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Case Analyses–Wal-Mart case

March 24, 2016 | Author: | Posted in management, mathematics and economics

Case Analysis

Can the success of Wal-Mart be attributed to the attractiveness of the industry in which it competes ? Do an industry analysis of the discount retailing industry to explain and justify your answer

Wal-Mart is the biggest discount retailer in the US with a 30 market share , with annual sales of 245 billion in 2002-03 . Its closest competitors , Target and Kmart , had annual sales of 43 billion and 30 billion respectively . Wal-Mart ‘s tremendous success can be attributed to a large extent to the type of industry it operates in . An [banner_entry_middle]

industry analysis using Porter ‘s Five Forces of Competition framework provides valuable insights into the discount retailing industry in the US

Competition

As such , the discount retailing industry environment in the US can be termed as an Oligopoly , with only a handful of players . After Kmart ‘s declaration of bankruptcy , the market had essentially been formed into a duopoly . Much of the competition had been eliminated by the enormous scale and cost-advantage of Wal-Mart , as well as by mergers and acquisitions

Bargaining power of suppliers

Due to the scale of operations and limited players within discount retail , suppliers did not hold substantial bargaining power over retailers . Wal-Mart was often the primary customer for large manufacturers such as Procter Gamble . This further shifted the buying power away from the suppliers . Companies had established supplier networks and distribution centers on a very large scale , which made it inevitable for manufacturers and suppliers to forge a relationship with Wal-Mart . Also , wherever possible , Wal-Mart directly dealing with original manufacturers , which allowed it to eliminate the need for the middle man . This resulted in savings on supplier margins , and gave Wal-Mart a very strong bargaining power

Bargaining power of buyers

With an established presence in almost all parts of the US , Wal-Mart presents an easily accessible and value-driven shopping source for cost-conscious customers . Customers place low prices and value as the most important reason for shopping at Wal-Mart . The prices for most items were uniform in all Wal-Mart stores across the country . It ‘s marketing slogan , Always low prices , emphasized its focus on providing consistently low prices in terms of value . Although there were other discount stores for different types of merchandise Wal-Mart ‘s strategy of making everything available under one roof kept its client base loyal . The buyer therefore had a medium to low bargaining power

Potential Entrants

The discount retailing industry is highly concentrated , with Wal-Mart Target , and Kmart holding almost all the market share . The economies of scale that these companies have , makes it possible for them to produce goods in high volumes , and at low prices . Their distribution networks are extensively developed , as is their inventory management system . The use of high-scale , advanced IT tools helps manage operations smoothly For a new entrant , developing this infrastructure and achieving similar economies of scale is almost impossible . The existing players also have a strong brand identity and a loyal customer base . Getting customers to switch to new entrants would require offering merchandise of similar quality at an even lower price

Given these conditions , there were very significant barriers to new entrants

Substitutes

The discount retailers sell a very large range of products , at a lower price . The switching cost to buy from another store would be high since the only other source for the buyer is to purchase from a regular store , which would have higher prices . These discount retailers have also developed their own brands , which offers more choice to the customer . There was also an increasing industry trend toward

Supercenters , which added full line grocery and specialty centers to a discount store . Wal-Mart focused on selling food items (35 of store sales ) in these Supercenters , and gained significant latitude across product categories by successfully establishing distinct profitable general merchandise and grocery departments . Therefore there is little threat of substitutes for discount retailers

The industry analysis shows that the discount retailing business environment is highly concentrated , with low threat from competitors or new entrants , and low bargaining power of suppliers and buyers . The industry environment is therefore responsible to a large extent , for Wal-Mart ‘s success

What kind of competitive advantage does Wal-Mart have relative to its rivals ? What are the sources of its competitive advantage in the retail field

Compared to its rivals Target and Kmart , Wal-Mart has the advantages of low-cost sourcing , highly efficient distribution network , advanced IT capabilities , and customer-centered approach to business

Wal-Mart was one of the first U .S . companies to embark on global sourcing for their products . By the mid-nineties , Wal-Mart was the largest U .S . importer from China . By 2003 , more than half of Wal-Mart ‘s purchases of direct imports were from China , accounting for 7 .5 billion . This allowed Wal-Mart to reduce the cost of its goods by 10-20 , on average , giving it an edge over its competitors in terms of volume of goods sold as well as cost savings

An advanced and highly efficient distribution system has been the key to Wal-Mart ‘s success and growth prospects . The ability to self-distribute merchandise from a vast network of modern distribution centers , served by a private truck fleet , has allowed Wal-Mart to restrict inventory growth , while maintaining a strong in-stock position and opening a number of new stores each year . Also , because of its policy of setting up stores within a day ‘s drive of its large distribution centers , the trucks don ‘t have to travel as far to stores to make deliveries . The shorter distances help reduce lead times for Wal-Mart to serve its stores and for suppliers shipping merchandise to the distribution centers . This ensured a high inventory turnover . In 2003 , Wal-Mart ‘s inventory was turned over 7 .6 times , compared to 6 .1 times for Target and 5 .4 times for Kmart . In the same year , Wal-Mart ‘s distribution costs accounted for 2-3 of its revenues , compared to 4-5 for its competitors

Wal-Mart constantly focuses on streamlining and automating its distribution process . In 2003 , Wal-Mart ‘s participation in an experiment with several major suppliers that involved radio frequency identification (RFID ) for tracking goods in transit . The technology allows individual products to be tracked throughout the supply chain and was estimated to yield cost savings of 6

Wal-Mart was also ahead of its competitors in developing IT infrastructure and extending it to its suppliers . Wal-Mart , one of the first users of Electronic Data Interchange (EDI , started the Retail Link private exchange , a mode of providing its suppliers with point of sales data on the two-year sales trends and the inventories of their products on a store-by-store basis . By 2002 , Wal-Mart had the second-largest private database of information in the world . This information access was successfully used to manage a highly responsive supply chain . It was estimated that as a whole , the retail industry lost about 8 of its sales to stock-outs . Wal-Mart conducted extensive data mining to constantly tailor its merchandising mix to meet market expectations , and often sourced its goods ahead of its competitors by anticipating demand

The level of customer service provided by Wal-Mart was also an important factor in maintaining its competitive advantage and customer loyalty Adhering to its marketing slogan of Always low prices , Wal-Mart made sure that its prices stayed lower than its competitors . For this purpose , Wal-Mart conducted price surveys in almost all Target and Kmart stores , every week . According to analyst

estimates , its goods were priced around 2-4 lower than its competitors Although Wal-Mart spent less in traditional advertising compared to Target and Kmart , it compensated by focusing more on community activities , and contributed to community charities , provided funding for scholarships , and held in-store charity-sponsored events

Wal-Mart also ensured a high level of customer service within its stores . Store managers were heavily incentivized , and achieved better in-store processing of goods compared to its competitors

How sustainable is Wal-Mart ‘s competitive advantage ? Will it be able to defend its position in discount retailing in the future ? Justify your answer

Wal-Mart is one of the most successful companies in the US , and the leader in the discount retailing industry . Wal-Mart (including all its divisions ) has enjoyed a Compounded Annual Growth Rate (CAGR ) of 15 .6 over the past 5 years , compared to 9 .8 for Target and (-0 .9 for Kmart . Wal-Mart ‘s competitive advantage , which lies in principally in its sourcing and distribution , is likely to sustain over the long term The distribution system , which is being constantly improved , aims to achieve a higher inventory turnover . With each turn , Wal-Mart is estimated to free around 2 billion as working capital

Wal-Mart sources its merchandise globally to achieve cost-control Although this practice is common among other discount retailers Wal-Mart ‘s established supplier sources and economies of scale provide an advantage . Wherever possible , Wal-Mart has forged tie-ups with its global suppliers , which has resulted in fewer inventory and stocking problems . The nature of the discount retailing industry makes it a sustainable business for only a few players , and Wal-Mart is unrivaled in the US . A possible threat to this could be the entry of foreign retailers and private label manufacturers into the US market , which might lead to price competition

How transferable are Wal-Mart ‘s advantages as it moves into new businesses (in the food industry and financial services industry ? Do you think it will be as successful in this business as it has been in the discount retailing business ? Justify your answer

With the saturating discount retail market in the US , Wal-Mart needed to focus on diversifying in to continue growth . By building Supercenters , Wal-Mart has achieved significant growth in the food and drugstore category , capturing market share from traditional grocery chains . Supercenters have been the highest growing division within Wal-Mart , giving it a 35 market share of the US food sales and 25 of drugstore sales . Wal-Mart ‘s established distribution base and logistics capabilities will allow it to continue growth in the food industry

As a solution to stagnating growth , Wal-Mart has also explored expansion opportunities in a variety of fields , including vacation planning , online services such as DVD rentals , and basic financial services . Its venture into financial services holds opportunity for long-term growth . Offering discounted financial services will appeal to the majority of its clientele . Also , Wal-Mart ‘s financial strength and corporate presence will enable it to gain confidence from financial institutions as well as clients

It appears that Wal-Mart is trying to increase its geographic scope by entering international markets and opening stores in urban areas . Is this an advisable strategy ? Why or why not ? Justify your answer

Wal-Mart ‘s Neighborhood Markets are a solution to serve densely populated suburban areas , providing grocery , general merchandise drugstore items , and photo processing . While this strategy may seem as a way to increase its geographic presence , it may not be sufficiently profitable . One of the reasons for this is the growth in online discount stores and merchandisers , which have been increasingly popular over the past few years . Secondly , retail space in urban areas would be expensive , and items such as groceries would not yield sufficient margin to cover costs . The long-term sales from opening a new Supercenter with an initial investment of 15 .5 million , are around 75 million per year . In comparison , opening a new discount store with an initial investment of 10 .6 million is expected to generate only 39 million . Thirdly , the discount retail and grocery segment is expected to reach a plateau , and the growth is expected to fall from 15 to 10 over the next 10 years . Based on these facts , it may not be advisable for Wal-Mart to flood an already saturating market with more stores

International expansion does hold promise for Wal-Mart . Today , Wal-Mart International is the second largest division in the company , and with a CAGR of 40 .3 . Wal-Mart has established considerable presence in stable economies such as Britain and Canada through acquisitions . It has also been tremendously successful in Mexico and Puerto Rico . However , it ‘s other international ventures have performed much below expectations Wal-Mart ‘s operations in Germany were closed in 2006 . In view of these facts , Wal-Mart would need to have a solid strategy in place in to establish international presence . If it can navigate around the pitfalls , international expansion would be very profitable for Wal-Mart

What are your recommendations for Wal-Mart in the area of business strategy and in the area of corporate strategy

Wal-Mart has taken definitive steps for revamping its business and corporate strategy and sustaining its growth and profitability . In to achieve success with current and future projects , Wal-Mart should analyze its internal and external environment more closely , and change the course of action where necessary

One area of potential profitability is online retailing . Wal-Mart already has a web-based store , which can be promoted more efficiently It would cut down on distribution and storage cost . Additionally , it would serve as a single source for accessing Wal-Mart ‘s different service offerings , such as financial services or insurance International expansion is another area of major growth . However before undertaking an international expansion , Wal-Mart needs to analyze a country ‘s political and economic stability , along with social and cultural preferences . It is also essential to developing a different business model for each country . A strategy that works in Mexico and Puerto Rico , may not work in Argentina , Germany , or China Staffing and management should be localized , with distinct geographical markets across continents . This would give more structure and agility to Wal-Mart ‘s international operations

Diversification into discounted services , such as insurance , travel management , transportation , and finance , will prevent Wal-Mart from being confined to one area . Transportation / freight management and travel services are especially attractive , because of Wal-Mart ‘s extended logistics network and negotiating ability

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