International Strategic Management - Essay Example

Analysis of the Australian Operations of Aldi PEST Analysis 3 Political Scenario 3 Economic Background 4 Industry Analysis 5 Internal Scanning 8 Company Strategy 9 Main Concerns for Aldi 10 Analysis and Recommendations 10 Reference 12 Bibliography 14 Introduction Aldi is one of the largest retail food outlets in the world. Presently, it operates from seven thousand stores from all over the world with an annual turnover of € 36.2 billion. In Australia, the first Aldi store came up in Sydney in January 2001. Currently, the Australian operations of Aldi are carried out from stores in New South Wales, Victoria, Queensland. Today, Aldi is one of the considerable players in the packaged grocery industry of Australia with almost 5% of the market share. Industry analysts estimate that with the current strategy of operations, Aldi is well on its way to become a force to reckon with in the retail market of Australia. The business strategy of Aldi has been truly robust; it stood the severe test of the ongoing financial crisis. The brand image of Aldi has been all the more strengthened through the word-of- mouth communication. According to industry reports, more than 1, 72,000 households have been to Aldi stores during 2007-2008. Another attribute of Aldi’s success has been its foray into the fresh fruit and vegetables segment (Grocery Report 2008, n.d.). According to latest reports, the number of stores of Aldi has, has surpassed 200 and it is all set to increase the number even more. The huge expansion plans are being complemented with proposals to build three warehouses in Sydney and Melbourne (Palmer D., January 21, 2009). PEST Analysis In order to analyse the business performance of Aldi, an understanding of the business environment of Australia is necessary. A traditional method of analysis will be followed in the process where the macro environment will be researched through PEST analysis. Political Scenario The Australian economy is stable in terms of its political environment. This has been instrumental in generating a decent growth for the economy since 2000 (The Economic and Political Situation, end of 2002). The Australian government is an ardent advocate of the free market economy and hence is linked to the major countries of the world through foreign trade. The center stage of Australian politics is shared by three political parties; The Liberal Party, The Nationals and The Australian Labour Party. The Liberal Party and The Nationals are conservative in nature, representing the commercial interests of the urban and rural business class respectively. The Australian Labour Party was formed by the labour unions. This party has been supporting the cause of workers and labourers with a leftist attitude. They are described as a “social democratic party”. There has been a marked change in the government’s strategy towards providing help to needy families. On the other hand, certain restrictions have been imposed on those enjoying financial assistance for being unemployed as well as those who are disabled. The government is also getting increasingly instrumental in implementation of the climate control measures, most important among which is the Kyoto Protocol. The prior focus of all the political parties today is the welfare of the citizens (Background Note: Australia, January 2009). Economic Background The service sector forms the economic backbone of the country. Almost 72% of the GDP is contributed by the services sector. Agriculture provides only towards 8% of the GDP; but it is the main export earner. Along with mining, agriculture contributes to about 52% of the export bill. The economy has been a witness to key reforms in form of removal of trade barriers, deregulation of certain critical sectors, privatization, low income tax and introduction of a general Goods and Service Tax. The Government has made sustained efforts so that Australaia attains the highest standard of living among G7 nations. In addition to this, the Australian economy is not indebted to any foreign country and is building up reserves to deal with probable economic shocks in future. Of late, the need for infrastructural developments and the concern for climate change are two of the most worrying problems faced by the economy.. (Background Note: Australia, January 2009). The rising unemployment rates are also a concern for the economy; it has increased by 1.3% from March 2008 to March 2009 (6202.0 - Labour Force, Australia, Mar 2009). Social and Cultural Aspects Australia’s indigenous society comprised of hunters and aborigines. Majority of the residents have their ancestral roots in Europe. As such there exists cultural and social similarity with the USA. Today, Australia is counted among the world’s most urbanized nations (Background Note: Australia, January 2009). Of late, the country has been subject to class conflicts between the two extensive classes; the Cosmopolitans and the Parochial. Cosmopolitans claim to be the new class, belonging to the recent times, the middle class of 21st century. Most of the people engaged in government activities, media industry, and education industry are from this class of the society. The cosmopolitans are characterized by their belief in education for all, etiquette, non-violence and uplifting of the poor. On the contrary, the Parochial class is often termed as the class of ordinary people. At the core of the classification lie traditional value systems. The value system is more dependent on family with less importance attached to education and more attachment with friends advocated. This translates into the fact that the Parochial are less fashionable than Cosmopolitans. Very often, the Parochial are referred to by the Cosmopolitans as racist (Australia's New Class Structure, n.d.) Industry Analysis The major players in the retail food industry of Australia are Woolworths, Coles Myer and Aldi. The former two have benefitted by the sellout of Dairy Farm International. Pick n Pay, a South African competitor has been another reckoning force in the industry. This move has strengthened the case for Foodland Associated Limited (FAL), an Australian public sector company, which also has three cash and carry grocery stores. Metcash Trading Limited is another formidable competitor in the industry (Gescheit R., January 2003). Aldi operates on a different model of providing selectproducts at the least price among the competitors. In this way it provides tough competition to other firms. In fact, Aldi has been the only firm to maintain its business activities at a decent level even in the ongoing recession. The business model of Aldi is robust enough to combat the effects of the entry of new competitors. In the retail industry, there is always substantial threat from other products. This can be regarded as a natural rule of the industry. Aldi has most of its products of the Australian make, but producers are also apprehensive about their tie up with Aldi that might endanger their relation with other players in the industry. This point needs to be stressed upon before it goes beyond control. In addition, the current sentiment of the sellers might become influential (later on) in creating procurement problems for Aldi. The cost competitiveness on which the business plan is currently based would then be hampered. It appears that Aldi enjoys the patronage of its customers to an enviable extent. This happens in spite of the unavailability of free services that is so common to any supermarket. The customers do not have any bargaining power as such. However, the lowest prices do not require customers to bargain either. In addition to this, customers have to incur additional costs like surcharge on credit card payments and carry bags. They also have to bear a token payment for using the trolley, which is reimbursed once the trolley is returned. As of now, the quality of products at the cheapest price gets a priority above everything else. But these factors have the potential to become nagging problems if not continuously monitored (Super Market Savings, April 2006). Internal Scanning Key Resources The key resources for any organization are its human assets. Aldi is no exception to this. The managers and executives have a passionate concern for reducing cost and implementing appropriate changes when needed. In a simple business format, Aldi does not go overboard to achieve greater turnovers. Promotion and recruitment of senior positions is done from within the organization. This eliminates the additional cost of training. The company personnel know every detail about the operation of the company on account of their familiarity with working in stores and warehouses. This becomes instrumental in attaining efficiencies across value chain, which is the main force in achieving the competitive advantage of cost leadership. Business Strategies Aldi has come a long way in becoming perhaps a household name in Australia. The main reason for this is the low price that it can provide to its customers in comparison to any other retail market. The company has inherent policies that assist in achieving the cost leadership. The business philosophy of Aldi has been to provide quality products at the lowest prices. This has made it an excellent value seller. It sells only 700 products on a daily average, which is lower than the product count of any other retailer. Aldi also sells certain offbeat commodities as ‘surprise buys’ every week, the prices of which are disclosed on the company website and holds good till stocks last. For example, it will be selling Medion notebooks with a two year warranty, from May 7, 2009 at the price of $999 (Official website, Aldi Australia). The store mostly sells in-house brands, but there are a few reputed brands also. Selling its own brands is less costly for the company, and it also provides a higher profit margin. This also means that the company is able to exercise bargaining power while purchasing commodities in bulk. All these advantages are passed on to the end customers in terms of lower price. Company Strategy The low price is also a result of the operational strategies of the company. The company has put conscious efforts to reduce costs across the value chain. The average size of an Aldi store is miniscule in comparison to other competitors. Aldi stores are often close by, the success of one leading to the start of another. The stores are no frills type and house only the minimum required employees. Strategic placement of products and wide passages within the store provide logistic convenience. There are no provisions for free carry bags, customers are also charged for payment through credit card. The company does not follow traditional rules of marketing, there are no personnel to specially look after pricing, distribution etc. The advertisement expenditures are minimum. Aldi relies on the word of mouth communication and through cheaper modes of communication. Company reports are constructed only to the extent required for internal analysis. The product range is updated as and when required. This addition is accompanied with the removal of those products that suffer poor demand or become outdated. As a business strategy, Aldi maintains transparent and prompt payment terms with the suppliers. In order to keep relations professional, officials of the company are restricted from accepting gifts from the suppliers. Main Concerns for Aldi Taking note from the Industry analysis, the key issue facing Aldi in the future is to maintain the low price (that has become its hallmark) in addition to the quality aspect of the products. The low cost attribute might cease being as attractive as it is now once the recession gets over and disposable income rises. The main target then will be to retain the present customer base. The company is also prone to entry threat from world famous retailers like Wal-Mart and Tesco. The industry scenario is sure to change once these heavy weight players enter the Australian market. Apart from this, Aldi is susceptible to substantial competition from Lidi, which has emulated Aldi in various aspects like low cost, efficiency at all levels of value chain. Analysis and Recommendations Aldi has been a tough competitor in the Australian retail industry on the ground of its ability to provide greater value than other firms. To combat this, Woolworths and Coles are constantly engaged in developing innovative measures that will provide them the platform to sell goods cheaply. These national level players, in addition to the domestic players like Action, IGA and Franklins, are improving their value chain and redesigning their logistics arrangement. It is highly recommended that Aldi resorts to more robust measures that will continue to give it cost advantage. This can be achieved through contracting with the suppliers. A legal agreement will be instrumental in ensuring that price advantages are maintained throughout the tenure of a contract. Currently, Aldi keeps some products from the national brands (about 20%) in its stores. This provision can be fully eradicated, whereby only its own brands will be sold. By adopting this measure, the profit margin that was achieved from the sale of 80% of the products can be extended to 100% of the products. Reference 6202.0 - Labour Force, Australia, (Mar 2009), Australian Bureau of Statistics, retrieved April 29, 2009 from http://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/6202.0 Australia's New Class Structure, (No Date), retrieved April 29, 2009, from http://www.class.org.au/NewClass.htm Background Note: Australia, (January 2009), Bureau of East Asian and Pacific Affairs, U.S. Department of State, retrieved April 29, 2009, from http://www.state.gov/r/pa/ei/bgn/2698.htm#econ Background Note: Australia, (January 2009), Bureau of East Asian and Pacific Affairs, U.S. Department of State, retrieved April 29, 2009, from http://www.state.gov/r/pa/ei/bgn/2698.htm#people Background Note: Australia, (January 2009), Bureau of East Asian and Pacific Affairs, U.S. Department of State, retrieved April 29, 2009, from http://www.state.gov/r/pa/ei/bgn/2698.htm#political Gescheit R., (January 2003), Food & Grocery Market, Economic Mission of Israel in Australia, retrieved April 29, 2009, from http://www.moit.gov.il/NR/exeres/02634452-DBA8-484A-9A45-605D31C201D9.htm Grocery report 2008, (No Date), Nielsen Australia, retrieved April 28, 2009, from http://au.nielsen.com/site/documents/nielsengroceryreport2008.pdf Official website, Aldi Australia, retrieved April 29, 2009 from http://www.aldi.com.au/au/html/offers_medion_20090507.htm Palmer D., (January 21, 2009), Aldi Plans To Double Market Share, Push Store Numbers Past 400, AFN, retrieved April 28, 2009, from http://www.ausfoodnews.com.au/2009/01/21/aldi-plans-to-double-market-share-push-store-numbers-past-400.html Super market Savings, (April 2006), Managing Money, Money Magazine, retrieved April 29, 2009, from http://money.ninemsn.com.au/article.aspx?id=100231 The Economic and Political Situation, (end of 2002), retrieved April 29, 2009, from http://redsites.alphalink.com.au/persp2002a.pdf Bibliography Hill C. et al, (2007), Strategic Management - An Integrated Approach, Edition: 2, Published by John Wiley & Sons, 2007, ISBN 0470809299, 9780470809297 Read More