussed about the current organizational structure which Aldi Australia has used along with

the current strategy and its advantages and its appropriateness.

Furthermore, I have discussed on why Aldi Australia should expand globally by considering

the incentives in international strategy and Porter’s Diamond model.

Analysing the above facts I have provided a summarized conclusion explaining the gaps Aldi

would face when implementing a global strategy which would be followed by the

recommendations to minimise the gaps and implement the global strategy which would be a

success in Aldi’s future endeavours.

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2.0 OVERVIEW OF ALDI AUSTRALIA’S CURRENT BUSINESS STRATEGY

This case study states that Aldi Australia is a typical ‘hard discounter’ pursuing a cost

leadership strategy and the following are its main characteristics.

Stocks only about 700 products lines

95% focus on its own brands

Limited National brand presence

Strict focus on price

Focus on most popular every day dry grocery and household items.

Limited in-store fixtures, product often bulk stacked on pallets and cartons

Aldi Australia has a clear business philosophy and guiding principles which is to offer a

limited number of top-quality products at low prices. These products include frozen food,

meat and dairy products, canned food, bakery products, household supplies, health and

beauty products, nappies, cleaning products, household products, a selection of fresh fruits

and vegetables. (Refer appendix 1, figure 1) In addition, Aldi Australia offers a selection of

‘surprise buys’ which change every week and are only available as long as stock last.

As per Karl Albrech, the Co-owner of Aldi, they do not consider the customer as the king and

no-frills added to the goods or services they offer to delight the customers. (Coriolis

Research, 2000) For an example, Aldi saved costs by not providing free shopping bags.

Customers were encouraged to bring their own bags or cardboard boxes or they could

purchase paper or reusable shopping bags at the checkout for a nominal cost.

Even though there is no mention of a specific vision or a mission of Aldi, its’ Pledge (refer

appendix 1, figure 4) elaborates more on their philosophy which focuses on meeting the basic

needs of its customers by providing high quality products by concentrating on five main

principles which are Huge Savings, Excellent Quality, Outstanding value, Superb special

buys and Buy with confidence. In addition to this, we will next look at the how Aldi Australia

has positioned its current business strategy under the Porter’s Generic strategy model.

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2.1 PORTER’S GENERIC STRATEGY ANALYSIS

Michael Porter proposes two generic competitive strategies for outperforming other

organizations in a particular industry: lower cost and differentiation.(Wheelen and Hunger,

2000) As displayed in figure 2 of appendix 1, the two strategies are considered under broad

and narrow market segments which provides us with five strategies. Each business level

strategy helps the organization to establish and exploit a particular competitive advantage

within a particular competitive scope. (Hanson et al, 2008). Distinctive features of these

generic competitive strategies are listed down under appendix 1, figure 3.

Based on the facts stated in the case study and the features that Aldi currently posses, it is

clear that Aldi’s current strategy is a “cost leadership strategy” where they target a broad

market by creating a competitive advantage of low cost. Aldi displays typical qualities of a

cost leader such as selling no-frill goods and services, but with features that are accepted to

the customers (competitive levels of differentiation) at the lowest cost, relative to that of

competitors. (Hanson et al, 2008)

2.1.1 THE PROVISION FOR ITS JUSTIFICATION THROUGH THE VALUE CHAIN ANALYSIS

The above identification of strategy can be justified by analysing the value chain of Aldi

which has been structured in order to minimise costs at all levels. (Refer appendix 1, figure 5)

Successful implementation of the cost leadership strategy requires a consistent focus on

driving costs lower, relative to competitors’ costs. (Hanson et al, 2008)

As displayed in the value chain, inbound logistics is one of the primary activities of an

organization. Since Aldi is handling a limited product range which is around 700, their costs

are minimised when it come to shipping, transportation and warehousing. Also the handling

is easier and the quality of the goods can be controlled more efficiently and effectively. As

displayed in the value chain, within the operations Aldi tests and samples the quality of its

products. This process is done regularly both in-house and independent food laboratories.

Due to the long-term contracts suppliers are bound to supply to Aldi’s specifications which

has made life easy to Aldi when checking for quality standards of the products. They usually

tend to use the cost effective in-house method which involve blind tests by their managers

comparing their own products with those of leading brands. However, retaining the trained

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personnel involved in these activities would be important in order to achieve economies of

scale. Furthermore, Aldi has taken the complete advantage of being the distributor and

controls its cost ruthlessly by focusing on using lower cost transportation carriers and use

effective delivery schedules. (Hanson et al, 2008).

Grocery items are low involvement products and they usually need a very good marketing

support in order to differentiate the product from the competitors. Marketing is a cost for the

organization which expects an increase in sales in the future. This would be either long term

or short term and the cost would be distributed among the products when it comes to pricing.

Since Aldi is following a “cost leadership” strategy they spend a very less amount (0.3% of

the revenue) for marketing and only rely on catalogues, local press advertising and web

updates. The marketing messages are product oriented and focused on the price and new

surprise buys. Furthermore, Aldi spends very less on the development of sophisticated

statistics, nothing on public relations and its Managers are discouraged from conducting

interviews on Aldi themes. With consideration to the place of marketing, Aldi follows a

selective distribution method where they use only a 1200 square metres in size, bright,

modern stores with wide aisles. The goods are no-frill and pre-packed with essential and

acceptable features The goods are displayed in specially designed cartons that can be stocked

directly on to shelves or wheeled into any place by using pallets which saves on the labour

cost to stock shelves, improve workflow and productivity. In comparison to the other

supermarket in Australia, Aldi typically has a less number of employees (4 or 5) per shop and

they are not even specialised in bakers or butchers. This results only a 6% revenue allocation

for labour cost. Furthermore, Aldi has focused on the limited opened hours, which is 19hours

less per week than the other supermarkets which is additional saving under labour cost. In

addition, they have cut down their services to the customer such as charging a $2.00 deposit

is to use a shopping trolley in Aldi, which is refunded when the customers return the trolley

and as a result Aldi doesn’t need to employ people to collect and return trolleys

Based on the above discussion it is successfully justified that Aldi Australia’s current strategy

is a “cost leadership strategy. Next it is important to evaluate the appropriateness of their

organizational structure on its current business strategy.

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3.0 ALDI’S ORGANIZATIONAL STRUCTURE

Strategy and structure have a reciprocal relationship. Therefore, when changing strategies, the

firm should simultaneously consider the structure that will be needed to support the use of the

new strategy. By matching each strategy with a structure will provide the stability needed to

use current competitive advantages as well as the flexibility required to develop future

advantages. (Hanson et al, 2008)

As per the case study, Aldi’s current business strategy is supported by a decentralized

organization structure. It is flat and lean where there is very few staff involvement. (refer

appendix 2, figure 1) For an example, Aldi Headquarters in Germany itself employees fewer

than 150 staff. Furthermore, there are no planning department and no central functions such

as Marketing, Human Resources, Controlling, Information Systems or Public relations. This

is an important aspect for a firm which is following a cost leadership strategy since

maintaining such central functions and departments are costly and there are no revenue

generated from those departments.

Aldi follows the “Harzburger model” which outlines three issues that should be delegated:

the task, the necessary competencies to enable task implementation and the responsibility for

implementation and results. The tasks are delegated to the managers who are in charge of

implementation and they will be responsible for their implementation as well as the results.

As a result of the Harzburger model, all managers have clearly defined job descriptions

specifying the goals, responsibilities and authority of their position. These are mainly focused

on avoiding unnecessary costs wherever possible.

Based on the above facts and the hierarchy of Aldi, we could determine that Aldi is currently

following “a mix of a Functional and Geographical Divisional Structure with a

decentralized delegating system” where there is a limited staff, with functional line

managers who have usually been employed in different parts of the organization including

the shops and the warehouses and the Area Managers have been well trained about the

structure, procedural elements of retail management including store operations and trading

rights, administration, logistics and property management. Here the operations are the main

function and the process engineering with relation to cutting cost is emphasized, rather than

new product R&D. Refer appendix 2, figure 2 for advantages and disadvantages of the

current organizational structure of Aldi.

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4.0 EVALUATION – ALDI AUSTRALIA SHOULD EXPAND GLOBALLY

One of the primary reasons for implementing an international strategy is that international

markets yield potential new opportunities. It is also a source of strategic competitiveness and

above-average returns. (refer appendix 3, figure 1) (Hanson et al, 2008)

4.1 INCENTIVES TO USE AN INTERNATIONAL STRATEGY

Aldi has already been established in 17 countries and they use the same strategies in every

country which is the cost leadership strategy. The expand is successful so far and there are

several reasons to support it. Even though Aldi was launched in Germany, people in foreign

countries who heard about it or visited it would also have demanded for a low cost grocery

store in their own countries. However, as the services become standard and with the increase

of competition there would be a time when every store reaches its maturity stage. Therefore,

considering the demand of the foreign countries and the low manufacturing costs Aldi would

need to pursue an international diversification to extend its product life cycle and increase

market size.

Aldi could also expand to countries that would be their suppliers, with the intention of

acquiring raw material, skills, labour and resources for a lesser cost and use it efficiently. For

an example, Australia is full of minerals and there is a huge advantage of receiving these at

the domestic rate. (Hanson et al, 2008)

The demand for low cost groceries appears to become more similar globally. Therefore, by

expanding globally Aldi could achieve economies of scale, particularly in their

manufacturing operations. With this way Aldi could standardize its products across the

country borders and use the same or similar production facilities, thereby coordinating critical

resource functions, it is more likely to achieve optimal economies of scale. Furthermore as an

added advantage Aldi may also be able to exploit core competencies in international markets

through resource and knowledge sharing across countries which would create a synergy in

operations. (Hanson et al, 2008)

Even though Aldi is successful in their own ways of doing things, due to the increase of

globalization Aldi’s competitors are considered at a worldwide scale. The use of online

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shopping, achieving efficiency and convenience through emerging technology and

communication would influence Aldi to step in and adjust to the global market or they would

be left behind.

4.2 PORTER’S DIAMOND MODEL

Porter’s Diamond Model (refer appendix 3, figure 2) describes the factors contributing to the

advantage of firms in a dominant global industry and associated with a specific home country

or regional environment. (Hanson et al, 2008)

The first dimension in Porter’s model is factors of production. As explained previously, it is important

to acquire resources such as capital land, natural resources, labour and transportation etc. In some

countries these are scarce or costly and since Aldi has already established themselves in 17 countries

and by expanding the operations more globally and creating a synergy and coordination among

themselves, they would have a comparative advantage in relation to factors of production.

The second dimension of Porter’s model is Demand conditions. It is important to identify that the

efficiency Aldi currently posses, is able to lead to domination of the industry in other

countries. Even though, Aldi have managed to achieve the cost leader in Australia within a

very short time there are still opportunities for global expansion since the Australian market

is demanding for low cost and it is a strong trend setting country which creates specialized

demands.

The third dimension is Related and supporting industries. 80% of Aldi Australia’s goods are

Australian made and the production is done by well-known brand manufacturers. However,

these manufacturers seem reluctant to be openly associated with Aldi fearing that they may

jeopardize their relationship with other retailers. Therefore, by expanding globally and

creating opportunities for the suppliers, will losen up this fear since Aldi will providing more

business to them.

The fourth one would be Firm strategy, structure and rivalry. Most of the time a firm’s

strategy, structure and rivalry changes from country to country. The rivalry is at an intensive

stage since there is a threat from the existing competitors and as well as the ones are to come

to the market. This would force Aldi to lower the cost more and therefore innovate, improve

and expand globally to keep up with their pricing strategy and continue to grow.

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5.0 CONCLUSION

As per the analysis, Aldi Australia’s current strategy is a “cost leadership strategy. Even

though they have a customer oriented strategy, they do not consider the customer as the king

and therefore, no-frills added to the goods or services they offer to delight the customers.

However, Aldi’s focus is to meet the basic needs of its customers by providing high quality

products by concentrating on five main principles which are Huge Savings, Excellent

Quality, Outstanding value, Superb special buys and Buy with confidence. Aldi has also

managed to maintain their cost leadership strategy by minimising costs at all levels in the

value chain. For an example, there are no planning department and no central functions such

as Marketing, Human Resources, Controlling, Information Systems or Public relations.

Furthermore, based on the analysis it is determined that Aldi is currently following a mix of a

Functional and Geographical Divisional organization structure with a decentralized

delegating system which is closely associated with Harzburger model.

Finally, after considering the incentives available for Aldi and the application of the Porter’s

Diamond Model it is recommended that Aldi would need to pursue an international

diversification to extend its product life cycle, increase market share, achieve strategic

competitiveness and above-average returns.

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6.0 RECOMMENDATIONS

Aldi is recommended to follow a Global corporate level international strategy. Due to the

range of products they sell which are mainly grocery products, Aldi could easily standardize

the product across geographical borders. This way there would be a control over the products

sold at any Aldi store in the world and it would be easy to achieve economies of scale and

provide the opportunity of offering products at a lower price. This will also enable efficiency

in the Aldi value chain.

Based on Aldi’s current corporate strategy, they give the individual country units the

authority to develop their own business-level strategies and they would be responsible for the

results as well. When implementing a global strategy this approach should be changed to a

corporate strategy which dictates the business-level strategies in order to standardize Aldi’s

products and sharing of resources across countries. (Hanson et al, 2008) In addition, it is wise

to follow the double loop learning when implementing the developed strategies. (refer appendix 4,

figure 1)

None of the five business-level strategies shown in appendix 1 figure 2 is inherently or

universally superior to one another. (Hanson et al, 2008). In this situation even though Aldi

has managed to become the cost leader, it has a tight competition from the competitors where

they add more value and differentiation to the product while reducing the cost. Therefore,

when going global I recommend Aldi to follow a “Best cost provider strategy” (integrated

cost leadership/differentiation strategy) in order to gain competitive advantage and above

average returns. By adapting a Best cost provider strategy, Aldi should be in a better position

to adapt quickly to environmental changes, learn new skills and technologies more quickly

and effectively leverage its core competencies while competing against its rivals. (Hanson et

al, 2008)

If Aldi is implementing its global strategy, they should change their structure from a

decentralized structure to centralized structure such as the “Strategic business unit form of a

multi-divisional structure” (refer appendix 4, figure 2) which would provide a better control

by the home office. But at the same time maintaining a lean structure would be important to

maintain their expenses.

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It is recommended that Aldi should use the “new wholly owned subsidiary” type of global

entry. Even though it is complex, risky, costly and time consuming Aldi would still have the

maximum control of it. Since there are no middleman or agents involved Aldi would earn the

full benefit of the profits. Why I recommend this entry type is that, Aldi has been successfully

using this strategy for 17 countries and have been a success. Their current main competitive

advantages (refer appendix 4, figure 4) would remain if they act independently and the risk is

reduced since they have tried and became a success 17 times. Financially Aldi is a stable

company and was one of the best corporate brands in Germany in 2004. Therefore, it is wise

to spend some extra cash than risking the possibility of damaging image by Licensing or

creating strategic alliances and acquisitions.

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REFERENCES

Coriolis Research (2000, May) Aldi in Australia: What will be the impact? Retrieved April

13, 2011 from http://www.coriolisresearch.com/pdfs/coriolis_aldi_in_australia.pdf

Grocery food Nutrition shopping (n.d.) Retrieved May 28, 2011 from www.grocery.com/aldi-

foods/

Hanson, D., Dowling, P. J., Hitt, M. A., Ireland, R. D. and Hoskisson, R. E. (2008). Strategic

management: competitiveness & globalization (3rd ed.) South Melbourne, Vic.: Thomson

Learning Australia.

Harzburg Model (n.d.) Retrieved May 29, 2011 from

http://translate.google.lk/translate?hl=en&sl=de&tl=en&u=http%3A%2F%2Fwww.wirtschaft

slexikon24.net%2Fd%2Fharzburger-modell%2Fharzburger-modell.htm

Hitt, M. A., Ireland, R.D. & Hoskisson, R. E. (2009) Strategic Management: Competitive and

Globalization, Concept and Cases (8th ed.) USA: Southern Western Cengage Learning

Information on Aldi (n.d.) Retrieved May 26, 2011 from the Aldi Website:

http://www.aldi.com/

QuickMBA: Strategic Management (n.d.) Retrieved May 17, 2011 from

http://www.quickmba.com/strategy/generic.shtml

Thompson, A.A., & Strickland, A.J. (2001). Strategic management(12th

ed.). Boston:

McGraw-Hill Irwin.

Wheelen, T.L., & Hunger, J.D. (2000). Strategic management and business policy (7th ed.).

MA: Addison Wesley.

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APPENDICES

Appendix 1

Figure 1: Sample Aldi Brands - (Coriolis Research, 2000)

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Figure 2: Porter’s Generic Strategies – (QuickMBA: Strategic Management, n.d.)

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Distinctive Features of the Generic Competitive Strategies

Type of Feature Low-Cost Provider

Broad Differentiation

Best-Cost Provider

Focused Low-Cost and Focused Differentiation

Strategic target A broad cross-section of the market

A broad cross-section of the market

Value-conscious buyers

A narrow market niche where buyer needs and preferences are distinctively different from the rest of the market

Basis of competitive advantage

Lower costs than competitors

An ability to offer buyers something different from competitors

More value for the money

Lower cost in serving the niche (focused low cost) or special attributes that appeal to the tastes or requirements of niche members (focused differentiation)

Product line A good basic product with few frills (acceptable quality and limited selection)

Many product variations, wide selection, strong emphasis on differentiating features

Good-to-excellent attributes, several-to-many upscale features

Features and attributes that appeal to the tastes and/or special needs of the target segment

Production emphasis A continuous search for cost reduction without sacrificing accept-able quality and essential features

Creation of value for buyers; strive for product superiority

Incorporation of upscale features and attributes at low cost

Tailor-made for the tastes and requirements of niche members

Marketing emphasis Try to make a virtue out of product features that lead to low cost

Build in whatever features buyers are willing to pay for Charge a premium price to cover costs of differentiating features

Either underprice rival brands with comparable features – to build a reputation for delivering the best value

Communicate how the focuser’s product attributes and capabilities aim at catering to niche member tastes and/or specialized requirements

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Sustaining the strategy Offer economical prices/good value Aim at contributing to a sustainable cost advantage – the key is to man-age costs down, year after year, in every area of the business

Communicate the points of difference in credible ways Stress constant improvement and use innovation to stay ahead of imitative competitors Concentrate on a few key differentiating features; tout them to create a reputation and brand image

Develop unique expertise in simultaneously managing costs down and upscaling features and attributes

Remain totally dedicated to serving the niche better than other competitors; don’t blunt the firm’s image and efforts by entering other segments or adding other product categories to widen market appeal

Figure 4: Aldi’s Pledge

Figure 3: Source - (Thompson & Strickland, 2001)

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Figure 5: Value Chain for Aldi Australia

Figure 6: Aldi’s Current International locations – (Information on Aldi, n.d.)

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Figure 7: Identifying Strategy for a single business company– (Thompson and Strickland, 2001)

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Appendix 2

Figure 1: Aldi’s Current International locations – (Information on Aldi, n.d.)

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Figure 2: Advantages and Disadvantages of Aldi’s structure

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Figure 2: Product Life Cycle of Aldi Australia - http://www.learnmarketing.net/productlifecycle.htm

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Appendix 3

Figure 1: Opportunities and outcomes of international strategy (Hanson et al, 2008)

Figure 2: Michael Porter’s Diamond Model

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Appendix 4

Figure 1: Dynamics of recipe change

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Figure 2: SBU form of the multi-divisional structure – (Hitt et al, 2009)

Figure 3: International Corporate Level Strategies – (Hanson et al, 2008)

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Figure 4: Competitive Implications from Resources