Analyzing business models and investment decision behavior
- Autores: Humberto Antonio Brea Solís
- Directores de la Tesis: Emili Grifell i Tatjé (dir. tes.)
- Lectura: En la Universitat Autònoma de Barcelona ( España ) en 2011
- Idioma: inglés
- Tribunal Calificador de la Tesis: Joan Enric Ricart i Costa (presid.), Emilio Huerta Arribas (secret.), Per Agrell (voc.)
- Materias:
- Enlaces
- Tesis en acceso abierto en: TESEO
- Resumen
Retailing is an economic activity that consists of ¿selling commodities or goods in small quantities to ultimate consumers. ¿ There is a large diversity of economic activities that satisfy this definition. For instance, furniture stores, supermarkets, pharmacies and clothing stores all belong to the retail category. Traditionally, these stores buy large quantities of merchandise and sell them later to final consumers in exchange for a margin.
A general merchandise store is a special type of retailer categorized by the U.S. Census Bureau. This kind of store sells a large variety of goods rather than focusing on one or several items. A traditional general merchandise store is a department store. During the late nineteen fifties and early nineteen sixties a new category of general merchandise store emerged with the objective of satisfying the increasing needs of the American working class. The name of the concept was discount retailing. A discount store is characterized for selling a large diversity of goods at very low prices by controlling costs.
This dissertation, which was supervised by Professor Emili Grifell-Tatjé, is an effort to gain a better understanding of the evolution of the American discount retailing business. In particular, we are interested in the business models followed by the two major firms in the discount retailing industry as well as the motivation behind their investment decisions. We expect that the findings of our research will provide more insight not only to academics but to practitioners as well.
A business model is defined as ¿the logic of the firm¿ by Casadesus-Masanell and Ricart (2010). Firms in the same sector could have different business models. Some ¿logics¿ could have better results than others. A discount chain must choose elements of its business model such as where to locate the stores, pricing policies, human resources practices, governance of fixed assets, merchandise variety, store layout among other elements. It is possible to imagine a multitude of configurations that a discount chain could adopt regarding these choices.
The first and second chapters of the thesis focus on two extreme cases: Walmart¿s success and Kmart¿s failure. The reason is that by focusing on both extremes it is possible to better identify the factors that determine good performance. The third and final chapter of the thesis explores the issue of how a behavioral trait such as optimism affects the investment behavior of a firm and includes an empirical application in the discount retailing context.
Walmart and Kmart opened their first stores in 1962. Kmart was the result of a diversification process undertaken by S. S. Kresge. Conversely, Walmart was a business developed from scratch by Sam Walton, who previously franchised a Ben Franklin variety store (Walton, 1992). Kmart was the most successful discount retailer for a limited time period. Kmart¿s Annual Report of 1971 informed that the discount retailing business generated 2.5 billion dollars in sales that year. In 1971, Walmart was approximately forty times smaller than Kmart in terms of total sales that particular year.
Walmart was a rural competitor with difficulties accessing capital. The firm also struggled to convince vendors to replenish its stores (Walton, 1992, p.52). On the other hand, Kmart expanded the size and scope of its businesses enormously. Kmart¿s achievements provided prestige to the discount retailing industry and the company quickly became a household name. Walmart was, for many years, a follower that limited its role to the service of fringe markets such as rural and suburban areas in the southwestern part of the United States. Despite its shortcomings, Walmart progressed until achieving the game-changer status that still holds today. In contrast, Kmart wasted its leader advantages and declared bankruptcy in 2002.
As previously mentioned, Walmart¿s success story is analyzed in the first chapter of the thesis. Our analysis starts with the description of Walmart¿s business model based on the company¿s reports and studies on the subject. It is at this point that most strategic management case studies stop. We go a step further by quantifying the impact of the main elements of Walmart¿s business model on profit variation. Specifically, we measure how Walmart¿s business model configuration is reflected in the economic drivers that constitute profit change. These economic drivers are price effect, technical change, operating and efficiency change and activity effect. The price effect reveals how the changes in output and input prices affect profits. Technical change shows the alteration in the evolution of profits due to technological shocks. The operating and efficiency effect measures the impact of improvement or deterioration of the production efficiency. The activity effect is a component that embodies all policies aimed at the firm¿s growth. Our results show that Walmart¿s performance is explained mainly by this last component. Walmart did not achieve its current status by charging higher margins or by being more productive, but by continuously expanding its business by opening new stores, increasing product variety and lowering prices to increase sales volume. The empirical analysis provides information about the current situation of the company. It reveals some stagnation in the firm¿s development, increments in costs and the difficulties that the warehouse division, Sam¿s Club, is facing.
Kmart¿s failure is examined in the second chapter of this thesis. Contrary to what occurred with Walmart, Kmart had different business models during the studied period. Kmart was a pioneer in many aspects of the discount retailing business. Harry Cunningham, Kmart¿s CEO from 1959 to 1972, was the manager that established many of the practices that today are commonly applied in the discount retailing sector. Sam Walton acknowledged in his autobiography that Kmart was a source of inspiration (Walton, 1992, p.48). Despite being the leader in the discount retailing business, the company modified its original business models several times in order to jolt their profit stream that was fading at the beginning of the 80s. Their adjustments failed to revitalize the company in a meaningful manner. The last CEO, Charles Connaway, embarked on a price war against Walmart that finished in Kmart¿s bankruptcy. We use a different methodology from the first chapter to quantify how these adjustments affect the evolution of profits. Our findings portray a company that changed its strategy every time there was a change in the CEO¿s position. Kmart¿s route to collapse is far from a downhill track. Kmart applied many incoherent policies that fractured the ¿virtuous cycles ¿ that it had and weakened its competitive position.
If the first and second chapters deal with the mechanics of the business models in the discount retailing industry, the last chapter goes a little further and focuses on the motivation behind the decisions made by the managers. In this chapter we focus on one particular element of the business model: the investment decision. After reading extensively about the different discount retailing chains in the United States, we found some of the choices made by the CEOs regarding investment to be intriguing. For example there was an ¿acquisition spree¿ during the first years of the 80s. The last CEO of Kmart waged a price war against Walmart and launched a program to boost the supply chain management, which required many resources. Annual reports were written optimistically with the idea that companies were heading towards a bright future. The reality was different, the newly acquired business failed to deliver the expected results and Kmart declared bankruptcy. Unrealistic optimism could be the cause of this distorted view of reality. We modify the traditional Adaptive Expectation Model (Maddala, 2001) to include the possibility of bias due to optimism. The result is a stochastic frontier model of expectations in which the inefficiency term represents the optimistic bias. An empirical application was included using data from the main discount retailing chains: Walmart, Target, Kmart, Sears and May.
