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Walmart Case

Walmart Case Definition of Main Problem: There can be no argument that Wal*Mart has revolutionized the discount retailing industry. Furthermore, CEO Glass and COO Soderquist have stepped in at the helm of this company and continued to take it in the right direction by quadrupling sales and profits from 1987 to 1993. The main problem they now face is how to sustain their phenomenal performance, and becoming number one has magnified this issue. No longer can they just sneak into small towns where the only competition is the local merchant’s shop. No longer can they copy larger companies like Sears and J.C. Penny’s because of their size and scope. The fact is, Wal*Mart is bigger than these companies and their direct competitors Kmart and Target are doing everything in their power to close that gap. They are lurking not so quietly in the shadows, benefiting from Wal*Mart’s past choices, successes, and failures. They are there to blow the whistle if Wal*Mart steps outside the lines. Wal*Mart may be growing, but at a rate under 10% for the first time in years. Shareholders are concerned, the press is relentless, and many obstacles lie in their path if they hope to continue the trends Sam Walton set so ambitiously in 1962. Analysis: With one of their main issues being sustained profitability, Wal*Mart is at a critical time in their life. They are no longer the hero, a place commonly reserved for competitors striving to be number one, because Wal*Mart is number one. No one can debate how effective they have been in getting here. Through their focus on superior technology and low cost leadership, Wal*Mart reigned supreme. They are redefining Porter’s five forces model in the discount retailing industry, and are in the enviable position of having first mover’s advantage. Yet this blessing is also a curse. By virtue of their efficient, effective system and its proven success, companies like Kmart and Target are watching closely and both emulating and improving upon this system. An analysis of the five forces model will show Wal*Mart’s main competitive advantages in supplier power and barriers to entry. A look into their distribution centers and how they have been instrumental in reducing supplier power will be followed by an analysis of how effective first mover advantage has been and where they must take it next. Early in the history of the company, Walton recognized the importance of backward integration as a means to pass on lower prices to consumers. Though supplier power is high in the retail discounting industry, Wal*Mart changed the game with their two-step hub-and-spoke distribution network. Though building 1,000,000 square foot distribution centers seems costly, it allows Wal*Mart to purchase from their suppliers at a significantly reduced cost and deliver to their stores with 48 hours, sometimes even 24 hours. The network’s become so effective that 80% of their inventory comes directly from these 27 centers. In contrast, Kmart has only 50% of their products coming from distribution centers with a full half being shipped directly from suppliers into their stores, thus raising costs to Kmart and their customers. Systems such as “cross-docking” are also aiding Wal*Mart in their fight to streamline every process by reducing inventory and restocking costs. Another decision that demonstrates Wal*Mart’s commitment to the future is their unyielding emphasis on superior information technology. Beginning in 1983 and standard by 1988, electronic scanning of Uniform Product Codes was installed in Wal*Mart stores. This and similar programs were effective in ensuring accurate pricing and reducing shrinkage, yet Kmart recognized its importance as well, and by 1990, had similar systems in place in its stores as well. Secondly, a $700 million investment in satellite systems made communication between headquarters, distribution centers, and stores much more effective. With this in place, sales data could be analyzed immediately and effectively, and Wal*Mart could better control inventory levels as well. Also instrumental as a means to achieving these ends was electronic data interchange. While UPC and satellite systems allowed sales to be collected and analyzed daily, EDI enabled 3,600 vendors to receive orders and interact with Wal*Mart electronically. All of these systems provided Wal*Mart the leeway to charge lower prices than their competitors, and though no supplier accounted for more than 2.4% of their total inventory, it streamlined the process and let Wal*Mart pass this savings onto their customers. Beyond reducing supplier power and installing pricing/communication systems ahead of their competitors, Wal*Mart has an advantage in the barriers to entry. Granted, the high fixed costs, the concentrated industry, and the high exit costs make barriers to entry high across the discount retailing industry. However, Wal*Mart has the first mover’s advantage and has kept it for the last thirty years by constantly expanding, constantly improving, and always remembering the value of the dollar. As their competitors continue to copy what is working for this industry leader, it is essential that Wal*Mart keep their first mover’s advantage when moving into new territories with improved technology. Understanding the five forces for this industry is helpful in understanding why Wal*Mart has performed well compared to their competitors. The overall profitability is medium in retail discounting for the following reasons: Supplier power, rivalry, and the threat of substitutes is high, which lead to low profitability. Barriers to entry are high and buyer power is low, and this suggests high profitability. As previously explained, Wal*Mart’s growth and profitability have been high relative to the industry, and competitive advantages such as an extreme emphasis on information technology have explained this incongruity between Wal*Mart’s average and the industry’s. However, shareholders’ and analysts’ concerns for the future are justified because of where Wal*Mart and its competitors are in the product/lifestyle curve. Kmart and Target are in the growth/maturity phase, and just as Wal*Mart copied industry leaders during this phase, so too are these companies. Whether it’s owning their own distribution centers or investing in electronic scanning of UPC at the point of sale, Kmart and Target are catching up quickly. Unfortunately, Wal*Mart is in the decline phase of its life and this becomes the justification for concern over Wal*Mart’s continuing growth and dominance. 1) Continue pumping more resources than their competitors into superior information technology without allowing their competition to catch up. 2) Expand internationally, but remain consistent with their strategies such as putting stores in rural areas. 3) Do not change corporate culture. This includes a conscious decision to stay out of major cities, and the choice to expand through acquisitions only when they are compatible with corporate strategy. Justifications: Though Wal*Mart no longer has larger companies to look to for recommendations; they have proven practices that have worked in the past. For example, the continuing reliance on information technology is essential to maintain market share and earnings potential. Continuing to focus on communication between their suppliers and individual stores as well as between headquarters and stores is a must. Yet they must improve upon their existing devices they have at their disposal. With Kmart and Target nipping at the heals of Wal*Mart in so many ways, the advantage Wal*Mart must exploit is the head start they have in the organization and implementation of these various information technologies. Along these lines, Wal*Mart does not need to overhaul their systems and look for outrageous solutions. Rather, by continuing what they are doing and what has been working, they will be able to maintain their competitive advantage. Secondly, Wal*Mart has demonstrated the effectiveness of sticking with a strategy that works. For the majority of their existence, they lived by Walton’s key approach of putting stores in rural places away from large rivals in the industry and understanding the value of the dollar. Thus, while global expansion is a decision with tremendous potential, Wal*Mart must continue to expand with the same strategy it used to be successful for the past thirty years. Whether they open stores in Mexico or South America, they should allow each store manager to price products to meet local market conditions as well as place their stores in equivalently rural areas. By focusing on this and maintaining technological superiority and efficiency, Wal*Mart can build its brand name in these new markets, putting them in an improved relative position in the product/lifestyle curve (i.e. a return to introduction and growth as opposed to decline). Thirdly, there are areas both domestic and abroad relatively untouched by Wal*Mart: large cities. Though it may seem like untapped potential in these markets, it is not recommended to expand in these highly populated areas. The axiom, “If it ain’t broke, don’t fix it,” applies: If Wal*Mart were to do an about-face and start expanding in this form, it would send mixed signals about not only changes in the corporate strategy, but also about the future of this conglomeration of stores. This is especially poignant at this volatile time in the price of their stocks. They should also be extremely cautious in the acquisition of existing discount retailing companies. As the industry becomes more concentrated, Wal*Mart’s selectivity in large acquisitions extends beyond just profits. Many times, Wal*Mart could better spend their resources by improving existing stores or building new ones because they can build them around their ideologies at a much lower cost than through purchasing other companies. Again, this is not to say they should not expand in this manner, just that they need to be extremely selective when doing so. Bibliography:

Word Count: 1562