Sample Business Studies Term Paper on Wal-Mart

Wal-Mart

Vision Statement

This paper aims at using Porter’s Five Forces model to analyze the processes and strategic posture of Wal-Mart, and in the end give recommendations on measures the company should take.

Strategic Concepts: Explanation

Porter’s Five Forces: This is a structure for the analysis of an industry and the development of a business strategy. It explains the five forces that shape strategy giving an overview of the intensity of competition and consequently the attractiveness of an industry. The five forces include customers, suppliers, potential entrants, substitute products, and industry rivalry.

Supply Chain Management: This refers to the management of material and information flow in a supply chain to provide the highest degree of customer satisfaction at the lowest possible cost.

Product differentiation: This is the development of characteristics in quality, price, benefit, or service into a product to distinguish/change the perception of the customer about the product in relation to similar offerings in the market.

Strategic Assessment

Developed in 1979, Porter’s Five Forces that shape competition has become among the most powerful tools for the analysis of companies and their business environment. The forces give an analysis of competitors within the same industry with which a company competes. Through the forces, which have almost become business standards for competitive analysis, companies are able to gauge their position within the wider industry. According to Porter (2008), “competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products” (p. 79). Given such an intricate situation that companies find themselves in, an understanding of these forces is particularly important for a company (in this case Wal-Mart) to remain buoyant in such a competitive environment. Knowledge of the forces is additionally important, given that industries are different, and so are the most powerful forces among the five that affect a particular industry (Thompson, Strickland & Gamble, 2010).

Wal-Mart stands as one of the biggest retail and chain stores in the world. Its success according to Hill et al. (2013) “is one of the most extraordinary success stories in business history” (p. 1). Established in 1962, Wal-Mart became among the very pioneers of the self-service model, one that is currently used by grocery chains. Wal-Mart’s success is perhaps attributed to its slogan and practical application of “everyday low prices” (Hill et al., 2013). Although the company’s rivals such as Target and Kmart were both established in the same year as Wal-Mart (1962), Walmart’s target location became a differentiating actor between its rivals and the company. Hill et al. (2013) inform, “Unlike its rivals, who focused on urban and suburban locations, Sam Walton’s Wal-Mart concentrated on small southern towns that were ignored by its rivals. Wal-Mart grew quickly by pricing lower than local mom-and-pop retailers, often putting them out of business” (p. 1). Given such a strategy, the company’s fortunes have been increasing over the years as well as its operations worldwide. This is particularly evidenced by their $256 billion sales in 2004, from its five thousand stores, spread across 10 countries (Hill, et al., 2013).

Having been the first to set up in the small towns, Wal-Mart secured its business in these small towns that were only capable of supporting a single discount store. Thus, by the time Wal-Mart’s rivals, such as Target and Kmart discovered the profitability of the small towns, Wal-Mart already had these towns under its claws (Hill, et al., 2013). In understanding the business environment that it operated in, and taking advantage of the opportunity that the industry offered therefore, Wal-Mart has been able to remain profitable much more than its rivals have. In acknowledging the importance of the environment and its influence on business, Thompson, Strickland & Gamble (2010) state, “All companies operate in a macro environment shaped by influences emanating from general economic conditions; population demographics; societal values and lifestyles; legislation and regulations; technology; and, closer to home, the industry and competitive environment in which the company operates” (p. 56).

Specifically however, a company’s macro environment refers to the relevant factors and influences that the company cannot control. In a sense, the relevance of the factors to a company is pegged on the weight that these factors have on the bearing of a company’s decision on its business model, strategy, objectives and direction (Thompson, Strickland & Gamble, 2010). The influences from the macro environment are significant due to the impact that they have on the company’s direction and strategy. The macro environment for the retail industry has companies operating within a framework of the five competitive forces as described my Porter. These forces include the threat of new entrants, supplier power, buyer power, threat of substitute and internal rivalry (Porter, 2008).

Porter describes the threat of new entry being an important factor since it brings “new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete” (Porter, 2008, p. 80). The threat of new entrants is especially real in cases where the new entrants are diversifying from other markets and can therefore equal existing capabilities and cash flows enough to destabilize competition (Porter, 2008, p. 80). For the retail industry, this threat is low considering the large number of barriers for entry.

Among the barriers are customer loyalty and a decreasing amount of standalone retailers. In its establishment and expansion, Wal-Mart was able to kill mom-and-pop retailers due to its product differentiation (Hill et al., 2013). Moreover, the presence of substantial economies of scale and the colossal capital requirement for any new entrant make it difficult for any new entrant into the market. Additionally, most of the industry players, such as Wal-Mart, Kmart and Target will strongly oppose entry into the industry. Even more is that new entrants will battle with strong brand recognition and well established distribution channels.

For Porter, the power of suppliers is dependent on many things, such as concentration, dependence on an industry for its revenue, switching costs between suppliers, supplier’s product differentiation and lack of substitute suppliers (Porter, 2008). For the retail industry within which Wal-Mart operates, supplier power is relatively low given that the stores are responsible for a huge chunk of the suppliers’ sales and sale volumes. The situation therefore makes the industry attractive for the established players, such as Wal-Mart and its rivals given that a change in the suppliers will expose them to even more suppliers willing to supply the produce at competitive prices.

Buyers can be either powerful or weak in their ability to capture value while forcing low prices, as well as demanding improved quality and consequently driving up costs for manufactures. These buyers (powerful) can also play participants within the industry against each other by their demands, largely affecting the industry’s profitability. Porter informs, “Buyers are powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive, using their clout primarily to pressure price reductions” (Porter, 2008, p. 83). Other situations that increase buyer advantage include bulk purchasers, situations in which products are undifferentiated and in cases where buyers have low switching costs from one product to another (Porter, 2008).

In the retail industry, therefore, the buyer’s bargaining power is considerably low given that no single buyer purchases goods in bulk from the stores. With a broad base of buyers, as it is with Wal-Mart, no single buyer can therefore pressurize the company on price concessions. Even more is that buyers usually make small purchases, while brand loyalty makes them come back to a particular store that stocks their products. Considerable however is the fact that buyers can use their bargaining power to demand quality and low prices through defection to a rival store. To prove the point of buyer power, Kapner (2013) states, “Part of the magic of retailing is to not only have the right product, but to sell it in a way that makes people happy…. If the lights are out, and the stores are dirty, why would people want to spend their hard earned money with you?” Therefore, buyers, even with their low bargaining power in the retail industry, still hold enough influence to demand quality in the service they receive and the environment they shop.

Substitutes on the other hand are always present for whichever product and whichever market. For Porter (2008), substitutes perform similar function to the product or supplied by the industry, but in a different way. Substitutes negatively affect an industry’s profitability when they are high, since they limit potential by bottlenecking product and service prices. This is a real threat for an industry since “If an industry does not distance itself from substitutes through product performance, marketing, or other means, it will suffer in terms of profitability – and often growth potential” (Porter, 2008, p. 84).

This threat is however minimal in the retail industry given that substitutes include small grocery stores, which do not supply as wide a variety as the big retailers such as Wal-Mart. Additionally, given their lack of economies of scale, these substitutes are highly priced than the big retailers. Conclusively, therefore, the threat of substitute store is largely low, given the huge number of entry barriers, such as cost, distribution channels and brand loyalty.

Rivalry among competitors, as Porter informs, “Takes many familiar forms, including price discounting, new product introductions, advertising campaigns, and service improvements” (p. 85). When it (rivalry among competitors) is high however, profitability suffers. The intensity of rivalry is usually dependent on the number of rivals and their size, the growth rate of the industry, commitment of rivals to industry, as well as the exit barriers present within the industry (Porter, 2008).

Rivalry in the retail industry is fierce given that the rivals are almost of similar size. This therefore makes most of them to rival against each other in prices and expansion to different locations, in a bid to improve their market position and performance. The intensity of the Industry rivalry in the retail industry is visible through the possibility of substitution of products from on retail store to another. The industry is therefore largely competitive and utterly unattractive for this matter. However, strategic placement and location are important for any competitor within the retail industry as Wal-Mart is.

Wal-Mart Strategic Posture and Processes

In attesting to strategic placement, in reference to Wal-Mart, Hill et al. (2013) indicate that Wal-Mart’s success to a large part is due to its location strategy. Wal-Mart’s success, largely, was influenced by its location strategy. Accordingly, however, the location was not entirely responsible for the company’s success. Other factors such as supply chain management, information systems, innovation, human resource management and product differentiation played a major role in propelling the company to its current level of success. Thus, the outcome of a combination of these strategies was lower costs and higher productivity than its competition; even as it charged low prices, while earning high profits (Hill, et al., 2013). Particularly, Wal-Mart’s supply chain management has been taunted as being the best in the world.

Wal-Mart’s strength in supply chain management has had a large bearing on its strategic placement and overall company profitability. Not only has the company been able to reduce costs through the supply chain management, but also appealed to its customers, having known the customer preferences and supplying products and services according to the customers’ desire. Moreover, with its presence nationally (over 3000 stores in the US), (Hill, et al., 2013) Wal-Mart has been able to comfortably serve its customers, regardless of their location. This has also included the use of loyalty programs, which have continued to net new customers, while maintaining a vice grip on its old customers.

According to the University of San Francisco, supply chain management refers to “Management of material and information flow in a supply chain to provide the highest degree of customer satisfaction at the lowest possible cost” (University Alliance, 2014). With a combination of different elements within its spectrum, such as logistics, procurement, manufacturing, warehousing, distribution and transportation, proper supply chain management is therefore the backbone of business success. With such a realization, therefore, Wal-Mart has, and continues to supply goods to customers when and wherever they want them (University Alliance, 2014). The strategy that the company has continued to apply in achievement of its goal has been the development of cost structures that drive its slogan: “everyday low prices”. Key to the strategy was the speed at which stock and inventory was replenished in the stores. Using a technique known as cross docking, “products are routed from suppliers to Wal-Mart’s warehouses, where they are then shipped to stores without sitting for long periods of time in inventory. This strategy reduced Wal-Mart’s costs significantly and they passed those savings on to their customers with highly competitive pricing” (University Alliance, 2014).

In looking at Wal-Mart’s supply chain management, it is in order to look at some of the components of supply chain management. University Alliance (2014), indicate, “The main elements of a supply chain include purchasing, operations, distribution, and integration” (University Alliance, 2014). Wal-Mart’s supply chain management follows an integration process through which it integrates its distribution, warehousing, manufacturing and supplies. The company’s supply chain management operates under four elements, which include integration, cross docking and management, vendor partnership and technology (University Alliance, 2014).

With knowledge of the industry within which it operates, which according to Thompson, Strickland and Gamble (2010) enable a company to understand strategies rival are expected to employ, Wal-Mart has been able to strategically source its products at the best price capable of meeting the company’s demand and at profitable prices. By establishing strategic partnership with vendors therefore, Wal-Mart offers its suppliers longevity and volumes in purchases for lower prices. This differentiates it from its rivals who source from multiple vendors and over short-term arrangements, sometimes resulting in empty shelves and dust-collecting goods (Kapner, 2013).

The arrangement between suppliers and the chain store has suppliers shipping products to its (Wal-Mart) distribution centers, where cross docking occurs for deliveries to the company’s stores. Accordingly, “Cross docking, distribution management, and transportation management keep inventory and transportation costs down, reducing transportation time and eliminating inefficiencies” (University Alliance, 2014).

Another important element in Wal-Mart’s supply chain management is its ability to innovate and use technology to its advantage. Among retail chain stores, Wal-Mart has been known as the industry leader in the use of technology. Attesting to this, Hill et al. (2013) state, “Wal-Mart led the way among American retailers in developing and implementing sophisticated product tracking systems using bar-code technology and checkout scanners. This information technology enabled Wal-Mart to track what was selling and adjust its inventory accordingly so that the products found in a store matched local demand” (p. 1). The company has therefore been able to avoid overstocking, as is the case with its rivals such as Kmart (Kapner, 2013). Wal-Mart does not therefore need to hold any periodic sales to enable shifting of unsold inventory, a feat achieved through the use of technology and innovation (Hill et al., 2013).

Technology therefore is the underpinning of Wal-Mart’s supply chain management. The University Alliance (2014), purport that Wal-Mart’s information technology infrastructure stands as the largest owned by a private company worldwide. Using this cutting-edge information technology infrastructure and network, Wal-Mart has been able to project demand, track and envisage inventory levels, formulate largely proficient transportation paths, as well as manage customer relations and service feedback logistics (University Alliance, 2014). The use of technology has enabled the company to link its distribution centers to a nationwide distribution network, where storage of inventories is done and shipment carried out to daily within a 300-mile radius of available stores (Hill et al., 2013). So far, this combination of distribution and information centers has been vital in the reduction of “the amount of inventory it held in stores and devote more of that valuable space to selling and reducing the amount of capital it had tied up in inventory” (Hill et al., 2013, p. 2).

Alternatives to Wal-Mart’s Current posture, Processes, and Strategies

Even with a good supply chain management and use of technology, Wal-Mart may still have other alternatives to expansion and increased profitability. A concentration in the US market (3000 out of the 5000 stores are in US) (Hill, et al., 2013) leave the company locked out of other viable markets such as in Europe, Australia and Asia. Given the deflecting value of the US dollar (Patton, 2013), Wal-Mart’s market power is largely reduced, due to its concentration on the US market. An alternative for this would therefore be spreading its wings to other stable and unexplored markets such as the larger Europe, Asia and Australia.

Wal-Mart’s differentiation has largely been on its prices and its location (in the small towns during its establishment) (Hill, et al., 2013). Its low price strategy has been countered by Dollar Stores, which are fast gaining the market share for consumers and shoppers due to their lower than Wal-Mart prices (Thomas, 2012). An alternative to its price strategy would be to follow Target’s strategy of wide price point provision. With such a strategy, Target has been able to reach different demographic markets, something that Wal-Mart could also do, and meet the needs of its diverse customers.

Recommendations and Action Plan

To remain atop the industry, Wal-Mart should do the following:

  1. Work on international expansion given its low penetration
  2. Increase use of technology to drive down costs

Research and development, as well as human resource training on the various technologies used by the company should be among the first to be undertaken to increase the company’s differentiation. Additionally, the use of technology should be spread to other areas within the supply chain. In its international expansion, the company needs to seek strategic alliances with players in the international market given its low penetration in the international scene.

Conclusion

Wal-Mart’s growth over the years has been due to a combination of price differentiation, effective supply chain management and strategic location. From Porter’s five forces analysis, internal industry rivalry stands out as the highest risk that Wal-Mart has to deal with. Particularly, Dollar stores’ pricing strategy threatens Wal-Mart’s position as the leading discount store. Although customer loyalty, the variety of goods that it stocks and its market penetration may continue to bolster its position as the leading, Wal-Mart needs to rethink its strategy to remain buoyant in the retail industry; given that, more of its competitors are copying and some bettering its very advantage. Although it has a strong presence in the US, Wal-Mart’s international presence and market penetration remains far spread compared to its competitors such as Target. It is therefore important that through its extensive supply chain management and innovation, Wal-Mart should consider further international presence through strategic alliances as well as acquisitions. It will also be considerable for the retailer to consider a combination of its low pricing strategy with Target’s market segmentation strategy to carter for specific market segments.

References

Hill, C. W. L. et al. (2013). Strategic Management Theory, 11th ed. Stamford, CT: Cengage Learning

Kapner, S. (2013). New Photos Show Disarray at Kmart. The Wall Street Journal, 4th November. Retrieved from http://blogs.wsj.com/corporate-intelligence/2013/11/04/new-photos-show-disarray-at-kmaPattton, M. (2013). Inflation of Deflation: Which is the Greater Risk? Forbes, 1st July. Retrieved from http://www.forbes.com/sites/mikepatton/2013/07/01/the-truth-behind-the-feds-monetary-expansion/

Porter, M. (2008). The Five Competitive Forces that Shape Strategy. Harvard Business Review

Thomas, B. (2012). Dollar Stores Take on Wal-Mart, and are starting to Win. Forbes,  16th April. Retrieved from http://www.forbes.com/sites/investor/2012/04/16/dollar-stores-take-on-wal-mart-and-are-starting-to-win/

Thompson, A. A., Strickland, A. J. & Gamble, J. E. (2010). Crafting and Executing Strategy: Concepts and Cases, 17th  ed. McGraw−Hill: Boston

University Alliance (2014). Supply Chain Training. University of San Francisco. Retrieved from http://www.usanfranonline.com/resources/supply-chain-management/supply-chain-training/#.U0o5r1PZ7GY