Wal-Mart’s Business Strategy Formulation

Project submitted to: Dr. Harsh Wardhan Mishra

Abhinav Jain (10PGHR03)

Mishra. Gurgaon. for providing the entire infrastructure. who have supported me at various points with their valuable inputs and suggestions. 2 . this project would not have been possible. Last but not the least. I would also like to thank my colleagues. Management Development Institute. Harsh W. Without his invaluable support and guidance. without which this project would have remained an unfulfilled dream. I would like to thank my esteemed institute. whose knowledge and experience has served as a continuous source of encouragement and motivation.Acknowledgement I would like to take this opportunity to extend my gratitude to Prof.

Table of Contents Executive Summary ………………………………………………………………………………………4 Introduction ……………………………………………………………………………………………….14 References ………………………………………………………………………………………………...9 Strategic Performance ……………………………………………………………………………………11 Financial Analysis ……………………………………………………………………………………….12 Strategy Recommendations ………………………………………………………………………………14 Conclusion ………………………………………………………………………………………………..5 Wal-Mart philosophy …………………………………………………………………………………….6 External Analysis …………………………………………………………………………………………7 Internal Analysis ………………………………………………………………………………………….15 3 ...

four years after his death. he and his associates led the company forward for thirty years. business practices. and sometimes unusual.Executive Summary Sam Walton. Today. a significant amount of controversy over several different issues. however. the company is still growing steadily. started his own company and made it into the leader in discount retailing that it is today. a leader with an innovative vision. and is still facing. especially if it is able to strike a comfortable balance between increasing its profits and recognizing its social and ethical responsibilities. none of these have done much more than scrape the exterior of this gigantic operation. The future also looks bright for Wal-Mart. 4 . Through his savvy. while simultaneously keeping one step ahead of the everchanging technology and methods of today's fast-paced business environment. Wal-Mart executives continue to rely on many of the traditional goals and philosophies that Sam's legacy left behind. The organization has faced.

Sam Walton's talent for discount retailing not only made Wal-Mart the world's largest retailer. and publicly traded on the New York Stock Exchange in 1972. The slogan of the company is “Save Money. Inc. In contrast. Wal-Mart had sales of $312. To get a sense of just how big Wal-Mart is today. The company was founded by Sam Walton in 1962.040. is home to 1. That basic strategy has shaped Wal-Mart's culture and driven the company's growth. Home Depot has 2. no one could have ever predicted the enormous success this small-town merchant would have. By comparison. incorporated on October 31. It is an economic force. Wal-Mart. is an American public corporation that runs a chain of large discount department stores and a chain of warehouse stores. Why is Wal-Mart so Successful? Is it Good Strategy or Good Strategy Implementation? -.4 million people. which ended January 31.5 billion. It all started with a simple philosophy from founder Sam Walton: Offer shoppers lower prices than they get anywhere else.Introduction Wal-Mart Stores.' Even with Walton's death (after a two-year battle with bone cancer) in 1992. 1969. Live Better” Wal-Mart Stores Mission Statement: "Wal-Mart’s mission is to help people save money so they can live better. 2006. when Sam Walton opened the first Wal-Mart store in Rogers.6 million people. the second-largest retailer in the country. To give you an idea of just how many people that is. a cultural phenomenon and a lightning rod for controversy. but also the world's number one retailer in sales. headquartered in Bentonville.43 billion in its most recent fiscal year.200 retail outlets. the 39th most populous state. Arkansas. consider these facts: Wal-Mart employs 1. Wal-Mart's sales continue to grow significantly. Wal-Mart was named 'Retailer of the Decade' by Discount Store News in 1989. Home Depot. Wal-Mart has 6. posted sales of $81. Idaho. Wal-Mart is more than just the world's largest retailer. and on several occasions has been included in Fortune's list of the '10 most admired corporations. is the largest majority private employer and the largest grocery retailer in the United States. Wal-Mart has 8500 stores in 15 countries. Arkansas." 5 . with 55 different names. Indeed.In 1962.

The technology was not used as a means of replacing existing employees. Wal-Mart is involved in many community outreach programs and has launched several national efforts through industrial development grants. He believed in three guiding principles: 1. The Associates: Walton's greatest accomplishment was his ability to empower. Partnership with its associates. Walton had a reputation for caring about his customers.The Wal-Mart Philosophy -. and that each store should be a reflection of the values of its customers and its community. 'Our People Make the Difference. In order to maintain its market position in the discount retail business. 5). 1994. Customer value and service. enrich. At each of the Wal-Mart stores. Walton was a man of simple tastes and took a keen interest in people. 1995). The Community: Wal-Mart's popularity can be linked to its hometown identity. 1994). his employees (or 'associates' as he referred to them). and his stores are still driven by this philosophy. Wal-Mart executives continue to adhere to the management guidelines Sam developed.' Associates regularly make suggestions for cutting costs through their 'Yes We Can Sam' program. One of Wal-Mart's goals was to provide its employees with the appropriate tools to do their jobs efficiently. 'It has to do with our desire to exceed our customers' expectations every hour of every day' (Wal-Mart Annual Report. One of Walton's deepest beliefs was that the customer is always right. but also for its innovative implementation of those strategic decisions.Wal-Mart is successful not only because it makes sound strategic management decisions. 3. Community involvement. signs are displayed which read. and train his employees (Longo. but to provide them with a means to succeed in the retail market (Thompson & Strickland. The Customer: The word 'always' can be seen in virtually all of Wal-Mart's literature. When questioned about Wal-Mart's secrets of success. 1995). and the community. 6 . He believed in listening to employees and challenging them to come up with ideas and suggestions to make the company better. Regarded by many as the entrepreneur of the century. Walton believed that every customer should be greeted upon entering a store. Walton has been quoted as saying. p. The sum of the savings generated by the associates actually paid for the construction of a new store in Texas (The story of Wal-Mart. 2.

and smile are their leading marketing strategies. Wal-Mart often has an absolute cost advantage over other competitors. In a sense. saving almost $500. 7 . and financial capital to fend off competitors. Another tactic includes their service from when you walk in the store to when you leave. and if not a hot commodity at one store. they have closely examined and utilized tactics to profit from their many stores. there is risk in this strategy. as Wal-Mart has an outstanding distribution systems. One great tactic is starting free-trade-zone distribution centers. Entry barriers are relatively high. However. brand name. Also. Porter’s Five Force Model analysis on the industry Threat from new entrant: Medium pressure o o o Grocers could potentially enter into the retail side. their bread and butter is again the technology they utilize. Wal-Mart’s low prices. This strategy has achieved enviable success over the last three decades without relying upon diversification to sustain its growth and competitive advantages. Target is the strongest of the three in relation to retail.External Analysis Global Environment Wal-Mart's success is mainly based on its concentration of a single-business strategy. and Target. service.000 annually. K Mart. Their crossdocking inventory and transportation services able them to have the goods needed by the consumer at all times. locations. In order for Wal-Mart to become a major global retailer. in turn. there are three main incumbent companies that exist in the same market as Wal-Mart: Sears. On the business side. Wal-Mart is the country’s most sophisticated retailer in terms of using information systems. they will ship it out to another where it is being sold much faster. because concentration on a singlebusiness strategy is similar to "putting all of a firm's eggs in one industry basket". They can track how much of one item has been sold on any giving day. Rivalry Among Established Companies: Medium Pressure o Currently.

but the convenience is lost. Wal-Mart does deal with some large suppliers like Proctor & Gamble. they offer a lot of business to manufacturers and wholesalers. 8 . Mature industry life cycle. there are not many substitutes that offer convenience and low pricing. o o Wal-Mart could vertically integrate. The Bargaining Power of Buyers: Low pressure o o o The individual buyer has little to no pressure on Wal-Mart. Sears and K-Mart seem to be drifting and have not challenged K-Mart in sometime. Consumer could shop at a competitor who offers comparable products at comparable prices.o o o Targets have experienced tremendous growth in their domestic markets and have defined their niche quite effectively. Substitute Products: Low pressure o o o When it comes to this market. 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. Consumer advocate groups have complained about Wal-Mart’s pricing techniques. Online shopping proves another alternative because it is so different and the customer can gain price advantages because the company does not necessarily have to have a brick and mortar store. passing the savings onto the consumer. The customers have the choice of going to many specialty stores to get their desired products but are not going to find Wal-Mart’s low pricing. Coca-Cola who has more bargaining power than small suppliers. Bargaining Power of Suppliers: Low to Medium pressure o Since Wal-Mart holds so much of the market share.

has been to drive costs out of the system in the stores.Internal Analysis The various critical success factors that contribute to the success of Wal-Mart are : Flexibility Dependability Cost Speed “The focus of Wal-Mart is that cost-cutting can co-exist with a moral center. it can see how individual products are performing country-wide. but from the cost end of every transaction. store-by-store at a glance. IT also supports Wal-Mart's efficient procurement. Wal-Mart has grown substantially over recent years. and has experienced global expansion (for example its purchase of the United Kingdom based retailer ASDA).Wal-Mart tried to keep constructions costs and rent at a minimum. not from the pricing end. For example.” A culture based on profit derived. convenience and a wide range of products all in one store. People are key to Wal-Mart's business and it invests time and money in training people. The company has a core competence involving its use of information technology to support its international logistics system. It has a reputation for value for money. all in the service of driving down prices at the retail level. 9 . The plan. A focused strategy is in place for human resource management and development. Wal-Mart continued to house several of their early stores in primitive facilities SWOT ANALYSIS Strengths Wal-Mart is a powerful retail brand. For that reason. from the manufacturers' profit margins. and from merchandise brokers and other middlemen. and retaining and developing them. which operates on the principle that it can be the cheapest place to shop and the best place to work at the same time. always.

This has lead to price competition. such as China and India. super centers. Therefore there are tremendous opportunities for future business in expanding consumer markets. Threats Being number one means that you are the target of competition. Manufacturing cost has fallen due to outsourcing to low-cost regions of the World. The company is global. New locations and store types offer Wal-Mart opportunities to exploit market development. to local and mall-based sites. despite its IT advantages. They diversified from large super centers. Being a global retailer means that you are exposed to political problems in the countries that you operate in. focusing on specific markets such as Europe or the Greater China Region. resulting in price deflation in some ranges. The cost of producing many consumer products tends to have fallen because of lower manufacturing costs. or form strategic alliances with other global retailers. Opportunities To take over.Weaknesses Wal-Mart is the World's largest grocery retailer and control of its empire. Since Wal-Mart sell products across many sectors (such as clothing. The stores are currently only trade in a relatively small number of countries. food. could leave it weak in some areas due to the huge span of control. or stationary). 10 . Opportunities exist for Wal-Mart to continue with its current strategy of large. it may not have the flexibility of some of its more focused competitors. merge with. but has has a presence in relatively few countries Worldwide. locally and globally. Intense price competition is a threat.

Wal-Mart was founded by an ambitious entrepreneur. Wal-Mart's growth during the first two decades was propelled primarily by following the strategy of establishing discount stores in smaller towns and capturing significant market share. nobody. In the late 1980s. and his company could achieve success by offering consumers better value for their money.Fig 1: Operations strategy at Wal-Mart Strategic Performance Considering the modest beginning of this company four decades ago. including the company officials expected Wal-Mart to emerge such a dominant player in the retailing industry . right from the day it began operations in 1962. Wal-Mart's success story is a classic example of a company. it ventured into food 11 . who figured out early that retailing was a volumedriven business. which became successful by rigorously pursuing its core philosophy of cost leadership. when Wal-Mart felt that the discount stores business was maturing. The company was able to foster its growth in the 1980s by making heavy investments in information technology (IT) to manage its supply chain and by expanding business in bigger metropolitan cities. Sam Walton (Walton).

The cost paid by Wal-Mart to finance property plants and equipment forced the company to increase long term debt by 4. At the speed at which Wal-Mart was growing. not spending. '. will likely take precedence because most baby-boomers are approaching retirement. If the company continues to take advantage of its buying power. . The challenge is how to run more stores with less operating expenses." Financial Analysis In addition. savings. Trends indicate that operating expenses have been growing at a rate of 27. Thus. an Arizona-based supermarket store. the company drew severe criticism from industry analysts for its strategies that aimed at killing competition. in order to 12 . Wal-Mart can expect to lower its cost of sales.9 billion. If Wal-Mart continues its expansion plans based on more debt acquisition at 1994 levels. Christopher Hoyt. According to Bill Fields.6 times during the period 1991-1995. when financial and personal priorities change. and be able to operate more stores without increasing its expenses. 163 warehouse clubs. just as it did with Microsoft. Though Wal-Mart had achieved huge success over the decades. said. Wal-Mart should reap the benefits of its investments in high technology. In the late 1990s. the baby-boomers are reaching their peak earnings years. the company may not attain forecasted gains by as early as 1998. Hoyt & Company.3%. analysts feared that the company would soon face an anti-trust suit2 for its monopolistic practices. and 94. the company will need to justify its expansion plans with consistent growth in sales. However. Debt Position: Based on Wal-Mart's position in 1994. Wal-Mart launched exclusive groceries/drug stores known as "neighborhood markets" in the US. which was considered a year of expansion for the company. For the coming years. Wal-Mart's future will depend on how well the company manages its expansion plans. the goal is to increase sales per square foot and drive operating costs down yet another notch' (Saporito. "The only thing that could stop Wal-Mart is if the government gets involved. Cost of Sales: Cost of sales historically has been equal to the level of sales. Long term debt for 1995 is $7. president of Scottsdale. p.7% in recent years. . (Wal-Mart added 103 new discount stores. 66). 1994. 38 'Supercenters'. Operating Expenses: Operating expenses will be a key strategic issue for Wal-Mart in order to maintain its position in the market.retailing by introducing Supercenters.000 new associates) interest debt increased 52.

such as 'mom-and-pop' enterprises. other merchants may object to Wal-Mart's entry into their community. Wal-Mart will reach its peak in the very near future. Because of its ability to out-price smaller competitors. This strategy has achieved enviable success over the last three decades without relying upon diversification to sustain its growth and competitive advantages. its growth will start to slow down and the company will need to turn its strategic attention to diversification for future growth. price. 2) Social responsibility: Retail stores can compete on several bases: service. Also. 1995. However. because concentration on a single-business strategy is similar to 'putting all of a firm's eggs in one industry basket' (Thompson & Strickland. price. 1995/1996). Besides protesting and signing petitions to attempt to stop Wal-Mart's entry into their community. Wal-Mart has been extremely successful in competing in the retail industry by combining service. Wal-Mart may want to continue its single-business strategy and to push hard to maintain and increase market share.offset the increases in debt interest and operating expenses. recently started a World Wide Web page entitled 'Us against the Wal. They. quality. if the retail industry stagnates due to an economic downturn. the opposition's efforts can even be found on The Internet. Gig Harbor. a small town in Washington. This makes it very hard for small businesses. Numerous studies conducted in different states both support and criticize Wal-Mart. and quality. Given its current position in the industry. more and more rural communities are waging war against Wal-Mart's entrance into their market. Wal-Mart needs to address two major areas in order to maintain or to capture an even stronger long term business position: 1) Single-business strategy: Wal-Mart's success is mainly based on its concentration of a single-business strategy. 187). Wal-Mart might have difficulty achieving past profit performance. In other words. and fashion. However. p. Wal-Mart did drive local merchants out of business when it opened up stores in the same neighborhood. As a result. fight to keep Wal-Mart from entering their locales. therefore. if Wal-Mart continues to follow Sam Walton's vision of expansion. there is risk in this strategy. to survive. Wal-Mart's stores threaten smaller neighborhood stores which can only survive if they offer merchandise or services unavailable anywhere else. 13 . When it does.' The town's neighborhood association promised that they 'will fight them [Wal-Mart] tooth and nail' (PNA/Island Aerie Internet Productions. exclusivity. Nevertheless.

One great tactic is starting free-trade-zone distribution centers. saving almost $500.Strategy Recommendation In order for Wal-Mart to become a major global retailer. their bread and butter is again the technology they utilize. Customers are being offered a wide choice of shopping experiences. they have closely examined and utilized tactics to profit from their many stores. Domestically. Success in the next decade will depend upon the level of understanding retailers have about the new values. and needs of the customer.4 billion and yearly sales of $137 billion should make you do a double take. Traditionally. retailers must recognize the strong implications of a 'buyers' market'. Technology. and if not a hot commodity at one store. Certainly the Internet provides a growth avenue as well that will open a new faucet for them to potentially take over an upcoming market. Conclusion The ever-changing market presents continuing challenges to retailers. and the advent of a global economy are all conspiring to rewrite the rules for success. this business is a very lowmargin space. 14 . They can track how much of one item has been sold on any giving day. in turn. Therefore. If Wal-Mart continues its customer-driven culture. they can make it a big winner. demographics. consumer attitudes. it is incumbent upon management to define their target market and direct their energies toward solving that specific market's problems. I really think that the growth opportunities for Wal-Mart are just beginning. Any company that can grow net income to $4. but with Wal-Mart's competitive advantages in distribution and leverage over suppliers. but no one operation can capture them all. First and foremost. Another tactic includes their service from when you walk in the store to when you leave. they will ship it out to another where it is being sold much faster. expectations. Also. Wal-Mart is growing through its Superstores.000 annually. International expansion has been robust and will continue to be an important part of Wal-Mart's future growth opportunities. it should remain a retail industry leader well into the next century. I personally feel that a trillion dollars in sales is not unreasonable.

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