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Wal-Mart case study Assignment

Discounting emerged as a retailing merchandising strategy in the 1950’s. The U.S. discount retailing industry enjoyed fast-paced growth in earlier years and attracted many players; the number of stores grew from 1329 in 1950’s to 7400 by 1970’s. High number of entrants saturated the market and growth slowed. In the 1960’s, the industry started to become a zero-sum game where only the largest chains would survive.

In the early and mid 1970’s, the discount retailing industry was not particularly attractive. Industry analysts had negative views of the future growth potential of discounters. The industry was characterized by increasing market saturation, rising costs associated with expansion and decreasing profitability. Beginning in 1960, discount retailers pursued an aggressive growth strategy, which led to a quadrupling of the number of stores over a 17-year period. This led to market saturation and forced the stores to begin competing with each other for discount shoppers. Since the discounters relied on high customer demand to generate sufficient returns, this saturation was detrimental to the profitability of the entire industry. During the mid 1970’s discount chains were unable to sustain their profitability as well as cover the costs of their continued expansion. Numerous bankruptcies and mergers followed.

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Although the overall discount retailing industry was not attractive at this time, the bankruptcies and mergers of large players provided openings for new competitors.

Wal-mart took advantage of the changing industry conditions and began their expansion (Exhibit 1). In doing so, the company targeted smaller communities that had all but been ignored by the competition.

By analyzing the retail industry conditions as well as Wal-mart’s specific strategies, it is possible to evaluate the reasons for the company’s continued success.

Industry Analysis

Wal-Mart has enjoyed compound average sales growth of 32% in the discount-retail industry from 1981 to 1990 (Exhibit 2). It has sustained this impressive growth rate due to a very focused business strategy that provided it with a unique competitive advantage. The Five-forces model is useful for analyzing the business environment that allowed Wal-mart to become the market leader (Exhibit 3).

1. The Threat of New Entrants: The discount retailing market was dominated by large players, which by themselves, served as substantial barriers to entry for new players. At the micro-level this was accomplished by:

A. Capital Requirements and Economies of scale: A typical Wal-mart store spanned almost 80,000 square feet compared to the average supermarket, which was typically 40,000 square feet. The sheer size of the stores and the variety of products that they carried thwarted any competition from small and mid-size retailers. Warehouse club stores were even larger, allowing for more economies of scale and lower costs.

B. Strategies: Firms focused on long-term strategies to compete against their rivals in the future. For example, Wal-Mart began opening stores only if it had the capacity to expand at a later date. Over the years, this excess capacity became a substantial deterrent for new market competitors.

C. Cost Advantages: Retailers gained absolute cost advantages by utilizing:

* Reducing operating costs

* Identifying markets with the least competition

* Strengthening and exerting influence over vendor relationships

* Promoting continuous improvement from the grass-roots level

* Buying goods from countries where labor-costs were cheaper

D. Product differentiation: In an industry where product differentiation was minimal, retailers tried to position themselves as superior service providers. Wal-Mart on the other hand, built its brand name around superior service combined with low cost products. The company also used a motto of “Everyday Low Prices”, which led consumers to think they were getting the lowest price, even if there was only a few cents difference between the pricing at a competitor’s store.

E. Distribution: Firms built efficient distribution networks to reduce costs. Innovative techniques led to lower inventory costs, increased product availability and shorter lead-times.

2. Competition from Substitutes: Discount retail firms faced stiff competition from substitutes as the majority of their sales were generated from nationally advertised, branded products carried by a variety of retailers. However, discounters slowly introduced their own private labels that provided higher margins and exploited store loyalty they had built over the years. Major substitute retailers for Wal-Mart were Target, K-mart, Service Merchandise, Price Club, etc.

3. Bargaining power of Buyers: Intense competition among retailers led to a market where buyers had the option to purchase the same product from a number of retailers. As a result, buyers’ decisions were made primarily on price, convenience and perceived image of the store. Accordingly, buyers had the strongest bargaining power in the model.

4. Bargaining power of suppliers: Firms benefited from strategic long-term relationships with their suppliers that allowed them to leverage significant discounts. Suppliers initially benefited from these relationships by receiving feedback on customer preferences, having stable demand for their products and lower inventory costs. Nevertheless, as the purchasing power of the discount retailers increased, the suppliers steadily lost their bargaining power.

Firm Analysis: Cost Versus Differentiation

Successful companies usually must choose between competing on the basis of either cost or/and by differentiating products through quality and performance characteristics. This theory captures the idea that a firm must incur higher costs in order to successfully deliver a product or service for which customers are willing to pay more. Secondly, the capabilities organizational structure, reward system, corporate culture, and leadership style needed to make a low-cost strategy succeed are contrary to those required for differentiation.

1. Cost Strategy: Virtually all steps in the Wal-Mart value chain are directed towards reducing costs (Exhibit 3). Sam Walton realized that consumers viewed many of his products as commodity items and therefore, the customer’s “willingness-to-pay” was not very high. Based on this fundamental idea, Walton utilized many methods to reduce costs at his stores. These measures allowed him to operate at prices 2 to 3% below those of his competitors, but with sufficient profit margins in a market where profit margins were usually only in the 2% range. Wal-Mart managed a higher profit of $1,076 millions by adopting cost reduction strategies1. Some of the strategies included:

A. Expansion: Wal-Mart adopted strategy of targeting smaller, rural communities in order to avoid competition. The company would saturate a geographical area with Wal-mart stores and then continue to expand into new areas until each had reached a saturation point. During the first ten years, Wal-mart had expanded operations to 276 stores in eleven states. By 1990, the company had sixteen distribution centers and stores in twenty-nine states. This high market saturation meant that any new competitors would have to compete head-to-head with Wal-mart’s discount pricing.

B. Relationship with Suppliers/Collaborators: Wal-Mart was an extremely tough negotiator; it eventually pushed the manufacturing representatives out of the picture and dealt directly with suppliers. Purchasing was centralized and spread over many suppliers, thereby limiting the clout of any one supplier. Suppliers were forced to reduce their own costs as much and as quickly as possible in order to compete for contracts.

C. Leveraging technology: Wal-Mart revolutionized many aspects of the discount retail industry by using information technology to cut costs. The company made large investments in information technology in order to control inventories more efficiently. The company’s private satellite and point-of-sale inventory control system allowed them to work closely with suppliers to fine-tune inventories. Suppliers were able to control and forecast inventory levels through EDI and Bar code systems connected to the point-of-sale inventory control system. Due to the intensive use of technology, Wal-mart was able to achieve very high inventory turnover rates along with precise and just-on-time inventory deliveries. Integrating suppliers into the Wal-mart supply chain process reinforced the strong ties between the company and their suppliers.

D. Warehouses and Distribution: In an effort to reduce costs, Wal-Mart began to build a network of large warehouses. The warehouses allowed Wal-mart to make high volume purchases of inventory in order to obtain significant discounts from suppliers. They also enabled Wal-mart to make frequent store deliveries, thereby ensuring products would always be available for customers. In the beginning, the company had higher fixed costs because of the warehouse and inventory stocks, but over time, the variable cost of its inventories were lower than its competitors. Overall, their total costs were lower and this gave Wal-Mart a strategic edge.

2. Market Segmentation: Wal-mart created self-branded products to increase profits and create brand-name exposure. They also implemented targeted advertising and marketing programs that capitalized on key issues with consumers. One example of this was the creation of a “Buy American” advertising campaign at a time when large numbers of domestic jobs were moving overseas. The company also formed several partnerships with American firms to provide American-made substitutions for products that previously had been manufactured overseas. These partnerships provided the company with additional P.R. benefits. In order to limit costs, Wal-mart limited each store to an advertising budget of only 1.5% of sales.

Wal-Mart also focused on creating strong loyalty with its customers. They hired “greeters” to welcome shoppers and create a friendly impression when the customers entered the store. Additionally, in a move to maintain customer loyalty, the company implemented a “Satisfaction Guaranteed” program that allowed customers to make returns for any reason.

4. Organization and Management: Wal-mart was a highly structured organization. The CEO and fifteen regional vice presidents spent perhaps 200 days per year visiting stores. The regional vice presidents managed 11-15 district managers, who in turn were in charge of 8 to 12 stores. The executives visited stores during the first half of each week, returning to headquarters on Wednesday or Thursday. Wal-Mart’s entire management team met every Saturday to rally the troops and share information. Although the organizational structure is very hierarchical, Wal-Mart tailored its merchandising strategy to individual markets and gave store managers control over setting prices. Managers were able to adjust their prices to meet local market conditions and thus differentiate themselves from local competition. In order to attract loyal employees who had a vested interest in the company, Wal-mart implemented an employee stock ownership plan. By creating a sense of ownership, the company fostered strong relations with its workers.

5. Diversification/Experimentation: Later in the development of the Wal-Mart enterprise, Sam Walton introduced three other store types: Sam’s Clubs, Wal-Mart Supercenters and Hypermart USA. Sam’s Club was designed to offer name brand merchandise at wholesale prices to members for use in their own operations. Wal-Mart Supercenters were introduced to provide a large supermarket/discount store combination. Costs were kept low by offering a large assortment of products but limited package sizes and brands. Hypermarts were introduced that included both general merchandise sections, full-line food sections, restaurants and service businesses.

Wal-mart during the 1990’s

Over the past few years the retail titan has suffered an avalanche of negative publicity in the U.S. due to both its financial numbers and retail strategy. The company’s profit ratio for 2000 is 3.36% compared to 4.17% in 1990 and net income to equity has decreased to 21.5 from 27.13 in 19902. Their current 2000 market share has dropped to 50% and sales decreased by 2% compared to 1999 numbers.3 The U.S. market was quickly becoming saturated and Wal-Mart needed to find new strategies to sustain historic growth rates. Two important strategies that the company pursued were international expansion and e-business.

Wal-mart’s International Strategy

Since the end of the case study, the company created the Wal-Mart International Division and has expanded its operations into Latin America, Canada, Asia and Europe. As of fiscal year 2001, Wal-Mart has a total of 612 discount stores, 406 Supercenters and 53 Sam’s Club’s in the International Division (Exhibit 5). The company’s current international strategy is to adapt its U.S.-based store layout and low-price offerings to new country cultures. Wal-Mart’s strategic international expansion has proven successful in some markets and challenging in others due to differences in regional consumer demand and market requirements.

Wal-Mart’s expansion strategy for European markets is to dominate the market via acquisition and implementation of its U.S. based price-focused strategy. In the summer of 1999, the company made its largest acquisition to date by acquiring ASDA, the British supermarket chain. The ASDA acquisition has been very successful because ASDA’s businesses model and pricing strategies were similar to Wal-Mart’s. ASDA also had a “colleagues” program to reward employees, which was similar to Wal-mart’s “associate” approach.

Wal-Mart’s entry into the German market was not as successful. The company acquired the Wertkauf and Interspar SB chains and quickly learned that its failure to adapt to the German consumer’s needs would negatively impact its performance. According to Helen Sommerville of Dow Jones International News, “Wal-Mart’s concept of outstanding customer service coupled with lower prices hasn’t caught on in Germany, where customers are extremely price sensitive and less interested in customer care.”4 In comparison with American consumers, German consumers have more brand loyalty and are less likely to switch to newer brands solely based on lower prices. Only cheaper prices on brand-name goods will receive the attention of German consumers.

Moreover, a few large companies tightly control the German market, which makes expansion into the country difficult. As a result of its difficult initial entry, Wal-Mart was forced to adjust its strategy to accommodate the German shopping culture. The adjustments proved to be successful and Wal-mart is enjoying high sales volumes at their Karlsruhe store5.

Because Wal-Mart is the biggest retailer in the world, it has the advantage of scale and has had a considerable impact on the European retailing industry. It elected to pursue an acquisition strategy for Europe in expectation of Europe’s possible resistance to their stand-a-lone entry into the market. Moreover, they are pursuing additional acquisitions of European retailers in order to extend their market penetration.

Moreover, Wal-Mart’s presence has caused European retailers to rethink their business strategies. As a result, many European chains are either becoming “value players” or “customer players.” Value players directly challenge Wal-Mart’s low-cost strategy and focus on achieving efficiencies through the supply chain. Customer players focus on customer loyalty and relationship management in an attempt to avoid price wars. Because of Wal-Mart’s scale advantage, many European companies will inevitably implement strategies that reduce costs in order to compete against Wal-mart.

Wal-Mart.com – E-Business Strategy

Wal-mart’s decision to go on-line was primarily market driven; one of its main competitors, Target, had already launched a web site. Wal-mart recognized that in order to remain competitive, they would also need to move into the e-retailing marketplace. In 1996, they developed an on-line strategy “Wal-Mart On-line”. Realizing the benefits of technology partnering, the company formed a partnership with Accel Partners, a respected Internet venture capital firm in 2000. The partnership prompted a name change to “Wal-Mart.com” and the on-line operations were re-located from Arkansas to Silicon Valley.

According to an e-business forum article written by KPMG Consulting, “the biggest advantages that clicks-and-mortar retailers possess are the brand name and the customer base.”6 Wal-Mart plans to capitalize on this advantage by taking Wal-Mart.com public, while giving Wal-Mart Stores Inc. majority ownership of the venture. The company also wants to ensure that the “on-line” store builds on the Wal-Mart brand and takes full advantage of the traditional bricks-and-mortar stores. In preparation for the 2000 Christmas season, Wal-Mart.com had five basic strategies for its on-line site. These strategies involved creating a user-friendly site, offering products that were not yet sold the company- but would supplement brick-and-mortar store inventory, and integrating its brick and mortar stores with the online stores.

Every new venture has its advantages and disadvantages and Wal-Mart.com made a costly mistake in replicating its bricks-and-mortar store on the web without conducting adequate consumer market research. Jeanne Jackson, CEO of Wal-Mart.com, noticed that several categories of traditional bestsellers at the stores, such as underwear, socks, and votive candles, failed to sell on-line. Moreover, the company also realized that Internet advertising was not a cost-effective way to attract customers and thus decided to rely on its brick-and-mortar stores to direct shoppers to its site.

Simplifying its web site was a good idea because on-line shoppers prefer simplicity over complexity when looking for low-value items. Offering supplementary products that are not in its stores is key because Wal-Mart stores are usually accessible to most shoppers. Moreover, selling large items like patio furniture that occupy too much in store space on-line will generate higher profit margins than offering traditional items like the aforementioned socks and candles. Therefore, products that complement limited store offerings should be used to target on-line shoppers.

The Future of Wal-mart

The primary issue facing Wal-Mart is how to sustain its historic growth rates in a mature market. At least one thing is clear – Wal-Mart has a significant competitive advantage relative to its rivals, all of whom are scrambling to find new sources of profits.

With its significant financial resources, Wal-Mart will be able to pursue various paths of diversification in either old economy or new economy segments, conceivably exploiting its established distribution networks. Despite comparative store sales inevitably dropping below the historic growth rate (32%), and return on assets and return on equity trending slightly downward (Exhibit 6), Wal-Mart should be able to maintain a competitive advantage relative to its rivals due to the cost advantages achieved from economies of scale and its cost savings focused infrastructure.

Therefore, I recommend that Wal-Mart use the Judo and Sumo Strategies together in order to maintain its competitive advantage, while continuing to cut costs and move rapidly to new markets at the same time. The uncontested ground can be another continent (International Strategy), another business (Diversification) or cyber market (E-business Strategy).

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