Aldi - A great example of strategic choices and trade offs

For anyone who has ever sat through a strategic planning workshop, you should have come across the line of Michael Porter’s, “The essence of strategy is knowing what to say no to.” (If you haven’t heard this before, then it might be time to change advisors!)

In one of my previous blogs, I quoted Aldi Australia’s Chief Executive Tom Daunt who stated, “Aldi is the price leader” and said “they would not give up that position.” “That is our most fundamental core competitive advantage. If we give that up we’re dead.”

Aldi is a great current example of a business that is clear on what it is saying no to (and therefore what it says yes to) and does it really well. So let’s examine what Aldi says yes and no to in more detail, and how these choices, like a well-tuned “symphony orchestra” support each other and the end strategic goal magnificently.

The Aldi “Price Leadership” or “Low Cost” Model – What does it look like?

The following map shows the key factors in Aldi’s “low cost” business model. I have looked at the model through the Lens of five key headings - Customers, Product, People, Suppliers and Store. I am sure I could have used many other headings but for me these are the visible ones that I also have some knowledge around.

The beauty of Aldi’s model is that every part of the business is helping to deliver the price leadership strategy. The dotted lines and arrows show how the strategic choices made by Aldi link to support other choices.

Let’s examine some of these linkages.

The Aldi customers play their part in the model.  They enjoy everyday low prices on all goods that are of a high quality. They enjoy less time shopping due to smaller stores and smaller range. The smaller store size means Aldi have lower overheads in occupancy costs such as rental, rates, cleaning and energy costs which then lead to further savings that can also be passed onto the customer. The smaller product range means fewer suppliers which again mean lower supply chain time and costs. The smaller store and range also lowers the number of staff required to maintain the store and the shelves.

 The Aldi customer must pack their own bags however this trade off means less staffing time and hence lower labour costs. The customer has virtually no brand choice, but fewer suppliers mean lower supply chain costs. Finally if something is not quite right, it is difficult to get help as all the staff are either flat out loading boxes into shelves or running the just in time registers. Again, the upside is lower labour costs.

Aldi has more of a “partnership “approach with it suppliers. It offers its suppliers significant volume which leads to trade discounts which in turn can be passed on as lower prices to customers. The trade-off is that Aldi want more say in the product including quality, appearance and packaging. Suppliers have to supply special boxes which must not only withstand shipping, but must also be able to be displayed straight on the shelves.  This demand on suppliers’ saves Aldi staff time in unpacking boxes and stocking shelves.

Meat and deli are all prepacked and so there is no need for in store butchers, bakery and deli staff. While this limits choice and service to the customer it again lowers the cost to the customer.

Filter

Aldi’s clear positioning of cost leadership and high quality acts as a giant filter for every decision that is made in the business. Marketing, operations, people, technology, innovation and supply chain decisions are all made with the strategic filter in mind.

I am sure Michael Porter would agree that Aldi is a business that understands the essence of strategy.

Mike Burke is an Accredited Mindshop Facilitator and specialises in business and leader success.

Email: mburke@bcag.net.au

Twitter: @mikeburke17

Web: http://www.bcag.net.au/

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