A firm which intends to engage in FDI has to make decisions about whichforms of FDI should they take. The previous research on entry modes suggeststhat an MNE entry mode choice has to be determined in terms of several factors.These include firm, industry and country specific variables (Siripaisalpipatand Hoshino 2000), forexample, Aldi has analysed the gap in the UK market and decided to compete withother supermarkets with the strategy of lowering the price standards.
Aldi is now classed as one of the cheapest supermarkets in UK, thusknown as UK’s fifth largest supermarket (Guardian 2017). In terms of the ownership advantage ofAldi, the organisation has charged for plastic bags sincethe 1990’s on their first branch opening in theUK. The company donates all the money generated from carrier bags to the RSPBfor three years since July 2012 which raised £2 million for charity (Independent 2016).
This gives Aldi a competitive advantageas it builds the company’s brand representation through the use of beingsocially and economically friendly. This fits into Dunning’s ownership specific advantages in which the firm has aninnovative process and method in terms of their attempt to raise money forcharity. This raises awareness for the charity and improves customerrelationship which can increase sales and profit. Furthermore, they encouragepeople to use less plastic bags for environmental benefits. Aldi is differentto other supermarkets such as Tesco as they were the first to raise the amountfrom 3p to 5p (Independent 2016) in order to encourage a more sustainableenvironment.
Organising ownership advantage with complimentary assets can beexplained in terms of the size and structureof the firm, Aldi provides a differentexperience to Tesco and Asda as it is bright, spacious and decorated withsmall, dimly-lit shops with narrow aisles and sparse shelves (BBC 2014). Unlikeother mainstream supermarkets, Aldi offers a friendly and comfortableenvironment for the shoppers as their organisational aim was to createconvenience through the small and compacted stores they build. This ownershipadvantage is clear and evident through consumer analysis. Consumer preferencepatterns show that shoppers prefer small stores as they are more consumerfriendly (Ker et al 1982).
To support this, the small environment storesattract middle class customers, thus the supermarket has altered their stock tocater their shoppers such as increasing luxurious items including “cut-pricefresh lobster tails and serrano ham” (BBC 2014). The link between the attractionof the supermarket, products and customer satisfaction is significant. Thechain sells a fraction of the items bigger supermarkets do, focusing on asingle own brand variant of any given product. In addition to firm-specificadvantages, a firm which wishes to compete successfully in foreign marketsrequires some degree of international management capabilities. As a firmexpands the operation overseas, a firm has learned more about how to cope withthe different environments in terms of the economic, political and legalsystems, as well as the cultural distances (Siripaisalpipat and Hoshino 2000). Aldi has been adapting well in theinternational stage, majority of their stores abroad sell local products inorder to adapt into the host country market. To support this, Aldi has noconcern about Brexit in UK, and believe that it will not have any impacts onthe business as stating that the majority of their products are Britishproduct, which mean they don’t import their products and instead working withlocal suppliers where again it is one of their key selling point that theyoffer lower price.
pdf?_tid=8e6e0f96-0032-11e8-bb8d-00000aab0f6b=1516707966_10c8044ef4a362686d2886a11a3d175a Identify core competencies is important for the business. Aldi hasfocused on pricing, in order to offer their customers with a competitive price.This results the company in leading the price position. Aldi has focus to bringin private brand product, by getting supply from local suppliers. The benefitsof this is that Aldi can negotiate directly with suppliers instead of hiringagency. A firm which lacks necessary resources and wishes toengage in international expansion may need a cooperative relationship withother firm in a specific host country. The partner need in an internationaljoint venture is the need for the contributions of the local partners in anumber of aspects such as capital, human resource market access, localknowledge and bargaining power (Beamish, 1987).
For example, Aldi has partnered with Alibabato enter their digital platform in china. Based on resource base view, Barney argued that sustained competitive advantage derives from theresources and capabilities a firm’s control that are valuable, rare,imperfectly imitable, and not substitutable. These resources and capabilitiescan be viewed as bundles of tangible and intangible assets, including a firm’smanagement skills, organizational processes and routines, and the informationand knowledge it controls. (https://www.
researchgate.net/profile/Mike_Wright7/publication/228558289_The_Resource-Based_View_of_the_Firm/links/568a297008ae1975839d39fa.pdf). Aldi is working with local smallsuppliers directly and it has aided Aldi to reduce their product price lowerfor customers, as Aldi suggests “Supplier relationships are key to everythingwe do” (Aldi 2018). This results other firms to find it difficult to competewith Aldi in terms of pricing which gives Aldi the competitive advantage.Furthermore, it is more sustainable as Aldi are using local suppliers ratherthan importing from other countries, this is beneficial as it reduces costs andit shortens transport commodities which lowers Co2 emissions. This therefore reducesenvironmental impacts to the environment which gives Aldi a competitiveadvantage that links to sustainability. Additionally, using local products candevelop relationship with local supplies, this benefits the local economy.
“The firm’s domestic recombination capability, which mayhave led to a dominant market share and superior expansion rate in the homecountry market, as the firm engaged in product diversification or innovation,and thereby increased its geographic market cover-age domestically, may not beadept enough to confront the additional complexities of foreign markets.”(Verbeke, 2013). In domestic, Aldi remain the key player of discounter retailerin Germany, despite sale declined. However, Germany is still the main marketfor Aldi, which has generated 39% of total company sales (Passport, 2017).
Thecompany has planned to invest more in abroad, as international expansion hasbeen a success for the company in recent years. UK, US and Austrian has beenachieved rapid growth and generated more sale for Aldi. Aldi is adapting wellin foreign markets such as UK, US and Australia. Aldi has tried to approachlocal consumers with label product instead of brand name, and encourageconsumers to purchase their products by working with local suppliers and lowcosts. To expand further, Aldi is looking at theRomanian market for future expansion (Rudolph et al 2012), this explains why Aldi isentering other markets globally as they are engaging in productdiversification. However, entering a new market can be a risk to the Aldi andtake away resources that could be used to make strategic investments. Afrequently unforeseen consequence of global expansion isthat healthy markets,especially the home market,are put at risk by this diversion of resources (Aaker et al 2010). 2.
3 Location Advantage: Dunning’seclectic Paradigm: For firm to engage in FDI three conditions must exist Aldi began toexpand to the UK in 1990 and now they have more than 500 stores located withinUK (Telegraph 2013). This explains the reason why European companies locatetheir businesses in the UK, as organisations do not need to pay duties forimport or export of goods and products within the European Union, thuscompanies based in the UK have the potential to reach 500 million consumersacross Europe (GOV). This provides location specific advantages of entering theUK for business start-up due to convenience and the demand of food retailers inUK that are cheap and fit with the consumer preferences. This further explainswhy Aldi sell relatively cheaper products than their competitors do in order toachieve competitive advantage.
Aldi is labelled as one of the cheapestsupermarkets in the UK and they have the title of UK’s fifth largestsupermarket (Guardian 2017). According to Dunning’s eclectic theory that”foreign countries have location advantage that make it more efficient tolocate production there as to opposed at home” (Devinney 2013: 14). Locationspecific advantages are significant in terms of decision making on productionof a product, for example, the lack of resources can lead Aldi unable tosell products fit for the location and the local consumers, which could cause adecline in sales and profit. Complexproducts are not ideal for businesses entering the UK; however, outsourcing dueto lack of resources can form the base for a long-term secure business (Dolcemascolo2006).
Furthermore, Devinney supportsthe issue with the lack of recourse in a location and suggests that thelocation advantages are wide and complex. These advantages include resource, production factors, tax,regulations and gaps in the market within the specified location (Devinney2013). Aldi has achieved both competitive and comparative advantage by locatingtheir branches in locations with recourses, which are capable to help Aldiperform as a supermarket.
Secondly, thechoice of products are important in link to the location as UK supermarketslack luxury food products for example, Wagyu beef that is known as a delicacyin international countries. Through analysis, Aldi has chosen to target middleclass consumers through the marketing gimmick of luxury products for an affordableprice. This gives them ownership advantage, as they are different; supermarketssuch as Marks and Spencer’s offer luxurious products for a high price, whichgives Aldi the advantage in terms of their competitors. Aldi takesopportunities and threats, acts upon them in order to succeed, stocking lobstertails and Wagyu beef, which created an uproar for shoppers (BBC 2014). The factthat UK supermarkets do not import many international goods and products setsthe opportunity for Aldi to counter.
Investmentdevelopment is a factor to consider with Dunning’s theory as it assumes that foreigncompanies change with the level of country development, which therefore affectsthe flow of inward and outward Foreign Direct Investment (FDI). Inward flows correlate with the improvements of the country’slocation advantages; outward flows interact with the development of domesticfirm ownership advantages (Kaliszuk and Wancio 2014). The development of the economy andcompetitiveness of the home country leads local firms to develop ownershipadvantages, which allows them to expand internationally. In which for Aldi,they have achieved this and invested in UK due to the strong economy analysis.UK is a popular destination for FDI in Europe; attracting the highest number ofFDI projects (total of 1,988 projects), thus receiving the most value of FDInet inflows within Europe in 2014 (GOV). Economic development and modernizationcan increase the attraction ofcapital investment and technical cooperation, to increase trade with foreigncountries (Kan 1998).This shows that UK benefit from foreigninvestment and that foreign investment has great potential to support thegovernment aims. Aldi analyzed the strength of UK as a location for businessexpansion and investment.
2.4 Internationalisation: The last part of dunning’s framework is internalisation that is knownas the most important key part. International advantages influence how a firmchooses to operate in a foreign country, trading off the saving intransactions, hold-up and monitoring costs of a wholly-owned subsidiary,against the advantages of other entry modes such as exports, licensing, orjoint venture. (http://users.ox.
ac.uk/~econ0211/papers/pdf/fdiprinceton.pdf) Aldi’s focus is working directly with small suppliers instead of goingthrough agents or third-party companies. This allows them to cut down theiroutgoing costs and extend the benefits to their customers. Aldi has chosen to investabroad because the company believes there is a potential market and anopportunity for growth. Aldi has determined FDI due to the model of their peakat their home country and applied this in monitoring the search for a goodlocation when choosing to expand internationally. Aldi invested into the UKmarket based on the free trade within Europe which cuts down import taxes andpreserves the UK economy.
Aldi choose greenfield investment for their new market entry strategy,as the company has the ability to keep business costs down. A greenfield investment is the initial establishment of a fully ownedsubstantial operations undertaken by the company (Shenkar, Luo 2008). https://books.google.co.uk/books?id=ppXWE0rUVWEC=PA303=greenfield+investment%5C=en=X=0ahUKEwju8sHK6fvYAhVqDMAKHQlTAeYQ6AEILzAB#v=onepage=greenfield%20investment%5C=false Following this concept, Aldi has been extremely successful in theirforeign market so far as there are few retailers who use the same businessstrategy as Aldi. Their success in the UK market is evident as Aldi has becomea threat to the 4 biggest supermarkets in UK, as reports have shown that theirhas been a decline in sales. By choosing greenfield as their main market entrydue to low transportation costs, Aldi has risen to become a key player in theUK market.
Barlett and Ghoshal’s idea that large MNEs are making a mistake whenthey adopt the two simplifying strategies of homogenization (treating all theirsubsidiaries the same) and centralisation which means making all theirstrategic decision at central headquarter (Verbeke, 2013). It is essential forthe organisation to make the right decision in FDI as firms tend to make amistake. “The decentralized multi-centre MNE, recognising that each host countryoperation needs to build upon its own distinct location-bound FSAs, transfersonly core routines; in the area of financial management and administrative bestpractices to each host country” (Verbeke, 2013: 21). Aldi is recognised as adecentralised organisation and this has benefited Aldi immensely. Since Aldi isdivided between two owners, this means that ideas are shared between bothcompanies.
This structure played a key role in the success of their ventureinto foreign markets, since Aldi is a small sized corporation, decentralisationallows the local managers to take part in decision making thus they are able toobtain more ideas. In the UK, a majority of Aldi’s products are British whichaccumulates for around 70 percent of their total sales. Despite Brexit’sconcerns, the company is still extremely confident about its growth in theupcoming years. In addition, sources state that one of their key advantages ispricing, creating a price gap as high as 30 percent in comparison to theircompetitors. (http://www.thisismoney.
co.uk/money/article-4281918/INTERVIEW-Aldi-boss-insists-77-UK-products.html). Based on a classification of subsidiary roles in the MNE & B&G,Aldi is recognised as a strategic leader.
The company has identified the needsof discount retail in the UK, therefore has used low costs products to enterand sustain their hold in the market. 3.1 Ethics: The ethical dimensions of Aldi’s strategy in expansion to UK includes bothinternal and external factors. In terms of external, the company focuses onbuilding cooperation and transparency with suppliers as well as ensuring theycomply with the ethical standards, with the Aldi Social Assessments (Aldi2018). This provides an accurate analysis of the issues affecting theproduction facility and counteracts audit fraud issues. However, issues mayarise in terms of the supply chain standards unable to meet Aldi’s socialstandards in production. For example, “millionsof pounds had been stripped out of the fresh produce sector through poor supplychain practices” (Guardian 2015).
This shows evident of ethical issues withinthe supply chain, which could cause environmental issues. Aldi’s strategy ofselling products at a lower price has made Aldi UK’s fifthlargest supermarket (Guardian 2017). However, in terms of my recommendations,Aldi must consider the factors within the supply chain that could cause adownfall of their reputation.
This is why Aldi concentrateson environmentalsustainability including the store design and transportation of goods. Aldi hasup to 60 stores in Queensland and each has an EcoBiz certification, whichensures the minimization of waste and emissions (Aldi 2018). This further linksto the environmental issues caused by expanding to the UK.In terms of theproducts, Aldi stocks own-brand food and beverages leading to excessive controlwithin what the products contain.
This creates social and environmentalbenefits for the society and forms a standard of health policy. Furthermore,Aldi’s products are low in price, this however can cause negative impacts as itcan cause other companies to decrease their prices in order for competition,which may involve decreasing costs and production within the supply chain. Thismeans that Aldi’s business strategy could affect the UK supermarkets and publiclife.The Internal aspectsof the ethical dimensions cover employee welfare and working conditions. Aldiemployees suffered from a decrease of wages due to the weakening of pounds from Brexit. It leadto the increase of import costs (Guardian 2017). This shows the negativeimpacts caused from Aldi’s strategy to implement in the UK, thus causing a badreputation for Supermarkets within the UK.
However, reducing employee wages isa standard procedure in terms of business strategies as Friedman suggests thatthe only responsibility of a business is to maximise profit (Friedman 1970).4.1 ConclusionTo conclude, Aldi hasbeen very successful in terms of FDI. A rapid growth of Aldi’s market share isevident in UK, which shows that Aldi is a leading retailer. Aldi used their lowcost advantage over the competitors to achieve competitive advantage throughtheir firm specific advantage of low price and luxurious private label products.
Furthermore, Aldi uses local suppliers which is why the costs are low andsufficient, thus benefits the company as it increased middle class consumers asmentioned in section 2.3 regarding the location advantage. Finally, theinternalization of Aldi shows that they have foreseen the market gap in UK andexplored the opportunity defined for their strategy to succeed as indicated.Aldi has achieved the three dimensions in terms of their business strategy withevidence of their success in the UK market.