Business Strategy and Transformation: Wall-Mart - Case Study Example

Wal-Mart Brief Summary Wal-Mart, which was established in 1962 by Sam Walton and incorporated seven years later, is a corporation that operates a chain of discount supermarkets and is the leading company when it comes to grocery retails and employee numbers within the US. Worldwide, Wal-Mart employs over 2.1 million workers and has 8,416 retail outlets going under different brand names located in 15 countries. While opening the doors of the first Wal-Mart store, Sam Walton had the goal of helping people live better lives by helping them save their money (Ferrell, Fraedrich & Ferrell, 2006). Today, more than 40 years later, the stores still operate guided by the same vision. Wal-Mart stores try to offer their clients best quality items and at the lowest prices, and this keeps most customers going back just to make some savings. The corporation has largely impacted the retail industry and increased the benefits to its clients by changing the way of doing retail business throughout the whole world (Fishman, 2006). This Wal-Mart has done by lowering the general cost of merchandize, raising tax revenues, creating new jobs, and boosting consumer traffic. It is estimated that, every week, around a third of America’s population visits Wal-Mart stores. Weekends experience the most traffic such that, there are times when the workers are unable to serve the customers as they would have desired. The supermarket-chain is also a leader in groceries as no other shop comes close to selling as much grocery as Wal-Mart. In fact, Wal-Mart controls about a fifth of the American grocery market with the fraction going to as much as a third in some few cities (Fishman, 2006). Wal-Mart’s sea food prices are approximately 15 percent cheaper than other stores retailing the same sea food. Wal-Mart has not only impacted grocery shoppers’ spending habits but set the standards leaving other stores racing to catch up. The stores that have failed to keep up with Wal-Mart’s competitive prices have, in many instances, ended up bankrupt and closed down. 2. Generic strategy There are numerous macro-environmental factors that affect the decision making process of managers in any company. Macro changes include trade barriers, new laws, demographic changes, tax changes and changes in government policies (Osborne & Brown, 2005). This paper will concentrate on the PESTEL analysis to scan the components of Wal-Mart’s strategic management. PESTEL, an acronym for Political, Economic, Social, Technological, Environmental and Legal factors, was initially designed as a scan for the business environment and is an important instrument of analyzing the business position, market changes, potential business and the operational direction. This analysis mainly examines external issues that may affect the business (Rushton, Oxley & Croucher, 2000). In some instances, the issues being analyzed may fall into different categories, for instance, the creation of committees to oversee certain governmental functions is mostly a political decision that leads to economic consequences. Another example is some government policies which trigger investments in technology. In cases like these where a specific factor fits in different categories, the organization leaders have to decide in which category best suits the factor. Nevertheless, it is vital that the PESTEL factors are not just listed as just the listing does not help the organization much. Instead, organizational leaders need to analyze the factors to determine which ones impact their organization in the greatest way. There are three main reasons as to why the PESTEL factors can be helpful to organization leaders. First, the organization leaders need to ensure that whatever project they are involved in is positively aligned with the influential change forces that affect their working environment. By embracing change the probability of success significantly increases. Secondly, they need to make proper use of PESTEL as this will enable them act in ways that will keep failure at bay or avoid situations beyond control. Thirdly, PESTEL is very helpful in launching new services or products as it aids in breaking free of assumptions and helps in the speedy adaptation to the new environment’s realities. 3. PESTLE analysis of Wal-Mart Political and legal factors: Wal-Mart’s expansion plans and capacity to draw new clients has greatly suffered from political and legal issues (Hitt, Ireland & Hoskisson, 2008). For instance, some cities within the US have enforced legislations preventing the erection of new stores. Some of the legal tussles that Wal-Mart has had to go through include health care law suits, wage, trade and environmental disputes. The publicity that comes with these legal tussles paints a bad picture of the stores to the public and can be attributed to the decline in the chain’s growth rate. The untapped Asian market provides a good opportunity for the retail to thrive there but the stringent Chinese laws on foreign establishments at one time created a major stumbling block to Wal-Mart’s expansion plans (Bogardus, 2007). Economic factors: The economic environment directly determines retail purchases. The economy is currently recovering from the global recession that brought most economies to their knees. The recession deeply affected the consumer purchasing power globally and had an effect on Wal-Mart’s profitability. The global economy is driven by changes in oil prices, the graph below shows a relationship between the two in 2005: The graph illustrates that most consumers’ spending on gasoline is proportional to their retail shopping. Nevertheless, the economic strategies that Wal-Mart uses has enabled the chain gain a cost advantage over its competitors of about three percent (Dennis and Harries, 2002). Social and environmental factors: Wal-Mart operates in different countries and is therefore exposed to different social and environmental factors including different cultures and business environments. Whenever it is venturing into a new country, the supermarket chain faces the challenge of adapting itself to the host country’s culture if it is to be allowed to continue business there. This Wal-Mart does by treating and serving each individual market in a unique way. Whenever Wal-Mart had to buy or enter into joint ventures with big local retailers as it expanded internationally, it always retained the culture of the former retailer and only changed its name (Bovaird, Bovaird & Loffler, 2003).This has enabled the stores blend well with the new cultures. Technological factors: The intricacy of attaining success in business though enhanced competiveness, effectiveness and efficiency combined with technological advances has increased the awareness of organizational leaders towards strategically approaching management and planning in industry (Luftman, Lewis & Oldach, 1993). Wal-Mart has successfully utilized the technological advancement in coming up with innovative products for its clients. Wal-Mart stores have in addition utilized information technology by having a website by which their clients can easily access whatever services or products are available for them. This website has been a successful tool of reaching out, going by the number of visitors to the site as shown in the graph below: Trafic as measured by compete.com Numbers are in millions 4. Diversification strategy Diversification is one of the four categories of the Ansoff’s matrix, the others being market penetration, market development and product development. Diversification is a portfolio strategy intended to cut down risk exposures by combining an assortment of investments like real estate, bonds and stocks which have a little probability of moving in a uniform direction in an economy, therefore reducing the risk of losing an investment (Wilson & Gilligan, 2005). The main aim of diversification is to spread the resources and therefore reduce a portfolio’s exposure to risk. Diversification can be very helpful option for a company that is facing a reduction in sales and market opportunities in its principal line of business. It involves proper management of all business owned by the particular company so as to ensure that the shareholders maximize their benefits from the company and have minimal losses (Barney, 1997). Diversification can be classified into two; related and non-related diversification. In related diversification, the company remains in the market industry that it is familiar with. For instance, a company that specializes in spices decides to manufacture soups as well. The soups could be made with different spices that the company earlier produced. This is also known as concentric diversification (Wasson, 1974). Another form of related diversification, known as horizontal diversification, happens when the company creates a new product that is directly unrelated to the one currently produced but could be of interest to the same targeted clients. This form of diversification can prove to be very beneficial in a highly competitive environment as it further increases clients’ loyalty to the old products and the new ones, as long as they are of good quality and affordable. For instance, a company that manufactures pens decides to diversify to notepads as well. This form of diversification however, makes the company dependent on specific segments of the market. Non-related diversification takes place when the company ventures in a field which it has completely no previous market or industry experience whereby the new product is produced and distributed using the same channels that the original product used (Chwa & Lee, 2004). This type of diversification mainly targets a totally new market of different group of clients. For instance, a company that originally manufactured beauty products diversifies to manufacturing hardware tools. This type is known as lateral or conglomerate diversification. This type of diversification is more risky but could prove very successful and open a new stream of company revenues. In general, diversification has proved an important tool of greatly boosting the performance levels, going by the success stories from companies that have applied the strategy (Calori & Harvatopoulos, 1988). Diversification is either offensive or defensive depending on the purpose for which it is applied. 5. Application of diversification by Wal-Mart Diversification is one of the growth strategies employed by Wal-Mart to enable it stay ahead of its competitors. The company originally operated discount stores but has since diversified its operations into nine retail formats namely, membership warehouse clubs, soft discount stores, apparel stores, restaurants, general merchandize stores, supercenters, bodegas, cash and carry and food and drug stores. These stores are organized into three main groups of Wal-Mart International, Sam’s Club and WAL-Mart Stores United States, the last one being the largest and accounts for more than two thirds of sales according to 2006 financial reports (Financial report, 2009). The percentage had however changed in the recent years. There are several reasons that prompted Wal-Mart to adopt the diversification strategy, especially during the 1980s. Wal-Mart’s diversification happened across different segments of the market. Throughout the decade, Sam’s club had the most success probably because of its adoption of the wholesale concept. Sam’s club was first launched in 1983 and was considerably bigger compared to Wal-Mart, even though it stocked only about 3500 items, a figure much less to Wal-Mart‘s 70,000 items (Monks & Minow, 2008). Sam’s club originally targeted the urban market and became so successful that by the decade’s end, it had over grown to 123 branches located in 23 states within the US. Wal-Mart also registered some growth but was not, at all times successful. Hypermart USA was launched in 1987, having been conceived from the French idea of being a place where one could have a one stop shopping. The store had stock ratios of two thirds for non-food items and a third for food items all in a big building of more than 200,000 square feet containing 35 different departments. The 1991 Wal-Mart acquisition of Philips Cos., which then operated a chain of 20 grocery stores, helped the chain in its strategy to satisfy the then volatile retailing environment. This acquisition provided Wal-Mart with knowledgeable supermarket traders who supplemented its own food operating staff enabling the discount retailer expand to the four hyper marts and the six supercenters in 1991. Although the store became very successful in terms of huge sales, it experienced several drawbacks that attracted voices of dissatisfaction from customers. Hypermart’s very high operating costs and lack of adequate parking spaces for customers contributed to the projects eventual demise in 1990 and the stores converted to Supercenters. The first Superstore came into existence in 1988 in Missouri. The superstores have grown in numbers to an impressive 2,737 as of December, 2009. These stores stock all that the discount stores have in their shelves and in addition stocks meats, baked foods, fresh sea foods, grocery and dairy products. A good number of the superstores also have in them a pet shop, garden center, a pharmacy, a portrait studio, a mobile phone shop, an optical center, a salon, bank branches, fast food outlets and some even sell gasoline. The first supercenter was revealed in 1988 in Missouri following the concept of the Texas Hyper mart that had been opened a year earlier. The neighborhood markets are basically grocery supplies who offer a wide range of services and goods apart from the grocery provision. Some of their extras include, health and beauty products, photo studios and pharmaceuticals. The neighborhood markets provide a bridge between Supercenters and discount stores. The discount stores mostly sell general merchandize and selected foods. Most though also have other outlets like a pharmacy, optical center, mentioning a few. These and the other branches that Wal-Mart has diversified in seemed to have worked well and contributed to its growth to what it is today. 6. What I have learnt The case of Wal-Mart has many lessons that one can learn from on to how to survive in the dynamic world of business. The store has employed a mixture of strategies that have enabled it not only survive in business but grow and remain very profitable and grow even with the tough conditions that have seen numerous other stores wrap up from business. Strategy is normally applied with the goal of winning (Grant, 2005), a fact that Wal-Mart as demonstrated only too well. Wal-Mart started off with an image of being a cheap provider of quality services and goods and went as step ahead to market itself as a store that seeks to save the customers’ money. With the tough economy, no one will pass at an opportunity to save some cash, however little it might be. It is therefore no wonder that a third of US shoppers are clients of the Wal-Mart stores. The retailer has even registered impressive sales in countries with low GDP due to its low price policy. Its low price campaign has revolutionized the retail world setting a trend that is hard to go against. Several stores that had operated with Wal-Mart in the same location and failed to keep up with its low prices campaign did not take long before being wiped out of business (Jones, Jones & Simmons, 1990). The success Wal-Mart enjoys currently did not come easy, on the contrary it involved a lot of planning and evolving to suit whatever conditions the market was offering. One notable adjustment was the wrapping up of the high cost Hypermarkets and replacing them with Supercenters. The lesson that can be learned from this is that a business should be able to evolve quickly should the situation call (Ebert, Griffin & Starke, 2002). By getting rid of the hypermarts, Wal-Mart not only got rid of stores that had high running costs but also did away with a brand that had already received dissatisfaction from customers. Customers are very important for the survival of any business and it always pays to show customers that there is someone who listens to their suggestions and complaints. Hypermarts dissolved with the negative publicity they had attracted and were replaced with a new brand that was devoid of the negativities of the hypermarts, therefore improving the Stores’ image. The chain has successfully employed several strategies to propel it to where it is today, one of which is the PESTLE strategy that this paper discussed in detail. According to Sandra, Vance and Scott (1994), Wal-Mart’s diversification strategy during the 1980s had more advantages than just enhancing the chain’s growth in terms of net sales volumes and retail square footage. The strategy also provided the chain with the opportunity to experiment in more ways than one and take risks that paid off with massive expansions of its operations territory (McGahan, 2004), the massive increase its net worth and revenues and the cutting down of its operating costs. Wal-Mart’s efficient management during the 1980s saw the firm achieve a high productivity level from the stores it had then and enabled it to open more stores in smaller cities and towns that its major competitors had overlooked. This also enabled the firm reduce its expenses and extend its gross margin reduction (Robert, 1998). Wal-Mart’s high sales volume enabled it have a huge buying power which enabled it purchase goods at low costs and pass the benefits to its many customers thereby earning their loyalty which further boosted sales. The embracing of technology contributed to the high efficiency levels of the stores and enabled its employees serve the customers better. By 1990, Wal-Mart had put in place a sophisticated distribution system which were fully automated and used conveyor belts and laser scanners. With the big number of customers passing through its doors daily, the management’s decision to massively invest in the latest technology was very wise and handsomely paid off with the reduction of inventory and the enabling of the accurate transmission of inventory-control data. The technology also enabled the chain to retain full stocks all its stores (Sandra & Scott, 1994).This clearly states the importance of investing in technology, even though it may initially be very costly. Wal-Mart’s way of doing international business provides good lessons. After beginning its international venture by the establishment its maiden international store at Mexico in 1991 (Govindarajan & Gupta, 2001), Wal-Mart has since flourished in Latin America and other countries like China. An important thing one can note is that Wal-Mart has ventured into Brazil and China, which happen to be some of the world’s most populous countries. By venturing into a big population of potential customers, the retailer increases its customer base and stands a better chance at making more sales and expanding in business. Wal-Mart’s impressive success continued well into the 1990s and the chain still performs impressively to date. Their advantage in pricing over rivals may currently have been narrowed but the chain still possesses an advantage in its distribution and information systems which they can easily utilize to boost their data warehouse and install the latest available technology (Caldwell, 1997). Since inception, Wal-Mart has shown the desire for continuous improvement which can be defined as the philosophy of management that considers the task of process and product improvement as a continuous process that gains small wins (Chase, Aquilano & Jacobs, 1998). The market keeps getting complex by the day making this theory become of much importance in today’s business world. Conclusion Competition is always expected and is always there in the business world, even in the retail industry. This however, should not cause discouragement, but instead should challenge any business willing to be successful to employ strategies that will enable them tackle the many challenges that come with doing business. 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