Thesis Sabisch Final v2

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FUNDAÇÃO GETULIO VARGAS SÃO PAULO

ESCOLA DE ADMINISTRAÇÃO DE EMPRESAS DE SÃO PAULO
IMPLICATIONS OF DIGITAL TRANSFORMATION RELATED INDUSTRY

EVOLUTION ON THE STRATEGY OF WALMART, AS AN EXAMPLE OF A U.S.
GROCERY RETAILER
SEBASTIAN FRANZ SABISCH
SÃO PAULO – SP
2019
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GROCERY RETAILER
Thesis presented to Escola de Administração de

Empresas de São Paulo of Fundação Getulio
Vargas, as a requirement to obtain the title of
Master in International Management (MPGI).
Knowledge Field: Strategy
Advisor: Prof. Dr. Sérvio Túlio Prado Júnior
SÃO PAULO – SP
2019
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GROCERY RETAILER
Sabisch, Sebastian Franz

Implications of Digital Transformation Related Industry Evolution on the Strategy of
Walmart, as an Example of a U.S. Grocery Retailer / Sebastian Franz Sabisch. - 2019.
98f.
Orientador: Sérvio Túlio Prado Júnior

Dissertação (MPGI) - Escola de Administração de Empresas de São Paulo.
1. Industry Evolution 2. Grocery Retail 3. Technological Transformation 4. Strategy

I. Prado Júnior, Sérvio Túlio. II. Dissertação (MPGI) - Escola de Administração de
Empresas de São Paulo. III. Título.
CDU xxx (given by library)
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GROCERY RETAILER
Thesis presented to Escola de Administração de

Empresas de São Paulo of Fundação Getulio
Vargas, as a requirement to obtain the title of
Master in International Management (MPGI).
Knowledge Field: Strategy
Approval Date: 30.09.2019
Committee members:
Prof. Dr. Sérvio Túlio Prado Júnior
Prof. Dr. Antonio Gelis Filho
Prof. Dr. Ricardo Rochman

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ABSTRACT
The thesis studies the evolution of the grocery retail industry in the United States and its impact
on the strategy of established firms in that industry. It builds upon a set of strategic concepts and
frameworks, most importantly, the resource-based perspective and product-market position view
on competitive advantage, and the theory on trajectories of industry evolution. Intensifying
competition, technology innovation, and changing customer behavior are identified as the major
trends in U.S. grocery retailing and the industry is found to be on an intermediating change
trajectory. On the example of Walmart, the thesis examines implications of the industry evolution
on the strategy of an incumbent and analyses the firm’s reaction to the changes in its environment
during the past five years. The thesis concludes with a future outlook for incumbents on how to
embrace these changes. Besides general valid recommendations, the thesis also suggests specific
advice for Walmart, most importantly to lever its large network of retail locations.
Keywords: Industry Evolution, Grocery Retail, Technological Transformation, Strategy

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RESUMO
A dissertação estuda a evolução do setor de varejo de supermercado nos Estados Unidos e seu
impacto sobre a estratégia das empresas estabelecidas nessa indústria. Ela se baseia em um
conjunto de modelos conceituais em Estratégia de Negócios, com ênfase na abordagem de
recursos, na visão de produto / mercado produto, na análise de vantagens competitivas e na teoria
sobre trajetórias de evolução da indústria. Intensificação de concorrência, inovação tecnológica e
mudança de comportamento do cliente são identificados como os principais tendências no varejo
de supermercado dos EUA e o setor está em uma mudança de trajetória intermediária. No exemplo
do Walmart, a dissertação examina implicações da evolução do setor na estratégia de um operador
histórico e analisa a reação da empresa às mudanças em seu ambiente nos últimos cinco anos. O
trabalho conclui com uma perspectiva futura para os titulares sobre como abraçar essas mudanças.
Além de recomendações gerais, são também elencadas algumas sugestões para o Walmart para
alavancar sua grande rede de locais de varejo.
Palavras-chave: Evolução da Indústria, Varejo, Transformação Tecnológica, Estratégia

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LIST OF FIGURES
Figure 1 – Strategy, Business Model, and Tactics. ....................................................................... 22

Figure 2 – Value Creation and Appropriation. ............................................................................. 23
Figure 3 – The Generic Value Chain. ........................................................................................... 24
Figure 4 – Three Generic Strategies. ............................................................................................ 28
Figure 5 – The VRIO Framework. ................................................................................................ 35
Figure 6 – The Dynamic Capabilities Framework. ....................................................................... 36
Figure 7 – Trajectories of Industry Evolution............................................................................... 47
Figure 8 – Industry Life Cycle Models. ........................................................................................ 50
Figure 9 – Analytical Framework. ................................................................................................ 51
Figure 10 – Walmart Competitive Advantage. ............................................................................. 55
Figure 11 – Business Model of Walmart. ..................................................................................... 57
Figure 12 – Comparative Development of Walmart Stock Returns. ............................................ 60
Figure 13 – Sales in U.S. Grocery Retail. ..................................................................................... 62
Figure 14 – Strategic Capital Allocation of Walmart 2015-2019.. ............................................... 77
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LIST OF TABLES
Table 1 – Central Definitions of Industry Trajectories. ................................................................ 44

Table 2 – Strategies in a Dynamic Industry. ................................................................................. 48
Table 3 – Profitability: Walmart vs. Competitors 2015-2019. ..................................................... 60
Table 4 – Industry Core Activities. ............................................................................................... 71
Table 5 – Retail and Pickup Location Presence of Walmart 2015-2019. ..................................... 78
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LIST OF ABBREVIATIONS
AR Annual Report
BMC Business Model Canvas
BOPS Buy-Online-Pick-Up-In-Store
EDLP Everyday Low Price
IoT Internet of Things
LTS Letter to Shareholders
PLC Product Life Cycle
RBV Resource-Based View
SCP Structure-Conduct-Performance
VMI Vendor-Managed Inventory
VRIO Value-Rarity-Imitability-Organization
WTP Willingness to Pay

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TABLE OF CONTENTS
I. Introduction .................................................................................................. 12
1. Relevance of the Study ...................................................................................................... 12
2. Methodological Approach ................................................................................................. 14
2.2. Research Question ...................................................................................................... 14
2.3. Research Method and Design ..................................................................................... 14
2.4. Data Collection & Analysis ........................................................................................ 15
II. Literature Review ......................................................................................... 16

1. Business Model & Strategy ............................................................................................... 16
1.1. Business Model........................................................................................................... 16
1.2. Strategy ....................................................................................................................... 19
1.3. Demarcation and Interlinkages ................................................................................... 21
2. Competitive Advantage ..................................................................................................... 23
2.1. Value Creation and Capture ....................................................................................... 23
2.2. Product-Market Position View vs. Resource-Based View ......................................... 25
3. Industry Evolution ............................................................................................................. 37
3.1. Introduction & Background ........................................................................................ 38
3.2. Triggers of Industry Evolution ................................................................................... 38
3.3. Trajectories of Industry Evolution .............................................................................. 43
3.4. Implications for Incumbents ....................................................................................... 47
4. Analytical Framework ....................................................................................................... 51
III. Case Study: Walmart ................................................................................. 52

1. Walmart U.S. ..................................................................................................................... 52
1.1. Early years and growth ............................................................................................... 52

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1.2. Walmart today ............................................................................................................ 56
2. Industry Evolution ............................................................................................................. 61
2.1. Industry classification and overview .......................................................................... 61
2.2. Industry analysis ......................................................................................................... 62
2.3. Industry trends ............................................................................................................ 65
2.4. Trajectory of change ................................................................................................... 70
3. Implications for Walmart ................................................................................................... 73
3.1. Theoretical lens........................................................................................................... 74
3.2. Analysis: 2015-2019 ................................................................................................... 75
3.3. Future outlook: guidelines for embracing change ...................................................... 80
IV. Conclusion ................................................................................................. 83

1. Concluding Remarks .......................................................................................................... 83
2. Limitations and Areas for Further Research ...................................................................... 84
V. References ................................................................................................. 85
VI. Appendix ................................................................................................... 94

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I. Introduction
1. Relevance of the Study
Over the course of the past three decades, technological progress in general and a rapid spread of
the internet in particular have changed many, if not most, industries. While this trend has brought
up new, highly valued and rapidly growing companies, it has also wiped long-established ones out
of business. This trend is reflected by a steadily growing churn rate in equity indices such as the
S&P 500 (Russell, 2017). In the retail sector, the most commonly known success story today is
Amazon, which grew from selling books to offering almost anything consumers can think of. The
case of former U.S. retail giant Sears, on the other hand, is a warning example of the opposite. As
the company failed to adapt its business model to undeniable changes in the industry, it ultimately
had to file for Chapter 11 bankruptcy protection in October 2018 (Corkery, 2018).
Like for any other industry and sector, technology-driven change poses both threats as well as new
opportunities for incumbents in the retail industry. By offering an online presence as just one of
several examples of technology induced change, retailers can target potential customers
independent of physical presence, and lever growing amounts of collected data. At the same time,
the ability to compare products and prices without much effort and a general trend towards
shopping at any time and any place, explain better informed and more demanding customers. Also,
incumbents of all sizes face new competitors that primarily pursue a digital business model. Hence,
it is of the utmost importance for the management of established companies to continually question
and adapt their business model, corporate strategy, as well as competitive strategy to establish and
sustain their position in a rapidly evolving industry. Only by doing so, they can sustainably earn
superior profits in the medium- and long-term future.
The grocery retail subsector is particularly appealing to elaborate on because of two reasons: first,
grocery retailers face complications regarding the perishable nature of part of their product range,
which distinguishes them from most other retail subsectors. Second, the grocery retail industry has
not yet been impacted as much as most other retail subsectors. As a report from Bain & Company
indicates, at around 3%, the share of e-commerce spending in grocery retail is still low in the U.S.,
especially in direct comparison with 40% in consumer electronics (Caine & Paratore, 2019).
Hence, this leaves room for a strong future growth, which is expected in the next years. In fact, the
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same report projects the rate of e-commerce penetration in the U.S. grocery industry to triple by
the year 2029 (Caine & Paratore, 2019).
Even though changes have not yet been as radical as in other subsectors of the retail industry, the
grocery retail sector is already amidst a process of transformation. The traditional bricks-and-
mortar store concept is no longer the only customer touchpoint, but most incumbents have started
to diversify their sales channels by offering e-commerce alternatives. Examples include the full-
service delivery, in-store pickup and curbside pick-up, which all have in common that the customer
places the order online. At the same time, grocers are faced with more demanding customers in
the bricks-and-mortar stores, predominantly related to technological innovation.
Structure
Subsequent to the Methodological Approach as the last part of the Introduction, the study consists
of three main parts.
The first section provides an overview of existing literature in the fields of business model and
strategy, competitive advantage, and industry evolution. Moreover, an analytical framework is
presented at the end of this section, which lays the foundation for the subsequent case analysis.
The second section comprises the case study on Walmart. Initially, the early years and current
position of Walmart are presented, including the firm’s business model and strategy. Depicting
upon the industry evolution in the U.S. grocery retail industry will be the focus of the second part
of this section. Subsequently, the case study will elaborate on the implications of the industry
evolution of Walmart first from a theoretical perspective and then by analyzing the actions of the
firm within the past five years and by providing an outlook into the future including guidelines for
the firm. Throughout the case study, the focus will be on Walmart’s domestic market and on its
grocery segment.
Lastly, the paper concludes with some final remarks and a presentation of limitations and
suggestions for further research.
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2. Methodological Approach
2.2. Research Question
“To what extent does digital transformation related industry evolution affect the strategy of
Walmart, as an example of a U.S. grocery retailer?”
As the above-stated research question indicates, this study aims to examine the evolution of the
grocery industry and how that translates to the business model and strategy of an incumbent U.S.
firm operating in that particular industry.
2.3. Research Method and Design
The proposed study follows a qualitative-method approach and uses a case study design to gain a
thorough understanding of the strategic implications of the digital transformation on Walmart and
grocery retailers in general.
The choice of methodology is in line with Yin (2009), who argues that a case study should be the
preferred research method when the research question is either concerned with the “how” or
“why”, when the author cannot fully control the events, and when the study’s focus has a
contemporary character (Yin, 2009, p. 2). Creswell (2009) adds that the case study design allows
the researcher to develop “an in-depth analysis of one or more cases” (Creswell, 2009, p. 193).
More precisely, the proposed case study is descriptive as it analyzes the strategic positioning of
Walmart over the course of five years and explanatory as it attempts to investigate possible courses
of action in terms of strategic direction.
The choice of company is not random but based on its long-established and robust position not
only in the US, which is one of the most important markets in retail worldwide, but also globally.
Walmart ranks among the biggest firms in terms of number of employees and revenues in several
of the markets in which it conducts business. As the world’s largest retailing company in terms of
revenue and second largest in terms of market capitalization, Walmart can be considered as
particularly relevant (Debter, 2019). Furthermore, the company is publicly traded, which allows
relatively easy access to data.
A single case study design is chosen over the multiple case study design. This is not only due to
the limited scope of the research project, but the choice of a single case study design is also
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supported by the findings of Yin (2009), who lists five rationales for choosing that particular
research design. One of these five rationales is the presence of an “extreme case” (Yin, 2009,
p. 47), which has been justified above by the immense relevance of the firm. The choice of an
extreme case is also supported by the research of Pettigrew (1990)
2.4. Data Collection & Analysis
The validity of the research is increased by data triangulation since various sources of (primary
and secondary) data are being considered, so therefore, biases that would be inherent when using
a single data collection method can be avoided (Eisenhardt, 1989; Yin, 2009). Moreover, a
significant part of the quantitative but also qualitative data is gathered from audited annual reports,
which can be considered reliable for that reason.
The study mainly builds on the analysis of primary data in the form of company publications of
Walmart, with a focus on annual reports. Besides data related to the financial performance, data
describing a shift of investments and managerial attention is particularly relevant for the research.
In addition, various sources for secondary data are used to analyze the case as well as the macro-
environment. Most importantly, this includes industry reports, consultancy reports, and news
articles, inter alia to lay out the technological change occurring in U.S. grocery retailing.
The above-described data will be analyzed by applying a specially developed analytical

framework, that builds on a set of strategic concepts and models, which are introduced in the
subsequent section ‘Literature Review’.
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II. Literature Review
1. Business Model & Strategy
Mistakenly, the terms business model and strategy are frequently used as synonyms. In order to
understand the competitive position of a firm, it is essential, however, to clearly distinguish
between the two concepts.
1.1. Business Model
The following section will briefly introduce the concept of the business model. Furthermore, it
will shed light on the importance of business model innovation, as well as touch upon the
concomitant challenges for well-established firms.
Business model as a term in academic literature has only been popularly used since the invention
of personal computers and spreadsheets towards the end of the 20th century, as the analytical
capability of the new technology allowed for a more systematic approach to planning and
forecasting (Magretta, 2002).
“Before the personal computer changed the nature of business planning, most successful
business models … were created more by accident than by design and forethought. The
business model became clear only after the fact. By enabling companies to tie their
marketplace insights much more tightly to the resulting economics - to link their
assumptions about how people would behave to the numbers of a pro forma P&L -
spreadsheets made it possible to model businesses before they were launched” (Magretta,
2002, p. 89).
Today’s body of literature offers a variety of definitions, ranging from simple and straight-to-the-
point to more sophisticated and complex versions. Michael Lewis, for example, defines a business
model simply as follows: “All it really meant was how you planned to make money” (Lewis, 2000,
p. 333).
Joan Magretta (2002) draws an analogy between business models and stories - more precisely
"stories that explain how enterprises work” (p. 87). The author adds that these stories need to
answer two of Peter Drucker’s five most important questions “who is our customer?” as well as
“what does the customer value?” but also the most fundamental question of any business, namely
how it can earn money (Drucker et al., 2008, pp. 89–90; Magretta, 2002).
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A second definition proposed by Magretta (2002) states that “[b]usiness models describe, as a
system, how the pieces of a business fit together. But they do not factor in one critical dimension
of performance: competition” (Magretta, 2002, p. 91). The second part of this definition makes
clear the demarcation to strategy mentioned at the beginning of the chapter.
Casadesus-Masanell and Ricart (2010) take another perspective and reason that business models
are comprised of management choices concerning the operation of the organization and their
associated consequences. Hence, the authors argue that every business, whether consciously or
unconsciously, must have a business model.
The dissimilarity of definitions shows that the concept of a business model is hard to grasp and
even more challenging to visualize. By designing a framework as a basis for discussion,
Osterwalder and Pigneur (2009) addressed that issue. The authors developed a tool called the
Business Model Canvas (BMC), consisting of nine building blocks and with which a business
model can be either drafted or tested. Unlike the more theoretical approaches, the BMC illustrates
the relevant components as well as the linkages between them. Therefore, the framework addresses
both managers as well as (aspiring) entrepreneurs (Osterwalder & Pigneur, 2009).
When aggregating the above-presented viewpoints of contemporary literature, a business model

can be summarized as a conceptual model that explains the fundamental workings and the
justification for existence of an organization – what the organization does and how the organization
does it.
The importance of an efficacious business model for the success of a firm seems self-explanatory.
Additionally, a commonly overlooked benefit of a successful business model lies in its ability to
increase the motivation of firm employees and to facilitate communication (Magretta, 2002).
Although possessing a competitive advantage without a successful business model is impossible

per definition, having a successful business model is no guarantee for sustainable success since
business models can be imitated if they are not differentiated (Teece, 2010). Therefore, a firm
needs to protect the competitive advantage, which it obtained by the design of its business model,
through competitive strategy (Teece, 2010). Yet, defending a successful business model through
strategic choices alone is often not enough.
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Depending on the industry, there are drivers of change of varying intensity, which sometimes even
call for a rethinking of the established business model. These drivers, amongst others, include
globalization, deregulation, and technological advancements and necessitate business model
innovation (Casadesus-Masanell & Ricart, 2010). The rise of the internet, for example, shook most
industries, made many business models obsolete, yet entirely new ones possible. A prominent case
is the music industry; Whereas new market players saw an opportunity for a new business model,
namely substituting the physical record (sold to own) with a platform to stream music online
(offered to access) using a so-called ‘freemium model’, traditional record companies faced an
existential threat and experienced a sharp decline in profits (Teece, 2010). More generally, recent
years have seen a trend of increased customer-centricity since customers benefit from higher
transparency due to facilitated access to information and from simplified access to alternative
supply sources (Teece, 2010).
Classic business model innovation can be performed in three distinct forms: “1. By adding novel
activities, for example, through forward or backward integration … 2. By linking activities in novel
ways … 3. By changing one or more parties that perform any of the activities” (Amit & Zott, 2015,
p. 39).
As a more extreme measure compared to the ones mentioned above, organizations can also
reinvent their business model entirely. According to Johnson, Christensen, and Kagermann (2008),
this should be the preferred action in a defined set of scenarios. For example, when there is an
“opportunity to address through disruptive innovation the needs of large groups of potential
customers who are shut out of a market entirely because existing solutions are too expensive or
complicated for them” (Johnson et al., 2008, p. 57). Other circumstances mentioned in the study
include the opportunity to exploit a new technology or introducing an existing technology to a new
market, “to bring a job-to-be-done focus where one does not yet exist” (Johnson et al., 2008, p. 57),
to defend against down-market disrupters, and to react to changes in the competitive environment
(Johnson et al., 2008).
Whereas the classic forms of business model innovation can be observed quite frequently,
examples of drastic changes are more difficult to find. Johnson et al. (2008) try to explain this fact
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by pointing out that, despite management awareness of the topic’s importance, global firms only
dedicate a small share of overall investment towards the development of new business models1.
Also, several other studies focus on trying to explain the barriers to business model innovation and
experimentation. Christensen (1997), for example, names the tension between an existing business
model and a new one required to make use of novel technology, including the initially superior
profitability of the established business model, as well as inflexible internal capabilities and
differences in speed between the change of technology and the development of customer demands
as some of the most critical factors. Chesbrough (2010) and Chesbrough and Rosenbloom (2002)
take a different stand and claim that most importantly, organizations are faced with a cognitive
bias as a predominant barrier to business model innovation. Both papers argue that an organization
tends to draw conclusions from previous success and apply them to new situations, which limits
the organization’s ability to experiment unbiasedly.
To conclude the findings of this subchapter, after successfully developing a viable business model,
it is imperative for managers of an organization to continually question the current and perspective
viability of its business model and consider adapting or even radically changing it in light of
changes in the organization’s environment.
1.2. Strategy
Before offering a clear demarcation to the above-thematized business model, it is crucial to first
comprehend the concept of strategy precisely. Due to an uncountable number of definitions and
elaborations of strategy in today’s body of literature, there are significant differences in focus of
content and interpretation. Besides the widespread use in research, the term is also used
inflationary outside of academia. The search engine Google, for example, yields 3.25 billion results
when looking for the term strategy2. Hence, this chapter aims to narrow down the concept of
strategy by focusing on the findings of a selected number of renowned academics in the field. In
its most broad sense, strategy formulation essentially focuses on dealing with competition (Porter,
1979).
1
According to a American Management Association study (as cited in Johnson et al. (2008)), global firms only invest
10% of their overall investment related to innovation into the development of new business models.
2
The search was performed on June 23rd, 2019.
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More specifically, in the context of this case study, strategy can refer to two levels of strategy –
corporate strategy and business strategy.
As the name suggests, the former refers to the overall strategy of a diversified organization that
consists of multiple businesses and represents the first level of strategy. According to Porter
(1987), corporate strategy builds on three premises; “[c]ompetition occurs at the business unit
level”, “[d]iversification inevitably adds costs and constraints to business units” and
“[s]hareholders can readily diversify themselves … often more cheaply than a corporation” (p.46).
Furthermore, the paper argues that corporate strategy deals with two matters; the decision in which
businesses the organization should be active, and how the range of businesses should be managed
(Porter, 1987, p. 43). In short, Porter summarizes corporate strategy as “what makes the corporate
whole add up to more than the sum of its business unit parts” (Porter, 1987, p. 43).
This statement is in line with the thoughts of Andrews (1997), who specifies on the second part of
Porter’s definition by pointing out the importance of focusing a firm’s resources, as to transform
competences into a competitive advantage.
Porter (1987) also offers a toolkit of corporate strategy for managers; in his opinion, corporate
strategy can be realized and implemented through a set of four distinct actions, which he calls
concepts of corporate strategy. The first mentioned concept is portfolio management and refers to
the opportunity for organizations to diversify their activities, mostly through acquisition of sound
companies, and hence, be active in more than one field. Similarly, the second presented possibility
is restructuring, whereby the organization aims at tapping unrealized potential in a business, which
is often unrelated to the organization. After the acquisition, replacing the management or
subsequently splitting and selling a part of that business is a common procedure in that regard,
says the author. Unlike the before-mentioned options, Porter’s concepts three and four describe
the intent to create value by leveraging the interlinkages between the business units. Transferring
skills and sharing activities both build on the concept of the value chain and stand for the
realization of synergies within an organization. (Porter, 1987, pp. 49–57)
Business strategy, which is also known as competitive strategy, is the second level of strategy and
deals with concerns regarding the individual business units of an organization. In short, it can be
described as a set of choices that allow a business to outperform its competition – by doing things
differently (Magretta, 2002). Hence, a successful competitive strategy makes a business model,
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which is typically easily observed once it is set up, hard to imitate and therefore allows a business
to earn sustainable returns (Magretta, 2002; Teece, 2010).
Porter (1980) adds the importance of industry structure and attractiveness, which is determined by
his model of the so-called five forces that will be discussed in more depth in the following chapter.
More precisely, he summarizes competitive strategy as “taking offensive or defensive actions to
create a defendable position in an industry, to cope successfully with the five competitive forces
and thereby yield a superior return on investment for the firm” (Porter, 1980, p. 34). Moreover,
the author presents three generic competitive strategies for businesses to aspire. As a first option,
a business can seek to be the overall cost leader. A second option is to stand out from the
competition through differentiation of its product and service portfolio. The third generic strategy
of Porter is for a business to focus on a specific customer group, geography, or product line
segment (Porter, 1980). The three generic strategies will also be discussed in more detail in the
subsequent chapter.
1.3. Demarcation and Interlinkages
To make clear the separation between the business model and strategy, Chesbrough and
Rosenbloom (2002) have worked out three key differences among the two. First, whereas the
business model focuses primarily on the value creation for the customer, strategy on the other hand
places a stronger weight on capturing value. Second, the authors claim that business models, other
than strategy, often neglect financial aspects of the undertaking. The third and last presented
difference regards to the available knowledge and the issue of biases. Following the authors, the
concept of the business model assumes that the knowledge inside a firm is incomplete and tends
to be biased by prior experiences. On the contrary, the concept of strategy presumes the availability
of dependable information as a basis for analysis (Chesbrough & Rosenbloom, 2002).
In contrast to the above laid-out comparison between the concepts of strategy and business model,
Casadesus-Masanell and Ricart (2010) highlight the interlinkage among the two.
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Figure 1 – Strategy, Business Model, and Tactics. Reprinted from "From Strategy to Business Models and onto Tactics", by R.
Casadesus-Masanell and J.E. Ricart, 2010, Long Range Planning, 43, p. 204. Copyright 2010 by Elsevier
The authors forego the differentiation between the two levels of strategy but instead describe
strategy simply as the choice of business model. With the two-staged framework that is depicted
above, they visualize the relationship between the concepts of business model and strategy. In the
strategy stage, the organization chooses among all possible business models, in this case denoted
as A, B, C, and D. After choosing a business model, business model D in the figure, the
organization enters the tactics stage. Regarding this stage, the article highlights the fact that the
tactical set is limited by the business model the organization has chosen. Metro’s business model
for example is based on giving away ad-sponsored newspapers free of charge. Hence, the authors
point out that the selling price is not among Metro’s company’s available tactics (Casadesus-
Masanell & Ricart, 2010).
In conclusion, business model and strategy are two different concepts and must not be confused.
However, in rare cases, a business model can also work as a strategy as the example of Dell shows,
since the business model of the early days of the firm was to sell computer hardware directly to its
customers, which was a means of differentiation because adopting this approach was not feasible
for the firm’s competitors (Magretta, 2002).
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2. Competitive Advantage
As the name of the concept implies, competitive advantage is based on the idea that a firm has
some sort of advantage compared to its industry competitors, which explains an above-average
profitability of the firm. Therefore, „an enterprise has a Competitive Advantage if it is able to create
more economic value than the marginal (breakeven) competitor in its product market” (Peteraf &
Barney, 2003, p. 314).
2.1. Value Creation and Capture
Before going into further depth on the concept of competitive advantage, a clarification of the idea
of economic value, as a vital part of the above stated definition, shall be presented. To begin with,
total value created refers to the difference between the customer’s willingness to pay (WTP) for a
particular product or service, and the opportunity cost of producing such product or service for the
supplier (Brandenburger & Stuart, 1996). However, value creation does not yet say anything about
who captures the value – this, according to the authors, is subject to the respective bargaining
power of the supplier, the firm, and the customer (Brandenburger & Stuart, 1996). The maximum
of value captured by each party is given by that player’s so-called added-value, which is defined
as the total value created by all parties minus the value created by all other parties (Brandenburger
& Stuart, 1996). Building on this, Ghemawat and Rivkin (1998) therefore define competitive
advantage as the ability of a firm to create a larger gap between the customer’s WTP and the
incurred costs compared to its industry competitors.
Figure 2 – Value Creation and Appropriation. Reprinted from “Value-based Business Strategy”, by A.M. Brandenburger and H.W.
Stuart Jr., 1996, Journal of Economics & Management Strategy, 5(1), p. 10. Copyright 1996 by The Massachusetts Institute of
Technology
24
Besides the vertical perspective on value analysis that covers all parties in the industry from
suppliers to the end customers, there is another perspective on value analysis that looks at the set
of activities of a firm’s business unit. The origins of this concept trace back to a staff paper of
McKinsey & Company from the year 1980 (as cited in Coyne, 2009). However, this perspective
gained widespread popularity with the publication of Michael E. Porter’s book Competitive
Advantage in 1985, in which he proposed the idea of the value chain.
The value chain visualizes those activities of the business unit that are strategically relevant,
including its linkages, and can be used in all industries (Porter, 1985). As shown in the following
figure, Porter distinguishes between primary- and support activities but also considers a margin.
The author further argues that differences in value chains among industry competitors justify
competitive advantage. Whereas, primary activities are directly related to the making, sale, transfer
and services of a product, support activities have the purpose of supporting the primary activities
as well as each other (Porter, 1985). The author additionally distinguishes between three types of
activities, namely those that are directly related to the value creation (e.g. assembling), those that
are indirectly related (e.g. maintenance), and those that have the purpose of assuring the quality of
other activities (e.g. inspecting) – all three types are present within each category of both the
primary- as well as support activities (Porter, 1985).
Figure 3 – The Generic Value Chain. Reprinted from “Competitive Advantage”, by M.E. Porter, 1985, New York, NY: The Free
Press, p. 37. Copyright 1985 by Michael E. Porter
25
2.2. Product-Market Position View vs. Resource-Based View
Today, there is two principal school of thoughts on the notion of competitive advantage. Michael
E. Porter is an advocate of the so-called product-market position view. In his opinion, success
primarily stems from the attractiveness of an industry, and the firm’s positioning explains
competitive advantage (Porter, 1979, 1980, 1985). Jay Barney and others, instead, argue that it is
not primarily industry attractiveness that can explain success and competitive advantage, but this
group of researchers instead focuses on the firm itself (Barney, 1991, 2014; Barney & Clark, 2007;
Newbert, 2007; Penrose, 2009; Teece, Pisano, & Shuen, 1997; Wernerfelt, 1984). Despite the
different argumentative approaches, the definition of competitive advantage by Peteraf and Barney
that was mentioned at the beginning of this chapter holds true for both ideologies.
The subsequent sections will follow the above-introduced structure and go into further detail on
both the product-market position view and the resource-based approach.
2.2.1. Product-Market Position View

The origins of the product-market position view on firm success and competitive advantage lay in
the so-called structure-conduct-performance (SCP) paradigm, suggests Bain (Barney & Clark,
2007). With the SCP, as a part of the industrial organization paradigm, Bain and Mason (as cited
in Porter, 1981), argue that a firm’s conduct is influenced by the structure of the respective
industry, and that the combined conduct of the firms then determines the overall performance of
all firms in the industry – hence industry structure determines performance. Bain (as cited in Porter,
1981), among others, considers barriers to entry and product differentiation highly relevant to
analyze industry structure.
But Porter (1981) identified a set of weaknesses in the paradigm, including but not limited to its
focus on the industry as a whole instead of individual firms, its underlying assumption of static
industry structure, and its neglection of diversified organizations that are active in more than a
single industry. Therefore, in a number of journal articles and books, Porter developed the ideas
of the SCP paradigm further. His overall conclusion on competitive strategy as a means to achieve
competitive advantage is that there are two paramount areas of focus; long-term industry
attractiveness, including its main determinants, and a firm’s relative competitive positioning within
the industry (Porter, 1985).
26
In his famous paper from 1979, Porter establishes the groundwork of his theory on industry
attractiveness by introducing a framework to analyze the level of competition in a particular
industry, focusing on five forces and in which the strongest force/ forces determine(s) the overall
profitability and should thus be the focal point of strategy formulation. According to the author,
this framework can be applied to analyze the profit potential of an industry since it explains the
value that every party in the vertical value chain can capture (Porter, 1985).
The following section, which is based on Porter (1979), summarizes the fundamental idea behind
the five forces and lists the most important factors within each of the respective forces mentioned.
For enhanced readability, the term ‘product’ can refer to both ‘product’ and ‘services’ in the
following paragraphs.
Threat of new entry: this first of Porter’s five forces stems from the new player’s longing to capture
market share, often by bringing with them significant resources. According to the author, the threat
of this force depends on the existing barriers to entry in the industry, which can be categorized into
the following six sources: “economies of scale”, “product differentiation”, “capital requirements”,
“cost disadvantages independent of size”, “access to distribution channels”, and “government
policy” (Porter, 1979, pp. 138–139). Moreover, Porter adds that the incumbent’s expected
retaliation to a new market entrant plays a significant role in determining the level of threat from
this force. (pp. 138-140)
Bargaining power of suppliers: this second of Porter’s five force is based on the threat of suppliers
raising their prices or lowering the quality of the purchased goods or services. The author argues
that for the first case, if industry participants are limited in their pricing, for example due to stiff
competition, this diminishes their profits. In Porter’s opinion, supplier groups can be considered
powerful if their concentration is higher than the industry that purchases from them, if their product
is differentiated or if there are switching costs involved for the purchaser, if there is a threat of
forward integration of the supplier, if there is no serious competition from alternative products,
and if the business from the purchaser’s industry is not significant for the supplier group. (p. 140)
Bargaining power of buyers: similar to the previous threat, this third of Porter’s five forces states
that also buyers can hurt the profitability of industry participants by leveraging their bargaining
power in order to push down prices or to demand higher quality. In general, the author argues that
the force is high if the buyer group buys in large volumes or is concentrated, if the industry’s
27
product is not differentiated, if the product is used to build another product and makes up a
significant part of its total costs, and if the buyer has a profitability issue. Other scenarios for a
large bargaining power of buyers mentioned by Porter are if the industry’s product is rather
insignificant for the quality of the buyer’s product, if the industry’s product does not help the buyer
to save costs, and also if backward integration by the buyer poses a genuine threat. Overall, Porter
considers a firm’s selection of buyers and customers to be of immense strategic importance. (pp.
140-141)
Threat of substitutes: in general, the threat of substitutes replacing the demand for the industry’s
product, which is the fourth of Porter’s five forces, puts a limit to the participants’ prices since
buyers will compare the industry’s product’s price/ performance with alterative products. Hence,
Porter suggests that the price/ performance of potential substitute products should be closely
monitored by industry participants. (p. 142)
Jockeying for position: The fifth of Porter’s five forces regards to the competition among the
players in an industry. According to the author, rivalry can generally be expected to be high if
competitors are either similar in size or plentiful, if the industry grows slowly, or if switching costs
are low or the industry’s product is not differentiated. Other situations mentioned by Porter include
if the industry’s product is perishable or the fixed costs are high, if the supply-and-demand
relationship is unbalanced due to overcapacity as a result of large batch sizes, if barriers to exit the
industry are high, and if the industry participants are not in agreement about “how to compete”
(Porter, 1979, p. 143). (pp. 142-143)
In conclusion, Porter (1979, 1985) sees competition not as the mere inter-firm rivalry, but rather
as the overall result of an industry’s fundamental economics. The author additionally points out
the importance of being aware of changes taking place in the industry, which can substantially
effect the five forces (Porter, 1979). Several years after the early publication of Porter’s opinion
on the importance of industry structure on business profitability, Porter and McGahan (1997) were
able to quantify that effect and concluded that “industry directly accounts for 19 percent of
aggregate variation in business-specific profits, and 36 percent of explained variation” (Porter
& McGahan, 1997, p. 29).
Besides industry structure and attractiveness, a firm’s competitive positioning in the industry is
the second building block for obtaining a competitive advantage in the product-market position
28
view (Porter, 1985). Whereas the above described industry analysis determines the average
profitability of an industry, positioning is argued to decide whether a specific firm or business unit
can earn profits below or superior than the industry average (Porter, 1985). Building on the value
chain concept and as briefly touched upon in the subchapter of business strategy, the author
suggests that there are two basic possibilities for a firm to attain a competitive advantage – being
cheaper than competitors while offering the same product or service, or to differentiate itself in
some way from competitors (Porter, 1980, 1985). In addition to the choice between cost leadership
and differentiation, a firm also needs to decide on the scope (Porter, 1985). Therefore, the author
suggests there are three generic strategies, cost leadership, differentiation, and two alternatives for
focus.
Figure 4 – Three Generic Strategies. Reprinted from “Competitive Advantage”, by M.E. Porter, 1985, New York, NY: The Free
Press, p. 12. Copyright 1985 by Michael E. Porter
The following section highlights the most relevant aspects of the generic strategies, closely
following Porter (1985).
A firm or business unit with what Porter calls a cost leadership positioning, pictured in the top left
quadrant of the above figure, can produce a product or service for the lowest cost in the industry
and, thus, has a competitive advantage if it can charge a price that is identical or at least close to
29
that of its competitors. Moreover, in the author’s opinion, the firm’s product must also be equal or
at least similar to competitors’ products in regard to the bases of differentiation. This positioning,
Porter suggests, is often the result of a firm’s advantages due to its breadth of operations and –
depending on the industry – can be based on economies of scale, privileged access to supplies, or
proprietary technology. Per definition, the author highlights that there can only be one single cost
leader in each industry, yet, above average returns can also be earned by firms that incur slightly
higher costs. (pp. 12-13)
A firm or business unit with what Porter calls a differentiation positioning, pictured in the top right
quadrant of figure 4, sets itself apart from competitors by being unique along one or several
specific dimension(s) that is/ are valued by buyers. In order to have a competitive advantage, Porter
argues that a firm with this strategy must be able to charge a price premium that surpasses the
additional costs spent on the differentiation of its product. The author emphasizes that, unlike in
the cost leadership positioning there can be several firms using this strategy in the same industry,
if the bases of differentiation differ. (p. 14)
In contrast to the first two possibilities, a firm with what Porter labels as a focus strategy has a
narrow scope. In general, a firm with this strategy, as the name suggests, focuses on a specific
segment of the industry and builds its strategy according to the needs of that segment, says the
author. Therefore, Porter emphasizes, it can attain a competitive advantage in its targeted segment
without having a competitive advantage in the entire industry. As can be seen in the above figure
reprinted from Porter, a firm can either have a cost focus, pictured in the bottom left quadrant, or
a differentiation focus, pictured in the bottom right quadrant. The prerequisite for this strategy to
lead to a competitive advantage, in the author’s opinion, is that the needs of the target segment
differ from other segments. (pp. 15-16)
To avoid the issue of being what Porter calls “stuck in the middle” (1985, p. 16), which the author
describes as the unfavorable situation of a firm that neither manages to be the cost leader nor attain
valuable differentiation, Porter (1985) argues that a firm usually has to decide on a single strategy,
as the attempt to attain more than one competitive advantage at the same time only pays off in a
limited amount of instances. Murray (1988), however, disagrees with Porter on this note and argues
that a firm can simultaneously seek to attain both cost leadership as well as differentiation since
the external preconditions of the generic strategies differ substantially.
30
Nonetheless, even when a firm has successfully positioned itself in one of the above-described
ways, there is a risk that this positioning cannot be sustained or that changes in the industry cause
the related advantages to diminish. Implicitly, Porter (1985) uses the term sustained competitive
advantage as a question of time that the firm can uphold that advantage. In the case of the cost
leadership strategy, risks include technological advancement that quashes prior investments or
learning, imitation or investment of competitors that allow them to improve their cost structure,
inflation of own costs, and missing required changes to the product or marketing efforts due to a
narrow focus on costs (Porter, 1980, p. 45). Common risks for firms with a differentiation strategy
include the cost difference becoming too substantial compared to the low-cost competitor in
relation to its differential factor, imitation, and a change of buyers’ needs (Porter, 1980, p. 46).
Lastly, the focus strategy comes with the risks of a competitor focusing on a subsegment within
the targeted market, changes in the needs of the target segment, and an increase in the difference
in costs compared to competitors with a broad scope that either diminish the firm’s cost advantage
or counterweights the differentiation (Porter, 1980, p. 46).
In a nutshell, the product-market position view on competitive advantage explains a business’

ability to earn superior returns as an interplay of the fundamental economics of an industry and
firm’s positioning in that industry.
2.2.2. Resource-Based View

Before going into depth on the concept of the resource-based view (RBV), its focal term shall be
clarified using the words of Wernerfelt (1984), who defines resources as “anything which could
be thought of as a strength or weakness of a given firm” (Wernerfelt, 1984, p. 172). This simple
definition hinting towards a focus on the internal perspective of the firm makes clear the
fundamental difference to the group of scholars around Porter, who instead focus on the
opportunities and threats, therefore, the external perspective of the firm (Barney, 1991; Barney
& Clark, 2007). Moreover, it shall be pointed out that resources can refer to ‘physical capital
resources’, ‘human capital resources’, and ‘organizational capital resources’, following
Williamson, Becker, and Tomer (as cited in Barney, 1991, p. 101)
The following section will look at the development of the concept, its main assumptions and
critical arguments and introduce two frameworks.
31
The RBV draws upon a set of earlier economic theories and concepts. More specifically, it builds
on the idea of distinctive competencies, Ricardian land rents, Penrose’s concept of firm growth, as
well as considerations of antitrust (Barney & Clark, 2007).
Firstly, the distinctive competencies theory suggests that the variety in terms of firm performance
can be explained by the fact that different firms possess different distinctive competencies (Barney
& Clark, 2007; Hitt & Ireland, 1986; Snow & Hrebiniak, 1980). Distinctive competencies in this
context can be defined as “an aggregate of numerous specific activities that the organization tends
to perform better than other organizations within a similar environment” (Snow & Hrebiniak,
1980, p. 317). Barney and Clark (2007) point out that the capability of general management was
among the first distinctive competencies to be in the focus of attention of researchers in this field.
The same authors, however, also highlight the limitations of this specific competence in explaining
firm performance, primarily due to a much too narrow point of view and the ambiguity involved
with determining what constitutes a ‘good manager’.
Secondly, besides the concept of distinctive competencies, the theory on land rents is another
historical contributor to the resource-based view (Barney & Clark, 2007). As early as in the
beginning of the 19th century, Ricardo (1819) identified the supply of land of a farmer/ firm as a
key factor of production. This model bases on the limited supply of land and argues that farmers/
firms possess different amounts and quality (fertility) of land, therefore require different amounts
of capital and labor to obtain a certain quantity of a good, which allows them to earn differing
levels of economic rent (Ricardo, 1819). Barney and Clark (2007) criticize that Ricardo does not
explain how firms came into possession of different quantity and quality of land and what they
spent in order to obtain it in the first place.
Thirdly, Barney and Clark (2007) but also Kor and Mahoney (2004) give credit to Penrose to have
contributed to the development of the resource-based view in her book The Theory of the Growth
of the Firm, which was first published in 1959. More precisely, Penrose suggests that a firm is not
solely an administrative organization, but also an assembly of productive resources with the
ultimate goal “to organize the use of its ‘own’ resources together with other resources acquired
from outside the firm for the production and sale of goods and services at a profit” (Penrose, 2009,
p. 28). Also, the author points out that most resources, which she categorizes into physical
32
resources and human resources, can be used in a variety of ways to produce heterogeneous
productive services and this, in turn, explains a firm’s uniqueness (Penrose, 2009).
Lastly, economic theory on competition and antitrust is also claimed to have contributed to the
concept of the resource-based view substantially, even though social welfare and antitrust
considerations were one of the fundamentals of the development of the SCP paradigm (Bain, as
cited in Barney and Clark (2007)), which is further argued to be one of the cornerstones in the
development of the product-market position view3 (Barney & Clark, 2007; Porter, 1981). As
described in a previous section of this study, the key statement of the SCP paradigm is that industry
structure explains the performance of firms within that industry (Porter, 1981). In the most
simplified scenario, one firm dominates the entire industry, whose structure is therefore far from
being perfectly competitive – social welfare is minimized due to the monopolist’s power to charge
higher prices than in a perfectly competitive market (Barney & Clark, 2007). However, Demsetz
(1973), for example, objects this classic view that only industry structure explains superior profits
and instead suggests also to consider two other factors. Being lucky in an uncertain environment,
and a firm’s management having better insights, hence, being more competent than its competitors
(Barney & Clark, 2007; Demsetz, 1973).
Whereas all the above-described theories have contributed to the development of the resource-
based view from various perspectives and disciplines, Wernerfelt (1984) and Barney (1991) are
often considered to be the seminal works of the RBV in the field of strategic management research,
for example by Priem and Butler (2001).
Wernerfelt argues that the body of literature up to that point, hardly considered the view of a firm
as a comprehensive collection of resources but instead has focused on a very limited scope of easy
to model resources, such as land, labor, or capital (Wernerfelt, 1984). Moreover, in this rather
abstract article, the author identified a gap in the analysis of the benefits of diversified firms in
terms of non-financial linkages. The fundamental difference between Wernerfelt’s concept of the
RBV and Porter’s product-market position view on firm success becomes apparent when looking
at his definition of strategy, which the author defines as “a balance between the exploitation of
existing resources and the development of new ones” (Wernerfelt, 1984, p. 172). Subsequently,
two relevant frameworks within the RBV emerged; Barney’s (1991) Value-Rarity-Imitability-
3
See chapter on product-market position view for details on the Structure-Conduct-Performance (SCP) paradigm.
33
Organization (VRIO) framework and the framework of dynamic capabilities by Teece et al. (1997)
and (Teece, 2007).
a) VRIO-framework: Barney
Only a few years later, Barney (1991) adds a set of fundamentals to the early concept. Firstly, he
opposes the underlying and implicit assumptions of Porter’s (1981, 1985) theory on competitive
advantage regarding the homogeneity of resources among firms in an industry, but instead suggests
that resources are heterogeneously distributed as well as, at least to a certain extent, immobile.
Furthermore, Barney (1991) provides a set of four distinct characteristics that have to be met for a
resource to potentially bring about a sustained competitive advantage. More precisely, he points
out that the first two attributes are required to obtain a competitive advantage, and attributes three
and four allow a firm to sustain it. A sustained competitive advantage in Barney (1991) is defined
as “implementing a value creating strategy not simultaneously being implemented by any current
or potential competitors and when these other firms are unable to duplicate the benefits of this
strategy” (Barney, 1991, p. 102). While the first part of the definition simply describes a
competitive advantage, it is the part after the ‘and’ that explains a sustained competitive advantage.
First, a resource must be valuable to be considered a resource in the first place, meaning it needs
to “enable a firm to conceive of or implement strategies that improve its efficiency and
effectiveness” (Barney, 1991, p. 106). Second, a resource needs to be rare, since resources that are
in the possession of a multitude of firms cannot be – by definition – the source of a competitive
advantage (Barney, 1991). Hence, as mentioned above, valuable and rare resources generate a
competitive advantage.
From the definition of sustained competitive advantage, it becomes clear that easy-to-copy
resources do not set firms apart from their competitors in the RBV. Hence, the third attribute
mentioned by Barney (1991) regards to the imitability of resources. For a resource to be
imperfectly imitable, a term that has been shaped by Barney (1986) but builds on the research of
Lippman and Rumelt (1982), one or several conditions need to be met. According to Dierickx and
Cool (1989) these conditions include “time compression diseconomies, asset mass efficiency,
interconnectedness of asset stock, asset erosion and casual ambiguity” (Dierickx & Cool, 1989,
p. 1505). Barney (1991), leaning on Dierickx and Cool (1989), essentially adapts these conditions
and boils them down to the following statement:
34
“Firm resources can be imperfectly imitable for one or a combination of three reasons: (a)
the ability of a firm to obtain a resource is dependent upon unique historical conditions,
(b) the link between the resources possessed by a firm and a firm’s sustained competitive
advantage is causally ambiguous, or (c) the resource generating a firm’s advantage is
socially complex” (Barney, 1991, p. 107).
In a later publication4, Barney (2014) adds patents as a further possible condition to the above list.
Lastly, the fourth attribute of a resource to generate a (sustained) competitive advantage concerns
its substitutability (Barney, 1991). As the name suggests, if an alternative resource exists (resource
B), which can replace the valuable, rare, and inimitable resource (resource A) and if that equivalent
resource (resource B) is either not inimitable or not rare, then that resource (resource A) does not
allow a firm to obtain a sustained competitive advantage (Barney, 1991). Sustainability in the
context of competitive advantage is therefore a question of duplication, not time (Barney, 1991;
Barney & Clark, 2007).
Besides the added condition regarding the imitability of resources, Barney (2014) also makes a
more substantial change to the original framework. As he argues that substitutability is an indirect
form of imitation, he summarizes these two attributes under the term imitability and adds a new,
fourth attribute called organization. In the updated version of the framework, the author argues
that whereas attributes one to three determine the potential of a resource for sustained competitive
advantage, the potential must also be realized through an adequate organizational setup, such as
reporting-, compensation- and control systems (Barney, 2014). The following figure summarizes
the VRIO framework.
4
Only for the purpose of better access, the fourth edition (2014) is cited in this study.
35
Figure 5 – The VRIO Framework. Reprinted from “Gaining and Sustaining Competitive Advantage”, by J.B. Barney, 2014,
Harlow: Pearson, p. 140. Copyright 2014 by Pearson
b) Dynamic capabilities framework: Teece et. al & Teece

Besides Barney’s VRIO framework, an alternative approach of explaining competitive advantage
within the RBV is Teece et al.’s (1997) concept of dynamic capabilities that focuses on processes,
which allow firms to exploit their resources (Newbert, 2007).
In a more recent article on the notion of dynamic capabilities, Teece (2007) argues that the
possession of resources and relying on economies of scale and scope are not enough for a firm5 to
obtain and maintain a competitive advantage. Firms, however, need to have unique and difficult
to imitate dynamic capabilities (Teece, 2007). Dynamic capability in this context is defined by the
author as “the firm’s ability to integrate, build, and reconfigure internal and external competences
to address rapidly changing environments” (Teece et al., 1997, p. 516).
Building not only on his previous work, but also on several other related fields of research, Teece
(2007) presents a comprehensive framework of dynamic capabilities.
5
The term firm in the context of Teece’s (2007) framework for dynamic capabilities refers to the level of the
corporation, not the individual business units.
36
Figure 6 – The Dynamic Capabilities Framework. Reprinted from “Explicating Dynamic Capabilities: The Nature and
Microfoundations of (Sustainable) Enterprise Performance”, by D.J. Teece, 2007, Strategic Management Journal, 28(13), p. 1342.
Copyright 2007 by D.J. Teece
The first capability in the framework regards to the “sensing (and shaping) of opportunities and
threats” (Teece, 2007, p. 1322). The author notes that related activities, e.g. “scanning,
interpretative, and creative processes” (Teece, 2007, p. 1322) can be performed by individuals,
however, implanting respective processes into the organization can decrease the dependency of
the firm on individuals. Moreover, relying on research and development activities, which is an
internal search, is not enough according to Teece (2007), who highlights the importance for firms
to also search within their environment, including suppliers, complementors, and customers. A
mentioned possibility for firms to facilitate the sensing capability is the use of analytical
frameworks, yet, the article points out the weaknesses of Porter’s five forces framework as an
example of a static framework that does not work well in a fast-changing environment.
The second capability in the framework regards to seizing opportunities. In order to seize an
opportunity, following the discovery of such, the organization needs to have in place proper
“structures, procedures, designs and incentives” (Teece, 2007, p. 1334). Essential considerations
in this regard, besides the decisions concerning the timing and focus of investments, are
considerations regarding the specifications of the product or service itself, but also the decision on
a suitable business model for that particular opportunity, hence, how the organization plans to
capture value (Teece, 2007). Regarding the choice of business model, the author suggests to follow
a four-step guideline:
“(1) analyze multiple alternatives, (2) have a deep understanding of user needs, (3) analyze
the value chain thoroughly so as to understand just how to deliver what the customer wants
37
in a cost-effective and timely fashion, and (4) adopt a neutrality or relative efficiency
perspective to outsourcing decisions” (Teece, 2007, p. 1330).
Among others, the author furthermore emphasizes the importance of avoiding decision biases by
managing incentives and ensuring a proper flow of information.
The third and last capability in the framework regards to “managing threats and reconfiguration”
(Teece, 2007, p. 1334). Hence, the firm needs to be able to deal with changes in the environment
and act accordingly, namely by aligning or realigning firm assets (Teece, 2007). The necessary
adaption depends on the trajectory of innovation, which will be depicted in-depth in the subsequent
chapter (Teece, 2007). A decentralized organizational structure, managing cospecialized assets,
knowledge management and governance considerations are some of the relevant aspects to
improve this particular capability, suggests the article.
Overall, the framework adds to the body of literature by enriching the RBV with elaborations on
the relevance of innovation, and at the same time provides a thorough guideline for practitioners.
Its key message can be summarized as that only above-described dynamic capabilities allow a firm
to obtain a sustained competitive advantage.
To conclude on the RBV, Newbert (2007) points out that the field of research is still rather new
and therefore suggests that the empirical support for the concept, which he finds to be modest and
dependent on the selection of the independent variables as well as the theoretical approach, needs
to be further validated. In direct comparison to the product-market position view, the RBV works
with alternative assumptions and takes a fundamentally different perspective on the concept of
competitive advantage. In sum, the RBV emphasizes the importance of the set of resources a firm
controls, including the characteristics of those resources and also, how the resources are exploited
for creating a competitive edge vis-à-vis competitors.
3. Industry Evolution
After shedding light on the fundamental concepts of business model and strategy as well as two
views on competitive advantage, the third and final part of the literature review deals with the
evolution of industries. Introductory, some facts and figures are presented and the background of
the research on industry evolution is outlined. Secondly, triggers of industry evolution are
discussed. Subsequently, this chapter presents the contemporary state of research on industry
38
evolution, focusing on the works of Anita M. McGahan (2000, 2004a, 2004b) and David B.
Audretsch (1995), two of the most cited scholars in the field. Lastly, the chapter provides insights
into how incumbent firms should deal with industry evolution.
3.1. Introduction & Background
According to a recent publication of the investment management firm Hermes, more than 50% of
today’s S&P 500 firms are estimated to be replaced within the next ten years only (Russell, 2017).
Moreover, the average lifetime of a firm in the mentioned index decreased from 61 years in 1958
to only 18 years at the time of publication (Russell, 2017). This overall trend is confirmed by
looking at numbers from past decades. Whereas in the 1950s and 1960s, a third of the firms in the
Fortune 500 were replaced within twenty years, in the 1970 this shortened to ten years and in the
1980s, it only took five years (Audretsch, 1995). Audretsch (1995) also points out that the U.S.
economy – home market of the subsequently analyzed company, Walmart - is particularly
turbulent, with a vast number of startups entering each year, out of which only few survive, and
even fewer pose a serious threat to large incumbent firms.
This overall development clearly shows that industry change and evolution, which is not a new
phenomenon per se, has picked up its pace in the recent past. Hence, being aware of the
background, its trajectories, but also its implications for incumbents and new market entrants is of
the utmost importance for management of firms of all sizes.
3.2. Triggers of Industry Evolution
3.2.1. Innovation: homogeneous vs. heterogenous submarkets

a) Homogeneous submarkets
A key driver of industry evolution is innovation, claims Audretsch (1995). In academic literature,
a variety of streams of research related to the topic have emerged, after Schumpeter (as cited in Li,
Li, Zhao, & Wang, 2014) developed the innovation theory in the 1930s, which highlights the role
of technological innovation for economic development. Edwin Mansfield, for example, can also
be considered as one of the early scholars in the field. His journal article of 1962 analyzes the
dynamic processes within an industry to explain the birth/ entry, growth, and death/ exit of firms.
For example, it looks at the impact of innovative capabilities on firm growth and the inter-industry
mobility in regard to size distributions of firms. Mansfield (1962) makes a number of essential
conclusions; First, he finds that successful innovators grow, on estimate, twice as much as their
39
competitors. Second, the paper finds proof for the logical assumption regarding the existence of a
relationship between capital requirements, profitability, and entry/ exit rates. Third, Mansfield
(1962) highlights that small firms, even though there is a high death rate among them, experience
higher and more variable growth in direct comparison to larger firms in case they prevail. Hence,
the author contradicts the so-called Gibrat’s Law of 1932, which assumes proportionate growth
relative to firm size (Mansfield, 1962). Lastly, the paper explains differences in intra-industry
mobility by the factors market structure and age of a particular industry (Mansfield, 1962).
The next group of seminal papers in the field is Abernathy and Utterback (1978) and Afuah and
Utterback (1997). Despite their focus on the manufacturing firm and a product-level view, the
articles add substantially to the body of literature on innovation and industry structure. Abernathy
and Utterback (1978) distinguish between minor/ incremental innovations and major/ radical
innovations. The paper argues that each radical innovation is followed by a number of minor
innovations and that radical innovation “which require reorientation of corporate goals or
production facilities tend to originate outside organizations devoted to “specific” production
system; or, if originated within, to be rejected by them” (Abernathy & Utterback, 1978, pp. 3–4).
Furthermore, Abernathy and Utterback (1978) suggest a three-stage model of innovation, which
has been recapitulated and used as the basis for further analysis by other studies, including a
particularly noteworthy one by Afuah and Utterback (1997). The original model proposes that in
the first stage, called fluid pattern, firms are faced with uncertainty regarding market needs and
technology, hence, motivation for major investments is low (Abernathy & Utterback, 1978). The
second stage, which the authors call transitional pattern, is characterized by a reduction of the
before-mentioned uncertainties, which incentivizes substantial investments. In the third and final
stage, called specific pattern, innovation takes place only incrementally and the principal concern
of the organization is to reduce costs (Abernathy & Utterback, 1978).
To this original model, Afuah and Utterback (1997) add a fourth stage, called discontinuity. The
paper suggests that before stages one to three repeat themselves when a new innovation is
introduced, discontinuity sets in first (Afuah & Utterback, 1997). Another contribution of this
journal article is its proposed integration of the above-described four-stage model of innovation
and industry analysis following Porter’s Five-Forces model, which has been laid out in a previous
subchapter of this study. By combining the two concepts, the article seeks to overcome the static
nature of the Five-Forces model, as well as the RBV. The authors specifically highlight the fact
40
that the threat of the five forces vary considerably depending on the stage in the innovation of the
respective industry. For example, the force rivalry is claimed to be rather low in the fluid stage
since products in this stage are characterized by high differentiation (Afuah & Utterback, 1997).
However, rivalry in the specific stage of industry innovation is typically high as products are
perceived as commodities, not as differentiated (Afuah & Utterback, 1997).
The above-described concept of innovation and industry evolution following Abernathy and
Utterback (1978) and Afuah and Utterback (1997) is often referred to as the dominant design view,
for example by Argyres, Bigelow, and Nickerson (2015) and Utterback and Suárez (1993). It refers
to the description of the product that emerges in the transitional stage in the model of Abernathy
and Utterback (1978) and “has the effect of enforcing or encouraging standardization so that
production or other complementary economies can be sought. Then effective competition begins
to take place on the basis of cost and scale as well as of product performance” (Utterback & Suárez,
1993, p. 1)
With a similar content focus, Klepper (1996) elaborates on the entry, growth and exit of firms in
an industry and looks at the role of innovation in the process. The paper’s main findings are that
the product life cycle (PLC) model, which underlies the papers of both Abernathy and Utterback
(1978) and Afuah and Utterback (1997), can be defended using two arguments. First, the size of
the firm matters in terms of its ability to generate returns to fund process research & development
(R&D) – the cost disadvantage for new entrants functions as an entry-barrier (Klepper, 1996).
Second, “firms possess different types of expertise which lead them to pursue different types of
product innovation” (Klepper, 1996, p. 580). However, most noteworthy in the context of this
study, the paper criticizes previous research in the field of industry evolution and innovation, in
particular the dominant design view (Klepper, 1996). The author argues that this view “minimizes
the influence of industry demand on incentives to innovate, attributing the slowdown in product
innovation and rise in process innovation entirely to the depletion of opportunities for product
innovation and the emergence of a dominant design” (Klepper, 1996, p. 563).
Another group of researchers including Myers and Marquis (as cited in Mowery & Rosenberg,
1979), in fact argues that the importance of demand for innovation even exceeds that of technical
potential. Similarly, Gilpin (1975) promotes that demand and supply in the form of technology
must be matched in order to innovate successfully, and in a later section of the report even claims
41
that “market demand is the primary determinant of successful innovation. What is important is
what consumers or producers need or want rather than the availability of technological options”
(Gilpin, 1975, p. 65).
Mowery and Rosenberg (1979) therefore weigh the arguments of researchers from both sides,
including the before-mentioned, who claim that demand factors play a dominant role for
innovation. Answering to Meyers and Marquis, Mowery and Rosenberg (1979) primarily criticize
the study’s vague definition of the central term market demand. Furthermore, Mowery and
Rosenberg (1979) point out that the arguments brought forward by Gilpin (1975) in part contradict
themselves and are also incorrectly interpreting prior research findings. The central findings of the
article are that neither the market demand nor the supply forces can explain the stimulation of
innovation alone (Mowery & Rosenberg, 1979). This is in line with the analysis of Kshetri (2017),
who, in addition to the supply side and demand side factors, adds (formal and informal)
institutional factors as a third category. Whereas regulation is mentioned as an example of formal
institutional factors, culture on a society-level serves as an example of an informal institutional
factor (Kshetri, 2017).
b) Heterogeneous submarkets
However, a more recent trend of research in the field emerged that challenges the assumption of
homogeneous markets as a result of the dominant design concept. Instead, other authors, including
Figueiredo and Silverman (2007), Argyres et al. (2015) and Uzunca (2018), build their
argumentation on innovation and industry dynamics on the existence of segmented markets. More
specifically, Argyres et al. (2015) propose that a substantial change in industry dynamics occurs
not with the advent of a dominant design, but “upon the introduction of a pioneering new product
design by a single firm, the demand for which surges in an unanticipated way. We call this shift
an “innovation shock.”” (Argyres et al., 2015, pp. 216–217). Whereas the dominant-design view
suggests that industry dynamics are mostly characterized by firms either exiting the industry or
imitating the dominant design product, Figueiredo and Silverman (2007) and Argyres et al. (2015)
propose that incumbents can reposition themselves in new segments (Murmann & Frenken, 2006;
Uzunca, 2018).
42
In conclusion, in order to analyze the incentives behind innovation, the demand side, the supply
side, as well as institutional factors should be considered. Furthermore, industry structure needs to
be factored in.
Evidently, the above-depicted articles and studies focus on innovation from a product perspective
and not necessarily from a service perspective. This can be seen as a gap in the existing body of
literature. Nonetheless, this study suggests that the core arguments of these articles also hold true
for non-manufacturing firms, based on the assumption that innovation in the context of industry
evolution does not necessarily require a product-manufacturing focus.
3.2.2. Other triggers

Besides innovation, literature offers another set of triggers for industry evolution. However, due
to the study’s focus on technological induced industry evolution, they will only be presented
briefly and primarily for the sake of completeness.
Buenstorf (2016), for example, emphasizes the role of incumbents on industry evolution. The
author suggests that established firms contribute to industry dynamics directly as well as indirectly.
In regards to the direct measures and in line with the previous subchapter on innovation, the paper
points out that industry incumbents can innovate within their own industries, as well as in related
industries (Buenstorf, 2016). In addition, firms can also indirectly stimulate industry evolution
through what the author calls spinoff-entrepreneurship, whereby the author defines spinoffs as
“entrepreneurial ventures started by former employees of incumbent firms active in the same
industry that the spin-off enters” (Buenstorf, 2016, p. 828). Cordes, Richerson, and Schwesinger
(2014) add to that stream of research by implying a relationship between a corporate culture and
spinoffs. More specific, the authors “argue that cooperative firm cultures and processes of
“entrepreneurial imprinting” are important sources of spinoffs’ superior capabilities concerning
their later market performance” (Cordes et al., 2014, p. 689).
Moreover, established firms can indirectly influence industry evolution dynamics by steering
agendas of public research and by offering innovative startups an exit option which effects both
entry as well as exit dynamics and, hence, industry structure (Buenstorf, 2016).
Another contributing factor for industry evolution is mentioned by Uzunca (2018). Following the
pivotal assumption of heterogeneous submarkets, the paper points out that the probabilities of
success for market entrants and established firms, and therefore the dynamics of the industry,
43
depends on the existence of intra-industry boundaries and the convergence of technological as well
as customer competencies. In a nutshell, Uzunca (2018) argues that chances for success of entrants
are low when there is convergence of both competencies, but in case there is convergence of only
one of the two competencies, chances are substantially higher. Hence, industry structure and
characteristics are not only a stimulus for innovation but also have a direct implication on industry
dynamics.
3.3. Trajectories of Industry Evolution
Besides a basic knowledge regarding the stimuli for industry dynamics, high-level insights on the
possible trajectories is another critical factor for understanding the impact of industry evolution on
firms. In this stream of research, the publications of Anita M. McGahan stand out, who notes that
neither Porter’s static five-forces model nor Abernathy and Utterback’s dynamic product life cycle
model help firms to improve their performance (2000, 2004a, 2004b). Her approach specifically
focuses on an industry as its unit of analysis, not an individual firm or technology. Preluding, the
author differentiates between two possible threats a firm can face; first, its core assets can become
obsolete, and second, its core activities can become obsolete. The following table summarizes the
central definitions of the concept from McGahan (2004b).
Asset Conditions for an object to be considered an asset
Durability “The object must retain its potential to create value even
after lying dormant for a year” (p.31)
Ownership “The object must be owned by one or more firms within

the industry” (p.31)
Activity Conditions for actions to be considered an activity
Control “The action must be directed by one or more firms within

the industry” (p.31)
Profit-orientation “The action must be designed to increase revenues or

lower costs or both for one or more of the firms within the
industry”6 (p.31)
6
In line with the definition of value creation from Brandenburger and Stuart (1996).
44
Core “An asset or activity is “core” if it is essential to the value created by the industry
in the following sense: Its eradication today (and continuing eradication for one
year) would lead to diminished profitability as of a date one year from now,
despite efforts to replace the eradicated asset or activity” (p.31)
Table 1 – Central Definitions of Industry Trajectories. Source: “How industries evolve: Principles for achieving and sustaining
superior performance”, by A.M. McGahan, 2004b, Boston, MA: Harvard Business School Press, p. 31.
Based on the possible obsolescence of core activities and core assets in this concept, there are four
mutually exclusive and collectively exhaustive trajectories of industry evolution. McGahan
(2004b) emphasizes that every industry follows only one of those four trajectories, shifts between
models occur seldom and only when a new threat either emerges or diminishes, and even if the
industry does not face either of the two threats of obsolescence, structural change can still be
weighty. Furthermore, the author differentiates between architectural transformation7, which
describes a situation in which core activities are under threat, and foundational transformation,
which describes a situation in which core assets are under threat. Moreover, McGahan (2004a)
cautions that a firm’s strategy needs to be well aligned with the change trajectory of the industry.
The following paragraphs condense the central aspects of each of the four trajectories, closely
following McGahan (2004b).
Progressive change: On this first out of four trajectories, which is neither a form of foundational-
nor architectural transformation, core assets as well as core activities are robust (McGahan,
2004b). Innovation is done incrementally and is mostly based on continuous feedback from
suppliers and clients, says the author. Moreover, industry growth is typically realized via
geographic expansions or extensions of the product-portfolio and firms in an industry that is on a
progressive evolutionary path are not required to spend heavily in order to test innovations but
instead they can learn in smaller steps (McGahan, 2004b). Hence, “in an industry on a Progressive
evolutionary path, performance depends on two primary capabilities: the development of a highly
efficient set of interlocking activities and the ability to respond quickly to feedback from buyers
and suppliers” (McGahan, 2004b, p. 13). Other mentioned characteristics on this trajectory include
the fact that almost the entire set of activities are core, firms are not secretive about their actions,
7
The author gives credit to Henderson and Clark (2002) as well as Tushman and O’Reilly (2002) to have used the
term in previous studies.
45
and the industry’s leading firms enjoy a stable average profitability (McGahan, 2004b). The author
further suggests that crucial for sustained success on a progressive trajectory is a “discipled
adherence to the dominant model for organizing core activities and core assets” (McGahan, 2004b,
pp. 39–40). Soft-drink bottling is mentioned as an exemplary industry on this trajectory. (pp. 12-
13; 37-43)
Creative change: On this second trajectory, which is a form of foundational transformation, core
assets are threatened to becoming obsolescent but core activities are robust (McGahan, 2004b). In
contrast to progressive change, the author notes that firms active within an industry on a creative
change path invest in risky projects with oftentimes highly uncertain payoffs. As there is high
degree of instability due to the threat of obsolescence of the core assets, firms must be creative in
regards to their product-line and lever their relationships with both customers and suppliers
(McGahan, 2004b). On a positive note, the reward for firms that manage to become a leader in the
industry by sustaining a set of core activities is a high profitability, however, this in turn increases
the threat of new entrants (McGahan, 2004b). In order to survive, McGahan suggests that the
commercialization of projects needs to be highly efficient and “the key to profitability is in creating
new products and services that capitalize on core assets that were conceived years in advance”
(McGahan, 2004b, p. 44). The author mentions pharmaceutical manufacturing as an example of
an industry on this trajectory. (pp. 13-14; 43-51)
Intermediating change: On this third trajectory, which is a form of architectural transformation,

core activities are under threat of becoming obsolescent but core assets are robust (McGahan,
2004b). According to the author, this trajectory is often the result of enhanced transaction
efficiency due to changes in the flow of information. Whereas short-term success can be attained
by sustaining core assets in established relationships for as much time as possible, sustained
success in this industry depends on a firm’s ability to establish new relationships and reconfigure
activities, and at the same time preserve its core assets (McGahan, 2004b). With this form of
industry evolution, the author points out, industry boundaries are less easily identifiable compared
to the two trajectories described above. Due to a substantial competitive threat, “there is a strong
incentive to preserve core assets by redeploying them into a new business (which is often the
business that creates the threat to the industry in the first place)” (McGahan, 2004b, p. 57). The
author mentions electricity transmission markets as an example of an industry on the
intermediating change trajectory. (pp. 14-16; 51-57)
46
Radical change: On this fourth trajectory, which is often triggered by drastic changes in the
regulatory environment or technology, both architectural as well as foundational change takes
place since both core assets as well as core activities are under threat to becoming obsolete
(McGahan, 2004b). Therefore, an industry under radical change sees its established relationships
with suppliers and customers fading while existing resources and capabilities lose their potential
to create value, says the author. Firms in such industry are faced with a tradeoff between trying to
remain competitive by recreating core assets or reducing their involvement in the business
(McGahan, 2004b). Characteristically, this trajectory results in a substantially reconfigured
industry, operating at a decreased scale and competing firms end up in what McGahan (2004b)
calls “a war of attrition … as leading firms compete for the last remaining viable position in the
industry” (McGahan, 2004b, p.58), which is rarely profitable due to the high costs of such a war.
According to the author, the key to short-term profitability in this environment is to lever the
established system of core assets and core activities for as much time as possible, and long-term
profitability requires finding new applications for the firm’s core assets and core activities. Most
importantly, firms need not to commit further in the old business (McGahan, 2004b). The author
further notes that this trajectory is the most similar to Clayton Christensen’s notion of ‘disruptive
innovation’8 and mentions the commercial railroad industry as an example of an industry on the
radical change trajectory. (pp. 16-17; 57-63)
8
For details on disruptive innovation refer to e.g. Christensen, C. M., Raynor, M., Mcdonald, R., (2015). What Is
Disruptive Innovation?. Harvard Business Review, 93(12), 44-53.
47
Figure 7 – Trajectories of Industry Evolution. Adapted from “How industries evolve: Principles for achieving and sustaining
superior performance”, by A.M. McGahan, 2004b, Boston, MA: Harvard Business School Press, pp. 34-35.
3.4. Implications for Incumbents
According to the respective underlying assumptions, authors of the homogeneous- and

heterogeneous submarkets view, as well as the more in-depth and action-oriented concept of
industry evolution by McGahan propose strategic recommendations for affected firms.
Afuah and Utterback (1997), building on their previously laid-out four-staged model of industry
innovation, suggest a set of strategies for each of the four stages, which are summarized in the
below table.
Innovation Stage Proposed Strategies Page Reference
Fluid stage - “Focus on niche products” p. 190

- “Build complementary assets”
48
- “Invest to try and influence the dominant design of the

transitional phase”
Transitional stage - “Focus on differentiated products” p. 191

- “Make irreversible investments in capacity, brand
advertising, process and product R&D in preparation
for specific phase”
- “Contract with suppliers for equipment or specialized
materials that will be needed in the specific phase”
Specific stage - “Focus on low cost” p. 192

- “Emphasize quality”
- “Signal commitments by advertising, investing in
capacity and R&D”
Discontinuity stage - “Ensure compatibility with old technology if p. 193

technology exhibits network externalities”
- “Take necessary steps to identify lead users”
Table 2 – Strategies in a Dynamic Industry. Source: “Responding to Structural Industry Changes: A Technological Evolution
Perspective”, by A.N. Afuah and J.M. Utterback, 1997, Industrial and Corporate Change, 6(1), pp. 190-193.
The biggest hurdle for practitioners applying this theoretical concept is that the dominant design
only becomes apparent in hindsight, which limits the strategic option to either imitate the
dominant-design product or exit the industry (Argyres et al., 2015; Murmann & Frenken, 2006;
Utterback & Suárez, 1993).
The more recent research of authors who assume homogeneous submarkets only adds limited
recommendations for action. Most importantly, they suggest that firms, besides exiting the industry
or imitating the dominant design, can reposition themselves to a niche, distant enough from the
product that caused the innovation shock, or enter into new segments that are different enough
from the old segment so cannibalization does not pose a problem (Argyres et al., 2015; Figueiredo
& Silverman, 2007)
The approach of McGahan can be seen as having more practical implications for managers
compared to the approaches laid-out above. In short, it allows for a more thorough and long-term
oriented analysis, and can assist decision-makers in making more informed decision when faced
49
with tradeoffs, such as staying committed to an existing business versus investing in a new one
(McGahan, 2004b).
To thoroughly understand industry trajectory, McGahan (2004a) suggests a four-step analysis. The
first proposed step is defining the industry, which is conducted by finding those firms that share
common suppliers and customers. To do so, the paper recommends several ways to identify direct
competitors. First, the use of the “5% rule to assess whether the commonality is sufficient to qualify
the firms as direct competitors: If a 5% price fluctuation by one company causes customers or
suppliers to switch to another company, the businesses qualify as direct competitors” (McGahan,
2004a, p. 92). Moreover, firms typically qualify as direct competitors if they use the same suppliers
and target the same buyer, and if they create value by using the same technology, says the author.
The second proposed step is defining core assets and core activities of the industry, the definitions
and precise conditions for which are described in table 1. Subsequently, the third proposed step of
the analysis is determining if core assets and/ or activities are under threat to becoming obsolete.
That would be the case if the particular threat makes core assets and/ or activities irrelevant for the
profitability (McGahan, 2004a). More specifically, the threat “must be significant enough to
jeopardize the survival of at least one industry leader and widespread enough to influence every
company in the industry” (McGahan, 2004a, p. 92). Therefore, the trajectory can be identified so
that with the fourth and last proposed step, evaluating the phase of the trajectory, the diagnosis is
completed. To do so, the paper suggests differentiating between the phases of progressive or
creative trajectories on the one hand, and radical or intermediating on the other. For the first,
McGahan (2004a) argues that the traditional life cycle model applies that is characterized by its s-
shaped curve of sales volume over time. For the latter, in which case the industry experiences an
architectural change, the article points out that following the traditional model would lead to
misdirected investments or missed opportunities and, hence, an alternate model of industry life
cycle is proposed that accounts for the development of both the established- as well as the emerging
industry.
50
Figure 8 – Industry Life Cycle Models. Adapted from “How Industries Change”, by A.M. McGahan, 2004a, Harvard Business
Review, 82(10), p. 93.
As fighting the change has a very low chance for success, accepting, understanding, and acting
upon change is the more sensible approach (McGahan, 2004a). In sum, the ability to understand
the trajectory of change is at the core for further strategic action as it allows a firm to make
informed decisions that balance short-term profits with long-term prospects (McGahan, 2004a).
Therefore, the recommended options for action, which in part have been described in the previous
subchapter, are centered around sustaining and reconfiguring core assets and core activities, based
on the type of change and its phase (McGahan, 2004a).
51
4. Analytical Framework
Figure 9 – Analytical Framework.
In the subsequent analysis of Walmart, the study follows the above-pictured framework, which
builds on the literature review. It shall be pointed out that this framework does not claim to
represent a complete view on the subject matter but rather it includes the central aspects that are
necessary to answer the research question.
52
III. Case Study: Walmart
1. Walmart U.S.
1.1.Early years and growth
What developed to become the largest employer in the United States9 according to a recent article
of Sauter and Suneson (2019), started with a simple vision of its founder Sam Walton in the year
1962. At the core of his concept was the goal to offer his customers both great service and, even
more importantly, low prices. Whereas the choice of location for the first department store was
likely due to personal reasons, the subsequently opened stores also focused on rather rural towns.
In record speed, Walmart expanded to 24 stores within its first five years of operations, went public
in 1970 and, with the new capital, increased its store count to 276 by the year 1980 (Walmart,
2019b). When looking at the next decades of Walmart’s growth story, two important factors can
be observed.
Firstly, the company quickly expanded its reach not only geographically, but also by introducing
additional concepts in order to grow its business. In the beginning of the 1980s, Walmart opened
the first Sam’s Club, a membership-based warehouse club (Walmart, 2019b). Then only a few
years later, the first Walmart Supercenter was opened, a retail format that combines the sale of
general merchandise and a supermarket (Walmart, 2019b). Shortly before the turn of the
millennium, Walmart introduced yet another format, the Neighborhood Market (Walmart, 2019b).
This store format differs mainly from the others by its significantly smaller size and a focus on
groceries.
Secondly, Walmart has put its focus on leveraging technology early on, as an important means to
lower its cost base. For example, in an attempt to maximize speed and accuracy of the check-out
process, Walmart has introduced a computerized point-of-sales (POS) system in the early 1980s
(Walmart, 2019b). Shortly after, in 1987, Walmart had the largest private satellite communication
system in place, linking all its locations and therewith improving the exchange of information and
data (Walmart, 2019b). This was only one of several measures in the company’s attempt to
9
Excluding state governments and military bases.
53
streamline its supply chain, which is widely agreed to be one of the explaining factors of Walmart’s
success story (Stalk, Evans, & Shulman, 1992; Traub, 2012).
Yet, in order to understand the dominant position and outperformance of Walmart, one must go
into more depth and analyze the business model and competitive strategy of the firm in its early
years.
1.1.1. Business model

To begin with, the business model at its core was nothing new when the firm was founded in 1962.
As Magretta (2002) notes, the idea of offering products at lower prices, made possible through
cutting costs, had already been transferred from supermarkets to general merchandise retailers in
the mid-1950s. The same article also defines the business models of discount retailing as follows;
“First, strip away the department store’s physical amenities such as the carpeting and the
chandeliers. Second, configure the stores to handle large numbers of shoppers efficiently.
And third, put fewer salespeople on the floor and rely on customers to serve themselves”
(Magretta, 2002, p. 91).
Building on this general business model, Walmart differentiated itself by a set of strategic choices.
First of all, Walton decided to differentiate the firm from its competitors by focusing on rural areas.
Other than the established incumbents, Walmart, in the words of its founder Sam Walton, chose
to “put good-sized stores into little one-horse towns which everybody else was ignoring” (Walton
& Huey, 1992, pp. 139–140). The fact that the locations were too small to allow a second discount
retailer set foot constituted an important first-mover advantage for Walmart (Magretta, 2002;
Teece, 2010). Moreover, Walmart differentiated itself by offering “everyday low price” (EDLP)
and selling national brands as opposed to competitors that frequently used price promotions and
focused on cheaper brands or private label goods (Magretta, 2002).
1.1.2. Strategy and competitive advantage

Since Walmart was focused on one industry initially, a distinction between corporate strategy and
business strategy is not beneficial. Leaning on Porter’s concept of generic strategies, Walmart has
followed a cost-leadership strategy from the very beginning. As described in the literature review,
this generic strategy allows a firm to attain a competitive advantage if its costs for a certain good
or service are lower than that of its competitors, so that it can earn a profit by charging the same
or even a lower price on its goods and services. Therefore, the next step in the analysis must be to
54
determine what contributes to Walmart’s low-cost base, which is the foundation and a prerequisite
for the feasibility of the EDLP policy. The easiest argument from today’s perspective is the sheer
size of the company’s operations, which allows for economies of scale that is a key factor in
Porter’s concept of cost leadership. However, this hasn’t always been the case. Thus, this factor
alone cannot explain the cost advantages of the firm.
Most importantly, Walmart made a set of interrelated decisions that optimized the efficiency of its
supply chain. First of all, in the 1980s, Walmart began to work directly with the manufacturer of
goods to not only save costs but also to reduce the complexity involved in dealing with a
middleman (Traub, 2012). In addition to reducing links in the supply chain, Walmart also
emphasized tight collaboration with its suppliers (Traub, 2012). By strategic investments in
information technology, including computerized point-of-sales systems, universal product code
bar code technology, Walmart was able to collect sales data on a store level and provide this
information directly to its suppliers (Traub, 2012; Walmart, 2019b). Before the rise of the internet,
the communication and transfer of information was made possible via the largest private satellite
communication system, which was installed in 1987 (Walmart, 2019b). Later, Walmart even
implemented a concept called vendor-managed-inventory (VMI), which means that the suppliers,
instead of Walmart itself, are responsible for inventory management (Traub, 2012). Furthermore,
video conferencing system is another example of information technology being used, specifically
to facilitate communication between the stores and corporate headquarters to maximize operational
learning (Stalk et al., 1992). This was complemented by a fleet of company-owned aircrafts to
allow for regular and direct exchanges between senior management and store managers (Stalk et
al., 1992). Additionally, logistics played a pivotal role in the firm’s strategy. An important aspect
of the firm’s growth strategy was to open new stores only within the reach of a distribution center,
so that the firm-owned fleet of trucks could serve them quickly (Walton & Huey, 1992). Moreover,
via an inventory-management system called cross-docking, Walmart was able to reduce the
inventory time of goods and therewith save on respective costs and increase flexibility and
responsiveness (Stalk et al., 1992). Lastly, the firm’s human resource management, which focused
on decentralized control and empowering employees and store managers via stock ownership and
profit sharing, represents another important piece of the puzzle (Stalk et al., 1992).
In short, Walmart streamlined its supply chain and fostered tight collaboration between all links,
optimized logistics, incentivized and empowered employees and management, and levered the
55
benefits of technology for the collection and exchange of information. It is important to highlight
that those key pillars of Walmart’s competitive cost structure are interrelated and only function as
a system. It is this set of competences and resources that made the business model, which is rather
easy to identify, extremely difficult to imitate.
Figure 10 – Walmart Competitive Advantage. Adapted from “Competing on Capabilities: The New Rules of Corporate Strategy”,
by G. Stalk, P. Evans and L.E. Shulman, 1992, Harvard Business Review, 70(2), pp. 60-61.
As previously mentioned, the low-cost structure was and still is a prerequisite for the EDLP
strategy of Walmart. However, EDLP also added/ adds to the cost advantage as it reduced/ reduces
the need for advertising campaigns and promotions, and because it lowered/ lowers the costs
associated with stockouts or excess inventory due to an improved demand stability (Stalk et al.,
1992).
In Porter’s product-market position view, Walmart had a competitive advantage due to its
successful positioning as a low-cost retailer in a favorable industry, whereby distribution and
inventory cost played a pivotal role in minimizing costs. In fact, the proponents of the resource-
based view would argue relatively similar. Particularly, the resources that can be summarized
under the term ‘organizational capital’, which is one of the three earlier in this study outlined
resources and in this case primarily refers to distribution and inventory related capabilities, have
contributed to Walmart’s competitive advantage, as they were valuable, rare at the time, difficult
56
to imitate, and exploited by the organization. Comparing the distribution costs of Walmart with
that of its main competitors shows that the above stated can be corroborated with data. In the year
1989, for example, Walmart encountered distribution costs of only 1.7% of its costs of sales,
compared to 3.5% of Kmart or 5% of Sears (Traub, 2012). Overall, Walmart significantly
outperformed the industry in terms of sales per square foot and return on assets, as shown by Stalk
et al. (1992). Between 1984 and 1992, the latter performance indicator moved between ten and
fourteen percent for Walmart, compared with five to seven percent for the industry (Stalk et al.,
1992).
1.2. Walmart today
The following facts and figures are based on the latest annual report of the firm, Walmart (2019a,
pp. 7–14). Today, Walmart operates around 11,300 stores in 27 countries, serves close to 275
million customers per week, and employs 2.2 million employees worldwide - 1.5 million of which
in the United States alone (Walmart, 2019a). The company’s segments are Walmart U.S., Sam’s
Club, and Walmart International, with Walmart U.S. being the largest segment (Walmart, 2019a).
Walmart U.S. is active in the sale of three categories of merchandise, specifically grocery, health
& wellness, and general merchandise – which can further be segmented into entertainment,
hardlines, apparel, and home/ seasonal (Walmart, 2019a). The segment’s most important store
formats include supercenters, neighborhood markets, discount stores, and e-commerce websites
(Walmart, 2019a). The Walmart U.S. segment accounts for 65% of Walmart’s net sales (Walmart,
2019a).
Walmart International conducts business in 26 countries other than the U.S. and operates in the
categories retail, wholesale, and other (Walmart, 2019a). Similar to the U.S. segment, store formats
include hypermarkets, supercenters, supermarkets, cash & carry, warehouse clubs, and e-
commerce (Walmart, 2019a). This segment accounts for 24% of Walmart’s net sales (Walmart,
2019a).
Sam’s Club is a membership-based warehouse club that operates in 44 U.S. states, in Puerto Rico,
as well as through the e-commerce website samsclub.com (Walmart, 2019a). The segment’s five
merchandise units are grocery and consumables, fuel and other categories, home and apparel,
technology, office, and entertainment, and health and wellness (Walmart, 2019a) This segment
accounts for approximately 11% of Walmart’s net sales (Walmart, 2019a).
57
1.2.1. Business model

In general, Walmart continues to employ the same discount retailing business model that it had
used since it entered the market in 1962. However, the scale as well as the scope of its business
have substantially increased. Following the methodology of Casadesus-Masanell and Ricart
(2010), the business model of Walmart can be portrayed in the below figure. The benefit of this
approach is that it clearly visualizes the interrelatedness of choices that make the business model
of Walmart unique. Readily observable in the portrayed figure, a substantial proportion of the
distinct choices of Walmart concentrate on the distribution and inventory activities, which is
central to the low-cost position of any retailer, including Walmart. Either directly or indirectly,
this capability helps the firm to cut costs.
Figure 11 – Business Model of Walmart. Content by the author. Methodology from “From Strategy to Business Models and onto
Tactics”, by R. Casadesus-Masanell and J.E. Ricart, 2010, Long Range Planning, 43(2-3), p. 199.
1.2.2. Strategy and competitive advantage

The first level of strategy, as defined in the literature review of this study, is the corporate strategy
of the firm. Most importantly, it focuses on the choice of businesses to be involved in and the
58
organization of them in a most profitable way10. In the case of Walmart, a prime example of a
multinational retailer, that also includes the decision in which geographic markets to compete in.
Evidentially, explicit details on the corporate strategy are not disclosed to the public but rather are
a ‘secret’ of the firm. However, several aspects of Walmart’s corporate strategy can be elaborated
upon. Unlike in the beginnings of Walmart, the firm today is active in several businesses and in
several geographic regions. According to the firm’s classification, it is involved in retail,
wholesale, and e-commerce websites (Walmart, 2019a).
Besides growing organically, Walmart also engaged in a number of partnerships as well as

acquisitions. Most noteworthy, since the beginning of the new century, Walmart has steadily
increased its exposure in the e-commerce section of all three of its business segments. Details on
selected partnerships, M&A activities, etc. will be provided in a latter part of this study.
The second level of strategy refers to the business- or competitive strategy of Walmart. As depicted
upon in detail in the previous subchapter, the firm focuses on costs. Since its competitive scope
can be described as broad, Walmart follows the generic strategy of cost leadership. More precisely,
the annual report of 2019 summarizes the firm’s strategy as follows:
“Our strategy is to make every day easier for busy families, operate with discipline,
sharpen our culture and become digital, and make trust a competitive advantage. Making
life easier for busy families includes our commitment to price leadership, which has been
and will remain a cornerstone of our business, as well as increasing convenience to save
our customers time. By leading on price, we earn the trust of our customers every day by
providing a broad assortment of quality merchandise and services at everyday low prices
("EDLP"). EDLP is our pricing philosophy under which we price items at a low price every
day so our customers trust that our prices will not change under frequent promotional
activity. Everyday low cost ("EDLC") is our commitment to control expenses so our cost
savings can be passed along to our customers.“ (Walmart, 2019a, p. 7)
Notably, besides the focus on cost- and price leadership, Walmart stresses the focus on
‘convenience for its customers’, and ‘becoming digital’ as additional focal points. The relevance
of these aspects will be elaborated on in the subsequent chapter on industry evolution.
10
Refer to the subchapter on strategy as part of the literature review for further details.
59
In conclusion, while the business strategy of Walmart is very much comparable to the one of its
early years, Walmart’s corporate strategy has become more complex due to a substantially
increased sectional and geographic scope of business.
After systematically analyzing corporate and competitive strategy of Walmart, the next relevant
point of interest is whether or not Walmart possesses a competitive advantage, and if so, what
factors help explain it. Following the straight-forward definition introduced in the literature
review, a firm has a competitive advantage if it outperforms its industry competitors in terms of
financial returns. Hence, the following figure pictures the performance of the Walmart stock
(WMT), in direct comparison to the Dow Jones Retail Index as a proxy for the performance of the
overall retail industry, as well as the very broad S&P 500 (SPY), which contains 500 large U.S.
American stocks for additional reference. The Walmart stock outperformed the S&P 500 index for
the most part of the time between the years 2000 and 2015 and since then the lead has generally
flipped. In comparison with the more direct and hence meaningful benchmark Dow Jones U.S.
Retail index, the Walmart stock was outperformed consistently, and very considerably so starting
at the turn of the last decade. Even though stock market returns are not the sole indicator of
performance of a company and despite the fact that this comparison utilizes rather broad
benchmarks, the data nonetheless hints at Walmart forfeiting the competitive advantage it used to
possess during earlier years.
60
Figure 12 – Comparative Development of Walmart Stock Returns. Reprinted from Onvista, 2019. Retrieved from
https://www.onvista.de/index/chart/DOW-JONES-U-S-RETAIL-Index-428456?notation=428456 on August 13th, 2019.
Copyright 2019 by Onvista Media GmbH
This finding is supported by comparing Walmart’s return on equity and net margins with selected
competitors. As opposed to the use of broad peer-groups from figure 12, this level of comparison
yields more specific insights. Due to a lack of available data, the figures relate to Walmart as a
whole. For Walmart, both performance indicators, return on equity and net margin, show a
negative trend over the course of the past five years. For benchmark competitors, the trend
regarding both indicators is, however, generally positive. Since a thorough comparison of financial
performance requires in-depth analysis of a variety of contributing factors, such as the leverage-
ratios for interpreting return on equity, the purpose of the comparison is not to provide full insights
into the financial performance of Walmart and its competitors, but rather to show a general trend.
2015 2016 2017 2018 2019

Walmart Return on equity 20,76% 18,15% 17,23% 12,67% 8,87%
Net margin 3,37% 3,05% 2,81% 1,97% 1,30%
Kroger Return on equity 31,70% 33,04% 28,98% 27,73% 41,52%
Net margin 1,59% 1,86% 1,71% 1,55% 2,57%
Costco Return on equity 20,74% 20,71% 23,44% 26,59% n.a.
Net margin 2,05% 1,98% 2,08% 2,21% n.a.
Amazon Return on equity 4,94% 14,52% 12,91% 28,27% n.a.
Net margin 0,56% 1,74% 1,71% 4,33% n.a.
Table 3 – Profitability: Walmart vs. Competitors 2015-2019. Source: GuruFocus.com, 2019. Data retrieved from
https://www.gurufocus.com on September 30th, 2019
61
Whereas the under-performance of Walmart’s stock in comparison with the Dow Jones U.S. retail
index can mostly be explained by the weight of quickly growing e-commerce players in that index,
most notably Amazon, the negative trend in Walmart’s profitability is more likely due to internal
factors. Large investments in e-commerce and related processes and price wars as a response to
high competition can be considered important factors in that regard (Bose, 2017; Thomas &
Reagan, 2019).
2. Industry Evolution
The purpose of this chapter is to first narrow down the focus area of this research paper, then
analyze current trends in the selected industry with a focus on technological advancements.
Following the methodology of McGahan (2000, 2004a, 2004b), the chapter will then determine
the trajectory of industry evolution and also make a statement about the stage of that evolution
subsequently.
2.1. Industry classification and overview
Before going into depth on the evolution of the industry, it is imperative to first narrow down the
focus of this study. Due to the breadth of Walmart’s operations, the firm is active in more than one
industry. According to formal classification, Walmart is primarily active in industry NAICS code
452210/ SIC Code 5311, ‘Department Stores’ (SICCODE.com, 2019c), which is a rather ‘broad’
industry. Since the informative value of industry analysis is higher the more narrowly it is defined
and also due to the limited scope of this study, the paper will focus on one specific sector, namely
the grocery segment of Walmart’s operations, which is labeled NAICS code 445110/ SIC Code
5411 (SICCODE.com, 2019a, 2019b). The industry in focus consists of “establishments generally
known as supermarkets and grocery stores primarily engaged in retailing a general line of food …
Included in this industry are delicatessen-type establishments primarily engaged in retailing a
general line of food” (SICCODE.com, 2019a, 'Description').
The decision to analyze the grocery sector is due to the industry’s particularities, including the
perishable nature of a large share of the goods sold and the fact that the proportion of e-commerce
in this sector is still comparably low today. For Walmart, the relative importance of the
merchandise category to the firm’s business is shown by the fact that grocery accounts for
approximately 56% of its sales (Walmart, 2019a).
62
According to the latest numbers from the United States Census Bureau11, the industry’s sales
amounted to over USD 646 billion in 2018, which is approximately 4,25% higher than in the
previous year. Moreover, the same data shows a cumulative annual growth rate (CAGR) between
of 2.84% between the years 2008 and 2018.
Sales in U.S. Industry NAICS 445110

700 6
650 5
600 4
growth rate in %
in USD billion
550 3
500 2
450 1
400 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
year
Figure 13 – Sales in U.S. Grocery Retail. Source: United States Census Bureau, 2019. Retrieved from
https://www.census.gov/econ/currentdata/dbsearch12 on August 17th, 2019.
2.2. Industry analysis
Following the priory introduced criteria for assessing the competitive forces of an industry, the
following section will elaborate on the attractivity of the grocery retail industry in the United States
using the model of Porter (1979).
2.2.1. Threat of new entry

Firstly, economies of scale are crucial to the retail industry in general and the grocery retail
industry in particular. Moreover, capital requirements for a new entrant with significant reach are
high and access to distribution channels are complex and costly to set up. Further, new entrants
can expect severe retaliation from incumbents, e.g. price wars. Switching costs for the consumers
11
See Appendix I for time series data and link to original source.
12
See Appendix I for time series data and full link to original source.
63
on the other hand are low and product differentiation typically does not play an important role in
the industry. Also, the above outlined hurdles for new chains do not apply for independent retailers,
for which entry is achievable. Lastly, a Marketline (2018) report points out that while the industry
in general is growing rather moderate, the niche markets for organic food is growing rapidly and
offers a chance for new retailers. In conclusion, the threat of this force can be considered as
moderate. (Marketline, 2018, pp. 19–20)
2.2.2. Bargaining power of suppliers

For both the suppliers of fresh products, such as fruits and vegetables, meat, or dairy products, as
well as processed foods and other groceries, the bargaining power mostly depends on their relative
size. Hence, whereas an individual, family-run farming company with little land does not have
bargaining power over large supermarket chains, large and nationwide farming enterprises can be
considered more powerful. Yet, for the majority of suppliers, a large proportion of its revenues
comes from the business with one or a select number of retailers. In the example of Walmart, the
low concentration of suppliers is visible by the fact that the firm buys from a global network of
more than 100,000 suppliers (Walmart, 2019a). Moreover, with few exceptions, products are little
differentiated and switching costs are rather low – depending on the respective contractual setting.
Forward integration can be considered to play a secondary role. Marketline (2018) adds that the
importance of private label goods has grown, with negative effects on several suppliers. Besides
retailers being in control of distribution activities, this is a relevant threat of backward integration.
On the other hand, multinational suppliers of non-commodity, branded products can be considered
to have bargaining power due to customer demand for those products (Marketline, 2018). In
conclusion, bargaining power of suppliers in the grocery retail industry is moderate. (Marketline,
2018, pp. 17–18)
2.2.3. Bargaining power of buyers

Most noteworthy, the buyer group in the grocery retail industry consists of individual end-
customers and is therefore not concentrated. Each customer only contributes a neglectable share
of the retailer’s revenues. However, retailers need to take into account collective customer needs,
namely price and convenience (Marketline, 2018). The study additionally points out that “[t]he
culture of convenience now faces the challenge of a counter-trend in which a shift back towards
fresh, simple or traditionally prepared foods undermines the retail position of frozen foods and
similar products” (Marketline, 2018, p. 15). On the other hand, depending on the availability of
64
stores, switching costs for buyers are low. The rise in importance of multi-channel shopping in the
grocery industry, however, increases the options for buyers and thus their bargaining power
(Marketline, 2018). Lastly, with the exception of specialized grocery retailers like delicatessen
stores, product differentiation does not play an important role. In brief, bargaining power of buyers
in the industry is moderate. (Marketline, 2018, pp. 15–16)
2.2.4. Threat of substitutes

The analyze the threat stemming from this force, one has to distinguish between the different
product groups of grocery retailers. For fresh foods such as vegetables and fruits, subsistence
agriculture can be considered a substitute. Besides the time and effort that is required for
consumers, limited space is a further restriction in this regard. For processed foods, restaurants
including fast-food alternatives represent a substitute. Especially due to the comparably higher
costs, this form of substitution does not play an important role. Lastly, household products, with
few exceptions, are almost impossible or at least unfeasible to substitute from a cost and effort
perspective (Marketline, 2018). In short, threat of substitution in the grocery industry can be
summarized as little significant. (Marketline, 2018, p. 21)
2.2.5. Jockeying for position

This last of the five potential threats is also known as ‘rivalry’. In general, the traditional players
in the industry can be separated into chains and independent retailers. Regarding the first, a small
number of players dominate the market. Walmart for example, had over 25% market share in 2017
alone, with Target, Krogers, Costco being other relevant competitors (Marketline, 2018).
Regarding the latter, the number of competitors is very high. Since product differentiation is
limited and switching costs for buyers are low, competition is primarily based on price. Moreover,
economies of scale represent an important advantage for big retail chains. Last but not least,
competition has been increasing further, in large parts due to online retailers entering the market
and a general trend of consumers asking for greater convenience in grocery shopping (Marketline,
2018). In a nutshell, the threat of rivalry can be described as intense. (Marketline, 2018, pp. 22–
23)
From the industry analysis laid-out above it becomes evident that competition is the most
determining one of the five forces. Taking this into consideration, it does not come as a surprise
that the average profitability, i.e. the attractivity, of the industry is comparably low. According to
65
the most recent data from the University of New York Stern School of Business, the net margin of
the U.S. food & grocery retail industry was 2.85%, with a median of 7.84% and an average of
9.75% for all U.S. industries (Damodaran, 2019). In contrast, the online retail industry had a net
margin of more than 11% (Damodaran, 2019). To show the recent development on a global scale,
a McKinsey & Company further points out that between the years 2012 and 2017, the Economic
Value Add13 of the largest publicly traded retailers in the grocery industry decreased by 54%
(Kuijpers, Simmons, & van Wamelen, 2019).
2.3. Industry trends
Whereas in the not so distant past, success in retailing was directly connected to having scale
advantages over immediate competitors, faced with changing customer demands and digital
progress, today, retailers are under pressure to innovate at rapid pace, master data analytics, and
compete for scale with a new form of digital competition (Kamel, Tager, Ringer, Cheris, &
Ormiston, 2019). Hence, it is fair to say that the industry is undergoing substantial change with
tremendous consequences for industry incumbents.
Following the methodology of the analytical framework, the subsequent subchapter will go into
more depth and examine recent trends and changes in the U.S. grocery industry and focus largely
on technology-related factors. In a structured approach, it will consider ‘demand pull’, ‘supply
push’ and ‘institutional’ factors. Despite being assessed separately, the factors are very much
interrelated. Other relevant industry trends are briefly analyzed at the end of this subchapter.
2.3.1. Technology
2.3.1.1.Demand pull
Demand pull in this context comprises all technological innovation and related industry change
that is sought after by the end customer, therefore visible to him and involving him directly. Most
importantly, customers in the grocery retail industry, alike in other retail industries, are looking
for greater convenience. This primarily but not exclusively relates to the available sales channels.
Sales channels: Similar to what occurred in other industries, including books or fashion, customers
are increasingly purchasing groceries online. Yet, today, online shopping in the U.S. only accounts
for 3% of total grocery sales, compared to 40% in consumer electronics, states a report from the
13
Economic Value Add = (Return on Invested Capital Weighted Average Cost of Capital) * Invested Capital
66
management consulting firm Bain & Company that bases on a joint study that was conducted
together with Google (Caine & Paratore, 2019). At the same time, the report projects the e-
commerce penetration rate to at least multiply by the factor three within the next ten years (Caine
& Paratore, 2019). This optimistic outlook is in line with the findings of The Nielsen Company
and Food Marketing Institute (2018), who state that “[h]istorically, 20% penetration has been a
tipping point for industries to accelerate to online maturation – the point at which 70% of
consumers are engaged in the online marketplace” (p.5). According to the study, this mark has
been reached in 2016, when 23% of U.S. consumers purchased either food or beverages, or both,
online (The Nielsen Company & Food Marketing Institute, 2018). Moreover, the authors point out
that the online purchase of consumer packaged goods spreads fairly evenly across generations as
well as socioeconomic classes (The Nielsen Company & Food Marketing Institute, 2018).
However, data suggests that consumers seem to hold onto their grocery shopping habits as only
6% of all consumers have ordered groceries online more than once a month (Caine & Paratore,
2019). This low adoption rate is explained by a ‘convenience gap’ when comparing online grocery
shopping with the traditional in-store experience, especially regarding the time it takes to find
products and the ease of comparing products (Caine & Paratore, 2019). In sum, given an improved
customer experience, the online grocery shopping has tremendous potential for growth. Further,
convenience regarding the sales channel is not limited to the pure e-commerce experience of
‘ordering online and having the products delivered to the home’. Another important fulfillment
option is the so-called ‘buy-online-pick-up-in-store’ (BOPS)14, which targets the convenience
problem mentioned above and which, according to data from Forrester Research (as cited in Gao
& Su, 2017), is found to be the most important out of all omni-channel fulfillment initiatives.
Omni-channel describes a seamless integration of multiple sales channels and can be seen as the
successor of multi-channel retailing, that has grown in importance with the rise of the internet and
digitalization (Verhoef, Kannan, & Inman, 2015). Besides the increased convenience for the
customer, BOPS often brings additional traffic inside the brick-and-mortar stores, can also have
customer loyalty, and allows retailers to promote private label brands (Kelso, 2018). Similar to
BOPS, curbside pickup is another trending omni-channel fulfillment alternative, whereby the
customer does not need to set food in the store to pick up an order (Howland, 2016). However, for
both pick-up alternatives, there is a number of considerations that needs to be done by the retailers.
14
Also known as ‚click-and-collect’.
67
For example, the feasibility of fulfillment options depends on the characteristics of products sold,
a potential profit cannibalization from other options, as well as management accounting and
organizational decisions in order to set the right incentives (Gao & Su, 2017). From the customer’s
perspective, the research from Chintagunta, Chu, and Cebollada (2012) highlights the importance
of explicit and implicit transaction costs involved in the decision on sales channels.
To sum up on the trend of sales channel development, the largest players in online grocery retail
and their respective monthly customers in the U.S. shall be introduced, following the data of the
research blog Second Measure. According to their findings, Walmart ranks number one, followed
by Instacart and Amazon Prime Now (Rieck, 2019). The next competitors are Amazon Fresh,
Shipt, Fresh Direct, and Peapod (Rieck, 2019). Whereas Walmart, Instacart, Amazon Prime Now
and Peapod offer both delivery and pick-up fulfillment, Fresh Direct and Shipt only offer delivery,
and Amazon Fresh offers delivery and pick-up in Seattle (Rieck, 2019).
Smart bricks-and-mortar shopping: Besides omni-channel retailing, there are several

technological trends that can improve the shopping experience by adding convenience to the
customer. Hence, even though separation is difficult, they are classified as further examples of
supply pull. These trends can be summarized under the term ‘smart shelves’, a term that is for
example used by Bandoim (2018) and Briggs (2018). In brief, ‘smart shelves’ means that printed
labels to display prices in shelves are changed to digital ones and related digital solutions with a
variety of benefits to the customer15, a technology that, for example, has been implemented by the
retailer Kroger under the name EDGE - Enhanced Display for Grocery Environment (Bandoim,
2018; Briggs, 2018). Customers can benefit from targeted advertisement and visual support for
finding products based on connecting with the shopping list on a mobile device (Bandoim, 2018;
Briggs, 2018). Moreover, digital labels allow for more information regarding ingredients,
nutritional facts, and make a comparison between products simpler, thus, increasing transparency
in the offline shopping (Bandoim, 2018). In combination with blockchain technology, customers
can even trace back the origin of products without gaps or risks of manipulation (Askew, 2018).
Transparency is primarily relevant since customers have grown used to easier access to
information from shopping online. The use of radio-frequency identification (RFID) and the
integration of mobile payment solutions further allow for automated checkout without queueing at
15
Also for the retailer – as discussed in the subchapter on ‘supply push’.
68
a cash register – another important pain point in bricks-and-mortar shopping (Bandoim, 2018).
Despite the described application of technology still being in its infancy, a rather quick
implementation by retailers can be expected as it makes the shopping experience more convenient
and provides the basis to make the omni-channel experience more seamless.
2.3.1.2.Supply push
Supply push in this context comprises all technological innovation and related industry change
that is neither necessarily visible to the end consumer nor does it necessarily involve him directly.
Rather, it is incentivized by the retailer. It does not necessarily have been invented for or within
the industry in focus, but it can also have been transferred from another use case to the grocery
industry. Predominantly, this relates to technology in the field of collecting and analyzing data and
automizing processes and common ‘buzzwords’ include artificial intelligence, the internet of
things (IoT), and big data. The importance of leveraging data is pointed out well by the statement
‘you can’t manage what you don’t measure’, which is attributed to the two authors, W. Edwards
Deming and Peter Drucker (as cited in McAfee & Brynjolfsson, 2012).
In the recent past, the use of Big Data has seen an up rise also in retailing. In the year 2012,
Walmart, for example, had already collected an estimated 2.5 petabytes of data from customer
transactions every hour (McAfee & Brynjolfsson, 2012). Without going into too much depth on
the specifics of big data, following Bradlow, Gangwar, Kopalle, and Voleti (2017), there are five
data dimensions in focus – customers, products, time, location, channel. The same article
highlights that today’s emphasis in retailing is placed on the quality of data instead of pure quantity
and outlines new sources of data, including data on the exact movement of consumers in the store,
or data from eye-tracking devices on an individual customer level (Bradlow et al., 2017).
This connects well with the previously described ‘smart shelves’, as further use cases of data
gathering can be found in that technology. For example, technology in combination with big data
gathering and advanced analytics allows retailers to personalize advertisement and price products
dynamically – both using digital displays (Bandoim, 2018; Briggs, 2018; Kuijpers et al., 2019).
For perishable products, dynamic pricing has the potential to substantially reduce the wastage of
food. RFID technology further enables retailers to better manage and track inventory (Bandoim,
2018; Marcotte, Rand, & Leonard, 2019) Moreover, data from IoT enabled sensors can also add
to reducing the wasting of food by monitoring the temperature for fresh products in refrigerated
69
shelves source, and even the electricity costs can be significantly reduced with ‘smart shelves’
technology, as digital labels are much easier to read with less illumination (Briggs, 2018)16.
Thus, technological advance not only comes with benefits for the retail customer, but also for the
retailer itself as it decreases uncertainty on customer behavior and therefore optimizes inventory
management, increases the effectiveness of advertisements, and minimize wastage. Evidently, it
has tremendous impact on the industry.
2.3.1.3. Institutional factors

Besides supply- and pull factors, also institutional factors shall be briefly touched upon as an
explanation for innovation in the U.S. grocery industry. In terms of formal institutional factors on
technology innovation, the ongoing debate on the introduction of a new federal minimum wage in
the U.S. can be named, since higher labor costs would further incentivize the use of technology to
substitute manual labor with automation. For example, via the already mentioned automated
checkout or in the field of controlling inventory. In July of 2019, a bill that would raise the federal
minimum wage to $15 per hour by the year 2025 has passed the House of Representatives,
however, chances of that bill passing the Senate seem to be low (Bose, 2019b).
In terms of informal institutional factors on innovation, general concerns regarding privacy can be
named – not as a stimulus but as an obstacle. Many of the above-described innovations involve
the collection and analysis of data on an individual customer’s level. However, not limited to the
industry and not limited to the U.S. market, public awareness for the sensibility of personal data
has been increasing (Byer, 2018). Hence, companies are challenged to strike a balance between
the application of big data analytics and the concerns of its (potential) customers. In case the U.S.
legislative body decides to follow the European example of tighter privacy laws17, this would make
this matter a formal institutional factor.
2.3.2. Other factors

After examining the triggers on innovation as a stimulus for industry evolution, this section shall
summarize other factors contributing to a change in the grocery industry.
16
Whether or not this last argument still holds when also considering the additional use of energy for digital labels,
cameras etc. is, however, doubtful.
17
The General Data Protection Regulation 2016/679 was implemented in 2018 ((“EU data protection rules,” 2019).
70
Following on the five forces analysis, industry incumbents of all sizes are being challenged by new
and intensifying competition. On the one hand, new pure-play e-commerce players emerged and
have grown rapidly, most prominently the San Francisco based platform Instacart, which was
founded in 2012 and was last valued at around $7.6 billion after the most recent founding round
(Bloomberg, 2019; Carson, 2018). Furthermore, discussing competition in the grocery retail
industry would not be complete without mentioning the e-commerce giant Amazon. According to
the research from Kantar (as cited in “The Power 25,” 2019), Amazon grew with an CAGR of
48.4% between the years 2014 and 2019, compared with 3.7% in the case of Walmart. In addition
to its online market dominance, the acquisition of Whole Foods in 2017 was a strong signal to the
industry that Amazon does not plan to compete solely on the e-commerce channel, but rather that
it plans to integrate bricks-and-mortar retailing into its ecosystem (Turner, Wang, & Soper, 2017).
A recent report from McKinsey & Company states that the immense threat for traditional
incumbents stems from the fact that “[d]ata-driven personalization, as well as network and scale
effects, drive down ecosystems’ costs while locking in customers” (Kuijpers et al., 2019, p. 38).
Another important trend in the grocery industry can be summarized under the term ‘growing
awareness’. An increasing demand for more convenience in shopping, as described in the
subchapter on ‘demand pull’, is not the only change in the cultural mindset. In general, customers
also demand more healthy and sustainable products, and even expect social and environmental
sustainability from the retailers (Kuijpers et al., 2019; Marcotte et al., 2019)18.
In sum, intensifying competition, technology innovation, and changed customer behavior in

regards to convenience and health and sustainability concerns are the most important trends in the
grocery retail industry – findings that are in line with Kuijpers et al. (2019).
2.4. Trajectory of change
Due to the advantages of the approach laid out in the literature review, the following section will
elaborate on the evolution of the grocery industry following McGahan’s four-step framework for
determining the trajectory of change, and, in the subsequent subchapter, the stage of change. The
first step, defining the industry, has mostly been done in an earlier part of the case study. In short,
direct competitors are large chains and individual stores since they rely on similar groups of
18
The article from Kuijpers et al. draws on a survey that was conducted in the U.K. Nonetheless, the general findings
are argued to hold true for the U.S. market as well. See Marcotte et al.
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customers and suppliers and also rely on the same technology. Pure-play e-commerce players,
including e-commerce ecosystems, on the other hand can be considered indirect competitors since
they rely on at least partially different technology.
The next step involves defining the core assets and core activities in the industry based on the
respective definitions from table 1. In her 2004 publication, McGahan suggests that retail
locations, distribution facilities and brand capital resemble the core assets in the industry
(McGahan, 2004b). Despite the fact that this analysis is around fifteen years old, it still holds true
today. In addition, this study proposes human capital and data on customer behavior as further core
assets in the industry since both pass the tests of ownership, durability and long-term value creation
potential.
Similarly, the core activities presented by the author that are portrayed in the below table, still
possess validity. Whereas the content of the activity categories has been adapting to industry
demands over time, the activity system still consists of the same building blocks.
1. Purchasing 6. Hub-and-spoke distributing 11. Managerial style
2. Merchandising 7. Accountability policies 12. Collaborating with suppliers
3. Real estate policies 8. Compensation incentives 13. Transportation system

policies
4. Hiring practices 9. Screening and selecting 14. Truck routing

suppliers
5. Training programs 10. IT practices
Table 4 – Industry Core Activities. Source: “How industries evolve: Principles for achieving and sustaining superior performance”,
by A.M. McGahan, 2004b, Boston, MA: Harvard Business School Press, p. 38.
According to the framework, in the third step, one assesses both the core assets and the core
activities to determine whether or not they are under threat of becoming obsolete. Based on the
state of the industry at the time of her work, McGahan (2004b) suggests that discounting retailing
in North America faces neither a threat of obsolescence regarding its core activities, nor regarding
its core assets. An important argument in the author’s assessment is that distribution costs in online
retailing make this approach inviable for retailers. Hence, McGahan (2004b) concludes that the
industry is on a progressive change trajectory, as the change is neither architectural nor
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foundational. Additionally, using the example of Walmart, the author highlights the importance of
“the tight coordination among activities and the constant adjustments in processes” (McGahan,
2004b, p. 39) for the firm’s success despite the transparency of the business model, which she
argues to be a key characteristic of industries in the progressive change trajectory.
However, the previously emphasized trends in the retail industry require this third step of the
analysis to be updated. Starting with the core assets; regarding the brand capital and data there is
no basis to argue that this asset is threatened with obsolescence. Similarly, despite the rise in
importance of alternative sales channels, distribution centers can still be considered core assets
and there is also no basis to argue that this core asset is under threat to become obsolete.
Independent of the new variety of fulfillment options, distribution remains a central aspect of
retailing, thus, the respective facilities per se are argued to stay relevant. Store location, as further
core asset in the industry, needs further elaboration. While on the one hand, the e-commerce
channel makes up a growing share of industry revenues, the relevance of the outlined fulfillment
alternatives BOPS and curbside pickup suggest that this core asset is also not under threat of
becoming obsolete. Lastly, human capital is also not considered to be threatened with
obsolescence, rather the job descriptions are expected to change due to the trends in the industry.
Therefore, the industry change trajectory is not foundational.
Looking at the core activities yields a less stable picture. The trend of customers demanding higher
levels of convenience and information, both in bricks-and-mortar shopping as well as online, pose
a serious threat to how core activity number two, merchandising, is conducted today. The factors
‘location of the retail outlet’ and ‘competitive pricing’ are being complemented by new factors
that strongly influence the purchase decision of customers. For example, this relates to targeted
marketing on different channel and other convenience related integration of technology in offline
retailing, but also alternative fulfillment options including BOPS and curbside pickup. Traditional
retailers therefore face the threat of the relationship with their customers becoming obsolete due
to a new form of competition that better targets the evolved demands. In conclusion, this paper
argues that while the activity ‘merchandising’ itself is not becoming obsolete, the way this activity
is performed is under threat of being seriously transformed.
Furthermore, demand pull as well as supply push factors substantially increase the significance of
the collection and analysis of data. As a result, activity number 10, IT practices, in its traditional
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form is threatened to be considerably changed. Generally speaking, retailers increasingly need to

shift their focus from broader groups of customers to an individual customer level (Askew, 2018).
Similarly, activity numbers six, hub-and-spoke distributing, and thirteen, transportation system
policies, are also threatened to be noticeably changed as the traditional form of warehousing and
shipping to retail outlets is not in line with the increasing demand for delivery to customers.
Therefore, items need to be picked and packed on the basis of individual customer orders and not
according to store-level demand.
With core assets being stable and several core activities in their current form under threat of
obsolescence, the grocery industry in the U.S. is following an intermediating change trajectory,
which is a form of architectural change according to McGahan (2004b)
In the fourth and last step, the stage of the industry change is evaluated. Based on the trajectory
identified above, McGahan (2004a) proposes to apply the alternate industry life cycle model that
is depicted in figure 8. Following the notion of McGahan (2004a), traditional bricks-and-mortar
grocery retailing represents the established industry in the model and online grocery retailing
represents the emerging industry. In this context, it shall be noted that the analysis of the stage is
not unambiguous as there is no formal determinants of when one stage is elapsed. Based on
experts’ projections, including from The Nielsen Company and Food Marketing Institute (2018),
this paper argues that the industry is currently in the convergence stage since the emerging industry
has already developed itself steadily during the last few years to grow out of the emergence stage,
and at the same time, absolute sales numbers are still comparably low, yet a steep increase is
expected in the not so distant future. This is in line with the theory, which states that in this
particular stage, “established companies may react by reconfiguring some of their activities”
(McGahan, 2004a, p. 93).
3. Implications for Walmart
The following chapter will analyze the impact of the above-described industry evolution on
Walmart. Firstly, it will use a theoretical approach and examine the implications on the firm’s
business model, strategy, and competitive advantage based on the content of the chapter Walmart
U.S. Secondly, it will analyze Walmart’s response to the industry change during the past five years,
primarily drawing upon the firm’s annual reports. The analysis focuses on the grocery business of
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the firm wherever this is feasible based on available data. Conclusively, this chapter attempts to
provide a future outlook, including guidelines for embracing the change.
3.1. Theoretical lens
As established previously, changed customer behavior in the form of increasing demand for
convenience and healthy options as well as increased awareness for sustainability, innovation in
technology, and new and intensifying competition are the major trends in the grocery industry.
When matching these observable trends with the business model of Walmart depicted in figure 11,
the theoretical implications of the industry change become obvious.
Changed customer behavior and demands primarily affect the group of choices and consequences
in the top right corner of the figure that picture the field of distribution and inventory management.
The growing relevance of e-commerce and the rising demand for fresh and locally sourced
products call for a change from the traditional method of warehousing and hub-and-spoke
distributing to more flexible approaches. As a result, a key aspect of Walmart’s business model,
cost and price leadership, is threatened.
Similarly, new forms of competition, particularly from e-commerce ecosystems, pose a threat to
the scale advantages that are key for Walmart’s strategy of cost leadership. As mentioned by
Kuijpers et al. (2019), ecosystems manage to cut down costs and increase customer loyalty by
leveraging their scale of operations and via personalization based on data analytics. Kamel et al.
(2019) add to the argument that it is absolute scale, which is key to keeping up with ecosystem
competitors.
Lastly, also technology innovation directly impacts the business model of Walmart. It especially
does so in regard to the ‘positive shopping experience’, but also in regard to cost-optimization.
Automation in warehouses, for example, serves as an example for the latter.
In conclusion, ‘lowest cost’, a pivotal aspect of Walmart’s business model and competitive
strategy, is seriously threatened by the change of the grocery retail industry. Yet, with adjustments
as described previously and following Amit and Zott (2015), the business model per se can be
applied prospectively from a theoretical point of view.
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3.2. Analysis: 2015-2019
From the observations above, it is evident that Walmart is urged to take action in response to the
changes in the environment. The following section will elaborate on the expressed
acknowledgement of changes taking place in the industry environment and the respective intended
plans to cope with them, as well as the implemented actions taken by the management of the firm
over the course of the past five years. Whereas the analysis of the so-called ‘soft factors’ does not
claim unambiguous informative significance, it is intended to lay out basic tendencies.
3.2.1. ‘Soft’ factors

As a first method of analysis, the annual reports’ (AR) title and the key messages from the chief
executive officer’s letter to shareholders (LTS) are used to draw preliminary conclusions about the
focus areas of the management of Walmart for the five respective years.
In 2015, the document was titled “Winning the future of retail”, already hinting towards the
evolving industry. In line with that title, the LTS touches upon fundamental changes in retail, but
also mentions the firm’s effort to save its customers money and time, for example via investments
in e-commerce (Walmart, 2015a).
In the following year, 2016, the AR was titled ‘Only Walmart’ and the LTS focused on how
Walmart is changing along with the retail industry and aims to offer a seamless experience across
channels for its customers. More specific, it uses the buzzword term ‘disruption’ and emphasizes
the importance of technology in the industry evolution. The LTS further highlights the advantages
Walmart holds over its competitors, including its employees, vast number of retail locations and
e-commerce sites, and its supply chain. (Walmart, 2016)
In 2017, ‘Moving with speed’ was the headline of the AR. Similar to the previous year, the LTS
highlights it is a “time of transformative change” (Walmart, 2017a, p. 2) in the industry and also
mentions the role of technology and the tremendous speed at which the change takes place. Further,
the LTS remarks increasing the convenience for its customers, changing towards a more digital
company, focus on results and discipline, and customer trust as the firm’s high-level goals. Also,
it states the focus of Walmart’s growth is on the e-commerce business. (Walmart, 2017a)
In 2018, the layout of Walmart’s AR changed, and it increased in length. The document’s title
reads ‘Accelerating Innovation’. Again, the LTS addresses the urge to adapt to industry changes
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and gives examples of how Walmart does so, including leveraging its number of stores, the
application of new technology to increase convenience, and growing the number of items available
online. Also, it lays out how the firm uses information technology, training, and tools in order to
increase efficiency. (Walmart, 2018a)
The 2019 AR was titled “Defining the future of retail”. Again, the LTS is addressing the change
taking place in the firm’s environment, specifically its speed and scale and also points out the
crucial role of the firm’s employees despite the technological advancements. Particularly
noteworthy is the fact that on the second cover page, the AR sets the goal for Walmart to build a
global ecosystem, a term that has been used in this paper when discussing intensifying and new
forms of competition. (Walmart, 2019a)
Whereas the focus of the five LTS is slightly different, the key messages are essentially identical.
From the beginning of the analyzed time period, Walmart, respectively the firm’s management,
has realized that the industry is undergoing substantial change and also suggested steps to prepare
Walmart for the new reality. This is also reflected in the titles of the reports. Additionally, all five
letters mention the topic of corporate social responsibility or sustainability. In conclusion, the
previously identified three major trends in the industry – changes in customer behavior, technology
innovation, and intensifying competition – can be considered as well-known to the firm’s
management.
Moreover, the frequency of certain key words in the AR are used to evaluate areas of relevance,
even though this approach solely allows to draw conclusions on the explicitly stated ones19. For
example, the term ‘omni-channel’ or ‘omnichannel’ was not used at all in the AR of 2015, once in
2016, not used in 2017, used 21 times in 2018 and 33 times in 2019. Besides the fact that the term
has only gained popularity in recent years, as the term ‘seamless’, which is used in a context that
describes the same phenomenon as omni-channel, is used fairly consistently over the considered
time period20, this contradicts a great importance of the previous evaluation. Further, ‘sustainable’
or ‘sustainability’ on the other hand has been used with a similar frequency over the past five years,
twice, once, three times, three times, five times respectively. Most notably and little surprising
19
The previously mentioned change in layout in 2018 that increased the overall length of the AR shall be noted for
the sake of clarity.
20
Five times 2015, eleven times 2016, eight times 2017, nine times 2018, five times 2019.
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given the overall trend in the retail industry, ‘e-commerce’ has developed from being used 66 in
2015 to 124 in 2018 and 113 in 2019. (Walmart, 2015a, 2016, 2017a, 2018a, 2019a)
Lastly, in the AR of 2019, Walmart changed the introductory sentence of its explicit strategy from
“[o]ur strategy is to lead on price, invest to differentiate on access, be competitive on assortment
and deliver a great experience”21 (Walmart, 2018a, p. 7) to “[o]ur strategy is to make every day
easier for busy families, operate with discipline, sharpen our culture and become digital, and make
trust a competitive advantage” (Walmart, 2019b, p. 7). Hence, while the ‘discipline’ sub-clause
refers to cost leadership and price leadership is still mentioned as a pivotal aspect of the strategy
in the following sentence, the new strategy is more broad and leaned towards increasing the
convenience for its customers, particularly emphasizing ‘saving time’ for the customers.
3.2.2. ‘Hard’ factors’
Besides the rather soft factors of analysis, data from the annual reports allows for a more robust,
quantitative evaluation of how Walmart has adapted to changes during the past five years. First
and foremost, the focus of the firm’s strategic capital allocation is considered in order to draw a
conclusion on the management’s expectations of the path and pace of change. The years mentioned
in the figure as well as the following table refer to financial years of the firm, not calendar years.
Strategic Capital Allocation

9.000
8.000
4,07%
7.000 37,37% 27,40% 12,28%
50,11% 28,01%
6.000
26,99%
USD m
5.000 20,06%
16,26%
4.000
9,98%
3.000
67,92%
52,54% 60,73%
2.000 46,37%
39,91%
1.000
-
2015 2016 2017 2018 2019
e-commerce, technology, supply chain and other remodels new stores and clubs
Figure 14 – Strategic Capital Allocation of Walmart 2015-2019. Source: Walmart Annual Reports 2015, 2016, 2017, 2018, 2019.
21
This strategy had been in place since the beginning of the analyzed period of time.
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Within only five years, the percentage of capital allocation in the field of new stores and clubs has
substantially decreased from over 50% to a little more than 4%. Instead, investments were directed
to the remodeling of stores, which almost tripled in percentage of total U.S. capital allocation, and
e-commerce, technology, supply chain and other that grew from almost 40% to almost 68%.
Hence, this is in line with the goal of the firm to focus on convenience and growth in the
ecommerce business.
Furthermore, the following table shows the development of the number of retail locations and the
respective total retail space in square feet, as well as the number of pickup locations – all relating
to the U.S. market.
2015 2016 2017 2018 2019
Retail locations 4,516 4,574 4,672 4,761 4,769
Square feet (in

thousands) 680,112 689,647 699,289 704,516 704,719
Grocery pickup
locations (> than) n.a. n.a. 600 1,100 2,100
Table 5 – Retail and Pickup Location Presence of Walmart 2015-2019. Source: Walmart Annual Reports 2015, 2016, 2017, 2018,
2019.
The numbers show that the shift in investment focus described above is consistent with the very
modest growth rate for the number of retail locations and retail floor space and the sharp increase
in the number of grocery pickup locations the retailer offers its customers.
Lastly some key acquisitions and partnerships and internal innovations shall be presented to show
the practical efforts of Walmart to adapt to changes in its environment. A series of acquisitions in
the U.S. e-commerce field started in 2016, with the acquisition of online retailer Jet.com, followed
by Moosejaw, Bonobos, and Shoes.com. to name a few (Walmart, 2019b). However, with the
exception of Jet.com, none of these sites are active in the grocery sector. Recent reports indicate
that Walmart is planning to integrate Jet’s team with its own online retailing business as a response
to the acquisition not living up to its expectations (Bose, 2019a). Besides online retailers, Walmart
also acquired a technology start-up active in the last-mile delivery, called Parcel, in 2017, which
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shows the firm’s acknowledgement of the importance of delivery for the success of online retailing
(Walmart, 2017b).
Besides acquisitions, Walmart also entered into strategic partnerships. In its 2018 AR, Walmart
for example mentions a partnership with Google in the field of voice-based shopping (Walmart,
2018a). Furthermore, Walmart and Microsoft agreed to partner in the field of digital innovation,
more specifically, regarding cloud solutions, internet of things, and artificial intelligence
(Walmart, 2018b).
In addition to partnerships and acquisitions, especially over the course of the last three years,
Walmart has been actively involved in the innovation, testing and implementation of new services
and expanding its service offering in ecommerce. Examples include the introduction of Walmart
Pay, a payment function within the Walmart application, in 2015, or offering free two-day shipping
in 2017 with a minimum order of USD 35 (Walmart, 2015b, 2017a). Also in 2017, Walmart
launched a concept named ‘endless aisle’, which allows shoppers in stores to order goods online
via screens (Campanelli, 2017). In 2018, scan & go was implemented in selected Walmart stores,
a service which was first introduced in the Sam’s Club format, and which allows customers to
check out on their mobile device, without queuing at the cash registers (Walmart, 2018a).
However, this service was terminated in the Walmart stores only shortly after due to low demand
but continues in the Sam’s Club format (Redman, 2018). Moreover, Walmart further innovated
towards increasing the ease of shopping by introducing a map feature in its application to guide
shoppers through the store, and new delivery concepts including free next-day shopping for certain
products, in-home delivery, and a delivery unlimited membership plan for a fixed annual or
monthly fee (Lore, 2019a, 2019b; Walmart, 2019a, 2019c). Lastly, Walmart redesigned a store in
New York into a retail lab, called intelligent retail lab, to test the future of retailing with a focus
on artificial intelligence (Smith, 2019).
Besides innovations in the area of increasing customer convenience, Walmart also innovated to
improve efficiency, for example via shelf-scanning technology (Walmart, 2018a, 2019a).
A further testament of Walmart’s innovative ambition is the foundation of a technology incubator,

Store No. 8, which was founded by the firm in 2017 and that focuses on virtual reality and
traditional commerce (Bhattacharyya, 2018; Store No. 8, 2019).
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As a result of the firm’s efforts in various directions, it has been able to grow its e-commerce
business substantially over the last years. In fiscal year 2019, Walmart U.S. generated e-commerce
revenues of USD 15.7 billion, which resembles approximately 4.7% of total net sales of the
segment (Walmart, 2019a). Compared with the previous year, in which e-commerce sales in the
segment were USD 11.5 billion, this represents an absolute growth rate of more than 35%
(Walmart, 2018a). However, the figures show that despite all efforts, Walmart still relies on
traditional bricks-and-mortar retail for more than 95% of its net sales.
3.3. Future outlook: guidelines for embracing change
The subsequent chapter intends to provide guidelines for industry incumbents in general and
Walmart in particular, on how to embrace the change that is evidently taking place in the grocery
retail industry, in order to stay relevant. It leans on both academic research and findings from
industry- and management consultancy reports.
As McGahan (2004a) concludes, managing a firm in an industry that is on the intermediating

change trajectory is extremely difficult and, to use a quote by the author, “[o]f all the change
trajectories …, this one is perhaps the most challenging because companies must simultaneously
preserve their valuable assets and restructure their key relationships” (McGahan, 2004a, p. 90).
McGahan (2004b) further argues that firms in that situation need to distinguish between short- and
medium to long-term considerations. In the short term, core assets are suggested to being used best
in the traditional way in order to obtain the highest profit. In the long term, however, the author
points out that the core assets need to be reconfigured to cater for the change in activities
(McGahan, 2004b). To recap, core assets in this context are retail locations, distribution facilities,
brand capital, and human capital – as discussed in a previous chapter. Hence, incumbents in that
situation are faced with a challenging tradeoff “of preserving critically valuable resources in old,
profitable relationships versus redeploying resources in new ways” (McGahan, 2004b, p. 54).
As described above, Walmart has realized that change is taking place and already acts upon that
knowledge. Most noteworthy, the firm has committed a large share of its investments into the
‘emerging industry’ while at the same time continuing its traditional offline retailing operations.
Therefore, this paper argues that Walmart’s management does not underestimate the threat of the
change to the firm as it is often the case in an industry undergoing intermediating change
(McGahan, 2004a). Yet, from today’s perspective, this claim cannot be validated on the basis of
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publicly available information alone. Also, it shall be pointed out that according to a Bain &
Company study (citing Ovum, company 10-Ks, literature searches and own research) in direct
comparison with Amazon, the largest retailers spend substantially less money on information
technology, thus creating an “IT investment debt” (Kamel et al., 2019, p. 2). Whether this will
have noticeable effects in the grocery retailing industry will only become obvious in the future.
To achieve profitable growth, the management consultancy McKinsey & Company suggests
traditional grocery retailers to follow six imperatives. First, the report proposes retailers to
“[d]efine a distinctive value proposition: Convenience, inspiration, value for money” (Kuijpers et
al., 2019, p. 39). In other words, this can be described as choosing one of Porter’s four generic
strategies, whereby convenience and inspiration are examples of a differentiation strategy (Porter,
1985). Second and third, Kuijpers et al. (2019) urge grocery retailers to build an ecosystem for
absolute scale and apply technology to every aspect of its operations as a key driver for cost cutting.
The prior imperative matches the opinion of a study composed by Bain & Company that lists
‘ecosystem players’ as one out of five promising retailer models (Kamel et al., 2019). Imperative
four concerns with the trend of customers demanding convenience in the form of (healthy) food-
service solutions and proposes that grocery retailers focus on that segment (Kuijpers et al., 2019).
Furthermore, the report proposes to “rethink all of your real estate“ (Kuijpers et al., 2019, p. 43).
The suggested courses of action include straight-forward options such as closing or down-sizing
stores, to options such as renting out parts of the stores to create a so-called ‘halo-effect’ (Kuijpers
et al., 2019). Lastly, increasing the speed of innovating by using agile methods is the sixth proposed
recommendation for traditional grocery retailers (Kuijpers et al., 2019).
When applying these suggestions to the case of Walmart, possible focus areas for the future can
be identified. Especially after changing its expressed strategy in the most recent AR, Walmart aims
to provide both convenience as well as low prices. Whereas customers expect a discount retailer
to offer a pleasant shopping experience besides low prices, Walmart needs to make sure to not
become “stuck in the middle” (Porter, 1985, p. 16). Instead, the firm should focus on levering its
existing assets, in particular its large number of retail locations, and new technologies in order to
successfully compete on price and meet customer demand. Regarding the second and third
proposition, the previous analysis of Walmart’s reaction during the past five years shows that the
firm is already active in those areas. Especially regarding the application of technology, Walmart
can draw on the firm’s immense customer base that generates valuable data. Also, through various
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previously discussed attempts to increase the convenience of shopping, the fourth proposition is
already being addressed. Suggestion five, rethinking real estate, is primarily addressed by levering
the extensive network of retail locations as pick-up spots for its customers. Further, Walmart has
announced opening veterinary clinics inside several of its stores (Thomas, 2019). Yet, other
considerations as proposed by the consulting report, have the potential to further strengthen
Walmart’s competitive position. Depending on the pace and scale of change towards e-commerce,
reconfiguring stores to fulfillment centers, for example, could be a sensible approach. Regarding
the last suggestion, increasing the speed of innovation, Walmart is already active as can be seen
by the firm’s efforts in the testing of new ideas and learning from customer reactions, for example
the introduction and termination of scan & go that has been outlined in the previous subchapter.
Also, the firm’s establishment of a retail lab and an incubator is another example of how Walmart
attempts to innovate outside of its established processes and thought patterns.
Besides the general guidelines for adapting to the industry evolution, it is imperative for Walmart
to lever existing assets. This includes but is not limited to the above-mentioned vast number of
retail locations. However, their importance is underlined by the fact that for approximately 90%
of U.S. Americans, a Walmart is within a ten-mile radius (Walmart, 2017a). With delivery costs
being the “biggest hurdle to profitability” (Kuijpers et al., 2019, p. 40) for e-commerce grocery
retailing, the stores can be not only used as pick-up locations but also for order fulfillment. In
addition, Walmart benefits from its brand capital and extensive customer base. A joint study of
Bain & Company and Google, for example, established that 85% of people who have not shopped
groceries online would trust their current grocer when trying it (Caine & Paratore, 2019). Further,
the firm’s enormous customer base generates valuable data that can be used to better target
demands and increase cost effectiveness.
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IV. Conclusion
1. Concluding Remarks
Intensifying competition, evolving customer demands, and the increasing use of new technology
are the major trends identified in this research paper and have led the grocery retail industry on an
intermediating change trajectory
The meticulous study of the industry evolution yields valuable insights into the strategic
implications for industry incumbents in general. In combination with a firm specific analysis,
statements can be made about the effects of that change in environment on Walmart’s U.S.
segment. Due to the paper’s industry focus on the grocery segment of Walmart’s operations and a
geographic focus on the firm’s domestic market, this conclusion follows the focus of the previous
analysis and concerns with the competitive strategy of the firm.
Walmart’s success has always relied on a business model of interrelated choices and consequences
that has made imitation difficult, notwithstanding it being easily observed. Mostly thanks to supply
chain excellence and the deployment of technology, the firm has developed to become one of the
largest retailers worldwide, which has allowed it to benefit from economies of scale and scope and
build up a collection of valuable resources. Thus, Walmart has enjoyed a competitive advantage
for decades, despite operating in a highly competitive industry. This holds true regardless of
whether one follows the product-market position view or the resource-based view.
The industry change, which is argued to be in a rather early phase, is not only expected to further
intensify the competitive rivalry, but also to fundamentally change how customers and grocery
retailers interact. Hence, following the product-market position view, Walmart needs to position
itself clearly within the industry. Since the firm’s entire business model is designed around cost
leadership, striving for this generic strategy is the obvious choice. At the same time, Walmart must
meet customer demand for convenience, in order for the service quality to be considered of equal
quality compared to competitors, which is a prerequisite for a cost leadership position to lead to a
competitive advantage in the product-market position view, as described in the literature review.
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The case analysis shows that the management of Walmart appears to not only have recognized the
changes taking place in the industry, but also to have laid the foundation for restructuring the
organization as a response. Using the terms of the dynamic capabilities framework, Walmart has
therefore both sensed and seized the threat and opportunity stemming from the industry change,
thus fulfilling the first two out of three requirements for having ‘dynamic capabilities’. Now, only
the future will show whether Walmart also possesses the third required capability, managing the
threat and transforming. To a large extent, this can be expected to depend on the adequate
commitment of capital and the firm’s ability to lever its existing assets in combination with
deploying new technology to assure a competitive cost position and, at the same time, meet
changed customer demands – both offline and online.
To answer the research question, the industry evolution presents Walmart with new challenges that
require a variety of adjustments and substantial investments in order to be able to successfully
operate the established business model and follow a competitive strategy of cost leadership. At the
same time, the change provides an opportunity for Walmart to return to the dominance of its early
years.
2. Limitations and Areas for Further Research
A first limitation of the research paper is its focus on one retail segment and a single geographic
market. Due to differences in the macro-environment, it can be expected that the process of
industry evolution differs substantially when analyzing other markets. A broader analysis in terms
of geography and retail segment would further allow for an evaluation of implications on corporate
strategy. Moreover, this research is solely based on publicly available information, which evidently
limits the informative value of the claims made in comparison to having access to inside
information on Walmart’s strategy.
Further research on the optimization of Walmart’s network of retail locations could yield valuable
take-aways for the firm. Such analysis could include balancing the importance of proximity of
stores and cost effectiveness for different scenarios reflecting varying rates of e-commerce
adoption.
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V. References
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Angeles: SAGE.
94
VI. Appendix
U.S. Census Bureau
Source: Monthly Retail Trade and Food Services
44511: Supermarkets and Other Grocery (Except Convenience) Stores: U.S. Total
Not Seasonally Adjusted Sales - Monthly [Millions of Dollars]
Period: 2001 to 2019
Data Extracted on: August 17, 2019 (9:53 am)
https://www.census.gov/econ/currentdata/dbsearch?program=MRTS&startYear=2001&endYear=2019&catego
ries=44511&dataType=SM&geoLevel=US&notAdjusted=1&submit=GET+DATA&releaseScheduleId=
Period Value
Jan-2001 31.657
Feb-2001 29.913
Mar-2001 33.084
Apr-2001 31.911
May-2001 34.154
Jun-2001 33.317
Jul-2001 33.437
Aug-2001 33.920
Sep-2001 32.574
Oct-2001 33.026
Nov-2001 33.571
Dec-2001 35.974
Jan-2002 32.836
Feb-2002 30.391
Mar-2002 34.034
Apr-2002 31.360
May-2002 34.485
Jun-2002 32.932
Jul-2002 33.849
Aug-2002 34.044
Sep-2002 31.689
Oct-2002 32.973
Nov-2002 33.812
Dec-2002 34.867
Jan-2003 33.618
Feb-2003 30.796
Mar-2003 33.438
Apr-2003 33.102
May-2003 35.203
Jun-2003 33.364
Jul-2003 35.141
Aug-2003 34.704
Sep-2003 32.872
Oct-2003 34.025
Nov-2003 34.097
Dec-2003 35.914
Jan-2004 34.761
Feb-2004 32.066
Mar-2004 34.081
Apr-2004 34.064
May-2004 35.785
Jun-2004 34.405
Jul-2004 36.142
Aug-2004 34.629
Sep-2004 34.442
Oct-2004 35.064
Nov-2004 35.117
Dec-2004 38.249
Jan-2005 35.458
Feb-2005 32.674
Mar-2005 36.393
Apr-2005 35.083
May-2005 36.840
Jun-2005 36.341
Jul-2005 37.333
Aug-2005 36.647
Sep-2005 35.859
Oct-2005 36.322
Nov-2005 36.619
Dec-2005 39.954
Jan-2006 35.773
Feb-2006 33.851
Mar-2006 36.978
Apr-2006 36.338
May-2006 38.267
Jun-2006 37.510
Jul-2006 38.247
Aug-2006 38.231
Sep-2006 36.817
Oct-2006 37.407
Nov-2006 38.171
Dec-2006 41.102
Jan-2007 37.883
Feb-2007 35.480
Mar-2007 38.930
Apr-2007 37.337
May-2007 40.144
Jun-2007 39.257
Jul-2007 39.563
Aug-2007 39.847
Sep-2007 38.278
Oct-2007 39.006
Nov-2007 40.058
Dec-2007 42.581
Jan-2008 40.060
Feb-2008 38.147
Mar-2008 40.692
Apr-2008 39.083
May-2008 42.481
Jun-2008 40.261
Jul-2008 41.942
Aug-2008 41.935
Sep-2008 39.465
Oct-2008 41.013
Nov-2008 41.088
Dec-2008 42.373
Jan-2009 41.365
Feb-2009 36.975
Mar-2009 39.627
Apr-2009 40.084
May-2009 42.227
Jun-2009 40.312
Jul-2009 41.970
Aug-2009 41.155
Sep-2009 39.768
Oct-2009 41.222
Nov-2009 40.753
Dec-2009 43.570
Jan-2010 41.185
Feb-2010 38.400
Mar-2010 41.542
Apr-2010 40.354
May-2010 42.658
Jun-2010 40.944
Jul-2010 42.598
Aug-2010 41.357
Sep-2010 40.710
Oct-2010 41.591
Nov-2010 41.897
Dec-2010 44.770
Jan-2011 42.501
Feb-2011 39.485
Mar-2011 43.103
Apr-2011 43.535
May-2011 44.129
Jun-2011 43.716
Jul-2011 44.937
Aug-2011 44.275
Sep-2011 42.867
Oct-2011 43.751
Nov-2011 44.156
Dec-2011 46.916
Jan-2012 43.576
Feb-2012 42.275
Mar-2012 45.239
Apr-2012 43.700
May-2012 46.239
Jun-2012 45.077
Jul-2012 45.349
Aug-2012 45.861
Sep-2012 44.017
Oct-2012 44.943
Nov-2012 45.440
Dec-2012 47.464
Jan-2013 45.231
Feb-2013 42.018
Mar-2013 46.829
Apr-2013 43.268
May-2013 47.314
Jun-2013 45.552
Jul-2013 46.483
Aug-2013 46.957
Sep-2013 44.310
Oct-2013 46.091
Nov-2013 46.785
Dec-2013 48.224
Jan-2014 47.312
Feb-2014 43.267
Mar-2014 46.954
Apr-2014 46.594
May-2014 49.457
Jun-2014 47.170
Jul-2014 48.962
Aug-2014 48.868
Sep-2014 46.602
Oct-2014 48.809
Nov-2014 48.890
Dec-2014 50.905
Jan-2015 49.513
Feb-2015 45.094
Mar-2015 48.876
Apr-2015 47.725
May-2015 50.567
Jun-2015 48.317
Jul-2015 50.332
Aug-2015 49.458
Sep-2015 47.714
Oct-2015 49.472
Nov-2015 48.985
Dec-2015 51.751
Jan-2016 49.701
Feb-2016 46.623
Mar-2016 49.865
Apr-2016 48.131
May-2016 50.436
Jun-2016 49.646
Jul-2016 50.499
Aug-2016 49.667
Sep-2016 48.725
Oct-2016 49.971
Nov-2016 50.168
Dec-2016 53.765
Jan-2017 49.971
Feb-2017 46.687
Mar-2017 51.515
Apr-2017 50.706
May-2017 52.659
Jun-2017 51.257
Jul-2017 52.202
Aug-2017 52.212
Sep-2017 51.344
Oct-2017 51.847
Nov-2017 52.936
Dec-2017 56.704
Jan-2018 52.742
Feb-2018 48.934
Mar-2018 55.097
Apr-2018 51.417
May-2018 55.635
Jun-2018 53.945
Jul-2018 54.568
Aug-2018 54.872
Sep-2018 52.960
Oct-2018 54.068
Nov-2018 54.762
Dec-2018 57.402
Jan-2019 55.612
Feb-2019 49.644
Mar-2019 55.289
Apr-2019 54.022
May-2019 57.427
Jun-2019 55.567
Jul-2019 NA
Aug-2019 NA
Sep-2019 NA
Oct-2019 NA
Nov-2019 NA
Dec-2019 NA

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1

FUNDAÇÃO GETULIO VARGAS SÃO PAULO

IMPLICATIONS OF DIGITAL TRANSFORMATION RELATED INDUSTRY

SEBASTIAN FRANZ SABISCH

SEBASTIAN FRANZ SABISCH

IMPLICATIONS OF DIGITAL TRANSFORMATION RELATED INDUSTRY

Thesis presented to Escola de Administração de

Knowledge Field: Strategy

Advisor: Prof. Dr. Sérvio Túlio Prado Júnior

IMPLICATIONS OF DIGITAL TRANSFORMATION RELATED INDUSTRY

Sabisch, Sebastian Franz

Orientador: Sérvio Túlio Prado Júnior

1. Industry Evolution 2. Grocery Retail 3. Technological Transformation 4. Strategy

SEBASTIAN FRANZ SABISCH

IMPLICATIONS OF DIGITAL TRANSFORMATION RELATED INDUSTRY

Thesis presented to Escola de Administração de

Knowledge Field: Strategy

Approval Date: 30.09.2019

Prof. Dr. Sérvio Túlio Prado Júnior

Prof. Dr. Antonio Gelis Filho

Prof. Dr. Ricardo Rochman

Keywords: Industry Evolution, Grocery Retail, Technological Transformation, Strategy

Palavras-chave: Evolução da Indústria, Varejo, Transformação Tecnológica, Estratégia

Figure 1 – Strategy, Business Model, and Tactics. ....................................................................... 22

Table 1 – Central Definitions of Industry Trajectories. ................................................................ 44

BMC Business Model Canvas

EDLP Everyday Low Price

IoT Internet of Things

LTS Letter to Shareholders

PLC Product Life Cycle

RBV Resource-Based View

VMI Vendor-Managed Inventory

WTP Willingness to Pay

2. Methodological Approach ................................................................................................. 14

2.2. Research Question ...................................................................................................... 14

2.3. Research Method and Design ..................................................................................... 14

2.4. Data Collection & Analysis ........................................................................................ 15

II. Literature Review ......................................................................................... 16

1.1. Business Model........................................................................................................... 16

1.2. Strategy ....................................................................................................................... 19

1.3. Demarcation and Interlinkages ................................................................................... 21

2. Competitive Advantage ..................................................................................................... 23

2.1. Value Creation and Capture ....................................................................................... 23

2.2. Product-Market Position View vs. Resource-Based View ......................................... 25

3. Industry Evolution ............................................................................................................. 37

3.1. Introduction & Background ........................................................................................ 38

3.2. Triggers of Industry Evolution ................................................................................... 38

3.3. Trajectories of Industry Evolution .............................................................................. 43

3.4. Implications for Incumbents ....................................................................................... 47

4. Analytical Framework ....................................................................................................... 51

III. Case Study: Walmart ................................................................................. 52

1.1. Early years and growth ............................................................................................... 52

1.2. Walmart today ............................................................................................................ 56

2. Industry Evolution ............................................................................................................. 61

2.1. Industry classification and overview .......................................................................... 61

2.2. Industry analysis ......................................................................................................... 62

2.3. Industry trends ............................................................................................................ 65

2.4. Trajectory of change ................................................................................................... 70

3. Implications for Walmart ................................................................................................... 73

3.1. Theoretical lens........................................................................................................... 74

3.2. Analysis: 2015-2019 ................................................................................................... 75

3.3. Future outlook: guidelines for embracing change ...................................................... 80

IV. Conclusion ................................................................................................. 83

2. Limitations and Areas for Further Research ...................................................................... 84