The Advantages and Disadvantages of Lidl

Rationale for choosing Norway based on PESTEL ANALYSIS on Appendix 1

Lidl is a discount supermarket chain that offers its customers products at discount prices. The supermarket chain has its origin in Germany and operates over ten thousand stores in the United States and Europe. Recently, it is considering setting up shop either in Mexico or Norway. According to the PESTEL Analysis of Mexico and Norway, Norway scores the highest with 9.6 while Mexico has a score of 6.925.

1.1.Political Factors

Norway is more politically stable compared to Mexico. The monarchy system of government has proved to be effective because there are no political tensions during elections as those witnessed in Mexico. Political stability throughout the year in Norway makes it the most suitable destination for Lidl to set up its operations. Political stability not only promises a stable future but also security and prosperity (Sridhar, 2016). Security in the country is also guaranteed as compared to Mexico. Despite Mexico having made significant improvements to ensure that businesses are safe, the country is still facing issues with unemployed youths who are a security threat. Mexico’s illicit trade problems also make it a risky destination for business as indicated in Appendix 1. Entering the Norwegian Market would guarantee Lidl a calm political environment that is free from security threats and has efficient institutions that facilitate business.

Norway does not have any disputes with other foreign countries. Mexico, on the other hand, has had quite a number of disputes with the United States. The problems range from drug smuggling and illegal immigrants entering the U.S. in search for jobs. Despite both countries enjoying relatively ‘warm’ relationships, these disputes threaten the existing peace and could lead to sanctions. Other than transnational disputes, Mexico is still faced with the corruption menace. Officers in different offices often ask for bribes particularly from foreigners in exchange for services. The institutions concerned with business registration and management are not as effective and efficient leading to tedious and slow processes (Foyer and Dumoulin, 2013). Human rights abuses have also been widely reported in Mexico making it a risky destination for business. On the other hand, there are no widespread reports of corruption in Norway. Service delivery is efficient and most processes are automated. The institutions are effectively functional and human rights are respected. The process of setting up for Lidl would thus be efficient and issues of human rights violations would not be an issue.

1.2.Economic Factors

Norway’s economic environment is much better than Mexico’s. The stock exchange in Norway, the large petroleum surplus, the huge fish industry and the sound banking system are the backbone of Norway’s economy. Norway has a GDP of 370.56 billion USD and an inflation rate of 3.6% in 2016 (World Economic Forum, 2018). Appendix 3 gives further information on the economic outlook of Norway. The GDP and inflation rate for Mexico in 2016 was 1046.93 billion USD and 2.8% respectively (IMF, 2018). Appendix 2 gives more insight into the economic outlook of Mexico such as current account, GDP per capita and unemployment rate.

The level of poverty in Mexico also makes it an unattractive destination to set up a business. Currently, almost 50% of the country’s population lives below the poverty line World Economic Forum (2018). Compared to Norway, Mexico’s government debt, credit rating, and goods market efficiency are still ranked lower. Norway has adopted sound economic policies that have ensured the availability of venture capital, easy access to loans and government support. Lidl would not only have access to fund its operations but also efficient infrastructure to support the availability of raw materials and products in its market. These facilities as well as the government’s willingness to spend its oil revenue to curb employment make Norway even more attractive. Norway’s port infrastructure, electricity supply, transport infrastructure are much better compared to Mexico. Norway is ranked 34 in terms of infrastructure while Mexico is 62 (World Economic Forum, 2018). More information on the economic environment of both countries is in Appendices 1, 2 and 3.

1.3.Social Factors

The social environment of Norway makes it suitable for Lidl. Norway is one of the most densely populated countries in the world. The high population coupled with high purchasing power implies that there is ready market (Sridhar, 2016). The literacy levels are also high, thus there is readily available skilled labour. Higher education and training is ranked 8th in Norway but 80th in Mexico (World Economic Forum, 2018). The one downfall with the social environment of Norway is the high cost of living. However, that is compensated by the comparatively higher GDP. Thus, Lidl would have readily available skilled employees to offer quality services to customers.

1.4.Technological Factors

The technological environment of both countries has experienced significant changes over the years. However, Norway has had more success in the sector as its technological readiness is ranked 11th while Mexico’s is at 71 (World Economic Forum, 2018). The country has invested significant amount of resources to develop centres of development. Norway has ensured the availability of the latest technology, mobile broadband subscription, technology transfer and internet subscriptions among others as shown in Appendix 1 (World Economic Forum, 2018). The technological readiness of Norway would facilitate innovation and support Lidl’s intentions of developing technology to improve the efficiency of their services and develop new products and services.

1.5.Legal Factors

The legal environment that face organizations in Mexico is quite complex. Over the years, it has become difficult for concerns to be addressed and most international businesses have been affected or harassed despite complying with all the laws and regulations. The judicial system is not fully independent and there are inefficiencies in dispute resolution. The legal system in Norway is quite effective and operational. Business people can easily seek redress in case of conflict and they are assured of justice. Rules and regulations are clear at all levels in the establishment and running of a business (Sridhar, 2016). Comparing the institutions of both countries, Norway is ranked 6th

while Mexico is ranked 123rd (World Economic Forum, 2018). Lidl would find is easy to resolve disputes. The intellectual property right of the company would also be protected and any form of infringement would be effectively addressed.

1.6.Environmental Factors

Mexico is among the most polluted countries and this has led to numerous diseases and deaths. In most cities, it has become difficult to find clean drinking water. The air is also polluted due to failure to enforce policies on environmental conservation. On the other hand, Norway is quite safe and has over the years reduced its carbon emissions. Doing business in Norway would guarantee the good health of the employees of Lidl and also their customers.

2. Porter’s Five Forces Model

Porters Five Forces model is an analysis tool that was developed by Michael Porter in 1979 with an aim of providing a novel approach towards industry analysis. The five forces that will be assessed by the Porter’s model include the threats of new entrants, the bargaining power of buyers and suppliers, threats of new competitors, and threats of Substitutes.

2.1. Bargaining power of Buyers

The large volume of potential customers in Lidl’s industry diminishes the power of individual buyers (Oraman, Azabagaoglu and Inan, 2011). The industry sells commodities, especially food that are used by people on a day-to-day basis hence the large number of consumers. The revenue of a single buyer is quite insignificant to the retailer, thus there is no much influence (Nicholson and Young, 2012). Collectively, consumers have power as buyers and they can easily articulate their interests which will decide the direction of the industry (Boora, 2016). Thus, retailers cannot afford to ignore consumer demands and trends. The bi-polarity makes buyer power in the supermarket and retail industry to be considered moderate.

2.2.Bargaining Power of Suppliers

Suppliers in Lidl’s industry include farmers, agricultural co-operatives, farmers and manufacturers. The large retail chains in Norway often maintain close relationships with a variety of suppliers who can sell them products in bulk in order to establish stability in prices and product supply (Nicholson and Young, 2012). Suppliers as a result have power over the retail chains they serve because they control the input. Without the large suppliers, most of the potential competitors of Lidl in Norway would close down due to lack of products to sell. However, the large sizes of the retail chains often reduce the bargaining power of suppliers because losing just a single customer can cost them their business (Oraman, Azabagaoglu and Inan, 2011). Hence, the bargaining power of suppliers is moderate.

2.3.Degree of rivalry

Lidl’s industry experiences one of the fiercest competitions. Consumers within the industry do not incur any switching costs and that puts great pressure on consumers to ensure they secure their loyalty (Oraman, Azabagaoglu and Inan, 2011). The lack of differentiation also plays a major role in increased competition. Firms in the industry usually resort to using prices to increase their sales and gain market share (Omsa, 2017). The outcome is price competition which sometimes forces other firms out of business. The large number of firms with similar resources and capacities also intensifies competition (Boora, 2016). Battles are often sparked and sustained because firms have comparatively similar resources that are able to sustain retaliation acts (McGrath & Bates, 2017). The degree of rivalry in the industry is high.

2.4.Threat of New Entrants

Large scale firms that are established in Lidl’s industry have an advantage in operating their business because they are able to benefit from economies of scale, established connections and ability to use aggressive pricing schemes that cannot be matched by other small firms in the long run (Boora, 2016). The capital investment required to start and succeed in the industry is quite high. Firms that enter the market have to contend with high fixed costs, inventories, research and development. Additionally, the firms have to engage in aggressive advertising to create awareness and attract customers (Oraman, Azabagaoglu and Inan, 2011). These costs and other additional expenses make it difficult for new firms to enter the market. Conversely, the big firms are also vulnerable to the threat of new entrants as the exist costs and barriers are low (Omsa, 2017). Thus, the threat of new entrants in the industry is low.

2.5.Threat of Substitutes

Substitutes are products and services that are able to perform the same function or offer the same value as those available in the industry (Oraman, Azabagaoglu and Inan, 2011). There are different substitutes for Lidl’s products and services. Restaurants and fast food joints are now substitutes because they offer foods and even drinks that are sold in supermarkets. However, fast foods and restaurants are quite expensive in Norway and thus they are not able to be considered as reasonable substitutes for supermarket and retailers (Boora, 2016). The substitutes are also not able to suppress the price ceiling. Thus, the threat of substitutes in the industry is low.

The industry is quite competitive hence Lidl has to constantly ensure that it engages in research and development to develop new and unique products and services that give it a competitive advantage over its competitors. The retail outlet should also be aware of consumer preference because they can significantly impact the business. The business will also have to incur huge advertisement costs at the initial stages to create awareness and attract customers. Suppliers play a vital role in ensuring products and services are available and Lidl has to create relationships with recognized ones to ensure that products are available and prices are stable.

3. VRIO Analysis

VRIO analysis is an analytical tool that is used in evaluating the resources of a company and hence the competitive advantage (Ariyani and Daryanto, 2018). VRIO is an acronym for value, rareness, imitability and organization. The VRIO analysis is perfect for evaluating the resources of a company. Once there is awareness of the resources of an organization, one is able to better understand the competitive advantage or the weakness of an organization. The analysis below will show the VRIO framework of Lidl and will ask four questions; the question of value, rarity, imitability and organization with an aim of determining whether the resources have the potential of obtaining a competitive advantage for the organization.

3.1.Value

The section will assess what the company is doing with its capabilities and resources to neutralize any threats it may face (Ariyani and Daryanto, 2018). Lidl has over the years focussed on offering its customers products at discounted prices. It means that the culture places great value on customers at it offers affordable products that they can easily afford. Lidl has made a name for itself by selling goods at discounted prices and this has ensured that customers keep coming back to the stores because they are sure of better deals compared to other outlets (Colla, 2003). Lidl entering not only large markets but also medium and small markets shows the value it will bring to the people. These values will range from jobs to a variety of products as well as easy access which other retailers may not be able to accomplish. Importantly, the presence of Lidl saves consumers thousands of dollars each year due to the low cost it brings in an area.

3.2.Rarity

Rarity will analyze the company’s strategy and how it sets it apart from other retailers in the industry. Lidl focuses in defining the characteristics of products such as canned products, meat and fresh products at cheap prices instead of spending heavily on display and relying on branded products which are quite rare. Their premise is that once consumers realize their high quality products and unbeatable prices, they will give up on old loyalties (Geppert, Williams and Wortmann, 2014). To facilitate the transition in thinking, they ensure a steady supply of special offers on familiar brands at discounted prices. The company capitalizes on the psychology of the market. It judges that once customers enter their stores, they will find their way around and this encourages browsing with a combination of pallets, aisles and waist high displays. The capability of Lidl to leverage IT in their favour is quite rare in the industry. The company uses point of sale (POS) that is connected to all its over ten thousand stores. POS is majorly used make forecast on sales and what consumers may want stocked. The relationship that Lidl has with its suppliers is also rare. They have a better buying power due to the large volume they purchase. Lidl is also synonymous for its reputation and integrity in the industry which makes other suppliers want to do business with them.

3.3.Imitability

Imitability explores whether a firm’s lack of resources that other retailers have will lead to a cost disadvantage in case of obtaining it (Ariyani and Daryanto, 2018). Lidl has more and well established distribution networks compared to its competitors. As such, the competitors would have to incur additional costs in order to have the products in their preferred destinations (Colla, 2003). The company has low inventory cost because of its cross docking ability. Efficient and extensive distribution channels make it possible for Lidl to keep its inventory on the shelves where they are being bought rather than in the warehouse where they do not add any value (Geppert, Williams and Wortmann, 2014). For other players in the industry to possess such a capability, they would not only require huge financial investment but also significant time and technology.

3.4.Organization

Organization assesses the policies and procedures of an organization to determine if it is organized in a manner that makes it valuable, costly to imitate and rare. Lidl’s organization is built to empower department managers to manage their dockets in a manner they see as best as long as it is within the company’s regulations. The management is also very lean and the management staff is skilful and knowledgeable on customer issues and store management (Geppert, Williams and Wortmann, 2014). As a result, the stores have been able to run as efficiently and effectively as possible.

In summary, the VRIO Model for Lidl is as shown below:

Resource/Capability

Is Valuable?

Is Rare?

Is difficult to imitable?

Is Organization organized around?

What is the result?

Discounted Pricing

Yes

Yes

Yes

Yes

Long-term Competitive Advantage

Information Technology Harnessing

Yes

Yes

No

Yes

Temporary Competitive Advantage

Extensive distribution Network

Yes

yes

Yes

Yes

Long-term Competitive Advantage

Skilled and Dedicated Management

Yes

No

No

Yes

Temporary Competitive Advantage

Table 1: VRIO framework for Lidl

Conclusion

In the analysis, it is easy to understand why Lidl is one of the most successful organizations in its industry. The company focuses on the psychology of consumers, something that most companies do not even think of doing. Their marketing and pricing strategies in particular have proven to be quite effective in differentiating it from other players in the industry. The discounted prices have added great value to the company and are expected to achieve even greater benefits in the future. Lidl has adequate resources and capabilities to ensure that it can successfully enter the Norwegian market.

4. Modes of Foreign Entry

Businesses look to enter international markets for several reasons that include acquisition of new technologies and skills, increasing profits, lowering costs and diversification of risks among others (Laufs and Schwens, 2014). Before undertaking an expansion strategy, it is important to understand the readiness of a company. The end goal, motivations, targets and processes must all the assessed and evaluated before a market entry strategy is decided. In entering the Norwegian market, the following market entry strategies are available.

4.1.Export

Exporting is an established form of entering foreign markets that involves marketing goods produced in one country into another (Shen, Puig and Paul, 2017). No production takes place in the foreign country. However, major investments in marketing are required. Exporting helps a company gain a global market share, lowers the cost of entering a foreign market, sells excess production capacity and helps in gaining new experience and knowledge. Lidl has an extensive distribution network as one of its resources that are difficult to imitated according to the VRIO analysis. However, export is not suitable because it the company focuses on providing customers with fresh products. The company would also have to incur additional expenses when exporting yet the products can be produced in Norway.

4.2.Licensing

In this entry strategy, a domestic firm leases the right to use the copyrights, intellectual property, and brand name of a business in a foreign country for free (Elsner, 2014). The cost of entering the foreign market using licensing is less costly and the domestic company has the option of choosing any international location and enjoying the benefits without assuming the responsibilities and obligations of the owner. Licensing has a high return on investment, low exposure to political and economic conditions and is preferred by most local governments. Its limitations include lack of control by the licensee, reduced profits and increased likelihood of future competition. Licensing is however not the best entry strategy for Lidl into the Norwegian market because it affects the rare resources of the company. Lidl will not have full control of how to market its products nor the information technology to use to promote its operations.

4.3.Franchising

Under this mode, an independent organization (franchisee) uses the name of another firm (franchisor) to operate the business (Laufs and Schwens, 2014). Under such as an agreement, the franchisee pays a fee to the franchisor in exchange of an operating system, trademarks and continuous support such as employee training and advertising. A franchise is beneficial due to low risks and investments. The franchisee is relieved from the risk of product failure and benefits from research and development at a low cost.

Despite the popularity and advantages of franchising as a successful mode for market entry, it has certain shortcomings. These include not having full control over franchises, increased possibility of nurturing future competition, failure to maximize profits as the franchisor receives a royalty fee and decreased brand quality. Despite the problems, franchising has been widely chosen by several organizations as a mode of foreign market entry. The high competition in Lidl’s industry makes franchising unsuitable. The intense rivalry of firms in the market implies Lidl will need to ensure it promotes its brand and maximizes it profits or risks failure.

4.4.Joint Venture

It involves two or more organizations joining together to create a new business that is distinct and separate from the owners (Elsner, 2014). Joint ventures provide for shared ownership. There are several reasons why companies establish joint ventures to help them enter international markets. These include management skills or core competencies, access to technology, access to distribution channels and research and development (Shen, Puig and Paul, 2017). A joint venture is not a suitable market entry strategy because it would interfere with Lidl’s value and organization. Lidl is an existing business with a reputation of offering its customers quality products at discounted prices. A joint venture would change the outlook and even the operational model of the company and this would affect its organization as shown in the VRIO analysis.

4.5.Wholly Owned Subsidiary

The type of entry involves a parent company buying all the stocks of another firm (Shen, Puig and Paul, 2017). Thus, an organization enters a foreign market with 100% ownership of a foreign country. Wholly owned subsidiaries can be achieved through either greenfield operation or acquisition. Acquisition involves entering a foreign market by purchasing a foreign company. On the other hand, a greenfield operation involves creating a new organization in the foreign market. In most cases, a number of organizations that want to minimize their risks while maximizing their exposure in the foreign market opt for acquisition (Shen, Puig and Paul, 2017). Acquisition uses an already established customer base and brand name. However, there is no superior strategy between acquisition and greenfield operation. The entry mode that is more desirable and beneficial is dependent upon the goals, objectives and circumstances of an organization. The risks of this type of entry are greater than other entry modes. However, if it is appropriately implemented, an organization can achieve quick success in a market because the organization will enjoy high level of control, presence and commitment.

4.6.Market Entry Mode for Lidl

Lidl should acquire a related business to enter the Norwegian market. Acquisition would guarantee Lidl instantaneous growth in the Norwegian market rather than organic growth. Lidl would also immediately capture a market share and be in a better bargaining position with respect to suppliers, dealers and consumers. The company would also have saved a lot of time that would be required in setting up new structures and finding employees. Entry barriers would have also been overcome. The resources of the company that are valuable, rare and not easily imitated would also be maintained. The company would also have the freedom to consider the needs of their buyers and negotiate with their preferred suppliers without any limitations. The legal system in Norway is also effective and would facilitate the acquisition process within a reasonable period of time.

5. References

Top of Form

Bottom of Form

Ariyani, W. and Daryanto, A. (2018). Operationalization of Internal Analysis Using the VRIO Framework: Development of Scale for Resource and Capabilities Organization (Case Study: XYZ Company Animal Feed Business Unit). Asian Business Research Journal, 3(1), pp.9-14.

Boora, K. (2016). Assessment of Five Competitive Forces of the Electronic Retail Stores in India: Expansion and Growth of Modern Retailing. IOSR Journal of Business and Management, 18(11), pp.30-34.

Colla, E. (2003). International expansion and strategies of discount grocery retailers: the winning models. International Journal of Retail & Distribution Management, 31(1), pp.55-66.

Elsner, S. (2014). Retail internationalization: Analysis of market entry modes, format transfer and coordination of retail activities. Wiesbaden : Springer Fachmedien.

Foyer, J. and Dumoulin, D. (2013). The Mexican Social Environment: An Endemic Version of Political Ecology. Ecologie & politique, 46(1), p.83.

Geppert, M., Williams, K. and Wortmann, M. (2014). Micro-political game playing in Lidl: A comparison of store-level employment relations. European Journal of Industrial Relations, 21(3), pp.241-257.

IMF. (2018). Mexico and the IMF. [online] Available at: https://www.imf.org/en/Countries/MEX [Accessed 20 Nov. 2018].

IMF. (2018). Norway and the IMF. [online] Available at: https://www.imf.org/en/Countries/NOR [Accessed 20 Nov. 2018].

Laufs, K. and Schwens, C., (2014). Foreign market entry mode choice of small and medium-sized enterprises: A systematic review and future research agenda. International Business Review, 23(6), pp.1109-1126.

Top of Form

McGrath, J., & Bates, B. (2017). The little book of big management theories...and how to use them. Harlow: Pearson Business.

Bottom of Form

Nicholson, C. and Young, B. (2012). The relationship between supermarkets and suppliers: What are the implications for consumers?.

Omsa, S. (2017). Five Competitive Forces Model and the Implementation of Porter’s Generic Strategies to Gain Firm Performances. Science Journal of Business and Management, 5(1), p.9.

Oraman, Y., Azabagaoglu, M. and Inan, I. (2011). The Firms’ Survival and Competition through Global Expansion: A Case Study from Food Industry in FMCG Sector. Procedia - Social and Behavioral Sciences, 24, pp.188-197.

Shen, Z., Puig, F. and Paul, J. (2017). Foreign Market Entry Mode Research: A Review and Research Agenda. The International Trade Journal, 31(5), pp.429-456.

Sridhar, R., Sachithanandam, V., Mageswaran, T., Purvaja, R., Ramesh, R., Senthil Vel, A. and Thirunavukkarasu, E. (2016). A Political, Economic, Social, Technological, Legal and Environmental (PESTLE) approach for assessment of coastal zone management practice in India. International Review of Public Administration, 21(3), pp.216-232.

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6. Appendices

6.1.Appendix 1: PESTEL Analysis of Norway

Mexico

Norway

Weighting

Points (Mexico)

Total

Points (Norway)

Total

Political

Mexico is a republic in North America and the second largest economy in Latin America. All legislation is passed and enforced by the federal government. Regulations with regards to business different between states and so do taxes. Laws concerning unionization and treatment of homosexual workers vary from state to state. Local governments can have a significant impact on business as some may be willing to provide incentives such as service roads and industrial parks to attract business people. However, the country is still faced by high levels of corruption, inefficient institutions, human right abuses and marginalization of populations. Public trust on politicians is ranked 127th, reliability of police service at 134, favouritism in decisions of government officials at 129, transparency of government policy making at 63 and irregular payments at 105.

Norway is one of the most economically and political stable countries in Europe. The country is a monarchy hence there are no opposition pressures. The country has severally been rated in the top ten among over 150 economies by the World Bank when it comes to the ease of doing business. Norway is a member of the European Union, the Free Trade Association and European Economic Area. The country grants preferential tariff rates to EEA members. Out of 137, the public trust on politicians is ranked 6th, Irregular payments and bribes at 10th, favoritisim in decisions of government officials at 11th and the transparency of government policy making at 7th.

30%

6

1.8

10

3

Economic

The GDP for Mexico in 2016 was 1046.93 billion USD and 1152.27 billion USD in 2015. The inflation rate was 2.8 and 2.7% in 2016 and 2015 respectively. The unemployment rate was 3.9% and 4.4% in 2016 and 2015 respectively. However, its neoliberal economic model has restricted the growth of wages, limited investment and leads to high unemployment. Around 44% of the population lives below the poverty line. Mexico’s infrastructure is ranked 62 out of 137. The macroeconomic environment, the goods market efficiency, the financial market development and the labour market efficiency are ranked 43rd, 70th, 36th

and 105th respectively.

The GDP of Norway was 370.56 and 386.58 billion USD between 2016 and 2015 respectively. The inflation rate was 4.7% and 4.4% in 2016 and 2017 respectively. The unemployment rate, on the other hand, was 4.7 and 4.4% in 2016 and 2015 respectively. The economy of Norway is stable and has a long standing record of fiscal responsibility and political stability. It also boasts of a sound banking system, petroleum surplus and a healthy stock exchange. Norway’s infrastructure has grown over the years. Its roads, ports and railroads and air transport have over the last few decades developed. The infrastructure, macroeconomic environment, goods market efficiency, labour market efficiency and financial development market are ranked 34th, 1st, 22nd, 12th

and 9th respectively.

15%

8.5

1.125

10

1.2

Social

Mexico is the most populous country in Latin America with the population being 122 million in 2016. About 76% of the population lives in urban areas with the aim of getting jobs. The major religious beliefs of the country are Roman Catholicism and pre-Hispanic religious beliefs. There are also different sports, festivals and