Written Analysis of Case – Wal*Mart Stores, Inc
1. To what extent can Wal-Mart’s performance be explained in terms of industry structure, and to what extent in terms of its competitive position?
In assessing industry structure I have focussed primarily on Wal*Mart’s core business of the US discount store industry. Relevant aspects of Wal*Mart’s diversification into wholesale clubs and supercentres are also considered – although it could be argued that the dynamics of both (particularly the supercentre business) are separate to discount stores. Using the model developed by Porter (2008), the key elements of the economic forces influencing the industry can be summarised as follows: * Intense price rivalry in a market dominated by the top 3 players * Strong buyer power among a price-sensitive buying segment * Substitutes readily available and increasingly able to challenge on prices (threat is mitigated by Wal*Mart’s ability to imitate substitutes, as with Sam’s Clubs) * Weak supplier power; tempered to a degree by symbiotic technological relationships and brand power * Threat of entry encouraged by recent high growth; deterred by high capital investments for large-scale entry and expected retaliation.
Overall, the industry is highly competitive, with average operating margins tight at 3.9% of sales (Bradley & Ghemawat, 2002). Within this industry structure, Wal*Mart relies on competitive position to achieve strong performance. Wal*Mart has adopted a combination of needs-based and access-based strategic positioning (Porter, 1996). The firm aims to capture a particular segment of price-sensitive customers by tailoring its products to meet local market needs. Wal*Mart also chooses its store locations to be an unchallenged provider of discount goods and positions itself as a reliable, consumer-friendly retailer which guarantees lowest prices.
2. Where does Wal-Mart’s competitive advantage come from – higher willing-to-pay or lower cost?
Ghemawat & Rivkin (2006) argue that competitive advantage comes from a firm offering something unique and valuable, in conjunction with an efficiently coordinated range of activities. Part of Wal*Mart’s value proposition includes selling nationally branded products, which are recognised and trusted by consumers and for which willingness-to-pay (WTP) is consequently higher than for non-branded products. This in itself is not unique; competitors can offer the same products, for which consumers will have identical WTP. However, Wal*Mart also tailors stock to meet store-specific customer preferences. While also not unique, this is a version of a differentiation strategy (Ghemawat & Rivkin, 2006) which does drive WTP. Wal*Mart’s ‘Buy American’ program is also a differentiation factor in attracting US consumers and driving WTP. Ultimately, however, it is difficult to argue that Wal*Mart has differentiated itself to the extent that customers would pay a premium for its products. Where Wal*Mart does create a degree of unique value is through its mutually beneficial supplier partnerships; this added value also helps keep costs low. It should be concluded, then, that Wal*Mart mainly achieves competitive advantage through its low-cost strategy (Ghemawat & Rivkin, 2006). Comparing Wal*Mart’s operating income of 7.5% to the industry average displays a strong cost advantage. There are other significant figures also to consider: * Wal*Mart’s average pricing at 3% below other stores
* Wal*Mart’s Operating Expenses of 18.1% of sales vs industry average of 24.6% It is self-evident that a company which sells at lower prices yet makes a profit must be doing so by having significantly reduced costs. If we take an extremely simplistic approach and calculate Wal*Mart’s operating margin at the industry average, we find that their competitive advantage through low operational costs translates to a dollar value of $1.75billion.
3. What are the main sources...
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