Value Chain Analysis: Learning objectives Mapping Industry value chains Calculating the economics of value chains Understanding

ing the difference between Industry value chain and a company's value chain Understanding a company's value creating activities De-constructing value chain to create competitive advantage

Economics of Industry Value Chain

Vendors Retailers Revenues Retailers Margin RetailersOpEx Retailers COGS Distributors Margin Distributors OpEx Distributors COGS Vendors Margin Vendors OpEx Vendors COGS
assumption Data in the Case

Distributors Retailers 5.90% 22.20% 71.90% 1.44% 2.00% 68.46%

Consumers 100.00%

4.79% 63.67%

Discount Industry Value Chain Visualized:

120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00% Vendors Distributors Retailers Consumers

Walmart Value Chain

The World of Walmart Map

Growth of Walmart

Economics of Walmart Value Chain

Dis-intermediate Vendors Distributors Retailers Walmart Revenues Walmart Ret. Margin Walmart Ret OpEx Retail COGS Walmart Distr.Margin Walmart Distr. OpEx Walmart Dist.COGS Vendor Revenue Vendors Margin 4.79% Vendors OpEx 63.67% Vendors COGS 1.44% 2.00% 68.46% 5.90% 22.20% 71.90%
Walmart no brainer

Walmart Actual

Consumers 100.00%

7.34% 24.20%

8.59% 17.64%

68.46%

73.77%

Walmart Value Chain

Walmart Value Chain
1985
120.00%

100.00%

80.00%

$$$$

60.00%

40.00%

20.00%

0.00% Vendors Walmart Revenues Walmart Distr. OpEx Distributors Retail COGS Walmart Distr.Margin Retailers Walmart no thought Walmart Ret OpEx Vendors OpEx Walmart Actual Vendors COGS Consumers Walmart Dist.COGS Vendor Revenue Walmart Ret. Margin Vendors Margin

WAL*MART Value Chain

Presented by: Benjamin Fieman MBAM 619 Strategy Management Professor Sunil Mehrotra

Value Creating Activities

       Inbound Logistics (3.4%*) Operations (Building Rentals) (1.9%**) Licensing (0.2%) Marketing (1.1%) Shrinkage (1.3%) Salary/Wages (10.8%***) Cost of Goods Sold (~74%****)

*= Averaging 1984 and 1985 logistics numbers ** = Adding 0.1% to the late 1970s number *** = Averaging the salary figures given **** = Averaging COGS/Sales for 5 years

Natalie-Rosanna Rebot

WAL*MART s Value Creating Activities

% Sales
Operating Flows Sales - COGS Gross Profit - Operating Activities (Value creating activities below) Operating Income Wal-Mart's Value Creating Activity Store merchandise in distribution center Centralized purchasing (in store termial + central computer) Central computers linked to several hundred vendors Hub-and-spoke distribution network (400+ truck tractors) Inbound logistics Leasing costs Store manager salary Store renovations Licensing fees Computerized system in each store Satellite system UPC at point of sale Increased store size (42 to 85,000 sq. ft.) and more locations Advertising expenditures Terms of sale Computer aided design 100,000 Employee salaries Administrative costs Warehouse club Category of Sales Soft goods sales Hard goods sales Stationary and candy Sporting goods and toys Heatlh and beauty aids Gifts, records, and electronics Shoes Pharmaceuticals Jewelry $8,451 million $6,361 million (75.3% of Sales) $2,090 million (24.7% of Sales) $1,485 million (17.6% of Sales) $605 million (7.2% of Sales)

Oper. Income COGS Operating Profit 7.2% 75.3% 24.7% Oper. Activities 17.6%
Cost $25 million % of Sales (1985) 0.3% 0.5% 0.1% 2.0% 1.0% 1.8% 1.0% 0.1% 0.2% 0.5% 0.0% 1.0% 0.1% 1.1% 5.0% 0.0% 10.1% 1.0% 1.0% % of Sales 29% 28% 11% 10% 9% 5% 3% 3% 2% 100%

Value Created Buy in volume at attractive prices Inventory control Expedited deliveries Less than 48 hour delivery and backhauls Distribution network More capital (high sales/sq.ft. & bargain-basement acquisition Autonomy in ordering stock and setting up displays Upscale look Specialty departments Computerized inventory system to track sales and do accounting Ease real-time communication to headquarters and cap phone costs ($10 million) Speed checkouts, bypass, paperwork, simplify inventory, reorders, postaudits More floor space and increased efficiency of delivery trucks Newspaper, circulars, and spot TV to advertise promotions No questions asked return policy, credit transactions Merchandise mix for each store based on 100 factors "We care about our people" reduced shrinkage to 1.3% of sales Regional vice-presidents living in Bentonville and flown to stores Sam's club diversification Description Apparel, linen, and fabrics Hardware, houseware, automotive, small appliances

$55 million $20 million $500,000/store

$10 million

Ben Fieman

Total

Walmart optimized its Value creating processes!!

Industry WMT Net sales Lic fee/other inc COGS Payroll expense Advertising exp. Rental exp Misc. exp Operating Income Op exp
100.00% 1.10% 71.90% 11.20% 2.30% 2.20% 7.60% 5.90% 23.30% 100.00% 0.81% 73.77% 9.00% 1.10% 1.90% 6.45% 8.59% 18.45%

% Diff
0% -26% 3% -20% -52% -14% -15% 46% -21%

Walmart's Business logic

Everyday low prices

Lower prices from suppliers

More customers

More goods sold Lower operating Costs