This paper seeks to evaluate three corporate strategies of Wal-Mart whether they would contribute to the shareholders’ wealth maximization objective of the company. Wal-Mart is a US-based Company and has its stores in many parts of the US and maybe characterized to have been engaged in bigger markets than its competitors thus allowing it to offer lower prices. The company’s operations are divided into three major segments: Wal-Mart Stores, Sam’s Club, and International with the first constituting the largest segment of its business. Wal-Mart Stores makes about more than 60% of its net revenues based on the company’s financial data as of the fiscal year ended January 31, 2008 (MSN, 2008a).
Wal-Mart Stores, while being operated under three different formats in the US, also serves its customers through online retail operations under walmart.com. The Sam’s Club segment is run via membership warehouse clubs in the US and also functions through online retail operations called samclub.com. Compared with the more than 60% of total revenues for Wal-Mart Stores, Sam’s Club accounts for less than 12% of the company net sales for 2008 (MSN, 2008a).
Wal-Mart also operates an online business. Its general merchandise stores deal with a wide range of general merchandise and a limited assortment of food items. The company like other players in the industry faces the realities of legal and environmental laws.
Analysis and Discussion
What would maximize the stockholder’s wealth objective?
What would contribute to the wealth maximization objective will increase the stock price of the company since increase stock prices allow stockholders to have capital gain after some time. What attains the objective also attains the corporate mission and vision which may be described as long-term. These are therefore called strategies that would attain the said objectives among other corporate objectives (Massie, 1987; Plunkett and Attner,1985; Porter, 1980).
Attaining wealth maximization objective, which is financial, must be held as attaining also non-financial or non-economic corporate objectives from a corporate point of view since a corporation or business entity is assumed to be a going concern – that is will continue to exist in the future until the proper time to cease operation (Meigs, Meigs & Meigs, 1995). Since an organization is but a group of individuals attaining an objective that will benefit its stakeholders this paper makes the premise that not only are strategies should result in more revenues and fewer expenses that would increase the stockholder’s wealth but all other factors continue to satisfy all the other stakeholders should be considered.
The same is assumed to cause investors to keep their investments in the stocks of a company since they believe that they would have their needed return on investments in due time. Evidence of increased wealth for stockholders of Wal-Mart may be viewed from a higher price to book ratio than the industry (Reuters.com, 2009a).
As to the kinds of strategies that are needed to attain wealth maximization objectives, the same must be able to take advantage of industry opportunities and protect the company from industry threats. Industry opportunities are those that would make it profitable for the company to continue in business and threats are those that may prevent the company from attaining its desired profitability. The strategies must also be able to use the company’s strengths and avoid or strengthen the company’s weaknesses. Company strengths are those internal to the company’s resources that may be of use in attaining its objectives and weaknesses are that may contradict or do otherwise.
Three corporate strategies will therefore be considered to increase wealth maximization objective if they take advantage of industry opportunities, protect the company from industry threats, make use of company strengths or avoid using company weaknesses. If they fail to accomplish any of these, then said the strategy will not be contributory.
There is, therefore, a need to do the SWOT (strengths, weaknesses, opportunities, and threats) Analysis.
To know the company’s strengths and weaknesses of Wal-Mart, a financial analysis is prepared. Profitability, liquidity, and solvency ratios would accomplish the purpose. In terms of profitability (Atkinson, Anthony, et al., 2005; Bernstein, 1993; Brigham, and Houston, 2002), Wal-Mart showed no improvement in 2009 compared to 2008 but was profitable compared with the average competitors in the industry. Gross margins, operating margins, net profit margins, and return on assets for 2009 turned out comparatively the same as in 2008. See Appendix A. It was only the return on equity of Wal-Mart which slightly decreased from 54% in 2008 to 53% in 2009 (Wal-Mart, 2009).
Said almost the same profitability for the last two years happened despite the increase in revenues by 7% which was also by a way higher than the industry average of 0.28% (Wal-Mart, 2009). Wal-Mart’s profitability ratios turned out better than the industry in terms of gross margin, operating margin, net profit margin, return on equity, and return on assets. See Appendix A.
Unexpectedly, despite the lack of increase in profitability ratios, Wal-Mart’s liquidity measures the capacity of a company to meet its currently maturing obligations using the current ratio and the quick asset ratio, which improved in 2009 compared to 2008. Quick ratios improved from 0.16 in 2008 to 0.20 in 2009 while the current asset ratios got better from 0.82 in 2008 to 0.88 in 2009. See Appendix A.
The combined profitability and liquidity ratios indicated that that the improvement was not caused by improvement in operation by either financing or financing activities of the company in 2009. However, in cash flow statements for the last two years, cash from operating activities increased in 2009 compared with 2008, and cash outflow from investing activities decreased in 2009 compared with 2008 (Reuters.com, 2009b). See Appendix A. This means that added back non-cash expenses for 2009 helped in increasing cash flow from operation and fewer investments were made in 2009.
The reported current ratio of Wal-Mart at 0.88 in 2009 is still higher than the industry average of 0.80. However, the quick ratio of 0.20 in 2009 is lower than the industry average of 0.58.
See Appendix A. This indicates that Wal-Mart is still more liquid than average competitors although it is less liquid as against competitors in terms of hard cash. Although the company may not be considered theoretically liquid due to a lower than 1.0 liquidity ratio, it is still better than other average competitors’ liquidity position indicating that Wal-Mart is not in a disadvantage position.
Solvency on the other hand showed a slight improvement from debt to equity ratio of 1.53 in 2008 to 1.50 in 2009 and it’s inferior compared with the industry of 1.01.
See Appendix A. Compared with earlier ratios, the lower the debt-equity ratios this time indicates less exposure to risks and should be considered better (Meigs, Meigs, & Meigs,1995). In other words, the company has more debt obligations about equity investment from owners while competitors in the industry have just less (Ross et. al, 1996; Van Horne, 1992; Weston and Brigham, 1993).
Based on this financial analysis, the strengths and weaknesses may be derived.
Strengths and Weaknesses
Strengths and weaknesses are conditions or characteristics of the company which could be tapped by the company in the design of its strategies. The following are the company’s strengths.
- High Level of Profitability — the company’s high profitability is evident in terms of more than 50% return on equity which could mean that investors are getting more than half of their investments in terms of earnings. See Appendix A.
- Generally Liquid – The company is generally liquid with a current ratio of 0.88 in 2009 and 0.82 in 2008. The company’s capacity strength to weather short-term insolvency could be further used to improve profitability. See Appendix A.
- Highly leveraged Position – Its 2009 debt to equity ratio has exceeded 1.0 which makes the company too risky to expand without infusing additional capital from stockholders. Compared with the industry, the company is riskier to invest in. See Appendix A.
Opportunities and Threats
The industry opportunities and threats are derived basically from Porter’s five forces may either cause an increasing decline in the profitability of the company.
- Low bargaining power of sellers — This is an opportunity since industry sellers are less in number compared to several retailers and this lessens their bargaining power to retailers like Wal-Mart given its size (Gosman and M. Kelly, T. 2002).
- High Bargaining power of buyers – There is a high bargaining power of customers or buyers because of their large number or they may have low switching costs from one retailer to another. This could affect the company’s profitability as customers would need to cut their expenditures due to economic pressures caused by the present recession in the US.
- High availability of product substitutes – Retailed goods may generally be described to be part of basic needs like a food item. This could lessen the chance to compete because of low switching costs from customers.
- The high rivalry of competitors – There is the high rivalry of competitors due to the presence of many competitors and prices generally defined the basis of competition. This forces existing players to for-profits as evidenced by the competition in terms of prices
- Ease of entry by new entrants – This is an industry threat because the industry is not capital intensive as a retailer could easily put up a business of retailing.
The Three Corporate Strategies and their evaluation
The three corporate strategies to be evaluated are the following: price leadership, focusing on return on investment, and pursuit of sustainability of its business
Price Leadership strategy
The company in the words of its Chairman of the Board was bringing life to its global vision. Its strategy appears to work and continues to build more momentum. The company has applied and intends to maintain its focus on price leadership in the very market. Price leadership means best-lower prices, higher-quality goods, and better store experience (Wal-Mart, 2009).
This strategy is contributing to stockholders’ wealth because it will take advantage of industry opportunities of every growing market and the low bargaining power of industry sellers. This allows the company to use its strengths of better profitability and generally favorable solvency position. The said strategy therefore could be considered to have contributed to increasing wealth.
Continued Focus on Return on Investment (ROI)
The company is very focused on working to improve its ROI. The said strategy is implemented by the improvement in capital efficiency which is claimed to have driven expansion plans by stepping up investments in technology. It allows the company to maintain leadership in areas that can drive its success. These efforts are believed to contribute to Wal-Mart’s increased efficiency through its use of capital, technology, and logistics. The chairman claims that the latest performance is considered strong at any time for any retailer and certainly during the most difficult global economies in decades (Wal-Mart, 2009).
This tremendous success was also viewed as a tribute to its culture and to every of its more than two (2) million employees who are called associates around the world (Wal-Mart, 2009) and 1.3 of which are in the US (Parnell and Lester, 2008). Its retail was tested in 2008 because of the recession in the US and many parts of the world and the fact the company reflected resiliency is indeed proof that the associates made the difference for the company. Despite the challenging situation in the economy, the company is still optimistic about the company’s opportunity as it claims to be well-positioned by offering still its customers lower prices and making a difference in the lives of the customers.
This strategy is contributing to stockholders’ wealth because it protects the company from industry threats which include high bargaining power of buyers, high availability of product substitutes, the high rivalry of competitors, and low threat of entry by new entrants.
Pursuit of sustainability strategy
The company claims sustainability to be part of its culture at it has helped the company to remove waste, lower costs and provide savings to customers. The company wants every part of the company to have a part in contributing to making the company more sustainable. Investors do want to increase wealth ideally both in the short term and in the long-term growth in their wealth. Most of the time, moderate yearly growth in wealth is better if the same is sustainable than big growth but not lasting. This is on the premise that long-term stockholders want to build their wealth over time rather than in an instant which may appear to be risky.
The pursuit of sustainable growth strategies would therefore mean a long-term increase in wealth although it may just be moderate. The most important thing is that the investors will earn better than the risk-free rate, which should compensate for the increased risks over the long term. One was made by the company to pursue sustainability through responsible sourcing where the company is committed is built a more socially responsible and environmentally responsible supply chain.
This strategy contributed to stockholders’ wealth because took advantage of industry opportunities of every growing market and the low bargaining power of industry sellers. This allowed the company to use its strengths of better profitability and generally favorable solvency position. The said strategy therefore could be considered to have contributed to the increasing wealth of stockholders
By maintaining price leadership, focusing on its ROI, and pursuing strategies to sustain its business, Wal-Mart strategies would be to take advantage of industry opportunities, protect the company from industry threats, make use of the company’s strengths and avoid or strengthen the company’s weaknesses as explained earlier(Byars, 1991). The same strategies will therefore contribute to the wealth maximization objectives.
Appendix A – Summary of Financial Data and Ratios vs. Industry Average
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