International Strategy – Case Study of Wal-Mart
International Strategy – Case Study of Wal-Mart
Strategies are central to the achievement of sustainable organisational development. Sustainable competitive advantage is the ultimate goal of strategising. Amongst the motivations to strategise are to grow fast ahead of the competitors, grow in the line with the industry or to simply catch up and defend an existing status. However, materialisation of strategies is hindered by different challenges, threats and risks experienced by the organisation in the process of pursuing strategies. As such, strategic decision-making is a multi-approach that requires careful consideration of the firm seeking to widen scale, scope and reach. International strategies, nevertheless, depends on the resources and capability of the organisation.
In this report, strategic management and its drivers, nature and dynamics will be discussed through investigating the case of Wal-Mart. The world’s largest public corporation by revenue, Wal-Mart is an American corporation that operates a chain of large discount department stores. The aim of this paper is to explore the attractiveness of the discount retailing industry in the beginning of the existence of Wal-Mart, the key components of Wal-Mart’s business model, the strategy orientation of the corporation and the degree of sustainability of discount retailing competitive advantage.
Discount retailing industry
In the mid-1950s, America had witnessed the emergence of discount stores as one of the major changes in retailing, the other being sub-urban shopping malls. The success of such a booming industry was due to the presence of three companies including Wal-Mart, K-Mart and Target (Ortega, 1999). However, Wal-Mart came forward as the most successful to date with its annual sales of $200 million. If we are therefore going to consider the success of Wal-Mart, it would be relatively easy to assume that the attractiveness of the discount retailing industry is high. Attractiveness means that organisations are and could create value for firms and shareholders which could be translated as making profits or returns that are in excess of cost capital. Discount retailing industry appeared comparatively attractive and the following are the reasons why.
In determining the competitive intensity hence attractiveness of discount retailing industry, Porter’s five forces model will be utilised. First is the threat of entry. Discount retailing industry was not concentrated in the 1950s but from the 1950s to the late 1980s, discount stores with hundreds in operation were more popular than supermarkets and/or department stores (Ortega, 1999). Thus, during these times, barriers to entry were relatively low because of the following reasons: opening a discount store was low-capital intensive, fixed costs are low and the specific knowledge of operating a discount store was realistically obtainable. Besanko et al (2003) asserted that it is important for a firm to evaluate its strategic positioning for the purpose of coping with entry decisions. Because Wal-Mart, and the likes of K-Mart and Target, has the ability to drive other small businesses out and with its inherent ability to set low prices over its major competitors, entry barriers in the discount retailing industry today is high.
Second is the threat of substitutes. Wal-Mart offers consumer staples while others also did offer products of both food and non-food. Apart from the suburban shopping malls, huge self-service stores which provides consumers with a variety of off-price merchandise were also known as substitutes. Strip malls composed of one or more big-box stores or superstores were also booming in the 1950s to 1960s (Ortega, 1999). These were known as ‘category killers’ due to the fact that these stores could carry only a few lines of merchandise in great depth. Membership warehouse stores also fell under this umbrella which offers bulk packaged food and non-food products. Today, brick and mortar stores and online shopping are the two main substitutes for Wal-Mart although the latter was addressed through creating www.walmart.com. From, 1999, Wal-Mart also shifted its strategy to increase food categories in addition to hard and soft goods as durable items and apparel. See below.
Figure 1 Wal-Mart’s Merchandise
(Source: Senne, 2005)
Third is the threat of suppliers. Even before, Wal-Mart has power over its competitors. Sam Walton, its founder, was able to push suppliers to sell merchandise at much cheaper prices so that Wal-Mart could sell those at cheaper prices as well. Bulk buying and contract agreements were critical in its supplier relationship. Wal-Mart embraced the ‘plus one’ philosophy and demanded that each supplier either lower its price or increase the quality every year on every item (Barbaro, 2006). The same philosophy exists today and is coupled with operating own distribution centers, leading to supplier power that is fairly nonexistent. Nevertheless, Wal-Mart represents a large percentage of the suppliers’ businesses (Sushil, n.d.).
Fourth is the threat of buyers. Wal-Mart maintained that the ultimate power rests in the hands of the buyer. Wal-Mart finds low-cost products to offer at low prices, dubbed as ‘Everyday Low Prices’ philosophy, was claimed to be consistent with great buyer power. This might be also because of Wal-Mart’s powerful position relative to the supplier which in effect shapes the seller profitability. What makes Wal-Mart appealing to the end consumers from the 1960s onward was its cost advantage while also avoiding erratic price changes in the market (Barbaro, 2006). However, individual buyer has little to no pressure on Wal-Mart because of its pricing techniques. Wal-Mart then could be considered as both powerful over its suppliers and buyers.
Fifth is threat of rivalry. Categories which began operations during the period of 1950s to 1960s were known as value merchandisers. Because of the presence of a number of substitute stores, competition was fierce but the discount store segment remained to be attractive especially when Sam Walton introduced the five and dime stores which had beaten down variety store competitions. Instead of gambling in this discount store segment, Wal-Mart though its founder had created a segment to compete for and where it will emerged as the leader. Wal-Mart stores were also strategically located on a connector highway outside a small community, drawing away business from small local retailers, enclosed malls and specialty stores.
Key components of business model
Wal-Mart operates in the discount retailing industry as the pre-eminent low-cost retailer with a strategy that is built around its pricing philosophy of ‘Everyday Low Prices.’ High consumer confidence is mainly because of broad variety of merchandise which makes one-stop shopping possible and in high stock levels. Besanko et al (2003) also contend that a firm should assess competitive pressures and evaluate responses to competitor price and non-price strategies. Wal-Mart is also perceived as dependable because of the ultimate convenience of shopping for what people want and need at a time most suitable for them; Wal-Mart stores have longer operating hours (Marquard and Birchard, 2006). As such, what maintains a strong and sustainable competitive advantage is its lowest-cost, one-stop-shop business model. In what particular ways such business model provides competitive edge for Wal-Mart is explored as follows.
Wal-Mart is built around four retail concepts, the first being its discount stores which follows the same pattern since the company’s founding in Roger, Arkansas. The second concept is the combination of these discount stores with a total inventory of almost 100, 000 items into supercenters. A third concept point to a Wal-Mart neighbourhood market which provides services of a traditional grocery store in a building format and the fourth concept is a membership warehouse store which carries a constantly changing inventory of about 4, 000 items. With this said, logistics, or its attitude toward its supply chain management, is believed to be the cornerstone in achieving and sustaining the competitive advantage (Marquard and Birchard, 2006).
As such, Wal-Mart operates a hard to beat global network of 146 distribution centers included in the total are 103 distribution centers in the US which provides service to approximately 2, 800 discount stores supercenters and neighbourhood markets and 525 membership stores known as Sam’s Clubs. In addition to this, there are also 1, 300 international units dispersed in 9 countries (Marquard and Birchard, 2006). Such strategy had resulted into a trickle-down effect which helps in reducing lead times in serving stores, and for suppliers shipping merchandise to the distribution centers. Wal-Mart’s supply chain is illustrated below. Troy (2003) asserted that shorter lead times mean less safety stock has to be kept on mind and when out-of-stock situations arise it can be resolved quickly because stores receive daily or multiple daily deliveries.
Figure 2 Wal-Mart’s Supply Chain
(Source: Singh, 2009)
To serve such a wide distribution network, Wal-Mart strategises to own one of the largest private fleets of more than 3, 000 tractors and 12, 000 trailers while most of the competitors are outsourcing trucking. This is an important part of corporate governance to give the company control of its operation which would be impossible in contract situations (Marquard and Birchard, 2006). Fleet has an on-time delivery record of 99.5%. Wal-Mart termed this as a saturation strategy wherein the standard was to be able to drive from distribution center to a store within the day, Distribution centers then were strategically placed so that it could serve 150-200 Wal-Mart stores within the day (Troy, 2002).
Wal-Mart implemented a satellite network system, allowing informations to be shared between the company’s wide network of stores, distribution centers and suppliers. Each store is equipped with a satellite dish for the purpose of linking data into the largest single sales database worldwide by means of two earth station transmitters at corporate headquarters (Troy, 2003). Such a system enables Wal-Mart to consolidate orders through buying full truckload quantities without incurring the inventory costs. The system keeps track of sales and inventory results in a total of 75 million point-of-sale transactions per week.
Further, Wal-Mart is committed in driving out costs so that prices will be cheaper at the retail level. A culture within Wal-Mart is based on profit-derived no from the pricing end but from the cost end of every transaction. There are seven basic rules of operation (Singh et al, 2009). Forming partnerships with vendors is the first whereby manufacturing processes are analysed in search for lower costs. Second is keeping expenses low with the belief that suppliers can provide timely deliveries at low prices hence efficient internal operation maintains realistically low pricing. Proper store location selection is the third rule to insulate Wal-Mart from competition (Troy, 2003). Company ownership of distribution fleet is the fourth while the fifth is ‘knowing the numbers’ or the detailed sales figure by department and by individual store associate. Associates are known internally as employees. Knowing its competition is the sixth and the seventh is taking care of the customers. What drives the operation is to have the lowest prices in the market as a tool for driving up sales and generating profits.
Wal-Mart is more tended on operative goals wherein measurable outcomes are the most important. This is particularly apparent in realising cost advantages and the process toward such realisation. To wit, because of this goal, Wal-Mart is able to consistently able to eliminate competition through setting low prices and subsequently driving competition out of business due to the fact that it has the capacity and the resources to do so. Besanko et al (2003) stated that the processes and activities must narrow the gap in the economics coverage of commercial activity. Positioning/activities therefore are the strategic perspective inherent to Wal-Mart and are evident on the combination of culture, purchasing and inbound logistics, store locations, brand reputation and associate diversity (Marquard and Birchard, 2006).
Wal-Mart’s executives continuously rely on several traditional goals and philosophies that Sam Walton’s legacy left behind. The frugal culture for instance as opposed to corporate extravagance is one aspect that is consistent with the lowered prices of products sold or the ‘Always Low Prices’ philosophy at Wal-Mart stores. The idea is to make the customer No. 1, encompassing the idea that by responding and serving customers’ needs first, the business would also serve the needs of its associates, shareholders, communities and other stakeholders. Another cornerstone of its culture is making Wal-Mart accessible to everyone through exclusive channel that are known as discount stores worldwide. While embracing its roots, Wal-Mart is also flexible enough to tap the advantages of technology thereby combining technology and world-class retailing (Singh et al, 2009).
Purchasing and inbound logistics is already discussed above. Simply, more than 85% of all merchandise sold by Wal-Mart is sold by its distribution centers. These distribution centers also make use of highly automated handling systems and carefully coordinated cross-docking to effectively move good through the system with a minimum of inventory and operates 24 hours a day. As such, inbound logistics is one of the core capabilities of Wal-Mart with 1.2 % distribution expense higher than the industry average cost (Spotts, 2005). To continue, selection of store locations sprung from the idea that saving a penny in operation is as important as generating a penny from sales. Such process is evident on how Wal-Mart treats its leasing processes. Wal-Mart had a 0.3% store rental space with sales higher than that of industry average with total minimum rentals of 9, 072 from 2006 and as predicted onwards (Sushil, n.d).
Although the reputation is increasingly becoming weaker, Wal-Mart maintains to be the strongest brand in its industry. Wal-Mart brand stood for both value and values such as patriotism, community and opportunity. For Wal-Mart, taking pride on its brand means to provide a better quality of life to its customers (Marquard and Birchard, 2006). Wal-Mart’s business model that is embedded on the shopper’s desire to buy a trusted item as quickly and as cheaply as possible is what makes the brand strength. The brand also caters to both basics and special item categories, an activity known to tap the mass market such as low to middle income categories. Intended to be the smart choice for the consumers, Wal-Mart as a brand is also overwhelmed by other strong brand names related to every category. For example, electronic products available in Wal-Mart offer options of Sony, Pioneer, Panasonic, JVC, Samsung and Magnovox among others. Further, about 40% of the products sold in Wal-Mart are private label store brands or products initially or exclusively at Wal-Mart and are being produced through contract agreements with manufacturers. The goal of advertising the brand, moreover, is to get people to realise that Wal-Mart has the right selection of brand names. It would be necessary to note that Wal-Mart has 1.2% advantage on advertising expense (Singh et al, 2009).
Educating and developing associates is another process important to Wal-Mart, which is manned by 1.9 million employees today. Investing in its people, Wal-Mart tries to grow talent internally and it has developed a detailed selection process to identify the best talent and is providing formal training to build skills that is required for the expanded roles. Wal-Mart has also complemented senior leadership teams and operations through offering new roles to high potential senior executives from other areas such as merchandising and logistics. Internal promotions are also complemented by internal promotions (Spotts, 2005). A completely redesigned compensation program that reward all store associates on the basis of achieving store goals in order to improve execution and close the gap between strategy and performance was also implemented. Wal-Mart has 1.1% payroll expense higher than that of the discount retailing industry.
Further, Wal-Mart had reorganised field operations so that associates could take ownership and improve customer service to better improve customer experience. Some of the changes that Wal-Mart recently implemented are store cash office redesign, front-end service, customer needs scheduling, positive associate experience and store manager routines, merchandise flow and increasing customer touch points (Marquard and Birchard, 2006). Aside from leveraging know-how of the associates, these processes enabled Wal-Mart to extract more knowledge from the customer, which could help in improving profitability as well. Through its associates, Wal-Mart achieved a 0.7% shrinkage expense.
Sustainability of discount retailing advantage
Wal-Mart’s generic strategy is cost leadership, a strategy that emphasises efficiency and take advantages of the economies of scale (Hummer, 2006). Whether Wal-Mart could sustain its competitive advantage through its generic strategy is something not easy to reconcile. There are threats, however, that Wal-Mart must understand and respond to. The first is process threat. A positioning report prepared for Wal-Mart mirrors low-cost strategy threats including the paradoxes in its core operation. First is the low-price paradox which tells that customers want the lowest price but these customers do not always trust the lowest price especially when there is no brand name that could provide assurance. Customers perceive low prices as an actual suggestion of low quality (Spotts, 2005).
Although Wal-Mart is the easiest place to do all of an individual’s shopping, the convenience premise is now working against Wal-Mart. As such, Wal-Mart is undisputed as a preferred choice for buying all the basic needs but when it comes to special items, the name Wal-Mart is not a strategic choice (Hummer, 2006). This is because the one-stop shopping format becomes time-consuming hence the threat of physical access. There is also the mass dilemma wherein Wal-Mart provides for every need of an individual. Therefore, when buying something special, a consumer typically picks other stores. The self-service model also contributes to this predicament especially when buying high-dollar items (Singh et al, 2009).
These things are domestic problems that could affect the sustainability of Wal-Mart’s competitive advantage. Internationally, though pricing techniques are also working against the objectives of the corporation. International strategies common to Wal-Mart are wholly owned stores in 14 countries outside the US including joint ventures and majority-owned subsidiaries in China. Ghemawat (2000) noted that it is important to redefine global strategies where differences are apparent. Logistics efficiency or speed to market is coupled with global buying for relentless pressure on prices (Hummer, 2006). Nevertheless, Wal-Mart is always finding difficulties in blending business models with the requirements of localization particularly in places where currency exchange is important. This last supposition refers to the control threat wherein interdependency risks are involved.
Wal-Mart had to face with fierce competitions in foreign markets and selling products at the lowest prices was not always advisable for the company. This is especially true when a local establishment is well-established already. Capturing market shares therefore was a factor by which Wal-Mart lagged behind competitors (Hummer, 2006). For example, Wal-Mart closed down its stores after capturing only 2% of the market share compared to the 19% of the primary rival Aldi. Ghemawat (2000) maintains that a business landscape should be favourable in terms of capital deployment, enables for smooth operation and receptive consumption markets. Further, another generic threat is the stability and applicability of business models. Wal-Mart also struggled in exporting brand elsewhere because of its objective to reproduce the business model (Sushil, n.d.). Preferences of consumers vary greatly and this has affected Wal-Mart operated in other countries.
In sum, sustainability of Wal-Mart’s competitive advantage that is basically embedded on low prices across all product lines and products’ unique selling proposition that are low prices, in-stock positions and customer service is effective in domestic setting but in the international scene, the very business could be jeopardised. Wal-Mart is the most significant player in the discount retailing industry; in fact, Wal-Mart is the very manifestation that such an industry exists. From its resource-base perspective, the key components of the business model is the consistent positioning – ‘Always Low Prices’. Strategies involved are competitively reduced cost, consumer-centric sales, and co-operated suppliers.
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