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BUAD 497 Week 7 Notes

by: Emily Laurienti

BUAD 497 Week 7 Notes BUAD 497

Emily Laurienti

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These notes cover the Walmart case that we discussed in week seven. If you have any questions, feel free to email me at
Strategic Managment
Prof. Michael Mische
Class Notes
strategy, Management
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This 5 page Class Notes was uploaded by Emily Laurienti on Saturday October 8, 2016. The Class Notes belongs to BUAD 497 at University of Southern California taught by Prof. Michael Mische in Fall 2016. Since its upload, it has received 22 views. For similar materials see Strategic Managment in Business Administration at University of Southern California.

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Date Created: 10/08/16
10.4.16 Sears v. Walmart v. Kmart th  High price, high image—Bloomingdales, Saks 5 Avenue, Marshall Fields, Nordstroms  Major industry—mom and pop stores with low image and low price  Consolidation began  Grant’s  Woolworth’s  Porter Model  Marketplace  Mobility barrier early 1900’s  Breaks off before the prestige (high price, high image) stores  Built on discrimination  Had to be white and affluent to shop at these stores  Woolworth’s and Grant’s were the “every person” stores  After Sears  Catalogue is blind to social class, ethnicity, etc. so everyone can shop there  Entrants  Consolidators—Woolworth’s and W.T. Grant  Sears—doesn’t consider pricing, looks at distribution and selection  All stores are brick and mortar so Sears introduces the catalogue  Allows Sears to circumvent the issue of the physical location  Circumvent the pricing barriers by moving to a standard price  Prices are standard across the country  Sears becomes the first store with low price, higher image (still not great image)  Sears creates a private label  Open their own profit sharing in 1916—first time employees shared profits  Consolidation of power—Sears consolidates the power by selling so many different categories, including insurance  Had their own credit card so you could use their credit to buy their products  1945 Sears sells over a billion dollars  1970’s mom and pop stores are wiped out  Kmart enters this space  Sears attracts two other competitors  Ward’s and Penny’s also start to compete on the catalogue level  Kmart—enters the market in the 1970’s with low price, low image.  Competes on price with a good selection  Competes on economies of scale with huge volume  Distribution was brick and mortar  Advertising—newspaper  Introduces the term off-price  Pricing off of and lower than the catalogue  Blue plate special—whatever you had yesterday you mix together today  Surplus food, loss leader, low price food you could buy anywhere  At Kmart—blue light special  Took a shopping cart with a blue light on it and put specific items on sale to drive volume  Opened 271 stores in 1976  Have a faster turnover than Sears  Even though average price per item is cheaper, their sales make up for it so their sales per sq. foot is higher than Sears  Kmart starts to put pressure on the low price, high image sector in the 1980’s  Walmart—began opening up stores 7 times faster than Kmart  Everyday Low Price (EDLP)—higher than discount and low , lower price than average and high  Keep quality up with EDLP strategy  Used military installations as the base for his customers  Focuses on rural areas  Their strategy was to go where the enemy wasn’t  They created, then expanded  Now they’re almost entirely defensive  Costco is threatening  Target—slightly higher image, slightly higher price  Suppliers—the stores  Basis of competition if you’re a store is through distribution and pricing with a factor of selection  Buyers—us  We have very low power in this market  Only power is whether we can buy or not  Substitutes  What Sears missed  Failed to notice the shift in consumer preferences, spending patterns and demographics including migration to the suburbs  Relied on location, image and historical patterns of management and behavior  Failed to recognize emerging forms of business such as Wal-Mart and Kmart  Promoted from within a succession of mediocre CEO caretakers  Became inwardly focused on their core process, measurements and the Sears way of doing things  Missed the assent of “off-pricing” concepts and big box stores  Was too diversified, lost focus on both customer and competition  Failed to acknowledge that it had been displaced as “America’s Retailer” in the late 1980’s  Walmart’s Path to Success  Technology that linked point-of-sale and item movement data at the SKU level with merchandising and replenishment decision-making and supported a hub-design for product distribution and logistics.  A store network design that linked store selection with a regional organization. Initially Wal- Mart concentrated on locating stores in rural areas and near military installations. It also employed a profit center concept that created a network of stores and stressed functioning as a unit within an area, as opposed to competing against one another as individual locations.  Extraordinary leadership in the form and persona of Sam Walton who expressed a vision with the passion and conviction to make the vision a reality.  Simple Merchandising Plan…quality + pricing = sales. As long as the American consumer is seeking the most product, lowest price & greatest value, they will shop at Walmart. 10.6.16 Walmart: China to India  What is Walmart confronting?  Geographic saturation—you can only have so many brick and mortar stores before your market is saturated  After this you reach your point of diminishing returns  Solution:  Have to find somewhere else to expand to  What makes us successful in the US?  Great bargaining power over the people who sell product to us  Predicated on our own efficiencies  Ship from distribution centers  Run on big volume, high velocity, with lots of terms  Great vertical integration  Where do we go from here?  China—natural inclination because there’s a huge market and a lot of people there  The market is opening up as more Chinese become affluent  Can we be successful in this market?  How do the Chinese shop?  Have to look at the culture of that market  Use PESTEL to analyze China  Political  Still a communist country  Very monolithic political system that does understand economics  Creates a political system that invites foreign investment (because it can’t afford to build infrastructure itself)  Jurisdictionally oriented—you pick where you want to go  Economy  Economy has been in transition for about thirty years  Largely illiterate and agrarian to more educated  Outside of the city is still impoverished  Wealth in the country comes from  The cities  Foreign investment  Bending the currency value  Society  Culturally people were trained to want to shop at smaller stores  Freshness was a concern—thought Walmart wouldn’t have fresh product  Selection—preferred more local product vs international brand  How do most people live?  Chinese want an even lower price than in US  Don’t buy in bulk like US does—like small parcels  This is because the Chinese don’t have a lot of cars—have to be able to get everything home  US wants a wide selection you can get everything at one shop, China likes specialty shops (one shop for each category focus)  US is transaction oriented—we want speed and ease. China uses shopping as a social experience  China allows price negotiation as a cultural tradition  Walmart model—  Size  Speed  Infrastructure  Technology  Habits  The Chinese experience doesn’t fit with the Walmart model  Technical infrastructure  Lack of roads  Don’t have the same data communication analysis  China has the most people using the internet of any country, but ranks 88 in the number of transactions occurring over the internet  Environment  Favorable to business  Legislative  China is friendly toward foreign investment  Communist government can nationalize the business any time they want which makes this risky  Result—our business model doesn’t fit into the culture of the company  Big problem—HUBRIS  Walmart beat everybody in the US, so the model should work everywhere  Failed to appreciate the shopper Walmart in India  Does India have better infrastructure than China?  Not really, has a lot of railroads but other than that infrastructure is still low  Have a lot of people  What did Walmart miss in India?  Indians don’t have cars  Purchasing power is lower than China  Still have a caste system  Poverty is higher  Politics in India  Lack of political awareness hurt Walmart  Had to pay 100 million just to get the license to go into the market  Each providence/state required this money  Walmart was only looking at the number of people in the market. Felt invincible because of their volume and ignored other factors  Need to understand the culture of a market before you enter it  Walmart had a lack of due diligence  Focused only on population  How you apply your capital is critical  Walmart could have leased stores in China for 100 million instead of trying to buy and build  Have to look at multiple function points in strategy instead of focusing on just one  After this, look at mobility barriers  The culture itself can be a mobility barrier  Look at the intent of the legislator and the customer to see your strategy


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