External and Internal Environments - Wal-Mart Stores - Essay Example

EXTERNAL AND INTERNAL ENVIRONMENTS Table of Contents Table of Contents 2 Company Background 3 External Environment Analysis 3 Industry Analysis 4 External Opportunities and Threats 6 Internal Strengths and Weaknesses 8 Resources, Capabilities and Core Competencies 8 Value Chain 9 Conclusion 9 References 10 Company Background Wal-Mart Stores, Inc. is US based multinational company which is headquartered at Bentonville, Arkansas and was founded in the year 1945 (Yahoo Finance, 2012). It is considered to be one of the largest retail organizations in the world and has been ranked second in the Fortune 500 list 2012 (CNN Money, 2012). The company is engaged in the business of running retail stores that come in various formats like discount stores, supercentres, neighborhood markets, etc. worldwide. The products of the company are also offered through different e-commerce websites that includes samsclub.com and walmart.com. Wide range of merchandise products are also offered by the company which comes at every day low price (EDLP). The companys operation is divided into three broad segments namely, Wal-Mart International, Wal-Mart US and Sams Club. External Environment Analysis The external environment in which Wal-Mart operates its business activities can have a significant impact on its growth and sustainability in future. The various external environmental factors that can have an impact on the company and its corresponding retail industry can be better understood through the PESTEL analysis. It stands for Political, Economical, Social, Technological, Environmental and Legal factors concerning the organization. Of all these six environmental factors the Economical and Social factors can have a significant impact on the organization and the industry in which operates its business. A detailed analysis of these two factors has been discussed below: a. Economical Factors: United States is considered to be one of the largest economies of the world with gross domestic product (GDP) of around $15.09 trillion and per capita GDP of around $49,000 in 2011 (CIA, 2012a). The recent global financial crisis (GFC) had a significant negative impact on the US economy but it recovered well. The US retail savings which also suffered a setback due to GFC is expected to have a steady growth. The disposable income of the US population is also expected to increase. All these factors can have a positive impact on Wal-Mart in increasing its sales in the forthcoming years through its low and competitive pricing strategy. b. Social Factors: The increasing healthcare costs and the ever increasing aging population of US are major concerns for the country at present. Another major social concern for the country is the rising inequality of income. United States has been ranked 42 out of 136 nations with respect to the income equality parameter as evaluated by the Gini coefficient (CIA, 2012b). Although US economy as a whole has experienced consistent growth it has not translated into redistributive social policies and increased wages. All these social concerns can have a significant impact on Wal-Mart because it employs large number of laborers and the wages issues associated with them can hamper the future growth prospect of the company. Industry Analysis Porter’s five forces model helps an organization to assess the competitive forces which exists within the industry (Hill & Jones, 2012, p. 49). The forces which help out in the process are named as a) threat of new entrants, b) threat from the substitute products or services, c) bargaining power of the suppliers, d) bargaining power of the consumers and finally e) competition within the industry (Society for Human Resource Management (U.S.), 2006, p.38-39). Out of the five competitive forces mentioned above two most important forces that can have a significant impact on Wal-Mart has been described below: a. Buyer Power: The retailers that operate in the retail industry vary greatly in their size with respect to companies like Wal-Mart who are having large chain of supermarkets exerting their power over other smaller counterparts. However the hold and grip of these retail giants is limited to a certain extent. Any individual customer does not have the ability to exert significant pressure on the retailers because of the huge volume of potential customers present in the market. However, the revenues generated through all the consumers as a whole represent consumer interests on a wider scale and the sensitivities of those buyers cannot be disregarded by the retailers easily. Consumer choice is greatly affected by two main factors namely, price and convenience. A counter-trend with respect to the culture of convenience is proving to be a challenge for the retailers in relation to the decreasing demand of frozen food products offered by them. The demand for fresh and simple food products is increasing in the market. Health consciousness amongst the consumers is increasing. Hence it is found to have a negative impact on the retailers like Wal-Mart and they are now required to accommodate with such diverse needs and requirements of the consumers. The switching costs for the buyers in the retail industry are low and it is difficult for companies like Wal-Mart to retain their customers. All these factors suggest that buyer power is high and exerting significant pressure on the retail industry and the companies operating their business activities in this industrial sector. b. Degree of Rivalry: Fierce competition is observed among the players in the retail industry (Wal-Mart Stores, Inc., 2012). The switching costs incurred by the consumers in the retail industry are negligible which implies that increased pressure is faced by the retailers to secure the customer loyalty. Larger retailers like Wal-Mart are forced to take up competitive pricing strategies due to the fact that limited amount of differentiation exists across the range of basic products. In spite of the fact that the retailers try to differentiate themselves from the other players through the products offered by them and the prices set for them, a high level of rivalry exist amongst the players in the market. Some companies like Wal-Mart operate in varied industries through their offerings of diversified products like electronics goods, apparels, pharmaceuticals, etc. Hence the degree of rivalry in the retail industry is high. The analysis of the two most significant competitive forces related to retail industry and Wal-Mart presented above suggest that the company needs to further differentiate their product offerings to increase the switching costs for the consumer. This would help in reducing the buyer power and accommodate the pressure exerted by its rival firms as well. Apart from this the company already has a competitive pricing strategy in place which addresses the issue by increasing the customer loyalty and thus helping the company to retain its existing consumers. Moreover the company needs to develop product lines in accordance with the changing tastes and preferences of the consumers and offer them with healthy quality products. This would ensure that the company is able to reduce the negative impacts of the two competitive forces discussed here and have a sustainable growth and development in future. External Opportunities and Threats Wal-Mart operates its business through variety of retail stores in United States and abroad. The external opportunities of the firm which it can utilize to further grow its business in future and various external threats faced by the company which it needs to address to maintain the competitive advantage in the retail industry has been discussed in this section. Opportunities: One of the major opportunities for Wal-Mart is the outperformance of the retail industrial sector that has been observed in various emerging markets. Wal-Mart already has its presence in many of the emerging nations of the world like Brazil, South Africa and Mexico. It is expected that the consumers in the emerging nations of the world would buy most of the worlds goods and products. This would definitely have a positive impact on the revenue growth of Wal-Mart. The important factors behind the growth of retail market in the emerging nations are strong economic growth, expanding population, and increasing disposable income of the consumers. The increasing demand for healthy food items by the consumers worldwide is also an opportunity for Wal-Mart because by concentrating on the sales of healthy grocery items by Wal-Mart would help the company to get them benefited through enhanced profitability in the future years. Internet retailing is also growing which is an added advantage for Wal-Mart which already established its online retailing business segment. Threats: There has been a surge in labor and healthcare costs in United States in the recent years. It is a potential threat for the company because the company employs a large number of laborers to carry on its business activities and the rising labor costs would ultimately increase the overall costs of the company, thereby affecting its profit margin. Hence the company needs to address this threat through prudential decision making in the recruitment process of its laborers. In addition to this, the recent volatility in the prices of commodities in the market can also have an adverse impact on reducing the profit margin of Wal-Mart. Internal Strengths and Weaknesses The identification of key strengths of Wal-Mart is necessary to build upon its core competencies so that it can outperform its competitors in the market. Moreover the identification of the important weaknesses of the company is also vital to help it to develop strategies that can fix these weaknesses. Some of those key strengths and weaknesses associated with Wal-Mart have been discussed below: Strengths: One of the greatest strengths of Wal-Mart is being the market leader in the global retail industry with a wide scale of operations followed in different parts of the world. The company can take advantage of this strength through further expansion of its business in different other nations of the world where it has not established its business as yet. Another major strength of the company is its low cost leadership in the retail market which helps it to offer various products to the consumers at comparatively lower prices than its competitors. Weaknesses: Wal-Mart has a big box retailing format wherein it operates its supercentres that requires large space for setting up its stores. This is disadvantageous for the company because it limits its expansion into the urban areas where the availability of space is limited. The company can fix this weakness by changing its retail format and making the stores smaller in size so that they can be set up in the urban areas. Another issue of Wal-Mart is the adverse effect of litigations on the labor relations. Hence the company needs to solve its labor issues so that it does not lose its skilled employees to the competitors. Resources, Capabilities and Core Competencies The competitive pricing strategy and the huge size of business operations followed by Wal-Mart are the two major competencies which helps it to be the market leader in the global retail industry. The company has access to different resources because of its presence in many countries of the world and thus offers wide range of products for its consumers. Thus the company has the capability to maintain its market leadership through strengthening its core competencies in the retail industry. Value Chain The company has drastically changed hub and spoke distribution channel with the help of superior inventory administration and logistic service. The company maintains value chain with large number of trustworthy suppliers. The company implemented private satellite communication system to increase efficiency of value chain. Radio Frequency Identification (RFID) technology helps them to identify and coordinate various elements like logistics, distribution, warehouse activity and sales of value chain. The whole process not only decreases cost for Wal-Mart but helps them to increase product quality as well (Kneer, 2009, pp. 6-7). Conclusion Wal-Mart is one of the largest corporations in the world and is a market leader in the global retail industry. The recent downturn in the global economy due to global financial crisis has been managed well by the company managed mainly due to its low and competitive pricing strategy. Moreover the company has a huge resource base due to its presence in many countries of the world. The key external and internal environmental factors that can have an impact on the company have been discussed here. The company has the ability to maintain its leadership in the market by implementing the recommended strategies to address all the critical factors affecting it. References CIA. (2012). The world factbook: United States. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/us.html. CIA. (2012b). The world factbook: Country comparison: Gini index. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/rankorder/2172rank.html?countryName=United%20States&countryCode=us®ionCode=noa&rank=42#top. CNN Money. (2012). Fortune 500. Retrieved from http://money.cnn.com/magazines/fortune/fortune500/2012/full_list/. Hill, C. W. L., and Jones, G. R. (2012). Strategic Management Theory: An Integrated Approach. Connecticut: Cengage Learning. Kneer, C. (2009). The Wal-Mart success story. Munich: GRIN Verlag. Society for Human Resource Management (U.S.), 2006. Essentials of Strategy. Boston: Harvard Business Press. Wal-Mart Stores, Inc. (2012). Form 10-K: Annual report 2011. Retrieved from http://www.sec.gov/Archives/edgar/data/104169/000119312512134679/d270972d10k.htm. Yahoo Finance. (2012). Wal-Mart Stores Inc. (WMT): Profile. Retrieved from http://finance.yahoo.com/q/pr?s=WMT+Profile. Read More