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Case Study Wal-Mart Stores, Inc.

MLA1 International Business and Management

Introduction Wal-Mart is one of the worlds largest companies and is operating in discount retailing. Its first stores were opened in 1962 in small towns because Wal-Marts founder Sam Walton who died in 1992 had the idea that these towns were large enough to support one discount retailer, but not two. The main reason for Wal-Marts leading position in the market has always been based on its ability to offer products at low prices. In the U.S., Wal-Mart has more than 4,000 thousands stores in its different formats: discount stores, supercenters, neighborhood markets and Sams Club. Since the early 1990s, Wal-Mart had limited success with entering foreign markets in South America, Europe and Asia. Now, Wal-Mart is trying to enter the African market, a $2.4 billion merger with Massmart Holdings should help. In 2011, Wal-Mart generated net sales of nearly $419 billion and an operating income of $25.5 billion. (http://walmartstores.com/sites/annualreport/2011/financials.aspx) 1. Please analyze the sources of Wal-Marts competitive advantage in discount retailing. On the market of discount retailing, Wal-Mart has a competitive advantage over its rivals because of its profitability which is greater than the average profitability of all companies competing in the market of discount retailing. Wal-Marts competitive advantage is based on distinctive competencies. These firmspecific strengths enable Wal-Mart to differentiate its products from those offered by rivals and achieve substantially lower costs than its rivals. (Hill/Jones 2010, P. 74) These distinctive competencies result from two complementary sources: resources and capabilities. (Appendix 1) Wal-Marts most important (tangible) resource is its high number of stores. Moreover, Wal-Mart own different store formats. In the U.S., there are 629 discount stores offering a pleasant and convenient shopping experience. Furthermore, there are 3,029 supercenters meeting the growing demand for convenient shopping. Then, there are 168 neighborhood markets offering a quick and convenient shopping experience for customers who need groceries, pharmaceuticals and so on. In addition, there are 609 stores of the format Sams Club, a members-only warehouse store. (http://walmartstores.com/aboutus/7606.aspx) Other important (tangible) resources are the 27 distribution centers delivering about 80 % of purchases to the Wal-Mart stores. Moreover, its satellite system (intangible resource), developed and implemented in 1983, allows sales data to be collected and analyzed daily and therefore enables the management to learn what merchandise was moving slowly, and thus avoid overstocking and deep discounting. Furthermore, because of its continuous cash-flow, Wal-Mart possesses a high level of liquidity. This liquidity can be used in order to do investments of major importance. For example, from 1987 to 1993, Wal-Mart spent over $700 million on its satellite system. In addition, Wal-Mart has a high reputation (intangible resource) because of its successful business model which enables millions of customers to buy goods for low prices since the first Wal-Mart store was opened in 1962. Moreover, Wal-Mart possesses inventory and sales data, for example generated by the use of the satellite system, which are parts of an information system. Wal-Mart does an excellent job in combining its resources and integrating them into the organizations rules, procedures, and processes. Before opening its first store in 1962, Wal-Marts founder, Sam Walton, was convinced that it would lead to higher profitability if Wal-Mart would concentrate on small towns that were ignored by its rivals because these towns were large enough to support one discount retailer, but not two. So, it is not quite important how many stores a company like Wal-Mart has. It is of major

importance where these stores are located. As a result, this decision has become one of the main reasons for Wal-Marts competitive advantage. Furthermore, all stores are connected with its information systems. So, the use of the inventory and sales data enable local store managers to display those items meeting the local preferences. Therefore, each store is able to meet the local needs rather than follow a general corporate policy. Moreover, the information system also transmits sales data to vendors in order to plan deliveries of specific products from specific warehouse to specific stores. So, Wal-Mart and its vendors can benefit from reduced inventory costs. As already described, Wal-Mart spent over $700 million on its satellite system. Due to the fact that this system is connected with the distribution centers, the merchandise replenishment process already starts at the point-of-sale when information will be transmitted via satellite to the distribution centers. Then, the required goods will be delivered to a distribution center where it will be sorted for delivery to the stores within 48 hours. As a result of this technique known as cross-docking, the goods will be delivered to stores without ever sitting in inventory. Analysts estimated Wal-Marts cost of inbound logistics to be 3.7 % of discount store sales, compared with 4.8 % for its competitors. So, this efficient supply chain has led to lower costs of inbound logistics and can therefore be seen as an additional main reason for Wal-Marts competitive advantage. Due to its low cost structure, Wal-Mart is able to give its store managers more opportunities in setting prices. So, if there is strong competition in the town, they will lower their prices. But if there is no competition in town, they will not lower their prices. As a result, Wal-Mart is always able to offer its products at lower prices than its competitors. Moreover, Wal-Mart has implemented many actions to increase the employees productivity. For example, associates have a key role because they have more responsibility and recognition than their counterparts at other retail chains. A key factor for increasing the employees productivity is the participation in the profit-sharing plan. This approach also results in high employee productivity which translated into a lower cost structure and higher profitability. In conclusion, Wal-Marts competitive advantage is based on its understanding on how to coordinate its resources and putting them to productive use. Wal-Mart implemented procedures and processes in order to achieve high profitability based on the ability to achieve substantially lower costs than its rivals. These procedures and processes can be improved continuous by the use of an information system which is able to deliver all required data in order to achieve superior efficiency. This superior efficiency based on an information system which improves the procedures and processes especially within the supply chain and implemented actions to increase the employees productivity as well, lead to Wal-Marts competitive advantage. 2. Please analyze the future sustainability of Wal-Marts position in discount retailing. In order to analyze the future sustainability of Wal-Marts position in discount retailing, three main factors have to be taken into account: barriers to imitation, the capability of competitors, and the general dynamism of the industry environment. (Hill/Jones 2010, P. 95) Barriers to imitation Wal-Marts tangible resources like stores and distribution centers are visible to competitors and can therefore be imitated relatively easy. In contrast, intangible resources like its reputation cannot be imitated. Moreover, the inventory and sales data generated by Wal-Marts satellite system cannot be imitated as well because they are parts of the companys information system. In addition to the tangible

resources, the satellite system can be imitated because distinctive competencies based on technological know-how can be relatively short-lived. Although some resources can be imitated relatively easy, Wal-Marts capabilities are quite difficult to imitate because for external people, it is not possible to get an insight into the procedures and processes. Indeed, competitors can be able to develop an information system as well but they are not able to know how Wal-Marts information system is structured and how it works. Furthermore, if a competitor tries to hire Wal-Marts employees, it would not lead to success as well because Wal-Marts capabilities are the product of a great number of employees knowledge. Capability of competitors Due to the fact that a lot of competitors are established in the market for several decades, they have already made a strategic commitment and so, on the one hand, they will have difficulties to develop and to implement new ways to do business. But on the other hand, although Wal-Marts main competitors Target and Kmart have been established in the markets for several decades as well, they try to improve their performances in order to attack Wal-Marts leading position. For example, Target has spent nearly $1 billion to remodel its stores and it plans to enter the Canadian market. Kmart tries to push for a greater presence in the online retail market. Industry dynamism Due to the fact that the U.S. market is approaching saturation, Wal-Mart has to improve its business model to save its competitive advantage. Moreover, Wal-Mart has already tried to enter foreign markets without being successful. In addition, while the internet becomes an integral part of daily life and therefore more and more people like to shop online, Wal-Mart will get into competition with new competitors like Amazon.com. So, a dynamic industry environment could demand for an improvement of its business model.

In addition to this approach, Porters five forces (Appendix 2) symbolize an opportunity in order to identify future opportunities and threats as well. Risk of entry by potential competitors The risk of entry by potential competitors is low because potential entrants have to realize Economies of Scale in order to become competitive. Furthermore, the brand loyalty within this market is high because it symbolizes a companys reputation. Moreover, Wal-Mart has cost advantages because of its low cost structure. The only advantage potential customers have is that there are no switching costs for customers. Rivalry among established companies The rivalry within this market is high because it is a consolidated, mature market with low growth rates. Moreover, the market seems to be saturated. Companies like Wal-Mart and Target are competing on costs, the products they offer are non-differentiated and in addition, the exit barriers are high because of the companies economic dependence on the industry.

Bargaining power of buyers The bargaining power of buyers is medium. On the one hand, there are no switching costs for customers but on the other hand, the customers are still conscious of price. Bargaining power of suppliers The bargaining power of suppliers is low because the industry is an important customer to the suppliers and if companies like Wal-Mart tend to change their suppliers, they would not have any switching costs. Moreover, no single supplier accounts for more than 2.4 % of Wal-Marts purchases. Threat of substitutes Due to the fact that the internet becomes an integral part of daily life, more and more people prefer to shop online. As a result, there will be more future substitutes like Amazon. So, the threat of substitutes is medium.

In conclusion, Wal-Mart has to pay attention to changes in its external environment. Due to the fact that the market for discount retailing is a consolidated and saturated market with low growth rates, companies have to find new ways to increase their revenues and profits. As already described, the trend to prefer online shopping will lead to a higher risk for the occurrence of substitutes like Amazon. In order to stay competitive, Wal-Mart has to contribute to this development. Nonetheless, due to the fact that Wal-Mart has a low cost structure based on a good working information system, an efficient supply chain management and high employee productivity, it is still in a leading position. As a result, Wal-Mart is still able to increase its revenues and profits. So, all in all, it can be said that Wal-Marts position in discount retailing is sustainable but it has to pay attention to the changes in its external environment because the internet is becoming not only an opportunity as an additional distribution channel, the internet can also be a substitute and therefore be a high risk for Wal-Marts sustainable competitive advantage.

Appendix 1

Appendix 2

List of references

Hill, Charles / Jones, Gareth: Theory of Strategic Management, 9th edition, 2010. http://walmartstores.com/sites/annualreport/2011/financials.aspx http://walmartstores.com/aboutus/7606.aspx