Wal-Mart Swot Analysis
Wal-Mart has grown into one of the largest discount retail stores in the world and has proven that the type of operation that they have is successful and effective. Although they are the industry leader, in the recent years their sales growth rate has not experienced such of an increase. The decrease of the slowing growth rate from their previous double-digit growth has begun to develop problems and serious concern for the company. They are now faced with the attempt to understand the symptoms and causes of the problem and how to regain their growth strength.
Internally analyzing with the VRIO system, Wal-Mart tends to still prove their strength. One of their largest strengths is the distribution system that they use. This decreases their cost and delivery time by remarkable numbers. Their use of the EDLP (Every Day Low Prices) executes the most success in being the lowest prices compared to their competitors. New systems have also now been implemented to decrease the cost of loss of inventory, shoplifting, or simply not having an item in stock.
Although the company is so large they are able to stay well organized, one way in which they do so is by keeping all of the vice presidents of the stores in the headquarters to maintain use of internal strategies. Porter’s five force model is an effective model to help with the understanding of how the company should rebuild their successful sales growth rate. The analysis showed the Wal-Mart faces almost no threat of entry with because Wal-Mart’s economy of scale eliminates the immediate threat of new entrants into the market.
With the products that Wal-Mart offers, there is a large chance for substitutes, but since the range is too large for smaller stores the only other substitutes are other large discount retailers. Threat of substitutes is not very apparent due to the fact that the number and size of Wal-Mart is much greater than any other supplier. Since it is difficult to measure name brand, the threat of buyers is apparent, although the biggest strength that Wal-Mart has is that the average consumer is price sensitive therefore they will continue to search for the low prices. These low prices are the main focus of the threat of rivalry.
Wal-Mart still continues to remain very strong due to their wide variety and low prices. Recently Wal-Mart approaches the maturing market leaving them in need of new market opportunities to retain or increase their sales and maintain competitive against their industry. Initially using the analysis conducted internally and externally once option would be to expand in select international markets. One struggle has been that some global markets are not becoming a strong profitable investment therefore if they would withdraw from these markets that are weaker and focus on the stronger global markets.
Another option would for Wal-Mart to wisely invest an appropriate amount of their profit into a higher-education program from students in global markets that they are currently operating in. Also using the citizens from those locations to be trained as managers and operate the stores would be much more beneficial to the country and more likely to increase the consumer base. This would help the economy as well as boost their occasionally negative reputation regarding their lack of social responsibility.
In 1962, the birth of regional discount stores occurred, including Wal-Mart, which grew to be one of the world’s most successful retailers from 1980 until current. Wal-Mart’s vision is to provide the largest assortment of merchandise at the lowest cost and with the most convenience. Wal-Mart now being a mature company faces the challenge of sustaining the growth that they have been previously experiencing. 1. 2. Problem Statement 1. 2. 1. Wal-Mart needs to sustain and increase growth in a maturing market, where discount and specialized retailers are increasing their competition. 1. 2. 2. Wal-Mart faces many barriers in expansion globally. . Industry Analysis and Company Analysis 2. 1. Internal 2. 1. 1. VRIO To gain a competitive advantage in today’s business environment, companies need to evaluate themselves internally more than just comparing themselves to competitors, or externally. They need to look at the major factors of their success and evaluate how competent they are with regards to value, rarity, imitability, and organization (VRIO). We decided that Wal-Mart’s main factors are their distribution system, pricing strategy, and technology. FactorVRIOCompetitive Advantage Distribution SystemYYYYY PricingYYYYY TechnologyYNYYY 2. 1. 1. 1.
Value A good question that pertains to value is, “Do resources and capabilities enable a firm to exploit an external opportunity or neutralize an external threat? ” Value in Wal-Mart’s industry isn’t specifically defined, but it involves price, service, quality, and convenience. Wal-Mart exhibits value as being a very strong point. Value in Wal-Mart’s distribution system is incredibly strong. According to their website, they have 7,200 semi trucks, 53,000 trailers, going to 112 distribution centers throughout the U. S. Target, considered a competitor to Wal-Mart, only has 26 distribution centers in the U. S.
Wal-Mart holds a tremendous advantage over their competition in regards to the amount of resources they have to conduct their distribution system. Wal-Mart’s core value is their pricing strategy. Their main goal is what they call EDLP, or Everyday Low Pricing. Their goal is to be the cheapest discounter, and hold a huge competitive advantage because they have made that their goal, and successfully kept their products cheaper than their competitors. Wal-Mart has also been the industry leader in using technology to stay one step ahead of their competitors. To start off, they developed EDI, or Electronic Data Interchange.
This system automatically took information from the cash registers about what was being sold, and therefore keeping an active inventory count. When the inventory reached a certain level, suppliers would be able to see that, therefore making sure that the product was replenished before running out. This was all done without human intervention. The result of this was a shortened distribution cycle, and a more efficient means of tracking supply and demand. Wal-Mart also implemented RFID, or Radio Frequency Identification. This technology eliminated the need for employees to scan the UPC codes, and it also helped track products.
This cut down on customers and employees using the five finger discount (shoplifting). It was said that this saved Wal-Mart almost eight billion in labor and two million in shoplifting. One last system they put in was POS, or Point of Sale. This was also an inventory management tool, but it was also useful for marketing purposes. It produced data that would assist in marketing strategies, such as showing that people who bought kids movies usually bought more than one, which allowed Wal-Mart to strategically put other kids’ movies next to the high seller movies. 2. 1. 1. 2. Rarity
Rarity is the next subject in the VRIO Framework. Rarity involves how unique something is to the company. A definition would be, “How many competing firms already possess particular valuable resources and capabilities? ” Wal-Mart’s distribution system is pretty rare, considering the size and complexity of it. Wal-Mart’s situation is very rare considering that their suppliers are dependant upon Wal-Mart’s business. For some companies with over one billion in sales, Wal-Mart provides up to fifteen percent of their sales, and smaller suppliers up to fifty percent of their sales.
Because of this, Wal-Mart has the upper hand in bargaining power, not allowing suppliers to push extra costs onto Wal-Mart, and forcing the suppliers to accommodate their needs. Also, Wal-Mart is such a big buyer in the market that suppliers allows them to have a two percent discount on the gross amount of invoices whenever Wal-Mart paid their bills, not net amount like typical discounts have. Wal-Mart’s pricing is rare as well. Since their core value is to keep prices low, they have made it their first priority to do so. They typically tay around seven to eight percent below their competitors, and have even resisted going to six percent, because of their deeply rooted belief in low prices. 2. 1. 1. 3. Imitability The third element is imitability. The central question that concerns imitability is, “Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it? ” Wal-Mart is hard to imitate on several fronts. To imitate Wal-Mart’s distribution system would require great amounts of resources and strategic planning.
Like we mentioned earlier, Wal-Mart has a gigantic network of distribution centers, stores, trucks, and trailers compared to its’ closest competitors. Imitating a system like that would be a very costly and time consuming task. Wal-Mart also has a very complex system called cross-docking. Using EDI and their technology strengths, they are able to coordinate their deliveries and pickups to the dot. Most times the inventory would be unloaded straight from the truck and either put on another dock to get picked up quickly or loaded straight onto another trailer that would be going somewhere else.
This method reduced Wal-Mart’s cost of sales by two to three percent. With the amount of resources Wal-Mart had, and the precision timing of deliveries and pickups, cross docking provided a system that was not imitable. Their pricing system is also hard to imitate. Because they believe in and implement rock bottom prices, they have to be very efficient at what they do and keep costs down. So far no one has been able to imitate their concept of making a profit off of the lowest prices in the U. S. , which means that they have figured out how to keep their costs at a minimum. 2. 1. 1. 4.
Organization The last part of the VRIO framework is organization. The question here is, “Is a firm organized to exploit the full competitive potential of its resources and capabilities? ” Wal-Mart is very organized, which is something in itself considering they have no regional offices. Instead the regional vice presidents make their home at the main headquarters in Arkansas, saving them costs. They are organized in such a way that they can keep being the cheapest discounter, yet through having many internal strengths and competitive advantages, still engulf a lion’s share of the market. . 2. External In order to sustain growth and increase profits consistently, Wal-Mart’s strategies must be designed and implemented in the most efficient and effective matter on a daily basis. Goals and objectives must provide the company with a clear overview of the intended direction. In order to prosper in the competitive nature of discount retailing, a comprehensive understanding of the firm’s external environment is critical. Identifying these threats and working to overcome them is one of the many reasons Wal-Mart has continued to expand and make money.
Here we will examine the adaptation of different factors such as, technological change, cultural trends, vertical and horizontal integration, and how expansion (both domestically and internationally) were all strategic decisions in adding value to this company. Obtaining the majority market share in the discount retail industry was not easily achieved. The founder, Sam Walton, put everything he owned on the line to finance his first few stores. Before going public in 1970, Walton was several million dollars in debt.
The capital finance from the public allowed Walton to expand domestically while increasing the value of its shares exponentially. Wal-Mart was one of the first to efficiently utilize technological products such as the Universal Product Code (UPC), Radio frequency Identification (RFID), Point-of-Sales scanning (POS), and Electronic Data interchange (EDI). The use of the latest technology resulted in further cuts in costs in the form of managing inventory, employee reduction, and information gathering, setting the curve for other discount retail stores to follow.
Wal-Mart’s latest super centers sell almost anything from apparel, to electronics, to groceries, all under one roof. The convenience of the one stop shopping center is more appealing than ever in America’s fast pace living environment. The everyday low price slogan heard daily in commercials has given the company that recognition of having the lowest prices, regardless of its accuracy. According to Citi Investment Research analyst Deborah L. Weinswig, Wal-Mart’s “low-price message” resonates better with consumers, who are trying to scale back on spending and get the most for their dollar.
A survey conducted by Citi Investment finds that 87% of customers agreed on the idea that Wal-Mart maintained the lowest prices. Despite Wal-Mart’s dominance in the retail discount industry, Costco continues its market leadership in the warehouse club segment, reporting almost twice the revenue of Wal-Mart’s Sams Club per store. International companies such as Tesco, Bailan Group, and Carrefour and Makro, are all adapting new strategies to compete against neighboring Wal-Mart centers overseas. All share the common bond in that they were motivated to expand internationally due to slowing growth rates in domestic markets. . 2. 1. Porter’s 5 Forces Model of Threats 2. 2. 1. 1. Threat of Entry The resources required to compete in the discount retail industry are substantial. After overcoming the initial financial shortages, Wal-Mart has dominated this industry for almost 30 years now. Business Weeks states, “Wal-Mart’s marketplace clout is hard to overstate. In household staples such as toothpaste, shampoo, and paper towels, the company commands about 30% of the U. S. market, and analysts predict that its share of many such goods could hit 50% before decade’s end”.
This number is unrivaled to any other business in America. On top of this, Forbes list of the top 25 richest people include 5 Walton’s. Wal-Mart’s economy of scale eliminates the immediate threat of new entrants into the market. The costs of a unit declines as the number of units produced is increased on a massive scale across the country. Established distribution centers cut the cost by eliminating the middle man. Other entry barriers include customer loyalty, strong brand recognition, and secure distribution channels.
Wal-Mart’s continued expansion and efficient use of technology also creates market barrier for new entrants requiring more resources in property, plants, equipment, and money. Before Wal-Mart became the giant discount retailer as seen today, existing competitors included Kmart, Target, Dollar General, and Shopko. Strategies and actions taken by Wal-Mart have essentially eliminated these retailers as current threats. 2. 2. 1. 2. Threat of Substitutes The magnitude of Wal-Mart’s product offering opens the door for a number of different substitutes.
Customers seeking more specialized products at a higher end store could qualify them as substitutes. Wal-Mart is the store people go to for one stop shopping and stores that do not offer a diverse product line at a lower price, like Wal-Mart, Kmart and Fred Meyer, can be considered substitutes. 2. 2. 1. 3. Threat of Suppliers The number of Wal-Mart stores and its high sales contributes largely to the threat of suppliers. The size of Wal-Mart is significantly larger than any supplier around. In holding the majority market share, Wal-Mart offers much more business to the public and therefore, more bargaining power over prices of materials.
Losing a supplier would not be nearly as devastating to Wal-Mart as it would be to the supplier in terms of revenue. 2. 2. 1. 4. Threat of Buyers Buyers will always pose a constant threat when it comes to business. In today’s age, the buyer has more power and choices than ever before. There are many factors that determine what and where buyers will go when they need something. A few of these include; convenience in location, price, quality of product, costumer service, loyalty, brand name, etc… It is difficult to put one of these factors over another as brand name or quality may outweigh price in some situations.
It is no secret that Wal-Mart does not carry the highest quality of goods, and that may deter some buyers from shopping there. Another reason may be loyalty. A person has been a long time customer somewhere else and does not wish to leave despite the variation in prices. There are also large consumer groups who refuse to shop at Wal-Mart because of how the company treats its employees regarding low wages and minimum benefits. The company’s economic control of price setting is anti-inflationary, hindering growth and productivity in America’s economy.
However, the consumer base that does shop at Wal-Mart has provided plenty of revenue for the company. With such a high concentration of buyers, Wal-Mart reported $245 billion in revenue in 2002; earning the crown as the world’s largest company. The main attraction here ultimately is the low price of goods. This strategy has worked, as a New England Consulting estimates that Wal-Mart saved its U. S. customers $20 billion last year alone. American consumers are price sensitive. Although the market is constantly evolving, it seems that Wal-Mart has maintained its competitive advantage and market niche via its low price, cost cutting strategy. . 2. 1. 5. Threat of Rivalry In selling relatively similar products, market based pricing becomes very competitive. One reason Wal-Mart is able to endure such low prices is because of its low cost incurred. However, price cutting attempts by competitors were unsustainable as it eliminated profit margins simultaneously. 2. 2. 2. Positioning Grid Price High JC Penney Low High Product Offerings Office Depot Fred Meyer
Target Kmart Wal-Mart Low 3. Strategic Options 3. 1. Option 1 Wal-Mart expands selectively in the international market. Wal-Mart will cease operations in countries they are having trouble in while increase operations in countries in which they are thriving. •Wal-Mart will cease operations in areas like Europe and Japan while increasing their market share in Canada, Mexico and the UK. 3. 2. Option 2 Invest proportionally appropriate amounts of their profits into the higher-level education of students in different countries around the world. Investing in international educations will provide an opportunity for those people who receive the education to achieve management roles in the internal structure Wal-Mart’s around the world. 4. Strategic Option Evaluation 4. 1. Strategic Evaluation of Selective Expansion During the 2007-2008 fiscal years Wal-Mart decided to fully exit Korea and to exit the majority of their business from Germany. The once strong willed internationally expanding Wal-Mart has seen recent speed bumps which has considerably altered their expansion game plan.
Our plan is to have Wal-Mart continue to sell their international ventures in countries that are struggling and to focus on those areas that are succeeding. To raise profits a company must either raise more revenue or cut more costs. This plan is to have Wal-Mart cut out the costs of the areas that are consistently failing. If they can establish a very strong presence in the countries they are succeeding in like the UK for a number of years that may translate into success in neighboring European nations that they are currently struggling with.
The obvious drawback to this solution is the costs of pulling the operations out of a country. They will not be able to recoup the expenses they have endured in building a business in those unsuccessful countries but they must realize that those costs are sunk costs and the opportunity costs of pulling out may be better than staying in the country and continuing to struggle. 4. 2. Strategic Evaluation of Education Investment Wal-Mart Has faced considerable difficulty overcoming international challenges in markets such as South Korea and Germany.
In Germany the annualized growth between 2001 and 2003 was a negative 7%. In South Korea the problem was that it couldn’t cash in on the huge market that the country had. Wal-Mart failed to succeed in the South Korean economy because they couldn’t counteract the “small business” culture that South Korea deeply roots itself in. Like other large companies who have attempted to succeed in the South Korean market like the French grocery conglomerate Carrefour, Wal-Mart wasn’t able to show that they could relate to the people in the area.
Germany showed resistance to Wal-Mart because of their keenness to low-prices. Wal-Mart couldn’t differentiate their low prices far enough from other German competitors. This along with customer service differences between Germany and the US caused the Wal-Mart downfall in Germany. Although the problems are very different between each country that Wal-Mart deals with, the solution can be presented equally for all the regions. All over the world one of the top issues is education. If Wal-Mart can focus in on assisting in certain college educations they will receive a sustainable return on their investment.
Wal-Mart can offer to help subsidize college educations in the US or in each country and in return ask those students to turn around and assist Wal-Mart in each individual county to help grown in each different society. 5. Recommendations and Action Plan 5. 1. Recommendations and Action Plan: Education Investment The student who receives scholarship in South Korea will help build ties into deeply rooted traditions that Wal-Mart may otherwise not achieve. They can build a trust with the South Korean people that will create a long-term gain for both the company and the customers of Wal-Mart.
The German student who gets economic help from Wal-Mart can turn around and use the information he has learned from his college experience coupled with the knowledge of German society to help make decisions in Wal-Mart management as to different ways to succeed in the German market. There maybe many ideas that a German citizen can offer that a traditional Wal-Mart executive doesn’t know about. These ideas can be used in each different country to benefit each Wal-Mart a little bit differently. The common result however will be profit.
The other up-side to this option is that it will boost public opinion of a company which has historically been very low. Wal-Mart can display this act of international generosity to the world to show the positive impact they are creating in the world. The downside to offering educations to students in other countries then becomes a cost issue. The average cost of education in the United States is roughly 6,000-10,000 per year per student. Wal-Mart will have to decide what the break-even point will be to determine how many students they will offer the scholarship to.
On top of the cost of the actual education the other major cost will come in marketing the plan to each country and allowing all students in the specific country an equal opportunity at the scholarship. 6. Competitive Advantage 6. 1. Temporary The investment of a portion of Wal-Mart’s profits back into a charitable fund for higher education in foreign countries will give Wal-Mart a temporary competitive advantage. This course of action will lead to a return that will more than likely cover the costs of implementation.
The temporary advantage for Wal-Mart will be a more complete understanding of the current cultures in foreign markets. Much to Wal-Mart’s international problems stemmed from this misconception of foreign cultures. Investing in college education with the expectation that graduates would enter the Wal-Mart executive team and corporation will lead to better business decisions for the company in foreign markets. Understanding the culture of a country is important to operating a business within that country. The formula that worked in United States may not be applicable to other countries, as Wal-Mart has found out.
Effectively, hiring educated and trained managers that offer the ability to understand and know a country’s culture is a benefit. The company will can make decisions and strategies that will generate the growth they are used to. The new educated employees will also understand what not to do and what will not work, eliminating costly errors that have led Wal-Mart to lose millions in foreign markets. 6. 2. Sustained The proposed donation towards college education for students in a foreign country has another competitive advantage that is more sustainable and long-term.
A common perception of Wal-Mart is not entirely positive. Positive image of companies are important because they create value. The brand equity of Wal-Mart is lower than it potentially could reach with a positive image. By using a strategy to upgrade their public image around the world, it would position themselves higher in the opinions of the public. The college education fund for students in need in foreign countries would benefit their image not only in that country, but also back home in the United States.
Critics have continually held the sentiments that, “American people cared about values, not just value, and because they didn’t listen… they have damaged their public image, and needlessly hurt their company, their shareholders, and their workers. ” A higher image of the company that would result from the education campaign would not only help business internationally, but domestically. The stalled growth in United States comes from many factors. However, one cause is due to a mature market.
Improving the image of Wal-Mart would allow the company a possible entry into those consumers that before did not choose to shop at Wal-Mart. This improvement of Wal-Mart’s corporate image would be for a sustained period of time. 6. 3. Areas that could Measure Competitive Advantage Wal-Mart would need to establish set procedures to understand the benefit of the strategic options. The procedures would both have to establish correct measurements for both temporary and sustained competitive advantages. The temporary competitive advantage would need to be measured by figures relative to foreign markets.
The best way to measure the benefits would ultimately see profits increase, due to the losses experienced in foreign markets recently. However, more realistically comparative figures for temporary gains would be improved sales and revenues. Allowing sometime for new local managers to adjust to needs to the country. Another measure would be increases in market share compared to past years. A visible increase would represent positive gains from installment of the program. The measurement of sustained competitive advantage would be most accurate is compared to domestic figures and results.
The reasoning would be due to the fact; Wal-Mart’s image is most affected here at home. A way to measure gains from positive image would be increase in sales and profits. Since the growth numbers have been lower than in the past, a good increase could signal positive gains from education program. 7. Managerial Implications Wal-Mart has demonstrated key issues and areas that have led to its continued success year after year. Effectively using strategies and correctly implementing them into a corporation is a fundamental area for the success of a company.
The strategies that Wal-Mart employed (integrating the use of technology, cost saving, and understanding the culture of your consumers) are replicated today by many other industries. The use of technology early on gave Wal-Mart an advantage with additional cost saving strategies. Cost saving increased profit margins, which allowed the company more options in the future. However, more importantly, it led to the competitive advantage that it held for a very long time. This advantage was offering cost-effective merchandise to consumers, which Wal-Mart continues to enjoy today.
Wal-Mart success showed that being aligned with customer’s expectations and wants is important. At a time when consumer purchasing decisions shifted and centered more on price-sensitivity and convenience, Wal-Mart was pushing itself towards the forefront. It understood what the needs of the consumer and took advantage. This long time success, has now given Wal-Mart the type of recognition that is not only beneficial but indispensable at the current time because it can leverage its power to control many areas of business to continue to enjoy that competitive advantage. 8. References
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