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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.