Walmart Inc

Executive Summary

Due to the issues resulting from the questioned sustainability of Wal-Mart’s growth, it is my recommendation that Wal-Mart focus their efforts and resources on the expansion into the U.S. and International Markets. With a strong channel management process in place, it needs to continue diversifying product offerings through entering into new sectors of retail. To have long term success in the U.S., it will need to also shift the negative public perception around forcing out small businesses. In order to be successful internationally, it should maintain the same operational effectiveness foundation, but tailor its relationships to accommodate the political and socioeconomic barriers that it will encounter in large and highly regulated markets (e.g. China).

Case Analysis

Retail industry analysis

As Wal-Mart’s main customers are individuals, and the population size is large, the bargaining power of these customers is low; power of suppliers is low due to the low switching costs and huge purchase quantities; risk of potential entrants is high due to low cost of doing business; power of substitutes is low due to competitive pricing, quality and performance; and rivalry risk is high due primarily to the large exit barriers and competitors of similar size (e.g. Target, K-Mart) (Appendix – Exhibit A).

Financial performance overview

Wal-Mart’s 2013 financial performance was superior in the industry. Wal-Mart’s discount stores had sales of $48.6 billion and operating income of $3.6 billion. The weighted average of its direct competitors had sales of $18.7 billion and operating income of $0.7 billion. Warehouse clubs (i.e. Sam’s Club) was $14.7 billion, with its next best competitor Price Club having $7.6 billion. Wal-Mart’s five year average return on equity, sales growth, and earnings growth were best in the industry at 31.2%, 28.2%, and 25% (Appendix – Exhibit B). Sales per square foot were nearly $300, compared with the industry average of $210. The primary driver behind Wal-Mart’s strong financial performance was based on strategic positioning and expansion in prior periods of putting good-sized stores into rural areas and small towns where there was little to no competition. Store managers priced products to meet local market conditions, in order to maximize sales volume and inventory turnover, while minimizing expenses. As such, by the 1990s, there was typically 2%-4% pricing differential between Wal-Mart and its best competitors.

Strategy

Wal-Mart’s primary strategy is to provide a wide variety of goods at low prices. Utilizing the value-chain as shown in Appendix - Exhibit C, Wal-Mart employs a combination of Cost-Leadership and Differentiation strategies. Denoted by the tag line “Always low prices – Always,” Wal-Mart has utilized a cost leadership approach where the primary focus is to pass savings on to the consumer. Wal-Mart’s retail discount stores operate using a low cost model utilizing low inventory costs, or high turnover of merchandise, and high volumes of sales. In addition, a primary advantage Wal-Mart has had over its competitors is its technological advancements that have gained them superb operational efficiencies. Wal-Mart utilizes an electronic data interchange (EDI) to interact with its vendors. The EDI allowed for residual efficiency for the management of inventory levels, and additional forecasting and planning capabilities with its vendors. Another import factor was their utilization of a hub-and spoke distribution network and cross-docking that enabled timely and efficient replenishment of inventory and limited inventory holds. Differentiating strategies were primarily focused on the quality service and capabilities of their employees, location and expansion into new market segments, and their strong relationships with their vendors.