A case study of Wal-Mart

Introduction

Porter (2002) states that root of the problem lies in the lack of distinguishing
between operation effectiveness and strategy. The expedition for productivity,
quality and speed has resulted in management tools and techniques, total quality
management benchmarking, time based competition, outsourcing, partnering,
reengineering, change management.  In any organization, strategy management is
the key to its success. There are many theories based on this assumption that
without a proper strategy and planning, it is difficult for any industry to survive
irrespective of its size. It is necessary to understand here that all the major
corporate organizations have established themselves, thanks to superior strategic
planning and implementation. The retail industry is making news everywhere with
not only the traditional industries increasing their outlets but some major corporate
industries also intruding into this industry like Fresh @ Reliance of Reliance
Industries, More of Aditya Birla Group in India. Wal-Mart, a US based retail
industry, which is known as the giant in the retail industry has survived and is still
the huge enterprise in the world which deals with almost all the F&B products,
apparels, etc. It is not only the largest company in world but also the largest
company in the history of world.(Fishman, 2006) The present paper is divided into
four sections to understand and answer as what makes Wal-Mart the best in the
industry, 1) retailing industry at the time of Wal-Mart's innings, 2) Wal-Mart's
Competitive advantage and key components, 3) Wal-Mart's Strategy and 4)
Sustainable growth of Wal-Mart.

I. Retail Industry – Wal-Mart says Hello!

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Strategic decisions are ones that are aimed at differentiating an organization from
its competitors in a way that is sustainable in the future. (Porter, 2002) Porter
strongly advocates that decisions in business can be classified as strategic if they
involve some innovation and difference that results in sustainable
advantage. According to Patrick Hayden et al (2002) the retailing industry adopted
the style of discounting on its merchandise after the Second World War. It is learnt
that discount retailing was not the strategy at the time Kmart, Target and Wal-Mart
first started operating their business. Frank (2006) states that when Sam Walton
was franchising for Ben Franklin's variety store, invented an idea of passing on the
savings to his customers and earning his profits through volume. Prior to Wal-
Mart's entry into the market, Sidney and Hebert from Harrison founded Two Guys
discount store in the year 1946 which dealt in hardware, automotive parts and later
on groceries. Two Guys was the forerunner as compared to today's retailers like
Super Target, Wal-Mart which succumbed to the economic recession. Another
discount store set up by Eugene as E.J. Korvette, which is often cited as first
discount store which did not raise from 5 & 10 cents roots and eventually declared
bankruptcy due to inability to compete with the new entrants.

Porter (2002) states that combination of operational effectiveness and strategy is

essential for superior performance which is the primary goal of any organization.
He also says that a company can perform its rivals only if it can operate in different
ways which are not in practice. Much emphasis had been laid on strategic
positioning like variety based positioning, needs – based positioning and access
based positioning.

Along with Wal-Mart, other stores that started operating were Target, Woolworth
(Woolco) and K-Mart. However, Target has been functioning successfully,
courtesy Wal-Mart, but other two failed in their operations and filed bankruptcy.
( Michael Bergdahl, 2004) Porters five forces model explains what strategic
decisions should be made and on what basis.  The model explains the basic
strategies to be considered while starting a business like bargaining power of
suppliers. While franchising of Franklin he always looked for cheaper deals and
thought of passing his savings to the customers and earning through the margin on
volume of bulk purchases. Through the way of discount stores, shoppers were
given the cheapest price as compared to any other store. In regard to threats of new
entrants, Wal-Mart has been constantly in the news for acquisition of other small
retail shops in view of its expansion. But nevertheless it has stiff competition from
likes of Super Target, Tesco, etc. it is the world's biggest retail industry.

II. Key Components of Wal-Mart Business Model

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Wal-Mart is the leader in retailing industry with fiscal revenue of $244.52 billion
in 2003 making it the world's largest corporation. Mike reports that Wal-Mart as of
2002 had 1,283,000 employees growing at 11.2%. The above data explains that
strategy of Wal-Mart is extraordinary which manages and operates over 4150 retail
facilities globally.The key components of Wal-Mart (The Value Chain), which
offers cheap prices than its competitors includes firm infrastructure like frugal
culture, no regional offices and pleasant environment to work. Managements take
lots of visits and it is learnt there are no rehearsals before any meeting which is
usually scheduled on every Saturday. In any organization, human resource is the
key to development and Wal-Mart efficiently manages its sources. Wal-Mart terms
its employees as associates. Manager compensation is linked to the profit of store
operated by him, within promotions, compensation offered to associates depending
on company's profits and also offered some incentives on their performances. The
workforce at Wal-Mart is not unionized as the company takes all the measures of
their benefits and provides them training on related issues. Technology plays a
vital role in development of the organization and Wal-Mart is well equipped with
technological innovations like POS, store performance tracking, real time market
research, satellite system and UPC. Wal-Mart procurement measures like hard-
nosed negotiations, partnerships with some vendors, centralized buying, planning
packets, etc. helps at large the cause of providing the goods and services on cheap
prices. The other factors that increase the margin of profit for Wal-Mart are
inbound logistics with frequent replenishment, automated DCs cross docking, pick
to flight, EDI, hub and spoke system. Wal-Mart strategy of operation is innovative
with big stores in small towns with monopoly in the market at low rental costs,
local prices, concentric expansion, merchandising in brand name, private labels,
little space for inventory, store within store, etc. In relation to marketing and sales,
merchandising is tailored from locals, spent less on advertising and the prices are
fixed low and it depends on the store manager to fix the latitude of pricing. All the
above factors combined together form the key components of Wal-Mart which not
only increase the margin of profits through bulk sales but also boost the confidence
of the customers with services like point of sale information system and everyday
low prices.

III. Wal-Mart Strategy

Wal-Mart dominates the American retailing industry due to number of factors like
its business model which is still a mystery and its effectiveness in not letting the
rivals let know about the weaknesses. Wal-Mart made strategic attempts in the its
formulation to dominate the retail market where it has its presence, growth by
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expansion in the US and Internationally, create widespread name recognition and

customer satisfaction in relation to brand name Wal-Mart and branching into new
sectors of retailing.

It is learnt that Wal-Mart strives on three generic strategies consisting of Focus

Strategy, the Differentiation Strategy and overall cost leadership. Managers strive
hard to make their organizations unique, distinctive and identify key success
factors that will drive the customers to buy their products.Thus, firm specific
resources and capabilities are crucial in explaining the firm's performance. The
Resource Based View (RBV) explains competitive heterogeneity based on the
premise that close competitors differ in their resources and capabilities in
important and durable ways. The company's capability can be found through its
functionality, reliable performance, like Wal-Mart superior logistics. (Helfat,
2002) Wal-Mart has firm infrastructure, well equipped in human resource with
management professionals and technologically too.

Any organizations thrive hard to be successful for which it needs to have better
resources and superior capabilities. Wal-Mart has strong RBV with economically
and financially very strong enough to stand still in the time of crisis. Pereira states
that dominating the retail market is its key strategy. Wal-Mart operates on low
price strategy which is operated as every day low prices (EDLP) which builds trust
among the customers.(Brunn, 2006)The strategy lies in purchasing the goods at
lower prices and selling the goods to customer at much lower prices, cutting the
price as far as possible and increasing the profit by increasing the number of sales.
This ferociously increases the competition in the market and Wal-Mart competes
with all its competitors till it is dominant it the market.

Wal-Mart is expanding seriously and rapidly which is also its strategic goal. Wal-
Mart employs over 1.3 associates, owns over 4000 stores out of which 3000 are in
US and serves around 100 million customers weekly. Wal-Mart has acquired many
international stores and merged with some super stores like ASDA in UK. Wal-
Mart far flung network of retail outlets has ensured that Wal-Mart interacts with
and has impact on virtually every locality within US. (Helfat, 2002) The expanded
strategy has led the hunger of Wal-Mart to many European Countries. It is learnt
that three countries with no Wal-Mart stores became part of corporation's
international presence wherein the domestic retail chains were taken over by Wal-
Mart including 122 Woolco stores in Canada, 21 Wertkauf stores in Germany and
229 ASDA units in United Kingdom. The takeover strategy by Wal-Mart keeps the
company at forefront when entering into the new market and the number of
competitors is also minimized. The strategies have helped the Wal-Mart to rein in
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number one position in international countries making it the largest retailer in the
world.

It is seen that Wal-Mart has significantly the Porters five force model wherein
through proper strategic planning and strategic implementation has led to removal
of barrier entry, rivalry from competitors and pricing norms. In regard to
substitutes, Wal-Mart in order to achieve its aim of customer satisfaction has
selling goods under its own legal brand.  Wal-Mart's big box phenomenon has
changed the retailing industry in the United States which is often considered as
discount stores and makes profit through high volume of purchases and low
markup on profits.(Parnell, 2008)Wal-Mart with its low cost and ever expanding
strategy has made a dramatic impact since 1962 when Sam Walton first started his
business. With this strategy, Wal-Mart has now over 4000 stores and outlets in US
and other countries through acquisition and mergers.

IV. Sustainability in Discount Retailing – Wal-Mart

According to Porter, (2002) operational effectiveness and efficiency are the key
elements of success in any organization. A company can outperform its rivals or
competitors in the market only with superior management and efficient control
creating a difference from the others which eventually attracts customers. Porter
defines operational effectiveness as performance of similar activities as its rivals
but better than them. In a study, it is stated the Wal-Mart is expert in manipulating
perceptions. It is termed that low price is not the strategy of Wal-Mart but the
advertisement manipulates the consumer perceptions by making them think that its
prices are lower than its competitors' price using ‘price spin'. Wal-Mart makes the
consumer addicted coming to its stores by convincing them the prices are lower
than in the other stores by selling itself cheaper by advertising that ‘we have lower
prices than anyone else' and placing a ‘opening price point'. The ‘opening price
point' is the lowest price in the store which is kept at high visibility which makes
consumer believes that the products in this store are really cheaper. (Race Cowgill,
2005)

The SWOT analysis of Wal-Mart reveals that it is most powerful retail brand,
reputation for money, value, commitment, and provides wide range of products. It
is growing at a brisk pace with expanding its horizon to other parts of world
through acquisition and merger. Wal-Mart has good opportunities in markets of
Europe and China and focuses on acquiring the market through acquisition of
smaller stores and merger with leaders in the specific markets. Wal-Mart is always
under threat to sustain its top position in market nationally and internationally.
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Global leader in the industry leaves the organization vulnerable to many

socioeconomic and political problems of the country.

Sustainability at the top place is the most important job that makes its managers
strives hard to frame the policies and strategy to compete with its rivals in the
market. Slack, Imitation, Substitution and Hold-up are some of the threats to any
organization in retail industry. However, Wal-Mart with its visionary goal of
attaining zero waste status and reaching 100% renewable energy has planned to
launch number of sustainability initiatives. (GreenBiz, 2008) Imitation increase
profits by increasing the supply. But imitation puts reputation, relationship at stake.
James Hall reports that Wal-Mart is planning to open convenience stores as Tesco
has started and operating in US called Fresh & Easy Neighborhood Markets.
(James, 2008) Such tactics will create mixed response among the consumers while
degrading the reputation of the leader in market. Substitution reduces the demand
for what a firm uniquely provides by shifting the demand elsewhere due to changes
in technology. The threats of substitution can be subtle and unexpected like
minimizing expenses through videoconferencing instead of air flights to long
distance meetings with its managers of other stores, etc. Therefore, substation is an
especially effective way of attacking dominant rivals in the market. Substitution
offers mixed responses after identifying and understanding the threats. The
organization should fight the threat and merging with them, switching to different
options of substitution to be in the market. Hold-up diverts the value to customers,
suppliers or complementors who have some bargaining leverage which results in
tough negotiations, contractual agreements and vertical integration.

Wal-Mart is having great network with almost over 7800 stores       and Sam's Club
locations in 16 markets worldwide. It employs more than 2 million associates and
serves more than 100 million customers every year. According to Fishman (2006)
Americans spend $26 million every hour at Wal-Mart which makes it believable
that Wal-Mart is financially very strong and is capable of combating any threat
from its rivals in the market. Wal-Mart is ever expanding its boundaries by way of
acquisition and mergers. Thus Wal-Mart with such a vast network of stores and
alliances in the forms of ASDA, Target and many other stores is well protected
enough to sustain its top position in the retail industry.

Walmart Porter's 5 Forces Analysis

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• Potential Competitors: Medium pressure

o Grocers could potentially enter into the retail side.
o Entry barriers are relatively high, as Wal-Mart has an outstanding distribution
systems, locations, brand name, and financial capital to fend off competitors.
o Wal-mart often has an absolute cost advantage over other competitors.

• Rivalry Among Established Companies:   Medium Pressure

o Currently, there are three main incumbent companies that exist in the same
market as Wal-Mart: Sears, K Mart, and Target.   Target is the strongest of the
three in relation to retail.
o Target has experienced tremendous growth in their domestic markets and have
defined their niche quite effectively.
o Sears and K-Mart seem to be drifting and have not challenged K-Mart in
sometime.
o Mature industry life cycle.

• The Bargaining Power of Buyers: Low pressure

o The individual buyer has little to no pressure on Wal-Mart.
o Consumer advocate groups have complained about

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Wal-Mart’s pricing techniques.
o Consumer could shop at a competitor who offers comparable products at
comparable prices, but the convenience is lost.

• Bargaining Power of Suppliers: Low to Medium pressure

o Since Wal-Mart holds so much of the market share, they offer a lot of business to
manufacturers and wholesalers. This gives Wal-Mart a lot of power because by
Wal-Mart threatening to switch to a different supplier would create a scare tactic to
the suppliers.
o Wal-Mart could vertically integrate.
o Wal-Mart does deal with some large suppliers like Proctor & Gamble, Coca-Cola
who have more bargaining power than small suppliers.
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• Substitute Products: Low pressure

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o When it comes to this market, there are not many substitutes that offer
convenience and low pricing.
o The customer has the choice of going to many specialty stores to get their desired
products but are not going to find Wal-Mart’s low pricing.
o Online shopping proves another alternative because it is so different and the...
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