Strategy Management

A case study on Wal-Mart

Introduction

Porter 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!

Strategic decisions are ones that are aimed at differentiating an organization from its
competitors in a way that is sustainable in the future. 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, 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 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 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
(Wool co) and K-Mart. However, Target has been functioning successfully, courtesy
Wal-Mart, but other two failed in their operations and filed bankruptcy. 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

Wal-Mart is the leader in retailing industry. The 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 expansion in the US and Internationally,
create widespread name recognition and customer satisfaction in relation to brand name Wal-
Mart.

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. 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. 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.
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 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, 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.

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. 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. 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 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 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 and the stores are well protected enough to sustain its top position in the
retail industry.