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5: Complexity as a Strategic Weapon
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global per-SKU sales of EUR 15 million Compared with Wal-Mart s Germany stores, ALDI s prices were 20% lower
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As Figure 52 illustrates, ALDI s strategy has resulted in significant growth in terms of both stores and revenues A key tenet of that growth is vigilance on price Whenever a supplier lowers a price, ALDI immediately lowers the retail price, so that any stock in the supply chain is sold to the customer at lower prices The customer also benefits from the speed of the checkout process Capping the number of SKUs to 700 greatly increases the speed and reduces variation in the cashier process But what has the competitive impact of ALDI been Consider: In Germany, ALDI holds 51% of the fruit juice market, 42% of the canned vegetables market, and 50% of the packaged and preserved meat products market Around 95% of ALDI SKUs are house brands sold only at ALDI outlets; its house brand laundry detergent has an estimated German market share of 25%
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Figure 52: ALDI s Growth
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Revenues Number of (million Euro) Stores 15 3,100 8,700 14,200 17,900 22,500 100 1,000 2,000 3,000 3,250 3,700
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According to Young and Rubicam in 2000, ALDI was the most well-recognized brand in Germany after Coca Cola and Nivea And in one survey, 82% of West Germans claim to shop at ALDI vs 27% for the next largest competitor ALDI understands that we primarily go to the supermarket for staple items If a quarter of all SKUs on supermarket shelves sell less than one unit per month very few customers buy these items why should ALDI carry the burden of this overhead and have to pass it on to the customer in the form of higher prices This is the equivalent of charging
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Conquering Complexity in Your Business
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someone with a low-risk financial profile the same rate as someone who is high-risk ALDI has segmented the market by the level of complexity incurred and in so doing, has accelerated its learning curve: introducing its own brand of products, increasing its buying power, and limiting its complexity costs Competitors are left with the low-volume products that sell infrequently Once the margins of the poor sellers are adjusted to account for complexity, many are value-destroying
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ALDI s Secret of Success: Eternal watch against complexity
ALDI s other key tenet is resistance to complexity Adding variety can be a temptation on paper To add 50 new articles would easily increase sales by EUR 1 billion, according to Dieter Brandes, long-time manager at ALDI and author of a book about the stores ALDI has resisted this temptation for decades Is this a typical corporate response Definitely not The opportunity for more revenue is normally seized upon And it takes great discipline and moreover, understanding the full economic cost required to produce that revenue to resist Experience has shown that infrastructure costs in companies grows in proportion to the number of various offerings, says Christian Homburg, Professor for Business Administration at the WHU in Koblenz In the decision process to add new variants, one assumes that the fixed costs are there already and will cover the new additional variant without addition Incremental decisions to increase complexity can result in quantum leaps in fixed costs (eg, new warehouses, new technologies, new organizations to manage the new complexity) ALDI avoids these costs by strenuously resisting proliferation And it simplifies supply chain management If an item is not in stock, ALDI reorders, keeping oneweek capacity for each article in the store This very simple system worked well for many years even before computers supported the process
5: Complexity as a Strategic Weapon
In another instance, ALDI held back until recently in adding cashier scanners to the stores As long as the stores had no computers, no phones were needed Only after scanners were added to the cash registers were telephone lines required ALDI has withstood all temptations for growth that would have created complexity, including: expansion of the offering beyond 700 items diversification into other areas purchasing decisions based on supplier special offers For many years, fruit, vegetables, frozen goods, and even butter were not carried, and when these were finally added, other articles were dropped to keep the total number of SKUs constant in the stores
Conclusion (and a look ahead)
Integrating the precepts described above into your strategic and tactical thinking will help you decide how to use complexity best in your business As noted above, though, these qualitative insights are only half of the equation you also need quantitative tools The elements of these tools Economic Profit, Process Cycle Efficiency, and the Complexity Equation have already been introduced in previous chapters Here s a quick preview of how these elements come together in the methodology you ll find in Part II The purpose of the quantitative methodology is to focus your attention on the largest creators and destroyers of shareholder value and help you find ways to defend the creators and reform or eliminate the destroyers The way you get there is to 1 Identify strategic complexity targets: Identify Business Unit segments in which there is a valuecreation opportunity Assess how the market is rewarding or punishing complexity over time Benchmark key data internally and externally to identify areas of complexity (Complexity Profile)
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