Case Analysis

1) 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 ustify your answer! Wal-Mart is the biggest discount retailer in the US with a 30% market share, with annual sales o !"#$ billion in "00"-03% &ts closest com'etitors, (arget and )mart, had annual sales o !#3 billion and !30 billion res'ecti*ely% Wal-Mart+s tremendous success can be attributed to a large e,tent to the ty'e o industry it o'erates in% An industry analysis using -orter+s .i*e .orces o Com'etition ramework 'ro*ides *aluable insights into the discount retailing industry in the US% a) Competition: As such, the discount retailing industry en*ironment in the US can be termed as an /ligo'oly, with only a hand ul o 'layers% A ter )mart+s declaration o bankru'tcy, the market had essentially been ormed into a duo'oly% Much o the com'etition had been eliminated by the enormous scale and cost-ad*antage o Wal-Mart, as well as by mergers and ac0uisitions% b) Bargaining power of suppliers 1ue to the scale o o'erations and limited 'layers within discount retail, su''liers did not hold substantial bargaining 'ower o*er retailers% Wal-Mart was o ten the 'rimary customer or large manu acturers such as -rocter 2 3amble% (his urther shi ted the buying 'ower away rom the su''liers% Com'anies had established su''lier networks and distribution centers on a *ery large scale, which made it ine*itable or manu acturers and su''liers to orge a relationshi' with Wal-Mart% Also, where*er 'ossible, Wal-Mart 're erred directly dealing with original manu acturers, which allowed it to eliminate the need or the

(he Wal-Mart Case 4middle man5% (his resulted in sa*ings on su''lier margins, and ga*e Wal-Mart a *ery strong bargaining 'ower% c) Bargaining power of buyers With an established 'resence in almost all 'arts o the US, Wal-Mart 'resents an easily accessible and

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*alue-dri*en sho''ing source or cost-conscious customers% Customers 'lace low 'rices and *alue as the most im'ortant reason or sho''ing at Wal-Mart% (he 'rices or most items were uni orm in all WalMart stores across the country% &t+s marketing slogan, 4Always low 'rices5, em'hasi6ed its ocus on 'ro*iding consistently low 'rices in terms o *alue% Although there were other discount stores or di erent ty'es o merchandise, Wal-Mart+s strategy o making e*erything a*ailable under one roo ke't its client base loyal% (he buyer there ore had a medium to low bargaining 'ower% d) Potential Entrants (he discount retailing industry is highly concentrated, with Wal-Mart, (arget, and )mart holding almost all the market share% (he economies o scale that these com'anies ha*e, makes it 'ossible or them to 'roduce goods in high *olumes, and at low 'rices% (heir distribution networks are e,tensi*ely de*elo'ed, as is their in*entory management system% (he use o high-scale, ad*anced &( tools hel's manage o'erations smoothly% .or a new entrant, de*elo'ing this in rastructure and achie*ing similar economies o scale is almost im'ossible% (he e,isting 'layers also ha*e a strong brand identity and a loyal customer base% 3etting customers to switch to new entrants would re0uire o ering merchandise o similar 0uality at an e*en lower 'rice% 3i*en these conditions, there were *ery signi icant barriers to new entrants% e) Substitutes (he discount retailers sell a *ery large range o 'roducts, at a lower 'rice% (he switching cost to buy rom another store would be high, since the only other source or the buyer is to 'urchase rom a regular store, which would ha*e higher 'rices% (hese discount retailers ha*e also de*elo'ed their own brands, which o ers more choice to the customer% (here was also an increasing industry trend toward

(he Wal-Mart Case Su'ercenters, which added ull line grocery and s'ecialty centers to a discount store% Wal-Mart ocused on selling ood items 73$% o total store sales8 in these Su'ercenters, and gained signi icant latitude across 'roduct categories by success ully establishing distinct, 'ro itable general merchandise and grocery de'artments% (here ore, there is little threat o substitutes or discount retailers%

(he industry analysis shows that the discount retailing business en*ironment is highly concentrated, with low threat rom com'etitors or new entrants, and low bargaining 'ower o su''liers and buyers% (he industry en*ironment is there ore res'onsible to a large e,tent, or Wal-Mart+s success%

") What #ind of competitive advantage does Wal-Mart have relative to its rivals? What are the sources of its competitive advantage in the retail field? Com'ared to its ri*als (arget and )mart, Wal-Mart has the ad*antages o low-cost sourcing, highly e icient distribution network, ad*anced &( ca'abilities, and customer-centered a''roach to business%

Wal-Mart was one o the irst U%S% com'anies to embark on global sourcing or their 'roducts% 9y the mid-nineties, Wal-Mart was the largest U%S% im'orter rom China% 9y "003, more than hal o WalMart+s 'urchases o direct im'orts were rom China, accounting or !:%$ billion% (his allowed Wal-Mart to reduce the cost o its goods by ;0-"0%, on a*erage, gi*ing it an edge o*er its com'etitors in terms o *olume o goods sold as well as cost sa*ings% An ad*anced and highly e icient distribution system has been the key to Wal-Mart+s success and growth 'ros'ects% (he ability to sel -distribute merchandise rom a *ast network o modern distribution centers, ser*ed by a 'ri*ate truck leet, has allowed Wal-Mart to restrict in*entory growth, while maintaining a strong in-stock 'osition and o'ening a number o new stores each year% Also, because o its 'olicy o

(he Wal-Mart Case # setting u' stores within a day+s dri*e o its large distribution centers, the trucks don<t ha*e to tra*el as ar to stores to make deli*eries% (he shorter distances hel' reduce lead times or Wal-Mart to ser*e its stores and or su''liers shi''ing merchandise to the distribution centers% (his ensured a high in*entory turno*er% &n "003, Wal-Mart+s in*entory was turned o*er :%= times, com'ared to =%; times or (arget and $%# times or )mart% &n the same year, Wal-Mart+s distribution costs accounted or "-3% o its re*enues, com'ared to #-$% or its com'etitors% Wal-Mart constantly ocuses on streamlining and automating its distribution 'rocess% &n "003, WalMart<s 'artici'ation in an e,'eriment with se*eral ma>or su''liers that in*ol*ed radio re0uency identi ication 7?.&18 or tracking goods in transit% (he technology allows indi*idual 'roducts to be tracked throughout the su''ly chain, and was estimated to yield cost sa*ings o =%%

Wal-Mart was also ahead o its com'etitors in de*elo'ing &( in rastructure and e,tending it to its su''liers% Wal-Mart, one o the irst users o @lectronic 1ata &nterchange 7@1&8, started the ?etail Aink 'ri*ate e,change, a mode o 'ro*iding its su''liers with 'oint o sales data on the two-year sales trends and the in*entories o their 'roducts on a store-by-store basis% 9y "00", Wal-Mart had the second-largest 'ri*ate database o in ormation in the world% (his in ormation access was success ully used to manage a highly res'onsi*e su''ly chain% &t was estimated that as a whole, the retail industry lost about B% o its sales to stock-outs% Wal-Mart conducted e,tensi*e data mining to constantly tailor its merchandising mi, to meet market e,'ectations, and o ten sourced its goods ahead o its com'etitors by antici'ating demand%

(he le*el o customer ser*ice 'ro*ided by Wal-Mart was also an im'ortant actor in maintaining its com'etiti*e ad*antage and customer loyalty% Adhering to its marketing slogan o 4Always low 'rices5, Wal-Mart made sure that its 'rices stayed lower than its com'etitors% .or this 'ur'ose, Wal-Mart conducted 'rice sur*eys in almost all (arget and )mart stores, e*ery week% According to analyst

(he Wal-Mart Case $ estimates, its goods were 'riced around "-#% lower than its com'etitors% Although Wal-Mart s'ent less in traditional ad*ertising com'ared to (arget and )mart, it com'ensated by ocusing more on community acti*ities, and contributed to community charities, 'ro*ided unding or scholarshi's, and held in-store charity-s'onsored e*ents% Wal-Mart also ensured a high le*el o customer ser*ice within its stores% Store managers were hea*ily incenti*i6ed, and achie*ed better in-store 'rocessing o goods com'ared to its com'etitors%

$) %ow sustainable is Wal-Mart&s competitive advantage? Will it be able to defend its position in discount retailing in the future? 'ustify your answer! Wal-Mart is one o the most success ul com'anies in the US, and the leader in the discount retailing industry% Wal-Mart 7including all its di*isions8 has en>oyed a Com'ounded Annual 3rowth ?ate 7CA3?8 o ;$%=% o*er the 'ast $ years, com'ared to C%B% or (arget and 7-0%C8% or )mart% WalMart+s com'etiti*e ad*antage, which lies in 'rinci'ally in its sourcing and distribution, is likely to sustain o*er the long term% (he distribution system, which is being constantly im'ro*ed, aims to achie*e a higher in*entory turno*er% With each turn, Wal-Mart is estimated to ree around !" billion as working ca'ital% Wal-Mart sources its merchandise globally to achie*e cost-control% Although this 'ractice is common among other discount retailers, Wal-Mart+s established su''lier sources and economies o scale 'ro*ide an ad*antage% Where*er 'ossible, Wal-Mart has orged tie-u's with its global su''liers, which has resulted in ewer in*entory and stocking 'roblems% (he nature o the discount retailing industry makes it a sustainable business or only a ew 'layers, and Wal-Mart is unri*aled in the US% A 'ossible threat to this could be the entry o oreign retailers and 'ri*ate label manu acturers into the US market, which might lead to 'rice com'etition%

(he Wal-Mart Case () %ow transferable are Wal-Mart&s advantages as it moves into new businesses )in the food industry and financial services industry)? Do you thin# it will be as successful in this business as it has been in the discount retailing business? 'ustify your answer! With the saturating discount retail market in the US, Wal-Mart needed to ocus on di*ersi ying in order

to continue growth% 9y building Su'ercenters, Wal-Mart has achie*ed signi icant growth in the ood and drugstore category, ca'turing market share rom traditional grocery chains% Su'ercenters ha*e been the highest growing di*ision within Wal-Mart, gi*ing it a 3$% market share o the US ood sales and "$% o drugstore sales% Wal-Mart+s established distribution base and logistics ca'abilities will allow it to continue growth in the ood industry%

As a solution to stagnating growth, Wal-Mart has also e,'lored e,'ansion o''ortunities in a *ariety o ields, including *acation 'lanning, online ser*ices such as 1D1 rentals, and basic inancial ser*ices% &ts *enture into inancial ser*ices holds o''ortunity or long-term growth% / ering discounted inancial ser*ices will a''eal to the ma>ority o its clientele% Also, Wal-Mart+s inancial strength and cor'orate 'resence will enable it to gain con idence rom inancial institutions as well as clients%

*) +t appears that Wal-Mart is trying to increase its geographic scope by entering international mar#ets and opening stores in urban areas! +s this an advisable strategy? Why or why not? 'ustify your answer! Wal-Mart+s Eeighborhood Markets are a solution to ser*e densely 'o'ulated suburban areas, 'ro*iding grocery, general merchandise, drugstore items, and 'hoto 'rocessing% While this strategy may seem as a way to increase its geogra'hic 'resence, it may not be su iciently 'ro itable% /ne o the reasons or this is the growth in online discount stores and merchandisers, which ha*e been increasingly 'o'ular o*er the 'ast ew years% Secondly, retail s'ace in urban areas would be e,'ensi*e, and items such as groceries would not yield su icient margin to co*er costs% (he long-term sales rom o'ening a new Su'ercenter

(he Wal-Mart Case with an initial in*estment o !;$%$ million, are around !:$ million 'er year% &n com'arison, o'ening a new discount store with an initial in*estment o !;0%= million is e,'ected to generate only !3C million% (hirdly, the discount retail and grocery segment is e,'ected to reach a 'lateau, and the growth is e,'ected to all rom ;$% to ;0% o*er the ne,t ;0 years% 9ased on these acts, it may not be ad*isable or Wal-Mart to lood an already saturating market with more stores%

&nternational e,'ansion does hold 'romise or Wal-Mart% (oday, Wal-Mart &nternational is the second largest di*ision in the com'any, and with a CA3? o #0%3%% Wal-Mart has established considerable 'resence in stable economies such as 9ritain and Canada through ac0uisitions% &t has also been tremendously success ul in Me,ico and -uerto ?ico% Fowe*er, it+s other international *entures ha*e 'er ormed much below e,'ectations% Wal-Mart+s o'erations in 3ermany were closed in "00=% &n *iew o these acts, Wal-Mart would need to ha*e a solid strategy in 'lace in order to establish international 'resence% & it can na*igate around the 'it alls, international e,'ansion would be *ery 'ro itable or WalMart%

,) What are your recommendations for Wal-Mart in the area of business strategy and in the area of corporate strategy? Wal-Mart has taken de initi*e ste's or re*am'ing its business and cor'orate strategy and sustaining its growth and 'ro itability% &n order to achie*e success with current and uture 'ro>ects, Wal-Mart should analy6e its internal and e,ternal en*ironment more closely, and change the course o action where necessary% /ne area o 'otential 'ro itability is online retailing% Wal-Mart already has a web-based store, which can be 'romoted more e iciently% &t would cut down on distribution and storage cost% Additionally, it would ser*e as a single source or accessing Wal-Mart+s di erent ser*ice o erings, such as inancial ser*ices or insurance% &nternational e,'ansion is another area o ma>or growth% Fowe*er, be ore undertaking an

(he Wal-Mart Case international e,'ansion, Wal-Mart needs to analy6e a country+s 'olitical and economic stability, along with social and cultural 're erences% &t is also essential to de*elo'ing a di erent business model or each country% A strategy that works in Me,ico and -uerto ?ico, may not work in Argentina, 3ermany, or China% Sta ing and management should be locali6ed, with distinct geogra'hical markets across continents% (his would gi*e more structure and agility to Wal-Mart+s international o'erations%

1i*ersi ication into discounted ser*ices, such as insurance, tra*el management, trans'ortation, and inance, will 're*ent Wal-Mart rom being con ined to one area% (rans'ortation G reight management and tra*el ser*ices are es'ecially attracti*e, because o Wal-Mart+s e,tended logistics network and negotiating ability%

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