Walmart Case Study

Part I - Main Problem Statement

As of today, January 1994, Wal-Mart is experiencing a falling stock price, which has destroyed $17 billion in market value, and comparable store sales are below 10% for the first time since 1985. Wal-Mart’s executive leadership is currently faced with a critical issue on how they can revitalize and maintain their competitive advantage to sustain their historically phenomenal performance in light of recent downturns. We believe that the recent decline in both sales and the company’s stock price can be attributed to the following factors: new and increasing competition as Wal-Mart enters new markets and categories and improving performance of competitors.

Part II - Problem Analysis

To begin our analysis, we looked at industry-level factors that were impacting Wal-Mart’s profitability and competitive position within the market. As shown in Exhibit D, there are two major threats to the profitability of discount retailers: intra-industry rivalry and the threat of new entrants. Rivalry is high due to several factors including low projected industry growth, oversupply relative to consumer demand (particularly in the warehouse club market), a relatively undifferentiated product offering, and low switching costs for consumers. Rivalry is tempered slightly by the consolidation of the industry and low exit costs. The consolidation of the industry is due to many failed competitors and the acquisition of competitors by the three remaining giants, Wal-Mart, Kmart, and Target. Consolidation also occurred in the warehouse club market when Price Co. and Costco merged in October 1993 and Sam’s Club acquired 99 of Kmart’s PACE clubs at the end of this past year as shown in Exhibit A.

The threat of new entrants to the profitability of incumbent firms remains a relatively high risk due to few structural barriers and high, expensive strategic barriers. Low structural barriers include low capital needs to open a store, lack of control of resources, an elastic demand curve, low exit costs, and low switching costs. High strategic barriers also exist in the industry and include limit pricing and potentially predatory pricing (as Wal-Mart had been accused of doing with prescriptions), larger companies taking over existing competition and new entrants, and incumbents’ economies of scale through regionalized distribution networks. The low structural barriers and the use of high strategic barriers within the market are leading to an overall decrease in prices across the industry. However, in spite of these strategic barriers, new entrants in the form of grocery chains are expanding their shelf space for non-grocery items to compete for a portion of the sales from the discount store industry. This should continue the downward trend of prices within the marketplace.

After reviewing the external environment, we then did an analysis