Accounting Across the Organization

Accounting Across the Organization - cutting its...

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Accounting Across the Organization Bonnie Kamin/PhotoEdit. In its death spiral toward bankruptcy, Kmart appeared to make two very costly strategic errors. First, in an effort to attract customers, it decided to reduce selling prices on over 30,000 items. The problem was that this reduced its gross profit rate—and didn't even have the intended effect of increasing sales because Wal-Mart quickly matched these price cuts. Because Wal-Mart operated much more efficiently than Kmart, Wal-Mart could afford to absorb these price cuts and still operate at a profit. Kmart could not. Its second error was to try to reduce operating costs by
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Unformatted text preview: cutting its advertising expenditures. This resulted in a reduction in customers—and sales revenue. Explain how Wal-Mart's profitability gave it a strategic advantage over Kmart. Answer: If two competitors get into a “price war,” the company with the lower costs can reduce prices further (thus eroding its gross profit rate), but still operate at a profit. Thus, Wal-Mart's success at minimizing its operating costs has enabled it to drive many competitors out of business...
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This document was uploaded on 11/03/2011 for the course ACCOUNTING ac 201 at Montgomery.

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