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Diversify or Not to Diversify
Wal-Mart Corporation (NYSE: WMT) and K-Mart, who is privately held, both have extensive investments in merger, acquisition, joint venture and global market development programs and initiatives. Both companies have had exceptional success with their diversification strategies domestically and internationally. Yet both have also faced very significant challenges and failures too. The intent of this analysis is to compare and contrast the two businesses, analyze the outcomes of their diversification decisions and results. Three primary reasons for their outcomes will be provided in this analysis for each company, and two recommendations will be made that could have made the unsuccessful diversifications more effective.
K-Mart and Wal-Mart: Two Domestic Giants Struggling Globally
The greatest strength both companies have in common is a proven and highly effective unique value proposition that captures the concerns, needs and pains of the price-conscious shopper. Wal-Mart's Every Day Low Price (EDLP) value proposition is one of the strongest in global mass merchandising and retailing, supported by a state-of-the-art logistics and supply chain management system (Krishnamurthi, 2001). K-Mart's acquisition by Sears Holdings Corporation also gave the company excellent logistics and supply chain knowedlge and systems to compete more effectively with Wal-Mart as well (Henderson, 2001). Both Sears Holdings and Wal-Mart have the ability to compete at the operational level of logistics, supply chain management (SCM) and depth of pricing management at the execution level (Henderson, 2001).
Where Wal-Mart exceeds the K-Mart is in the area of price optimization and analytics. Wal-Mart has an extensive satellite network that uploads sales-out and financial data daily to Bentonville, Arkansas for use in predictive analytics models and pricing strategies to ensure the company can profitably compete while keeping prices extremely low (Krishnamurthi, 2001). K-Mart, now part of Sears Holdings, does not have near this level of analytics expertise and insight into pricing dynamics. As a result, their strategy relies more on layaway and a highly segmented series of credit programs and services which are a core part of the Sears Holdings business model which has an overarching focus on financial services (Craib, 1985). Sears has the potential to be significantly stronger in their strategies for competing with Wal-Mart yet have not been able to coordinate their financial services business to fuel greater spending in the low-end of their retail locations including the remaining K-Marts and flagship Sear's stores throughout the U.S. And Canada. On the first and most critical dimension of any business, which is their unique value proposition (UVP) and how they each differentiate themselves from each other and the competition, Wal-Mart has been far more effective in attracting and retaining price-sensitive shoppers. Wal-Mart has done extensive analysis in fact of their customer base from a psychographic perspective and found that the Price Value Shopper, at just 16% of its total customer base, is the greatest contributor to profitability than all other psychographic segments combined (Wal-Mart Investor Relations, 2012). Based on an analysis of Wal-Mart's financial statements, filings with the Securities and Exchange Commission (SEC) and the many studies completed of their marketing strategies, the following graphic has been developed showing the distribution of segments by percentage of sales.
Figure 1: Segmenting the Wal-Mart customer base using psychographic analysis
Source: (Wal-Mart Investor Relations, 2012)
On the customer loyalty dimension and strength of the company's ability to deliver on the expectations they create, Wal-Mart is not only stronger than Sears they also have significantly greater momentum in the market as well as evidenced by comparing their financial performance.
Wal-Mart is nearly 10X the size of Sears Holdings in terms of their latest annual revenues and significantly larger from a Net Income standpoint. In their latest fiscal year, Wal-Mart generated $421B in Sales and a Net Income of $16.3B in Net Income earing a 25% Gross Contribution Margin in the process (Wal-Mart Investor Relations, 2012). Ten-year revenue growth has averaged 8.2% which is exceptional given the economic turmoil and lack of stability in global markets. Wal-Mart is able to accomplish this level of consistent economic growth by maintain an astounding 3.99 level of Days Sales Outstanding (DSO), carrying just 40.22 days inventory during the last full fiscal year with is nearly 60% of the higher levels of industry competitors (Wal-Mart Investor Relations, 2012). This all leads to a cash conversion cycle of 7.16, also an industry-leading level of performance. Wal-Mart successfully operates in 28 different nations through joint ventures, subsidiaries and alliances with retailers across each major region fo the world. Wal-Mart was slow to move onto the Web and embrace e-commerce yet was able to develop and launch a shop-and-pick up application for their North American website in record time, beating competitors Best Buy and Target to market with a state-of-the-art online ordering application which today is attracting an entirely customer segment (Wal-Mart Investor Relations, 2012). Wal-Mart has made acquisitions to stabilize and grow their e-commerce initiative including buying OneRiot, a company that has developed advanced social media analytics software that analyzes social networks to develop personas of Wal-Mart buyers online
(Wal-Mart Investor Relations, 2012). This strategy of acquisitions is different than those of the past, where Wal-Mart acquired complementary and often potentially competitive companies in geographic regions to gain access to new nations including Germany (Fernie, Hahn, Gerhard, Pioch, Arnold, 2006). The acquisitions to bolster their e-commerce initiatives have been consistently more effective than those used for gaining access to Germany, South Korea and other nations with cultures significantly different than the U.S. (Troy, 1999).
Contrasting this multifaceted approach to acquisitions, Sears has concentrated on building out their distribution and supply networks while also adding in their own e-commerce acquisitions. This strategy is deliberately aimed at increasing their ability to execute throughout multiple channels domestically more effectively than they had been able to in the past. Their latest Annual Sales for Sears totaled $43.3B and a Net Income of $407M earning a dismal operating margin of 1.1%. Sears is not nearly as efficient as Wal-Mart at the operational level with 5.62 Days Sales Outstanding (DSO) and 103 days inventory on average throughout their latest full fiscal year. Their cash conversion cycle is 71.73 days and their Asset Turnover is an anemic 1.77 times for the full fiscal year. Given the mediocre of Sears domestically as evidenced by their financials, it is no surprise their latest acquisition is based on accentuating and augmenting their online channels. As of today Sears operates 1,300 off-mall stores and 30 Supercenters throughout the U.S., Puerto Rico, Guam and the U.S. Virgin Islands. The company closed 100 K-Marts as it consolidated the most unprofitable stores and regions. Sears trimmed back K-Marts to create a more niche-based retailing strategy (Gallagher, 1988) that continues to this day. The acquisition of Delver.com in 2009 by Sears was insightful from a multichannel management and planning standpoint as it gave the company greater insight and intelligence into its most nascent, smallest yet highest potential channel (Tode, 2009). Delver.com is predicated on Latent Semantic Indexing technology which is comparable in speed and accuracy to the Google core set of technologies. The Delver.com platform shows potential as an intelligent selling system too.
Analysis of Acquisitions: Wal-Mart vs. Sears
Wal-Mart's track record in the area acquisitions continues to be challenged by a wide range of factors, including a lack of integration at the supply chain level in diverse geographic markets, an inability to re-tune and modify their value chains successfully to the specific needs of a given regional market. These are the factors that led to Wal-Mart suffering and eventually having to pull out of Germany and South Korea entirely, even after making acquisitions of local mass merchandisers and low-price leaders in these countries (Fernie, Hahn, Gerhard, Pioch, Arnold, 2006) (Wall Street Journal, 1997). Wal-Mart struggles crossing the cultural chasm in these markets and cultures they are unfamiliar with, often with expensive, grand failures (Wall Street Journal, 1997). In Germany, Wal-Mart was completely out of their element from a cultural standpoint. One of the many indications of this was the issue of using a greeter, which was considered creepy and awkward in the German culture (Christopherson, 2007). Another was the lack of variety and sourcing problems on South Korean fresh produce and unique products (Fernie, Hahn, Gerhard, Pioch, Arnold, 2006). Wal-Mart did not have an accurate, scalable and reliable framework or strategy in place for expanding globally. This changed in China where Wal-Mart slowed down and first studied the market thoroughly, taking great pains to create their own supply chain and institute a very thorough quality management program (Wal-Mart Investor Relations, 2012). Wal-Mart had learned a very painful series of lessons in Germany and South Korea that helped them succeed in China.
Contrasting this was the acquisition of Delver.com by Sears in 2009 (Tode, 2009). Sears has immediately put the series of technologies acquired into their online selling strategies, integrating the Delver core technologies of Latent Semantic Indexing (LSI) into the catalog and online order management applications on the many Sears sites. The use of Delver technologies and…[continue]
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