QUESTION 1. HOW ATTRACTIVE WAS THE DISCOUNT RETAILING INDUSTRY IN THE USA WHEN WAL-MART FIRST BEGAN OPERATIONS IN THE 1950s?
The discount stores emerged in the United States in the mids-1950s on the heels of supermarkets which sold food at unprecedently low margins. But how attractive was the discount retailing industry by this time? And what means by attractiveness? By attractiveness within an industry we mean create value for firms and shareholders or making supernatural profits or, in other words making a return in excess of cost capital. To analyse the attractiveness of this industry in the mids-1950s the best way is by using the 5 forces framework for industry analysis developed by Michael Porter (1985).
The approach of five forces tries to analyse the attractiveness or value within an industry identifying 5 fundamental competitive forces. These 5 forces determine the competitive intensity and therefore attractiveness of a market.
FORCE 1: THE THREAT OF ENTRY
"Average profitability is influenced by both potential and existing competitors". The more profitable is a market or industry yielding supernatural profits, the more this markets will draw firms to entry in order to gain market share and take a piece of the cake. The result of this many entrant is an increase of the competition level and consequently a reduction of industry´s profit margin. Therefore, the key concept which allows incumbents firms to block entries on the already profitable industry is the entry barriers. Entry barriers exist if it is difficult or not feasible economically for outsiders to replicate the incumbents´ position and rest on irreversible resource commitments, such as economies of scale, capital requirements, brand identity, low-cost production design and so on. The discount retailing industry was not concentrated in the 1950s, existing a vast range of competitors, that´s why the economies of scale and capital requirements (needed to get good deals on purchases so as to get attractive prices and investments to build stores) were not enough how to restrain an in-flux of firms. The access to distribution was at this time very rudimentary following the classic approach of manufacturer-wholesaler-retailer, and there were not any firm leading this field. Also then any firms had developed yet a low cost distribution design as currents high developed logistics systems which restrain firms to enter on this industry. By this time there not existed highly developed operational system as to recent time, such as satellite system communication, electronic data interchange (EDI), high develop logistics systems, and so on... Also by this time the learning curve within industry was not enough developed as to deliver an advantage to any specific firm and to prevent new firms to entry. Others entry barriers were not a really problem. For instance, related to the vast range of competitors, there were not well-established and clearly differentiated brand names with enough loyalty as to prevent the entry of new firms on the industry, the access to necessary inputs was easy, and the government policy had bolstered consumer self-confidence.
FORCE 2: THE THREAT OF SUBTITUTES
The existence of close substitute products increases the propensity of customers to switch to alternatives products, which raise the competition level among firms, consequently lowering the attractiveness and profitability within industry. Clarify that a substitute product is this that can perform similar functions for customers in order to satisfy the same needs than the others, not just a physically similar product. Threats worth to mention are, first those products or services which improve relative price-performance´s priors products, switching cost incurred by a firm when the customer switches to a different sort of product or services, and the buyer´s propensity to substitutes. Substitutes of discount stores were primarily supermarkets and...
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