walmart case study on strategic management

8/3/2019 Walmart Case Study on Strategic Management

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A case study of Wal-Mart

Introduction

Porter (2002) states that root of the problem lies in the lack of distinguishing between operationeffectiveness and strategy. The expedition for productivity, quality and speed has resulted inmanagement 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 assumptionthat without a proper strategy and planning, it is difficult for any industry to survive irrespectiveof its size. It is necessary to understand here that all the major corporate organizations haveestablished themselves, thanks to superior strategic planning and implementation. The retailindustry is making news everywhere with not only the traditional industries increasing theiroutlets but some major corporate industries also intruding into this industry like Fresh @lReliance of Reliance Industries, More of Aditya Birla Group in India. Wal-Mart, a US basedretail industry, which is known as the giant in the retail industry has survived and is still the hugeenterprise in the world which deals with almost all the F&B products, apparels, etc. It is not onlythe 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 makesWal-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) Sustainablegrowth of Wal-Mart.I. Retail Industry Wal-Mart says Hello!

Strategic decisions are ones that are aimed at differentiating an organization from its competitorsin a way that is sustainable in the future. (Porter, 2002) Porter strongly advocates that decisionsin business can be classified as strategic if they involve some innovation and difference thatresults in sustainable advantage. According to Patrick Hayden et al (2002) the retailing industryadopted 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 startedoperating their business. Frank (2006) states that when Sam Walton was franchising for BenFranklin's variety store, invented an idea of passing on the savings to his customers and earninghis profits through volume. Prior to Wal-Mart's entry into the market, Sidney and Hebert fromHarrison founded Two Guys discount store in the year 1946 which dealt in hardware, automotiveparts and later on groceries. Two Guys was the forerunner as compared to today's retailers likeSuper Target, Wal-Mart which succumbed to the economic recession. Another discount store setup by Eugene as E.J. Korvette, which is often cited as first discount store which did not raisefrom 5 & 10 cents roots and eventually declared bankruptcy due to inability to compete with thenew entrants.Porter (2002) states that combination of operational effectiveness and strategy is essential forsuperior performance which is the primary goal of any organization. He also says that a companycan perform its rivals only if it can operate in different ways which are not in practice. Muchemphasis had been laid on strategic positioning like variety based positioning, needs basedpositioning and access based positioning.Along with Wal-Mart, other stores that started operating were Target, Woolworth (Woolco) andK-Mart. However, Target has been functioning successfully, courtesy Wal-Mart, but other twofailed in their operations and filed bankruptcy.( Michael Bergdahl, 2004) Porters five forcesmodel explains what strategic decisions should be made and on what basis. The model explains


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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 hissavings to the customers and earning through the margin on volume of bulk purchases. Throughthe way of discount stores, shoppers were given the cheapest price as compared to any otherstore. 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 stiffcompetition from likes of Super Target, Tesco, etc. it is the world's biggest retail industry.II. Key Components of Wal-Mart Business Model

Wal-Mart is the leader in retailing industry with fiscal revenue of $244.52 billion in 2003 makingit the world's largest corporation. Mike reports that Wal-Mart as of 2002 had 1,283,000employees growing at 11.2%. The above data explains that strategy of Wal-Mart is extraordinarywhich 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 firminfrastructure 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 whichis 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 asassociates. Manager compensation is linked to the profit of store operated by him, withinpromotions, compensation offered to associates depending on company's profits and also offeredsome incentives on their performances. The workforce at Wal-Mart is not unionized as thecompany 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 equippedwith 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 thecause of providing the goods and services on cheap prices. The other factors that increase themargin of profit for Wal-Mart are inbound logistics with frequent replenishment, automated DCscross docking, pick to flight, EDI, hub and spoke system. Wal-Mart strategy of operation isinnovative 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 forinventory, store within store, etc. In relation to marketing and sales, merchandising is tailoredfrom locals, spent less on advertising and the prices are fixed low and it depends on the storemanager to fix the latitude of pricing. All the above factors combined together form the keycomponents of Wal-Mart which not only increase the margin of profits through bulk sales butalso boost the confidence of the customers with services like point of sale information systemand everyday low prices.III. Wal-Mart Strategy

Wal-Mart dominates the American retailing industry due to number of factors like its businessmodel which is still a mystery and its effectiveness in not letting the rivals let know about theweaknesses. Wal-Mart made strategic attempts in the its formulation to dominate the retailmarket where it has its presence, growth by expansion in the US and Internationally, createwidespread name recognition and customer satisfaction in relation to brand name Wal-Mart andbranching into new sectors of retailing.It is learnt that Wal-Mart strives on three generic strategies consisting of Focus Strategy, theDifferentiation Strategy and overall cost leadership. Managers strive hard to make theirorganizations unique, distinctive and identify key success factors that will drive the customers to


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buy their products.Thus, firm specific resources and capabilities are crucial in explaining thefirm's performance. The Resource Based View (RBV) explains competitive heterogeneity basedon the premise that close competitors differ in their resources and capabilities in important anddurable ways. The company's capability can be found through its functionality, reliableperformance, 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 andsuperior capabilities. Wal-Mart has strong RBV with economically and financially very strongenough to stand still in the time of crisis. Pereira states that dominating the retail market is itskey 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 thegoods at lower prices and selling the goods to customer at much lower prices, cutting the price asfar as possible and increasing the profit by increasing the number of sales. This ferociouslyincreases the competition in the market and Wal-Mart competes with all its competitors till it isdominant 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 100million customers weekly. Wal-Mart has acquired many international stores and merged withsome super stores like ASDA in UK. Wal-Mart far flung network of retail outlets has ensuredthat 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 islearnt that three countries with no Wal-Mart stores became part of corporation's internationalpresence wherein the domestic retail chains were taken over by Wal-Mart including 122 Woolcostores in Canada, 21 Wertkauf stores in Germany and 229 ASDA units in United Kingdom. Thetakeover strategy by Wal-Mart keeps the company at forefront when entering into the newmarket and the number of competitors is also minimized. The strategies have helped the Wal-Mart to rein in number one position in international countries making it the largest retailer in theworld.It is seen that Wal-Mart has significantly the Porters five force model wherein through properstrategic planning and strategic implementation has led to removal of barrier entry, rivalry fromcompetitors and pricing norms. In regard to substitutes, Wal-Mart in order to achieve its aim ofcustomer satisfaction has selling goods under its own legal brand. Wal-Mart's big boxphenomenon has changed the retailing industry in the United States which is often considered asdiscount 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 dramaticimpact since 1962 when Sam Walton first started his business. With this strategy, Wal-Mart hasnow over 4000 stores and outlets in US and other countries through acquisition and mergers.IV. Sustainability in Discount Retailing Wal-MartAccording to Porter, (2002) operational effectiveness and efficiency are the key elements ofsuccess in any organization. A company can outperform its rivals or competitors in the marketonly with superior management and efficient control creating a difference from the others whicheventually attracts customers. Porter defines operational effectiveness as performance of similaractivities as its rivals but better than them. In a study, it is stated the Wal-Mart is expert inmanipulating perceptions. It is termed that low price is not the strategy of Wal-Mart but theadvertisement manipulates the consumer perceptions by making them think that its prices arelower than its competitors' price using price spin'. Wal-Mart makes the consumer addicted


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coming to its stores by convincing them the prices are lower than in the other stores by sellingitself cheaper by advertising that we have lower prices than anyone else' and placing a openingprice point'. The opening price point' is the lowest price in the store which is kept at highvisibility which makes consumer believes that the products in this store are really cheaper. (RaceCowgill, 2005)

The SWOT analysis of Wal-Mart reveals that it is most powerful retail brand, reputation formoney, value, commitment, and provides wide range of products. It is growing at a brisk pacewith expanding its horizon to other parts of world through acquisition and merger. Wal-Mart hasgood opportunities in markets of Europe and China and focuses on acquiring the market throughacquisition of smaller stores and merger with leaders in the specific markets. Wal-Mart is alwaysunder threat to sustain its top position in market nationally and internationally. Global leader inthe industry leaves the organization vulnerable to many socioeconomic and political problems ofthe country.Sustainability at the top place is the most important job that makes its managers strives hard toframe 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% renewableenergy has planned to launch number of sustainability initiatives. (GreenBiz, 2008) Imitationincrease 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 startedand operating in US called Fresh & Easy Neighborhood Markets. (James, 2008) Such tactics willcreate mixed response among the consumers while degrading the reputation of the leader inmarket. Substitution reduces the demand for what a firm uniquely provides by shifting thedemand elsewhere due to changes in technology. The threats of substitution can be subtle andunexpected like minimizing expenses through videoconferencing instead of air flights to longdistance meetings with its managers of other stores, etc. Therefore, substation is an especiallyeffective way of attacking dominant rivals in the market. Substitution offers mixed responsesafter identifying and understanding the threats. The organization should fight the threat andmerging with them, switching to different options of substitution to be in the market. Hold-updiverts the value to customers, suppliers or complementors who have some bargaining leveragewhich 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 in16 markets worldwide. It employs more than 2 million associates and serves more than 100million customers every year. According to Fishman (2006) Americans spend $26 million everyhour at Wal-Mart which makes it believable that Wal-Mart is financially very strong and iscapable of combating any threat from its rivals in the market. Wal-Mart is ever expanding itsboundaries by way of acquisition and mergers. Thus Wal-Mart with such a vast network of storesand alliances in the forms of ASDA, Target and many other stores is well protected enough tosustain its top position in the retail industry.

walmart case study on strategic management

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