Of Contents Executive summary Details of the acquisition Introduction Wal-Mart Strategy, resources, history Introduction Seiyu New initiatives post investment Wal-Mart’s expansion into foreign markets M&A’s causes and effects Corporate Strategic Analysis Part I Environmental Analysis
Market Definition Market analysis Market Value Market Segmentation I Market Segmentation II Competitive landscape Japanese retail landscape analysis Competition Supply side Byers side Characteristics of consumption Entry Barriers
Industry analysis; Wal-Mart Five forces analysis Barriers to entry Supplier Power Buyers Power Substitutes Competition Key Success Factors Conclusions Transitional SWOT Analysis
Evaluation of the Strategic choice The Attractiveness Test The Cost of Entry test The Better-off Test Financial Strategy II General performance Market reaction to the investment Dividend policy analysis Risk Analysis and Failure Prediction Ratio analysis
PER Liquidity Efficiency Capital Structure and Cash Flows Conclusions Change Management Part III Introduction Planned and Emergent Approach National cultures Process V Results Community V Self Hierarchy V Disarray Commitment V Wariness Structural Changes Leadership Changes Conclusions Final remarks References Executive Summary The purpose of the this paper will be to investigate the acquisition of the minority stake holding of Seiyu Ltd by Wal-Mart Inc, while focusing on the question, which asks if it has generated wealth for current or future shareholders. In addition it will recommend if it is rational for Wal-Mart to continue with its investment as outlined in the deal terms. There could be no one denying the fact that change has been always accelerating, until recently this has been slow enough to enable people to adapt either by making small occasional adjustments or accumulating the need to do so and passing it over to the next generation. In the past because change did not press people greatly, it did not receive much of their attention. Today it presses hard and therefore is attended to. Its current rate is so great that delays in responding to it can be very costly, even disastrous. Adaptation to current rapid changes requires frequent and large adjustments of what we do and how we do it. As the eminent student of management Peter Drucker (1968) put it, “managers must now manage discontinuities”. One of the unique characteristics of change brought to our attention by Schon (1971) is that as the rate of change increase, the complexity of the problems also increases the more complex these problems are, the more time it takes to solve them. The more the rate of change increases, the more the problems that face us change and the shorter is the life of the solutions we find to them. Therefore by the time we find solutions to many of the problems that face us, the problems have so changed that our solutions to them are no longer relevant or effective One of the changes occurring in the business environment is M&A’s and their increasing rate brings out considerable difficulties and complexities never faced before. While there is a considerable research in the area it is fragmented, leaving gaps that need to be addressed. In the 1990’s the popularity of this type of strategic expansion increased tremendously ( Shimizu et al 2004), but the results do not correspond with their popularity, a recent study by KPMG found approximately that only 17% of cross-border acquisitions created shareholder value, while 53% destroyed it (Economist 1999). It is logical to assume that the principles for change outlined above apply readily for M&A’s framed as discontinued occurring changes. The fragmented nature of the academic research accompanying M&A’s across disciplines (strategic management, finance, human resource management, international business) suggests that further research and a more intergraded approach is required for solutions to be identified and applied therefore increase their effectiveness and success of them. In this project such an intergraded approach has been adopted, viewing our acquisition through the lenses of strategic management, finance and change management we will try to accumulate evidence which will help us conclude in our original question. Details of the acquisition In 2003 Wal-Mart (WMT) acquired an additional 192.8m shares, equivalent to a 27.9% stake in Seiyu Ltd, Tokyo, Japan, an owner and operator of a chain of supermarkets, at a price of JPY270/share. The acquisition will increase the stake held by WMT from 6.1% to 34%. Under this partnership, it is proceeding towards the adoption of business know-how and improvement of financial structure. (Reuters 2006) Introduction Wal-Mart WMT Inc. is the largest retail company in the U.S. and has been ranked number one on the Fortune 500 Index by Fortune Magazine, and larger than any other retail chain in the world. It operates currently over 4,150 retail outlets world-wide. In addition, the company is the dominant retail store in Canada, Mexico, and the U.K. (www.walmart.com). The company is ranked as the second most admired company in the world by Fortune (www.fortune.com) WMT has four parts to their corporate strategy 1. Dominance in the Retail Market 2. Expansion in the U.S. and International Markets 3. Creation of Positive Brand and Company Recognition 4. Branch Out into New Sectors of Retail WMT provides general merchandise: family apparel, health & beauty aids, household needs, electronics, fabrics, toys, crafts, lawn & garden, jewelry and shoes.(www.walmart.com). WMT’s corporate management strategy is built on selling high quality and brand name products at the lowest price. In order to keep low prices, the company reduces costs by the use of advanced electronic technology and warehousing. It negotiates also deals for merchandise directly with manufacturers, therefore eliminating the middleman. Strategy, resources and history After the end of the 2nd WW, the style of retailing in the US changed into discount merchandising. It assumed the form of departmentalized retail business. A discount retail store such as WMT can provide lower priced goods for consumers at lower prices by allowing for lower margins, while selling greater volume of goods. The industry during the 70’s became highly competitive, but, at the same time the nation’s economy became weak due to inflation. WMT grew rapidly during the 80’s due to diversification which centered on small-towns first, and then expanded to large cities. This transpired while other retailers centered on larger city centers. However, as the economy faced a downturn, consumers required low price stores. In addition, as consumers became mobile, they moved to suburbs and small town and were willing to travel further to purchase low price products. Through the 80’s, local chambers of commerce supported WMT due to the fact that they believed that the company helps a local economy by providing low prices and good quality products. Critics contend that the success of WMT damages the existing local independent traders. Wal-Mart stores, super centers, Sam’s Club warehouses and Neighborhood markets Its core retail business can be divided into four retail divisions: It should be noted that most WMT employees do not get paid “generous” wages. They are part-time workers who are compensated the minimum wage. The majority of employees are not entitled to any benefits, as it takes a part-time employee over five years to become eligible for benefits, profit-sharing, or other such compensation. Therefore there is a high turnover rate among them, which implies most do not reach the requisite level of seniority. In many cases the minimum wage is far below the poverty line. Introduction Seiyu Seiyu Group is a Japanese operator of supermarkets, department stores and shopping centers operating for the last 36 years. It is also the second-largest retailer in the world in terms of stores owned (400), but ranks lower by sales, with more than 34,000 employees it ranks 6th in the Japanese market. In addition to its Japanese operations, Seiyu also has department stores operating under its name in Singapore and Hong Kong. WMT from 2003 is Seiyu’s largest shareholder and is working closely with Seiyu to regain its focus on the customer and its core retail operations, as well as on its transition to a low-cost, low price operating structure. (www.YahooFinance.com ) New initiatives post investment The investment by WMT scopes to increase Seiyu’s financial stability, and more importantly, to enable Seiyu to benefit from the superior services and sophisticated expertise of the world’s largest retail company. (Seiyu 2003 Annual Report) For more than six months, Seiyu and WMT conducted surveys and analyses of the present situation at Seiyu and trends in the Japanese market. This information will enable Seiyu to incorporate the expertise of WMT, the world’s leading retailer, in areas such as: store operation, store development, logistics, market analysis and business management, and to utilize Wal-Mart’s global merchandise procurement services.
Furthermore, in Aug 2003, Seiyu plans to introduce a store information system that generates highly efficient and accurate demand forecasts by releasing sales and inventory data to manufacturers and wholesalers. Taking into account the characteristics of the Japanese market and consumer trends, they continue this gradual, step-by-step transformation. In Jan 2003, Seiyu underwent a structural reorganization in which eleven divisions were streamlined. In Mar, five new directors from WMT were appointed in the board. Under the new organization, the company is working to integrate the expertise of WMT towards becoming the “New Seiyu” in every aspect of their operations, including product lineup, store environment and customer relations. They have also begun “everyday low cost” cost-reduction efforts to offer “everyday low price” products. With the integration of WMT’s considerable know-how, these initiatives will try to uplift the company to WMT’s standards and create the so much sought added value to its shareholders. (Seiyu Annual Reports 2002-2005) Wal-Mart’s expansion into foreign markets WMT is expanding into the world marketplace. The retailer already has approximately 400 European stores, mostly in the UK and Germany (dir.yahoo.com). Seiyu will introduce WMT on Japanese customs to better prepare the retail giant for possible acceptance by peculiar consumers (biz.yahoo.com).
WMT is not off course the first retailer to try to enter Japan, but it is the first to try and work closely with an established Japanese company and transition itself into the market. The retail market in Japan is weak but crowed. If WMT adapts fast, it will have a good chance of survival. On the first day of the alliance, Seiyu’s stock shot up 21%, boding well for WMT’s entry (biz.yahoo.com). On the other hand. Seiyu’s executives have strongly resisted WMT’s no-nonsense, cost-cutting strategy, but that is not a surprise, and it is too early to predict this venture a failure. (The Economist 2004) M & A’s causes and effects Liberalization, deregulation and integration of the markets led to globalization and the growing interdependence of them. This internationalization of commercial activities led to an increasing proportion of the world’s labour force being engaged in activities linked to international trade. In parallel, M&A’s led to the rise of huge global and regional wholesalers and retailers. And yet consolidation had wider repercussions, with retail trade increasingly becoming international in scope as retailers from developed countries expanded in foreign countries, both developed and developing. (International Labour Organization, 2003) Because national markets had become more saturated in many developed countries (US is considered a mature market) for various reasons, corporations were increasingly looking for new opportunities to expand outside their domestic markets. Concentration in mature markets encouraged price-based competitive business strategies, whereby eliminated costs which were reinvested back into price-cuts. A price-oriented strategy such as this one, demanded that the sales base be enlarged, and, since this could rarely be accomplished through organic growth in mature markets, M&A’s became the only route to increased market share.- a fact that Wal-Mart in experiencing therefore striving to expand globally. (International Labour Organization, 2003) Looking at our case study the following quotations capture the rationales behind Wall-Mart’s diversification strategy into Japan, Mike Duke, WMT’s vice-chairman, said, “Seiyu is a valuable addition to Wal-Mart and provides us with a significant presence in the world’s second-largest market. (www.Wal-Mart.com) “To be known as a true global retailer, we must be in Japan, the world’s second-largest economy,” said Charles Holley, Chief Financial Officer of Wal-Mart International. (www.Wal-Mart.com) Ed Kolodzieski which will take over the management of the new Japanese unit said “The company makes this investment because it sees a lot of long-term, bright possibility, from our perspective, there is an incredible opportunity. There’s clearly a lot of consumption in this country.” (www.news.bbc.co.uk) The discussion above captures some of WMT’s strategic rationales behind the diversification and its long term expectations, but in the research conducted, there is no mention of any financial expectations or any quantification of benefits to illustrate enhancement of shareholder value. We do recognize that the cost of the deal is not substantial for a company of the size of WMT, but never the less a company is accountable to its shareholders at all times and adequate rationales and demonstration of added value to any decision should be thoroughly analyzed and reported.( Pike and Neal 2006) Corporate Strategic Analysis Environmental analysis The first step of the analysis towards the answer to our main question will be the usage of the PEST framework (Grant 2005), the checklist below is a synthesis of current issues concerning the two companies wide environment, also considerable attention is given to the industries and their historical context. The influences considered will be depicted mainly from the Japanese and US macro-environment, although some of them can be considered of a global nature. The range of the factors is quite wide, so to attempt to analyze all of them is quite unproductive and undesirable. All of the influences considered will be tracing the implications along three dimensions, which they reside in the industry environment: Suppliers Competitors Customers
In addition, the analysis will provide critical insights into the threats and opportunities that two companies faced before and after the 2003 increase of the minority stockholding. Effectively this part will reveal actual and potential benefits that WMT derived by its strategic choice thus answering our original question. Global PEST Framework-Environmental Scanning Political Commercial Code regarding M & A’s (Japan)
Corporate governance
Zoning rules (Japan) Economical M & A’s
Oil prices
Energy prices
Rise of the Asia-Pacific markets
Transportation costs
Consumer spending and confidence
Interest rates
Inflation
Employment Social Obesity dimension
Population growth and its changing structure
Changes in consumer behaviour patterns
Corporate culture Technological
Food innovation; new technologies prompting the development of new products
Increasing automation and the importance of information technology.
Internet applications. The starting point of any industry analysis is what determines its level of profitability. The basic premise which underlies industry analysis is that the level of profitability is neither random nor the result of entirely industry specific influences- it is determined by the systematic influences of the industry’s structure. (Grant 2005) Market Definition The food retail industry consists of the total revenues generated through food sales from: supermarkets, hypermarkets, cooperatives, discounters, convenience stores, independent grocers, bakers, butchers, fishmongers and all other retailers of food and drink for off-the-premises consumption.(Global – Food Retail Data monitor May 2006)
Market Analysis The global food retail-industry has performed well over the past five years and is forecast to continue to expand at rates between 3% and 4%. The industry’s growth has mainly attributed to increased sales of luxury and premium items, such as organic food, despite the increasingly low cost of everyday items owing to significant pricing pressure due to high levels of strong competition. The global food retail industry generated total revenues of $2,928.4b in 2005, this representing a compound annual growth rate CAGR of 3.4% for the five-year period spanning 2001-2005. The main profit source for the retail industry is the supermarkets segment, which has generated total revenues of $1,179.9b in 2005; equal to 40.3% of the overall market value. In contrast, the food-specialists industry was worth $392.1b, which represented 13.4% of the market value-share. The EU is the largest market in the food-retail industry, generating $1,102.3b in 2005, equal to 37.6% of the global industry’s value. Although, the Asia-Pacific market is only marginally smaller, generating $1,002.5b or 34.2% of the global food retail industry, and growing at a higher rate than the EU market, predominantly due to the rapid expansion of food retail in India and China. Looking ahead, the industry is forecast to speed up its current performance, with a forecasted CAGR of 3.9% for the five-year period 2005-2010 expected to raise the industry to a value of $3,546.7b by the end of 2010. The rising trend of organic-food, allied to increasingly wealthy, time-poor consumers, purchasing premium ready-meals, is expected to be a key factor behind the global industry’s growth; this in addition to the rapid expansion of the emerging markets of Asia- Pacific.(Datamonitor food retail report 2006) MARKET VALUE The global food retail industry grew by 3.8% in 2005 to give a value of $2,928.4b. The CAGR of the industry in the period 2001-2005 was 3.4%. MARKET SEGMENTATION I Supermarkets account for 40.3% of the industry’s value. Food specialists, such as bakers and fishmongers, generate a further 13.4% of the industry’s revenues. MARKET SEGMENTATION II Europe generates 37.6% of the global industry’s revenues. Asia-Pacific accounts for a further 34.2% of the global industry’s value COMPETITIVE LANDSCAPE The global food retail sector is becoming increasingly polarized. However, discount retailers are also enjoying a high growth rates in the developed markets, a fact soon to be true for the developing regions of Asia-Pacific, as several supermarket chains pursue aggressive inorganic expansion (see Wal-Mart, Carrefour). Nevertheless, market players still face significant cost pressures. Crude oil prices continue to deduct from margins for food retailers, increasing the costs of energy, transportation and packaging. Disposable income of consumers has also been affected by the rise in the price of gasoline, impacting revenue streams and contracting consumer spending. Online virtual supermarkets make-up a small portion of the retail landscape. Although the trend is rising, this concept of shopping is still in the process of development. All of the major grocery retailers are developing or have developed web-shopping platforms to attain market share in this expanding sector. In the US, online sales of food amounted to $2.4 billion in 2004, and are expected to reach $6.5b by 2008 equivalent to an annual growth rate of 42%, online shopping is the fastest growing segment in the food retail sector.( Datamonitor Food Retail Report 2005) The global obesity levels are raising and a reinvigorated restaurant market combine to impact negatively upon the volume of food sales. Increasingly companies are therefore diversifying into non-food retail, and offering services such as credit cards and insurance. Japanese retail landscape analysis Japan has the 2nd largest economy in the world, and retails sales are more then $1t a year, second only to the U.S. Further, per capita household consumption expenditure and retail sales are among the highest in the world, and the Japanese market is one that is very attractive to foreign retailers. Further as the Asia–Pacific continues to grow as an astonishing pace and economic integration in the region continues to increase, Japan possesses all the qualities required in international business to become a hub in Asia. Given the vitalization of economic activities, the countries and regions of East-Asia, particularly urban areas, are increasingly coming to share purchasing preferences and lifestyles requirements that are becoming more standardized. Consumer goods, clothing and cosmetics tend to spread throughout East-Asia after first becoming popular in Japan. Japan is therefore an important hub for marketing activities for companies scoping to enter the East Asian market additionally the country is very stable in social terms and its geographic proximity to East Asian countries makes it an excellent choice for locating regional headquarters in East Asia. (JETRO review 2005). In the 80’s, East-Asia’s share of global GDP stood an 16%. That figure now stands at nearly 30% due to economic growth of East-Asian countries with Japan continuing to have a strong presence. Although, when looking at the recent economic and consumption situation, it can be seen that in the 90’s after that collapse of the bubble, in addition to stagnant consumption, consumer prices have dropped, and from a peak of 148t yen in 1997, retail sales fallen. The annual sales for the retail industry were135t yen in 2002, and a significant drop of 6.1% from the figures in the last survey (1999). Source: Ministry of Economy, Trade and Industry, Census of Commerce, individual years Competition An eminent characteristic of the market is the fact that a large number of very small-scale retailers exist, and a result of this, there has been little consolidation of the market by leading retailers, when compared with the U.S. and U.K. There are several variables that contributed to this: the fast growth of the 1980’s increased the market size, and ensured ample market opportunities for even small retailers that allowed them to remain in business: consumer patterns still exist of buying fresh produce frequently at local stores;
systems in place to protect and grow small and medium sized retailers;
regulations such as the Law concerning the measures by Large-Scale Retail Stores in place to prevent large-scale stores opening. However, from 1991-2002, supermarkets and home centers have been increasing their share in the market, along with corporations that have opened chains of convenience stores and drugstores, and the composition of sales by business type has been changing dramatically. Further, consolidation into large-scale retailers is at hand, and sales of large-scale retailers have increased dramatically as well, partly as a result of M&A’s. On the other hand, the share of small- and medium-scale retailers in total sales is decreasing rapidly. (Ministry of Economy, Trade and Industry, Census of Commerce) Share of the Top 3 Retailers in National Retail Markets (in Each Country) Supply side Changes are also evident in the wholesale industry. Until recently, one of the main characteristics of the Japanese distribution structure was the extended number of wholesalers, and their numerous levels. This structural characteristic occurred due to the large number of small-scale stores to supply to, therefore primary wholesalers were not able to cover the whole market sufficiently, resulting in a secondary layer of wholesalers forming. This web of powerful wholesalers, distributors contribute to the high price of goods in Japan; each level of distribution requires a cut of the total price of the product. However, the decline of smaller stores, has forced many small- and medium-scale wholesalers to leave the business. (Ministry of Economy, Trade and Industry, Census of Commerce) Another crucial point to be mentioned is the logistics infrastructure which is one of the best in the world facilitating movement of goods and people at all categories (highways, railways, ports, airports). Japan’s national labour market has abundant highly-skilled human resources. In addition the increased labour market liquidity is facilitating the recruitment of highly qualified staff. Productivity is increasing each year on a total of 60 million people and it has one of the highest rates of university attendance among developed countries. Talented highly educated human resources are available in abundance. Also in general Japan’s labour management relations are very positive, allowing business to operate smoothly Byers Side Starting from the 90’s, household consumption has been depressed. As household income continues to fail to raise, the burden of children’s education expenses, rent or house loans, and medical fees continue to rise, and the level of free income available to each household is decreasing. This environment is encouraging consumers’ desire for low-price goods, and has resulted in the intensification of retail prices wars. The trend effectively has set the scene for Western-style mass discount retailers to enter the market. Although many households are feeling the pinch in terms of income, the average savings per household is over 12m ($112,000) yen, and while buying power at present is at low levels due to the depression, it must be seen that the average household has large potential buying power. A trend can be seen in which households are reducing expenditure as a whole, and by focusing their disposable income on certain items, are able to buy more expensive products. Characteristic of Japanese Consumption A characteristic which defines Japanese consumers is that they are very particular in regards to quality. For this reason, the quality of fresh foods has a large impact on the reputation of retail stores. Differentiation between consumer preferences is also exhibited regionally, and types of fish and vegetables preferred by consumers can differ greatly. Consumers will tend to look for a place to do their shopping where they can get good fresh foods such as fish and vegetables, and for this reasons regional supermarket chains exist around the country. Although amongst younger consumers, the tendency is buying in bulk, and there is a trend for fresh produce to be bought less often. However, the tendency for consumers to buy small amounts of products often in order to get fresh products remains high. On the other hand, the increasing rate of female participation in the workforce is altering purchase patterns. The percentage of households preparing meals on week-days is steadily decreasing, and instead, there are an increasing number of people that buy dinner at supermarkets or department stores. For items other than fresh foods as well, Japanese are particular in regards to quality, and products that are low priced although of dubious quality do not easily gain acceptance in the market. Recognition of brand names is especially high amongst consumers especially those of manufacturers. With few exceptions, there has been little market penetration observed by private brands backed by retailers. (Datamonitor Food Retail Report 2004) Entry barriers As the Japanese corporate culture becomes more similar to that of the EU and the US (JETRO Review 2005), Japanese corporations are less inflexible than before to redundancies and the sale of operations. In response to economic globalization and other factors, Japan has is progressing reforms of major elements of its economic and legal framework. The stock cross-holding structure, which had impeded M&A’s, has disintegrated as well. The Commercial Code revision in 2006 will make it easier for foreign companies to acquire Japanese firms through equity-swaps. Further, the adoption of new accounting standards based on international accounting standards makes it easier to make comparisons between companies in Japan and parent companies overseas. Other issues concerning costs of doing business in Japan are: Real estate prices Communications: Labour and interest rates: Logistics costs and tax rates: Finally some indicators for foreign direct investment and the average return on assets for foreign affiliates The impression given following the above data is that Japan’s environment it’s changing rapidly to accommodate economic development and foreign investment. In the opinion of this writer, Wal-Mart has thoroughly taking into consideration these factors before entering Japan and realized that the existing infrastructure and the restructuring can provide opportunities to be taking advantage off. Although the above data build a positive picture, buyouts of well-managed Japanese companies could remain difficult in light of past experiences with failed takeover bids. ote: Figures in brackets are the number of firms that have left the market Source: Prepared by Saison Research Institute based on Nihon Keizai Shimbun, Inc., “The Age of Global Retailer: To and From Asia,” 2001 by Ross Davis and Toshiyuki Yahagi Many of the foreign retailers that entered the Japanese market in the 1970s and 1980s have long since left the market. Background reasons for leaving the market include: an inability to provide products that met the Japanese consumers’ needs, differences in strategy with partner firms, differences in opinion on stores location and product lineup, restructuring of the partner firm forcing the tie-up to be dissolved, etc.(JETRO Japanese Market Report 2004)
The conditions have altered dramatically from the early 90s. A major issue was that it was pointed out by the US-Japan -Structural Impediments Initiative- in 1989 that Japanese distribution systems and complex trade practices as well as store opening regulations under the Large-Scale Retail Stores Law, were acting as non-tariff barriers to the Japanese market, and this in turn resulted in the Large-Scale Retail Stores Law being reformed. Further, improvements in trade practices particular to Japan such as rebates and recommended retail prices, and the fall of retail prices as the bubble burst both contributed to creating an environment much more conducive for foreign retailers to enter. The late 90’s saw a marked increase in global general retailers specializing in foods entering the market. This began with Costco in 1998, and was followed by Carrefour, Metro, Wal-Mart and Tesco. All of them firms have been in the Japanese market for a short period of time, and there are issues of their business that are not yet proceeding as planned, but it can be expected that the market entry of these firms that will have a large effect on existing trade practices and manufacturers’ distribution systems. Also, recently, large-scale retailers have continued to fail, and the current environment, with low stock prices, is one that is conducive to corporate takeovers. (Wal-Mart; Case Study) Industry analysis Wal-Mart We now have a good understanding of our firms’ resources and capabilities (see also financial analysis), the industry environment and the national environment the next part will use the analysis to explore Wal-Mart’s sources of competitive advantage and how these can be applied to the Japanese market. The strategic fit if it exists will provide evidence towards our main question. Firm Resources and capabilities Financial resources Physical resources Reputation Functional capabilities General management capabilities The industry Environment Key success factors The national environment National resources and capabilities Domestic market conditions Government policies Related and supporting industries Competitive advantage Source (Grant 2005) In order to determine whether or not Wal-Mart maintains sustainable competitive advantages within the retail industry, it was necessary to conduct a five forces analysis (Porter 1987). Competitive advantage originates from two sources; cost advantage where products are virtually similar and product differentiation the exploitation of these create value for the shareholders (Pike and Neal 2006). The strength of the five sources of competitive pressures will be determined by a number a key structural variables The objective is to build upon an understanding of the industry’s competitive forces in order to plan effective strategies and develop competitive advantage over the organization’s rivals and more specifically within the Japanese environment which we have just outlined above, the potential transfer of competitive advantages implies that Wal-Mart will be in a position to add value in its operations and ultimately increase shareholders wealth. Wal-Mart Competitive Analysis: Five Forces WMT is operating in the retail industry as the dominant low-cost retailer. WMT’s strategy is structured around its philosophy on pricing of providing EDLP. WMT’s broad variety of merchandise that provides one-stop shopping and high in-stock levels provide confidence to customers that WMT will have what they need, and its long operating hours which allows customers to shop at their convenience. Barriers To Entry Immediate BTEs are relatively low since: opening a retail store is relatively low-capital intensive, fixed costs are low, and specific knowledge of operating a retail store is realistically obtainable.
Although, when a WMT store opens in vicinity, smaller proprietary retail establishments are often driven out of business, because WMT has the ability to command prices below the long-run average operating cost of a smaller proprietary retailer. WMT is able to do this because, as the largest retailer in the world, its long-run average operating cost is much lower due to economies of scale it realizes. Supplier Power Supplier power for WMT is fairly nonexistent. As the largest retailer in the world, it maintains a tremendous amount of buyer power to dictate volume discounts from suppliers. In many cases, WMT’s business represents a large volume of any one supplier’s business, further enhancing WMT’s ability to demand discounts from its suppliers. Supplier power from a human capital standpoint is also very low since most positions within WMT can be classified as unskilled labor positions. Furthermore, WMT does not cater to labor unions and no union is represented in WMT’s business. WMT avoids distribution bottlenecks by operating its own distribution facilities. WMT is well known for its proprietary “pull” inventory management system which allows it to bypass inventory build-up and shortages, the system can help mitigate as well any supplier-power. Buyer Power The costumer maintains the ultimate buyer power for WMT. WMT’s pricing philosophy is to provide EDLP to consistently attract consumers who trust WMT will provide them with the lowest prices available and additionally avoid erratic price changes due to promotional activity. By being the most consistent and lowest cost retailer in the market, WMT business strategy appeals to the end consumer. Substitutes A major substitute for shopping at retail stores is online shopping. Trends are showing that online shopping is growing rapidly year on year. WMT does provide online shopping on www.walmart.com but the threat of online shopping cannibalizing sales has not been a significant issue at this point. Competition Competition is intensive within the industry as evidenced by tight margins: Ave. Gross Margin (Retail Industry/Market: 26.5% vs. 48.3%); Ave. Operating Margin (Retail Industry/Market: 8.5% vs. 12.6%); Ave. Net Margin (Retail Industry/Market: 3.4% vs. 7.0%). Source: Reuters 2006 WMT competes within various different retail sub-industries: discount, department, drug, variety and specialty stores and supermarkets, many of which are national and international operations. WMT also compete with retailers for new store sites. In 2005, the WMT’s segment ranked first, based on net sales, among all retail department store chains and among all discount department store chains. Following on Kenichi Ohmae (1983) reasoning we will try to summarize the key factors of success (KSF) within the industry, deriving from our external and internal analysis. The matching up of the external environment with the resources of the business effectively reveals the (KSF) within the market. 8.0Key Factors of Success (KSF) within the Industry Customers Differentiation through intangible and tangible assets (Brands, ethical products, store formats)
High quality/low prices characteristics (Health issues, pricing policies, ) Superior customer service. Good labour/management relations Competition The ability to expand into non-food areas of business. Supplier relationships
Store size and locations
Market Dominance Corporation Low cost Operations Economies of Scale Innovation in term of products and processes
Employee involvement and development. Conclusions Based on lowest-cost and the one-stop-shop business model WMT maintains a strong, sustainable competitive advantage in a highly competitive industry. WMT’s realizes many cost advantages through its extremely high buyer power which is generated by its sheer size. WMT’s business model works with the end consumers’ demand for consistent, low-cost retail items and helps to diminish buyer power. Meanwhile, WMT is constantly able to eliminate competition though setting low prices and subsequently driving competition out of business. SWOT Analysis So does the link exist between Wal-Mart and its external environment in other words a strategic fit? Grant (2005) holds that for a strategy to be successful it must be consistent with the characteristics of the firm’s external environment and with its characteristics of the firm’s internal environment and-its goals and values, resources and capabilities and structure and systems (Lynch 2005). We can establish this by bringing together our knowledge of the internal characteristics of the two companies, PEST analysis and industry analysis to derive conclusions on our original question. Strengths Reputation as a global company
Strong management and employee development programs
Excellent logistics system
Global procurement
Aggressive growth strategy
Ultra strong financial position
Extremely high buying power Weaknesses Limited international presence compared to main competitors
High employee turnover
Reputation
Opportunities Japan is the second largest retail market in the world.
De-regulation (Large-Scale Retail Store Location Law)
Lack of consolidation in the Japanese market.
Emergent markets of Asia-Pacific Threats Consumers preferences (quality of products, stores and services)
Supply networks
Japanese corporate culture
Weak Japanese economy
History of corporate entry failures
Strengths Reputation as a global company WMT has a truly global presence, measuring its self as the largest company in the world. It expects to open over one new store every day into 2004 its presence continues to grow internationally with about 1,300 locations in Mexico, Canada the UK, Germany, Asia and S. America, in addition 400 Seiyu stores in Japan. Further its reputation can effectively influence political and economical institutions to its advantage thus creating further opportunities for growth. (Datamonitor, February 2006) Strong management and employee development program. WMT management structure has been consistently strong and effective, keeping the company moving steadily in the right direction. WMT has programs designed to identify high-potential individuals and develop them into company assets. A good percentage of employees began their time with WMT as hourly employees. The work force is also not represented by a union. This allows WMT more flexibility on work productivity rulings, and is not threaten by strike actions. Excellent logistics system WMT has a superior logistics system that continues to deliver exceptional performance. In the US, merchandise is moved from about 85 WMT owned distribution centers. With this brings a very effective global sourcing advantage. This provides a competitive advantage, since WMT can gain cost advantage by sourcing from the cheapest location. Having in mind the suppliers’ infrastructure operating in Japan the above strength can provide the basis for cost efficiencies increased buying power and finally competitive advantage against local competition. Global procurement WMT is has recently structured its business with global procurement capabilities. It began to seize opportunities a few years ago, and is moving ahead rapidly now. Due to its size domestically, and because it sells many of the same commodities in various countries, WMT realizes economies of scale when it purchases goods. WMT management believes that global procurement would add meaningfully to gross margins for a period of about five years. Again the strength can translate into cost advantages and differentiation of its products against local competition, baring in mind again the nature of Japanese consumers, being increasingly price sensitive, the low prices which Wal-Mart can obtain will contribute to its success. Aggressive growth strategy and financial prowess Despite its clear leadership, the growth of WMT shows little sign of subsiding. In 2003, the company allocated around $11b on capital projects, adding about 48m square feet of retail space. At the end of 2003 WMT required 4,000 Super Centers to meet increasing customer demand. SuperCenters have propelled WMT to become the nation’s largest food retailer. These type of stores attract consumers from a wide radius, including those from several neighboring WMT discount stores. It is logical to assume that WMT will not sit waiting for results only from Seiyu and it can potentially try further acquisitions as rumors suggest. In addition the laws, concerning super-stores which are the main vehicle for growth in the US market, are being gradually relaxed therefore lowering entry barriers thus allowing the company to play to its strengths. Weaknesses Insufficient International exposure compared to main competitors For such a massive corporation in both market capital and number of operating units, the company still holds a relatively low international presence. WMT has currently has a presence in eleven countries around the world and it is well known, WMT’s operations in three countries – the Canada, UK and Mexico – make up more than 90% of its international business and effectively all of its international revenues. So, though seemingly a vastly “global” operation, the bulk of WMT’s revenues still come from N. America and the UK. Carrefour – 31 countries. Ahold – 26 countries. Metro Group – 26 countries. Ito-Yokado – 13 countries. Tesco – 13 countries. Wal-Mart – 11 countries. Kroger – 1 country. Target – 1 country. Albertsons – 1 country Kmart – 1 country. Source :M+M Planet Retail High employee turnover WMT derives competitive advantage from its inventory system and supplier relationships, which keep its costs – and prices – low. It pays at the bottom end of the compensation scale and experiences high turnover of its nonunion workforce. On the other hand Japan has a vast supply of well-rounded personnel but labor costs are also comparatively higher than other countries a fact that can create problems having in mind that a source of competitive advantage for the company are the low wages it pays. Accordingly, the fact that labor costs increase in step with the age of employees is a big issue. Further, it is quite easy to find capable and well-educated housewives for part-time work. Within Seiyu, over seventy percent of employees are part-timers. Seiyu is adopting Wal-Mart’s shipping and display methods to raise labor productivity, as well as its approach to distribution, logistics, and supplier relationships to boost competitive advantage (Troy 2003). Reputation Although mentioned above as a strength community relations’ problems are bound to exist with a corporation the size of WMT. Not a big surprise, WMT has developed a long list of critics, including unions, human rights organizations, religious groups, environmental activists, community organizations, small business groups, academics, children’s rights groups, and even institutional investors. These groups have criticized the company’s illegal union-busting tactics, its many violations of overtime laws, its abuse of child labor, its exploitation of immigrant workers, its gender discrimination, the horrific labor conditions at its suppliers’ factories, and its environmental degradation. This is a worrying aspect which within the Japanese environment can have adverse reactions which could lead strong opposition in its operations. Opportunities Second largest economy in the world Japan’s attractiveness consists of being the second largest economy in the world with the second higher retail sales second only to the US in addition its market it’s growing at a faster rate than the EU market. Discount retailers are enjoying a boom in the developed markets a fact soon to be true in the developing regions of the Asia-Pacific. Wal-Mart has successfully entered the Japanese market with a low risk investment and its waiting for consumption rates to bounce back as its restructures Seiyu to its strengths and at the same time learning about its new market. Wal-Mart’s strategy perspective is to enter markets where they can win so targeting other industries that are fragmented, do high sales volume, with inelastic price and less efficient supply chains. Japan’s food retail and mass merchandize fulfills all of the above criteria. Un-consolidated market The structure of the market consists of the presence of very small retailers when compared to the US and other developed markets, a trend that has been assisted by the fresh produce buying culture and legislation such as the Large-Scale stores which made quite difficult for large retailers to open up greater size facilities due to environmental and competition reasons. Wal-Mart can effectively take advantage of the lack of concentration and raise the pressure for everyone in the market increasing competition therefore increasing its probability of obtaining larger market share. De-regulation The abolition and deregulation of the legislation along side changes in the preferences and structure of consumers are creating opportunities which Wal-Mart is taking advantage by opening its first super center in Numazu, which the retailer hopes to be a model for stores across the archipelagos. With the economy finally bouncing back Wal-Mart management is convinced that it can capture a big slice of Japan’s $1, 3t retail market. Asia-pacific region The analysis above shows clearly that 34,2% of the global revenues within the food retail industry is generated within the Asia-Pacific region and the projections show that the trend will continue to increase. In addition Japan is a trend setter in the wider region and model for a lot of countries to follow the presence of Wal-Mart in the region can effectively be translated into various benefits such as; establishment of its brand for the entire region, learning lessons from the Japanese market and effectively the entire region, which can be transferred into its other markets, increased opportunities for collaboration with other prospects. In conclusion if any company wanted to establish a presence in the region and scope for a long term presence and development, it could not find a better place than Japan. Threats Consumer preferences Compared with other countries, Japanese consumers tend to pay more attention to details such as the quality of products, stores and service, as well as design, rather than focusing solely on price. They tend to demand perfect products, and this can result in mounting costs for the required quality management, Japanese consumers can be not pleased without paying attention to quality. However, depending on the product or industry, there are cases where low prices are focused on more than quality and design, and when entering the market, full and detailed market research can not be forgone. WMT attention does not focus on design or quality sometimes it concentrates on the basics and low prices and this is in its core business model. On the other hand economic depression and changing consumer preferences can help the company make up on this issue. Localized preferences is also an issue where consumers have quite distinct preferences across Japan something that WMT up to this moment cannot accommodate successfully having in mind its business model of standardization of products and services. Weak Economy Although the Japanese economy is beginning to show slight recovery, consumer spending is still cautious and the confidence level is low. Stagnant consumption has brought retail sales from a peak in 1997 of 148t Yen to 135t in 2002 a significant change of 6,1%. The weak economy has induced low stock prices thus creating an environment where purchases of other companies and foreign entry into the market are easy – a condition which WMT took advantage off with its investment in Seiyu. On the other hand the performance of Seiyu over the last 5 years is a disappointment to current stakeholders and part of the explanation is the general economic conditions. Supply network The supply regime in Japan which is supposed to be one of the most complicated and toughest in the world, with multiple layers of wholesalers detracts from retailers profit margins. The condition has been proliferated by the large presence of small scale retailers. With further consolidation of the industry, deregulation and globalization, the supply network is getting smaller and less powerful therefore opportunities for the retailers to increase their dominance increases. WMT with its core capabilities in global procurement, distribution, buying power and information systems infrastructure is effectively trying to bypass or change the existing power balance thus sustain competitive advantage against competitors and even restructure the market further in terms of the existing complex trade practices. Corporate failures Although there is a lot of progress in entry conditions and structural reforms in the Japanese market, it remains a challenge and a threat for everyone wishing to break trough and establish a long term presence. Taken as s paradigm the main reasons for failure outlined above and contrast them against WMT approach we can come to some conclusions. WMT entered the market very cautiously while phasing its stake in Seiyu, illustrating the need for a careful consideration of the variables surrounding the market at the same time it’s reducing its investment risks and buying time to establish how several environmental forces are going to evolve, such as consumption patterns and various regulations mentioned above. WMT effectively is taking the long-term view in its investment, having secured additional investment injections to raise its stake progressively and worth mentioning in predetermined prices. In the meantime it’s learning, and prepares for the turnaround of the economy and other conditions to become more favorably. Corporate culture Again contrasting against the main failure reasons stated above, WMT has chosen its vehicle for this venture to be Seiyu, a 37th year old retailer 6th largest in the industry, which implies a good knowledge of the market, its practices and established relationships with various stakeholders. In addition an important cultural characteristic which WMT seems to be taken into account is that business relationships in Japan are not based on the profitability of one deal but on securing advantage for both parties from a much longer point of view. Other evidence of acting with considerable care on cultural sensitivities is the fact that Seiyu’s executive board retains a majority of its original members which means WMT is paying attention to effective management structures, off course other rationales exist such as existing know-how and relationships which these members hold with the wider community and are considered assets within the Japanese retail business environment. Strengths Reputation as a global company WMT has a truly global presence, measuring its self as the largest company in the world. It expects to open over one new store every day into 2004 its presence continues to grow internationally with about 1,300 locations in Mexico, Canada the UK, Germany, Asia and S. America, in addition 400 Seiyu stores in Japan. Further its reputation can effectively influence political and economical institutions to its advantage thus creating further opportunities for growth. (Datamonitor, February 2006) Strong management and employee development program. WMT management structure has been consistently strong and effective, keeping the company moving steadily in the right direction. WMT has programs designed to identify high-potential individuals and develop them into company assets. A good percentage of employees began their time with WMT as hourly employees. The work force is also not represented by a union. This allows WMT more flexibility on work productivity rulings, and is not threaten by strike actions. Excellent logistics system WMT has a superior logistics system that continues to deliver exceptional performance. In the US, merchandise is moved from about 85 WMT owned distribution centers. With this brings a very effective global sourcing advantage. This provides a competitive advantage, since WMT can gain cost advantage by sourcing from the cheapest location. Having in mind the suppliers’ infrastructure operating in Japan the above strength can provide the basis for cost efficiencies increased buying power and finally competitive advan Global procurement WMT is has recently structured its business with global procurement capabilities. It began to seize opportunities a few years ago, and is moving ahead rapidly now. Due to its size domestically, and because it sells many of the same commodities in various countries, WMT realizes economies of scale when it purchases goods. WMT management believes that global procurement would add meaningfully to gross margins for a period of about five years. Again the strength can translate into cost advantages and differentiation of its products against local competition, baring in mind again the nature of Japanese consumers, being increasingly price sensitive, the low prices which Wal-Mart can obtain will contribute to its success. Aggressive growth strategy and financial prowess Despite its clear leadership, the growth of WMT shows little sign of subsiding. In 2003, the company allocated around $11b on capital projects, adding about 48m square feet of retail space. At the end of 2003 WMT required 4,000 Super Centers to meet increasing customer demand. SuperCenters have propelled WMT to become the nation’s largest food retailer. These type of stores attract consumers from a wide radius, including those from several neighboring WMT discount stores. It is logical to assume that WMT will not sit waiting for results only from Seiyu and it can potentially try further acquisitions as rumors suggest. In addition the laws, concerning super-stores which are the main vehicle for growth in the US market, are being gradually relaxed therefore lowering entry barriers thus allowing the company to play to its strengths. Weaknesses Insufficient International exposure compared to main competitors For such a massive corporation in both market capital and number of operating units, the company still holds a relatively low international presence. WMT has currently has a presence in eleven countries around the world and it is well known, WMT’s operations in three countries – the Canada, UK and Mexico – make up more than 90% of its international business and effectively all of its international revenues. So, though seemingly a vastly “global” operation, the bulk of WMT’s revenues still come from N. America and the UK. Carrefour – 31 countries. Ahold – 26 countries. Metro Group – 26 countries. Ito-Yokado – 13 countries. Tesco – 13 countries. Wal-Mart – 11 countries. Kroger – 1 country. Target – 1 country. Albertsons – 1 country Kmart – 1 country. Source :M+M Planet Retail High employee turnover WMT derives competitive advantage from its inventory system and supplier relationships, which keep its costs – and prices – low. It pays at the bottom end of the compensation scale and experiences high turnover of its nonunion workforce. On the other hand Japan has a vast supply of well-rounded personnel but labor costs are also comparatively higher than other countries a fact that can create problems having in mind that a source of competitive advantage for the company are the low wages it pays. Accordingly, the fact that labor costs increase in step with the age of employees is a big issue. Further, it is quite easy to find capable and well-educated housewives for part-time work. Within Seiyu, over seventy percent of employees are part-timers. Seiyu is adopting Wal-Mart’s shipping and display methods to raise labor productivity, as well as its approach to distribution, logistics, and supplier relationships to boost competitive advantage (Troy 2003). Reputation Although mentioned above as a strength community relations’ problems are bound to exist with a corporation the size of WMT. Not a big surprise, WMT has developed a long list of critics, including unions, human rights organizations, religious groups, environmental activists, community organizations, small business groups, academics, children’s rights groups, and even institutional investors. These groups have criticized the company’s illegal union-busting tactics, its many violations of overtime laws, its abuse of child labor, its exploitation of immigrant workers, its gender discrimination, the horrific labor conditions at its suppliers’ factories, and its environmental degradation. This is a worrying aspect which within the Japanese environment can have adverse reactions which could lead strong opposition in its operations. Opportunities Second largest economy in the world Japan’s attractiveness consists of being the second largest economy in the world with the second higher retail sales second only to the US in addition its market it’s growing at a faster rate than the EU market. Discount retailers are enjoying a boom in the developed markets a fact soon to be true in the developing regions of the Asia-Pacific. Wal-Mart has successfully entered the Japanese market with a low risk investment and its waiting for consumption rates to bounce back as its restructures Seiyu to its strengths and at the same time learning about its new market. Wal-Mart’s strategy perspective is to enter markets where they can win so targeting other industries that are fragmented, do high sales volume, with inelastic price and less efficient supply chains. Japan’s food retail and mass merchandize fulfills all of the above criteria. Un-consolidated market The structure of the market consists of the presence of very small retailers when compared to the US and other developed markets, a trend that has been assisted by the fresh produce buying culture and legislation such as the Large-Scale stores which made quite difficult for large retailers to open up greater size facilities due to environmental and competition reasons. Wal-Mart can effectively take advantage of the lack of concentration and raise the pressure for everyone in the market increasing competition therefore increasing its probability of obtaining larger market share. De-regulation The abolition and deregulation of the legislation along side changes in the preferences and structure of consumers are creating opportunities which Wal-Mart is taking advantage by opening its first super center in Numazu, which the retailer hopes to be a model for stores across the archipelagos. With the economy finally bouncing back Wal-Mart management is convinced that it can capture a big slice of Japan’s $1, 3t retail market. Asia-pacific region The analysis above shows clearly that 34,2% of the global revenues within the food retail industry is generated within the Asia-Pacific region and t