Case analysis of Wal-Mart Stores, Inc

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Case analysis of Wal-Mart Stores, Inc

 

1.        Introduction of Wal-Mart Stores

 

1.1    History of Wal-Mart

 

Established in 1962 with the opening of the first Wal-Mart Store in Rogers Ark by Sam Walton with the vision to help people save money and make them live better, Wal-Mart since then grew in a rapid speed with the leading retail strategy feature by super-efficient production and advanced and innovative inventory management (holding stocks for less than 48 hours in its inventory), and finally the company has established itself as the world’s largest retail stores serving customers and members more than 200 million times per week at more than 9198 retail units under 60 different banners in 15 countries with the contribution of more than 2.1 million staffs.

 

1.2    Brief introduction of the industrial environment

 

Chart 1 The industry life cycle

Source: Grant 2005, p.301

 

In many countries especially the developed one in which Wal-Mart is operating, the retail industry has already entered into the mature industry stage in the industry life cycle which is featured as: the market is totally saturated and the demand is limited to replacement demand, growth is low or zero or coming from a population expansion which brings new customers or with an increase in replacement demand (Hill & Jones 2009, p.59). As in this stage, Wal-Mart’s focuses will be to reduce the total cost such as operating cost and labor cost and product differentiation such as creating its own special products.

 

2.        Company objective

 

2.1    Dispute about a company’s objectives

 

2.1.1            Profit maximization as a company’s objective

 

Chart 2 Profit maximization model – marginal revenue equals marginal cost

Source: Samuelson 2010, p.226

 

In the traditional economy theory, the profit maximization could be looked at using a marginal principle by holding which people will maximize their income or profits or satisfactions by counting only the marginal cost and marginal benefits of a decision and this “marginal revenue equals marginal cost” rule could be applied to all firms, whether they operate in perfectly competitive markets, monopolistic markets, oligopolistic markets, or monopolistically competitive markets and the only special case happens in a competitive market in which P=MC but still the rule applies (Carbaugh 2011, p.101). For example, within a decision to decide the quantity to be sell and the price to be set, when the marginal revenue equals marginal cost in the point E as shown in the chart above, then the profit is maximized because if the company makes and sells additional one unit then the total revenue from the sale of another unit of output would be less than the addition to total cost of producing another unit of output. Though to the owners of a company or shareholders in a large profit chasing organization would always consider profits as desirable and losses dreadful but profits and losses are both important for efficiency in the economy, in many case, if a company does not bear to lose some profit in the short term, then it will lose more in a long run. And to maximize the profit in a long run, more factors need to be taken into consideration and that’s why we will introduce another frequently used concept, the market value as the company’s objective to achieve the maximization of the shareholder’s wealth rather than short term profit maximization.

 

2.1.2            Market value as a company’s objective

 

People may look at the measurement of the company’s value is to look at the book value of the share which is the value of a firm’s assets minus its liabilities and it is evaluated at historical costs and is often used as a valuation yardstick (Siegel 2008, p.117). But because book value only reflect only the historic cost of the company’s assets rather than the company’s ability to generate profit, in order to achieve the maximization of shareholder wealth it is important to understand another concept, the market value, which the shareholders should truly care about: it is the price at which an asset would trade in a competitive auction setting. There are three major determinants of the market value of the share of a company: cash flow, timing of cash flows and risk (Moyer, McGuigan & Kretlow 2009, p.11). Cash flow could be defined as an external flow of cash and/or securities (capital additions or withdrawals) that is client initiated (Merna & Al-Thani 2008). In another word, cash flow relates to the actual cash generated or paid out by the company and it is important because only cash could be paid back to the investors. The second factor that has an impact on the value the company’s share is the timing of the cash flows. According to the time value of money which revalue cash payoffs at different times and converts dollars from one time period to those of another time period (Besley & Brigham 2008, p.128), one dollar is more valuable than one dollar in the future because today’s money will increase in its value by at least how much could be gained by saving it in the bank. The third measurement of the value of the share is the risks attached to the cash flow of the company. Risk is not preferred by any investors except it brings higher expected profit than other lower risk investments and that is why a low-risk investment will have a lower expected return than a high-risk investment (Melicher & Norton 2010, p.327). So a company needs to provide a sound profit compared to the perceived risks.

 

Figure 1 Product life cycle model

Source: Reid & Bojanic 2009

 

For example, when Nokia dominated the mobile phone market, according to a profit maximization model in which marginal revenue equals marginal cost, the only thing that Nokia needed to think about is how many units that it needed to ship to all over the world and when it noticed the release of the Apple iPhone, the Nokia management team did not take it as a threat because they thought that a touch screen phone without a traditional keyboard will have high risks, but they failed to see that premium profits that this new model phone could bring if it does prove it as a success. Here the model of product life cycle which describes how a product progresses from its infancy as a new product in development through a growth phase to a maturity phase and then eventually into decline. As the figure above illustrates, in the introduction and growth phases, product may not bring enough of profits to the companies compared to other current cash cows and also the new products may have risks of failure during the product life development which means that they the progress will halt any phases, and only those enter into the maturity could bring the maximized profits to the firms. And when the new maturity products come out, they will usually replace the competitive products. So in the case of the competition between Nokia and Apple, the new released innovative Apple iPhone obviously has proved it a great success and to Nokia, it is useless to calculate the perfect production volume because new product cycle has begun. They have to compete in a strategic level rather than focusing on the profit maximization model and this case again proves that future cash flow with risks also needs to be focused.

 

2.1.3            Stakeholder view

 

The stakeholder theories have developed gradually since the 1970s. The first representative stakeholder theory was proposed Freeman (1984) in which he suggested that a firm should incorporate corporate accountability to a broad range of stakeholders. Stakeholders are those in an exchange relationship with the firms (Hill & Jones 1992), they commonly include shareholders, employees, suppliers, customers, creditors and the communities in the vicinity of the company’s operations. The relationship between the stakeholder groups and the companies is a kind of exchange in which the stakeholder groups supply companies with “contribution” and expect their own interest to be satisfied via “inducements” (March & Simon 1958). As suggested by Östring (2004, p.20) that it is important to find the main stakeholders and identify their interest, and also prioritize the objectives of the key stakeholders and to be aware of the overall objectives. In other words, when a company sets its company objectives, it needs to ensure that the key stakeholders’ interests are ensured by achieving the company objectives.

 

2.2    Wal-Mart Stores’ promises to stakeholders

 

2.2.1.1      Profit sharing and keep growing – promises to shareholders

 

Wal-Mart began to offer common stock to the public in 1970 and in 1974, the company announced the first cash dividend and have provided shareholders an annual dividend, paid quarterly, every year since then. Like many other companies Wal-Mart keeps very good relationship with the shareholders and aims at achieving the shareholder wealth maximization through careful operation and appropriate strategy and decision making in its business.

 

2.2.1.2      Saving people money – promise to customer

 

Saving people money so that they could live a better life was what Sam Walton envisioned when he open the first Wal-Mart Store more than 40 years ago (Prager 2011, p.183). With this vision, the company has been keep delivering the promise to the customer and bring them convenience and money saving by creating a Wal-Mart mode marked with price leadership and other features that has soon been popular in the world.

 

2.2.1.3      Dedication to diversity – promise to the employees

 

Diversity and Inclusion are enduring values embedded into company’s culture. And as an employer of more than 9198 retail units under 60 different banners in 15 countries which hire more 2.1 million staffs, it is critical to critical for Wal-Mart to obtain human capital from employees from different cultures, education background, religions and other diversity dimensions.

 

2.2.1.4      Environmental goals – promise to the society

 

Besides being an efficient and profitable business, Wal-Mart also work to be a good steward of the environment with the following promises given to the society which as described in the official website of Wal-Mart as simple and straightforward: firstly, Wal-Mart Stores will be powered by 100 percent renewable energy; secondly no waste will be allowed in the Wal-Mart Stores; and finally goods sold in Wal-Mart Stores will sustain people and the environment.

 

3.        Industrial analysis

 

3.1    Porter (1985)’s Five Forces analysis

 

Porter (1985)’s Five Forces of Competition Framework helps establish the links between the structure of an industry to the competitive intensity within it and to the profitability that it realizes by analyzing the five key forces of the companies (Grant 2010, p.516). In following, we will carry out an industrial competitiveness in the retail industry in which Wal-Mart Stores operate using Porter (1985)’s Five Forces of Competition Framework.

 

3.1.1            Potential Competitors: Medium pressure

 

There are always potential competitors who will be interested in entering into the retail industry such as the grocers and some companies with famous brand which are interested in building up their own distribution channels by entering into the retail industry, but still the pressure from potential competitors is still medium due to the relatively high entry barriers for the following reasons. Firstly, as mentioned above there are more than 9198 retail units under 60 different banners well established by Wal-Mart in 15 countries which form up the company’s large and broad distribution channel and many of the stores have took up the advantageous locations in the cities creating substantial barriers to the potential market entry. Secondly, Wal-Mart has been considered as one the most efficient among the big retailers at forcing the absolute lowest cost of goods, no matter where the products are from around the world (Lipscomb 2011, p.38), and the low price leadership will keep the potential competitors away from entry due to the low profit margin that could be expected from the investors. Thirdly, Wal-Mart and other giant supermarkets have already built up cooperation relationships with the local suppliers of which are exclusive which means that less suppliers resource will be available to the potential competitors.

 

3.1.2            Rivalry among Established Companies: Medium Pressure

 

As mentioned above, in many countries especially the developed one in which Wal-Mart is operating, the retail industry has already entered into the mature industry stage in the industry life cycle which is featured by limited demand, slow growth and price competition, so the rivalry among the existing competitors will depend on the numbers of the competitors and the distance between the stores which may decide level of direct competition between the stores.

 

3.1.3            The Bargaining Power of Buyers: Low pressure

 

The bargaining power of the buyer in the retail industry is low and it is almost the same in every country. On one hand, most buyers are individual buyers and they tend to have no pressure on Wal-Mart in term of bargaining down the price of a product for example. On the other hand, though individual customers could also have their bargaining power shown by choosing to buy the competitors’ products rather than from Wal-Mart. But because stores are located in a physical position, by changing to the competitors the customers will lose the convenience. So that in conclusion, the customers would only have a low level of pressure that could be exerted on Wal-Mart.

 

3.1.4            Bargaining Power of Suppliers: Low to Medium pressure

 

The bargaining power of suppliers refers to their ability to raise prices and/or reduce the quality of goods and services (Peng 2008, p.41). The bargaining power of suppliers to Wal-Mart is in a low to medium level due to the following reasons: firstly, for the similar product category in the consuming product market, there tend to be more than one supplier and because of the low cost to change to another supplier the suppliers would not dare to raise prices and/or reduce the quality of goods and services; secondly, as the world’s largest super market chain stores, Wal-Mart in many of the markets in which it operates currently posses a large market share which means a big business to any suppliers by losing which it will incur a big loss to any brand and any companies; thirdly, in many product categories, Wal-Mart has already started the vertical integration which brings in great threat to the product suppliers and reduce the bargaining power of the suppliers even for some product categories in which there are only several large suppliers.

 

3.1.5            Substitute Products: Low pressure

 

When it comes to the retail market, it seems that there are not many eminent substitutes that offer convenience and low pricing. And one possible substitute product is the online shopping which could also offer convenience and low pricing but there are several defects and constrains that limit its development and make it less liable to be a substitute of giant retail stores like Wal-Mart. Firstly, online shopping could be provide a physical connection between the products, goods and the customers in term of smell, touch and close observation though online there are also pictures. Secondly, people in the modem society spent too much time at home, shopping provide a good chance to exercise their boy; thirdly, there would be some time to wait before the good are delivered to door which could not be accepted to some customers; fourthly, online shopping so far could be achieved in a market with a large population which result in a long delivery time during busy hours.

 

3.2    Complementor analysis

 

As proposed by Andrew Grove, the former CEO of Intel who suggested that Porter (1985)’s Five Forces model ignores a sixth force which is the power, vigor and the competence of the complementors (Hill & Jones 2008, p.54) which are companies in an industry that can add values to the a company by selling their products and doing their business. As for complementors of Wal-Mart that exists for Wal-Mart is Sam’s Wholesale Clubs which by providing the same products in wholesale form making Wal-Mart more profitable but it does not affect Wal-Mart’s business model suggesting that the company only has a low pressure to Wal-Mart.

 

4.        Promises delivery

 

Chart 3 Net sale (Dollar in billions)

Source: Wal-Mart 2011 Financial Report

 

Chart 4 Dividends (Dollar per share)

Source: Wal-Mart 2011 Financial Report

 

To the shareholders, Wal-Mart has successfully delivered its promise by keeping the global business in a growing direction and maintains the business as is the best-positioned global retailer to address the needs of customers around the world. And as the chart above demonstrates, the company’s net sales has kept growing in the past five years and in 2011 financial year, the net sales has reached 419 billion dollars. And also in term of dividends, Wal-Mart has increased the dividends in a five year consecutive basis representing that the company has paid back the shareholders with sound profits. And to the society Wal-Mart has kept its promise in moving forward to the environmental goals. For example, as stated in Wal-Mart’s Global Responsibility Report, the Balzac Fresh Food Distribution Center will boost energy efficiency by 60 percent over the next five years in Canada market and the LED lighting system in more than 350 of the Central America stores are expected to reduce CO2 emission by 540 tons. And in term of keeping promises to employees, in the 2010 Diversity and Inclusion Report, Wal-Mart claimed that with more than 2.1 million associate world wide with minority associates accounting for 35.33% and women associates 57.76% as of on 13th August 2010, also over the past five years, the number of minority officials and mangers has increased from 13,109 to 16,237. And to the customers, the long term low price strategy and the growth of the business have provided driving forces to everything that has been done in Wal-Mart.

Reference list

 

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Porter, M. E. 1985, Competitive advantage: creating and sustaining superior performance, New York: The Free Press.

 

Prager, E. 2011, Sex, Drugs, and Sea Slime: The Oceans’ Oddest Creatures and Why They Matter. Chicago: The University of Chicago Press. p.183

 

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Samuelson, P. A. 2010, Economics. Special Indian Edition, New York: McGraw-Hill Companies, Inc.p.226

 

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