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INSEADCONSULTINGCLUBHANDBOOK2011Note:TheINSEADConsultingHandbook2011isstrictlyfortheuseofcurrentINSEADstudents.Nopartofthisdocumentmaybereproducedortransmittedinanyformorbyanymeans-electronic,mechanical,photocopying,recording,orotherwise-withoutthepermissionoftheICC-INSEADConsultingClubsponsoredby:ICCHandbook2011Page5410.Caseexamples10.1Discountretailercase(BCG)Step1:ActivelylistentothecaseYourclientisthelargestdiscountretailerinCanada,with500storesspreadthroughoutthecountry.Let'scallitCanadaCo.Forseveralyearsrunning,CanadaCohassurpassedthesecond-largestCanadianretailer(300stores)inbothrelativemarketshareandprofitability.However,thelargestdiscountretailerintheUnitedStates,USCo,hasjustboughtoutCanadaCo'scompetitionandisplanningtoconvertall300storestoUSCostores.TheCEOofCanadaCoisquiteperturbedbythisturnofevents,andasksyouthefollowingquestions:ShouldIbeworried?HowshouldIreact?HowwouldyouadvisetheCEO?Step2:EstablishunderstandingofthecaseSo,theclient,CanadaCo,isfacingcompetitioninCanadafromaU.S.competitor.Ourtaskistoevaluatetheextentofthethreatandadvisetheclientonastrategy.BeforeIcanadvisetheCEOIneedsomemoreinformationaboutthesituation.Firstofall,I'mnotsureIunderstandwhatadiscountretaileris!Adiscountretailersellsalargevarietyofconsumergoodsatdiscountedprices,generallycarryingeverythingfromhousewaresandappliancestoclothing.Kmart,Woolworth,andWal-MartareprimeexamplesintheU.S.Step3:SetuptheframeworkOh,Isee.ThenIthinkitmakessensetostructuretheproblemthisway:First,let'sunderstandthecompetitionintheCanadianmarketandhowCanadaCohasbecomethemarketleader.Thenlet'slookattheU.S.tounderstandhowUSCohasachieveditsposition.Attheend,wecanmergethetwodiscussionstounderstandwhetherUSCo'sstrengthintheU.S.istransferabletotheCanadianmarket.Thatsoundsfine.Let'sstart,then,withtheCanadiandiscountretailmarket.Whatwouldyouliketoknow?Step4:EvaluatethecaseusingtheframeworkAreCanadaCo's500storesclosetothecompetition's300stores,ordotheyservedifferentgeographicareas?ICCHandbook2011Page55Thestoresarelocatedinsimilargeographicregions.Infact,youmightevenseeaCanadaCostoreononecorner,andthecompetitionontheverynextcorner.DoCanadaCoandthecompetitionsellasimilarproductmix?Yes.CanadaCo'sstorestendtohaveawidervarietyofbrandnames,butbyandlarge,theproductmixissimilar.AreCanadaCo'spricessignificantlylowerthanthecompetition's?No.ForcertainitemsCanadaCoislessexpensive,andforothersthecompetitionislessexpensive,buttheaveragepricelevelissimilar.IsCanadaComoreprofitablejustbecauseithasmorestores,ordoesithavehigherprofitsperstore?Itactuallyhashigherprofitsthanthecompetitiononaper-storebasis.Well,higherprofitscouldbetheresultoflowercostsorhigherrevenues.Arethehigherper-storeprofitsduetolowercoststhanthecompetition'sortheresultofhigherper-storesales?CanadaCo'scoststructureisn'tanylowerthanthecompetition's.Itshigherper-storeprofitsareduetohigherper-storesales.Isthatbecauseithasbiggerstores?No.CanadaCo'saveragestoresizeisapproximatelythesameasthatofthecompetition.Ifthey'resellingsimilarproductsatsimilarpricesinsimilarly-sizedstoresinsimilarlocations,whyareCanadaCo'sper-storesaleshigherthanthecompetition's?It'syourjobtofigurethatout!IsCanadaCobettermanagedthanthecompetition?Idon'tknowthatCanadaCoasacompanyisnecessarilybettermanaged,butIcantellyouthatitsmanagementmodelforindividualstoresissignificantlydifferent.Howso?Thecompetitor'sstoresarecentrallyownedbythecompany,whileCanadaCousesafranchisemodelinwhicheachindividualstoreisownedandmanagedbyafranchiseethathasinvestedinthestoreandretainspartoftheprofit.ICCHandbook2011Page56Inthatcase,IwouldguessthattheCanadaCostoresareprobablybettermanaged,sincetheindividualstoreownershaveagreaterincentivetomaximizeprofit.Youareexactlyright.ItturnsoutthatCanadaCo'shighersalesaredueprimarilytoasignificantlyhigherlevelofcustomerservice.Thestoresarecleaner,moreattractive,betterstocked,andsoon.Thecompanydiscoveredthisthroughaseriesofcustomersurveyslastyear.Ithinkyou'vesufficientlycoveredtheCanadianmarket-let'smovenowtoadiscussionoftheU.S.market.HowmanystoresdoesUSCoownintheU.S.,andhowmanydoesthesecond-largestdiscountretailerown?USCoowns4,000storesandthesecond-largestcompetitorownsapproximately1,000stores.AreUSCostoresbiggerthanthoseofthetypicaldiscountretailerintheU.S.?Yes.USCostoresaverage200,000squarefeet,whereasthetypicaldiscountretailstoreisapproximately100,000squarefeet.ThosenumberssuggestthatUSCoshouldbesellingroughlyeighttimesthevolumeofthenearestU.S.competitor!Close.USCo'ssalesareapproximately$5billion,whereasthenearestcompetitorsellsabout$1billionworthofmerchandise.IwouldthinkthatsalesofthatsizegiveUSCosignificantcloutwithsuppliers.Doesithavealowercostofgoodsthanthecompetition?Infact,itscostofgoodsisapproximately15percentlessthanthatofthecompetition.Soitprobablyhaslowerprices.Rightagain.Itspricesareonaverageabouttenpercentlowerthanthoseofthecompetition.SoitseemsthatUSCohasbeensosuccessfulprimarilybecauseithaslowerpricesthanitscompetitors.That'spartlyright.Itssuccessprobablyalsohassomethingtodowithalargerselectionofproducts,giventh