Institute for Simplicity

Recently, on July 16th, Karl Albrecht passed away. Together with his brother Theo, who passed away in 2010, he created the most succesful Food Retailer in the world. Their Hard Discount System was a revolution for the retail industry and role model for many other industries and companies.

We want to use this opportunty to describe a few important factors which led to this success. All of them have to do with the Management of Simplicity. What can be learned from ALDI serves as best lessons for  right practices in management, invented and developed by Karl und Theo Albrecht who – by the way – never went to University, not speaking of any MBA.

For decades, journalists, competitors and consultants have tried to unterstand what are the basics of such a phenomenon – without much success. What are the specific methods and principles? Others believe they can call themselves discounters just because they offer low prices. In fact, the essential is invisible to the eye, says the Petit Prince of Antoine de Saint-Exupéry.

Now, what is Discount? 

What means Discount? What has ALDI invented here? Discount means first of all to avoid. Discount is limitation. It is about the courage not to do everything possible. Even to give up potential sales and thus reduce the complexity that comes with it.

Simplicity was not from the beginning of any matter to the ALDI management. It evolved over time as the company was managed by common sense. Looking back it is obvious that simplicity and learning about how to cope with complexity has been essential for the success of ALDI.

How did ALDI do it?

 

Avoid complexity

It starts with Clarity and Limitation.

ALDI had always clear Goals and a simple business model. Very few fundamental thoughts formed the core business:

– a very limited assortment

– goods of every day consumption,

– each article should be easy to handle in regards to logistics,

– best possible quality (comared with main brands),

– lowest possible sales prices.

Don´t we very often observe that in many companies clear and easy to unterstand goalds are missing?

Probably the two brothers were very lucky when they wanted to develop their family company right after the war. Their financial possibilities were rather limited. So they could not afford to carry a large assortment as planned. Theo Albrecht once said it is better to have too little: too little money, too little employees, too little space… That helps to be creative to do the best out of what is possible. Concentration and austerity are the result and let in this case to the business model mentioned above. When Karl and Theo realized that the small assortment (plus low prices) works well and their cost were so much lower than their competitor, they gave up their original plans of a large assortment. They continued to focus on improving their system every day.

Many other things become dispensable when clear goals and priorities exist. It is easy to understand all the  many things which are not needed. Nothing unnecessary is being created. ALDI concentrated and their results proved their strategy to be right.

In many companies mediocre results make managers think they only have to improve their planning methods, their controlling departments. Not many managers question the goals and fundamental priorities a company has. Any project always rottens from the head.

 

Reduce complexity

Maybe the surprise actually was that ALDI was so consistent with their clarity and fundamental business strategy. Still today.

ALDI did not sell many items which are standard since many years: fresh mild, butter, fruits and vegetables. ALDI did not go after the revenue of these categories for the sake of consistency.

Still today, ALDI offers the smallest assortment of all retailers and operates only one type of chain, the ALDI stores. Other retailers operate many different types of stores. If such a retailer is successful it is not because of their different business lines but despite of this.

 

Manage complexity

The clear fundamental goals of the business model do not mean that this is not being developed further. ALDI watched the trends and customer habits closely, including fresh, diet or organic food items. ALDI began with cans and UHT milk and today sells fresh steaks and Champagne.

Such a development increases the complexity of the operation. When we are discussing simplicity we are carefully introducing new elements which mean more complexity. New items mean more elements, more relations between these elements. Maybe a new supplier has to be added to the existing ones. Space is needed for a new item in the refrigerator, another item has to to give up space. Maybe an additional refrigerator is needed? The expiration of the additional item has to be considered as well the complete cooling chain etc. New ways of procurement (Asia) and advanced quality controls lead to more complexity. Everything has to be developed, implemented and connected with each other.

 

What did ALDI do in order to manage this complexity?

An example:

About 30 years ago, ALDI did not sell Fruits & Vegetables. The General Manager of the region of Seevetal near Hamburg made a test. in only a few stores he tested apples. Only apples! Not a large assortment of Fruits & Vegetables. Only one item! When that was working well and all logistic processes as well as quality and freshness was well managed, he extended this test to all of 80 stores of his region. Here also he watched carefully the function of all the processes and systems. As a next step he started to add oranges and other fruits. Of course, his General Manager colleagues in the other regions and the Top Management of ALDI were informed by him from time to time about his tests. In one of the General Manager Meetings he stood up and explained to all of them how to add this assortment now to all the regions.

How was that possible? The reason is the right organization.

The General Manager mentioned above has just like all his colleagues the freedom to add a small regional assortment to the national standard assortment. Here he could decide fully autonomously. He did not have to ask anybody. No central function got involved.

ALDI works according to the principles of decentralization and delegation. Decisions are being delegated into the regions and into the operational entities far away from the central office. There are the employees who know and who work with these issues day by day. ALDI never had any so called staff departments.

Fundamental for decentralization is trust. The General Managers had the trust of the Top Management and of the owners. They trusted that they can do their job , that they wanted to achieve the best possible results and would always handle everything with high responsibility. Regular controls and and checks of their work would prove the trust again and again or sometimes suggested some modifications.

One of the most important methods to manage complexity is Trial & Error. As described above the General Manager in Seevetal tried something, watched the processes, observed and corrected until everything worked well and produced good results according to the Business Model.

The General Manager had the trust of his boss and used couragously his freedom according to his job description. An example for everyone.

ALDI always managed complexity well and developed using the fundamental principles of the Management of Simplicity:

– Decentralization,

– Responsibility for Line Managers instead of Staff Departments,

– Trial & Error,

– trust and courage,

– responsibility and control.

 

Karl and Theo Albrecht have learned from their first steps and then always tried something new to find out which works before implementing it.

The result: with limitations and consistency (and without Customer Relationship Management, Data Warehouse or Market Research) ALDI became the most successful food retailer in the world.