Financial Information for Business Decisions - Case Study Example

?Financial Information for Business Decisions Table of Contents Introduction 3 Company Overview 3 Business Model Analysis of Wal-Mart 4 Current Business Model of Wal-Mart 5 Changes in Wal-Mart over Five Years 8 Competitor Analysis 9 Financial Analysis Based on the Income Statements 10 Conclusion 11 References 13 Appendices 15 Appendix 1 15 Appendix 2 16 Introduction The financial information plays an important role in the companies not only for assessing the performance of the business but also for taking business decisions. This study aims at analyzing the business model of a multinational company which is also in the second position in Fortune 500 list. The company chosen for the study is Wal-Mart, which is regarded as the last retailer or supermarket chain globally. The study would be including an overview of Wal-Mart, further leading to an evaluation of its business model (CNN Money, 2012). The global economy has undergone a drastic change due to recession and economic slowdown in different parts of the world, so on the basis of volatile economic condition, the companies have also changed their strategies and business models to survive in the market, and retain their position among the other players. In order to identify the repercussions of turbulent economic environment, and effects industrial factors on Wal-Mart, an overall analysis of the operations of Wal-Mart over five years would be done. Further, the competitors of Wal-Mart would also be analysed to gauge the position of the company, globally, in terms of market share. The financial analysis of the company would also reveal the financial stability of the firm, which would assist in deriving a conclusion regarding the effect of financial information on the business decisions of Wal-Mart. Company Overview Wal-Mart Store, Inc. is a multinational company which was established in the year 1945 and is headquartered at Bentonville Arkansas, United States (Yahoo Finance, n.d.). It is a publicly listed company and its shares are traded in the New York Stock Exchange (NYSE) with the ticker symbol “WMT”. The company’s stocks were first traded at NYSE on August 25, 1972 (Wal-Mart, 2012a). Wall-Mart is engaged in retail or supermarket business in various formats around the world. Wal-Mart operates restaurants, retail stores, supermarkets, discount stores, hypermarkets, supercenters, apparel stores, warehouse clubs, etc. The products offered in the stores of Wal-Mart include frozen foods, meat, dairy products, bakery products, baby products, beverages, grocery items, electronic goods, household items and so on. Presently the business operations of Wal-Mart are divided into three broad segments, namely: a) the Wal-Mart International segment, b) the Wal-Mart US segment, and c) the Sam's Club segment. Retail stores of various formats are run by Wal-Mart in all the 50 states of US. Along with this it also operates its retail operations online through walmart.com. The international segment of Wal-Mart has its presence in 26 countries of the world and is also in the business of operating its retail operations in all those countries outside US. The Sam's Club segment of Wal-Mart includes membership based warehouse clubs that are operated in 47 states of US along with Puerto Rico (Wal-Mart, 2012b). The US business segment of Wal-Mart operates its business activities which are divided into six strategic merchandise units. They are: a) Grocery, b) Entertainment, c) Hardlines, d) Health and wellness, e) Apparel, and f) Home. All these six merchandise units offer different categories of merchandise products through its various types of retail stores located in different parts of US. In the recently published Fortune-500 list Wal-Mart has been ranked second, just after Exxon Mobil. Business Model Analysis of Wal-Mart After getting an overview regarding the operations of Wal-Mart, its business model would be studied in a comprehensive manner in this section. The current business model would be scrutinized and the changes that have taken place in the last five years in the business framework of the company would also be discussed in this section. For understanding the current business model of Wal-Mart, it is vital to identify with the concept of the business models. The notion of business model first appeared in the 1970s, and became popular since 1990s onwards (Zott, Amit, and Massa, 2011, p. 1019-1042). Business model was defined in terms of architecture, structure, or the framework of the business or company. However, in modern days, business models are defined to be the basic foundation of the company, firm or organisation based on which the business strategies of the company are developed (Whitley, 2007). The mission of Wal-Mart is “To help people save money so they can live better” which is based on the business model of Wal-Mart. Michael Duke, the CEO of Wal-Mart has mentioned that the business model of the company has been designed strong enough to support the company through the present turbulent economic condition and the changing future situations. The revenue of Wal-Mart in the year 2011 was $421 billion which makes Wal-Mart the largest retailer globally. The low pricing format of Wal-Mart has led the company to become the largest grocery chain within US and internationally too. Current Business Model of Wal-Mart According to Osterwalder and Pigneur (2010), the business model of companies illustrates the justification of the way the organisation captures, creates and delivers value. The business model of Wal-Mart follows the nine building block model of Osterwalder and Pigneur, as can be seen in Figure 1. Based on the business model of Wal-Mart as explained in Figure 1, the current business structure of the company would be discussed. This would include not only the business framework, but also the participants who work within the model. Source: (LI, 2011) The business model of Wal-Mart consist of nine essential points or building blocks namely, a) Key Activities, b) Partnership, c) Value Proposition, d) Resources, e) Cost Structure, f) Customer Relationship Management (CRM), g) Target customers or customers segments, h) Supply Chain, and i) Revenue. a) Key Activities: The key activities of Wal-Mart which are essential part of the business model are purchasing goods, controlling the cost and delivery of the goods. The other activities include customer satisfaction, inventory control, and managing the distribution channel (Basker, 2007) Wal-Mart also has the responsibility of handling its suppliers and workforce of about 85,000. It has to manage about 147 distribution centres, over 8,000 truck drivers, and 100,000 trailers and tractors (Wal-Mart, 2009a). b) Partnership: Wal-Mart maintains a strong relationship with its suppliers and the suppliers are considered as the closest partners of the company. They also form an integral part of the value chain and assist Wal-Mart to access broad markets. The suppliers also assist in controlling the business by supporting Wal-Mart to lower the cost and adjust the price of the products. c) Value Proposition: The value proposition of Wal-Mart is mainly based on providing low priced product to the customers every day. This is also the core of the business model in Wal-Mart, and the business strategies of the companies are formulated to keep them aligned with the core value. d) Resources: The major resources of the company can be segregated into three major divisions, namely the physical resources of the company such as the stores and the distribution channel of the company, the human resource which consist of the store managers, managers, etc, and the organisational culture of Wal-Mart (Fishman, 2006). e) Cost Structure: Wal-Mart has a cost driven structure which mainly focuses on minimizing the costs. The expansion of the company allocates economies of scale at chain levels. The financial discipline of the company is well-known because they pass on their operating cost to the suppliers. f) Customer Relationship Management (CRM): Wal-Mart has established the customer relationship on the basis of self-service and technological advancement. The motive of Wal-Mart is to reach the mass, so automation of processes offers fast and easy services to large number of customers. g) Target customers: Wal-Mart targets three segments of customer groups; firstly low-income groups with aspirations to buy branded products, wealthy customers who prefer good deals and customers who wish to have affordable and good quality products (Barbaro, 2007). h) Supply Chain: In order to deliver value, the company reaches to its customers through its efficient distribution channel and this assist in generating adequate profit margin for the company. Wal-Mart utilises mass media, which is low cost, yet effective, such as internet. i) Revenue: Revenue is generated from customers through retail sales. Wal-Mart generates revenue also from the sales of products of own brands, products produced by other retail companies, etc. It enjoys the advantage of selling before paying off to its suppliers. Changes in Wal-Mart over Five Years Lee Scott became the CEO of Wal-Mart in the year 2000, who was succeeded by Mike Duke in the year 2009. About five years ago, Wal-Mart though being the largest retailer was in news because of intense criticism, lawsuits, tumbling stock prices, and negative human resources strategies. However, the changing leaders and leaderships has motivated the strategies and supported the framework of the company more towards environmental friendly strategies, and store renovation. The new campaign of Wal-Mart to introduce a new image has worked and this can be seen through its operational and financial performance. When profitable businesses were going bankrupt, Wal-Mart was growing continuously. The changes in Wal-Mart in 5 years would be discussed through analysis of the annual reports of the company over a period of five years. The business model of the company was based on selling more at lowest possible price. In order to do that the employees were first considered being associates in the company than just workforce, so their uniforms were changed in 2007 to make them look more casual. The suppliers were charged slotting fees as before, but the store managers were provided incentives for selling more and dropping out on the most unpopular products. In 2011 the net income of the company was $15.4 billion, while the revenue was $421 billion, which implies that a profit margin of about 24.7 percent was estimated. In the year 2012, the revenue was recorded to be $446 billion, so an increasing trend reveals growth and remarkable achieve of Wal-Mart (Wal-Mart, 2012b). In the year 2009, Wal-Mart achieved the record of $400 billion of sales, when the economic condition of the global market was highly volatile due to recession and credit crunch (Wal-Mart, 2009b). The company also maintained its corporate social responsibility activities and contributed $2 billion to end hunger issues in US in the year 2010 (Wal-Mart, 2010). Wal-Mart took its first initiative to explore the Asian markets further by getting into a joint venture in India and enter as Bharti Wal-Mart. It also acquired Massmart in 2011 and outshined about 10,000 retail units globally (Wal-Mart, 2011). Wal-Mart has been able to complete 50 years of its operations profitably in 2012. However, still certain issues like labour problems, strategies related to wages and salaries and organisational culture of Wal-Mart still remain under the scanner. Competitor Analysis The competitors of Wal-Mart are mainly the domestic competitors where the company is doing business, retailers involves in grocery retailing, and international competitors such as Tesco from UK, Metro from Germany, Carrefour from France, and many more. However, price had always been the major unique selling proposition of the company in 50 years, and this has assisted Wal-Mart to remain as the global retail leader irrespective of the changing external business environment. In US the main competitors of Wal-Mart are the departmental stores like Target, Meijer, Kmart, etc. The company faced fierce competition from the foreign markets like Aldi, which captures 19 percent of the market share in Germany. Asda the subsidiary of Wal-Mart in UK, which captures the second largest market share in UK after Tesco. In the year 2006, Wal-Mart sold all its stores in South Korea to a popular retailer called Shinsegae at $882 million. The Wal-Mart stores in South Korea were renamed as E-Mart. The company also had to struggle in China due to the culture of the Chinese consumers to consume fresh products. So supplying fresh fish, sea food was becoming difficult initially, which the consumers easily acquired from local shops Wal-Mart, 2012b). Financial Analysis Based on the Income Statements The analysis of the income statement of Wal-Mart would be done in this section so as to critically analyse the financials of the company. As can be seen, from Appendix 1, the revenue generated through sales in 2008 was $378,799 million (Wal-Mart, 2008), in 2009 it crossed $400 billion and the growth continued till 2012, so the revenue of Wal-Mart in 2012 was $446,950 million. The revenue generated by the company in the last five years of its operations shows that the company has managed to have a steady increase in its revenues. It also reveals that during recession too the company has been able to generate profits and has been able to utilize its resources well, to generate higher revenues. Similarly, the operating income also shows an upward trend. In 2008 it was $21,996 million and has jumped to 27,602 million in 2012 (Wal-Mart, 2012b). The net income in the year 2008 was $12,731 million while in 2011 it increased to $16,454 million (Wal-Mart, 2011). However, again the net income decreased to $15,699 million has been seen in 2012. It can be seen from Appendix 2 that the percentage increase in revenue in the year 2008 was the highest that is 8.4 percent, which further diminished in 2009 to 7.3 percent (Wal-Mart, 2009b); while in 2010, a considerable decrease in net sales percent shows the effect of recession on Wal-Mart (Wal-Mart, 2010). As can be seen from Appendix 2, the inventories in 2012 have increased to $40,714 million than the other four years. In 2010 it was around $32,713 million, which was the lowest in the respective five years. This shows that the current assets have increased, but the cash equivalent assets were decreasing. The increasing trend of shareholder’s equity reveals that the debt of the company has decreased with years. In 2012 the shareholder’s equity is $71315 million, which were $68,542 million in 2011 and $64,969 million in 2009. The number of units count as stated in Appendix 2 reveals that the international segment of Wal-Mart that is Wal-Mart doing business outside US has sold more than the US segment in 2012, the US segment sold 3,868 units, while the international segments sold 5,651units (Wal-Mart, 2009b). Conclusion Sustainable growth of a company involves many aspects, among which business model of the firm, financial aspects and the competitors of the business of company are the primary ones. The business model of the company is the basic framework or structure based on which the strategic objectives are decided and marketing strategies are laid down. The financial statements reveal the operational expenses and the return from the sales, while competitors indicate the challenges in the external business environment. In this study, the business model of Wal-Mart has been studied, which also further evaluates the changes and improvements in the company. Wal-Mart has been able to generate profit even during recession when other companies were going bankrupt, so the financial analysis of the company has been done through analysis of the income statement for a period of five years. Apart from this, an overall assessment of the competitors has been also done in order to indicate that though being a market leader Wal-Mart had to survive the stiff competition in different countries that it does business in. The performance of Wal-Mart as indicated through this report shows that the company has done better in the international market than in its home country. References Barbaro, M., 2007. It's Not Only About Price at Wal-Mart. The New York Times Company. [online] Available at: < https://myaccount.nytimes.com/auth/login?URI=http://www.nytimes.com/2007/03/02/business/02walmart.html&OQ=Q5fQ72Q3dQ30> [Accessed on 14 January 2013]. Basker, E., 2007. The Causes and Consequences of Wal-Mart’s Growth. Economic Perspectives Working Papers, [e-journal] 21, Available through: University of Missouri < http://econ.missouri.edu/working-papers/2006/wp0611_basker.pdf> [Accessed on 14 January 2013]. 177–198. CNN Money, 2012. Wal-Mart Stores. Cable News Network, [online] Available at: < http://money.cnn.com/magazines/fortune/fortune500/2012/snapshots/2255.html> [Accessed on 14 January 2013]. Fishman, C. 2006. The Wal-Mart Effect: How The World's Most Powerful Company Really Works and How It's Transforming the American Economy. New York: Penguin Press. LI, Y., 2011. Walmart Business Model Study. International Journal of Advanced Economics and Business Management, [e-journal] 1(2), Available through: IJAEBM < http://www.ijaebm.iserp.org/archieves/1-D16-31-10/Vol-No.1-Issue-No.2/5-IJAEBM-Volume-No-1-Issue-No-2-Walmart-Business-Model-Study-093-097.pdf> [Accessed on 14 January 2013]. 177–198. Wal-Mart, 2008. Annual Report 2008. [online] Available at: < http://media.corporate-ir.net/media_files/irol/11/112761/ARs/2008_Annual_Report.pdf> [Accessed on 14 January 2013]. Wal-Mart, 2009a. Walmart: A Leader in Logistics. [online] Available at: < https://www.sidweb.espol.edu.ec/public/download/doDownload?attachment=288973&websiteId=1587&folderId=1&docId=575569&websiteType=1> [Accessed on 14 January 2013]. Wal-Mart, 2009b. Annual Report 2009. [online] Available at: < http://media.corporate-ir.net/media_files/irol/11/112761/ARs/2009_Annual_Report.pdf> [Accessed on 14 January 2013]. Wal-Mart, 2010. Annual Report 2010. [online] Available at: < http://cdn.walmartstores.com/sites/AnnualReport/2010/PDF/WMT_2010AR_FINAL.pdf> [Accessed on 14 January 2013]. Wal-Mart, 2011. Annual Report 2011. [online] Available at: < http://www.walmartstores.com/sites/annualreport/2011/financials/Walmart_2011_Annual_Report.pdf> [Accessed on 14 January 2013]. Wal-Mart, 2012a. Stock Information. [online] Available at: [Accessed on 14 January 2013]. Wal-Mart, 2012b. Annual Report 2012. [online] Available at: < http://www.walmartstores.com/sites/annual-report/2012/> [Accessed on 14 January 2013]. Whitley, R., 2007. Business Systems and Organizational Capabilities: The Institutional Structuring of Competitive Competences. 1st ed. Oxford: Oxford University Press. Yahoo Finance, no date. Wal-Mart Stores Inc. (WMT): Profile. [online] Available at: [Accessed on 14 January 2013]. Zott, C., Amit. R. and Massa, L., 2011. The Business Model: Recent Developments and Future Research. Journal of Management, [e-journal] 37 (4), Available through: SAGE Journals Library website [Accessed on 14 January 2013]. Appendices Appendix 1 Income Statement of Wal-Mart for 5 years Appendix 2 Five Year Financial Summary of Wal-Mart Read More