Business Strategy
Competing in a dynamic and fierce industry with well – established firms that dominate the market, Aldi, a German grocery company, developed its own value chain that allowed it to be grasp a portion of the market share and become a relevant player in UK (IBS Center for Management Research, 2015). According to Michael Porter (38), value chain is industry – specific and firms organize their internal value chain structure different than other players, so that they can gain distinctive competitive advantages. Porter’s (39 - 40) value chain model is based on the premises that every company has primary activities (inbound logistics, operations, outbound logistics, marketing & sales and services) and support activities (procurement, technology development, human resources and administrative functions), which can generate competitive advantage if properly structured.
The case of Aldi in United Kingdom demonstrates that the value chain can be a source of competitive advantage, as the company mixes its strengths and competencies across various areas of activities. The company harmonizes the inbound and outbound logistics, by keeping in its warehouse limited amounts of products that will be placed on shelves when the demand requires. While the company has its own labeled products, it does not process them in their UK owned warehouses, leaving the available capacity to deposit finished goods from local suppliers (IBS Center for Management Research 6). The strength of this organization is that, in ordering and hosting small quantities of products, Aldi does not risk hitting the expiration date, as it assures rapid and efficient transfer into stores. Another advantage of this warehousing model is that the company does not over-order, hence it manages its available space, without having to rent additional space that would increase its costs. Furthermore, the no – frills policy that applies to outbound logistics, visible in the way the products are displayed and the rapid handling of the orders by the cashiers that scan the barcodes of products, also constitute internal competencies.
In terms of operations, the company controls its suppliers, by paying fairly for meeting the expectations, in terms of packaging, quality, delivery time, and by applying deductions in case they fail to meet the agreed conditions (IBS Center for Management Research 6). This is an internal competency, which allows Aldi to guarantee for the quality of its products and compete against reputable player like Tesco, Asda or Morrisson, while proposing lower prices.
Aldi is not an adept of advertising, considering it an expense that it would be better used in providing customers more value for money. However, in UK it uses TV commercials since 2005 and it advertises its products, focusing on the premium goods, through the campaign “Spend a Little, Live a Lot” (IBS Center for Management Research 8). Furthermore, it maximized the financial crisis period, by advertising the lower prices and high quality of its products, gaining significant market share over its competitors (IBS Center for Management Research 13).
In terms of services, the company has a return policy that allows customers to receive refunds if unsatisfied (IBS Center for Management Research 5). This policy contributes to encouraging customers to purchase from Aldi, as they have the guarantee of quality or return of product, further generating customer loyalty (IBS Center for Management Research 5; Marthur 301).
For the support activities, Aldi’s competencies refer to a well – established supply management, and clear specifications that strengthen its procurement, internal product development that meets high quality standards and HR management that hires graduates and prepares them for managerial positions (IBS Center for Management Research 9). In addition, the company’s infrastructure, most importantly the fact that it is a family business, allows Aldi to make quick decisions or to implement long-term strategies, without reporting to shareholders or getting their approval.
High quality products, achieved through strict supplier guidelines, effective inbound and outbound logistics and no frills services, plus low prices offers Aldi the opportunity to achieve profit margin and be competitive on an intense rivalry market (Porter 46).
What are the critical success factors (CSF) in the UK grocery Shop industry?
Post economic crisis, the grocery shop clients in UK were highly focused on quality, associating the value of products or services with higher prices (IBS Center for Management Research 3). Therefore, quality is a critical success factor in the UK grocery shop industry. Post economic recession, consumers became more critical about their expenses, as their confidence declined on the ground of higher employment incertitude and decreased salaries (IBS Center for Management Research 3). The reputation of the grocery shop is yet another CSF, and also the brands it sells, contribute to purchase decision (IBS Center for Management Research 4). Proximity of the store, freshness of the products and a long-hours schedule are other CSF in the UK grocery shop industry (IBS Center for Management Research 5).
Strategic Options
There are several strategic options that should be considered when pursuing a sales increase for a company activating in grocery shop industry, based on the Ansoff matrix: market penetration, product development, market development and diversification (FME 5).
Ansoff Matrix
Through market penetration, there can be opened more stores in the existent market(s). There should be taken into consideration that the new stores meet several conditions, such as a certain number of residents (30.000 desired), closeness to the public transportation and available parking spaces (IBS Center for Management Research 5). With market penetration it is also aimed to reach customers new consumer categories. However, this is best achieved through the second strategic option, which is product development. Product development refers to developing new products or services for the existing market, in order to increase sales by attracting new customers that would otherwise not shop from this retailer (FME 5). The company should consider introducing electronics, entertainment (music, video games, movies, etc.). While this would target different consumers and might increase the market share of the growing UK grocery company, the company should consider that it also might be a cost that will not result in return of investment.
Another option that should be considered is market development, which implies extending into new geographical markets, creating new product dimensions or new distribution channels and targeting new market segments through different pricing (FME 13). For the growing UK retailer a new geographical market would mean targeting new areas, not previously tapped in UK. New product dimensions could refer to smaller packages for cleaning or cosmetic products, such as shampoo sachets, to reach the lower end customers. New distribution channels could offer the possibility for Aldi fix or mobile kiosks or automatic machines, while the pricing policy means selling the same product, but with different features, in order to establish different prices, hence targeting different segments (FME 13). These would represent different approaches to reaching new customers, but the company should consider the outcomes of the new positioning upon its brand image.
Finally, diversification option refers to creating new products for new markets (FME 21). The grocery firm should consider that this is the riskiest strategy of all four, because the company will extend on a market in which it does not have experience, with products that it does not master, compared to other more experienced players. Furthermore, it implies a tremendous invesFMEnt, whose recovery is not guaranteed.
Generic business level strategy. Critically evaluate
Aldi’s business level strategy is cost leadership. The company was initiated on the principle of providing products for the basic consumption needs and evolved into providing products for every need, with a no – frills policy (IBS Center for Management Research 9). The cost leadership strategy usually implies compromising quality in order to afford reducing prices (Marthur 24). However, this is not always the case, as Aldi demonstrated. Aldi’s cost leadership strategy contributed to positioning the retailer as a less expensive grocery player, threatening Tesco and other reputable grocery companies in UK.
Targeting the cost leadership business level strategy does not make Aldi’s products or services qualitatively poor. The grocery company manages to keep prices low without compromising quality, by arranging its operations in a sustainable and effective manner that results in savings, which is used to offer lower prices. The limited investment in marketing activities allows Aldi to use the advertising budget and direct it in the cost leadership business level strategy. This tactic confers Aldi less visibility than Tesco and other big rivals, but it ensures lower price on the long run, which is a source of sustainable competitive advantage. The cost leadership strategy that Aldi adopts has contributed to increasing its market share, especially in the recession period, when consumers were looking to make more affordable purchases, hence generating competitive advantage over other retailers. Competitive grocery stores needed to cut prices and affect the entire value chain in order to offer lower prices, while Aldi maintained its prices and the same effective value chain. Therefore, Aldi is one step ahead of its competitors that are trying to imitate its business level strategy of cost leadership, maintaining its competitive advantage due to the internal processes that allow the company to offer lower prices for high quality.
Works Cited
FME. Ansoff Matrix Strategy Skills. Free Management eBooks. 2013. Print.
IBS Center for Management Research. Aldi in the UK: Cost Leadership through Operational Excellence. Telangana: IBS IBS Center for Management Research. 2015. Print.
Marthur, U.C. Global Business Strategies. New Delhi: I.K International Publishing House Pvt, Ltd. 2011. Print.
Porter, Michael. Competitive Advantage. Creating and Sustaining Superior Performance. New York: Free Press. 1985. Print.
