full version Case Study Solution: Wal-Mart Stores, Inc. Essay

Case Study Solution: Wal-Mart Stores, Inc.

Category: Business

Autor: Antonio 22 November 2009

Words: 2040 | Pages: 9

Wal-Mart Stores, Inc.

1) Please describe the sources of Wal-Mart’s Competitive Advantage in discount retailing!

The global player Wal-Mart operates in 14 different markets all around the world, serving 176 million customers every week. Today, the second biggest company of the world, concerning turnover which amounts to 312,427 million US-$, categorizes its operational facilities into five divisions. Among those divisions are the Wal-Mart discount stores, offering convenience and low-priced goods. Wal-Mart supercenters are the biggest stores, being open 24/7 hours and employing a workforce of 350 people, selling all kinds of groceries and general merchandise at the lowest possible price. Wal-Mart neighborhood markets are specified in offering pharmaceuticals and fresh produce groceries such as diaries and meat. The fifth category, the so called Sam’s club stores are the biggest members-only stores, offering goods in large volumes.
Wal-Mart started to build up its stores in smaller cities having a population ranging from 5000-25000 inhabitants, where hardly any other competitors were located. Consequently, consumers stopped driving to other cities to do their shopping, but started to shop at Wal-Marts stores in their own towns. By the mid 80’s Wal-Mart had one third of its stores in regions where no direct competitors could be found. The discount-retailer gained therefore more influence on the customer, eliminating the prejudice that discount retailing is only possible and profitable in larger cities. Sam Walton strived for his vision to offer his products and merchandise always below competition. The whole company was oriented to do so from the very beginning as well as saving costs in all business decisions and areas. As a result out of this policy, Wal-Mart was able to build up high amounts of monetary reserves to resist long-term price conflicts with other competitors.
Concerning the merchandise, Wal-Mart allowed its store managers to find out which product ranges are preferred by the local customers, based on each stores sales data.
Thus, it was not necessary to broadcast regional advertisement campaigns on a regular basis as every customer knew about the specialized product ranges offered at Wal-Mart. Compared to an average of 50-100 advertisement circulars of Wal-Mart’s competitors, the discount retailer launched only 13 circulars as a reminder. Consequently, costs for advertisement were 0.6% lower than the competitors that spent 2.1% of their store sales. While offering its prices 1 % below in direct competition, Wal-Mart sold its products 6 % higher in those areas where no direct competitors, such as Target and Kmart were located. In this way, additional costs could be saved.
Another reason for Wal-Marts success is the national brand strategy which implies that orders are made preferably with American suppliers, in order to avoid expensive imports of goods. Furthermore, this program corresponded with the typical values of the American customer and encouraged him to buy especially at Wal-Mart.
Basically, it took 120 days from laying the first brick to complete the construction of a new Wal-Mart store. All of these stores were built with the possibility to be extended in its size if it was necessary to do so. Compared to the industry average of 25%, Wal-Mart dedicated only 10 % of its floor space for inventory, being able to store a higher amount of goods in each store. This leads to a saving in operating expenses of 6.5% compared to the industry average of 24.6%. To improve the efficiency of internal communication, Wal-Mart nearly spent nearly a billion US-$ on its own satellite system, providing information about sales, stocking and developments in stores on a daily basis. That information is used to maximize store sales and at the same time to save costs.
Various competitive advantages are also to be found in the distribution channels of the discount retailer. The basic strategy in distribution is known as cross-docking that makes it possible to deliver every good directly to the store without being stocked. Moreover, it was possible to deliver several Wal-Marts on a single tour, because of the special store arrangements. Thus it was possible to save in-bound logistics costs. Vendors were not allowed to provide more than 2.4% of Wal-Marts purchases, making the discount retailer independent and dominating its suppliers. Nevertheless, working with Wal-Mart is very profitable; the purchase of Procter & Gamble’s products equals about 10% of their annual revenue. Through developing electronic invoicing and annual strategic business planning packages for the communication with the vendors, it was possible to reduce the inventory costs and to increase sales.
Human Resources bear another competitive advantage of Wal-Mart. The retailer is eager to employ only people that agree totally with the philosophy of Wal-Mart and put all their effort to achieve the most possible success for their company. Furthermore, it is common to recruit graduates directly after education. The advantage of the company is the ability to influence the working behavior of the employees. In order to motivate the employees, they were involved into actively suggesting improvements in day to day operations, resulting in cost savings of 85 million US-$ in 1993. Additionally, it is possible for the employees to participate in shareholding and to obtain dividends of Wal-Marts profits. Looking at the top of the company, it is not important, which position every single management member takes in the organization process. During weekly meetings, everyone is allowed to bring in innovative ideas that are taken into consideration.
All in all, these facts lead to Wal-Marts uniqueness as a discount retailer and make them the most successful discounter in the whole world.

2) Please describe the future sustainability of Wal-Mart’s position in discount retailing!

Wal-Mart has, as mentioned above, developed to the biggest discount retailer by sales . Moreover Wal-Mart’s sales almost equal the sales of their ten largest competitors combined. By means of that it becomes clear that Wal-Mart has got a very dominant position in discount retailing. Through Wal-Mart’s distribution channels the vendors can sell as much as through ten of Wal-Mart’s competitors. The historical data implies that the tendency is that Wal-Mart is growing. The operating results were doubled from 32,602,000 US $ in 1990 to 67,345,000 US $ in 1993 . For the future it is to say that Wal-Mart has the best chances to keep its dominant position, due to many advantages in terms of cost-savings, publicity and locations. For 1993 a Z’’-score of 4.3 was reached , showing that Wal-Mart is very solvent and in no financial danger . This can also be observed in the current ratio at 1.51, meaning that all short-term obligations can be met. Furthermore, Wal-Mart creates a net asset turnover of 4.05. In combination with the net profit margin of 6.23% a return on net assets can be appointed to 25.23%. This number reflects the businesses effectiveness that the employed capital is worked with . These and other ratios show that Wal-Mart seems to be very stable and therefore financially sustainable for the near future.
The historical approach of building long-lasting and future-oriented vendor relationships is as well a sign for Wal-Mart’s sustainability. A main challenge will be the handling of the rapid growth rate, yet presuming the same success with this as in the past no greater problems should occur. Since Wal-Mart has been continuously growing, they can make use of their existing expansion capacities and specified knowledge in this area. During the planning phase of every store an expansion was considered and is possible; thus there is no need for acquiring bigger properties at a later date. Especially the trend towards supercenters, which require higher square footage, is favoured by this approach.
As mentioned above Wal-Mart built stores throughout the USA. Their net of stores and distribution centers covers the whole country which is an excellent position for further growth. Furthermore the locations chosen are very favourable since a lot of stores do not face direct competition. At store in rural areas the prices are usually a bit higher. This extra income is used to set lower prices at stores with competition, creating a great price-advantage.
Many of Wal-Mart’s vendors create a major part of their gross margins through their distribution channels, equipping Wal-Mart with great negotiation power. This allows them to keep their low prices also in the future. On the one hand this leads to a stable and future-proof relation with their vendors, since they mostly cannot afford to end their business relation with Wal-Mart. On the other hand, since Wal-Mart is able to dictate the conditions, their hard negotiation course may lead to an aggravation of finding new suppliers in the future.
Wal-Mart’s human resource management is aiming at binding its managers to the company. Usually the managers are hired directly after finishing college. This includes the advantage of having a fresh and motivated staff with lots of ideas and boundless energy. Yet the inexperience of these managers is likely to create a more number-oriented way of thinking. The meetings where each employee can announce his ideas and suggestions are a measurement to ensure that all kinds of problems within Wal-Mart are solved directly. This shows that the overall communication between the management and the workers is considered to be very important and builds a great foundation for future success. However, as Wal-Mart is constantly growing it will become more difficult to decentralize the decision-process, the training and the individual scope for development. Furthermore it will become harder to keep up the good working environment (e.g. health-care benefits, profit-sharing plan) because the competition will accommodate to Wal-Mart’s operating strategy and become more competitive. Thus cost cutting solutions might affect the employees first, creating discord among the company. This development can be seen in the growing costs of sales and the decreasing operating expenses . Since the price has to be lower than the competitions the costs of sales increase, creating a smaller profit margin. This absence of profit has to be compensated by the operating expense, which also includes the salary and hourly wage of employees.

3) Please predict how effective their diversification into the food industry will be!

The entire food industry, from growing to processing to retailing, is an extremely competitive market where profit margins are typically so low that it is often challenging to maintain profitability. The world wide food market has been challenged by a low growth rate, high costs for energy and the changing consumer tastes. Nevertheless, there are segments that grow constantly. For example the health and organic foods, energy drinks or bottled water.
Concerning the diversification into the food sector, Wal-Mart is in a very good position. First of all, the discount retailer is one of the most experienced companies in the world and has the necessary knowledge to diversify into the food sector. Wal-Mart’s monetary reserves allow the company to expand, even if the intention might be risky and there are low profit margins. The retailer is able to force down prices and to eliminate direct competitors, because of its huge capacity which enables Wal-Mart to cut costs and to offer food products at low prices.
Moreover, the discount retailer profits from a huge brand-awareness and a good reputation, offering high-quality brand products cheaply to the customer. Consequently, consumers developed a strong loyalty towards Wal-Mart and thus will follow to buy food products of the discount retailer.
Most important is the combination of the classic discount retailer and supermarket. Wal-Mart’s aim is to attract as many costumers as possible, thus combining these two sectors is highly effective. While only going shopping for groceries one might fall upon something else that he/she needs, yet could not find in a normal supermarket. Taking into consideration that a lot of Wal-Mart stores do not face direct competition from other retailers, each shopping trip for groceries and merchandise can be combined by simply going to Wal-Mart instead of a retailer and a supermarket.
Today Wal-Mart established so called neighborhood stores all across the US, selling all kinds of groceries and only limited items of merchandise, successfully. More than 120 of these stores were opened since 1998.
All in all we can draw the conclusion that Wal-Mart followed its diversification strategy from the very beginning and became the most profitable and biggest food retailer in the world.


Bibliography

http://www.walmartfacts.com/articles/2502.aspx.
http://www.plunkettresearch.com.
http://www.12manage.com/methods_altman_z-score_de.html.
Business Finance 7th edition, McLaney, 2006, pp 51-53.