CLASS: STRAT – WAL-MART PAGE 1 5/3/23

Background 2003, WM worlds largest company, 245B rev, 8b income, largest employer w 1.4M employees Discount retailing 1970s – consolidation of market 1981 – Kmart 5 times size WM 1980s – developed into supercenters w groceries + gen merchandise 2002 Kmart bankrupt early investment in IT to support inventory management and efficiency Sam Walton:

o actively learnt/copied best practice from otherso strong relationship/culture between management and employeeso very cost conscious

Growth 1988-2000: 20 -> 200B Strategy:

o See what others doing, integrate into WM

Questions1. How attractive is the discount retailing industry in the United States? Consolidate industry with supercenters developed in 1980s 2003 average margins 6.6% 2001 growth sources: 7% new shoppers, 21% increase from existing shoppers, 72% from other channels It is not an attractive industry to WM: New Entrants: high barriers to gain scale and likely to receive strong opposition from big and established players 320B industry – Ex 3 – add Revenues Ex 3: 5yr CAGR Sales – 15.6% WM, 9.8% Target; Net Income 17.9% WM, 17.1% Target;

2. Wal-Mart has a large competitive advantage in the discount retailing industry and, as a result, has been far more profitable than the average competitor. What are the sources of Wal-mart’s competitive advantage?

5 forces: Buyers: hold a lot of power as they are typically price biters and hence will easily switch to cheaper alternatives. Increasing number of chanels to buy products (eg. online).

However, some WMs located in rural areas may not face competition in which case buyers will have few alternatives. Suppliers: hold little power as they receive lot of revenue from WM because of its scale. WM is a major route to end consumers and hence suppliers can be squeezed on price

and payments terms (see Procurement, Merchandising and Pricing) Substitutes: Market is consolidating. Kmart bankrupt in 2002. Major competition Target. However, also compete with supermarkets on food items. Also other chanels, eg

online. Competition: as per above

Procurement: Private labels Deal straight with manufacturers

CLASS: STRAT – WAL-MART PAGE 2 5/3/23 Created culture of very competitive pricing Retail Link – shared inventory info with suppliers -> strong relationships.

o WM developed this, but lost IP to amazon.com and otherso Allows optimal stocking and inventory mixeso Can predict stock outs

High imports from China – 10-20% cheaper WM tried to mandate standards from suppliers (child labor, safety, laws)Distribution: Warehouses/Distribution Centers – buy in bulk, save $$. Hub and spoke with stores (avg 150 stores per D.Center). Operated” 24hr/day Stores maximized selling space by not holding stored inventory Scan ‘N Pay – suppliers kept control of inventory until sold at WM stores Inventory turn – number of times inventory sold in a period. Higher the I.turn, lower costs of holding the inventory and hence higher profits Cross docking – inventory transferred from inbound trucks to Dist.Centers to outbound trucks to stores, without being stored. Increased throughout by 18%Merchandising High sales per sq foot, broad assortment of merchandise, consistently low price, cheap but cheerful stores WM – 30% of US staple household products Focused on hardgoods that needed smaller sq foot, built more traffic, required fewer markdowns, but lower margins Focus on private labels WM more variety and few stockouts them competitors Focused inventory prices and displays on individual stores and communitiesPricing: “Always low price, Always” – EDLP – every day low price Rollback – category discounts, absorbed by suppliers, but compensated with increased volume High % price checks in competition stores – Target and Kmart Studies showed 2-4% price differential with competition in most marketsMarketing: Promoted EDLP, sponsored community, scholarships – helped to counter big small-store-crusher image 2002 advertising ratio:sales 0.3% (vs 2.2 Target)Store Operations: concentrated in small towns/rural = higher chance of being only store Leased stores (.45% of sales) Early adopter of technology to make checkouts more efficient, + early use of credit cards Sales per sqr feet - $440 (vs $249 for target, $221 for Kmart) Superior in store efficiency Local store autonomy to improve efficiency (eg. source locally, discounts, displays etc)People: “associates” vs staff – shared info, got their ideas, profit sharing, open door policy tight control payroll (50% op expenses) superior sales per employee: IT, cross training, high utilization low wages performance based bonuses training, promotions, reduced healthcare benefits employee turnover 44% per annum. Less then industry averageLitigation: pressure to work off the clock to meet managers targets whilst getting work done female gender discrimination – less promotions and less pay -> class action suit 2004

CLASS: STRAT – WAL-MART PAGE 3 5/3/23 illegal contractor workersManagement: balanced scorecards innovation flow central to stores and vv small central headquarters (no regional headquarters) frequent management meetings

3. How sustainable is Wal-Mart’s competitive advantage? What are the most serious threats to it? 2003: Capital investment, stock repurchase growth opps: domestic and international discount retailing strategy – growth in stores future: tapering of discount stores over next 10 years - > may lead to increasing focus on international markets to capitalize on IP generated of a successful model. However,

facing significant challenges with international expansion. Increased autonomy of international operations from central US headquarters (Bentonville) Experimenting in other products: vacations, flower delivery, DVD rental, financial services So long as the market remains high consolidated and high barriers to entry of competition, I believe that WM have a very sustainable business model. They are unlikely to

enter price wars such that the model will become unviable. Serious threats:

o Online channels: amazon, ebay, online supermarketso Stronger unionized workforce – staff are 50% of operating costs. WM pays less then industry averages. I also believe they avoid health insurance costs by avoiding

threshold employment hours per week. If these change, then costs could increase significantly

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