Aldi, a German supermarket chain, entered the UK market in 1990 and now operates a network of over 500 stores (Aldi, 2014). The competitive landscape for UK supermarkets is fierce (Sandberg, 2013) with many different strategies being adopted, each aligned to a different segment of the market. Aldi focuses on delivering a basic, value for money shopping experience (Naslund, 2013). Such a cost leadership strategy and lower cost structure enables discount companies to enter and take a larger percentage share of the market (Harvard Business Review, 2005). As consumers focus on saving money in times of recession, the business model used by Aldi presents an opportunity to save money on weekly food shopping whilst still buying healthy food. Supermarkets following a low cost leadership strategy often stock the same product as their rivals but deliver it under a different service model (Harvard Business Review, 2005). Smaller companies, such as Aldi, do not spend as much time publicising their plans or marketing their products, this can create competitive advantage as they are less exposed to public opinion. This leads to an information gap, however it also allows them to develop and grow quickly whilst adapting to the changing trends (Skordili, 2013). The increased demand for cheaper food is better served by discount retailers. It also removes a significant cost associated with in store branding, technology and functionality, enabling the same or similar products to be offered cheaper. The external business environment is made up of two elements; the general macro environment which takes a wide lens view of the environment in which the business operates and the micro view which focuses on the specific industry or sector in which the business operates (McLean, 2005). The external environment refers to events or trends, which are relevant to the business, as well as being uncontrollable by the business. The external environment directly contributes to the success or failure of the business, for example in 2010 Aldi left the marketplace in Greece citing unfavourable external factors as the reason (Skordili, 2013). By understanding the external environment leaders make better decisions (Kefalas, 1981); knowing the likely impact of that decision and knowing what might affect the organisation in the future. The external business environment is changing faster than ever (Mason, 2007) and therefore being able to understand, anticipate and adapt to changing trends is a key leadership skill (Kotter, 1996). This essay presents an analysis of the external business environment in which Aldi UK operates. Analysis of the general macro environment using PEST before a more focused analysis of the retail supermarket sector is conducted using Porter’s Five Forces Model in order to draw conclusions.
Stacey (2011) explains that the dynamic of this macro external market place can be categorised into a number of headings for the purpose of analysis. PEST allows a business to periodically scan the environment to anticipate future trends as well as identify current challenges. PEST scanning splits the environment into 4 key factors: Political, Economic, Social and Technology. This is a commonly used, simple model which allows the general market to be scanned. The micro external environment was described by Porter as being concerned with getting raw materials to consumers, suppliers to buyers and how the connection are made in a competitive way (Linstead, Fulop and Lilley, 2004). In this model the specific sector or market in which the organisation operates is analysed, this allows the specific market challenges within that sector to be understood for that organisation. To undertake this micro level analysis Porter created a model called the Five Forces which looks at the interaction between the forces. At the heart of the model is ‘competitive rivalry’ which is impacted by 4 other forces:
Porter argued success was created by the organisations ability to negotiate with suppliers to get the right prices which enable a low cost leadership model or enable larger margins. By putting itself in this position the organisation remains in the driving seat.
There are a number of factors which Aldi need to consider as part of their PEST analysis of the UK marketplace.
Within the grocery sector in the UK there is fierce competitive rivalry. A micro analysis is presented below:
The threat of new entrants is relatively low due to the cost of entry and the competitive environments.
As Tesco enters a period of decline, due to what is widely considered unethical practice, bad financial management and abuse of power (Proud, 2015). This may lead to a decline in consumer favour leading to opportunities for merger and acquisition of the brand.
Aldi operates in a highly competitive market place, both the macro and micro perspectives show challenging market conditions. Whilst new entrants are unlikely there is a clear need to explore changing customer buying trends and how interactive routes to market contribute to customer loyalty. With buying patterns moving towards 24 hour shopping, online marketing and self-service, consideration needs to be made around whether this needs to be included in Aldi’s long term strategy. The UK election in May 2015 presents the most immediate challenge, particularly if that results in a change of government and possible European referendum. Should the UK leave the EU this is likely to present Aldi with a financial challenge as well as imposing possible import restrictions for products. Equally, such a move could also see buying trends move towards British companies. Aldi continues to thrive in the market, however a change in the disposable income of its customers may also change buying habits. Focus on retention of market share needs to be integrated into the strategic sustainability plans, particularly in the absence of any loyalty schemes. Continual development and alignment to its target market is critically important to maintain market share and ultimately survive. Consideration needs to be made around what consumers want from their experience. By undertaking market research and focus groups Aldi will be able to understand what is working and what may be useful to start to consider. In a world where change is the norm it should be expected that all businesses will have to adapt and become more agile to some degree.
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