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Wal-Mart has recently experimented with diversifying into smaller stores. Its first move in testing smaller stores was on a university campus in Arkansas, where it offered food and non-food ranges in the Campus store replacing their ordinary parapharmacy / drugstore products. Its objective in diversifying into smaller stores is intended as competition against the other two major players, CVS and Wal-Green who showed rapid growth between 2005-2010.
Wal-mart's other decision to diversify arises from the fact that it has saturated its hypermarket and mass merchandiser channels and wishes to grow and find new store locations without destructing existent ones. Its modest growth sales in the U.S. In 2010, and its disappointing consequences of its Project Impact programme, have compelled it to look into the possibility of diversifying into smaller stores.
Porter (2001) presents three essential tests for assessing the conditions under which diversification will create shareholder value:
1. The attractiveness test; the industries chosen for diversification must...
The cost-of-entry test. Whatever it costs for business to enter field and take over / diversity into the new field must not prove too expensive so that it will torpedo further profits.
3. The Better-off test: Either the corporation must gain enhanced competitive benefit from its new acquisition / change in direction / diversification, or vice versa.
Applying these tests to the Wal-Mart scenario, we see:
1. The attractiveness test- operation on the campus stores, with food and non- products (such as beauty goods and sanitary items) offers a structurally attractive situation to Wal-mart. It is a risk in that, even though Wal-mart has some success with small grocery retailing S. America, this is relatively new territory for the corporation, and it will require the company to gain new logistics and supply chain skills. Nonetheless:
2. The cost of entry is relatively small compared to the huge amount of money that Wal-mart has to sink into its…
Reference
Euromonitor International. Wal-Mart tests small stores to exploit new growth areas, Jan. 2011.
http://www.euromonitor.com/wal-mart-tests-small-stores-to-exploit-new-growth-areas/article
Porter, M.E. From competitive advantage to corporate strategy, Harvard Business Review, 2001
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