Business Model Evaluation: Quantifying Walmart's Sources of Advantage

• DOI: http://doi.org/10.1002/sej.1190
• Author: Ramon Casadesus‐Masanell,Emili Grifell‐Tatjé,Humberto Brea‐Solís
• Date: 01 March 2015
• Published date: 01 March 2015

BUSINESS MODEL EVALUATION: QUANTIFYING

WALMART’S SOURCES OF ADVANTAGE

HUMBERTO BREA-SOLÍS1, RAMON CASADESUS-MASANELL2*, and

EMILI GRIFELL-TATJÉ3

1HEC Management School, University of Liege (ULg), Liège, Belgium

2Harvard Business School, Harvard University, Boston, Massachusetts, U.S.A.

3Department of Business, Universitat Autònoma de Barcelona, Barcelona, Spain

We develop an analytical framework on the basis of the economics of business performance to

provide quantitative insight into the link between a firm’s business model choices and their

profit consequences. The method is applied to Walmartby building a qualitative representation

of its business model and mapping that representation on an analytical model that quantifies

the company’s sources of advantage over time. The analysis suggests that the effectiveness of

a particular business model depends not only on its design (its levers and how they relate to one

another) but, most importantly, on its implementation (how the levers are pulled). Copyright ©

2014 Strategic Management Society.

INTRODUCTION

In recent years, strategy researchers have become

increasingly interested in the study of business

models.1Although the expression was introduced

long ago by Peter Drucker (1954), academic work on

business models began just a decade ago in the

context of the Internet boom, where entrepreneurs

were asked to explain how their ventures would

create value (the wedge between customers’

willingness to pay and suppliers’ willingness to

sell—Brandenburger and Stuart, 1996) and how

value would be captured as profit. Indeed, the most

common definition of business model is ‘the logic of

the firm, the way it operates, and how it creates and

captures value for its stakeholders.’2

Casadesus-Masanell and Ricart (2008, 2010,

2011) and Casadesus-Masanell and Zhu (2010)

operationalize this notion by decomposing business

models into two fundamental elements: choices—

such as policies, assets, and governance of policies

and assets—and the consequences of these choices.

The causal links between choices and consequences

help explain the logic of the firm, how it creates and

captures value for its stakeholders. These authors

also propose a methodology to represent business

models qualitatively.

In this article, we propose a novel approach to

quantify the link between a firm’s choices and their

consequences and, ultimately, to gain a better under-

standing of the virtues and weaknesses of a firm’s

business model. The method builds on recent

Keywords: Walmart; business model; business model evalua-

tion; business strategy; productivity; retailing

*Correspondence to: Ramon Casadesus-Masanell, Harvard

Business School, Harvard University, Morgan Hall T93, Sol-

diers Field Rd., Boston MA 02163, U.S.A. E-mail: casadesus@

gmail.com

1The recent special issue of Long Range Planning on business

models (April 2010) received more than 80 submissions and

attracted contributions from scholars such as David Teece and

Nobel Prize-winning practitioner Muhammad Yunus. Zott,

Amit, and Massa (2011) review the growing literature in man-

agement on business models. A Google search for ‘business

model’ in September 2014 yielded 27.9 million hits.

2Long Range Planning (2008) call for papers for the special

issue on business models by Charles Baden-Fuller, Ian

MacMillan, Benoît Demil, and Xavier Lecocq.

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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 9: 12–33 (2015)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1190

Copyright © 2014 Strategic Management Society

advances in the economics of business performance

by Grifell-Tatjé and Lovell (1999, 2013, 2014,

Forthcoming) and relates business model choices

to profit variations over time. Its starting point

is the observation that profits rise and fall for two

reasons: changes in prices or in quantities. Specifi-

cally, a firm’s profits could increase for any of the

following reasons: (1) selling goods at higher

prices; (2) paying less for inputs, such as labor or

capital; (3) selling more goods while holding con-

stant a positive cost markup; or (4) using fewer

inputs per unit of good produced/sold. Note that 1

and 2 are related to prices whereas 3 and 4 are related

to quantities.

The proposed analytical framework combines the

theory of index numbers and production theory.

Index numbers produce estimates of the impact of

price and quantity changes on profit change. The

price effect provides insight on the impact of busi-

ness model choices that affect profits through input

and output prices (e.g., product range changes and/or

new supply sources). The quantity effect captures the

impact of choices that affect profits through input

and output quantities (e.g., hiring more staff or

investing in larger stores). Havingobtained an aggre-

gated estimate of the impact of price and quantity

changes on profits, we explore the quantity effect in

more detail. In particular, we use production theory

to gain additional insight on the drivers of quantity

changes and to measure the contribution of these

drivers to profit change. This additional level of

detail is helpful to better understand how business

model choices leading to growth contribute to higher

profits.

To demonstrate how the method can be applied

to produce insights on how a firm’s business model

operates, we apply the method to study the evolu-

tion of Walmart after its IPO in 1970, from 1971 to

2008. Walmart constitutes an ideal setting to apply

our approach and demonstrate its value because:

(1) there is a wealth of qualitative information

about the company, which allows us to build a

detailed business model representation; and

(2) being a public company, the accounting data

needed for the analysis are readily available. The

study has two parts. First, we use information from

annual reports, analyst reports, academic papers,

case studies, and books about Walmart to describe

the company’s business model choices over time.

Second, we implement the quantitative model to

determine the effect of Walmart’s choices on its

performance.

The results reveal that while Walmart’s business

model did not change during the 36-year period of

study, by emphasizing different elements, each CEO

implemented the business model differently.Specifi-

cally, input and output prices, technological prog-

ress, sales volume, and volume of inputs employed

played different roles under Sam Walton, David

Glass, and Lee Scott. Thus, the results suggest that

the effectiveness of a particular business model

depends not only on its design, but also on its imple-

mentation.

Under Sam Walton (1972 to 1988), Walmart

deepened its policy of everyday low prices

(EDLP), which led to negative output price varia-

tion. These were somewhat offset by favorable

input price concessions obtained from vendors.

While price reductions to customers hurt profits,

more favorable purchase prices from vendors

had a substantial positive effect. The analysis

also reveals that under Sam Walton, Walmart

increased profits substantially through the adoption

of new technology (e.g., investment on a satellite

system, uniform product codes, or automated dis-

tribution centers) that corrected the inefficient

expansion of its first decade. Thus, embracing new

technology was a key determinant in Walmart’s

future success.

Walmart’s success during David Glass’s (1988 to

2000) period was due to business model choices

aimed at increasing volume, such as building new

stores, increasing product variety, setting low prices,

and implementing high-powered incentives for store

managers. Technologicalimprovements explain only

a small fraction of the company’s profit variation

over this period.

The third and last period of the study corresponds

to Lee Scott’s tenure (2000 to 2008). Our results

show weaker EDLP and cost controls. Indeed, value

added per dollar sold and input prices—labor costs,

mainly—were on the rise under Scott’s tenure.

Finally, our study indicates that by the early 1980s,

Walmart had become the most efficient discount

retailer in the United States, a position it held

through the end of our sample.

The article is organized as follows: we next briefly

discuss the concept of business model, introduce the

terminology of business lever, and describe

Walmart’s most important business model choices.

Then we present the methodology and describe the

dataset. After presenting the results, we conclude

with a discussion of the advantages and drawbacks

of the method.

Business Model Evaluation: Quantifying Walmart’s Sources of Advantage 13

Copyright © 2014 Strategic Management Society Strat. Entrepreneurship J.,9: 12–33 (2015)

DOI: 10.1002/sej