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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 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, 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

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 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 everyday 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 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. 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.