Strategic Social Challenges of Wal-Mart - Article Example

Strategic Social Challenges of Wal-Mart Wal-Mart has been attacked for years for ruining their vendors, exploiting their workers, destroying communities and harming the planet (Money Control, 2008). They have also been accused of discrimination against women in promotions and wages (Head, 2004). As a company grows, its challenges increase as it has responsibility towards several stakeholders. Being the world’s largest company, hence, forced Wal-Mart to take notice of several areas in their operations. Competition has intensified which led them to cut costs in various sectors. They have always maintained a tight rein on finances and sourced their supplies from the cheapest vendor which allowed them to offer goods at the most competitive prices. They have also been accused of running sweat shops round the globe as they pay their employees much lower than their competitors. Wal-Mart practically pays no benefits and the workers have to work over time without any additional compensation. However, these strategies have now worked against Wal-Mart as they face several challenges and threat. Scott (2005) claimed that issues such as jobs, healthcare, community involvement, product sourcing, diversity, environmental impact would be dealt in a different perspective. Scott expressed environmental concerns because the supply of natural products can be sustained if the ecosystems that provide them are sustained. Hence their environmental concerns include recycling, using renewable energy, creating zero waste and selling products that sustain the resources and environment. They expect to achieve this by making the trucks, refrigerators, stores, lighting, packaging and shipping more productive than before. These can be brought about my making small changes at their stores. For instance, using solar panels generating electricity for the stores can attract more consumers to the store while it reduces the energy cost. Reducing green house emissions can save money for their consumers. The company also planned to give preference to the suppliers that participate in this program. They have started recycling plastic to eliminate waste and they are also working with their suppliers and educating them. Packaging should be from renewable or recyclable material to save cost and they decided to work with their packaging supplier. Recycling can save on landfill costs. As far as products are concerned, Scott said they would introduce products that are safe and produced in a sustainable way. They are introducing organic products to eliminate toxins in different product categories such as paper, food, fisheries and electronics. Apart from the environment, they also decided to focus on product sourcing, health care, wages, community involvement and diversity. They are trying to ensure that all the workers are treated properly. They also want to bring in insurance for all their Associates and establish basic health care clinics to bring greater access. They would also focus on the wages as this has been the area of criticism but they claim to be abiding by the minimum wages laid down by the Congress. They believe in diversity and would continue to hire the minorities and the women and also increase business with minorities companies. Wal-Mart was aware of the challenges that the company was facing as they proposed to revise their Associate benefits and the public reputation during their Board Retreat in 2005. The initiatives focused on employee benefits and proposed that the eligibility criteria for health insurance be realigned (Chambers, 2006). This would make Wal-Mart more competitive in the retail sector. By decreasing cross-subsidization of spouses they would be better able to cater to their Associates and their children. Educating the Associates was another important initiative that Wal-Mart decided upon as they lacked information on specific health care services. They also intend to focus on the life insurance coverage benefits for the Associates and to improve labor productivity they intend to capture savings from current initiatives. They intend to reduce the number of labor hours per store. They intend shifting to more part-time Associates which would reduce their healthcare costs. Other initiatives include various programs to improve quality of care and develop high-performance service provider networks. They would try to provide the Associates benefits that would be individually beneficial for them. They also intend putting clinics in stores which would eventually become an important part of their health-care strategy. The two main challenges that have been discussed in 2005 are the environmental concerns and the human resources. The issue of dis-satisfied Associates was evident from the 2003 case study as it has been mentioned that the wages at Wal-Mart were much less than the competitors (Ghemawat, Bradley & Mark, 2004). Walton believed in frugality and hence the compensation was tightly controlled at all levels. Even their policy to share information with the Associates was with the need to keep the payroll under control. They always linked the base salary of the managers with store performance as these managers were responsible to keep the pay roll expenses under control. Wal-Mart provides its store managers with a “preferred budget” for employment which would allow managers to staff their stores so that managers can staff their stores at adequate levels but there is always a gap between the preferred and the actual budget. The stores are always understaffed and the difference between the two budgets tells the managers how much more work they need to extract from their workforce (Head, 2004). The medical plan of Wal-Mart for their employees was too expensive and the Associates had to manage through Medicaid on their own. In 2003 it was evident that they were trying to squeeze their suppliers. To save costs, they usually dealt with unbranded suppliers. They did use technology to link themselves with their suppliers so that they could exchange real-time information. Wal-Mart had already come under criticism for its labour standards, as they insisted that their suppliers comply with the standards concerning child labour, workplace safety and any other local laws (Ghemawat, Bradley & Mark, 2004). The 2001 audit revealed that more than half of the international suppliers’ factories violated the norms. Even though the company claimed that finally all the suppliers had complied but in 2003 they were voted as the “Sweatshop Retailer of the Year”. Alternatives Wal-Mart faces strategic social challenges such as weaving their social and political awareness into their corporate strategy (Bonini, Mendonca & Oppenheim, 2006). Consumers today are very conscious of the social responsibility that companies discharge. This has made it vital that companies extend beyond compliance of legal formalities and not just because it can add value. Consumers expect the corporations to play a wider role in the society than just focusing on profits. These should be seen as opportunities rather than as compulsions to be complied with. While companies have not been able to understand the consumer expectations, the executives do know that they need to anticipate social pressure. While labor standards have been set in each country, many reputed multinationals have been found to violate these norms which can harm a company’s reputation. The balance of power today is in the hands of the consumers. The executives must be able to evaluate the impact of the strategic impact of sociopolitical trends. Risk to reputation has to be reduced by anticipating new regulations while creating value by taking advantage of the social and political shifts. Today people have faith in the NGOs, citizens’ groups and online communities as faith on corporations have declined especially since such cases as Enron and World.com have shaken the confidence of the people. Business can and do provide benefits to the society such as employment, good products at low prices. Conclusion Since profit margins in the retail sector has become challenging, and payroll being the most important part of the overheads, the growth of labor productivity should exceed the growth of its wages and profits. Wal-Mart has gone to the extremes as its workforce has one of the best productivity records but the compensation level is barely above the poverty line (Head, 2004). Less than half of Wal-Mart employees can afford even the least expensive health-care benefits offered by the company. Working conditions being harsh, the employee turnover at Wal-Mart is very high. Several class-action lawsuits have been brought against the company. Wal-Mart is a workplace where management suspicion affects the morale of even the best employees. Their core business strategy appears to be exploitation of the working poor. Their environmental concerns were not evident in the 2003 case study but in 2005 the management did wake up to find that being socially responsible could be an opportunity to increase their profit margins. For instance, they found that just by changing the packaging of toys, they could save substantially on shipment costs from overseas (Berner, 2005). Wal-Mart works primarily on a low-cost business model and that is where they stretch to extremes. Wal-Mart has now moved on from market leaders to being environment leaders as they opened two pilot stores in the US totally from environmentally responsible and renewable resources. These are in line with the environmental goals announced by Scott in 2005 of creating zero waste and selling products that sustain resources and the environment. Payton (2005) also aggress that being ‘green’ is no more an element of politic but a viable strategy to gain and sustain competitive advantage. Their strategy is in the best interest of their stakeholders including consumers, associates and the shareholders. This is because improvising on the truck efficiency not only saves on emission and fossil fuel but also saves them on energy costs. Their focus is on three areas – energy, waste and products. Using sustainable energy sources such as solar and wind in their stores will help them achieve their EDLC (every day low carbon) targets. With the intention to reduce costs, Wal-Mart plans to employ more part-time workers and discourage unhealthy people from working at Wal-Mart. They also plan to reduce benefits and employ younger workers. As incentive, they would offer them education benefits. The recommendations given by their internal executive claims, all changes and proposals are in the best interest of the employees (Greenhouse & Barbaro, 2005). Under the new proposals, the part-time workers would qualify for health insurance in one year against two years as it stands now. They claim that they are merely redirecting their savings to another part of their benefit plans. Since employees paid more for their spouses’ health insurance, the proposal also suggested that 401(K) contributions should be reduced to 3% of the wages from the existing 4 percent. They also plan to reduce the company-paid life insurance policies and make it equal to annual wages of the employee. Implementation As they have taken initiatives, they have started responding to critics by changing their strategies. They have started taking the healthcare initiatives and the environmental concerns more seriously. In 2005 they had launched a series of measures to handle these issues which had tarnished their reputation. However, the number of law suits against Wal-Mart did distract its attention away from operations and the CEO had to focus on enhancing the public relations of the company. Thus, financial performance cannot be the only criteria for a company. Their core business strategy has to change because the “every day low prices” caused them a severe setback. They have found business opportunity by bringing in low energy light bulbs. They have expanded their own pharmacy business and started filing prescription for common drugs for as little as $4. They feel they are contributing by making health care more affordable for the masses that do not have any or adequate insurance. Despite making changes Wal-Mart has still not been able to cover even half its employees. They claim to be environmental leaders but their own carbon footprint has gone up in every region of the world. The employees are not feeling any more valued than they did three years ago. The consumers and communities have become more aware about Wal-Mart’s labor and business practices. This has exerted pressure on Wal-Mart to set things right. Wal-Mart must be able to identify their short-term objectives, outsource non-essential functions, and communicate policies that empower people in the organization. Priorities have to be defined and their short-term objective should be to change their tarnished image and spend on information advertising and promotion. None of their strategies appear to be based on the concern of their workers or on sustaining long-term relationships. Wal-Mart has typically been achieving economies of scale as they squeeze suppliers and sell at the lowest prices. These are their firm-specific advantage. However, Wal-Mart’s competitors – ASDA – too focused on low-cost strategy but this was secondary to developing long-term relationship with their suppliers of reputed brands. Wal-Mart should think in terms of long-term relationship with suppliers rather than squeezing them at every point (Rugman, Waters & Dossett, 2005). In Germany, Wal-Mart has just 95 stores and is unable to achieve the economies of scale as local competition is very strong. This suggests that they should change their strategy and not compete on price alone. Wal-Mart has been only focusing on a low-cost strategy but they should know how to pursue both low-cost and differentiation strategy. If Wal-Mart wants to examine the value chain of their business for low-cost leadership advantages they must evaluate the sustainability of those advantages by benchmarking their business against competitors (Evans, n.d.). They must also consider the effect of any cost advantage on the five forces in their business’s competitive environment. In the case of Wal-Mart, their cost leadership has resulted in their exploiting the workers and ruining their vendors. This has given them a bad reputation and as a result they have been distracted towards lawsuits rather than focus on operations. Thus the trade-off for low-cost leadership has not been beneficial as the effect of cost-advantage has worn off. Hence Wal-Mart should strive to achieve competitive advantage through differentiation. According to Porter, this requires a definite strategy because operational effectiveness is not a strategy (Porter, 1996). Tools such as benchmarking, total quality management, partnering, and change management have been used by companies but this has not been able to give them sustainable competitive advantage. To achieve competitive advantage through differentiation, cutting-edge technology is essential which Wal-Mart is already employing and is ahead of competition. The sales staff must have technical competition which is lacking at Wal-Mart as they prefer younger employees with practically no experience. This is because it is cheaper to employ them and this strategy has to be changed. Procurement strategy can make a difference. While Wal-Mart has strict control at the suppliers’ end, they have not made efforts to build long-term relationships with the suppliers, which is where ASDA scores. It is only recently that Wal-Mart has started working with suppliers in new packaging development as part of their concern for the environment. Wal-Mart should stick to branded superior quality products and not opt for cheaper run-of-the-mill items. While they do use technology to replenish their supplies and have real-time information on the movement of goods, they have not been spending on informative advertising and promotion. Wal-Mart has to grow beyond cost leadership and use differentiation for sustained competitive advantage. While they have taken steps towards environmental protection and using sustainable resources, their human resources policies still have the cost-cutting measures. While they claim to be providing health care benefits, more than half the workers still have to resort to Medicaid. Hence, they need to employ full-time skilled workers and actually treat them as “associates” and not just name them so. They need to removed the stigma against their name and ensure action lawsuits are not filed against them. They must be able to weave their sociopolitical concerns into the core business strategy because as Porter says, operational effectiveness is not a strategy. Reference Berner, Robert. (2005). 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