Managerial Economics
Answer 1
The Aldi retail supermarket firm transformed its competitive position by following the cost leadership strategy as Aldi’s aim is to become leading player by offering gods and services at low prices. While studying about Aldi retail firm, it is found that company s discounter retail firm which is using cost leadership strategy in order to attract a large number of customers (Li, et al., 2013). This strategy is used to reduce the cost of operation that is running under the supermarket chain. After adopting the cost leadership strategy, Aldi gained 16% growth in sales and increased competition among other key players in the year 2015 in UK retail supermarket.
This transformation in Aldi’s competitive position affected the other key player’s market position as it started selling goods and services at low prices which are easily able to afford by every customer. However, it is not possible to depend fully on cost leadership strategy in a high competitive market, so it is not easy to sustain with a same market position for a long time period. While studying and analyzing the UK retail supermarket, it is found that Aldi is Britain fifth leading supermarket company which is targeting its customers by using pricing competitive strategy which helped in gaining the large UK market share by cutting down the market share of existing leading supermarkets (Wang, et al., 2016). Through price competition strategy, Aldi was able to increase its sales to 12.4% yearly as well as increased its market share by 0.6% which resulted in achieving a fifth competitive market position in the UK supermarket.
(Source: Kantar World Panel, 2017)
In earlier years, Aldi was not leading supermarket retail firm as there were many other retail supermarkets which are providing the customers with the best quality of product and services at considerable prices. But, Aldi retail firm decided to transform their market position by targeting the customers with very low market prices of product and services. This change in marketing strategy due to pricing competition strategy leads to increase in demand of goods and services in the market as well as supply of goods and services also increased which resulted into low cost of production as goods and services are produced and supplied in a bulk to meet the customers demand on time (Weisstein, et al., 2016). This step of action of Aldi in supermarket brought high competition in the market as other key players have to maintain and retain their loyal customers for which they also have to develop and improve their marketing strategy which helps them in maintaining their demand and supply. The demand and supply of goods and services in the UK supermarket was increasing rapidly as there was non-pricing competition in the market because of which companies were competing in the market on the basis of prices which are set for attracting and targeting the large market share.
Moreover, to maintain and retain in the same market position, Aldi was using the price elasticity of demand and supply in which goods and services are sold at a very cheap rate as price elasticity of demand is based on the prices (Esteves and Reggiani, 2014). The price elasticity of demand refers to a percentage of change in the quantity demanded of goods and services are divided by percentage change in the price of goods and services. On the other hand, the price elasticity of supply is referred as a percentage change in the quantity of goods and services supplied is divided by the percentage of the price of goods and services. This prices elasticity of demand and supply has influenced and supported the Aldi retail supermarket in maintaining its competitive position in the high competitive market (Thimmapuram and Kim, 2013). In UK supermarket, demand and supply condition was changing rapidly as Aldi, and retail supermarkets goods and services are demanded by the customers for fulfilling their needs and wants at a reasonable price.
However, it is difficult for the Aldi to maintain this competitive position in the market as this market position is not sustainable for a long time because risk and uncertainty always exist in every organization which may affect the marketing decisions and strategy of the company (Pettinger, 2014). After studying the competitive market position of Aldi Company, it is very much clear that Aldi retail firm has to adopt and focus on the marketing strategy in support of pricing strategy in order to develop a sustainable market position. The current market position of Aldi Company is sustainable in the market as its sales, revenue and profit are increasing year to year by some percentage.
The market structure is illustrated as a state of a market which is developed with respect to competition. There are different types of a market structure such as perfect competition, monopoly and oligopoly market. These all market structure has different aspect or purpose in the organization. Generally, supermarkets are considered under an oligopoly market due to its characteristics that some firms have like non-price competition, high barriers for a new entrant and so on (Barbagallo and Mauro, 2014). Similarly, in the UK, the market key players of a supermarket do not seem to be an oligopolistic market because currently, supermarkets are strategically changing its behavior on the basis of the price of products and services. There are some markets leaders in a supermarket such as Aldi, Tesco, Sainsbury’s, Morrison, ASDA, etc are competing in the oligopoly market with their prices of product and services which are offered to the customers.
But, currently, the UK supermarket is strategically changing its behavior and market structure by using game theory approach. Game theory approach is an approach that helps in analyzing the market as well as helps in studying the behavior and conducts of firms in oligopoly market (Arsenyan, et al., 2015). In simple words, this approach helps in understanding and determining the behavior of firm, customers, and markets towards the economic changes. This approach is an economic theory which is applied to the firms in order to analyze the need to bring a change in behavior when there are some competitors in a market.
At the same time, kinked demand curve theory of oligopoly market is also studied as it helps in demonstrating the high degree of interdependence that is found among the firms in an oligopoly market (Vatter, 2017). This economic theory contributes to understanding and evaluating the market structure of supermarkets on the basis of current strategic behavior. Through this theory, current market structure and market behavior are studied on the basis demand curve in which demand curve is sloping downwards but the elasticity is depending on the competitors which change prices and output. In the below diagram, it is clearly seen that increase in marginal costs will not lead to increase in prices of goods & services (Sushko, 2013). This kinked demand curve theory suggests that there will be a change in price in these competitive markets and also firms will rely more on non-price competition in order to increase sales, revenue, and profits.
(Source: Cliffsnotes, 2016)
These both economic theories will help in evaluating the current market structure of UK by understanding the key retailer’s challenges which they are facing because of change in prices, i.e., products and services are made available at low discounted price. For instance, Aldi has to grab large market share by providing the customer’s goods and services at a very low discounted rates which have created huge influence on other key market player’s shares and profit margin. While studying and analyzing the UK market, it is identified that there is an increase in barriers for new firms that enters in an oligopolistic market structure (Carraro, et al., 2013). In earlier years, there was low competition between major key retail firms, but as a market develops, several new entrants have entered with their products & services into the UK supermarket which developed difficulties as well as opportunities for key players to maintain or improve their sustainable business (Epstein and Buhovac, 2014). For attracting large market share, Aldi and Lidl decided to provide a various discount that is offered to customers in order to cut the market shares of big retail companies like Tesco, Sainsbury, etc. This change in UK market growth of different retailers is shown in given below graph:
The below given figure depicts that there are other retailers in the UK supermarket that are existing and growing consistently in the competitive market after they are getting affected with the market share of other key retail players. After analyzing the market, it is clearly demonstrated that existing number of retail firms and absence in new entry due to barriers in the UK supermarket illustrated that UK supermarket is not currently behaving similarly like the oligopolistic market structure.
At the same time, UK supermarket was also not behaving to work under non-price competition market structure because key retail players are handling the high market competition by providing or offering retail discounts. The key retailers including Tesco are facing difficulties competition with those retailers like Aldi which are discount retailers as they sell their goods & services at discount prices. For attracting a large number of customers, key players are also adopting discounting strategy in which they are cutting down the prices of their products and services in order to handle the high market competition (Cairns, 2013). In UK supermarket, price-based competition seems to be behaving to a large extent which results in the change in the oligopoly market structure of UK retail supermarket.
In order to analysis, the attractiveness of UK supermarket industry, porter’s five forces model will help in evaluating and determining the Aldi’s position in the competitive market of supermarket industry in the UK. While studying, it is found that there is a large number of competitors in the UK market that creates a high competitive situation as they are seeking to enter in the market which will lead to intensifying their competition level to a large extent. In this context, Aldi will also seek to maintain and develop its competitive position in the UK market by using Porter’s Five Forces Model.
(Source: Dudovskiy, 2016)
Threat of new entrant
In the UK, a threat of new entrant is low because scope and growth for new entrants are limited because of existing competitive firm growth in the market. The supermarket industry in the UK has strong entry barriers which restrict the new entrant to UK market with their new similar product or services. It is very difficult for new entrants to raise sufficient capital for their investment in fixed cost and develop under the complex situation.
Threat of new substitute
In the UK, the threat of new substitute is also low in the supermarket retail industry as the substitute of retailers like a small chain of shops; stores are not threat for the supermarkets like Aldi, Tesco. This supermarkets retailer provides customers with high quality of products & services at an affordable prices. However, the threat of new substitute of food items is low in comparison to clothing items which is fairly high. So, in the UK the threat of new substitute is low as customers are loyal towards the brand.
Bargaining power of buyers
In every industry, a power of buyers is high as there are large numbers of buyers than sellers. In the UK, Tesco, Aldi are supermarket companies which are successfully adopting customer retention strategies which are used to increase the profitability ratio (Belleflamme and Peitz, 2015). In the UK, bargaining power of buyer is high as they have a large number of sellers who offers similar types of products & services to a customer. For retaining the customers, supermarkets provides different offers to customers in order to maintain their brand loyalty. Therefore, bargaining power of buyer is imperative and volatile in nature as customers can easily switch the cost.
Bargaining power of sellers
The bargaining power of supplier is medium as supermarkets firms have a large number of sources of getting quality material for their product from the supplier so there is no fear of losing the business in super marketers (Roson and Hubert, 2015). But in the UK, a number of large suppliers has a fear to lose contracts with the supermarkets which affect the relation as well as chances to negotiate in a high competitive market.
Intensity of rivalry
In the UK market, supermarket industry many competitors of Aldi such as Tesco, Sainsbury’s, Morrison, ASDA are top leading competitive firms which are selling heir branded products. In the UK, it is observed that customers are loyal towards the brand as customers are well aware of the brand which is more important for the industry than a cost.
From the above study, it can be easily recommended to Aldi to change its strategy on a constant basis in order to sustain or maintain its market position in the high competitive market for a long time period. It is recommended to the customer to focus on other key areas rather than focusing on reducing the prices of goods & services because it is not possible for Aldi to increase its market share on the basis of cost leadership strategy in the UK (Guo, et al., 2013). Aldi Retail Company is required to focus on other competitive strategy like differentiation strategy or by developing and improving the marketing mix. The development of marketing mix will help the Aldi to maintain and increase its market share by targeting the customers in the different geographical region.
In order to maintain the competitive position in the market, Aldi is required to focus on developing its marketing strategy rather than declining the product prices less than the actual market prices. This declining in the prices below the market rate indicates that company is not following ethical principles which are required to be followed by every organization in order to sustain the competitive environment of the market (Davoudi Nasr and Cheraghi, 2017). The other recommendation to Aldi is to follow the ethical principle in which Aldi is required to keep its prices low but not below than the market prices. The role of ethics in economical decision making is playing a significant role in ethics helps in making the decisions which are related to the cost and benefits (Zhou, et al., 2014). This role of ethics sets the standards under which organizations are required to make a decision for their benefits and to accomplish their objective on time.
On the other hand, Aldi Retail Company is recommended to adopt and implement the non-pricing strategy in its marketing strategy as non-pricing strategy is a strategy which helps firms to focus on other areas or aspects in which product differentiation is done on the basis of product attributes and features from other competing retail firms such as Tesco, ASDA. In simple words, a non-pricing competitive strategy is widely used by an organization in order to target customers with their differentiating product and services at an affordable price (Sogn‐Grundvåg, et al., 2014). Therefore, these all recommendation will be helpful for the company to sustain in the competitive market at a high market position by targeting customers with both pricing and non-pricing competitive strategy.
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