Walmart and K-Mart's divergent diversification strategies and global outcomes

¶ … 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 Outcomes

Wal-Mart failed in Germany and South Korea on several different levels of their business model. First and most significant was the lack of flexibility in their go-to-market frameworks including allowances for significant differences in cultural perceptions of excellent customer service (Christopherson, 2007). The second reason Wal-Mart failed in both Germany and South Korea was the lack of forward planning for how to bring their own unique metrics and Key Performance Indicators (KPIs) into the supplier evaluation and approval process (Wal-Mart Investor Relations, 2012). Wal-Mart came across as large, demanding of compliance on the part of suppliers in these regions, and often didn't offer support to them to get up and running. While Wal-Mart could quickly complete transactions and pay cash for companies of interest (Wall Street Journal, 1997) they failed to have a sufficient approach to defining how they would culturally the companies into their supply chain, intensively analytics-based, and price-driven corporate culture (Fernie, Hahn, Gerhard, Pioch, Arnold, 2006).

Conversely Sears was successful with both the K-Mart acquisition by concentrating on how the stores could fit into an entirely new customer-driven marketing strategy (Calandro, 2008). This customer-centrism drove the company to also concentrate on how best to create value from its financial services and credit card divisions as well (Craib, 1985). This is the area of greatest potential for Sears today, bringing in their extensive credit card development and processing expertise to fund purchasing by middle-income and low-income consumers (Gallagher, 1988). Third, Sears was able to immediately make use of their investments in Delver.com and unify their electronic commerce, online catalog, and online selling systems while infusing them with intelligence and insight, making them an intelligent selling system (Tode, 2009). Third, Sears had a very clear picture of just who they were selling to and why they needed to move quickly with the integration of entirely new e-commerce strategies in order to be successful. Wal-Marty on the other hand was purely doing a land-grab at a strategic level in their acquisitions, attempting to move into new markets.

Recommendations for Wal-Mart

Of the many possible solutions to the challenges that Wal-Mart had in expanding into Germany and China, the best possible recommendation is to create a more effective value chain analysis prior to initiating their supplier enablement strategies. Using a more effective cultural framework for recruiting suppliers and then creating a shared set of metrics and KPIs would have been a better strategy than attempting to enforce their own, U.S.-based standards on all suppliers instead (Krishnamurthi, 2001). Second, Wal-Mart would have been more successful if they had indexed overall subsidiary performance to discounts given to suppliers -- in essence sharing the risks and rewards of the total performance of the network across everyone (Fernie, Hahn, Gerhard, Pioch, Arnold, 2006). In cultures that are highly egalitarian, this would have gone over extremely well from a values-based selling and strategic involved perspective as well. Finally Wal-Mart would have been much more successful if they had chosen to complete joint ventures first and better understand not just the widely varying cultures but also the completely different approaches to managing transactions as well, a key lesson learned in Germany (Christopherson, 2007). All of these factors point to Wal-Mart having an ethnocentric mindset about global development that eventually was replaced with a more realistic one as evidenced by their successes in China.