Step 1: Actively listen to the case
Your client is the largest discount retailer in Canada, with 500 stores spread throughout the country. Let's call it CanadaCo. For several years running, CanadaCo has surpassed the second-largest Canadian retailer (300 stores) in both relative market share and profitability. However, the largest discount retailer in the United States, USCo, has just bought out CanadaCo's competition and is planning to convert all 300 stores to USCo stores. The CEO of CanadaCo is quite perturbed by this turn of events, and asks you the following questions: Should I be worried? How should I react? How would you advise the CEO?

Step 2: Establish understanding of the case
So, the client, CanadaCo, is facing competition in Canada from a U.S. competitor. Our task is to evaluate the extent of the threat and advise the client on a strategy. Before I can advise the CEO I need some more information about the situation. First of all, I'm not sure I understand what a discount retailer is!

A discount retailer sells a large variety of consumer goods at discounted prices, generally carrying everything from housewares and appliances to clothing. Kmart, Woolworth, and Wal-Mart are prime examples in the U.S.

Step 3: Set up the framework
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 U.S. 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 U.S. 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?

Step 4: Evaluate the case using the framework
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 U.S. market.

How many stores does USCo own in the U.S., 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 U.S.?

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 U.S. 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.