Strategic analysis of WalMart

Strategic analysis of WalMart The secret of successful retailing is to give your customers what they want. And really, if you think about it from your point of view as a customer, you want everything: a wide assortment of good-quality merchandise; the lowest possible prices; guaranteed satisfaction with what you buy; friendly, knowledgeable service; convenient hours; free parking; a pleasant shopping experience. Sam Walton (1918-1992) (WAL-MART FOUNDER) Wall mart bought a revolution in the field of retail industry with its tag line low Price Always. This is achieved through large scale of operation and bulk buying. Though it has a wafer thin profit margin, it is able to retain its cost leadership in market. Company History: Wal-Mart Stores, Inc. is not only the largest retailer in the world, it now also ranks as the largest corporation in the world. The retail giant dwarfs its nearest competition, generating three times the revenues of the worlds number two retailer, Frances Carrefour SA. Domestically, Wal-Mart has more than 1.2 million workers, making it the nations largest nongovernmental employer. U.S. operations include 1,478 Wal-Mart discount stores (located in all 50 states); 1,471 Wal-Mart Supercenters, which are combined discount outlets and grocery stores (and which make Wal-Mart the countrys top food retailer); 538 Sams Clubs, the number two U.S. warehouse membership club chain (trailing Costco Wholesale Corporation); and 64 Wal-Mart Neighborhood Markets, smaller food and drug outlets also offering a selection of general merchandise. International operations, which commenced in 1991, include Wal-Mart discount stores in Canada and Puerto Rico; Wal-Mart Supercenters in Argentina, Brazil, China, Germany, Mexico, Puerto Rico, South Korea, and the United Kingdom; and Sams Clubs in Brazil, China, Mexico, and Puerto Rico. Wal-Mart Neighborhood Market Wal-Mart Neighborhood Markets are grocery stores that average about 42,000 square feet (3,901.9 m ²). They offer a variety of products, which include full lines of groceries, pharmaceuticals, health and beauty aids, photo developing services, and a limited selection of general merchandise. The first Neighborhood Market opened in 1998 in Bentonville, Arkansas. As of November 30, 2007, there were 128 Neighborhood Markets in the United States. Sams Club Sams Club is a chain of warehouse clubs which sell groceries and general merchandise, often in large quantities. Sams Club stores are membership stores and most customers buy annual memberships. However, non-members can make purchases either by buying a one-day membership or paying a surcharge based on the price of the purchase. Some locations also sell gasoline. The first Sams Club opened in 1983 in Midwest City, Oklahoma under the name Sams Wholesale Club. Sams has found a niche market in recent years as a supplier to small businesses. All Sams Club stores are open early hours exclusively for business members and its slogan, as such, is Were In Business for Small Business. WAL-MART GOING GLOBAL Wal-Mart and International Expansion Wal-Mart was entered into international markets by a conviction that it could achieve competitive advantage abroad by applying its combination of technology, logistics and human resources with its tremendous buying power with multinational consumer goods suppliers. Wal-Marts strategy has been to acquire companies and convert them into the Wal-Mart way stores. European retailers like Carrefour and Ahold, have more than 20 years of international experience than Wal-Mart. Multinational retailers entry is usually by mergers acquisitions, which is what Wal-Mart did in its initial entry into Mexico, with a joint venture with CIFRA, the most powerful retailer in Mexico. Models For Strategic Analysis ENVIORNMENTAL SCANNING OF WAL-MART External Environment Socio-cultural Throughout the world there is a large shift in our demographics. There currently is a larger aging population than ever before, and at the same time the birthrate in developed countries is decreasing, as it is increasing in underdeveloped countries. Due to advances in medicine individuals are living longer and longer, as it seems we can beat any disease. Health is becoming more and important to individuals as they exercise and eat better; everyone wants to stay healthy longer. At the same time in the United States in particular the population is getting fatter and fatter, preschool age children are being labeled as obese. Shopping has turned into a favorite pastime for the whole family, and when buying big-ticket items, everyone has a say. Increasingly there are more single-parent households, which does not leave much disposable income. Most two-parent households have both parents working and earning more, living in bigger houses, taking more vacations, and owning more cars. On the o ther hand we are currently experiencing a great deal of the American public has been downsized, and may be unemployed, starting a new career, or back in school. Technological Due to the current recession the government has been looking for any way possible to save money, and unfortunately research and development, non-military that is, was one of the first things to go. However many of the suppliers to retail are forced to continue their RD programs as competition is stiff and their product line needs to continually be updated. Technology is growing at an incredibly rapid pace that no one can keep up with it. There have been amazing growths in the areas of health, consumer goods, and food due to technology. As consumers are used to the ever-growing technology they are not as wary of it as in the past, but do not buy the newest thing, as quickly because the item it replaces is less than a year old. Production is becoming more and more automated which is pushing individuals out of jobs. The Internet is widely available in the United States, but that is not the case in the rest of the world. Even in parts of Europe many houses do not have computers much less access to the Internet. Telecommunications structures continue to be improved upon or even built. Politico-Legal USA has democratic form of government. In fact it is the one of the worlds oldest democracy of more than 200 years where everyone has a saying in the government. Pressure groups play a vital role in US democracy, a retail chain giant like Wal-Mart have their representatives in congress and senate. Hence , they keep a keen eye on all the policies and laws so that it is conducive with the Wal-marts future plans In case of any blockage lobbying is used by them. Economic US has capitalist system of economy, the mode of production is controlled by private enterprises. The economic conditions are favorable for operation of private firms. In fact big retail chains like Wal-mart has revolutionized the US economy Always Low Prices- ALWAYS .With trends of globalization Wal-mart is able to spread its wings in Asia-Pacific region where the economy is liberalized . Globalization, Liberalization and Privatisation gives economic policy that are is consonance with growth and expansion strategies of Wal-mart. Internal Environment Being the largest non-government employer and corporation in the world, Wal-Mart is bound to have an interesting internal structure put in place. So what exactly is the method to all the madness? Lets look inside Wal-Marts Internal Environment. Corporate Structure Wal-Mart is a public corporation, however the majority of the stock is still held by Walton family members. Therefore, there is lots of family involvement at the top level. The headquarters are in Bentonville, Arkansas, along with the control and decision making ability of the organization. There is a very hierarchical structure in place which only fuels the good old boys club for top management. The other unique element in Wal-Marts corporate structure is a strong culture that is fueled by the Wal-Mart way of doing things, which as far as they are concerned is the only way. WAL-MART ANALYSIS INTERNAL ANALYSIS ANALYZING RESOURCES Financial Resources Wal-Mart is the worlds largest and most profitable retailer. Wal-Marts pre tax return on sales was 8% during 1989 which was double the industry standard and it continues to be the front runner till today. Wal-Mart commands market value 10 times more than its book value. Wal mart stores FISCAL YEAR SEGMENT NET SALES SEGMENT OPEARTION INCOME 2007 7.8% $17029 2006 9.4% $15324 2005 10.1% $14163 Sams Club FISCAL YEAR SEGMENT NET SALES SEGMENT OPEARTION INCOME 2007 4.5% $1512 2006 7.29% $1385 2005 7.59% $1280 International FISCAL YEAR SEGMENT NET SALES SEGMENT OPEARTION INCOME 2007 30.2% $4259 2006 12.7% $3509 2005 19.3% $3197 Human Resources Wal-Mart promotes internal staff development and over 60% of its store managers are promoted internally then direct recruits. Wal-Mart believes in recruiting people with a flair for customer service and trains them accordingly to its strong company values. Employees are treated as owners as more than 70% of employees have shares of the company and incentives are paid in stock options too. Physical Resources Wal-Mart developed its computerized inventory system way back in 1970 that decreased check-out and reordering times and built highly automated distribution centres, reducing shipping cost and time. Wal-Mart has continued to be an innovator and has this has led it to create and sustain its competitive advantage by being the first and to be continuous to replace systems and processes replicated by competitors. Intellectual or Intangible Resources Wal-Marts core resources are its customers which total over 40 million per year. Wal-Mart has over 1.3 million associates (employees) at its stores, worldwide. The author feels this itself is unique which helps Wal-Mart get 1.3 million unique, hardcore loyal customers. Wal-Mart uses its technological capabilities to sustain its cost leadership in distribution and superior inventory systems. Culture Analysis Wal-Marts culture is as unique and distinctive as possible considering the mammoth that it has grown into today. Usually firms even of a small and medium company find it hard to maintain and build good customer service but Wal-Mart has always had it as its foundation and till today preaches and practices exemplary customer service. Wal-Marts Corporate Citizenship actively helps development of the community with programs spread across education, health, and environment. Wal-Marts Code Adam, a tribute to a lost child in a retail store helps prevent children getting lost in stores today which make it a safer place for families to shop. Wal-Marts Ten Foot Rule and Sundown Rule all promote the employees to treat the customer right, first time, always. Employees are treated as Associates inspiring their status. The everyday morning cheers act as a ritual and cheer and energize the associates making them part of the organization. Associates acting as greeters at the entrance of every store worldwide is unique and makes the customer more welcome and special. P.E.S.T. ANALYSIS FOR WAL-MART P.E.S.T. Analysis Political Influences à ¢Ã¢â€š ¬Ã‚ ¢ European Customs and Regulations à ¢Ã¢â€š ¬Ã‚ ¢ FDI Restrictions à ¢Ã¢â€š ¬Ã‚ ¢ UKs Zoning Regulations Economic Influence à ¢Ã¢â€š ¬Ã‚ ¢ War in Iraq à ¢Ã¢â€š ¬Ã‚ ¢ Global Terrorism à ¢Ã¢â€š ¬Ã‚ ¢ Exchange Rates à ¢Ã¢â€š ¬Ã‚ ¢ Low levels of productivity in Asian Countries à ¢Ã¢â€š ¬Ã‚ ¢ Wall Street Improvements Social Influence à ¢Ã¢â€š ¬Ã‚ ¢ Marketing strategies ineffective à ¢Ã¢â€š ¬Ã‚ ¢ Absence of Bulk Buying à ¢Ã¢â€š ¬Ã‚ ¢ Language and Cultural Barriers à ¢Ã¢â€š ¬Ã‚ ¢ Anti-Globalisation Movements Technological Influence à ¢Ã¢â€š ¬Ã‚ ¢ Advances in Technology and Satellite systems à ¢Ã¢â€š ¬Ã‚ ¢ Lack of basic infrastructure Political Influences The political influences in this industry is probably the most burning concern with organizations going global and many countries restricting the growth of companies by many countries. European Customs and Regulations heavily hamper expansion plans. FDI in many countries are still heavily regulated and global companies are yet to set foot into emerging markets like India. Economic Influences War on Iraq has had a negative impact on consumer spending and outlook. Disproportionate levels of income and consumer spending in developing countries like India and China will impact growth of global companies. Exchange rates affect global sourcing and pricing policies on a day to day basis. Recent developments with Wall Street have helped foster a better relation and helped in Wal-Marts listing and ratings. Social Influences Developing countries are not used to push type marketing and aggressive selling. Bulk buying patterns predominantly present in USA, is non-existent in Asian countries. Language and cultural factors is a barrier to globalisation. Anti-Globalisation movements in the recent past has affected growth of global companies, especially companies originated USA. Technological Influences Development in technology and satellite systems has given a boost to Wal-Mart. Basic infrastructure still lacks for effective warehousing and distribution, the lifeline of a retail chain. PORTERS 5 FORCES ANALYSIS FOR WAL-MART Porters Analysis SUBSTITUTES CUSTOMERS SUPPLIERS MARKET NEW ENTRANTS Horizontal Forces Mature markets Vertical Forces Growth Markets Vertical and Horizontal Competitive and changing markets WAL-MART SUPPLIERS POWER Wal-Mart enjoyed a 50 percent market share position in the discount retail industry. Procter Gamble, Clorox, and Johnson Johnson were among its nearly 3,000 suppliers. Though Wal-Mart may have been the top customer for consumer product manufacturers, it deliberately ensured it did not become too dependent on any one supplier; no single vendor constituted more than 4 percent of its overall purchase volume. Further, Wal-Mart had persuaded its suppliers to have electronic hook-ups with its stores. About 85 percent of all the merchandise sold by Wal-Mart was shipped through its distribution system to its stores. (Competitors supplied to their retail outlets on average less than 50 percent of the merchandise through their own distribution centers.) Wal-Mart used a saturation strategy for store expansion. The standard was to be able to drive from a distribution center to a store within a day. A distribution center was strategically placed so that it could eventually serve 150-200 Wal-Mart stores within a day. Stores were built as far away as possible but still within a days drive of the distribution center; the area then was filled back (or saturated back) to the distribution center. Each distribution center operated 24 hours a day using laser-guided conveyer belts and cross-docking techniques that received goods on one side while simultaneously filling orders on the other. The company owned a fleet of more than 3,000 trucks and 12,000 trailers. (Most competitors outsourced trucking.) Wal-Mart had implemented a satellite network system that allowed information to be shared between the companys wide network of stores, distribution centers, and suppliers. The system consolidated orders for goods, enabling the company to buy full truckload quantities without incurring the inventory costs. The bargaining power of suppliers and buyers is low with Wal-Mart having established a near monopoly in its home market and increasing its market-share in its overseas operations. Wal- Mart is already Canadas and Mexicos top retail chain and in UK is at the third position. Threat of entry remains low in the home market and globally. The entry scene is limited to existing retail chains as the cost of setup is substantial. Regulatory restrictions are also a concern here. Threat of substitute products is low to medium with consumers having a choice from different stores to buy the same product at highly competitive prices. A sixth force, called the complementors enable the firm whose products or services work in conjunction with enabling a synergistic effect .Wal-Mart sees more customers than the banks do these days. Recent antitrust lawsuits over Visa and MasterCard by retailers, headed by Wal-Mart, alleging the use of expensive debit cards and the costs borne by the retailers may upset the market .The intensity of competitive rivalry can be classified low to medium The power obtained by the low bargaining power of suppliers and buyers is offset by the threat of substitutes and threat of entry. Overall a substantial amount of power still lies with Wal-Mart considering the scale of operations and maturity in its industry. WAL-MART S.W.O.T. ANALYSIS S.W.O.T. ANALYSIS Strengths Wal-Mart is the largest corporation in the world giving it enormous status and recognition in the industry and new markets. Wal-Mart is great at building and maintaining relationships with suppliers. Wal-Mart is a continuous learning organization with integrated systems and frequent meetings with store and aisle managers and systems that receive 8.4 million updates every minute on transactions from its stores. More than 70 million customers roam Wal- Mart aisles each week (Fortune, 2003). Wal-Marts distribution centre and logistics capabilities are a key strength adding value to its entire system. Wal-Marts cross-docking and effective inventory managements gives its a 3% cost advantage which helps sustain its Every Day Low Price strategy . Weaknesses Wal-Mart shows little adaptability to its formats in overseas expansions. Wal-Mart is still to develop its expertise in international marketing. Shows weakness in its expansion by not fulfilling expansion plan of opening 50 new stores in Germany during 2001. Opportunities Growing middle class of consumers in emerging markets like China and India, gives Wal- Mart a tremendous opportunity for global expansion. There is growing consolidation in the market with the weak economy which is also leaving many competitors up for sale at below book value. Growth of e-commerce enables a new business channel and Wal-Mart has aggressively trying to capture and create its presence in this medium too. Threats Recent years have witnessed anti-globalisation movements affecting global companies and American companies in general and Wal-Mart can face stiff resistance from consumers in new markets. Recent wars and outbreaks have affected sales globally. Increased competition in mature markets like Germany and U.K. with established retail chains dominating despite Wal-Marts entry. Growing trade blocks and zoning regulations hamper Wal-Marts expansion plans. Summary The beauty of Wal-Marts Value Chain is the scale of operations and the control it exercises over each activity. Wal-Mart takes care of all the activities internally except partially outsourcing its logistics requirements. Its systems integration from inventory, to stores, to headquarters to suppliers is the lifeline of its success. Transportation undertaken by its own fleet of trucks is an added advantage. The core activity remains in its bulk buying and inventory management which supports Wal-Marts competitive advantage of pricing and every element shows traces of cost leadership. Total integration is key here. Wal-Mart located its discount stores around regional warehouses allowing a streamlined and low cost physical distribution . CONCLUSION Wal-Mart considering its scale and scope of operations has given a dynamic perspective in analysis of the many frameworks analyzed with. Strategists like Govindrajan and Gupta, who specialize in globalisation, endorse and acknowledge Wal-Mart as a global organization and highly lauding Ironically, Rugman, argues, Wal-Mart as a regional player with regional strategy considering that Wal-Mart has only 9.6% of its stores outside its home region and only 16.3% of revenue is generated from stores outside its home country. Again considering classification such as the NAFTA and the TRIAD, large economies (Countries) are clubbed together and treated as one which the author disagrees to justify as one. Arguments such as only a certain percentage of business is generated outside the TRIAD making a business less global are arguments the author disagrees with. With the EU becoming as one then soon, the world will become large chunks of amalgamations. The simple definition or presence in different markets should be taken into consideration of being global. Many strategists do not give concessions for the time the business has started to expand globally. Wal-Mart for instance has grown to such a strong position over 40 years, this would take considerable time to replicate and adapt in international markets. Analysis using Yips Globalisation / Localisation Drivers shows the industry and Wal-Mart in general moving towards globalisation but yet maintaining key aspects to localisation. This could be the way ahead. The Transnational Model illustrates the same key aspect. Marketing strategy and product variation though it can be global, it needs to be tuned to the local market catered considering the emergence of localisation preference in consumers. The market has gone too global, that consumers place an emphasis of localisation. Acknowledgements are made that the industry is maturing far greater than Internationalisation but its yet to be seen as a global player. But its a matter of time before it expands it to new markets and creates a foothold. COMPETITIVE ADVANTAGE FOR WAL-MART Analysis of the generic strategy and the supporting value chain, gives us a good insight into sources of Wal-Marts competitive advantage. When two or more firms compete within the same market, one firm possesses competitive advantage over its rivals when it earns a persistently higher rate of profit . Wal-Marts capability to outperform its rivals is achieved with its ability to outperform its competitors quickly and effectively. Supporting this is its, highly integrated systems, technological advances, highly efficient inventory management skills, few markdowns and few stock-outs. This is supported also by its corporate culture encouraging and rewarding initiative and innovation. Low cost leadership helps the firm above average returns in the industry despite strong competitive forces . Traces of cost leadership are noticeable in the value chain. Wal-Mart saves costs by holding stocks for less than 48 hours in its inventory. Wal- Mart is known to negotiate with suppliers for the lowest cost of the product without any frills and marketing expenses which adds to the cost later. Wal-Marts purchase by the truckload saves costs again by bulk purchasing. Wal-Marts inventory handling and logistics distribution with its own fleet of 2000 plus trucks help attain a cost effective distribution channel than relying on unreliable suppliers networks which costs in delays. But is Wal-Marts strategy based solely on cost or does it have any other attributes based on its characteristics. Wal-Mart appears to have a differentiation strategy. The differentiation strategy is one of differentiating the product or service offering of the firm, creating something that is perceived industry-wide as being unique. It can be design or brand image, technology, features, customer service, dealer network or other dimensions High degree of customer service with store greeters and no questions asked policies reaffirms Wal-Marts differentiation from its competitors. Every Day Low Price strategy helped reinforce Wal-Mart was the lowest price. The third generic strategy advocated by Porter is the focus strategy. The focus strategy is focusing on a particular buyer group, segment of the product line or geographic market as with differentiation, focus may take many forms .Wal-Mart right from its foundation located its stores to out of town areas with small populations. This was a segment ignore by its competitors giving Wal-Mart an edge over competition by locating itself in a low competitive environment before it creates competition. Wal-Marts focus on the segment of people targeted as well as its location of stores, does give it an attribute of the focus strategy. Effective implementation of any of these generic strategies usually requires total commitment and supporting organizational arrangements that are diluted if there is more than one primary target .Arguably Porter termed organizations attempting cost leadership and differentiation together as stuck-in-the-middle and it does not lead to competitive advantage and its sustainability. Academic criticism is not new and Porter has received his share of it. Most strategists feel low cost leadership alone, does not lead to competitive advantage unless there is an element of differentiation. A strategy combining elements of low cost, price and leadership is known as hybrid strategy .Mintzberg advocated the hybrid strategy for it combines both elements of low cost leadership with differentiation. However, the fact can not be denied that Wal-Mart has a focus strategy as well as a differentiation strategy. Overall the company thrives on cost leadership. The global validity of these are tested with Wal-Marts core strategy in every market it operates, it maintains cost leadership in all activities as well as it maintains its differentiation by having exemplary service. The adoption of the focus strategy globally can be critiqued as Wal-Mart is unable to expand into most markets like UK and Europe with tight zoning regulations and its entry into these markets have been through mergers and acquisitions. But the focus of the segment of customers targeted remains undiluted though the focus of location geographically is understood to be compromised considering the market conditions. SUSTAINABLE COMPETITIVE ADVANTAGE Wal-Marts sustainable competitive advantage can be attributed to its cost advantage supported by its inventory management skills and processes and expertise in supply chain management (which can not be replicated considering the scale of operations) and its culture which promotes aggressive customer service and satisfaction through satisfied and happy associates.The ability to build and maintain relationships with its customers, suppliers, and its associates and its speed in innovation and initiative ness is also a source of sustainable competitive advantage. CORE COMPETENCIES FOR WAL-MART Prahalad and Hamel (1990) define core competencies as the collective learning of the organization, especially how to co-ordinate diverse production skills and integrate multiple streams of technologies. The cumulative learning acquired with experience in an industry enhances a firms competence. Wal-Marts core competence can be said to be its knowledge achieved by its inventory management skills with its supply chain management facilitated by its innovations like the cross-docking techniques and its innovation in information technology and in relationship strategy maintained with its customers, suppliers, and associates and its cost strategy achieved with its scale of operations. This passes the three tests whereby its providing added value to customers and is difficult for competitors to imitate considering the scale of operations to achieve such economies and provides access to wider markets. Wal-Marts achieves competencies from: à ¢Ã¢â€š ¬Ã‚ ¢ Cross docking à ¢Ã¢â€š ¬Ã‚ ¢ Supply chain management à ¢Ã¢â€š ¬Ã‚ ¢ Communication strategy with suppliers and associates à ¢Ã¢â€š ¬Ã‚ ¢ Relationship strategy with suppliers and associates à ¢Ã¢â€š ¬Ã‚ ¢ People strategy à ¢Ã¢â€š ¬Ã‚ ¢ Cost strategy à ¢Ã¢â€š ¬Ã‚ ¢ Location and market strategy à ¢Ã¢â€š ¬Ã‚ ¢ Ability and inspiration from Sam Walton à ¢Ã¢â€š ¬Ã‚ ¢ Customer service strategy à ¢Ã¢â€š ¬Ã‚ ¢ Knowledge management à ¢Ã¢â€š ¬Ã‚ ¢ Innovation in I.T. and warehousing and inventory management Although an exhaustive list, Wal-Mart does achieve and maintain the above in proportions unseen in its industry. Although they are imitateable, competitors have been unable to replicate the entire series and sustain it. Profit verses non-profit objectives: We can see one difference in both the objectives i.e. in profitable objectives we have to emphasise revenue, profit growth and our product must be able to fulfil our customer demands. But non-profit objectives are just to complete the need of our organisation i.e. general community, health and welfare.