Competitive Strategy

Oh, I see. Then I think it makes sense to structure the problem this way: First, let's understand the competition in the Canadian market and how CanadaCo has become the market leader. Then let's look at the United States to understand how USCo has achieved its position. At the end, we can merge the two discussions to understand whether USCo's strength in the United States is transferable to the Canadian market.

That sounds fine. Let's start, then, with the Canadian discount retail market. What would you like to know?

Are CanadaCo's 500 stores close to the competition's 300 stores, or do they serve different geographic areas?

The stores are located in similar geographic regions. In fact, you might even see a CanadaCo store on one corner, and the competition on the very next corner.

Do CanadaCo and the competition sell a similar product mix?

Yes. CanadaCo's stores tend to have a wider variety of brand names, but by and large, the product mix is similar.

Are CanadaCo's prices significantly lower than the competition's?

No. For certain items CanadaCo is less expensive, and for others the competition is less expensive, but the average price level is similar.

Is CanadaCo more profitable just because it has more stores, or does it have higher profits per store?

It actually has higher profits than the competition on a per-store basis.

Well, higher profits could be the result of lower costs or higher revenues. Are the higher per-store profits due to lower costs than the competition's or the result of higher per-store sales?

CanadaCo's cost structure isn't any lower than the competition's. Its higher per-store profits are due to higher per-store sales.

Is that because it has bigger stores?

No. CanadaCo's average store size is approximately the same as that of the competition.

If they're selling similar products at similar prices in similarly-sized stores in similar locations, why are CanadaCo's per-store sales higher than the competition's?

It's your job to figure that out!

Is CanadaCo better managed than the competition?

I don't know that CanadaCo as a company is necessarily better managed, but I can tell you that its management model for individual stores is significantly different.

How so?

The competitor's stores are centrally owned by the company, while CanadaCo uses a franchise model in which each individual store is owned and managed by a franchisee who has invested in the store and retains part of the profit.

In that case, I would guess that the CanadaCo stores are probably better managed, since the individual storeowners have a greater incentive to maximize profit.

You are exactly right. It turns out that CanadaCo's higher sales are due primarily to a significantly higher level of customer service. The stores are cleaner, more attractive, better stocked, and so on. The company discovered this through a series of customer surveys last year. I think you've sufficiently covered the Canadian market—let's move now to a discussion of the United States market.

How many stores does USCo own in the United States, and how many does the second-largest discount retailer own?

USCo owns 4,000 stores and the second-largest competitor owns approximately 1,000 stores.

Are USCo stores bigger than those of the typical discount retailer in the United States?

Yes. USCo stores average 200,000 square feet, whereas the typical discount retail store is approximately 100,000 square feet.

Those numbers suggest that USCo should be selling roughly eight times the volume of the nearest United States competitor!

Close. USCo's sales are approximately $5 billion, whereas the nearest competitor sells about $1 billion worth of merchandise.

I would think that sales of that size give USCo significant clout with suppliers. Does it have a lower cost of goods than the competition?

In fact, its cost of goods is approximately 15 percent less than that of the competition.

So it probably has lower prices.

Right again. Its prices are on average about ten percent lower than those of the competition.

So it seems that USCo has been so successful primarily because it has lower prices than its competitors.

That's partly right. Its success probably also has something to do with a larger selection of products, given the larger average store size.

How did USCo get so much bigger than the competition?

It started by building superstores in rural markets served mainly by mom-and-pop stores and small discount retailers. USCo bet that people would be willing to buy from it, and it was right. As it grew and developed more clout with suppliers, it began to buy out other discount retailers and convert their stores to the USCo format.

So whenever USCo buys out a competing store, it also physically expands it?

Not necessarily. Sometimes it does, but when I said it converts it to the USCo format, I meant that it carries the same brands at prices that are on average ten percent lower than the competition's.

What criteria does USCo use in deciding whether it should physically expand a store it's just bought out?

It depends on a lot of factors, such as the size of the existing store, local market competition, local real estate costs, and so on, but I don't think we need to go into that here.

Well, I thought it might be relevant in terms of predicting what it will do with the 300 stores that it bought in Canada.

Let's just assume that it doesn't plan to expand the Canadian stores beyond their current size.

OK. I think I've learned enough about USCo. I'd like to ask a few questions about USCo's ability to succeed in the Canadian market. Does USCo have a strong brand name in Canada?

No. Although members of the Canadian business community are certainly familiar with the company because of its United States success, the Canadian consumer is basically unaware of USCo's existence.

Does CanadaCo carry products similar to USCo's, or does the Canadian consumer expect different products and brands than the United States discount retail consumer?

The two companies carry similar products, although the CanadaCo stores lean more heavily toward Canadian suppliers.

How much volume does CanadaCo actually sell?

About $750 million worth of goods annually.

Is there any reason to think that the costs of doing business for USCo will be higher in the Canadian market?

Can you be more specific?

I mean, for example, are labor or leasing costs higher in Canada than in the United States?

Canada does have significantly higher labor costs, and I'm not sure about the costs of leasing space. What are you driving at?

I was thinking that if there were a higher cost of doing business in Canada, perhaps USCo would have to charge higher prices than it does in the United States to cover its costs.

That's probably true, but remember, CanadaCo must also cope with the same high labor costs. Can you think of additional costs incurred by USCo's Canadian operations that would not be incurred by CanadaCo?

USCo might incur higher distribution costs than CanadaCo because it will have to ship product from its United States warehouses up to Canada.

You are partially right. CanadaCo has the advantage in distribution costs, since its network spans less geographic area and it gets more products from Canadian suppliers. However, since CanadaCo continues to get a good deal of product from the United States, the actual advantage to CanadaCo is not great—only about two percent of overall costs.

All this suggests that USCo will be able to retain a significant price advantage over CanadaCo's stores: if not ten percent, then at least seven to eight percent.

I would agree with that conclusion.

I would tell the CEO the following: In the near term, you might be safe. Your stores have a much stronger brand name in Canada than USCo's, and they seem to be well managed. However, as consumers get used to seeing prices that are consistently seven to eight percent less at USCo, they will realize that shopping at USCo means significant savings over the course of the year.

Although some consumers will remain loyal out of habit or because of your high level of service, it is reasonable to expect the discount shopper to shop where prices are lowest. Moreover, over time your brand-name advantage will erode as USCo becomes more familiar to Canadian consumers. You certainly have to worry about losing significant share to USCo stores in the long term. You should probably do something about it now, before it's too late.

Can you suggest possible strategies for CanadaCo?

Maybe it can find ways to cut costs and make the organization more efficient, so it can keep prices low even if its cost of goods is higher.

Anything else?

It might consider instituting something like a frequent shopper program, where consumers accumulate points that entitle them to future discounts on merchandise.

What might be a potential problem with that?

Well, it might not be that cost-effective, since it would be rewarding a significant number of shoppers who would have continued to shop there anyway.

Any other suggestions?

CanadaCo might want to prepare a marketing or advertising campaign that highlights its high level of service. It might even institute a CanadaCo Service Guarantee that surpasses any guarantees offered by USCo.

Assuming the only way to keep customers is through competitive pricing, is there anything CanadaCo can do to appear competitive to the consumer?

It might want to consider offering fewer product lines, so that it can consolidate its buying power and negotiate prices with suppliers that are competitive with USCo's. It might lose some customers who want the variety of products that USCo has, but it may be able to retain the customer who is buying a limited array of items and is just looking for the best price.

All of your suggestions are interesting, and you would want to analyze the advantages and disadvantages of each in more detail before making any recommendations to the CEO.