ANGLIA RUSKIN UNIVERSITY A Case Study of Wal-Mart Student Name: Muhammad Atif Student ID: 1230580 Module Leader: Dr. Noah Karley Module: MOD001126 Year: 2013/14 Word Count: 4,074 1 Table of Contents 1. Introduction ................................................................................................................................ 3 1.1. Company Overview ................................................................................................ 3 1.2. History .................................................................................................................... 3 2. External Analysis ........................................................................................................................ 4 2.1. PEST Analysis ..........................................................................................................4 2.2. MNC and Foreign Exchange Strategies .................................................................. 6 2.3. Modes of Entry into Foreign Market ...................................................................... 8 2.4. Cultural and Ethical Issues related to Wal-Mart ..................................................... 8 2.5. Competitor Analysis ................................................................................................ 9 2.6. Competitors around the World ........................................................................... 10 2.7. Analysis of industry competition .......................................................................... 12 3. Internal Analysis ....................................................................................................................... 13 3.1. Company’s Financials .............................................................................................. 13 3.2. SWOT Analysis ........................................................................................................ 14 3.3. Factors that influence Wal-Mart’s Management ................................................... 17 4. Conclusion ................................................................................................................................. 18 5. References & Bibliography ....................................................................................................... 19 6. Appendix …………………………………………………………………………………………..……………………..23 2 1. Introduction 1.1. Company Overview Wal-Mart is well-known American company that operating retail stores including grocery stores, discounts warehouse clubs and combination of general merchandise store. The “Every Day Low Price” (EDLP) strategy makes Wal-Mart different from its competitors. The company divided into three sections: a segment inside the U.S, Sam’s club and International Segment of Wal-Mart. In Fiscal year 2013, 58.89% total sales are considered by Wal-Mart U.S. which is the biggest segment, 29% from WalMart International and 12.11% total sales from Sam’s Club (Gough, 2013). The company sells electronic items, baby & kids clothing, video games, toys, fitness and sports instruments, jewelry, groceries and so many other things. The annual revenue of the Wal-Mart is greater than the GDP of Switzerland (Brenner, Eidlin and Candaele, 2006). According to Fortune’s ranking, the 2nd largest company in the world is WalMart by revenues almost $469.2 billion (Hayes, 2013). 1.2. History The Store called Wal-Mart, founded in 1962 by Sam Walton along with his brother Bud in Rogers, Arkansas. He was running a store already before opening the Wal-Mart named “Walton’s Five and Dime”, which was a franchise of Ben Franklin. The new business model of Sam Walton’s was different from other traders not only in terms of discount but he also focused on opening stores in small towns. At the beginning he opened more stores in Arkansas but later he expanded Wal-Mart to Oklahoma and Missouri in 1968 (Brenner, Eidlin and Candaele, 2006). In 1972, the company listed in the New York Stock Exchange (‘NYSE’) (Lorea, 2009). Walton group also introduced the Sam’s Club warehouse store and opened other stores in Iowa, Nebraska and Indiana in 1983. During 1980s, the company rises considerably by reaching $25.8 billion sales with almost 1,525 stores and 271,000 workers at the end of the decade. The year 1992 was not good for the Wal-Mart as Walton died in this year and after 3 years his brother and the co-founder of Wal-Mart “Bud Walton” also died in 1995 (Brenner, Eidlin and Candaele, 2006). In 1990s, Wal-Mart has considered as the largest retailer of the nation and it continued the achievements by opening more stores within the country and outside the country. In Canada, the company bought 122 Woolco stores and built three stores in Argentina and five stores in Brazil in 1995. It penetrated in China all the way through joint venture in 1994. In Germany 1997, Wal-Mart acquired 3 74-unit “INTERSPAR” hypermarket chain and the 21-store “WERTKAUF” chain. Later on in 1998, the company entered in Korea with joint venture and after one year it went to UK and bought the UK’ s third largest grocery chain called “ASDA”. The company entered in Japan by buying a 36% stake of Seiyu in 2002 and Wal-Mart steadily increased its stake about 67% by 2007 (Brenner, Eidlin and Candaele, 2006). According to fiscal year sales of Wal-Mart is about $469.2 billion in 2013 with 2.2 million workers acquaintances worldwide and 11,000 stores under 69 banners in 27 countries (Walmart, 2013). The reason of doing this assignment is to study the circumstances in which the company is operating. We will critically analyze the Wal-Mart by examine the company’s internal and external environment. In external analysis we will look at the foreign exchange strategies for multi-national corporations, modes of entry into foreign market, cultural and ethical issues related to Wal-Mart and the competition that the company is facing within the country and globally. To increase an understanding of Wal-Mart’s business potential and to know the future market, we will use different analytical models. 2. External Analysis External environment can be estimated through PEST analysis. This tool is used to identify the business size, positions, economics, growth, politics and the development or decline trend of the market. 2.1. PEST Analysis Figure 1: PEST analysis of Wal-Mart Political Economical Social Technological 4 2.1.1. Political Factor To increase the company’s footprint in California in the term of expanding public opposition, the controversial strategy has been used by Wal-Mart. According to a recent report in which, it is mentioned that Wal-Mart have significantly raised their political contribution. Report states that Wal-Mart has spent millions on state and local projects and over $17 million in federal elections. More than 69% which accounted for $11.6 millions of Walton family and Wal-Mart’s contribution has gone to Republican candidates and committees. A member of Wal-Mart has reported that Walton’s family is the richest family in the world; they are putting millions to their radical ideology and right-wing agenda instead of putting their money to increase wages for Wal-Mart’s workers (UFCW, 2013). Furthermore, the political factor can negatively affect the Wal-Mart’s sales and profits because government can change the rules and the regulations at anytime which can be influenced WalMart directly. For example; the sale of Wal-Mart in February, 2013 was lower than the expected due to delay in income tax refunds (Irwin, 2013). There are many issues which are difficult to control by the firm such as; authority to work, health issues, war against terrorism and geopolitical uncertainties. The sale of Wal-Mart’s globally can be influenced by those issues. Since to decrease working expenditure and gaining more profit Wal-Mart has operated in different countries Such as; Germany, Canada, China, Mexico, UK and India. If these countries face any political instability or any problem, it can reduce the market share of Wal-Mart (Alden and Buckley, n.d.). 2.1.2. Economic Factor Purchasing power depends on the World’s economic conditions. The management of Wal-Mart says that economic factor; both domestically and internationally might affect Wal-Mart’s financial performance unfavorably. In U.S and other countries’ higher fuel price, energy cost and higher interest rate, inflation, weak housing market, unemployment rate, higher debt and changes in tax law and overall economic slowdown could affect consumer demand for the services and products selling through Wal-Mart stores. Others factors like higher transportation cost, foreign exchange rate fluctuation, healthcare and insurance, and other economic factors 5 can raise the cost of general and administrative expenses and harmfully effect the operations of Wal-Mart (WMT 10-K, 2008). Therefore, U.S has been planning to increase the number of superstores to raise the sales in U.S stores and outside to get high returns from it in order to leverage their capital assets (Nyakreal, 2013). 2.1.3. Social Factor Social factor plays a pivotal role to making a customer’s mind. A Quality factor always has been on forefront of Wal-Mart throughout the history which is why people thought that Wal-Mart is the best place to go for shopping. Due to the social influence people who want one stop service prefers Wal-Mart for shopping (Nyakreal, 2013). 2.1.4. Technological/Innovation Factor The Company launched its 1st satellite network in 1987 which connects home office to every single Wal-Mart store and clubs via video, data and voice communication (Brenner, Eidlin and Candaele, 2006). At current situation Wal-Mart is more innovative and productive company, and its supply chain and logistics management is more successful now than before. In terms of technology, Wal-Mart is far away from its competitors. The modern technology is using by Wal-Mart for the purpose of marketing and selling its product (Manjoo, 2012). 2.2. MNC and Foreign Exchange Strategies Multinational companies trade across the borders in order to maintain supply and demand of their products globally. This leads them to face foreign currency risks due to which MNE’s enroll themselves into foreign exchange strategies. China is one of the prominent examples where international trade takes place. A giant retailer like Wal-Mart requires to foreign exchange market for given reasons: To refurbish stores, build new stores or expand stores in a particular state. To purchase cheaper products in different currency and then sell that goods in U.S at low prices by adding small margin to compete its competitors. To hire employees by paying in local currencies. 6 To gain more profit from foreign market Let’s take the Chinese currency, Yuan renmimbi as an example to demonstrate the impact of foreign currency. Wal-Mart imports from China and the intense pressure of exchange rate fluctuations results in exchange gains and losses both to the customer and supplier. Chinese Yuan is currently pegged at 6.8 Chinese Yuan to 1 US Dollar (2010 figures) and is a major point of controversy between U.S manufacturers and trade groups. Chinese supplier faces negative foreign exchange risk in supplying goods to Wal-Mart by the revaluation of Chinese Yuan or viseversa (Jan, 2010). Wal-Mart often requires fixing its currency exchange rate in purchasing contracts with Suppliers of China to manage the currency concern. In terms of fixing the currency exchange rate will lead Wal-Mart to lock its product costs and profitability. So, by using this kind of strategies Wal-Mart can protect itself to increase in the value or unexpected drops of the RMB and U.S dollar (Carpenter and Dunung, 2011). Wal-Mart also hedges a portion of foreign currency risk by entering into currency swaps and net investment hedges in order to hedge against foreign exchange rate variations exposure associated with the potential payments of principal plus interest of non-U.S. denominated debt. Fair Value of all of these swaps was an asset of $313 million in 2012 and $471 million in 2011. Any fluctuations in the foreign currency rates results in exchange gains and losses underlying these swaps. Wal-Mart has faced $67 million and $74 million exchange gains and losses in 2012 and 2011 respectively. In addition to swaps, approximately GBP 3 billion debt in 2012 was hedged against net investments in United Kingdom. Again, any increase or decrease in British Pounds against US Dollar results in exchange gains or losses. Similar applies to Wal-Mart’s trade in Japanese Yen; 10% fluctuation of US Dollar against Japanese Yen have resulted in exchange gains or losses of $328 million in 2012 and $533 million in 2011(Wal-Mart Annual Report, 2012). 7 2.3. Modes of Entry into Foreign Market Table 1: Methods of Entry into International Market Strategies Joint Venture Countries Acquisition Wholly Owned Wal-Mart entered in Mexico by using the strategy of joint venture with its local player, CIFRA, who was the largest player in Mexico. The reason of joint venture is to understand the market of Mexico. CIFRA helped Wal-Mart to understand the culture, helped Wal-Mart to work with home authorities and providing supplier connections to Wal-Mart (Mun, n.d.). In 1994, the company entered in Canada through Acquisition by buying the 120 stores of Woolco Discount retailer. Wal-Mart has set up wholly owned subsidiary in U.K. The company acquired Asda in 1999 (Corporate Watch, 2004). 2.4. Cultural and Ethical Issues related to Wal-Mart Ethical Issue Wal-Mart’s corporate goodwill has been ruined due to: Failure to provide better workplace for its employees. Litigation suit and gender discrimination low wages as compared to other corporations Illegal workers mopping the floor These are some of the examples that Wal-Mart has always been criticized for. Some say that there is an evil company in Arkansas. The company can do anything to get higher market profit (Seglin, 2004). Cultural Issues Cultural differences are the main reason of failing Wal-Mart in Germany and in South Korea. In America the employees offering to bag groceries for customers but in Germany people did not like because they prefer to do it by own. 8 Second reason to fail in Germany is that the workers instructed by the management to smile at customers but in Germany, people thought the smiling workers were flirting with them. In Korea, people normally have short heights. Wal-Mart opened stores with huge shelves due to which people have to use ladders in order to reach the top shelves. These are some of the cultural issues for the failure of Wal-Mart in Asian Countries. Other issue was that people in Korea prefer to buy foods and drinks, where as Wal-Mart’s was focused in electronics, according to business week (Lutz, 2013). 2.5. Competitor Analysis In terms of market share it’s not possible to other discount retailers to compete with Wal -Mart but it does not mean that there is no competitor in the market. There are so many competitors in domestically and internationally because of Wal-Mart’s gigantic diversification. It is difficult to find out one exact competitor. According to market Wal-Mart’s competitors can be summarized as: Local Competitors (Direct and Indirect) and International competitors. 2.5.1. Direct & Indirect Competitors by Domestic Region Costco and Target is the direct competitor of Wal-Mart in local market and they are the more significant threat to the market share of the Wal-Mart. Costco is the largest discount wholesaler which can compete with the Sam’s Club of Wal-Mart (Gough, 2013).Target can be the biggest threat in terms of competing with Wal-Mart in all levels. The low price strategy followed by the Target is the same strategy which is Wal-Mart using. Target is gaining recently more market share by adding more grocery options in stores and expended its stores internationally (Gough, 2013). Table 2: Direct & Indirect Competitors by Domestic Region Wal-Mart Direct Competitors Costco Target Select Indirect Competitors Dollar Tree Dollar General Family Dollar Market Cap Revenue (ttm) EBITDA (ttm) Net Income (ttm) $251.51B $469.16B $36.30B $17.00B $46.17B $44.16B $103.13B $73.30B $3.87B $7.51B $1.96B $3.00B $10.55B $16.49B $6.88B $7.39B $16.02B $9.60B $1.10B $1.96B $915.37M $619.3M $952.66M $422.17M Source: Student Investment Management Analyst Report: Initiating Coverage 9 According to Indirect competitor, “Dollar Stores” could be the threat of Wal-Mart Company’s market share because of the recent success of “Dollar Stores” such as Dollar Tree, Dollar General and Family Dollar but the fact is they cannot compete with Wal-Mart because these competitors are small in size and don’t have the potential to provide the same services and products as Wal-Mart (Gough, 2013). 2.5.2. DuPont Analysis According to DuPont Analysis; Wal-Mart has the highest net margin of 3.62, financial ratio of 2.8 and asset turnover is 2.39 and the company is generating the highest ROE (22.53) as compared to Target and Costco (Stone, 2013). Figure 2: DuPont Analysis Source: Morningstar 2.6. Competitors around the World There are many International competitors available in the market but we are only looking at some main competitors of Wal-Mart. 10 Table 3: Wal-Mart’s Market Growth with International Competitors Companies Countries Revenue International Growth (2010 to 2015) 9.8% Domestic Growth (2010 to 2015) 2.7% Wal-Mart United States $469.1B Carrefour France $112.6B 7.7% 3.2% Tesco U.K $96.8B 10.5% 5.9% Metro Germany $90.5B 7.4% 1.6% Source: Forbes/Successful Global Growers These four retailers are actually expending more stores globally. Wal-Mart is the biggest in terms of revenue as compared to its competitors. By comparing the rest of three retailers Carrefour is on 2 nd number after Wal-Mart’s sales. However, in terms of compound annual growth rate, U.K is increasing by 10.5% internationally and 5.9% domestically (Loeb, 2013). 2.6.1. Overall International Market Growth The company is enjoying notably from its operations almost everywhere except Japan. In Chine, WalMart has reasonable increase in market share and almost doubled their revenue growth (Stone, 2013). Figure 3: Wal-Mart Growth with International Market Growth Source: NYSE: WMT 11 2.7. Analysis of industry competition Here five competitive forces by Michael Porter are using to distinguish the competition in the given industry as seen below in figure 4. This tool will help to know the Wal-Mart’s capacity to compete in given market Figure 4: Five competitive forces of Michael Porter Threat of Substitute Products Bargaining Power of Suppliers Rivalry among existing Competitors Bargaining Power of Buyers (Customers) Threat of new Entrants Source: Harvard Business Review 2.7.1. Rivalry among existing competitors If there are a few competitors in the industry then rivalry can be weak but many competitors will lead to increased competition and shrink market attractiveness. In Wal-Mart’s case the competition stays moderate because of company’s ability to expand its products and operations (Hilaire, 2012). 2.7.2. Bargaining power of suppliers There are some reasons when suppliers are more powerful such as; in market there are few substitutes available, supplier product is unique or most effective, and switching cost from one to another supplier is high. Wal-Mart holds a greater part of market share and suppliers know that, so the power of suppliers is low in Wal-Mart’s case (Anon, 2009). 12 2.7.3. Bargaining power of buyer If the products are not differentiated then buyers can switch to another retailer as buyer seems to be more prices sensitive. If the products are similar then the buyer will compare the price among suppliers which increases the competition and lead to lower prices and profits. Wal -Mart offers a wide range of products with the strategy of ““Every Day Low Price”” that appeal to large audience (Mallon, n.d.). 2.7.4. Threat of new entrance If the barrier to entry is reduced in market then the threat of new entrants’ increases. It is usually more costly for new firms to enter in high barrier industries. Wal-Mart’s brand image is too strong and it is very difficult to enter the market for new born firm. However, if the firm enters in the market then it will find difficulties to exist in the market (Mallon, n.d.). 2.7.5. Threat of substitute product Customer mainly influenced by low prices. Therefore, if cost of switching the product is low then threat of substitutes is higher. Normally, there are three factors that can influence the customer to switch the product such as; willingness of buyers to switch the product, performance and price. On the other hand, if the buyers become loyal to the products then threat of substitute can be decreased (Campbell, 2002). In Wal-Mart “Every Day Low Price” strategy keeps customers in touch with the company (CGMA, n.d.) 3. Internal Analysis 3.1. Company’s Financials The financial performance of Wal-Mart is presented at the end in “Appendix”. 13 3.2. SWOT Analysis This model can help to evaluate the market position of the company through its strong operating performance. We will also identify the company’s strengths and opportunities which have also increase the investors’ confidence. However, the extreme competition can affect the company’s margin. Table 4: SWOT Analysis of Wal-Mart Source: Strategic Management Insight 3.2.1. Strength 1. Scale of operations. The strong market position is the main strength of Wal-Mart with more than $400 billion revenue and almost 11,000 stores worldwide and consumer’s trust that differentiate Wal-Mart from its competitors. Wal-Mart can also achieve higher profit because of its huge size and it has a strong buyer power on suppliers to trim down the costs as compared to competitors (Anon, 2013). 14 2. Competence in information systems. The one reason of Wal-Mart’s success is its Supply Chain and Logistics management. The company is saving significant cost by using its information system properly that managed inventory level, orders, sales and other information. Any information can be easily accessible at each store at any time (Khade and Lovaas, 2009). 3. Wide range of products. The company is offering broad range of both branded and own label products to attract its customers. Wal-Mart sells health and wellness, entertainment, clothing, home and grocery related goods under different categories (Novellino, 2013). 4. Cost leadership strategy. Everyday low price strategy makes different to Wal-Mart from its competitors. Wal-Mart built different discount stores and selling goods at low cost as much as no other competitor can do. Low cost strategy has helped Wal-Mart to become leader in the Market (Gough, 2013). 5. International operations. Wal-Mart has expended its store Worldwide and the company is also looking to open more stores in different countries in upcoming days. According to one study, Wal-Mart earned $135 billion in sales in 2013 from its international stores, which will be grow more faster after opening more stores (Jurevicius, 2013). 3.2.2. Weaknesses 1. Labor related lawsuits. Wal-Mart’s corporate goodwill has been ruined due to its failure to provide better workplace for its employees. Poor work conditions, voluntary overtime work, gender discrimination and litigation costs are some of the examples that Wal-Mart has always been criticized for. This has resulted in the company to pay million dollars of penalties and lawsuits every year (Farfan, 2013). 2. High employee turnover. Wal-Mart’s employee turnover costs are heavily increased due to high employee turnover. It has to incur a lot of expenses for employee on-the-job training and recruitment expenses; the main reason behind these expenses is low skilled labor and low wages jobs (Ungar, 2013). 3. Negative Publicity. Wal-Mart’s has always been criticized for its poor practices such as inducement and poor work conditions for employees. Several lawsuits against the company have damaged its brand image; therefore negatively publicized (Jurevicius, 2013). 15 3.2.3. Opportunities 1. Retail market growth in emerging markets. The company plans to raise its sales by 5 to 7 percent in next year. According to CEO of Wal-Mart International, the company will make balance in existing market and through acquisitions will enter higher growth and large markets (Walmart, 2013). 2. Rising acceptance of own label products. The company has a potential to earn higher profit margin through increasing the sale of their own private label products at its stores. However, over the last 10 years, the sales of private label product have increased by 40% (Chittock, 2013). 3. Online shopping growth. In the first quarter of the year, the online sale of Wal-Mart’s grew by 30% and in March the total sale was about 9 billion. However, it is reported by the company to expand its sales around the world through its e-commerce operations (Davis, 2013). 3.2.4. Threats 1. Increasing competition from brick and mortar and online competitors. Best buy is also planning to start “Same day home delivery” option like Wal-Mart and some other competitors like Target, Tesco and Amazon are also trying to reduce differences among Wal -Mart’s prices that the company enjoys. The company is not so much different from other low cost seller which will increase the competition in future (Ball, n.d.). 2. Increasing resistance from local communities. According to one market analysis report, says that when Wal-Mart opens new store to any particular area, then some local retailers are usually forced to close off their operations. Due to this circumstance Wal-Mart faces strict resistance from communities and retailers which is becoming more difficult for Wal-Mart to open new stores (Catala, n.d.). 3. Rising commodity product prices. Due to increase in manufacturing cost lead the Wal-Mart to raise its product/commodity prices which is reducing the profit margins of Wal-Mart and down the competitive gain (Jurevicius, 2013). 16 3.3. Factors that influence Wal-Mart’s Management In domestic market the strategies which are using by Wal-Mart’s management are BCG matrix and Porter’s generic model. But to knowing that how does Wal-Mart make a decision to enter a new market globally and how many chances are available to succeed in that market. Cathy Smith, CFO and executive vice president of WalMart’s strategy maker talks about the factors that influence and challenges of entering a new market (FDE, 2013). Cathy smith works with neighboring partners globally to make more efficient procedures of Wal-Mart’s market to serve customers around the globe from Europe to South Cathy Smith, CFO and executive vice-president of strategy at WalMart International. Source: Finance Director Europe Africa and Latin America to China. She said by looking that what market is suitable for expansion, the factors that influencing the senior managers in international market and the filters that we use to focuses are as follows: 3.3.1. Factors: Cathy said first we focus on how much risk is there? Then we sort out our ability to capture market by using market trend. She said customers are the most important assets for Wal-Mart, due to this management looks at particular markets where there is an emerging consumer because the Company’s mission is to save people money for their better living standard. Smith said to know the above mentioned points, the management do a lot of research by using the strategies given below; 3.3.2. Strategies: Market Research (Enter organically or through Acquisition) Competitor Analysis Quantitative Analysis 17 Raising the level of retailing ---- Buy or Build? Economies of Scale Smith said, Wal-Mart’s management team do a lot of research before enter into the market. The company sends the small team to the market to spend most of the time in market and learn from competitors and to look the trend of customer that helps managers to understand the market. The team will typically do a competitor analysis and quantitative analysis by research and simple sampling. Once the team done the research then the company decided to enter organical ly by opening new stores or enter through acquisition. For example; In UK, the company acquired the 3rd largest chain “ASDA” but in china the company has grown organically by opening stores in poorly areas to serve people in a big scale (FDE, 2013). According to Smith, in china there are 1.35 billion people; most of them are from middle classes. So, there is a chance of Wal-Mart to grow more by 7-8%. The company just stated that in the next three years Wal-Mart will open 100 new stores in China that will provide 18,000 jobs (FDE, 2013). 4. Conclusion This research has demonstrated the retail industry’s major problems but also assessed Wal-Mart’s overall performance in terms of its defined respective strategies and objectives and the way these have been executed. The low cost strategy of the company attracts more customers towards the Wal -Mart which increases the profit margin. In addition, the company has satisfied its customers need through offering a wide range of products which reduces the risk of customer’s turnover. The Company is well placed and it has the ability to control the major part of market share. It has expanded many stores worldwide and still planning to open more stores. Every year the company finds more ways to satisfy their customer’s need. To conclude, Wal-Mart has developed a great workplace environment which full of competition, self improvement and respects that differentiate the company from its competitor. 18 5. References & Bibliography Alden, E., and Buckley, N., 2004. Wal-Mart Becomes Largest Corporate Political Investor. [Online] Available at: <http://reclaimdemocracy.org/walmart_largest_political_donor_investor/> [Accessed 22 Nov 2004] Anon, 2013. 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