Wal mart and discount retailing industry analysis

In the 1950s, Wal-Mart started with few discount stores situated only in small and rural towns.

From the beginning, Sam Walton has built a culture with "low-cost" products, a unique value culture where value are preferential to luxury.

Nowadays, Wal-Mart is the most valuable firm in the world. According to the 2008 Fortune 500 index, Wal-Mart Stores Inc. is the number one retailer.

In 2008, Wal-Mart stores, Inc. possessed 971 discount stores, 2447 supercenters, 591 Sam's Clubs, and 132 Neighborhood Markets in America. Wal-Mart in addition operates overseas, in 12 countries that include Canada, Mexico, UK and China.

No other company has been growing to achieve such rapid growth as Wal-Mart due to its specific management, high technology and superior logistics. Everywhere, Wal-Mart is admired like a giant.

The following paper outlines four main questions in order to understand why and how Wal-Mart became a superpower. The first part will define the attractiveness of the business in the 1950s, followed by a description of Wal-Mart's competitive advantage. Then, the RBV model (Resource Based View) will be applied to explain the competitive advantage and end with an explanation of sustainability.

QUESTION 1  How attractive was the discount retailing industry in the USA when Wal-Mart first began operations in the 1950s ?

During the 1950s, Wal-Mart possessed only small supermarkets, located in rural and small towns. Sam Walton focused on a unique niche, where no other American discounters were located. People did not need to travel up three hours to do shopping. It was a very simple business with no information technology, no computer, and unluxurious fixtures. Moreover, ancillary services, for example delivery and in-store selling were scarce. In addition, discount stores charged gross margins 10-15% lower.

At this time, Sam Walton's main goal was to sell a wide range of services and products at low prices, in big quantities. For these reasons, Wal-Mart built its own warehouses. The second aspect for growing Wal-Mart was a pattern of expansion.

By offering a wide range of cheap products in small areas Sam Walton seeked to become a pioneer of the discount retailing. As a result, in 1962, the first Wal-Mart discount store opened. From day one, Wal-Mart's founder created a value culture in which low costs are preferred to luxury. American people, well-informed by TV advertising, were ready to accept the "discount".

Between the end of the 1950s and the beginning of the 1960s, the debate to how making profit in industry attractiveness was growing. By attractiveness within an industry, it is meant to make supernatural profits, in other words, economic rents to create value for companies. To describe how and why Wal-Mart was an unattractive industry, Porter's five Forces framework, is essential. Because of the attractiveness of an industry change all the time, it has been decided to focus here only in the 1950s period. The framework as follows, establishes the competitive strength and consequently the attractiveness of the market:

Figure 1- Porter's five Forces

Source: http://www.thebusinessofamericaisbusiness.biz/Porters_five_forces.PNG

Below is the Porter's five Forces model for Wal-Mart in the 1950s:

- Force 1- the degree of rivalry: high

- The industry is made of numerous small players (Kmart, Target), it is a fierce competition.

- The degree of rivalry is increased by a low industry growth with high fixed costs and a lack of product differentiation.

- The degree of rivalry is also characterized by behavioural determinants. Competitors were diverse, thus they have to face high exit barriers in order to compete aggressively.

- Force 2- the threat of entry: high

- At this time, the retail industry, are protected by high barriers to entrance, for example, grocers cannot easily set up in the retail industry. When a competitor wants to enter in the industry they need a high capital to buy in bulk, therefore they need high economies of scale. Moreover, because competitors sell their product at very low prices, it will be difficult to do better.

- Force 3- the threat of substitutes: low

- The threats of substitutes open to buyers are low. All its products are relatively the same as other competitors. This is a real threat to Wal-Mart in the term that it did not seek to differentiate its products, which lead to a threat in its competitive advantage. However, Wal-Mart remain the only discounter in 1993, compared to the others top ten discounters in 1962.

- Force 4- buyer power: low to middle

- The power of buyer is quite low and influences the value created by an industry. There were not many substitutes available for the buyers. For instance, customers in rural towns had to travel 3 hours or more to reach a supermarket. The buyer power can also be considered as middle because customers have only similar products, they compared aggressively on prices.

- Force 5- supplier power: strong

- Mirror of the buyer power, the power of supplier is strong, at the end of the 1950s. Fewer suppliers there are, the more power they have on Wal-Mart. Pressure on retailers is consequently high. Retailers have to preserve a good cooperation and relation as well as competitive elements with their supplier. Otherwise, they risk to be driven out of business and have no more sources of goods.

- A supplier becomes stronger with the switching costs as the cost to switch to a new supplier rises.

- This section summarizes that when the supplier power is strong, the market is unattractive.

Looking outside the firm allows to mapping the business landscape and identifying the company's competitive position in it. One important factor to consider is that the environment is not constant.

To sum up, the industry can be qualified as unattractive in the 1950s and means that it is not profitable. The potential to make profit and create value were weak.

QUESTION 2  With reference to the key components of its Business Model, describe the sources of Wal-Mart's competitive