Walmart's strategic management

by mrqureshi (student)

University Degree Business and Administrative studies

Executive Summary

At the beginning of 2009, Wal-Mart top management faces the question of whether the same strategy that it has been adopting in the past can be used to maintain the company’s remarkable performance and growth in the next decade.

In the last 10 years, Wal-Mart has achieved strong and constant growth in sales and net income. It has maintained the leading position in the U.S. discount retail industry and has become the largest retailer in the world. With the maturity of the industry, coupled with the intense competition from rivalry companies, maintaining the current level of high performance becomes very challenging.

The Porter’s Five Forces analysis reveals that the competition among rivals is the driving force of the industry, in which price is the most critical factor. The value chain analysis and resource based view analysis show that Wal-Mart has been very successful in implementing the strategy as the low-cost leader by inculcating cost efficiency in its corporate culture, management style, and operations. It has been the pioneer in adopting cutting edge technology to streamline its supply chain, and to understand and respond timely to customer demand. Wal-Mart has developed many strengths that help guard its leading position and open door to many opportunities for expanding the business. However, it also faces threats from growing too big and in many areas, which makes it vulnerable to losing control, weakened cooperation among stores and regions, and competition in multiple fronts.

Wal-Mart should be caution in its growth strategy, especially in the expansion of its international presence. Although its financial strength, management skills, and operation efficiency allow it to enter many overseas markets, it should be selective in choosing the destinations. Wal-Mart can focus on emerging markets where customers are price sensitive such as China and India in Asia. In Latin America, it should focus on Mexico and a few key markets that it previously achieves success. In Europe, it can target regions that lack the presence of large retailers such as Tesco and Carrefoure. Although Wal-Mart’s common practice of acquiring existing small local chains to enter a market has helped Wal-Mart lower its market penetration costs and quickly adapt to local market demands and culture, this practice also raises the issues of diluting corporate culture and weakening the company’s ability to reinforce coherent management practices and strategy. Therefore, international expansion should be implemented patiently and carefully.

Over the last four decades, Wal-Mart has achieved significant successes to become the world’s largest retailer. The company has maintained sustainable growth in a fiercely competitive U.S. retail market environment. It has been continuously expanding both in the range of goods and services, and in the number of stores in the U.S. and worldwide. While this expansion has generated handsome profits for its stakeholders and put the company in a strong financial position, it has also presented significant challenges for sustaining growth and performance, and managing a company that is incessantly becoming larger. Top management now is trying to address whether the same strategy that the company has been pursuing is suitable for maintaining and strengthening its current growth rate and market position, as well as for leading the company into the next decade.

This report will present: 1) an analysis of the external environment of the company; 2) a discussion of the company’s internal resources and capabilities; 3) a diagnosis of the external and internal factors; and 4) recommendations of how the company should move forward.

External Environment

In this section, an analysis of the Porter’s five forces of the discount retail industry and Wal-Mart is presented. For each force, the discussion first provides a general overview of the industry in the U.S., and then focuses on Wal-Mart.

Potential entrants: the threat of potential entrants is considered low due to the following reasons:

Discount retail industry is a highly competitive environment with mostly big players competing for market shares.
Price is mainly the key factor for competition.
Existing companies have established strong and stable supplier networks.
Wal-Mart has a superior logistics and distribution system, cutting edge technology to support all phases of its operation, a well-established brand name, a large number of stores nationwide, and a deep financial resource.
Wal-Mart also has cost advantage over its competitors due to its large purchase volume.

Wal-Mart can deter potential entrants.

Substitutes: the threat of substitute is low.

Consumers can buy from small mom-and-pop stores or specialty stores, but these stores do not offer a wide range of products, nor do they offer competitive prices.
On-line purchase can be a substitute means for shopping; however, it may not be a good choice for goods that are consumed daily because shipping costs may lead to higher final prices, and shipping time can delay the need’s fulfillment.

Industry competition: the competition among existing firms is high because:

This is a mature industry.
There are few but large competitors, who dominate the majority of the market.
Price is the focus of competition, and firms are forced to cut cost to stay competitive.

Bargaining power of suppliers: the power of suppliers is low.

In general, most suppliers rely on retailers to distribute their products to the end consumers; therefore, the role of retailers in the distribution channels is critical.
Wal-Mart not only carries a wide range of products, but also possesses thousands of stores in the U.S. and worldwide. This combination places Wal-Mart in a very strong negotiation position with suppliers and gives it great flexibility in choosing and working with a wide range of suppliers and vendors. As stated in the case, Wal-Mart is “both desired and feared by manufacturers”.
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Bargaining power of suppliers: the power of suppliers is low.

In general, most suppliers rely on retailers to distribute their products to the end consumers; therefore, the role of retailers in the distribution channels is critical.
Wal-Mart not only carries a wide range of products, but also possesses thousands of stores in the U.S. and worldwide. This combination places Wal-Mart in a very strong negotiation position with suppliers and gives it great flexibility in choosing and working with a wide range of suppliers and vendors. As stated in the case, Wal-Mart is “both desired and feared by manufacturers”.
With a fleet of 4,000 trucks, Wal-Mart also has capability to independently operate part of its transportation logistics without relying solely on outside vendors.
Wal-Mart also carries some of its own Great Value private-label products tailored to local demand.

Bargaining power of buyers: the power of buyers is considered moderate.

Switching costs of buyers is low.
Buyers are price-sensitive. They can be easily lured to competitors to buy products that are offered at a lower price.
The differentiation in the products and brands among different discount retail stores in this industry is low.
Since most of the products offered are commodity, buyers usually choose the store that is closest to their home or their workplace for convenient shopping.
Wal-Mart provides a wide range of products and services, and offers very low prices. In addition, it has many stores serving different geographical areas. Hence, it has a large and loyal customer base.

Interest groups such as organized labor unions, environmentalists, and human rights activists can interrupt the business. When a retailer expands internationally, it can face political challenges, as well as differences in culture and practices which may support or deter both the establishment and growth of a company in a country.

In the discount retail industry customers focus on a few elements, including price, convenient location, range of products, and good service. Therefore, the key success factors of the industry require that the firms need to: (1) Maintain low cost by having efficient and effective operations, making bulk purchases from vendors to enjoy volume discounts, and paying low wages; (2) Create differentiation by having large stores carry a wide range of products, easy and accessible locations for convenient shopping, and products that meet local customer preferences and needs; and (3) Fast response to market demand.

The nature of the external environment of the discount retail industry dictates that potential entrant firms can only achieve moderate profit. The driving force of the whole industry is the high competition among rival companies, in which price is the most critical factor. In order to survive and be profitable, firms have to offer competitive prices. This translates into high efficiency in operation, low costs of goods sold, and low operating expenses. The industry may discourage small investors, but because the U.S. is one of the world’s largest retail markets, it can attract potential investors with strong financial strength, especially international retail chains, to enter the U.S.

Internal resources and capabilities

Wal-Mart’s purpose is revealed in its founder Sam Walton’s statement, “If we work together, we’ll lower the cost of living for everyone…we’ll give the world an opportunity to see what it’s like to save and have a better life.” Its mission statement is, “Saving people money so they can live better”. Its mission statement is very brief and broad, but it reflects the purpose of the company and its founder. With the way that mission statement is written, it can be considered as the company’s vision statement because of its broad sense.

Wal-Mart’s corporate strategy is to be a low cost leader, which reflects precisely the purpose of the company’s existence. In the past decade, its strategy has been very effective and successful. It has been continuously growing in sales revenues and net profits from 1998 to 2009. Specifically, net sales increased from US$118 billion in 1998 to US$401.2 billion in 2009, and net profit increased from US$3.5 billion in 1998 to US$13.4 billion in 2009. The company also has a strong balance sheet with ample cash balance. Relative to its rivals (e.g. Target, Dollar General, and Costco), it has higher percentages on return on assets and return on equity. Wal-Mart’s growth strategy is expanding in products and services, as well as in geographical areas. It has been successful in Canada and Mexico, and established presence in other countries.

Below is a value chain model analysis that examines the company’s current key activities and evaluates the effectiveness of these activities. In addition, wherever possible, the discussion also points out the differences from the rival companies and how these activities add value.

Support Activities:

General administration. Wal-Mart has very unique practices. The communication flows are direct between each individual store and headquarter in Bentonville. People from headquarter are sent to local stores to obtain information about competitors and learn about what is happening in the local stores. This practice is different from its competitors who require their people from local stores go to regional offices to report activities and discuss issues. This unusual practice creates a close connection between headquarter and local stores. Therefore, Wal-Mart can timely respond to customer demand, make corrective actions, and react to rivals’ moves to stay ahead of the competition. Collectively, these capabilities help add values to the end users by providing the products at low prices, meeting customers’ demand, and resolving any big issues that affect their buying decision.

The Saturday morning meetings are the trademark of the company management’s style. This activity forms a very unique culture and is considered Wal-Mart’s “spirit”. By having a common ritual, Wal-Mart has created a workplace that bonds people together and creates a sense of belonging for its associates.

Human resource management. Human resource and interaction practices between the company and its associates are based on respect, high expectations, close communication, and clear incentives. Employees receive low pay but enjoy other benefits such as health care plans, retirement schemes, profit incentives, and stock purchase plans. The facts that employees have high degree of autonomy and the company offers “open door” policy and great promotion opportunities create a very unique culture of Wal-Mart. While this culture is unusual in large retail organizations, it adds values to the value chain by creating a good working environment for employees to devote to their jobs and best serve their customers. The low wage, on one hand, allows the company to keep price low; on the other hand, it exposes the company to employee abuse issues and criticisms from interest groups.

Technology integration. Technology integration is one of the primary focuses of the company because of its vital role in the company’s success. Technology has helped integrate Wal-Mart’s entire supply chain so that each stage of the value chain is very effective and efficient, which allows it to promptly offer the right products at low prices to its customers.

Procurement. Wal-Mart deals directly with manufacturers, and purchasing is centralized at headquarter. It requires manufacturers to cut their margin and meet its employment policies. It also has close collaboration with its big suppliers such as P&G to facilitate inventory control. All of these practices have enabled Wal-Mart to buy its inputs at the lowest cost and to save inventory holding costs, which allow it to offer low price products.

Primary activities:

Inbound logistics and outbound logistics. Wal-Mart has superior logistics system. It adopts the concepts of distribution centers and “hub and spoke” arrangement. This is very effective for keeping the inventory level at each local store low and reducing transportation cost. While other retailers rely on either suppliers or 3rd party logistics companies, Wal-Mart is quite independent from outside logistics companies. It also takes control of import logistics from overseas suppliers. In addition, it always strives for cheaper, faster, and more reliable logistics systems by implementing methods such as cross docking systems and remix systems. These practices not only help Wal-Mart reduce expenses but also give it more control and flexibility in handling purchases.

Operations. Wal-Mart’s goal is to offer a wide range of quality products at low prices in a pleasant shopping ambience. It carries both nationally branded products and its own Great Value private label products tailored to local demand. It also continuously expands its product brands to meet different customer needs such as the inclusion of upscale brands such as Apple, Sony, and Kitchen Aid.

A very distinctive feature of Wal-Mart’s operation structure is the decentralization of store management. Store managers are empowered to make decisions related to product range, product display location, and pricing. Department managers within the store can implement their own ideas in order to increase sales and reduce expenses. This is very different from other retailers where these decisions are made at the regional or headquarter offices. This empowerment allows it to best serve its customers, because only local managers are able to best understand local competitors, and demand and shopping behaviors of their local customers.

Marketing and sales. Wal-Mart creates low price appeal to its customers. Its marketing strategy relies on word-of-mouth communication and focuses on everyday low prices, which means that customers can buy the products at the lowest price all the time. This strategy aligns well with its objective of minimizing cost and adds value for the customer because the savings from advertising and promotion allow it to offer products at low prices.

The facts that Wal-Mart issues its annual report on ethical sourcing and commits to environmental sustainability programs by shifting product mix towards environmentally friendly products are good moves. They not only generate a good image for the company, but also create values for its customers by offering environmental friendly products to those who concern about the environment. In a broader sense, it has promptly responded to the trend of conserving the environment, which has become a very hot topic in the current business community.

Service. Wal-Mart’s goal is to create a pleasant shopping experience for its customers. It has achieved this by having greeters at the entrance door and implementing 10-foot attitude that requires employees to greet a customer within 10 feet. It also guarantees customers’ satisfaction by accepting returned goods on a no-questions-asked basis.

The value chain analysis reveals that Wal-Mart’s core competencies include a supply chain with integrated technology, an ability to generate large sales volume, superior logistics systems, operations that are decentralized, a strong and unique culture, a close knit management style between the headquarter and individual stores, a management team that makes things happen with great autonomy, and effective management routines and practices.

An analysis based on the Resource Based View model is conducted to identify whether these core competencies are sustainable. Please refer to the VRIN table in Appendix 1 for conclusions. Based on the VRIN table, it can be concluded that: a) a supply chain with integrated technologies is a competitive parity; b) an ability to generate large sales volume to enjoy low price from suppliers, superior logistics system, operation decentralization, human resources are temporary competitive advantage; and c) strong culture and management routine and practices are sustainable competitive advantages.

Wal-Mart’s strong culture and management routines and practices are very unique. Although at the individual level, many of Wal-Mart’s core competencies are temporary competitive advantages, but in combination, these competencies form a sustainable core competency for Wal-Mart’s superior profitability. In order for a competing firm or a potential entrant to compete, it requires a very strong financial capability to invest in integrated technology of supply chain and superior logistics system. It is also very difficult for any company in the industry to achieve the large sales volume like Wal-Mart does to have such a bargaining power over suppliers. The structure of the company’s management and communication styles, operation autonomy inside Wal-Mart, and management team though imitable and substitutable but can hardly be the same. These core competencies make it difficult for rivals to identify which core competency is critical for Wal-Mart’s success. Therefore, the combining of these core competencies forms a sustainable core competency for Wal-Mart for many years to come.

Diagnosis

The external environment reveals that competition among existing firms in the industry, specifically price competition, is the most critical driving force of the industry. The key success factors include low price, wide product range and convenient location, and fast response to market demand. Wal-Mart’s strategy of being a leader in reducing cost is aligned with the condition of the external environment that it is in, and cost efficiency is embedded in its management systems and its corporate culture. It has been continuously striving to achieve the lowest cost in every aspects of its business. For example, Wal-Mart’s constant efforts can be found in the investment and successful adoption of cutting edge technology in supply chain and logistics systems, making them one of the best systems in the world.

Compared to its competitors, Wal-Mart has many strengths. It has a very strong brand name with reputation for low prices and wide range of products. Its enormous sales volume allows it to have very strong bargaining power over its suppliers. Integrated technology in supply chain enables Wal-Mart to achieve high operation efficiency. Due to its superior logistic systems, Wal-Mart saves transportation costs and is independent from outside logistics. Wal-Mart has capable managers who contribute to the success of the company. However, capable people may not be enough without a very strong culture and values that are shared among associates at all levels. And Wal-Mart does have both. It not only leads the U.S. market, but also is very successful in Canada and Mexico.

Along with the strengths, Wal-Mart also has weaknesses. It can only attract price sensitive customers; those who demand higher quality will stay away from shopping at Wal-Mart. For example, Wal-Mart’s Sieyu chain failed in Japan due to its inability to attract quality-obsessed shoppers. The expansion plan in both product and service range and geographic areas also comes with the cost of losing control in some areas and can negatively affect its ability to compete.

In terms of future opportunities, Wal-Mart has big potential markets in Europe and Asia. With its financial strength, it can either make direct investments through building its own stores or acquire small local chains, or form strategic alliances with leading chains in specific markets.

Wal-Mart also faces several threats. It is always under pressure to sustain its market leader position. Carrying a wide range of products makes it exposed to competition from different fronts, especially from those rivals who are more focused on their merchandise offerings. Being an international retailer, Wal-Mart also faces political problems as well as differences in cultures and practices overseas. The intense price competition put all the players in the industry in a mode of continuously striving to cut costs and achieving high operation efficiency. Foreign giant retail chains such as Tesco or Carrefour can compete with Wal-Mart in both the U.S. and international markets. A summary of Wal-Mart’s strengths, weaknesses, opportunities, and threats can be found in the SWOT table of Appendix 2.

Recommendation

Wal-Mart’s strategy of being a low cost leader is very successful. This same strategy should be maintained and focused in the future. To sustain its success, Wal-Mart should capitalize on its current strengths, minimize weaknesses, capture opportunities, and limit threats.

The company’s adoption of cutting edge technology to learn about customer demand and needs as well as to achieve high operation efficiency must be done on a regular and ongoing basis. Maintaining Wal-Mart’s culture and practices is very important to maintain success. The trademark Saturday morning meetings should be resumed to weekly, because it is very “Wal-Mart” and it helps strengthen Wal-Mart’s associates’ spirit. The company can get larger and larger, but the company’s uniqueness should not be fading or being replaced.

Currently, Wal-Mart only attracts price sensitive customers, those who are more quality obsessed or brand conscious are not shopping at Wal-Mart. Wal-Mart should not change or do anything to minimize this weakness because the company’s strategy is being a low cost leader, and it is impossible to satisfy all the market segments. It is believed that companies that stretch thin in different market segments can easily be stuck in a position without a target market.

Wal-Mart has strong opportunities to enter more markets in Europe and Asia. However, its current growth strategy of both widening product ranges and expanding geographically put the company at risk of stretching its resources, losing operation control, and weakening strategy coherence. It is recommended that Wal-Mart focuses its growth strategy on expanding product ranges to meet various demands. As for international expansion, it should only focus on the markets that it can do well, such as Canada and Mexico. It should consider dropping any international markets that are not performing well (i.e. any unsuccessful markets in Latin America). Before entering Asia and Europe markets, market research should be done thoroughly and Wal-Mart should only focus on a few markets that have the best potential and less competition. The company’s past international expansion faced strategic and organization issues, and therefore, its success has been inconsistent in foreign markets. This is a sound evidence of losing focus and losing control.

By maintaining its strengths, Wal-Mart can continue to beat the competition and minimize its threats. Wal-Mart has responded well to the pressure from environmentalists, women’s and children’s rights advocates, and anti-globalization activists. Although these pressures do not currently affect Wal-Mart’s bottom line but successes in responding to them have helped form and maintain a positive image for the company. It should continue its programs of ethical sourcing and environmental sustainability. Regarding low wage issue, it should maintain its current pay schemes. First, the rates are slightly above the general retail trade. Second, Wal-Mart offers other benefits in addition to basic salary, including profit incentives, stock purchase plan, and promotion opportunities.

By continuously focusing on its strengths and finding ways to increase operation efficiency, Wal-Mart will stay ahead of the price competition from rivals, and deter potential competitors from entering the markets.

Appendix 1: VRIN TABLE