Wal-Mart Case Study
Wal-Mart faces a daunting series of challenges beginning with the need to refine and strengthen its core marketing strategies in the U.S., resolve Human Resources compliance violations, and learn from failures to expand globally and be successful in China and India. In addition to these challenges, Wal-Mart faces competitors who are growing in strength and marketing expertise both in the U.S. And globally, and must also confront an emerging global recession. All of these challenges are made all the more urgent by the slowing revenue growth and expansion of Wal-Mart both in the U.S. And globally. With the board of directors being given the commitment of 7.5% growth globally and 7% U.S. market growth after the company had achieved 10% growth in preceding years, the need for capitalizing on the company’s core strengths is turning into a strategic priority. While the Low price Every Day (LPED) value proposition has been changed to Save Money, Live Better, Wal-Mart faces the daunting challenge of becoming relevant in high growth economies of China and India where the company’s core messaging does not resonate at the level it does in the U.S. Compounding this is the fact that the customer base Wal-Mart relies on in the U.S. is having their incomes squeezed by an oncoming recession and the company must first find how to increase same-store sales if the goal of 7% growth is to be attained. The intent of this analysis is to provide recommendations of how to refine their marketing strategies, Human Resources (HR), increase the potential for success from global expansion efforts, while competing profitably and alleviating the effects of a recession that threaten the company’s marketing strategies.
The five strategic challenges that Wal-Mart faces are first getting their U.S. marketing strategy better aligned with their core market segments; second, development more effective governance and compliance of their Human Resources (HR) functions; third, develop more effective international growth strategies based on lessons learned from failures in Germany and Korea; fourth, develop a more effective competitive strategy against Target and other big-box retailers; and fifth, develop contingency strategies for managing the company through the beginning of a global recession. Each of these challenges are now analyzed for the purpose of developing alternatives and recommendations.
Re-Aligning the Marketing Strategy for Greater Relevancy
It is not enough to merely re-design the store layouts or add faux flooring within the Wal-Marts, or add in designer clothing lines in an attempt to increase same-store sales. This has unfortunately been the strategy Wal-Mart has relied on in conjunction with its LPED value proposition (Frazier, 38). As Wal-Mart has been very successful in the past with bland, low-price store interiors there is a resistance to change in terms of changing the store layouts, augmenting merchandising or significantly upgrading the shopping experience (Blanchard, Comm, Mathaisel, 169, 170). Increasing same-store sales cannot be “bought” through all these externalities and investments in store layouts. They do contribute to a more pleasant shopping experience, yet Wal-Mart’s most loyal shoppers come back to the store because the prices help them to make ends meet, as many have incomes at or below the per capita income of the United States (Wal-Mart Annual Reports).
The traditional logic of retailing therefore does not completely apply to Wal-Mart. The ambience of shopping is secondary to the price savings and the trust its most loyal customer segments have in the quality and availability of products. What gives Wal-Mart such a competitive advantage on pricing, availability and the quickness of rolling out new stores is their supply chain management (SCM) practices and strategies, considered one of the best worldwide (Mottner, Smith, 535). Wal-Mart has pioneered the development of Collaborative, Planning, Forecasting and Replenishment (CPFR) a critically important. The essence of this supply chain framework and series of strategies is to share forecasting processes across suppliers and retailers to alleviate out-of-stock conditions during periods of high demand (Doiron, 53, 54). Wal-mart uses CPFR for toys during the holiday season to make sure they do not run out, and they also use them for electronics products that are positioned squarely against Target, including plasma flat-screen TVs.
In evaluating how CPFR plays a critical role in their marketing strategies, it is important to keep in mind that their core customer base, often called the Price Value Shopper in their annual reports and SEC documents (Wal-Mart Annual Reports) relies on Wal-Mart as a primary means of keeping their family budgets in balance. If Wal-Mart does not continually exceed or at least meet the Price Value Shopper’s expectations over time, same-store sales from this most valuable segment will decrease as will same-store sales. The continual addition of services, initially appearing to be unrelated, are all aimed at increasing same-store sales to the Price Value Shopper while increasing sales into the other segments Wal-Mart is attempting to penetrate with new selling strategies.
Wal-mart is known for their ability to quickly analyze supply chain performance in the context of per-store performance through the use of advanced analytics (Todd, 35). This inherent strength of the company of being able to manage the retail industries’ most complex and diverse supply chain in conjunction with managing to continually add new stores in several countries at the same time needs to be continually improved upon to make both same-store sales and new market penetration strategies successful.
From an analysis of their annual reports and SEC filings (Wal-Mart Annual Reports) the current structure of the Wal-Mart customer base can be ascertained. Figure 1 provides an analysis of the seven key segments that Wal-Mart has been able to ascertain as the most potentially profitable based on their market research, both through demographic and psychographic studies (Wal-Mart Annual Reports).
Figure 1: Wal-Mart Segmentation Strategy
Source: (based on analysis Wal-Mart Annual Reports & SEC filings)
As can be seen in the figures shown for each segment Wal-Mart needs to increase same-store sales from all segments if they are to attain their 7% growth in the U.S. Of all segments that Wal-Mart sells into the largest are the Brand Aspirationals that comprise 29% of their total installed base (Wal-Mart Annual Reports). What has been determined from the research about the Brand Aspirationals is their paradoxical nature, and the bigger problems they cause Wal-Mart when taken into account from a same-store sales strategy. Brand Aspirationals are heavily committed to Wal-Mart from a behavioral standpoint as they seek to gain the pricing advantages the chains’ supply chain can provide on name-brand merchandise. Yet they are often not willing to even pay the reduced prices at Wal-Mart for name-brand apparel. Instead the Brand Aspirationals label shop and only buy only when there are sales at Wal-Mart. This is a trap that Wal-Mart has fallen into when it comes to merchandising and store refurbishment, as this segment, the largest they have at 29%, has a household income of less than $40,000 per year on average. Same-store sales strategies into this segment often stall out because this segment only waits for quarter-end and seasonal sales to purchase name-brand apparel. Further complicating same-store sales into this segment is the fact that the majority of this segment are in urban areas, outside the rural and suburban areas Wal-Mart has its greatest retail strength in the U.S. within. In addition this segment is younger than their mainstream Price Value Shopper who has a median age of 34 and often is often a working mother (63%) who relies on Wal-Mart to make ends meet and the budget in their households to balance. IN attempting to go up-market to the Brand Aspirationals through the re-vamping of their stores, Wal-Mart runs the risk of alienating the most loyal customer base they have. From a strategic branding standpoint, the company also runs the risk of going against its rural strength as a one-stop shop at a reasonable price for products and services to keep a household running. The remaining segments are eclectic in their use of retailing outlets to purchase products and skew towards being more brand than retail outlet loyal. An analysis of these segments based on the insights shared by Wal-Mart over their filings with the Securities and Exchange Commission over the five years of the study timeframe (2002 — 2007) illustrates how these seven customer segments align relative to loyalty to Wal-Mart. Figure 2, Customer Segment Loyalty Analysis illustrates the percentage of the Wal-Mart customer base and the relative levels of loyalty each segment has to Wal-Mart. At 11% the Price-Sensitive Affluents are a third group Wal-Mart is addressing with their merchandising strategies.
Figure 2: Customer Segment Loyalty Analysis
Source: (based on analysis Wal-Mart Annual Reports & SEC filings)
The Price Value Shopper, Brand Aspirationals and Price-Sensitive Affluents are the three most critical segments to enabling greater same-store sales. Yet the strategies Wal-Mart is taking appeal only to Brand Aspirationals and run the risk of alienating the predominately rural-based Price Value Shopper. The Price-Sensitive Affluents are not as influenced by improvements to the shopping experience as they are to Wal-Mart doing what it does best, which is working with suppliers to deliver exceptionally high quality merchandise at exceptionally low prices. The Price-Sensitive Affluents, Wal-Mart has learned (Wal-Mart Annual Reports) is more interested in finding an exceptionally good deal and not necessarily concerned about the shopping experience. This is particularly true as one of the strongest factors influencing the execution of their strategy, the emerging global recession during this timeframe, takes hold. Again as with the Price Value Shopper and the paradoxical purchasing patterns of the Brand Aspirational segment show, the cost savings, accuracy, and quality of products delivered with the Wal-Mart supply chain are much more important in the long run relative to store accoutrements and improvements. Admittedly nearly two dozen superstores are very dated in their decor and layout and do need to be re-vamped (Frazier, 38). Yet as this analysis of the customer segments shows based on Wal-Marts’ filings with the Securities and Exchange Commission over time (Wal-Mart Annual Reports), the far greater contributing factor to growing same-store sales performance is concentrating on the supply chain initiatives and strategies delivering new suppliers with innovative new products at prices that cannot be found anywhere else. There is the expectation across all of these three most strategic segments that uneatable prices is the most critically important concern, followed by faster checkout and wider isles (Wal-Mart Annual Reports). Wal-Mart must keep these expectations and requirements in context if they are to overcome this first and most critical challenge of growing same-store sales in their most critically important segments over time.
Human Resources Lack Compliance and Governance
The lack of compliance and governance, and the lack of a Corporate Social Responsibility (CSR) initiative to unify the global Human Resources of Wal-Mart and its suppliers have significantly degraded the brand of the company. Accused of allowing and even promoting its suppliers to use child labor and unethical sourcing practices globally to gain the best possible price (Fishman, 69, 70) Wal-Mart has shown the dark side of their low price leader strategy. There is are also claims of age and gender discrimination in their stores and how they are run, and the use of illegal immigrants hired as cleaning crews to save on healthcare costs (Department of Labor, 2005).
As if these claims were not enough, statistical analysis of the hiring practices of Wal-mart show that there is rampant age and gender discrimination at the department level throughout the company’s many stores and locations (Drogin, et.al.) The deliberate strategizing of how to supplant and even replace their own healthcare responsibilities to workers through reducing their hours just enough to get away from the legal liability of providing healthcare but employing them enough to have Medicaid has been documented by the U.S. Government and led to substantial fines for the company as well (Department of Labor, 2005).
In response to these claims, Wal-Mart initially refuted the fact that there was a significant difference in pay scales and promotions for men vs. women in their stores. This has since been proven to be more of a public relations strategy than an actual Human Resources (HR) strategy as shown by the statistical analysis of Dr. Richard Drogin (4, 6-10). Dr. Drogin’s analysis shows that even when women have worked nearly a decade for Wal-Mart and have nearly perfect performance records they are routinely passed up for promotions relative to their male counterparts. The Drogin analysis (et.al.) also shows that women have significantly less opportunities to gain senior management positions within the company as well. Based on Dr. Drogin’s analysis the difference in Regional Vice President and General Manager salaries showed how dramatically different the acceptance of women are in these ranks of Wal-Mart. Only 10.3% of the Regional VP and GM positions are staffed by women as of the timeframe of this case study. According to the Drogin analysis, (26) women in these positions earn $279,772 versus $419,435 for their male counterparts, over a $139,000 difference. Women it appears in the Wal-Maret culture are destined to be Associates with very few being moved into management positions.
Taking the analysis of HR practices to the store level shows a different aspect of the approach the company relies on to ensure a non-unionized workforce. Combating the entrance of unions, Wal-Mart typically sets the target of full-time workers at 70% of an entire store staff (Department of Labor, 2005). This is consistent with their approach to staffing a typical 24-hour SuperCenter with approximately 450 total employees, which yields on average 315 as full-time associates (Wal-Mart Annual Reports). From the analysis completed by Dr. Drogin (25, 26 — 30) less than 23% are minorities. Wal-Mart relies on a unique management structure to accomplish this mix of full-time vs. part-time employees. Figure 3, taken from one of the company’s Securities and Exchange Commission 10Q filings, show the structure of the company’s chain of command. Only after a Support Manager is promoted to Management Trainee are they taken off an hourly wage and given a salary. This is to ensure a greater level of consistency across the hourly wage base and also attain higher levels of profitability across the entire company. According to Dr., Drogin this chain of command also makes it possible for Wal-Mart to selectively promote based on congruence of potential management trainee candidates to the internal culture, which he contends (39, 40) results in a type of discrimination against women that is difficult to track and prove. His analysis however shows this practice, in aggregate, takes place within Wal-Mart throughout the U.S. quite often (Drogin, et.al.)
Figure 3: Wal-Mart’s Chain of Command
Source: (Drogin, 22, 23)
Wal-Mart has had to answer to its shareholders, the U.S. Department of Commerce and the U.S. Labor Department about is practices globally in the context of HR practices. Ironically for all the efforts to gain competitive advantages on costs through these activities, Wal-Mart faces the daunting challenge of creating a corporate-wide Corporate Social Responsibility (CSR) strategy that will both satisfy its shareholders and also the U.S. government. Exacerbating this challenge is the role of compliance in the form of Sarbanes-Oxley laws that Wal-Mart must comply with as a publicly-traded company in the U.S. Of all areas of challenge for Wal-Mart this is the potentially most expensive to resolve and the one that requires the culture of the company to change.
Ethnocentrism Rampant In Global Growth Strategies
Wal-Mart’s expertise in expansion is well-honed within the U.S. And regions of the world that have comparable economies and cultural values. The use of the Hofstede Cultural Dimensions (Hofstede, et.al.) illustrates why this is. Wal-Mart is not necessarily intentional in this bias; their supply chains require infrastructure and logistics that are found in nations that are comparable to the U.S. In conjunction with this prerequisite, Wal-Mart also standardizes their retail environment for maximum supply chain performance and supply chain efficiencies. The use of supply chain metrics of performance and benchmarking to the retail store level within the Wal-Mart culture necessitates this focus and orientation (Blanchard, Comm, Mathaisel, 166, 167). When all these factors are taken into account in conjunction with the five cultural dimensions as defined by Hofstede, the valuable lessons learned from a failure to establish a successful retail operation in Germany and Korea become clear. Wal-Mart suffers from an ethnocentric mindset when it comes to global expansion that is partially supported by the intensive supply chain and logistics infrastructure needs, but also by the lack of patience for results in global markets significantly different than the U.S. And cultures like it. Analyzing the failures of Wal-Mart in Germany provides an excellent example of the extent to which this happens. Comparing the Wal-Mart expansion strategy prior to and during the Germany expansion relative to Tesco, their dominant global competitor based in the United Kingdom (Child, 134, 135) illustrates how the European-based competitor takes years to study potential global markets for launch of a new store.
In analyzing why Wal-Mart failed in Germany the factors of how different the supply chain practices, systems and approaches are, the disconnect on the value proposition the company used, and the lack of foresight on the merger used to gain access to the market all must be taken into account (Christopherson, 451, 453-455).
Beginning with the significant differences between the German and European-based supply chains relative to the American-based ones, Wal-Mart quickly realized after acquiring a company to gain access to the market that “Big Box” retailing the company had pioneered in the U.S. required an exceptionally high level of supply chain synchronization to succeed. In fact this assumption of supply chain maturity of processes throughout Germany specifically and Europe in general proved to be false (Christopherson, 452). There was little use of analytics on the part of suppliers and no use of CPFR between larger suppliers including the German, French and other European suppliers and Wal-Mart’s acquired company in Germany (Christopherson, 467). In essence Wal-Mart’s supply chain operations took a significant step backward in terms of overall performance as a result. This significantly cut the company’s ability to fulfill demand for the most price-driven commodities and products, hurting their marketing strategies and selling performance as a result. In launching their retail operation into Germany Wal-Mart had assumed that suppliers would be at least at the median level of performance as American counterparts. When this proved to not be the case, Wal-Mart’s ability to serve customers drastically dropped and customer dissatisfaction ensued (Christopherson, 454, 455).
Second, the LPED value proposition that was so successful in the U.S. was misunderstood as an indicator of quality in the German market. This was a significant disconnect between what German customers viewed as a price/quality relationship in products and the messaging Wal-mart relied on. Wal-Mart did not for example know the structure of psychographic segments in Germany as well as they did in the U.S. As shown in Figure 1, the Wal-Mart Segmentation Strategy. Further, the Wal-Mart had no idea of how the alignment of segments were relative to the model they had seen in the U.S. As shown in Figure 2, Customer Segment Loyalty Analysis would play out. All of this added to the confusion over just who the customer was and what their unique requirements and unmet needs were in shopping at Wal-Mart’s acquired stores in Germany in the first place (Christopherson, 454).
As if this lack of insights into new customers was not challenging enough, the European Union (EU) saw the aggressive supplier relationship management strategies of Wal-Mart as a threat to their most valued industries, agricultural and food production. Both of these industries have extensive tariffs in place to protect them from nations outside of the EU driving up prices and use subsidies to support farmers and growers to alleviate pricing aberrations and fluctuations as well (Christopherson, 468, 469).
At the center of the merger that Wal-Mart used to gain access to the German market was a focus on creating a hyper-mart, or larger supercenter concept which had been so successful in the U.S. In fact Germans often preferred to shop for bargains in their own neighborhoods first (Dennis-Jones, pp. 18 — 20).
Competitive Strategies must get Beyond Price Wars
Due to Wal-Marts’ exceptional level of efficiency of supply chain management practices and the use of information technologies including bar coding, material handling and their insistence that their top one hundred suppliers have Radio Frequency Identification (RFID) tags enabled on all in-bound products (Powanga, Powanga, 1, 4), the company has exceptional control over pricing. This is reflected in the stabilized rate of Return on Assets as shown in Appendix A, Wal-Mart Stores Financial Analysis (2002-2008). One can also see that Return on Investment (ROI) is also flat lining for the company during this period. Across the financial ratios for this time period it is clear that Wal-Mart is struggling with profitability and growth. Yet despite this struggle, the company continues to initiate price wars in the product categories that their strongest competitors can also dominate including toys and flat panel televisions with Target and Best Buy. While Wal-Mart has not publically acknowledged their intention to complete in price wares on flat screen and plasma televisions, it is evident from the merchandising and pricing strategies over the Internet and in newspapers. Toys on the other hand have been an area that Wal-Mart has long acknowledged as being one where they actively compete on price across anywhere from fifteen to over one hundred specific products (Belden, et.al.). This began in 2003 and continues every holiday season, with Wal-Mart concentrating on a loss-leader strategy to drive foot traffic into their stores while also measuring price elasticity of this strategy over time. As late as 2008 according to the Wall Street Journal Wal-Mart continues to use pricing as the catalyst for foot traffic into their stores, also being mindful of the elasticity of demand as it relates to the toys being sold (Bustillo, Zimmerman, B1, B2). Industry analysts speculate Wal-Mart has price elasticity and demand curves of toy pricing and prices to the demand curve to drive competitors out of the market while also attaining the maximum amount of foot traffic attainable. This is attributable to how competitive the culture is inside Wal-Mart for pricing as a competitive advantage yet is detrimental to overall financial results over time.
The next challenge that Wal-Mart faces is their entrenched competitors both in the U.S. And globally. Wal-Mart has three major big box retailing competitors in the U.S. including Costco Wholesale Corporation with 20.2% market share, Meijer with 4.2% market share and BJs Wholesale Club with 2.7% market share as of 2007. Target is considered a department store vs. A big-box retailer and is therefore not included in the market share analysis shown in Figure 4. From seeing Figure 4, Big Box Retailing Market Shares 2007 it is evident what a commanding lead Wal-Mart has in the Big Box retailing segment of the U.S.
Figure 4: Big Box Retailing Market Shares, 2007
Source: (based on analysis Wal-Mart Annual Reports & SEC filings)
Wal-Mart Stores, Incorporated
Costco Wholesale Corporation
BJ’s Wholesale Club, Inc.
Target is by far the strongest competitor the company has today in the department store segment, followed by Costco primarily in the Southwestern U.S. As Costco is headquartered in California. Globally Wal-Mart faces Carrefour, a French-based global retailer who has exceptional control over distribution channels throughout Europe, and Tesco, which is based in the U.K., yet has made significant inroads in the U.S. through the use of their innovative approach to managing market development (Palmer, 1075, 1076).
Target is a formidable competitor due to its reliance on 3rd party logistics providers and the use of a world-class distributed order management system that synchronizes fulfillment for26 distribution centers throughout the U.S. As of July, 2009 the company has approximately 1,613 stores, including about 1,395 Target general merchandise stores and approximately 218 SuperTarget Stores in 47 U.S. states. The company’s strengths include centralized operations and the use of 26 distribution centers including a centralized warehouse in Minneapolis that fulfills orders from target.com.
The secondary competitor that Wal-Mart is Costco, a company who has defined their supply chain management processes and systems to support the high priority this competitor places on electronics system is designed to support the big box retailer’s prioritization of electronics followed by upscale apparel. Costco has also successfully created an Internet-based business model with Costco.com, which is one of the more successful big-box retailers’ efforts to get online and sell products. As of July, 2009 Costco’s distribution network is comprised of 537 warehouses, 393 of which are located throughout the U.S. In 40 different states and Puerto Rico. Like Wal-Mart, the company has also launched a series of stores throughout the United Kingdom (UK) in addition to 75 in Canada, thirty one in Mexico and five in the island nation of Taiwan with six in Japan. What is most significant about Costco’s approach is their tight focus on product stocking units (SKUs) versus Wal-mart. Costco stocks 4,000 units or products and Wal-mart, 40,000. As a result Costco can move much more aggressively on pricing and specials, including localized merchandising than Wal-Mart. Due to these factors Costco continues to be successful in the Western U.S. where 31% of sales are generated (Costco Wholesale Corporation, 12, 13). The company plans to have a total of 50 warehouses in the U.S. By the close of their fiscal year in 2009, and markets primarily through events in regionalized areas of the Southwestern U.S. The greatest competitive threat to Wal-Mart from Costco is the fact their entire distributed order management system is oriented to providing each retail location with a pricing advantage on larger-ticket electronics including flat screen televisions and computer equipment. This is precisely the market that Wal-Mart and Target compete in.
Responding To an Emerging Recession
The sixth challenge the company faces is competing in a worsening global recession that will force it over time to re-evaluate its LPED strategy and choose instead the value proposition of Save Money, Live Better. This value proposition could very well have been invented by the Price Value Shopper. Yet what will eventually become a worsening global recession forces Wal-Mart to consider every aspect of their marketing mix, from the product strategies that are reflected in their sourcing and procurement strategies to the global expansion plans in BRIC (Brazil, Russia, India & China) nations (Powanga, Powanga, 17, 18) the most critical being China. Beginning with its greatest competitive strength, its supply chain, Wal-Mart faces increasing risk of suppliers defaulting as the economy slows and their orders from other businesses slow down. There is also the risk that freight forwarders and members of the logistics industry going out of business due to the contraction of the economy. For Wal-Mart this is a mixed blessing as a recession will bring more potential customers from each of their key segments as shown in Figures 1 and 2 of this analysis. Yet the recession will also bring added stress to their supply chain and its ability to execute over time.
The intent of this analysis is to illustrate through an assessment of Wal-Mart’s strengths, weaknesses, opportunities and threats (SWOT) analysis what the company’s competitive advantages are, how sustainable they are over time, and how transferrable these are to new international locations they are opening specifically in China. Additional analysis of how Wal-Mart can capitalize on their move to these new formats is also explored in the recommendations section as well.
Exceptional financial management and use of real-time financial reporting to keep the company profitable — Given complexities of managing tens of thousands of suppliers while at the same time keeping pricing in alignment with strategic goals Wal-Mart has an exceptional financial management system., The use of real-time and batch-oriented reporting on sales-out data from its retail stores, even though on a 24/7 basis are a significant competitive advantage over global competitors Carrefour and Tesco. The extent of this strength is seen in the approach the company uses with toy pricing to drive store foot traffic during the holidays to drive up sales of products in their stores.
Brand is globally recognized for being a low price leader and has become indispensible for specific customer segments including the Price Value Shopper which is the core of the company’s customer base – Wal-Mart continues to dominate retail sales as the brand has been successfully aligned with low prices and quality merchandise. Wal-Mart’s brand is synonymous with cost saving shopping strategies globally and is well positioned during economic recessions especially. The Wal-Mart brand is also accentuated by its wide variety of store locations and activities across many nations of the world, and the growth of stores throughout the Pacific Rim nations of China specifically.
Employee Development and Management Training and Development Programs Are Exceptional — Nearly every senior manager at Wal-Mart worked their way up out of the store system and therefore have expert-level knowledge of each system and process the company relies on to attain daily tasks throughout its stores. There is also significant effort put into giving employees ownership of their specific departments and working areas to ensure they take responsibility for their specific functional areas. Lastly Wal-Mart continues to invest in programs to increase the level of awareness of HR policies and the need to stay in compliance with U.S. Department of Labor and Sarbanes-Oxley financial reporting requirements. All of these are evolving strengths that had emerged during the time period of the case study yet continue to get attention as the company works to turning what was weakness into strength.
World class supply chain and logistics system — Without question Wal-Mart’s supply chain and logistics system is one of the best in any industry, credited with perfecting the concept of Direct Store Distribution (DSD) in conjunction with Proctor & Gamble. One of the key determinants of this strength for the company is their ability to quickly integrate technology into supply chain processes, as is the case with RFID (Powanga, Powanga, et.al) and CPFR processes, systems and techniques for streamlining forecasting and replenishment (Doiron, 52, 53).
World-class strategic sourcing and procurement systems, processes and strategies underscored by exceptional IT expertise — The Wal-Mart organizational culture relies on metrics to evaluate the performance of strategies, specifically those in the area of strategic sourcing, procurement and supplier relationship management. Wal-Mart also works to create systems that can spot trends and alerts in the mass of selling data the company accumulates, in an effort to create useful process-based intelligence for use in evaluating strategies over time (Jones, Mitchell, 9, 10). This also transcends into the use of cost analysis to gain insights into how to better manage supplier relationships over time (Norek, Pohlen, 37, 38).
Lack of European Expertise in Supply Chain Management – Despite its world class logistics and supplier management systems, Wal-Mart currently has an operating presence in less than fourteen countries around the world. As has been noted only those companies with cultures and supply chains comparable to the U.S. are the most successful for the company.
Extreme price competition and price deflation are harming its profitability — Given the pricing pressure suppliers have when working in conjunction with Wal-Mart there is the potential they will be driven to sell products below their costs, breaking at a loss as a result. Each of the suppliers are also integral parts of supplier and buyer networks and the impact of cost reductions and margin pressure can have a reverberating effect on pricing .
Wal-Mart.com shows significant inroads relative to competitor’s e-commerce strategies — Like its competitors Costco and Target, Wal-Mart is concentrating on creating product lines that only are sold on their website, often at substantial discounts. Wal-Mart is experimenting with laptop computers, low-end electronics and home entertainment products using this strategy, often with significant success over their website. This can become a significant source of revenue over time if Wal-Mart continues to expand product lines specifically meant for sale over the Web.
Expand Into Smaller SuperCenters Globally with More Aggressive Use of Direct Store Distribution — Wal-Mart can selectively expand into new global markets using smaller, more focused stores that can achieve the same level of financial performance as the larger ones by concentrating on Direct Store Distribution (DSD) and RFID to more efficiently move products, often at the palette level, through their supply chains. Wal-Mart could for example work with the top suppliers who are providing products via the DSD program including Proctor & Gamble, to provide mixed palettes of products they product. This could for example lead to a more effective launch strategy in China, were smaller stores are critically important in the most urban cities for example.
Growth in China through cooperation with the Chinese Communist party — Of all regions that Wal-Mart could potentially expand into, China is by far the most promising as it does not require a corporation that is native to the country either own part of its operations or have a seat on the board. This is the case with India and many other countries for example. Wal-Mart needs to take a long-term perspective to growing their business in China as a result.
Product-based growth categories are becoming harder to capitalize on and penetrate – Wal-Mart is contributing to the commoditization of consumer electronics and toys through its aggressive pricing, yet has not differentiated itself in the Do It Yourself (DIY) segments which have significantly greater profits. This is a long-term risk to Wal-Mart that must be addressed in their planning, as new growth areas need to be found.
Litigation Costs and Damage To Their Brand From Ethics Violations — From their suppliers’ violations of human rights violations to their own use of illegal immigrants to clean their stores, Wal-Mart has a strategic threat in their lack of ethics. Add in the fact that it has been statistically proven that they discriminate against women in their promotion standards and practices, and the company’s branding messages about being concerned with family’s sounds empty. Wal-Mart will need to face these issues head-on and create a compliance initiative that can quantify and provide evidence of the company being able to manage these issues globally.
Extreme Competition Globally — Costco, Target and others in the U.S. And Carrefour and Tesco globally are increasing their pressure on pricing, availability and suppliers to gain a greater level over competitive strength over Wal-Mart. Target has a price matching program in place throughout the U.S. To specifically focus on cutting Wal-Mart’s pricing lead in key product areas.
Unpredictable Foreign Currency Translations – The timeframe of the case study saw the beginnings of what would eventually become one of the most challenging recessions and economic periods globally. As Wal-Mart expands globally this threat of unpredictable and uncertain foreign currency translations will be a major threat to profitability of the company overall.
In analyzing the industries that Wal-Mart competes in including big-box retailing and department store retailers including Target, the critical factors of growth potential of the industry, profitability of the industry, industry risk levels, and how the industry is confronting the global economic recession are discussed. The Porter Five Forces (Porter, et.al.) The big box retailing industry and retail in general are both considered to be in the mature phase of their product lifecycles. The U.S. Department of Commerce considers the big box retailing industry one of three industries that comprise the U.S. General Merchandise Stores Sector. According to industry analysts real sector revenue increased 14.1% over the last five years. Of the three industries that comprise this sector, the big box retailing industry generated the majority of growth, average a Compound Annual Growth Rate (CAGR) of 5.8% during this time period (Sampson, 2, 3 & 5).
Big box retailing is the fastest growing of the three segments that comprise the U.S. General Merchandise Stores Sector as defined by Sampson (et.al.) in conjunction with her analysis of the industry with IBIS World (Sampson, 14). As a result of the economies of scale made possible by its supply chains and the development of one-stop shopping services big box retailing is expected to growth 3.6% per year from 2008 through 2013 (French, et.al.). Studies suggest that big box retailing is countercyclical to gas prices and the anxiety of consumers about the future of the economy, including uncertainty about their jobs. As has been shown in the analysis of the Price Value Shopper (Wal-Mart Annual Reports) the growth of the big box market in general and Wal-Mart specifically is being driven by the reliance on these stores by middle-class consumers who live paycheck to paycheck and look to Wal-Mart to assist them in keeping their budget balanced.
In terms of profitability, big box retailing as a segment will contribute the majority for profitability for the U.S. general merchandise stores sector during the 2008 — 2013 timeframe due to the operations efficiencies Wal-Mart and its competitors are investing in. Internal efficiencies based on continual supply chain improvements, the adoption of RFID, and the use of more advanced approaches to CPFR will all contribute to cost reductions throughout the big box portion of the industry globally. Revenues are projected to grow modestly at 3.6% through 2013 and expenses staying flat even with operational performance gains. Wal-Mart is expected to be a catalyst of growth for this market globally with sales per employee staying at $180,000 or more and Return on Investment (ROI) being at 20% or higher. For a full financial analysis of Wal-Mart, please see Appendix A of this document.
As has been seen throughout this case analysis, there are significant risks associated with big box retailing, the greatest of which is supply chain and inventory management (French, et.al). The disruption of a supply chain, whether from internal inefficiencies or external events, can quickly and completely change the profitability of the entire industry. Wal-Mart’s efforts to create a more effective approach to measuring supply chain performance through real-time metrics provides an element of control over this aspect of their operations, yet their competitors often lack this level of insight.
The low price value proposition that has become so pervasive in big-box retailing carries with it the need to continually seek out cost and pricing efficiencies over time. This places an inordinate amount of risk on suppliers to these big box retailers, many of which are dependent for the majority of their sales from Wal-Mart, Costco and others for the majority of their revenues. The flip side of this are the gains in supply chain performance and efficiencies, which are illustrated when the store types are compared as shown in Figure 5, Comparing Store Statistics. While Wal-Mart SuperCenters have the second higher operations expense per store they have the largest average size and highest average sales volumes, at $75M a year, per store. Clearly the concept of internal supply chain efficiencies is critical in this industry as is shown in the following table.
Figure 5: Comparing Store Statistics
Sources: Wal-Mart Annual Reports;
Average size ( in Square Feet)
Annual Sales per Store (U.S.$Millions)
Operations Expense (% of Store Sales)
Average Number of Employees per Store (Estimate)
% of Workforce full-time
SAM” s Club
In applying the Porter Five Forces Model to this industry, the following insights emerge by area. Figure 5, Porter’s Five Forces Model, provides the theoretical structure for the analysis.
Threat of New Entry
Given the extremely high rates of capitalization and the reluctance of many lenders today to provide loans in the hundreds of millions or even billions of dollars, it is unlikely that there will be new entrants into the big box retailing industry. The one exception would be department stores going down-market to compete with Wal-Mart on specific products, which is precisely what Target is doing on flat screen and plasma televisions. The threat of new entry is therefore considered low.
This is the most active area of the five forces model from the big box retailing standpoint due to price and availability competition, and the build-out of supply chain management and optimization systems to better manage pricing over time. One of the unintended consequences of the high degree of activity in this area of the five forces model is the rapid price commoditization effect on the industry’s most popular products. These include laptop PCs, netbooks (small laptop PCs), flat panel televisions, and toys. Competitive rivalry is the catalyst for supply chain improvement and optimization over time as well.
Wal-Mart is well-known for its intensive control over its suppliers including the ability to negotiate for pricing that is often far below what suppliers off other customers (Fishman, 71, 72). For many other big-box retailers and global retailers, the same holds true. The balance of power is definitely on the side of the big box retailers and larger, more integrated department store chains due to their economies of scale and ability to quickly move millions of dollars in product relatively quickly through their distribution and retail systems. As a result of these factors and the significant investments that Wal-Mart and others are making in enabling technologies which give them even greater efficiencies and cost reductions over time, supplier power in this industry is considered weak.
As has been seen from the analysis of the core Wal-Mart buying segment, specifically the Price Value Shopper, Brand Aspirational and Price Sensitive Aspirants (Wal-Mart Annual Reports) the buyer in this industry has significant power. The use of merchandising to increase same store sales is not enough of a viable strategy to continue to attract these buyers; there needs to be more effective use of supply chain management and optimization as well. The fact that the Price Value Shopper relies on Wal-Mart to consistently provide top-quality merchandise at the lowest price underscore just how critical it is for the company to continue investing in the strengthening and optimization of its supply chain. Their supply chain is the greatest competitive weapon they have at Wal-Mart, and to continue attracting customers and increasing same-store sales, the company has to continually improve its performance on this dimension. Buyer power in this context is a catalyst for continual innovation and improvement within Wal-Mart specifically and the industry in general.
Threat of Substitution
The threat of substitution is very high in emerging global markets, specifically those located in the high-growth BRIC economies (Troy, 33) where Carrefour and Tesco are creating subsidiaries through mergers and acquisitions to establish competitive leadership over Wal-Mart. There is also the threat of substitution in these nations from government subsidized and nationalized retailers, and the use of tariffs to protect industries highly dependent on retailing as part of their go-to-market strategies. In this latter case, there are the high tariffs France puts on agricultural and food products to protect these industries and their distribution channels as well. Due to these government-based efforts, the threat of substitution is very high globally in this industry.
Wal-Mart can pursue a purely marketing and merchandising-related expansion strategy in its core markets, areas where the company executes exceptionally well, or choose to concentrate on streamlining and making as efficient as possible its supply chain through greater investments in IT and logistics-related enterprise software and technologies including RFID. Third, Wal-Mart could concentrate on entering global markets by combining these two strengths. The intent of this section is to briefly analyze each of these alternatives and set the foundation for the recommendation in the next section of this analysis.
First Alternative: Heavy Investment in Merchandising and Marketing to Increase Same-Store Sales
This alternative is one the case study initially mentions and is one that the supply chain management and optimization systems of Wal-Mart would need to be aligned with in order to be successful. Simply changing the store layouts and merchandising strategies is not enough; entirely new generations of products, including low-end consumer electronics, from laptops and netbooks to plasma TVs and even toys, would need to have accelerated forecasts and as a result, greater emphasis in the company’s supply chain. Increasing the price discounts on these most popular products in conjunction with changing merchandising strategies would also invite significantly greater levels of price competition from big box competitors including Costco and department store competitors including Target. Another complication of this strategy is the fact that the launch of entirely new stores often take a price-skimming strategy over a price penetration one, and this would no doubt cause issues for Wal-Mart in regions of the U.S. who may have been reluctant to give them access to their communities to begin with. In addition to all these factors, there is the fact that is strategy, while increasing same-store sales in the U.S. And established markets, does little to move Wal-Mart forward with global growth.
Second Alternative: Increase process-related and IT investments, including RFID in the Wal-Mart global supply chain so aggressive pricing can be pursued.
Wal-Mart is often cited by industry analysts including AMR Research, Gartner and Forrester as consistently having one of the top performing supply chains globally today (Ford, 7). In the aftermath of Hurricane Katrina, Wal-Mart had supplies into New Orleans faster than the Federal Emergency Management Administration (FEMA). There are many other examples of how efficient the company is in managing their suppliers, including the streamlining of logistics process workflows and approaches to product delivery and tracking. Wal-Mart pioneered the development of satellite dishes on their stores in 1989 to feed real-time data on sales-out (sales to customers) and inbound product shipments to SuperCenters (Shuman, 1). This real-time data analysis capability is what gives the company insights into how much store traffic is driven by a reduction in the price of toys during the holidays. It also provides the company with insights into the price elasticity of their products over time, yielding demand curves in the process. As Wal-Mart has had this ability for nearly three decades, their growing expertise in the use of analytics applications to quickly analyze and interpret the data has grown significantly as well (Todd, 35). In addition the adoption of RFID technologies and the requirement Wal-Mart has placed on its top 100 suppliers is expected to deliver both significant cost reductions and the ability to launch smaller, more market-specific stores as a result (Blanchard, et.al). For all of these benefits however there is the challenge of how Wal-Mart will retain its Price Value Shoppers on price alone when they are intent on seeing a broader range of services. This second alternative, while it delivers significant performance and cost gains, lacks the necessary balance to ensure its success across other geographies including Asia where Wal-Mart has yet to build out the infrastructure necessary to support this level of performance. This is a strategy that would work best in the U.S., where the level of integration, both at a process and IT level, is significant enough to support this level of cost and price reduction.
Third Alternative: Enable Global Market Growth by capitalizing on analytics, merchandising, supply chain and technological expertise.
Third, Wal-Mart could concentrate on entering global markets by combining their strengths of merchandising, continued investments in their stores in an attempt to drive up same-store sales, and invest in technologies and process improvement to ensure greater success in global expansion. In conjunction with capitalizing on these core strengths of the company, Wal-Mart needs to concentrate on being more focused on the cultural dimension differences between cultures. Using the cultural dimensions model (Hofstede, et.al.) would give the company greater appreciation for cultural differences that in turn impact the infrastructure within specific regions of the world that they are highly dependent on.
There is also the aspect of how Wal-Mart deals with governments globally, and how it navigates political parties vastly different than the U.S., which is by nature capitalistic in approach. The communist influence in the BRIC nations will takes literally years of investment and trust-building in order for the company to successfully move into these regions. In addition, Wal-Mart will have to petition the Chinese Communist Party, often called the People’s Republic of China (PRC) party, for the right to build a store in any of the higher growth cities in the region. For Indian expansion the requirements are even more stringent, with Wal-Mart expected to have an Indian-based company on their board of directors in the country subsidiary, and also share ownership with an Indian firm. These all translate into significant costs and much more patience and commitment to long-range planning than Wal-Mart has shown in the past. Yet for the company to grow profitably, the combining of their strengths into a highly focused global expansion strategy is critical.
Wal-Mart must fundamentally change their approach to global expansion in order to achieve their 7.5% growth objective in the 2007 timeframe. The lessons learned from being more effective at global expansion will also help them to achieve more domestically in the U.S. As well. The recommendation for Wal-Mart based on an analysis of this case is to combine its innate competitive advantages, including its merchandising, pricing and distribution expertise with its supply chain automation and management to aggressively pursue new global markets. As many of the existing Wal-Mart suppliers are based in BRIC nations this expansion strategy will also serve to the make the company more efficient as it will nurture greater communication and knowledge transfer will suppliers as well.
Specifically looking at how to attain greater growth in China is the recommendation. Wal-Mart first opened in Shenzhen on August 12, 1996 (Wal-Mart Annual Reports) and by December, 2007 had grown to 94 stores in 51 cities throughout the nation. It had also created jobs for over 43,000 associates in China. Most importantly though Wal-Mart had publicly acknowledged that is rural-only growth strategy did not and would not scale in the vast majority of global locations it hoped to compete in (Fong, B1). In effect this expansion, during the same time period of the case study, showed that Wal-Mart had become less ethnocentric and more focused on how to align its strategies with the specific characteristics of the markets it looked to penetrate.
In attempting to grow their sales in China, Wal-Mart needs to also get back to their core strength of competitive analysis, a practice Founder and CEO Sam Walton engrained into his direct reports. Wal-Mart must get back to a core set of 1,500 Stocking Units (SKUs) and concentrate on analyzing their pricing performance over time if they are to be successful not only in their expansion efforts in China but also globally. It is apparent from the case study and further analysis that Wal-Mart has become too myopic, too focused only on flat panel televisions and toys, and as a result is inciting price wars with its competitors. Wal-Mart will need to expand the scope of their ongoing depth of competitive analysis to at least 1,5090 items, a figure often quoted by company managers, to better manage their competitive position in China as well (Wal-Mart Annual Reports).
Strategically Wal-Mart needs to see governments as partners and not adversaries. The failure in Germany was partially due to Wal-Mart viewing the German government demands of full time employment (Christopherson, 454, 455) more as a cost and less as a concern that had to be addressed. The same holds true for their approach to working with the U.S. Department of Labor and U.S. Department of Commerce. Wal-Mart must take a more partnership-based approach to working with the Chinese Communist Party if it hopes to succeed. It is common knowledge that the Chinese Communist Party is regionally stronger than it is nationally which translates into Wal-Mart having to work very closely with the Shanghai Communist Party first to expand more fully into one of China’s wealthiest city.
Figure 7: Chinese Economic Zones
Source: (based on analysis of Maddison, Wu, et.al.)
As the regional Communist Party offices hold the majority of power and access for entrance into each specific region, Wal-Mart needs to concentrate on East China and North China first, and then build out to the cities of Chengdu, Nanjing, Chongqing, & Wuhan. A third series of developments into the cities Changzho, Jinhua, Mianyang would serve to provide Wal-Mart with coverage of the entire nation. Given the fact that in the cities of North China and East China are highly populated and the majority of spending occurs in these urban regions, it is recommended that Wal-Mart acquire a regional retailer who has the ability to scale from an infrastructure standpoint yet also has the small footprint stores critical in this cities. The recommendation is to look at how best to acquire a small retail chain to move into these fastest growing economic regions while at the same time prequalifying any acquisition candidates based on their ability to integrate into the broader Wal-Mart supply chain management and automation workflows. The acquired retail chain must also have the ability to coordinate with the Chinese Communist Party and have a track record of winning concessions from them in the most profitable areas of the country. It is common knowledge for example that the Shanghai Communist Party exerts exceptional control over the economic growth of its region, often overruling the Communist Party in the capital city of Beijing (Taylor, 187). For Wal-Mart to effectively expand into China they need to acquire or at the very least, create an effective Joint Venture with a retail chain that has the relationships in the Communist Party in Shanghai and other high-growth Chinese cities.
As part of this recommendation to aggressively move into the Chinese market, Wal-Mart must also face the challenge that the Chinese government may be suspicious of their pervasive use of satellite dishes on every store, a practice in place since 1989 in the U.S. (Sherman, et.al.). Wal-Mart’s introduction of RFID into China and its ability to set its adoption as a prerequisite for any larger supplier in that nation to sell to them will actually deliver greater benefits to the pilots that are languishing in the U.S. during this time (Luo, Yen, Tan, Ni, 17). Overcoming any restrictions on the part of the Communist party to uploading and analyzing information will most likely force Wal-Mart to seek even more effective approaches to managing supplier relationships globally, benefiting global operations in the process. Wal-Mart will need to be inventive to overcome the limitations of the Chinese government in this regard, and the resulting increases in efficiency will benefit the company globally.
What emerges from these series of recommendations is a value chain framework (Porter, Millar, 151). Figure 8 provides the recommended value chain network for more aggressive expansion into China that will also deliver supply chain efficiencies globally for Wal-Mart.
Figure 8: Wal-Mart Value Chain Analysis
Source: (based on analysis of Maddison, Wu, et.al. Wal-Mart Annual Reports; Fong, B1; Luo, Yen, Tan, Ni, 17)
Wal-Mart Stores Financial Analysis (2002-2008)
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Porters’ Five Forces Model