Economics of Business Strategy
Strategic Analysis of Wal-Mart
Introduction
Central to the achievement of sustainable organizational development are strategies. Sustainable competitive advantage is the ultimate goal of strategizing. Amongst the motivations to strategize are to grow fast ahead of the competitors, grow in the line with the industry or to simply catch up and defend an existing status. Materialization of these strategies, however, is hindered by different challenges, threats and risks experienced by the organization in the process of pursuing strategies. As such, strategic decision-making is a multi-approach that requires careful consideration of the firm seeking to widen scale, scope and reach. Strategies, nevertheless, depends on the resources and capability of the organization. In this report, strategic management and its drivers, nature and dynamics will be discussed through investigating the case of Wal-Mart.
Brief Background of the Company
Wal-Mart was founded in 1962 through opening the first Wal-Mart discount store in Rogers, Arkansas. The world’s largest public corporation by revenue, Wal-Mart is an American corporation that operates a chain of large discount department stores. Wal-Mart employs 2.1 million employees, known as associate internally, worldwide, all of which contribute to the $401 billion sales within fiscal year 2009. The company serves more 200 million times per week its customers and members in more than 7, 800 retail units. These units are under 55 banners in 15 countries. Its super center, with the first one opened in 1983, is now the dominant format, featuring a complete grocery plus general merchandises. Further, Wal-Mart ranked first among retailers in Fortune Magazine’s 2009 Most Admired Companies survey for the reason of sustainability, corporate philanthropy and employment opportunity (Wal-Mart online).
Porters Five Forces Analysis
Wal-Mart operates within the retail industry as the preeminent low-cost retailer, a strategy that is embedded on its pricing philosophy of Everyday Low Prices. What drives the competitive advantage of Wal-Mart are the broad assortment of merchandise that enables grocers a one-stop shop experience and the high in-stock levels which provide these grocers the confidence that Wal-Mart stores will have what they need as well as its long operating hours that allows customers to shop at their convenience. Besanko et al (2003) also contend that a firm should assess competitive pressures and evaluate responses to competitor price and non-price strategies. Whether or not Wal-Mart maintains sustainable competitive advantages within the retail industry could be determined by a five forces analysis, consisting of barriers to entry, supplier power, buyer power, substitute and competition.
Barriers to entry
Penetrating the retail industry would have immediate barriers that are relatively low. This is because opening a retail store is low-capital intensive, fixed costs are also low and the specific knowledge of operating a discount store was realistically obtainable. Besanko et al (2003) asserted that it is important for a firm to evaluate its strategic positioning for the purpose of coping with entry decisions. Because Wal-Mart, and the likes of K-Mart and Target, has the ability to drive other small businesses out and with its inherent ability to set low prices over its major competitors, entry barriers in the discount retailing industry today is high. Wal-Mart, most specifically, is able to do this because of the long-run average operating cost which is much lower due to economies of scale it realizes.
Today, Wal-Mart offers consumer staples both food and non-food. Wal-Mart, to address the wealth of substitute products from rivals, shifted its strategy to increase food categories in addition to hard and soft and durable items and apparel from 1999 (Senne, 2005). Brick and mortar stores and online shopping are the two main substitutes for Wal-Mart although the latter was addressed through creating www.walmart.com. Understandably, the threat of online shopping cannibalizing sales would have no significant effects to Wal-Mart’s operation at this point and in the case that Wal-Mart saturates the market through its retail stores, online shopping would be detrimental to its store sales.
Even before, Wal-Mart has power over its competitors. Sam Walton, its founder, was able to push suppliers to sell merchandise at much cheaper prices so that Wal-Mart could sell those at cheaper prices as well. Bulk buying and contract agreements were critical in its supplier relationship. According to Barbaro (2006), Wal-Mart embraced the ‘plus one’ philosophy and demanded that each supplier either lower its price or increase the quality every year on every item. This very same philosophy still exists today coupled with operating own distribution centers, telling that supplier power is fairly nonexistent. Sushil (n.d.), nevertheless, noted that Wal-Mart represents a large percentage of the suppliers’ businesses.
Wal-Mart maintained that the ultimate power rests in the hands of the buyer. Wal-Mart finds low-cost products to offer at low prices, dubbed as ‘Everyday Low Prices’ philosophy, was claimed to be consistent with great buyer power. This might be also because of Wal-Mart’s powerful position relative to the supplier which in effect shapes the seller profitability. Barbaro (2006) maintain that what makes Wal-Mart appealing to the end consumers from its inception onward was its cost advantage while also avoiding erratic price changes in the market. On the other hand, I could also consider that individual buyer has little to no pressure on Wal-Mart because of its pricing techniques. As such, Wal-Mart then could be considered as both powerful over its suppliers and buyers.
Ortega (1999) accounts that instead of gambling in the discount store segment, Wal-Mart, through its founder Sam Walton, had created a segment to compete for and where it will emerge as the leader. Wal-Mart stores were also strategically located on a connector highway outside a small community, drawing away business from small local retailers, enclosed malls and specialty stores.
SWOT Analysis
Wal-Mart is also perceived as dependable because of the ultimate convenience of shopping for what people want and need at a time most suitable for them; Wal-Mart stores have longer operating hours (Marquard and Birchard, 2006). As such, what maintains a strong and sustainable competitive advantage is its lowest-cost, one-stop-shop business model. In what particular ways such business model provides competitive edge for Wal-Mart is explored as follows by means of analyzing its strengths, weaknesses, opportunities and threats.
Strengths
Firstly, Wal-Mart is very customer-oriented; decisions are built upon strategies to maintain effective customer relationship. Aside from offering on-stop shopping, Wal-Mart also enables its customers to buy bulk. Satisfaction guaranteed programs are also evident which were perceived as promoting customer goodwill. Wal-Mart also aids the economy by means of buying from local merchants whenever possible (Barbaro, 2006; Spotts, 2005). For its employees, stock ownership and profit-sharing are provided while also providing these associates an ongoing development through seminars, workshops and trainings. Wal-Mart also has a strong community involvement both the associates and top management.
Weaknesses
One of the primary weaknesses of Wal-Mart is that it lacks a formal mission statement, which is important in setting future directions of a company. Because of its old fashioned store policies, the company is also tended to keep poor performing employees on hand. Another weakness is that its top management accommodates very few women and minorities (Hummer, 2006).
Opportunities
When it comes to the consumers, they are increasingly demanding for ease of shopping aside from increasingly becoming ethical and/or environment conscious consumers. The elderly population is growing with which could be exploited as a significant market niche segment (Spotts, 2005). Nevertheless, Asian and some European markets are relatively untapped by retail. In terms of operation, similar shopping patterns worldwide could be also exploited.
Threats
Immediate threats to Wal-Mart are variety of competition locally, regionally and nationally, all of which can be regarded as substitute. Another threat is the value of dollar that is declining if not really stable as this can decrease the expected retail sales output of the company (Hummer, 2006; Spotts, 2005). Others include, regulations relating to retail operations and bad media exposure of specific brands. Small towns do not want the entry of Wal-Mart as it can kill various small businesses in that town.
Value Chain Analysis
Wal-Mart is built around four retail concepts, the first being its discount stores which follows the same pattern since the company’s founding in Roger, Arkansas. The second concept is the combination of these discount stores with a total inventory of almost 100, 000 items into super centers. A third concept point to a Wal-Mart neighborhood market which provides services of a traditional grocery store in a building format and the fourth concept is a membership warehouse store which carries a constantly changing inventory of about 4, 000 items. With this said, logistics, or its attitude toward its supply chain management, is believed to be the cornerstone in achieving and sustaining the competitive advantage (Marquard and Birchard, 2006).
As such, Wal-Mart operates a hard to beat global network of 146 distribution centers included in the total are 103 distribution centers in the US which provides service to approximately 2, 800 discount stores super centers and neighborhood markets and 525 membership stores known as Sam’s Clubs. In addition to this, there are also 1, 300 international units dispersed in 9 countries (Marquard and Birchard, 2006). Such strategy had resulted into a trickle-down effect which helps in reducing lead times in serving stores, and for suppliers shipping merchandise to the distribution centers. Wal-Mart’s supply chain is illustrated below. Troy (2003) asserted that shorter lead times mean less safety stock has to be kept on mind and when out-of-stock situations arise it can be resolved quickly because stores receive daily or multiple daily deliveries.
Marquard and Birchard (2006) also assert that to serve such a wide distribution network, Wal-Mart strategize to own one of the largest private fleets of more than 3, 000 tractors and 12, 000 trailers while most of the competitors are outsourcing trucking. This is an important part of corporate governance to give the company control of its operation which would be impossible in contract situations. Fleet has an on-time delivery record of 99.5%. Wal-Mart termed this as a saturation strategy wherein the standard was to be able to drive from distribution center to a store within the day.
Troy (2003) relates that Wal-Mart implemented a satellite network system, allowing informations to be shared between the company’s wide network of stores, distribution centers and suppliers. Each store is equipped with a satellite dish for the purpose of linking data into the largest single sales database worldwide by means of two earth station transmitters at corporate headquarters. This system enables Wal-Mart to consolidate orders through buying full truckload quantities without incurring the inventory costs. The system keeps track of sales and inventory results in a total of 75 million point-of-sale transactions per week.
Core Competences Analysis
A culture within Wal-Mart is based on profit-derived no from the pricing end but from the cost end of every transaction. Singh et al (2009) outlined the seven basic rules of operation: forming partnerships with vendors, keeping expenses low with the belief that suppliers can provide timely deliveries at low prices, proper store location selection, company ownership of distribution fleet, ‘knowing the numbers’ or the detailed sales figure by department and by individual store associate, knowing its competition, and taking care of the customers. To have the lowest prices in the market as a tool for driving up sales and generating profits is the core competence.
Wal-Mart’s executives continuously rely on several traditional goals and philosophies that Sam Walton’s legacy left behind. The frugal culture for instance as opposed to corporate extravagance is one aspect that is consistent with the lowered prices of products sold or the ‘Always Low Prices’ philosophy at Wal-Mart stores. The idea is to make the customer No. 1, encompassing the idea that by responding and serving customers’ needs first, the business would also serve the needs of its associates, shareholders, communities and other stakeholders. Another cornerstone of its culture is making Wal-Mart accessible to everyone through exclusive channel that are known as discount stores worldwide.
Although the reputation is increasingly becoming weaker, Wal-Mart maintains to be the strongest brand in its industry. Wal-Mart brand stood for both value and values such as patriotism, community and opportunity. For Wal-Mart, taking pride on its brand means to provide a better quality of life to its customers (Marquard and Birchard, 2006). Wal-Mart’s business model that is embedded on the shopper’s desire to buy a trusted item as quickly and as cheaply as possible is what makes the brand strength. The brand also caters to both basics and special item categories, an activity known to tap the mass market such as low to middle income categories. Intended to be the smart choice for the consumers, Wal-Mart as a brand is also overwhelmed by other strong brand names related to every category.
Educating and developing associates is another process important to Wal-Mart. Investing in its people, Wal-Mart tries to grow talent internally and it has developed a detailed selection process to identify the best talent and is providing formal training to build skills that is required for the expanded roles. Spotts (1995) claims that Wal-Mart had also harmonized senior leadership teams and operations through offering new roles to high potential senior executives from other areas such as merchandising and logistics. Internal promotions are also complemented by internal promotions. A completely redesigned compensation program that reward all store associates on the basis of achieving store goals in order to improve execution and close the gap between strategy and performance was also implemented.
Further, Wal-Mart had reorganized field operations so that associates could take ownership and improve customer service to better improve customer experience. Some of the changes that Wal-Mart recently implemented are store cash office redesign, front-end service, customer needs scheduling, positive associate experience and store manager routines, merchandise flow and increasing customer touch points (Marquard and Birchard, 2006). Aside from leveraging know-how of the associates, these processes enabled Wal-Mart to extract more knowledge from the customer, which could help in improving profitability as well.
Wal-Mart’s generic strategy is cost leadership, a strategy that emphasizes efficiency and take advantages of the economies of scale (Hummer, 2006). There are threats, however, that Wal-Mart must understand and respond to. The first is process threat (Spotts, 2005) wherein the customers want the lowest price but these customers do not always trust the lowest price especially when there is no brand name that could provide assurance. Customers perceive low prices as an actual suggestion of low quality. Further, Wal-Mart is undisputed as a preferred choice for buying all the basic needs but when it comes to special items, the name Wal-Mart is not a strategic choice (Hummer, 2006). Further, another generic threat is the stability and applicability of business models. Wal-Mart also struggled in exporting brand elsewhere because of its objective to reproduce the business model (Sushil, n.d.).
Conclusion
In sum, Wal-Mart is the most significant player in the retailing industry; in fact, Wal-Mart is the very manifestation that such an industry exists. Wal-Mart thrived in the retail industry amidst the fierce competition is because of lowest-cost, one-stop shop business model. The unique selling proposition that are low prices, in-stock positions and customer service are the key strategies. Strategies involved are competitively reduced cost, consumer-centric sales, and co-operated suppliers.
References
About Us, Wal-Mart Corporate Website, Wal-Mart, retrieved on 26 May 2009, from http://walmartstores.com/AboutUs/.
Barbaro, M 2006, ‘Wal-Mart Tries to Find Its Customer,’ New York Times.
Besanko, D, Dranove, D and Shanley, M 2003, The Economics of Strategy, John Wiley and Sons, New York.
Fishman, C 2006, The Wal-Mart Effect, Penguin, New York.
Hummer, R 2006, Wal-Mart Stores: Competitive and Financial Analysis.
Marquard, W H and Birchard, B 2006, Wal-Smart: What It Really Takes to Profit in the Wal-Mart World, McGraw-Hill Professional.
Ortega, B 1999, In Sam we trust: the untold story of Sam Walton and how Wal-Mart is devouring the world, Kogan Page Publishers.
Senne, S 2005, ‘Wal-Mart struggles with deeper problems,’ MSN-BC.
Spotts, G 2005, Wal-Mart: The high cost of low price, The Disinformation Company.
Sushil, A n.d., Capability Analysis.
Troy, M 2003, ‘Logistics still cornerstone of competitive advantage - Wal-Mart The Category King: A New Era of Excellence,’ DSN Retailing Today. Singh, A, Kasarwani, R J, and Agarwal A 2009, Wal-Mart – Competing in the Global Market, Online resource.
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