Wal-Mart Stores Business Performance - Essay Example

Wal-Mart Case Analysis Report Table of Contents Wal-Mart Case Analysis Report Table of Contents 1.Introduction 2.Why (and How) has Wal-Mart Stores, Inc. done so well? 1 3.Key Sources of Competitive advantage for Wal-Mart 4 4.Contestability and Sustainability of Competitive advantages 4 5.Why did competitors leave Wal-Mart unchallenged? What could they do? 5 6.Can Wal-Mart maintain this high growth in the future? How? 5 Annexure-1 – Porter’s Five Forces Model 6 1. Introduction This report presents an analysis of Wal-Mart Stores, Inc.’s emergence as a leader in the mass retailing business in the United States, looking at its strategies from its early beginning in 19602 to the position the firm had reached in 1990. The report attempts to understand and establish the reasons behind Wal-Mart’s stupendous success in an industry considered saturated, and then goes into an analysis of the competitive advantages of the company, concluding with an attempt to predict the possibilities of Wal-Mart maintaining its track record in the 1990s and the future 2. Why (and How) has Wal-Mart Stores, Inc. done so well? Starting with the establishment of the first store in 1962 in Rogers, Arkansas, Sam Walton together with his brother had managed to grow the firm to 32 stores spread across four states by 1969, when Wal-Mart Stores, Inc was incorporated, and subsequently to 330 stores spread across 11 states by 1980, culminating in 1,402 Wal-Mart Stores and 123 Sam’s Wholesale Club outlets covering 29 states by Jan 1990 with Sales of over $25.8 billion. In fact, back in 1977, Forbes magazine had ranked Wal-Mart first in the discount retailing industry based on parameters such as return on equity, return on capital, sales growth, and earnings growth. To understand the reasons behind such phenomenal performance it will be prudent to look at some financial performance parameters of Wal-Mart and its competitors, and then to look at how competitive forces act in this industry using Porter’s Five forces model. 2.1. Financial Performance Highlights A quick look at Exhibits 4 and 5 from the case brings out the following key pointers that explain Wal-Mart’s success: a) In the period from 1981 to 1990, Wal-Mart’s net sales had grown nearly sixteen-fold from $1.64 billion to $25.81 billion, clocking an average annual growth rate of 31.7% b) During the same period, the performance figures of other major competitors as given in Exhibit 5 of the case show that Sears and Kmart had recorded an average annual sales growth rate of just 7.8% and 7.9% respectively, while Target had recorded 12.9%. This indicates that Wal-Mart was way ahead of competition in sales growth. c) Wal-Mart also ensured that this sales growth was accompanied by excellent returns to stockholders by maintaining the profitability despite such growth in sales. Thus net earnings increased from $0.55 billion in 1981 to $1.90 billion in 1990, with EPS growing from $0.11 million to $1.90 million d) On this count again Wal-Mart was way above competitors clocking an average growth rate of 30.3% on Return on Equity (ROE), and 32.9% on EPS as against Sears (11.1%; 8.0%), Kmart (13.5%; 12.6%), and Target (15.2%; 14%). e) Wal-Mart had also managed its working capital very well with a current ratio ranging from a low of 1.66 to a high of 2.07 during this decade, primarily through excellent management of inventories, achieving an inventory turnover of 4.53 against Kmart’s 3.38. 2.2. Porter’s Five Forces model evaluation Again, to understand how Wal-Mart had crafted its strategies to outwit competition in the discount retailing industry, let us look at the industry characteristics in terms of Porter’s five competitive forces model. Figure-1 in the Appendix gives the structural view of the model, indicating the determinants under each of the five forces. 2.1.1. Competitive Rivalry a) The retailing industry is characterized by intense competition with players of different sizes from Mom-and-Pop stores to national chains with the well known names being Wal-Mart, Sears, Kmart, Target, JC Penny etc… b) Discount retiling industry itself had become saturated with the number of stores having grown from a few handful in 1950s to 1,329 in 1960 and then to 7,400 by 1977, with several stores declaring bankruptcy due to declining margins. c) Number of household per discount store had dropped from 16,000 in 1967 to around 9,000 in 1989. d) Generic service differentiation is limited. Differentiation comes in mainly through price, quality of merchandise and customer service e) Switching cost are low considering low differentiation All these points had made the industry unattractive. 2.1.2. Buyers’ bargaining power a) Buyers’ price sensitivity is high, and this imposes a high bargaining power b) Switching cost to the buyers is also practically non-existent c) Incentives offered, if attractive, can help 2.1.3. Suppliers’ bargaining power a) Fairly large number of suppliers of different sizes exist, implying high bargaining power b) Management of quality and delivery times is difficult , thus increasing supplier bargaining power acutely as premium for quality and delivery commitments c) Real estate suppliers or stores can exercise immense bargaining power, and this impacts firm strategies largely d) Though backward integration is technically possible, it has not been practical 2.1.4. Threat of Substitutes a) Main substitutes are from smaller outfits like Mom-and-Pop stores, but the price differential implies very low threat on this count b) Theoretically cost of switching is high because of price differential c) Buyer willingness to adopt substitute channels is also low, after getting used to discount retailing stores. This explains why several independent store owners had gone out of business 2.1.5. Barriers to entry a) High economies of scale act as a deterrent to new entrants b) Low product / service differentiation means less of a threat c) High real estate prices in premium locations increase entry barrier 3. Key Sources of Competitive advantage for Wal-Mart The case brings out clearly how Wal-Mart has worked around the various forces discussed above and crafted strategies providing excellent competitive advantages to Wal-Mart even in an industry perceived as being saturated with declining margins. a) Wal-Mart had consciously avoided head-to-head competition with national chains through its blue-ocean strategy of focusing on rural communities with population ranging from 5,000 to 25,000, thus gaining location advantage in 70% of stores b) Implementation of an excellent warehouse strategy through 16 distribution centers had resulted in cost advantage with favorable inventory turnover c) Great capital infusion strategy by inducting investors for warehouse space had led to substantial Return On Equity advantage d) Aggressive pricing, “Satisfaction Guaranteed” program and “Buy American” program had led to customer loyalty advantage e) Location advantage and deep discounts had led to Sam’s Wholesale Clubs rising to No 2 position with excellent profitability f) Robust IT systems and satellite-based EDI applications with benefits to over 2000 trading partners through better information access and better payment terms (29 days against Kmart’s 45 days) had led to supplier loyalty advantage, together with great bargaining power advantage for Wal-Mart on prices g) Sam Walton’s industry knowledge and business acumen were unbeatable strengths and his management style had percolated to the entire organization leading to employee motivation through “We Care” and other programs. 4. Contestability and Sustainability of Competitive advantages So far as the key competitive advantages that Wal-Mart had gained by way of locating 70% of its stores in rural communities and small towns with a population of less than 25,000 is concerned, this is largely uncontestable and entirely sustainable. Wal-Mart had clearly gained first-mover advantage in these areas and had supplemented this advantage with excellent programs to garner customer loyalty as well as supplier loyalty. The cost advantage gained through its warehouse strategy and capital infusion strategy is definitely a sustainable advantage, though it is also contestable, in some ways. The advantages gained through early adoption of IT systems again are a sustainable but at the same time replicable. Sam Walton’s personality advantage is not a sustainable advantage, especially as he was getting older. 5. Why did competitors leave Wal-Mart unchallenged? What could they do? Wal-Mart’s strategy of locating stores in small towns and rural communities pre-empted competition since those areas do not afford additional demand for other new stores. Competitors could only try and eat into Wal-Mart’s existing customers. This was perhaps one reason competitors left Wal-Mart unchallenged. They could definitely have borrowed Wal-Mart’s idea and extended this concept to new states. It is difficult to understand why they did not take this step. 6. Can Wal-Mart maintain this high growth in the future? How? Though Wal-Mart had begun to face some opposition to its location strategy and “power-buying” practice from some quarters, Wal-Mart can definitely maintain the growth rate by spreading out geographically to other states. As of 1990 they had covered only 29 states, and they can easily extend the reach to all 50 states since they have the financial muscle, and their capital infusion strategy had worked well. They could possibly take care of the small-time store owners who were being thrown out of business by offering appropriate incentive schemes and through offer of investment in equity, since Wal-Mart stock was doing exceptionally well in the market. Thus Wal-Mart’s strategy if executed well can easily warrant the same growth rate for at least 10-15 more years. Annexure-1 – Porter’s Five Forces Model Jarvis Michael and Perry Natasha. Chain Store Guide. Aug 2008. Read More