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Wal-mart case analysis
Competitive advantage and competitive dynamics
What might explain Wal-Mart’s performance over time in discount retailing? Is it the industry or company specific factors?
Post Second World War, the style of style of retailing in the US evolved into discount merchandizing. At the time, Wal-Mart was quick enough to ride the tide and develop an overall cost leadership model that allowed it to emerge as a leader in the market in the discount retailing space.
Wal-Mart’s performance driven by overall cost leadership
Wal-Mart’s strategy over time helped it establish leadership position in discount retailing. It used rural underserved markets to announce its arrival. It also used innovation levers, customer centricity, positioning as a low cost player, and effective stakeholder management including employees, suppliers, and stockholders to achieve distinctive competitive advantage. It successfully outperformed other firms in the industry leveraging its strategy to achieve overall cost leadership.
The experience curve concept and was successfully adopted by Wal-Mart. The various levers it used to achieve cost leadership included,
|Achieving economies of scale |Rapidly expand geographical footprint as well as number of stores, variety of stores, and store sizes |
|Vigorous pursuit of cost reductions |Aggressively deploy buyer’s negotiating power saving as estimated additional 3-4% |
| |Use effective proportion of leased vs. owned properties |
| |Leverage IT and technology including EDIs |
| |to keep minimal inventory (roughly 10% of its square footage) |
| |Optimized distribution and logistics management |
|Tight cost and overhead control |Integrated supply chain with complete control over the vendors |
| |Reduced advertising expenditure compared to industry advantages |
| |Strict travel and internal expenses management policies |
Having a strong low cost proposition yielded Wal-Mart above-average returns in the discount retailing industry despite the presence of competitive forces.
Analysing the correlation between company vs. industry performance
Post Second World War, the style of style of retailing in the US evolved into discount merchandizing. This provided Wal-Mart and its founding strategy a perfect launch pad.
1. Vendor consolidation and growth: Whereas in 1986, the top five discounters had accounted for 62% of industry sales, in 1993 they accounted for 71, and discount stores companies that operated 50 or more stores accounted for 82%
2. The discount stores have grown in excess of 7% all through 1970s, 1980s, and 1990s in terms of revenue though the increase in number of stores were not proportionate
3. Improvement in information dissemination by means of media that increasingly drove consumers to discounters
While the industry was on an up-tide, it was Wal-Mart’s well navigated strategy that allowed it to perform well above its industry peers.
Would you consider this performance to be sustainable (discount retailing in 1994)?
|Our above analysis shows that Wal-Mart clearly has a competitive advantage over its peers in most of the segments it operates in. However, our analysis elaborated below demonstrates the following key |
|observations outlining the sustainability of its performance, |
|Our overall analysis shows that the business of Wal-Mart looks fairly sustainable at this point in time with nothing significant to suggest otherwise |
|The degree (of performance) might not however be sustainable |
Exploring sustainability from an ROA angle
Wal-Mart does not have as big an advantage in terms of returns on assets as they did initially. But still, Wal-Mart continues to deliver good ROA in absolute terms.
Exploring sustainability from an ROE angle
Even from a Return-on-Equity (ROE) perspective, the performance of Wal-Mart as demonstrated in the graph below shows a declining trend indicating that it hasn’t been able to sustain the ROE performance over time.
Threats to Wal-Mart’s sustainability and Wal-Mart’s response
The threats that Wal-Mart faced over the period of time can be broadly classified into the following four broad categories which captures majority of the factors contributing to its unsustainability (or potential unsustainability). Wal-Mart has deployed successful measures to protect themselves against the adverse effects of these threats.
|SN |Threats |Response/ strategy adopted by Wal-Mart |Comments/ observations |
|1 |Threat of Imitation |Entry barrier by means of Economies of Scale |Wal-Mart built size and scale large enough to capture a large pie of the underserved segment. Any new |
| | | |player trying to imitate Wal-Mart would flood the market with over-capacity which would be catastrophic |
| | | |to both. |
| | |Leveraging learning curve |Wal-Mart was a dynamically moving company, consistently leveraging its learning to refine its business |
| | | |model and sustain the competitive advantage. |
| | | | |
| | | |It therefore invested heavily in IT and automation. |
| | |Building relationships, clout and integrations |Wal-Mart used its size and scale to develop close relationships with its vendors which the vendors could |
| | | |not afford to ignore. They further integrated many of their suppliers closely into their system |
| | |Aggressive retaliation to kill completion |In a low margin economy such as discount retailing, Wal-Mart would further lower the price leveraging its|
| | | |cost leader advantage to kill the competition. |
| | |Speed of response and innovation |Wal-Mart was constantly refining its systems and processes. Therefore, once a new system (such as |
| | | |barcode) was introduced, it would introduce further new elements and before competitor caught up |
| | | |imitating what it successfully introduced |
| | |Orchestrating the massive system |Wal-Mart could make different components of its system fit together in a particular way which might be |
| | | |extremely tough for a competitor to imitate as a whole |
|2 |Threat of Substitution |Diversification |In the retailing wheel, every format arrives, has its period of competitiveness, and then is displaced by|
| | | |newer, more efficient formats. |
| | | | |
| | | |Wal-Mart has dealt fairly successfully so far with substitution threats by diversifying and still |
| | | |continuing to be among the Top 3 players in the category they operate such as Warehouse Clubs, |
| | | |Supercenters, Hypermarkets, Close-out Stores, etc. including international expansions. |
|3 |Threat of Holdup |Total control over supplier |There was no treat of holdup to Wal-Mart. The market was in favour of Wal-Mart. |
| | | | |
| | | |It was however, other way round, where Wal-Mart would ask suppliers to closely integrate into their |
| | | |system and requirements thereby making them possibly pose a threat of holdup to their suppliers. |
|4 |Threat of Slack |Effective free cash flow management |There was a constant re-investment of resources generated for the expansion of business and ongoing |
| | | |system refinements. |
| | | | |
| | | |Their dividend to stockholders and incentive plans were means to reward stakeholders and better utilize |
| | | |surpluses. The dividends per share have shown consistent growth over the period 1983-93. |
| | |Cost consciousness aligned corporate culture |Wal-Mart preached and practice frugality and the management led by example. |
From the above analysis, we understand that Wal-Mart is not susceptible to the adverse effects of the possible threats to a consistently sustained performance. While the performance based on its responses to the threats makes its sustenance viable; the degree of sustenance will be affected.
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"Walmart Competitive Analysis." 123HelpMe.com. 05 May 2016