Difference between the business models of Target and Wal-Mart
Discuss about the Business Models and Technological Innovation.
The current assignment deals with identifying the comparisons between the business models of Target and Wal-Mart. In addition, the significance of ratio analysis along with the important categories of ratios is evaluated from the perspective of the retail organisations. The impact of the business models on the financial performance of the above-mentioned organisations is critically reflected to develop an insight about their financial positions. Moreover, the study also analyses the cause behind changing rate of return in terms of equity, price-earnings and leverage ratios. The latter segment of the assignment sheds light on Ackman’s views for modifying the financial and overall strategies of Target.
The Dayton Company has established Target in the year 1962 and Wal-Mart has been set up in the same year. These two organisations are the major competitors in the US retail industry in the 21st century. The major points of distinction between the business models of Target and Wal-Mart are summed up as follows:
Nature of services:
Target has been popular in the US retail industry for its “fun, fast and friendly services” to its clients. Wal-Mart, on the contrary, has been popular for its strategy of low cost services. In this context, Baden-Fuller and Haefliger (2013) stated that the small retailers often tend to follow the business models of large retailers for improving their themes of store layout to cater the needs of the customers.
Prices and visual display:
Wal-Mart is known for its cheaper prices of products and the stores contain large boxes with racks of products and general merchandise to meet the needs of the customers. The racks and furniture are of basic designs with the aisle space minimised to portray the sensation of low prices. In the words of Landry et al. (2013), such sensation converts the perceptions of the customers to purchase quality products at lower prices compared to the other stores in the market.
Target, on the other hand, has designed its theme at the most appropriate costs, as it mainly aims to target the higher-class customers. Additionally, the fixtures and layouts of Targets are highly elaborate having broader aisles and quality concepts of lighting. In this regard, Schaltegger, Lüdeke-Freund and Hansen (2012) stated that such high quality layout and visual display improves the customers’ shopping experience. However, it is worth mentioning that Wal-Mart has now undertaken initiatives in most of its US stores by incorporating better quality of fixtures and broader aisles to attract the high-level customers.
Nature of services
Soft lines:
As commented by Baden-Fuller and Haefliger (2013), the soft lines are the soft products involved in retail organisations like linens and clothing. Target has developed a set of designers to create brand new soft lines for its stores. Therefore, the organisation aims to improve the shopping experience of the customers by depicting the reflection of selling better quality soft goods at reasonable prices. Conversely, Wal-Mart has focused on the traditional marketing approach of providing quality soft goods at cheaper prices compared to the competitors.
The financial ratio analysis is an important method to evaluate the financial performance of an organisation and its significance is briefly summed up as follows:
Evaluation of financial statements:
With the help of ratio analysis, the associated stakeholders of an organisation could determine the profitability and liquidity positions of the same (Healy and Palepu 2012). For instance, the profitability ratios like gross margin, operating margin and net margin could help the organisation to know about its profit margin and accordingly, measures could be taken to improve the same further.
Judging the organisational efficiency:
As commented by Delen, Kuzey and Uyar (2013), the efficiency ratios and the liquidity ratios like inventory turnover, debtors’ collection, creditors’ payment, current and quick ratios help in knowing about the operational efficiency of the management. Accordingly, Target would be able to make effective use of its assets to earn higher income. In addition, the turnover ratios would also help the organisation to know about the market demand. The other two efficiency ratios would indicate the effectiveness of the organisation in collecting and paying amounts to the debtors and creditors respectively.
With the help of accounting ratios like return on investment and dividend payout, the external investors associated with Targets could make sound decisions based on the annual or monthly returns. Based on these ratios, the investors make decisions whether to make investments or withdraw the fund invested in the business (Brigham and Houston 2012).
Comparison of financial performance:
In the words of Brigham and Ehrhardt (2013), it is of prime necessity for an organisation to compare the financial position of its rivals. Hence, based on the financial ratios, Target could be able to distinguish its performance from Wal-Mart and take remedial actions, if necessary, to increase its revenue margin.
Evaluation of the stability of a firm:
The accounting ratio like capital gearing ratio help in evaluating the financial stability of a firm by indicating its leverage (Frank and Pamela 2016). In case, the preference share capital and other fixed interest bearing loans are higher in contrast to the equity share capital and reserves, the investors might not be willing to invest in Target and vice-versa.
Prices and visual display
Figure 1: Importance of financial ratio analysis
(Source: Brigham and Houston 2012)
Identification and importance of the key ratio categories for the retail companies:
With the help of gross margin, Target would be able to review its pricing strategy and evaluate the risk of overpricing or under pricing based on the cash flows. In case, the profit is low, the management of Target could reduce its cost of sales, increase the sales value and minimise damages. In the words of Vernimmen et al. (2014), the retail organisations mainly aim to achieve 50% gross margin at the end of each accounting year.
Inventory turnover:
The management of Target needs to consider this ratio, since it helps in knowing the selling and replenishment of stocks. In this context, Weil, Schipper and Francis (2013) cited that higher rate of turnover reflects the introduction of new merchandise, while a lower turnover indicated the capital congested in stocks. In the latter case, Target needs to release its inventory at lower cost to avoid any potential loss.
Liquidity ratios:
With the help of liquidity ratios, Target could gauge the ability of its stores to write off the short-term debts and obligations. According to Edwards (2013), the benchmark for current ratio is 2 and that of the quick ratio is 1 for the retail industry. However, Richard and David (2016) argued that the retailers often consider the quick ratio as the best measure, since it subtracts inventories from current assets to indicate the firm’s ability of raising cash for meeting debt obligations.
The return on assets is considered as another important ratio, which portrays the growth rate of the retail operations (Horngren et al. 2012). The retailers like Target always prefer to have higher ratio to maximise the amount of revenues. The creditors consider the gearing ratio to compare the investments with the funded business portion. Thus, Target needs to maintain a lower gearing ratio to ensure increase in funds from the creditors.
According to the financial report of Target, the sales of the organisation have increased at almost a fixed rate from $26,296 in 1999 to $62,884 in 2008. This depicts that the organisation has managed to increase its customer base through improving its store layouts and the nature of services. However, Wal-Mart has also experienced wide increase in its revenues from S153,345 in 1999 to $401,244 in 2008. In this case, Wal-Mart has been enjoying competitive advantage over Target due to its low cost products to attract all categories of customers.
Soft lines
According to the gross margin value, Wal-Mart has been enjoying competitive advantage over Target. This is because of high quality products at cheaper prices to attract all types of customers. However, both the organisations have performed quite above the industrial benchmark of 50%. The degree of financial leverage for Target has been 0.96 in 2008 compared to 0.61 of Wal-Mart. This depicts that Target has relied highly on debt financing, which has increased the debt payments of the organisation. In addition, the inventory turnover of Wal-Mart has been greater, which is due to the selling of goods at low prices to the mass market.
However, the liquidity position of Target has been quite higher in contrast to Wal-Mart. The possible reason is the increased amount of retained earnings and less investment on capital projects. This implies that the company has been efficient in discharging its existing liabilities with the cash generated. This has been further supported by the dividend payout, which is high for Wal-Mart over the years 2006-2008. The debt-to-equity ratio has been significantly high for Target, which reveals that the company is inefficient to acquire funds through issuance of equity shares. The credit policy of Wal-Mart has been stringent, as the company is not extending the amount to be received from the debtors for accumulating higher working capital. This is because Wal-Mart has been making payments to its creditors within short span of time in comparisons to that of Target.
Thus, these above-mentioned ratios are the key metrics, which have helped in ascertaining the financial performance of Target and Wal-Mart.
The rate of return on equity is largely dependent two components, which include net margin and the asset turnover. For instance, if the sales of an organisation increase, the return on equity also increases, since each sale generates higher money for the organisation (Hotchkiss, Strömberg and Smith 2014). In addition, if any retailer generates greater sales from the assets owned, it increases the return on equity. Thus, the product sales and turnover from assets are the major determinants, which lead to differential rate of return on equity for the retailers.
Some retailers deliberately increase the financial leverage to acquire funds through debt financing in relation to the equity shares. Thus, higher amount of debt in the capital structure of the organisation might result in higher price/earnings ratio and equity returns (Pätäri, Karell and Luukka 2016).
According to the provide case, Ackman has hold a substantial portion of the shares of Target and initially, the person was highly satisfied with the financial performance of the organisation. However, the person has demanded to be appointed as a board member of Target. The management of the organisation has declined the negotiation immediately. Hence, this shows that the person has self-interest in the organisation to accomplish his personable goals and objectives.
Importance of financial ratio analysis and the importance of some ratio categories in contrast to others
It is quite justified on the part of Ackman to change the board of directors of Target, as no direct possesses the relevant CEO experience. However, it is to be borne in mind that Ackman has been quite satisfied with the management before putting forward the proposal of becoming a board member. Thus, this demand for change might not be aligned to suit the needs of the associated stakeholders.
Ackman has also suggested to increase the business reach outside USA to match with the revenues of its major competitor, Wal-Mart. In addition, the proposed nominees of the person do not have any sort of relationship with Ackman, which challenges the personal conflict issue. Furthermore, one of the former board members of Target has extended support to the proposed changes, as they will result in creation of long-term values fore the shareholders.
However, most of the external analysts have supported the management of Target by stating that the investors are highly satisfied with the organisational performance. This is because the earnings from each share of the organisation have increased from 1999 to 2007; however, it has fallen marginally in the year 2008. In addition, the management of Target has been effective to maintain its liquidity position despite the lower turnover from inventory and delayed payments from debtors. Despite positive effects of Ackman’s changes, the demand for changes has aroused because Ackman has been denied to be appointed as a director within the organisation. Hence, despite the increase in financial leverage and fall in the annual sales growth, it has yielded adequate returns to the investors. Thus, Ackman’s demand for changes is not justified to match the organisational strategies and financial record of accomplishment.
In compliance with the brave discussion, it is feasible for the investors to stay with the current board of Target. This is because Target has provided the opportunity to Ackman to express his views to the shareholders possessing the voting rights and most of the shareholders have turned up for the organisation. In addition, the changes proposed on the part of Ackman would barely result in long-term benefits to the shareholders. In addition, Target has increased its dividend payout to the shareholders over the years, which also signifies the management efficiency in running biasness operations. Hence, from the perspective of an investor, it is better to select the existing Target board instead of choosing the proposed slate of Packman.
Evaluation of financial statements
In order to avoid such conflict, the Target Board could have increased the remuneration of Ackman, as the maximum amount of investment is drawn from the person itself. However, Callen (2015) argued that increasing the remuneration of a specific shareholder might result in discontentment amongst the other stockholders. In addition, Target could issue bonus shares to Ackman through which greater benefits could be realised. With the help of such strategies, Target might have been able to avoid such conflicting interest and maintain effective relationship with the largest shareholder of the organisation.
According to the provided scenario, a substantial portion of the derivative securities of Perishing Square is with Target, which would perish within two years. Hence, this type of investment would help in boosting the stock performance of Target in the short-run; however, the value is nominal in relation to long-term shareholder value. As a result, the return on equity might be reduced largely along with fall in the dividend payout ratio. In addition, the company might suffer from poor liquidity position, as the creditors might not be willing to extend its payment period due to the possible fall in share prices.
Conclusion:
According to the above discussion, the business model of Target is to attract the high-income individuals by selling products at affordable prices. On the other hand, Wal-Mart has been providing high quality products at lower cost to attract all types of customers. In addition, it has been found that ratio analysis is an important financial tool to evaluate the financial performance of an organisation and help the investors to make sound decision-making. After comparing the financial performance of Wal-Mart and Target, the former has been enjoying competitive advantage due to its expansion in the global markets.
Furthermore, from the given case, it has been found that Ackman’s proposed changes are not effective in improving the financial performance of Target from the ethical perspective. In order to avoid such conflict, the organisation might have increased the remuneration ad issued bonus shares to Ackman. Lastly, it has been evaluated if such the changes were implemented, it might result in loss of shareholder value of Target.
References and Bibliographies
Baden-Fuller, C. and Haefliger, S., 2013. Business models and technological innovation. Long range planning, 46(6), pp.419-426.
Landry, R., Amara, N., Cloutier, J.S. and Halilem, N., 2013. Technology transfer organizations: Services and business models. Technovation, 33(12), pp.431-449.
Schaltegger, S., Lüdeke-Freund, F. and Hansen, E.G., 2012. Business cases for sustainability: the role of business model innovation for corporate sustainability. International Journal of Innovation and Sustainable Development, 6(2), pp.95-119.
Healy, P.M. and Palepu, K.G., 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications,40(10), pp.3970-3983.
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.
Frank, J.F. and Pamela, P.P., 2016. Financial Management and Analysis.
Hotchkiss, E.S., Strömberg, P. and Smith, D.C., 2014, March. Private equity and the resolution of financial distress. In AFA 2012 Chicago Meetings Paper.
Pätäri, E.J., Karell, V. and Luukka, P., 2016. Can size-, industry-, and leverage-adjustment of valuation ratios benefit the value investor?.International Journal of Business Innovation and Research, 11(1), pp.76-109.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014. Corporate finance: theory and practice. John Wiley & Sons.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting)(Vol. 29). Routledge.
Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D. and Tan, R., 2012. Financial Accounting. Pearson Higher Education AU.
Richard, L. and David, P., 2016. Advanced financial accounting.
Callen, J.L., 2015. A selective critical review of financial accounting research. Critical Perspectives on Accounting, 26, pp.157-167.
Warren, C.S., Reeve, J.M. and Duchac, J., 2013. Corporate financial accounting. Cengage Learning.
O’Neill, P., Sohal, A. and Teng, C.W., 2016. Quality management approaches and their impact on firms׳ financial performance–An Australian study. International Journal of Production Economics, 171, pp.381-393.
Parker, L.D., 2012. Qualitative management accounting research: Assessing deliverables and relevance. Critical Perspectives on Accounting, 23(1), pp.54-70.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
