strategic international business management midterm...

Strategic International Business Management – Midterm Assignment 27/11/2016

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Student ID NO. 109025249

Module Name

Class #1986 – UoS-SIBM – Strategic International Business Management

Assignment Title

Lidl going Global – Midterm Assignment

Assignment deadline: 27 Nov 2016

Effective word count: 3279 (deviation from 3000 = 9.3%)

This word count is done by excluding:

Module names

Titles

Indexes and front-page information

Bibliography

Appendix text

I confirm I have read the University regulations on plagiarism and that this assignment is my own

work.

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Contents

1 Rationale for selection of chosen market .............................................................................................. 3

1.1 Discussion of PESTLE ................................................................................................................. 3

1.2 PESTEL results for chosen market ............................................................................................... 3

2 Opportunities and Threats of industrial environment in chosen market ............................................... 8

2.1 Models........................................................................................................................................... 8

3 Strengths & Weaknesses of internal environment in chosen market .................................................. 13

3.1 Value Chain Analysis ................................................................................................................. 13

3.2 VRIO Analysis ............................................................................................................................ 15

4 Various modes of entry available ........................................................................................................ 16

4.1 Strategies ..................................................................................................................................... 16

4.2 Reflection of the possible entries ................................................................................................ 17

4.3 Recommended available entry .................................................................................................... 17

5 Bibliography ....................................................................................................................................... 19

6 Appendix A – Potential Attractive Target Market .............................................................................. 23

6.1 Chosen countries to investigate................................................................................................... 23

7 Appendix B – Rating system PESTEL colors..................................................................................... 28

7.1 Positive ........................................................................................................................................ 28

7.2 Negative ...................................................................................................................................... 28

7.3 Alerts ........................................................................................................................................... 29


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1 Rationale for selection of chosen market

1.1 Discussion of PESTLE

In this section the choice of Canada as target market for Lidl will be discussed. This analysis is

based on the results of the PESTEL analysis found in Appendix A – Potential Attractive Target

Market.

In this appendix the elements of the PESTEL diagrams are given a color. This color is an indication

of how positive or negative the element is for Lidl when expanding her business in those markets.

Fundamental to these colors are the organizational characteristics of Lidl and the way she does

business in already existing markets. Making a brand, having access to enough information and

using social media excessively, put some high demands on the target markets (IDG, 2015; Spary,

214).

1.2 PESTEL results for chosen market

Lidl is a company with many locations around the world. These locations share a similar culture,

political system, legal and social characteristics comparable with where Lidl originated. Although

some locations are Eastern European countries with a focus on communism and Russia, the

common element of these locations is the steady move to a free market and more democracy. Lidl

is sensitive to cultural differences, stakeholders and an open flow of information. Therefore not

every target market is a good fit (Eide, 2010).

The final choice for the preferred target market is also influenced by the intention of Lidl to expand

to the U.S. (Peterson, 2015). For this expansion, it may be favorable to include a target market that

is closely related to the economy of the U.S. Canada seems to be the best option for this. The

PESTEL results of the target markets will be described in the following subsequent paragraphs.

These summaries combined with radar charts are based on the PESTEL findings and used

references in Appendix A – Potential Target Market and the color Scheme of Appendix B –

Rating system Pestle Colors.


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1.2.1 Political analysis

The political framework of Canada is the one with most similarities in structure and execution

compared to the characteristics and the way Lidl does business. The instability of Turkey in the

past year and years to come, makes it political unstable. This is followed by Estonia, which resides

in a region within and between Eastern Europe and Russia.

Figure 1.2.1.1. – Radar charts about the political analysis of target markets

1.2.2 Economic analysis

Mainly because Lidl wants to expand in the U.S. it would be smart to enter Canada first, with its

tight economic connections with North America. Not only is the economic future of Canada itself

the most stable compared to Turkey and Estonia; the free market structure also seems to be the

best fit.

Figure 1.2.2.1. – Radar charts about the economic analysis of target markets


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1.2.3 Social analysis

Although the social structure of Estonia could work, the stability and similarities with the social

structure of Canada are more in line with the future U.S strategy of Lidl. The social structure of

Canada could be the first training ground before entering the social structure of the U.S. The social

structure of Turkey is at this moment very insecure, unstable with negative consequences for new

business.

Figure 1.2.3.1. – Radar charts about the Social analysis of target markets

1.2.4 Technology analysis

Although Turkey and Estonia has attracted and created a vast array of western oriented

technologies, both markets are still adapting to western standards. Turkish insecure future will

have a blocking effect on new developments. The new developments of Estonia are also negatively

influenced by instability in Eastern Europe and Russia. The technology endeavors of Canada are

comparable to the U.S. and the best fit for Lidl’s strategy to enter this market.

Figure 1.2.4.1. – Radar charts about the Technology analysis of target markets


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1.2.5 Environmental analysis

Although Turkey has had a modern infrastructure, many blockers arose during past events

concerning the Kurdish conflict, Syria, Russia and struggles with European regulations. These

blockers are often artificial but remain to exist or become worse. Estonia has a less modern

infrastructure related to energy, information, transportation and internet.

Both these countries hardly can cope with the information and social media demands of Lidl

without changing many things. Canada on the other hand is a modern society with American

standards, just the thing Lidl needs for U.S. expansion.

Figure 1.2.5.1. – Radar charts about the Environmental analysis of target markets

1.2.6 Legal analysis

Turkish legal system is under high pressure because of the latest turmoil in Syria, Kurdish areas

and Russian’s involvements, with huge influence on entering new business. Estonia is trying to

keep up despite pressure from developments in Eastern Europe and Russian involvement in the

background. Lidl plays safe with Canada, which legal system is the best fit and makes the jump to

the U.S. a lot easier.


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Figure 1.2.6.1. – Radar charts about the Legal analysis of target markets

1.2.7 PESTEL Totals

The total PESTEL are reflected in the radar charts below. Remark that the relative low alerts in

Turkey are more than compensated by the high negatives. Alerts in Turkey were all negatives. The

same is true for Estonia. Canada has some alerts, but also a high score on the positives and low on

the negatives.

Figure 1.2.7.1. – Radar charts about the PESTEL totals of target markets


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2 Opportunities and Threats of industrial environment in chosen market

2.1 Models

To better be able to analyze and describe the possible opportunities and threats of Lidl in the chosen

target market, some models are used. There are many models available, this short research will use

three of them.

2.1.1 The competitive advantage model

The importance of information for the competitive advantage has fundamentally changed how

managers and strategists look at it as an organizational asset (Rijamampianina, et al., 2003).

Information about the market is a resource that Lidl should use in its strategic planning before

entering new markets (Robson, 1997).

In line with Robson (1997) about the importance of information is what Porter (1985) emphasizes

when he states that the competitive strength of an organization is dependent on the value an

organization creates and add to a specific target market. This added value is highly related to the

information an organization collects of the target market and itself, to increase the value of its

products related to the costs of producing, transporting and delivering it.

Initially Porter (1985) identified some levels of strategy that are useful to get more insight in the

competitiveness of Lidl. For Lidl these levels can prove or disprove her overall strategic approach

towards the chosen target market.

The Cost Leadership Strategy (CLS) could help Lidl to increase her price competitiveness to make

sure she always offers similar product against lower prices. The CLS has always played a critical

role in the overall strategy of Lidl as a discount retailer and gave her the current competitive

advantage compared to others.

The Differential Strategy (DS) is about offering different products or make them more attractive

than what competitors offer. Lidl makes heavy use of the DS combined with CLS, offering similar


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products against a lower price and presenting them in different ways. Lidl uses the Focus Strategy

(FS) to target the low budget buyers, which she offers more quality against the same or lower

prices as higher segment competitors in the same market (Lau, 2001).

Figure 2.1.1.1. –Competitive advantage model (source: Rhode (2013))

Related to Porter’s generic strategies the overall use of lean production used by Lidl covers these

areas in some specific ways. The lean principles of Lidl have many commonalities with Aldi,

which is not really a surprise considering their similar business model. The differentiation is

covered through continuous improvement and diversity of the products. The cost focus is served

by just in time production and time based management. The overall focus strategy of Lidl is often

the cheapest with the highest quality for the money, being always available and with great customer

focus (Business, 2016).


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2.1.2 5 Forces Analysis model

The competitive advantages model is about the macro environment. In the 5 force model the main

focus is the micro environment. Lidl can use the five forces to create a competitive strategy before

entering the chosen target market (Porter, 2008; Johnson, et al., 2008).

Figure 2.1.2.1. – Porters 5 forces model and the balance of power (source: Goldfarb (2010))

These 5 forces of Porter (2008) reflect the strengths and weaknesses of Lidl almost automatically

when analyzing them. After weighting these 5 forces the balance of competitive power for Lidl

can be analyzed.


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Lidl has many suppliers and low cost of change, keeping the Supplier Power as low as possible

and avoiding price fluctuations. This will increase the Buyer Power of customers in Canada by

offering many products against lower prices and often better quality.

The Competitive Rivalry is very low in the way Lidl does business. Only Aldi is somewhat

comparable and Aldi has chosen the U.S as first entry market above Canada (Samuel, 2005).

There are no real Substitutions for Lidl in Canada except maybe the fast food restaurants. Health

care issues will probably have a positive effect on the buyer behavior in favor of Lidl (Essays,

2014). The Threats of Entering this new market are lower compared to Estonia and Turkey

because of the similar political, economic and cultural supply chains and buyers Canada offers.

2.1.3 The 7 P’s of Marketing model

The model started with four P’s being Product, Price, Place and Promotion (McCarthty, 2001).

The extended version of this model is useful because it takes into account the P’s for People,

Process and Physical Environment. The low value Turkey and Estonia are able to offer on these

extra P’s of the extended model, was an important reason to choose Canada as the preferred target

market.

Figure 2.1.3.1. – The 7 P’s of marketing model (Source: Mix (2016))


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Lidle has a strong Product strategy of being the lowest in Price with the highest quality offered

and always available. Other retailers do not offer the same in Canada.

The low Prices could make customers think that the Products are not good and Lidl must prove

otherwise. The stable economy of Canada and its relations with the U.S. makes it the best choice

compared to the instability of Turkey and the weak financial situation of Estonia.

The Locations of Lidl are effectively spread around Europe and the UK. To be able to offer the

lowest prices, the stock levels must be implemented efficiently. Therefore the Places they operate

must fit into their locations strategy and infrastructure needs. Canada offers the best information,

technology and transportation infrastructure to fill in these needs.

Canada offers similar modern Promotion possibilities as Europe and the UK compared to Estonia

and especially Turkey with its political instability. The People factor in Canada is similar to other

western oriented countries with the same educational and cultural backgrounds. The Processes of

Lidl probably will find their best fit in the similar culture offered by Canada (Borg, et al., 2014;

Simon, et al., 2010; Essays, 2015).


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3 Strengths & Weaknesses of internal environment in chosen market

There are some strengths and weaknesses in the internal environment which support or challenge

the expansion of Lidl in the chosen target market. These strengths and weaknesses should get

proper attention when defining the expansion strategy in the chosen market. This is part of the

microeconomic strategic management of Lidl and can be approached through different models.

Microeconomics is about the behavior and possibilities for an individual organization within the

markets they operate. The focus is on the elements that provide competitive advantage for the

organization and what the balance is between its consumption and profits (Perloff, 2009; Johnson,

et al., 2008).

The balance of demand and supply, the cost of production and transportation, the market structure,

information infrastructure and labor economics should play an important role in the strategic

analyses of Lidl when entering the new market (Katz & Rosen, 1997).

To be able to properly create more insight in these matters, the value chain analysis is used in this

research combined with the VRIO model.

3.1 Value Chain Analysis

When analyzing the competitive advantages of the target market with the model of Porter (1998),

the demand conditions, factor conditions and related supporting industries play and important role

when weighting the value of all activities, associated resources and abilities for Lidl in the value

chain. It is assumed that Canada provides more safety on most aspects in the value and supply

chain management of Lidl compared to the instability of Turkey and the cultural differences and

somewhat fuzzy business environment of Estonia (Tallinn, 2014; McDermott, 2013; Cetin &

Oguz, 2011; Onis & Senses, 2009).

The value chain analysis creates a useful framework to detect sources that could have a competitive

advantage for Lidl. It does not lend itself very well to create more insight into the elements


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themselves. The VRIO model is a great addition to the value chain analysis when trying to create

this extended insight (Gaubinger, et al., 2015)

Figure 3.1.1. – Value chain analysis (Source: SmartDraw (2016))

The value chain can be combined with supply chain management. In this research both are used

intermingled. For Lidl to become a lean enterprise within a collaborative context focusing on the

supply chain in the upstream, these supply chains must be defined around the value streams. In

doing so, waist is eliminated and better response to demands of the product by customers is made

possible. This will have a positive effect on stock elimination through more efficient procedures

and operations around the flows of products (Womack & Jones, 1996; Johnson, et al., 2008).

Supply chain management is about planning and controlling of all the processes around

procurement, conversion, stock management, transportation and distribution across all layers of

the value chain (Johnson, et al., 2008). It has a focus on coordination and collaboration between

partners like suppliers, intermediaries, third party service providers, retail outlets and customers

(Hoek & Harrison, 2011). The risks for Lidl are in these areas because it enters a new market and

have to include different new and sometimes unforeseen elements in these chains.


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3.2 VRIO Analysis

The VRIO analysis is useful when done for an individual organization. It can be part of the strategic

analysis at the level of the company. This analysis is useful to identify strategic valuable resources

and their status, but is less useful to identify risks, weaknesses and gaps. Identification of these

elements are strategically as important as identifying the opportunities and strengths to build up a

stable business environment for Lidl in the chosen target market (Grunig & Kuhn, 2015).

Figure 3.2.1. – VARIO Analysis (Source: Mania (2015))

The VRIO model can be related and combined with the competitive advantage model (CAM) of

Porter (1998). Where VRIO zooms in on the specific competitive aspects, the CAM defines the

various elements that could be analyzed in the VRIO model. The elements in CAM are detailed

out towards the competitive value they have for Lidl in the chosen target market. The cost,

differentiation and focus of CAM could be used to answer the VRIO questions on value, rarity,

imitability and organization for Lidl. Probably the way Lidl is organized increases the value, makes

the offers rare and the business model difficult to imitate.


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4 Various modes of entry available

4.1 Strategies

The participation strategy can be beneficial for Lidl to fill in the People part of the 7 P’s model of

Booms & Bitner (1981) as an extension to the 4 P model of McCarthy (1964). Where the other P’s

or more ‘hard’ in nature, it is the People P that gives Lidl the opportunity to embed the other

elements of the model within the context of stakeholders, culture, customers and employees.

Organizations in earlier days started with one big fuzzy strategy coming from the top, often badly

communicated and targeting markets with a very broadly defined mode of entry (Johnson, et al.,

2008). This broadly defined strategy was replaced with a very detailed well-planned outline with

tightly defined boundaries and little flexibility. The environments thought to be very well known

and market segmentations were less divers than today (Chaffee, 1984).

Because of changing markets there was a shift from a linear sequential strategy process towards a

more adaptive and interpretive strategy. The adaptive strategy tries to include flexibility when

external and internal market forces change to be able to adapt and transform easily when needed.

(Johnson, et al., 2008; Mintzberg, 1978). For Lidl it is important in a new market to react to change

fast and therefore to increase the opportunities and chance for success. Therefore the adaptive

strategy is probably a good choice.

It is important to have a high committed workforce to increase performance and this becomes even

more important within an interpretive strategy. To increase the success of being adaptive to change,

lateral thinking stimulates creativity and innovation. It is about thinking outside the box. Lidl must

be able to change its cognitive map and align her strategic mental models with the stakeholders of

Canada (Beer, 2009; De Witt & Meyer, 2005; Bono, 1990).


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4.2 Reflection of the possible entries

For Lidl there are different possibilities to enter the target market. Analyzing the possible modes

of entry to define the participation strategy for Lidl, is about determining the level of risk and profit

the target market presents for the company (McDonalds & Burton, 2002).

There are two main entry modes interesting for Lidl being the non-equity mode and the equity

mode. The non-equity mode is mainly focused on export models and contracts being set up around

it. The equity mode is about being part of the target market through joint ventures or wholly owned

subsidiaries (Hitt, 2008). The wholly owned subsidiaries is the one that needs most attention,

looking at how Lidl did business in other countries when entering their market (Dudovskiy, 2012).

Franchising means giving others semi-ownership of your trademark and business model (Salomon,

2006). This is not the way Lidl entered other markets and therefore possibly not wise to start with

in Canada.

Licensing agreements give a foreign organization exclusive or non-exclusive rights to manufacture

or produce a product for a specific market. This form offers benefits related to exclusive access to

patents, trademarks, technology and suppliers so that Lidl can do business as usual without opening

newly to be created operations overseas. Not really the game of Lidl and therefore does probably

not apply (Sherman, 2003).

4.3 Recommended available entry

Looking at the history of Lidl’s expansion it is safe to say that the company used the Greenfield

investment strategy to enter new markets as Aldi seems to do also. Greenfield is part of the wholly

owned subsidiary strategy together with acquisitions. Doing acquisition is difficult because Lidl

offers a whole new way of discount retailing with its own supply chain strategy not existing in

Canada at this moment.

Lidl will do new investments in facilities that do not yet exist which make it possible for the

company to utilize and emphasize its own way of doing business when entering Canada. Because

there are no comparable companies, doing acquisitions within Canada is therefore not relevant and


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would be a difficult concept. The discount retailing concept executed by Lidl is still a new concept

in the target market and join-ventures are not expected on the short term (Ando, 2006; Barclay,

2002).

To really exploit the advantages of wholly owned subsidiary, the target market has to score well

in the PESTEL analysis. Some of these equity greenfield advantages are low trade restrictions,

stable economy, positive tax incentive regulations, low costs in the overall supply chain, support

from the country to go and a stable currency, to name some (Hitt, 2008; Dudovskiy, 2012).

Support from host countries often are created because of the supply chain and production

opportunities they retrieve. These new opportunities for the target market often creates more

incentives for the entering organization. These incentives probably would be higher in Turkey and

Estonia, but the stability of the economy of Canada and its relation with the U.S. still makes it the

best bet for Lidl.

Considering the short analysis of how Lidl already exploited the equity model through wholly

owned subsidiaries and Greenfield strategies, it is probably safe to suggest and advice that this

entry mode would be the best fit when entering the Canadian market.


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6 Appendix A – Potential Attractive Target Market

6.1 Chosen countries to investigate

This section starts with an economic and political description of three potentially attractive target

markets for Lidl. After this short reflection of their economic, social and political situation the

macro-environmental factors are reflected through a comparative PESTEL analysis. The PESTEL

forces will mainly be filled in with Lidl and her needs and demands in mind; being an open and

free market, a culture not too distant from herself, a democratic society with a separation of

government, religion and law enforcement and finally the technological and information

infrastructure to serve Lidl’s social media strategies. Variation in these elements are acceptable

within certain ranges.

The PESTEL forces will indicate with green, orange and yellow the positive and negative elements

of the target markets. Only a subset of possible PESTEL elements is given per target market

focused on the needs of Lidl and they are different per country. Explanation of the color scheme

can be found in Appendix B – Rating System PESTEL colors.

6.1.1 Canada

Canada is through its founding from European economies of the past a free world with an open

market. The market of Canada is comparable with Western Europe and Northern America and her

social and cultural characteristics are also closely related to these systems. Because Lidl wants to

expand into the U.S., Canada is almost a natural choice at this moment.

There’s a strong focus of Canada’s economy towards Europe, North America, Australia and other

free market oriented countries. Because their political system is democratic without powers trying

to enforce economic movements, organizations are adaptive for change and can freely decide

themselves which way to go. The culture is open minded, relatively free of negative religious

movements and similar to the ‘free world’ wherein Lidl normally does business (Frue, 2016;

Chineray, 2012; McDermott, 2013; Dilawari, 2011).


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6.1.2 Estonia

Estonia has its communistic economic past left behind and is moving more and more to a climate

where economic growth and opportunities are present while their fiscal position became relatively

stable. But Estonia is still not fully cut off from her Russian past and it gave her backwardness in

economic growth, knowledge sharing and infrastructure shortages. Through high emigration of

knowledge the necessary skills for more healthy economic grow and connection with other free

markets slowed down.

Although the energy extraction and use is somewhat old fashioned and inefficient, the product and

labor market became business-friendly for investors and external organizations. Governmental

institutions became more open and law enforcements is efficient although still at some places with

a smell of light corruption. The transparent taxation support for new business is attractive and it is

supported with an increase in the quality of education (Laffranque, 2005; 1Office, 2016; Miil &

Ruttu, 2013; Usithalo & Whisehunt, 2008; Tallinn, 2014; Holt-Jensen; 2010).

6.1.3 Turkey

It is hard to see the economy of Turkey as a separate entity apart from its political system. There

is not a real free market similar to the more Western oriented countries. Although there has been

several initiatives to reform and regulate their economic system (Cetin & Oguz, 2011), the weight

of their political power remained a force that prevented many positive changes towards more

freedom in its markets. The latest political turmoil around radicalization, Russia, Syria, ISIS and

the Kurdish factions created a leap back in time

Despite the structural reforms in the eighties and nineties, the real free market and integration with

Europe still is being blocked by many political, social, cultural and economic differences

(Muftuler-Bac, 1997). Against this political influence as a result from the past, rigorous

privatization programs prevented more state involvement and the growing middle-class

entrepreneurs added more variation into the traditional production of clothing, agriculture and

textiles (Ibp, 2015). This is an indication that opportunities for external organizations possibly are

increasing (Cetin & Oguz, 2011; Onis & Senses, 2009; UKessays 2011; CIA, 2016).


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6.1.4 PESTLE Canada

Resources: (Frue, 2016; Chineray, 2012; McDermott, 2013; Dilawari, 2011)


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6.1.5 PESTLE Estonia

Resources: (Laffranque, 2005; 1Office, 2016; Miil & Ruttu, 2013; Usithalo & Whisehunt, 2008; Tallinn, 2014; Holt-Jensen; 2010)


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6.1.6 PESTLE Turkey

Resources: (Cetin & Oguz, 2011; Onis & Senses, 2009; UKessays 2011; CIA, 2016)


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7 Appendix B – Rating system PESTEL colors

To make it more transparent and easy to analyze, the PESTEL forces in the diagrams of Appendix

A – Potential Attractive Target Markets are colored. These colors shows if the element is positive,

negative or needs extra attention. This color scheme is explained in this Appendix in order to make

the trade-offs even clearer. Based on these colors, some graphs are presented in Chapter 1 –

Rationale for selection of chosen market, where the rationale is being discussed of the chosen

market for the economic expansion of Lidl.

7.1 Positive

Overall the prospects and characteristics of the element with this color is positive and a good fit

for the strategy of Lidl with its orientation to democratic, western oriented free markets and a

participative strategy.

7.2 Negative

Overall the prospects and characteristics of the element with this color is negative and NOT a good

fit for the strategy of Lidl with its orientation to democratic, western oriented free markets and a

participative strategy.


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7.3 Alerts

Overall the prospects and characteristics of the element with this color needs attention and can

become or is already a risk for the strategy of Lidl with its orientation to democratic, western

oriented free markets and a participative strategy.

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