Wal-Mart Corporation: Company Analysis - Term Paper Example

? Wal-Mart: Company Analysis Executive Summary The process of organizational assessment benefits a business concern to identify its strengths and weaknesses and thereby improve its operational efficiency. An organizational assessment is mainly performed to point out any issue/issues that can have potential impact on the firm’s operational performance. This report will present ideas obtained from the organizational assessment of Walmart. The study indicates that the organization has further growth potential regardless of the current global financial crisis. The company’s stock prices indicate an upward growth trend and this situation would attract new investors. From this assessment study, environmental safety has been identified as the most potential impediment to Walmart’s growth. Since people today give great emphasis to ecological sustainability, they are less likely to compromise with environmental safety. Introduction Wal-Mart is a US based multinational corporation operating under the retail industry, and it runs a network of huge discount stores and warehouse stores across the globe. The company was founded in 1962 by Sam Walton. As Frank (2006) describes, since Walton could neither renew the lease nor find a new location, he opened a new franchise in Bentonville under the name ‘Walton’s Five and Dime’. The company opened its first Walmart Discount City store in Rogers in 1962 and subsequently expanded across Arkansas over the next five years. In 1968, the firm opened its stores in Missouri, Sikeston, and Oklahoma. On 31st October 1969, the organization was incorporated as Wal-Mart Stores, Inc. In 1970, the company started its operations as a publicly held company and it was subsequently listed on the New York Stock Exchange. The company opened its first Walmart Supercenter in Washington in 1988 (Frank, 2006). The company expanded its operations to South Africa in 1995; four years later, the company entered the European market by purchasing the UK’s Asda for $10 billion. As per the Fortune 500 list, the organization was rated as America’s largest corporation for the first time in 2002. Recently in 2010, the company acquired the video streaming company Vudu, Inc for $100 million. Throughout its corporate history, the company performed well and its growth was stable. This tends to present an organizational assessment of Walmart. Planning and Budget Concerns Walmart has been one of the global leaders in the retail industry that thoughtfully uses planning function of management so as to gain competitive advantages over its rivals. As Hallsworth and Evers (2001) point out, in the planning phase, the Walmart management will choose appropriate short term policies and courses of action to meet the firm’s long term goals and objectives; and in addition, the company analyzes competitor prices on identical products and, based on this comparison; it will set lowest possible prices to offer customers. It seems that the company gathers customer feedbacks and employee opinions before planning a policy or program. The company conducts market surveys and online polls to effectively plan its new market entry or business expansion. The firm’s efficient strategic planning played a notable role in positioning the corporation at the top of the world’s retail industry. Walmart’s strategic planning team gives great emphasis to ethnical diversity because the corporation has a global presence. While analyzing the Walmart’s corporate history, it is obvious that the firm’s budgetary concerns have been the central factor that drove the business to success. As discussed earlier, since the organization follows a low cost strategy, it is essential for the firm to trim down its operating expenses extensively. In the words of Blocher (2006, p. 277), the organization gives prime focus to budgetary control so as to offer increased financial benefits to its customers. Since fixed costs remain unchanged regardless of sales volume, the corporation gives specific attention to variable costs. In order to reduce costs; the company deploys several approaches such as budgeting payroll, cutting of travelling expenses, and increased technology sector investments. Budgeting payroll is one of the most notable strategies used by Walmart to review departmental costs and thereby maintain a balance between employee hiring and fund availability. Finally, Walmart’s financial managers are cautious to make certain that actual expenditure never exceeds planned budgetary expenses; otherwise, they immediately seek solutions to fix the problem. Financial Ratios and Industry Comparison This section of the assessment is based on the financial data published by Daily Finance (2012) on 7th July 2012. According to this, Walmart’s price to earnings ratio (TTM) is 15.4 whereas it is 17.4 in case of the retail industry. Similarly, the company achieved a price to sales (TTM) ratio of 0.53 while it is 0.6 for the industry. This difference can be directly attributed to the firm’s low cost pricing strategy. When Walmart attained a 2.2% dividend yield, it is only 1.8% for the whole industry. In case of payout ratio (TTM), the organization (32%) could perform better than the industry (26%). The high payout ratio may assist the company to meet the interests of existing shareholders as well as attract more new investors. However, while comparing the firm’s 5 year growth rate of sales (4.43%), it seems that Walmart underperforms the industry average (5.54%). The organization’s quick ratio is (0.20) slightly less than that of industry (0.30). The current ratio also shows the same trend; Walmart’s current ratio is 0.80 while it is 1.00 in case of the industry. This condition indicates that the firm’s ability to pay its short term obligations is relatively low. Data reflect that the company’s debt to equity ratio is (0.79) slightly greater than that of industry (0.76). When the firm maintains a gross profit margin (TTM) of 26.70%, the industry average is 26%. However, the net profit margin is the same (0.04%) for both the organization and the industry. While analyzing return on assets (TTM) and return on investments (TTM), it is clear that the corporation performs better than the industry. In case of the firm, return on assets (TTM) is 8.50% and return on investments (TTM) is 14.60% while they are 8.20% and 13.40% respectively for the industry. From an observation on 5 year growth rate of EPS, the Walmart’s position (9.07%) is far better than that of the industry (7.04%) (DailyFinance, 2012). Main Products Walmart has a wide range of product lines and the firm’s product offerings slightly vary from country to country. Although the firm sells a wide variety of goods, it mainly focuses on general merchandise and grocery items. Data indicate (as shown in Center for Community and Economic Development, 2006) that grocery, tobacco, and candy items represent Walmart’s 31% sales; and similarly; softgoods, hardgoods, and domestics, assist the organization to generate nearly 33% of sales. Electronics, pharmaceuticals, stationary, sporting goods, and toys are other major product categories of Walmart. Recently, the company expanded its product lines to include software products and computer applications. In short, the company offers almost all product items necessary to serve the needs of a normal customer. Overall Strategy While analyzing the Walmart’s current financial strategy, it seems that the firm gives primary focus on capital investment or capital spending. In the words of Charles Holley, the executive vice president, finance and treasurer, the company management “expects to grow total company square footage between three and four percent next fiscal year, which means that square footage and capital spending will grow at approximately the same rate” (as cited in Walmart corporate, 2010). As part of this financial strategy, the company significantly increased its spending on capital projects. As per the City Wire (2010, Oct 13) report, for the fiscal year ending 31st January 2012, the company planned to make nearly $13.5 to $14.5 billion capital investments. The company officials say that Walmart prioritizes rate or returns, growth, and leverage and hence the corporation plans to increase its capital investments. As Franklin (2001) points out, Walmart’s management believes that the capital investment strategy would assist the firm to maintain an effective balance between growth and return on investment; this condition in turn may aid the company to grow internationally and in the United States. The company has planned to invest more in the United States with intent to introduce more supercenters and other smaller store formats. Evidently, Walmart traditionally follows a low cost strategy as the firm’s operating expenses are lower while comparing with the industry average. By practicing a low cost strategy, the firm attempts to increase its market share globally. The organization gives a prime focus to emerging market segments as financial analysts predict that emerging economies are less likely to be affected by global economic downturns. As Harper (n. d.) comments, Walmart’s overall business strategy specifically tries to promote efficiency and productivity. For this, the company offer extensive employee benefits and other financial incentive programs. SWOT Analysis Strengths In the opinion of Gates, Goralski, Leblanc & Adams (2011) the most notable strength of Walmart is that it offers huge selection of goods in a single store at competitive prices. The firm has a potential IT infrastructure to support its international logistics system; therefore, the Walmart executives can easily assess the performance of firm’s individual products on the ground of market area or stores. In addition, a potential workforce and global presence are other competitive strengths of the organization. Weaknesses Some customers hold the view that low cost products are of cheap quality and hence, such perceptions become constraint to Walmart’s sales growth. According to Aubin and Carlsen (2008, p. 71), since Walmart is a multinational corporation, the company is facing numerous difficulties in competing with more focused rural rivals. Due to its larger size, the company faces operational inflexibility in many regions. Opportunities Since the organization engages in large scale purchase, production, and distribution, it can cut down its operating expenses to a large extent and pass such saving to customers. Emerging economies like India and China offer several potential opportunities to the company for the next decades. Berman (2007, p. 632) states that the large size provides the company with the opportunity form strategic alliances with other leading retail outlets. Threats Undoubtedly, increasing environmental concerns appear to be a major threat to the organization. In many countries, niche marketers and other local players are likely to protest against the arrival of Walmart since they fear that this corporate giant would dominate them badly. Since Walmart has a global presence, the corporation is largely exposed to political issues and other regional operational barriers as well. The SWOT analysis indicates that it would be better for the organization to continue its current low cost strategy together with the promotion of efficiency and productivity. Future Prospects of the Company While analyzing the current market position of the company with respect to global financial market conditions, it is clear that Walmart has a potential future. The global economic recession 2009 adversely affected the corporations worldwide. The global economy is still under the process of recovery and hence the current economic environment is not favorable for new marketers to launch their business venture. This situation offers numerous opportunities to Walmart as it is a well established and reputed international corporation. Since the threat of new entrants is comparatively low, the firm can easily expand its business operations without paying much attention to new entrepreneurial ventures. As Walmart is a globally recognized organization with its low cost strategy well known to customers, the company does not have to spend much on sales promotion. From the Walmart’s mission statement (“we save people money so they can live better”), an average customer gets the feeling that the firm offers its products and services at affordable rates. In addition, corporate social responsibility programs such as Social retailing school (Brazil), Bharti Walmart training centers (India), Walmart China Women’s Development Fund, and Driving to transform would assist the company to add value to its market stature (Wal-Mart. (2011 global sustainability report). Such programs may also assist the company to get increased support from government and society. Value line analyses (2010) specifically point out Walmart’s extensive and improved distribution network as the firm’s one of the most valuable assets. Such researches also indicate that it would be difficult for other firms to replicate Walmart’s massive distribution network. Value line studies (2010) also suggest that the low pricing strategy would provide Walmart with a number of competitive advantages over its market rivals. In short, these study reports reflect that the organization is potential enough to effectively confront with severe market competition and to dominate the retail industry over the coming decades (Value line, 2010). However, rising concerns about environment raises some serious threats to Walmart’s future. People today are less likely to encourage products or services that would hurt environmental sustainability. In 2004 (as cited in Cook, 2007), Walmart agreed the government to pay $400,000 in order to settle the claims that the organization had violated federal air pollution regulations. In the same year, the company flouted the Clean Water Act and consequently remitted huge amount of money in penalties. These are just a few examples that show how Walmart’s business can have negative impact on environmental sustainability. A large number of Walmart’s distribution vehicles run along the road every day and cause huge amount of CO2 emissions. In addition, it is observed that Walmart stores occupy more space than what is actually needed; this condition would worsen the current land scarcity issues. Hence, it would be difficult for Walmart to smoothly continue with its expansion operations unless it pays specific attention to environmental sustainability. Current Stock Price Walmart’s stock price chart (see appendix) was prepared as on 10th July 2012. From the diagram, it is obvious that the company’s stock price has been constantly mounting since the midst of May. Although the firm’ stock price was below $60 by the midst of May, it increased over $65 by the close of the same month. Currently, the Walmart’s stock price stands at $71.52 level (see appendix). The current trend indicates that the firm’s stock price is likely to further increase over the next months. Stock Type Recommendation I will recommend the company as a hold type of stock. From the above stock price chart, it is clear that the Walmart stock price has been dramatically growing for the last few months. Market experts predict further increase in the company’s stock prices over the next months. In this situation, it would not be better to sell stocks as this situation may cause stockholders to lose additional money that might be obtained from increased future stock price. Therefore, a buy and hold strategy is best recommendable for shareholders to reap extensive financial benefits in the long term. Under this policy, shareholders hold stocks for a long period of time regardless of price fluctuations in the market. This strategy would also provide the beneficiaries with greater tax benefits. When the stock prices reach a fixed level, the stakeholder may convert the stock into sell type of stock. This policy may assist the shareholder to make profits on stocks. Conclusion From the above research, it can be undoubtedly stated that Walmart is a multinational corporation with huge growth potential. The company has presence worldwide and it possesses a massive global network of stores. The company is always keen to observe competitor prices on identical products and thus offers lowest possible prices to its customers. Since Walmart’s budgetary concerns are centered on its low cost concept, budget management specifically tries to trim down operating expenses with intent to pass the savings to customers. The financial ratio analysis indicates that Walmart has been better positioned over the industry average. As compared to the industry average, Walmart generates higher rate of returns on its investments. Although the company sells almost all categories of products, it mainly focuses on general merchandise and grocery items. Clearly, low pricing is the overall business strategy of the Walmart, which has been linked to the company’s mission statement. Currently, the firm follows capital investment strategy to promote its global expansion and enhance value chain efficiency. The SWOT analysis indicates that the company has the potential to survive stiff market competition and dominate the retail industry. The present global economic condition offers some potential operational advantages and thereby a great future for the firm. However, it seems that environmental issues can be a serious growth constraint to the organization. Reports indicate that Walmart’s business operations cause huge volume of greenhouse gas emission, which raise numerous threats to environmental sustainability. Currently, Walmart’s stock prices show an upward trend, and hence the company may be recommended as a hold type of stock. To conclude, the company can continue its market expansion and global growth if it pays due attention to environmental safety aspects. Even though the firm keeps its stock prices growing, stakeholders would refuse to choose Walmart unless the firm curbs its environmental issues. Therefore, it is advisable for the organization to consider environmental sustainability as part of its corporate social responsibility. This organizational assessment makes one understand that a strong business network would assist a company to survive market difficulties to a great extent. References Aubin, D. D & Carlsen, B. J. (2008). Attract, Engage & Retain Top Talent: 50 Plus One Strategies Used by the Best. USA: AuthorHouse. Berman. (2007). Retail Management: A Strategic Approach. India: Pearson Education India. Blocher. (2006). Cost Management: A Strategic Emphasis. New York: Tata McGraw-Hill. Center for Community and Economic Development. (2006). Big box retailers: Pharmacy sales comprise 9% of Wal-Mart’s total sales. Retrieved from http://www.uwex.edu/ces/cced/PercetnageofSales.cfm The City Wire. (13 October 2010). Wal-Mart unveils new store strategy, updates expansion plans. Retrieved from http://dev.thecitywire.com/node/12252 Cook, J. (2007). Wal-Mart: An environmental issue. Yahoo Voices. Retrieved from http://voices.yahoo.com/wal-mart-environmental-issue-461611.html?cat=48 Daily Finance. (2012). Financial ratios. Wal-Mart Stores. Retrieved from http://www.dailyfinance.com/quote/nyse/wal-mart-stores/wmt/financial-ratios Frank, T. A. (2006). A brief history of Wal-Mart. ReclaimDemocracy.Org. Retrieved from http://www.reclaimdemocracy.org/walmart/2006/history.php Franklin, A. W. (2001). The impact of Wal-Mart supercenters on supermarket concentration in U.S. metropolitan areas. Agribusiness, 17(1), 105-114. Gates, D., Goralski, M. A., Leblanc, H. P & Adams, M. G. (2011). Determining what strategic resources are necessary to obtain before marketing an online social network website. Business Research Yearbook: Balancing Profitability and Sustainability: Shaping the Future of Business, 18(2), 325-637. Hallsworth, A & Evers, D. (2001). The steady advance of Wal-Mart across Europe and changing government attitudes towards planning and competition. Environment and Planning C: Government and Policy. 20(2), 297-309. Harper, L. (n.d). Wal-Mart: Impact of a retail giant. Online News Hour. Retrieved from http://www.pbs.org/newshour/bb/business/wal-mart/unique.html Value Line. (2010). Using the Value Line Page: Wal-Mart August 6, 2010. Research Hub. Retrieved from http://www.valueline.com/Stocks/Highlight.aspx?id=9230 Wal-Mart. (2011). 2011 Social communities. Global Responsibility Report. Retrieved from http://www.walmartstores.com/sites/ResponsibilityReport/2011/social_Communities.aspx Wal-Mart Corporate. (2010). Wal-Mart announces capital strategy to drive global growth: Next year's capital spending to increase slower than sales. Retrieved from http://investors.walmartstores.com/phoenix.zhtml?c=112761&p=irol-newsArticle&ID=1482363&highlight= Appendix (Source: Market Watch. The Wall Street Journal, July 14, 2012. Retrieved from http://www.marketwatch.com/investing/stock/wmt) Read More