Problems Faced by a Retail Giant: Wal-Mart - Case Study Example

Business Executive Summary The purpose of this paper is to analyze the problems faced by a retail giant, Wal-Mart, in the U.S. market in recent times. Few issues that are responsible for these hurdles being encountered by Wal-Mart have been widely discussed. This research is based on secondary sources of data and content analysis in order to comprehend these problems faced by Wal-Mart presently. One of the primary limitations of this research is that it uses no primary data for the analysis. The findings from this study have shown that there are primarily three problems, which are being faced by Wal-Mart in the current scenario. The major issue is that of sustaining previous growth rate for the company. It has been observed that the level of growth has fallen for the company below 10% mark and share prices are on a decline, resulting in loss of market value. Also, legal suits filed against the company are responsible for creating a negative image in the public. Based on this analysis, few recommendations have also been suggested for the company to improve its prospects. The major recommendations include international expansion into the European market and greater concern for employees by way of raising their compensation. Contents Executive Summary 2 Contents 3 4 Background of the Study 4 Introduction and Statement of Problem 5 Analysis of Case 6 Findings 8 Recommendations 10 Reference List 13 Appendices 14 Background of the Study Wal-Mart has become one of the discount stores in America, which had experienced a meteoric rise ever since its inception in 1962. The retail chain has been incredibly successful in a time when most of its competitors went out of business or were acquired by other super market chains. Wal-Mart, on the other hand, has been able to successfully manage their growth momentum since inception. Wal-Mart had undertaken a unique strategy for its expansion. Firstly, the company had targeted those places in America, which were not considered by other major retailers. This provided them with first mover advantage and growth was assured by following the path of charging lowest price. Secondly, the pattern of expansion that was adopted by Wal-Mart had also been phenomenal for success it had acquired. The practice of competitive pricing that was followed came from a number of sources. For instance, effective management of the inventory, efficient relationship with the investors and unique store operations ensured competitive advantage for Wal-Mart. All these factors had collectively combined to reduce operational cost of the retail giant and allowed it to charge lower prices from customers. This in turn had enhanced company’s customer base and was reflected in the rapid rise in sales figures. Additionally, the diversification strategy followed by the company had helped to win a wide range of customers based on their requirements (Bradley and Ghemawat, 2002). Though the company has experienced unprecedented growth in previous decades, including the 80s, yet growth rate of the company had shrunk 1993 onwards. Wal-Mart is currently facing a problem, which is met by most of the companies when they become very large and successful. The rationale here is that as companies grow bigger in size, they require higher amount of capital for investment, which reduces their momentum of growth. Wal-Mart is facing a similar problem as is finding it increasingly difficult to maintain the pace of growth. The rate of growth for the company had particularly declined after 1993 when it was observed for the first time that growth rate had fallen below 10%. The stock price of the company had fallen by 22%, which had led to a loss of market value, estimated to be 17 billion dollars. Of late, the company has also been involved in a few legal hassles, which have jeopardized its market value (Bradley and Ghemawat, 2002). Introduction and Statement of Problem It has already been discussed that Wal-Mart was able to manage a phenomenal growth in the past years. From all factors that have been studied, it can be commented that the diversified pricing strategy followed by Wal-Mart has helped to sustain the company’s level of growth. Managers of the Wal-Mart stores had the autonomy to charge different prices at separate stores, depending on price charged by its competitors and their relative positions. This strategy had allowed Wal-Mart to win over various market segments. Wal-Mart had introduced a number of measures like, inventory control, which had contributed to profit margin. Finally, the management skill exhibited by Sam Walton played a major role in driving Wal-Mart to its success. Effective management of employees had a major role in strengthening the human capital. However, three major problems can be identified in context of Wal-Mart. The first issue that can be identified is the problem of maintaining growth level above ten percent. The second issue is that of falling share prices of the company, which can severely halt company’s growth rate and the third problem is the increasing number of legal problems for the company in recent times, which can harm reputation and future growth. The aim of this report is to research the above mentioned problems for Wal-Mart in order to find out solutions, which can facilitate and improve its future growth (Bradley and Ghemawat, 2002). In order to accomplish the aim, the objective of this research is to: Take up a comprehensive study of the existing literature in order to recognise probable causes for the problems. To frame solutions to the problems based on studying journals and books related to similar problems. This report will be essentially based on secondary research. The subsequent part of the report is divided into three broad segments. The part “Analysis of Case” applies the academic theories and tools of management so as to identify problems that are faced by Wal-Mart. The segment of “Findings” discusses the application of these models in case of Wal-Mart and clearly follows from the previous section; and the last part focuses on recommendations that are appropriate for the case of Wal-Mart so that future position can be improved. Analysis of Case The existing literature points out that retail markets have a typical pattern of growth. It has been observed, particularly for retailers, that they experience exceptionally high growth rate through rapid rate of expansion of stores at an early stage, while becoming operational. Researchers have shown that most retailers have a linear relationship between the rate of market growth and that of outlets (Mahajan, Muller and Wind, 2000). However, the relationship between these two factors is S-shaped one as existing literature points out. The rationale behind the S-shaped curve is that with passing time, retailers experience market saturation, which reduces their market share in home markets. Figure 1: Area wise market saturation (Source: Mahajan, Muller and Wind, 2000) The above graph is an illustration of market share and outlet growth among retailers. The works of Mahajan, Muller and Wind (2000) had stated that a firm can achieve maximum level of growth until it reaches u0. After this point, firms experience a decline in the level of growth. According to the researchers, the area marked by Area I have reached saturation. The one marked Area II has chances of expansion. The Area marked III is underperforming and the one marked as Area IV is overbuilt (Mahajan, Muller and Wind, 2000). Several researchers have suggested market saturation as one of the primary reasons, which lead to a fall in demand for the products purchased by customers. According to the views of Wilkinson (2013), if the population of a region is growing very slowly and level of income has stagnated, then it is likely that the market is saturated and further growth in the area can only occur at the cost of competitors. This is often the reason that motivates the retailers for international expansion (Wilkinson, 2013). It is observed in case of Wal-Mart that the rate of growth has fallen to a range of 7%-8% in 1993. This rate was historically low for the company as growth did not fall below 10% since 1985. Market saturation has been found to provide push factors for retailers in order to expand into international markets. When domestic economy of a country stagnates and the market is almost mature, outside markets offer greater opportunities for retailers as investors raise the pressure of earnings for the company. One of the problems being encountered by Wal-Mart is that its price is falling in the stock market. It has been documented in the existing literature that the level of stock prices is determined by demand and supply of stocks. It has been found out that the level of expectations of people is an important determinant in assessing stock price. If investors assume that the level of net income will rise in future, then the value of stock also rises. If the investors expect a fall in company’s future net income, then they revise their expectations downward and prices of the stocks fall. Analysts have pointed out there are many reasons, which can lead to fall in prices of company’s share. There are both internal and external reasons that lead the price of stock value of a company to fluctuate. External reasons for fall in stock price include weak economic conditions, recession and other volatility in the economy like, inflation. It is observed that if any firm does not treat customers and employees in a proper manner, then there are high chances that stock value of the firm will slump. These factors can be attributed as internal reasons that lower the growth rate of firms. A major consequence of the fall in share price is that the proposed issue of share in upcoming years is unlikely to be successful and the company will be unable to receive future funding (Silver, 1997). Constraint in the level of funding by the company is expected to hinder the extent of its expansion plans. The research conducted by Riley and Wilson (2013) has shown that non-financial indicators have greater relevance than financial indicators in determining the stock value of a firm. Kaplan and Norton’s balanced scorecard approach provides a good way to measure non-financial indicators as it involves both internal and external indicators, which are subdivided into dimensions that captures various non-financial aspects of a firm (Roslender and Wilson, 2013). There are both tangible and intangible losses attached with legal battles against a company. Losing legal battles can result in financial loss as company has to pay compensation to the victim. Furthermore, losing legal battles for a company can also result in intangible losses such as, loss of reputation and public image. These damages can also be reflected in the falling stock price of the company. Financial loss faced by a company has major consequences in the sense that it can lead to material loss not only for the company, but also for the investors. Additionally, a company can be involved in lawsuits on violating the rights of employees. It is noticed that for retailers, a major way to reduce their operational costs involve lowering the salaries and benefits of employees. Majority of giant retailers pay minimum wages to employees and bears almost little or no costs for their insurance and other health benefits. These activities can be related to violation of human rights. Breaching the rights of employees not only results in financial loss, but also entails considerable social loss for a firm. Financial loss also brings along reduced investment for a firm, which can stall growth. Findings The analysis from the previous section could be directly related to the case of Wal-Mart in the present case. It has been observed that discount retailers in Americas had grown in number at an exceptionally fast rate since World War. Discount retailing in the American retail sector had exploded since then and players had entered the retail market at local, regional and national levels. This is evident from rise in the sales figure, which had grown from a mere value of $2 billion in 1960 to $ 19 billion in 1970. The decade of 70s had alone witnessed a growth of 9% and the rate of outlets opened had grown by 5%. In the period of 80s it was found that growth rate was 7%, but that of outlets was just 1%. In the period of 90s, annual growth rate of the discount retailers as a whole was close to 12%, yet that of the outlets was a mere 2% (Bradley and Ghemawat, 2002). Hence, the situation of market saturation was clearly visible from this trend. As had been pointed out in the research of Mahajan, Muller and Wind (2000), excessive growth of outlets in an area leads to market saturation therein. It can, therefore, be argued that fall in the share of profit of Wal-Mart could be attributed to market saturation at regional levels. Wal-Mart had initially started with an unconventional approach to open stores only in rural areas, which were not then approached by other retailers. This strategy had initially contributed to phenomenal growth of Wal-Mart in the decades spanning over 60s, 70s and 80s. The conditions had rapidly changed since end of the 80s as geographic growth of Wal-Mart had infiltrated in every region. It was found by 1993 that the company had been facing major competition from competitors like, Kmart and Target, which were other big names in the retail industry. Statistics show that 55% of the Wal-Mart stores had encountered direct competition from Kmart stores and 23% stores were direct competitors of Target stores. Also, 82% stores of Kmart faced competition from Wal-Mart and the equivalent number for Target was 85%. The reason here was that Wal-Mart had taken an aggressive policy of expansion in America and had very quick geographic expansion. As a result of this policy, Wal-Mart had already made its presence felt in 47 states, which is expectedly triggering the issue of market concentration (Bradley and Ghemawat, 2002). A probable explanation for fall in the prices of Wal-Mart can be the death of Sam Walton. Under guidance of Sam Walton, Wal-Mart had an exceptional reputation based on management practices that were created by him. The innovative style of leadership displayed in the field of management like, simplifying the structure of management, partnership with vendors, control of inventory and management of merchandise, had ensured strong growth of the company. The challenge of changing the status quo by the retail industry had led Sam Walton to create a business empire out of a small retail store. It is likely that investors are going to be affected in a negative way and react adversely to the news of his death (Bergdahl, 2010). This may be one plausible factor for fall in the stock price of the company, despite sound financial returns. It has been alleged that Wal-Mart quoted its price wrongly for attracting customers. Target, one of the major competitors of Wal-Mart, has confirmed that it was impossible for the management to go ahead with this policy, if Mr. Walton was alive. Though Wal-Mart had vehemently opposed to these allegations and has claimed to be uninvolved in any type of illegal pricing. Rivals of Wal-Mart complain that the business practices of Wal-Mart have been modified, after death of Mr. Walton, which is particularly raising concern among the other industry players. Reputation loss of Wal-Mart can also be treated as an important reason, which can contribute to the fall of share price for Wal-Mart in recent times. Wal-Mart has increasingly been dragged into legal hassles. The most predominant ones are opposition raised by small town businessmen who had accused Wal-Mart of forcing them out of business. This has led the small merchants to protest against Wal-Mart as their livelihood has been upset. Such activities also bear social cost, which exceeds their economic costs. This is because loss of jobs by small merchants results in disintegration of communities as well as reduces the number of options that are available to consumers (Bruning and Ledingham, 1999). Secondly, pharmaceutical companies have particularly issued legal suits against Wal-Mart as the company has continued to charge prices below market average. This action of Wal-Mart has been termed as an anti-consumer decision and the company had to stop selling below market cost. Such legal issues have also emerged in multiple countries. These actions can be treated as a plausible cause that reduces the stock price of Wal-Mart. It can be argued that the cost involved in legal battles for a company are immense and it is a time consuming process, which creates further organisational issues. Collectively, these activities can have adverse impacts on the investors because they lower investors’ confidence in the business practices of Wal-Mart. In case of Wal-Mart, it has been noted that the workers are vulnerable and not adequately protected. Wal-Mart does not have a unionized workforce and almost 30% of the workers work on part-time basis. Though the management tries to motivate workers by trusting the employees and sharing information with them, yet it is difficult for the employees to protest against the management while facing inconveniences pertaining to their wages and work hours. This is because it has already been observed that wages of employees in the large retail stores are curtailed in order to improve profit margin of these organizations. This has the potential of creating problems for the employees in future. Recommendations On studying the sections on analysis and findings, it is revealed that presently, there are few avenues that Wal-Mart can explore so as to improve their current scenario. Wal-Mart has already undertaken certain activities in this regard and few other steps are yet to be taken. Wal-Mart’s growth has appeared to decline mainly in the decade of 90s because of market saturation in the home market and stagnation of the economy. In order to improve the situation, it is recommended that Wal-Mart takes the route of international expansion more aggressively. Current evidence suggests that Wal-Mart has already applied measures of expansion by way of venturing into international markets like, Canada and Mexico. The company is also attempting for cross-continent internationalization by entering into the South American markets of Brazil and Argentina. It is suggested that Wal-Mart should explore the European markets. The rationale behind entering the European markets is to tap opportunities for increased profitability and a way to diversify its customer base. It is seen that European markets provide robust market and opportunities for international expansion (Doherty, 2007). Here it must be mentioned that if Wal-Mart considers the policy of profit maximization as the sole criteria, then it should be practiced aggressively and not half-heartedly. If Wal-Mart ventures in Europe, then it will also be beneficial for the business, given that previous overseas operations would prove to be a good learning point for the company. Even so, it must be considered that success in international venture is difficult to achieve if appropriate mode of entry is not selected by the management. There are three possible ways in which Wal-Mart can achieve the same, namely franchising, setting up wholly owned subsidiaries or joint ventures. If Wal-Mart chooses franchising as its mode of entry, then the capital investment required to start business will be small; but returns from the investment will also be smaller. If the company chooses the other two modes, then investment required will be larger, where their returns can be expected to be higher (Burt, et al., 2002). As noted, company has been facing declining share prices in the recent times. In case of Wal-Mart, it can be argued that the level of financial returns of the company is adequately strong as has been observed from the financial indicators. As a result, in order to arrest fall in the share price, non-financial indicators of the company must be improved, which will help to rectify the situation. Wal-Mart has closely followed a policy of customer satisfaction so as to gain competitive advantage over its rivals. It is seen that Wal-Mart has modified its business practices to suit the needs of customers, which range from arranging merchandise as per the taste and preference of customers to greeting people with “People Greeter”. However, aspects relating to the price of products have been under scrutiny of late, given that Wal-Mart was accused of quoting wrong prices. Thus, it is recommended that Wal-Mart must quote all its prices correctly and avoid selling at prices below industry standards for certain products like, pharmaceuticals. Quoting incorrect prices can lead to loss of reputation among consumers, causing depletion of customer base. The retail industry is extremely competitive and other players like, Kmart and Target, can easily divert the customer base of Wal-Mart. Also, predatory pricing followed by the company in certain sectors like, pharmaceuticals, creates a monopoly, which has already entailed considerable number of issues. It has been witnessed that Wal-Mart has already destroyed a number of jobs by way of driving the small merchants out of business. As a retail giant, Wal-Mart must engage in proactive practices of corporate social responsibility in order to improve company image. It is, therefore, suggested that Wal-Mart incorporates the small merchants in its business plan. Additionally, it must also help small businesses for enhancing the level of its community level management. This can be done by making contributions and charitable donations to the community for supporting small entrepreneurs with their business (Stone, 1997). These activities will enable the company to improve its local image, which is currently under pressure due to large numbers of protests against the company in local communities claiming that Wal-Mart is disrupting their livelihood. The final recommendation presented in this paper includes better care towards the employees. It is noticed that Wal-Mart has managed its employees in an effective manner and provides them with adequate autonomy for conducting business practices; but it cannot be denied that the company greatly reduces costs of operation at the expense of employees. A number of reports published previously about Wal-Mart have revealed that the company has large number of cases filed by workers related to low wages and poor treatment of workers. Workers have often been made to work for long duration without additional pay. It is, hence, recommended that the company treats its employees with higher compensation and compassion. Legal suits filed by employees can lead to graver consequence for Wal-Mart if it continues unethical practices. Human resource is one of the greatest assets of any organization and improper management of human resource can have adverse impacts on organisational welfare. Paying low wages by Wal-Mart can depress wages for entire retail sector in the forthcoming years, which will affect quality of life for the labourers working in the retail sector. As a consequence, better treatment of the employees can help Wal-Mart improve its ethical and social responsibility as well as performance. This research has been conducted only on a secondary level and has focused on a few problems faced by Wal-Mart in the decade of 90s. One of the limitations of this research is that it is based only on secondary sources as no primary data could be collected by the researcher. Future research on this topic can be built on the aspect of improving corporate social responsibility of Wal-Mart. The competitive environment of the retail industry can prove to be difficult for Wal-Mart if it refuses to comply with standards of social responsibility. Reference List Bergdahl, M., 2010. The 10 rules of Sam Walton: Success secrets for remarkable results. New Jersey: John Wiley & Sons. Bradley, S. P. and Ghemawat, P., 2002. Wal*Mart Inc, Inc. [pdf] Harvard Business School. Available at: [Accessed 18 June 2014]. Bruning, S. D. and Ledingham, J. A. 1999. Relationships Between Organizations and Publics, Development of a Multi-Dimensional Organization-Public Relationship Scale. Public Relations Review, 25, pp. 12-35. Burt, S. L., Mellahi, K., Jackson, T. P. and Sparks, L., 2002. Retail internationalization and retail failure: Issues from the case of Marks and Spencer. International Review of Retail, Distribution and Consumer Research, 12(2), pp. 191-219. Doherty, A. M., 2007. The internationalization of retailing: Factors influencing the choice of franchising as a market entry strategy. International Journal of Service Industry Management, 18(2), pp. 184-205. Mahajan, V., Muller, E. and Wind, Y., 2000. New-product diffusion models. Berlin: Springer. Roslender, R. and Wilson, R. M. S., 2013. The Marketing / Accounting interface. London: Routledge. Silver, C., 1997. Flat Fees and Staff Attorneys: Unnecessary Casualties in the Continuing Battle over the Law Governing Insurance Defense Lawyers. Conn. Ins. LJ, 4, pp. 205-215. Stone, K. E., 1997. Impact of the Wal-Mart phenomenon on rural communities. Increasing understanding of public problems and policies, 1997, pp. 1-22. Wilkinson, F., 2013. The dynamics of labour market segmentation. New York: Elsevier. Appendices Financial Summary 1983-1993 Corporate Performance of Discounters List of top discounters Read More