Wal Mart Strategy Analysis
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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 industryÐÒs 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 incumbentsÐÒ 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, thatÐÒs 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-performanceÐÒs priors products, switching cost incurred by a firm when the customer switches to a different sort of product or services, and the buyerÐÒs propensity to substitutes.
Substitutes of discount stores were primarily supermarkets and department stores, and more slightly local merchants. Department stores are not really a threat for discount stores because they cover roughly the same range of products but charging higher gross margins. Supermarkets also were not really a threat because they offer narrower range of product (almost all food) at similar prices, which means fewer possibilities of choices.
One of the threats than could likely affect discount retailing was the buyerÐÒs propensity to department stores when it concerns to big-ticket items, technologically complex, or “psychologically significant” in which procurement process is worthy expertise advise from shop assistants. This is the major threat to discount store retailers in the way its low cost advantage is based on unluxurious in-store selling and ancillary services.
FORCE 3: BUYER POWER
Buyer power is the ability or bargain power of customers to put the firm under pressure, thus forcing down prices, requiring firms to either offer high quality or more services. This buyer power influences the appropriation of the value created by an industry turning it less attractive or profitable.
The power of buyers within this kind of industry was and will be always high while customers have the final decision of “what I want to buy” and “where I want to buy it”. Therefore, customerÐÒs brand image and price sensitive was and will be one of the key success element for whichever firm. It is known that “the talk of the town” could be much more powerful than any advertising or marketing campaign, especially when there are possibilities of choices.
It is worth to mention in relation to this industry that as the same time that supermarkets had educated customers about self-service, general merchandise had matured, the advertisement by manufacturers was higher, and government had bolstered consumers ÐÒself-confidence. Sometimes the customers cannot access easily to substitutive firms (1950).
The rest of entry barriers like buyer volume, buyer concentration, buyer profits were not a really problem, because they tend to be problems when we are located in a B2B market not when we are located in a B2C market.
FORCE 4: SUPPLIER POWER
Conversely, supplier power is the ability or bargain power of suppliers (wholesaler and manufacturers in this case) to put the firm under pressure, thus charging higher prices for all firms or charging different prices in line with the different