Wal-Mart

In Search of Renewed Growth

Wal-Marts performance (before 2000)

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Wal-Mart store openings

http://projects.flowingdata.com/walmart/

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Wal-Marts performance
Invest $1,000 in IPO in 1972 $10,000,000 in 2000 Richest Americans

6 (Chirsty Walton), 9 (Jim Walton), 10 (Alice Walton), 11 (S. Robson Walton) combined wealth of $87B

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Wal-Marts performance (after 2000)

But essentially flat since 2000

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Understanding financial data

ROE ROA
Net Margin
Net Income Operating Profit Gross Profit Sales

Asset Turnover
Sales

Leverage
Total Assets

Equity

Sales

Total Assets

Tax and Other

COGS

SG&A

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Should Wal-Mart grow by

moving upscale?

Project Impact Thinking small Miles Cyrus clothing line

expanding internationally?

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Update Wal-Mart
Competitors are getting tougher: Costco, Target, but

also Amazon Great recession initially helped but later hurt WalMart New CEO Mike Duke appointed in 2009 Going slightly upscale

Project Impact, Miles Cyrus clothing line, etc. But it is not doing so well (WJS, Jul 28, 2010) Mike Duke reversed much of PI
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Update Wal-Mart
Global Initiatives

Wal-Mart to South Africa (AP, Feb 17, 2010)

Firm Competitor

Wal-Mart takes over transportation for suppliers

(BW, Jun 6, 2010)
WTP

Cost

Would you get your taxes done at Wal-Mart?

(Time, Jan 20, 2012)
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The Wal-Mart effect (Furman 2005)

Benefits to consumers

Savings of $263B in 2004 ($2,329 per household) About 25% reduction in food spending ($782 per household) Benefits distributed progressively Productivity effects

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The Wal-Mart effect (Furman 2005)

Impact on Retail Workers Wal-Mart opens in Glendale AZ hiring 525 employees with wages as low as $6.75 8000 applicants! (harder that getting into Harvard) Wages not significantly lower given location and qualification but lower than unionized workers in major cities Health benefits comparable to other retailers Net effect on employment and wages is less clear Could Wal-Mart Do Much Better for Workers? Promote public initiatives! Universal healthcare
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Takeaways from the case

Growth is usually an outcome not a source of

competitive advantage To create added value, activities must be tightly integrated

Helps you sustain your completive advantage by avoiding imitation But it implies tradeoffs

Wal-Mart's strategy: Every day low costs

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Mutually reinforcing activities

Wal-Mart's value chain
Firm Infrastructure
Frugal culture (sharing hotel rooms, calling collect No regional offices Lots of management visits Saturday meetings Fun working environment

Support Activities

Human Resource Management Technology Development Procurement

Associates, not employees Manager compensation tied to store Not unionized Stock ownership plan Store manager autonomy Decentralized training in DC

Promotion from within Associate compensation tied to company Shrink incentive plan Real-time market research

POS Store performance tracking Satellite system UPC Hard-nosed negotiating Centralized buying Frequent replenishment Automated DCs, cross docking, pick-to-light EDI Hub and spoke system No-frills meeting rooms Partnerships with some vendors

M
EFT, electronic invoicing Planning packets Easy returns

a r g i n

Big stores in small towns => local monopolies, low rental costs Pricing that reflects local monopoly Concentric expansion Brand-name merchandise Private labels Little space for inventory Suggestion program Store within a store

Traiting: tailoring merchandise to locale EDLP Low prices Store manager latitude on pricing Little advertising Merchandise meeting

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

After-Sales Service

Primary Activities
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You dont have to be good at everything!

Low prices Selection across categories Rural convenience Reliable prices Merchandise quality Suburban convenience Selection within categories Sales help Ambiance 1 2 3 4 5
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Wal-Mart

Sears

Mom & Pop

Cost Leadership
Firm Competitor

WTP

Cost

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Cost Leadership
WTP Price Cost WTS
Industry average Successful lowcost competitor competitor
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Cost Leadership
WTP Price Cost WTS
Industry average Successful lowcost competitor competitor
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1. Creates added value 2. Captures a bigger share of the added value

Cost Leadership
Sources of cost leadership

Learning curve? Popularized by BCG

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The Learning Curve

The Law of Experience
1992

Cost per unit of output (in real $)

1994

The unit cost value added to a standard product declines by a constant % each time cumulative output doubles.
1996 1998 2000 2002 2004 2006

Cumulative Output
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Examples of Learning Curves

Japanese clocks & watches, 1962-72
1960 Yen 15K 20K 30K Price Index 50 100 200 300

UK refrigerators, 1957-71

75% slope
100K 200K 500K 1,000K

70% slope
5 10 Accumulated units (millions) Source: Grant (2007), p. 226 50

Accumulated unit production (millions)

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The importance of market share

If firms in an industry have the same learning curve: Change in relative costs over time = f(relative market share) Implies that market share is linked to profitability, which is confirmed by PIMS data:
OP Margin (%) -2 0 5 10

0-10

10-20

20-30 30-40 Market Share (%)

over 40

BUT: Association does not imply causation

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Cost Leadership
Sources of cost leadership

Learning curve? Popularized by BCG Better to think about in terms of Economies of scale Economies of scope Economics of density Suppliers opportunity cost (WTS)

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Whats next?
ZARA: Fast Fashion Assignment Questions

What are the distinctive elements of Zara's business strategy? How do the distinctive elements of Zara's business strategy affect its operating economics relative to its competitors?

Poll Question As an advisor to Amancio Ortega, would you recommend franchising the Zara stores for faster expansion?
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