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An analysis of aldis strategy

Introduction

In 1948, the brothers Theo and Karl Albrecht opened the grocery store ‘Albrecht Discounts' (Aldi) in Essen (Ruhr Valley), Germany. The store had a simple layout and provided a great deal of products at a low price. The company grew rapidly, owning 13 stores in 1950 and about 300 stores in 1961 across Germany.

In 1961, Theo and Karl divided the company into Aldi North (run by Theo) and Aldi South (run by Karl). The reasons for this division, according to Dieter Brandes, a former managing director of Aldi in Schleswig-Holstein, Germany, were different views about how to develop the business. However, the brothers normally exchanged information about a range of issues such as performance and cost figures, current and potential suppliers and they also conducted joint negotiations with suppliers. In 2003, Theo and Karl resigned as CEOs. Theo's son, Theo Albrecht Jr, now runs Aldi North, and Juergen Kroll and Norbert Podschlapp run Aldi South.

Since the ‘Spend a little Live a lot' message is being known by more and more people, and Aldi has been obtained ‘Best Supermarket 2009 Award' in 2009, Aldi has become one of most reputable retailer in the international business, and it operates over 7,000 stores worldwide. Considering of this situation, it would be interesting to understand and analyse the management strategies of Aldi. Therefore, my project will analyse management strategies of Aldi which operates a discount supermarket chain in the retail industry.

The paper begins by using PEST analysis, Porter's 5 forces analysis and Competitors' analysis to analyse the environment of supermarket industry. The next section is to analyse the strategic capability of Aldi. The following section discusses purpose of Aldi, and the final section draws recommendations for improvement of Aldi's strategy.

Section 1: Environmental Analysis

PEST analysis

Based on using a PEST analysis, it is likely to recognize the core environmental influences on Aldi. Firstly, it is well-known that the major economic factor is the global recession which originally caused by the United States housing bubble during the period from 2005 to 2008. This financial event has been to strongly motivate customers who begin to purchase inexpensive products with high quality. This means that Aldi will attract a great deal of customers without advertising and doing activities of sales promotion. Because of this situation, it is not necessary to conduct new strategies for the growth of customers. On the other hand, global recession possibly result in the increase of product's cost, thus there is a doubt of whether Aldi could sale low-price products with good quality. Therefore, Aldi should consider this problem in order to ensure future growth.

Furthermore, social factors impact on Aldi includes the change in consumer taste, some of lifestyle changes and health concerns. It is clear that in recent years more and more consumers start changing their taste, for instance, an increasing demand for organic foods and ban of GM foods. Aldi should consider this factor because it may impacts on the future products' development of strategy. Moreover, there is not doubt that some of lifestyle changes such as home shopping and interest usage might increase online shopping, thus according to this factor, Aldi possibly invest more funds to enhance their online service and delivery's service. Recently, health concern has become a key issue around the world, so consumers tend to purchase health products without worrying about the price. For example, BSE outbreak precipitated ban of British beef (Elliott, 2005).

There do not seem to any main political and technological factors in the environment that Aldi needs to consider.

Porter's five forces

In order to effectively analyse the competitive environment of Aldi, it is better to use Porter's five forces to analyse (Porter, 1985).

According to the analysis, the threat of new entrants into the supermarket industry in the UK is not high. It is clear that Tesco, Asda, Sainsbury and other supermarket chains may set up considerable barriers to entry for new entrants. For instance, the new supermarket will not be able to access inexpensive and reliable suppliers because Tesco may have cornered the market for certain goods. However, there is evidence of size and power of large supermarket unable to retaliate on price, value and quality. For example, Aldi successfully obtain more market share in the UK in recent years, because it has applied the strategy of low-price products with high quality.

Furthermore, it is not doubt that buying power of consumers was high because they had so much choice, and their actions can force prices decline. For example, if beans are too expensive in Aldi, buyers will move to another supermarket to purchase, thus a price was will happen immediately among supermarkets.

Moreover, it is believed that suppliers' power was low because of low cost of switching suppliers and alternative source of supply. However, sometimes suppliers may stand a high power. For instance, normally suppliers signed a contract with retailers about paying a certain price for their products, but if retailers do not pay the price, suppliers will delay the product's delivery or do not send goods to them.

Competitive rivalry is very high in the supermarket industry. The core reason for competition is strong in the supermarket industry because price wars always happen among supermarkets. Based on price wars, winner can gain more market share. For instance Aldi gave the highest discount to gain a part of market share while it enters the UK supermarket industry.

Product for product substitution within supermarket industry is the main threat, thus it is believed that the threat of substitutes is strong. For instance, Aldi has competition from companies like Asda or Tesco that can provide substitutes for their goods. This may drives a low-price of groceries in both companies.

Competitors' analysis

Aldi not only faces the competition of strong supermarkets such as Tesco, but also faces the threat of Lidl as the discount store.

In 2008, Tesco launched a new strategy that setting 34 discount brands across 350 categories and reduce its price to attract more customers to purchase products in Tesco in order to defend the price war of Aldi (Reuters, 2008). After that, the sales of Tesco has increased by 6.7 percent according to researchers TNS World panel reported (Reuters, 2008). Furthermore, Tesco possible offers great range of discount brands in the future, and negotiates with more suppliers to decrease the price of goods in order to gain more market share. Tesco has applied another strategy that it has opened 24 hours Tesco express to service for consumers to buy products in the evening, which also increase the sales of products in Tesco. Considering this situation, Tesco will be the core competitor for Aldi. Therefore, Aldi should pay more attention to Tesco's development.

Beside the competition of Tesco, Aldi also faces the strong competition from Lidl as one of the largest grocery retailers in Europe, because Lidl has almost the same target customers and similar sales strategy with Aldi. Moreover, possibly Lidl may enter into tourism in order to increase its competitiveness. Therefore, Lidl is the most powerful enemy for Aldi in the supermarket industry.

Section 2: Capability Analysis

Strategic capability

Firstly, Aldi successfully saves the cost of hiring employees. In each shop, Aldi only employs less than six employees to work per day. Although few people work for Aldi, services for customers have never been later, for example, if there is a long queue waiting for checking out, a special ring is used to call other colleagues to open the other line.

Furthermore, Aldi efficiently saves the cost of building up stores. Kumar (2006) states that “Another efficiency stems from the fact that Aldi sets up outlets on side streets in downtown areas and in suburbs, where real estate is relatively inexpensive. Since it uses small spaces, the company's start-up costs are low, which enables it to blanket markets: Aldi now owns 4,100 stores in Germany and 7,500 worldwide”.

Aldi also presents other strategic capabilities which help it to successfully reach its goal. According to Kumar (2006), “Aldi's stores display products on pallets rather than shelves in order to cut restocking time and save money”. In addition, consumers need to bring their bags or purchase bags while they are shopping in Aldi's shops (Kumar, 2006).

Section 3: Purpose

The mission of Alid is to make prefect quality products available to its customers at the lowest possible price, and make its customers to enjoy the best for less.

Furthermore, the objective of Aldi is to sell products that are popular with customers, made from the best possible ingredients and represent brilliant value for money. All of these are key considerations when deciding on the products that we offer.

Corporate Social Responsibility

Aldi is a responsible business, and they value both the trust and satisfaction of their customers. Aldi promise to delivering high quality products; not just in terms of safety and value, but also in terms of the social and ecological criteria involved in their production. Moreover, Aldi (2009) presents that “Aldi take their responsibilities as an international retailer seriously and they are active members of the Business Social Compliance Initiative (BSCI)”.

Human Rights, Labour Standards, Environmental Protection and Fighting Corruption

As a member of BSCI, all of the European operations of the Aldi South Group, including their suppliers, are committed to complete the principles of the BSCI code of conduct. According to Aldi (2009), “This code of conduct promotes compliance with local and national legislation and specifically prohibits:

  • Child labour
  • Forced labour and unlawful disciplinary measures
  • Discrimination of any kind
  • Excessive working hours
  • Poor health and safety provisions
  • Non-payment of minimum wage
  • Infringements on freedom of association and collective bargaining rights
  • Poor environmental protection practices
  • Bribery and corruption.”

Aldi's membership of BSCI also promises it and its suppliers to the execution of an independent social auditing programme, set to international criteria. It aims to use this programme to normally examine its social performance and, together with its suppliers, it also aims to identify that the social conditions in its supply chain adhere to the highest possible standards.

In addition to Aldi (2009) states that “Aldi's membership of BSCI, Aldi is also committed to the following international standards:

  • The fundamental principles, rights and working standards of the International Labour Organisation (ILO)
  • The UN Declaration of Human Rights and the principles of the UN Global Compact”.

Organisational Culture

Aldi's founders have strongly impacted on its culture, and its cultural rules and values reflect Aldi's philosophy, guiding principles and business strategy. Furthermore, it is easy and clear for employees, managers and customers to understand the Aldi model that is the provision of low-price products with high quality.

It is well-known that the aim of Aldi is to avoid unnecessary cost wherever possible, and urge employees and managers at all levels of the company are very cost conscious and greatly focus on to economic efficiency, because Aldi is not allowed to waste. For example, one of typical rules is that all of employees have to switch off lights in offices when there was enough daylight from outside. Therefore, the concept of ‘cost-watching' extends into all areas of the value chain, including the development of new techniques for warehouse management or for the transport of goods.

Beside pay more attention on economic efficiency, Aldi also aim to find small improvements in all aspects and to develop pleasure in achieving small successes. This culture of continual improvement is accompanied by a strong focus on the development and implementation of solutions. Aldi will try new ideas and solutions, rather than revealing detailed analysis, for example, new products are not subjected to detail market analyses, but are tested in three shops. If they are successful, meaning that they achieve a fast, pre-determined minimum turnover, they are introduced in all other shops.

The organisational culture is strengthened by Aldi's selection and recruitment approach. Managerial talent from inside the Aldi is carefully selected, developed and enhanced. Moreover, significant qualities for potential managers are a high attention on economic efficiency, fairness towards others, including suppliers, modesty, and reservation towards the public and the press.

These behavioural characteristics are strengthened by job descriptions outlining clear goals and competencies. Aldi managers have always been employed in different parts of the organisation, including the shops and the warehouse. They have to understand how Aldi operates and have ingested the organisational culture. For example, area managers need to understand the structural and procedural factors of retail management, including store operations and trading rights, administration, logistics and property management when they go through a 12-month training project.

The program is described as follows (Area Managers, 2005):

“An important part of this program centres on Aldi's management system, including its focus on economic efficiency. The first part of the training takes place in a store where future area managers take over the role of a store manager for several months. This ‘hands on' approach aims to acquaint them with Aldi's operations, but also its business philosophy and core values. During the second part of the training, future area managers work alongside experienced colleagues and learn about their role and responsibilities. This includes the tasks of recruitment, planning and organisation of the stores.”

Section 4: Recommendations

Since global economy in recession, the sales of Aldi in the UK have been dramatically increasing, because Aldi is selling the low-price products with high quality to customers who would like to spend little money for goods in order to safely spend this period. Although the sales of Aldi in the UK have been slightly grown, comparing with Tesco, the market shares of Aldi still not match.

Firstly, Aldi need to invest in new product development. The core reason for that is Tesco has developed some of discount products for new target market in order to capture more market shares from Aldi. Therefore, Aldi need to develop more new discount products in order to against new strategy of Tesco, and also keep its competition in the UK market. In addition, it is highly possible to launch its private label to open new segment market. Based on this idea, Aldi may enhance its brand and increase its market shares in the UK. Otherwise, Aldi may directly sell its products to some of small retailers which like canteen in University campus or in the street of city centre. This possibly motivates the growth of sales of Aldi's products. Aldi's website also needs to be improved in order to attract more people to shop in Aldi.

Reference

Aldi, (2009), Available from: http://www.aldi.co.uk/index.htm [Accessed 1st July 2009]

Area Managers, (2005), Available from: http://uk.aldi.com/recruitment/recruitment_2.html [Accessed 1st July 2009] Elliott, V. (2005) Nine-year BSE ban on older beef lifted

http://www.timesonline.co.uk/tol/news/uk/article567064.ece [Accessed 20th July 2009]

Kumar, N. (2006) Strategies to Fight Low-Cost Rivals, http://hbr.harvardbusiness.org/2006/12/strategies-to-fight-low-cost-rivals/ar/1 [Accessed 11th July 2009]

Porter, M.E. (1985) Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press.

REUTERS, (2008) Tesco takes on discounters with new low-cost range, http://uk.reuters.com/article/idUKLH54179620080917 [Accessed 3rd July 2009]