Strategies Used by Wal-Mart to Drive Their Business Today - Essay Example

?Strategies used by Wal-Mart to drive their business today Wal-mart is a global retailer that operates in the US and 27 other international markets with retail sales totaling $409 Bn in financial year 2010. Wal-Mart had a net income of $16.9 Bn. The business generated a return on investment of 19.2% and the free cash flow from operating activities for Wal-Mart was $10.9 Bn. This shows that their core business of retail remains healthy. Wal-mart does its business in two major customer segments across most of its markets – the mass market (retail) segment, and the small & medium enterprise (wholesale) segment. In the retail segment, Wal-Mart operates through various store formats to reach out to its customers; these formats include – supercentres (most widely deployed network in the US), Discount stores, and Neighborhood stores. For the small and medium enterprises, Wal-Mart has a “Sam’s Warehouse club” where member businesses can buy retail and office items at cheaper rates. In serving both these customer segments, the key strategy of Wal-Mart is to maintain price leadership. Its business is based on the premise that Wal-Mart can guarantee the best (lowest) price to its customers. This best price guarantee is reflected in what they call is their “Every Day Low Price” (EDLP) program. Wal-Mart gets this price advantage mainly through a two-pronged strategy. The first lever to ensure low price is their economy of scale, and the second lever is the global sourcing which allows them an “arbitrage opportunity” between supplier prices across a broad spectrum of geography which other retailers may not be able to access. The second key element of strategy for Wal-Mart is to address the sustainability and environmental issues. Due to the nature of its business, Wal-Mart and other retailers are constantly under pressure from NGOs and other activists to render the business more environment friendly and more socially responsible. Therefore, Wal-Mart’s strategy is to work closely and transparently with several organizations to address these issues and to provide an annual update on these elements in their annual report. This strategy helps Wal-Mart maintain its friendly image and prevents customers sensitive to these issues from moving away from Wal-Mart. Expected changes in their strategy to expand the business The retail business is under pressure from several fronts. From direct and indirect retail competitors (large store based retailers and small neighborhood shops), from pressure due to poor economic condition causing less security and job losses, and from emerging technologies (e-commerce and mobile commerce) which can entire alter the retail business landscape. These pressures are also bound to affect the profitability of their operations. Thus, Wal-Mart can be expected to bring in several strategic changes that enhance their productivity and lower costs. Further, in order to respond to these challenges, Wal-Mart can be expected to being several strategic changes to their sales operations as well including changing the current store plans, introducing new store formats, and scaling up its e-commerce operations. Wal-Mart realizes that current stores need to be made more relevant to the customer; that is expanding the assortment of products offered. In order to do this, they may need to not only generate more supplier contracts but also alter the allocation of their retailing pace. Further, in order to counter the competition from small local stores, Wal-Mart can be expected to introduce new retail formats – neighborhood stores/convenience stores. As the volumes and variety of products at these stores is expected to be lower than in their traditional large retail stores, they could be expected to make significant changes in their supply chain for serving these retail stores too. Next, as internet-based and now mobile-based commerce is becoming increasingly important, they can be expected to increase their investment in providing solutions for these opportunities. Developing Smartphone applications and redesigning their e-commerce interface would be starting points - these operations could become a key strategy to cater to the urban retail markets. The costs of delivery could be offset by the low operating cost nature of these models (no additional retail space cost). Also, an important growth lever could be international expansion. Currently, Wal-Mart operates in 27 countries outside the US. However, most of these countries are in Latin America and Asia. Europe is relatively “untouched” today for Wal-Mart. Therefore, a key strategic change could be to rapidly expand in Europe while maintaining growth in other international markets. Finally, given that the core business of Wal-Mart generates large cash flow; one key element of expansion for Wal-Mart could be financial services. Wal-Mart has access to a large population through its retail operations; Adding financial services to the irregular core business could be relatively easy to do. These financial services could include credit lending and insurance. Wal-Mart already has credit cards, but it could also expand to non-credit card based lending, something similar to consumer credit lending by banks. These financial services could be provided by making JVs with banks and insurers. The JV with bank would be responsible for increasing the credit lending to the customers and the money for this JV could come from both Wal-Mart and the partner bank. The JV for insurance could sell all kinds of insurance to the customers either directly in-store, or through telemarketing, or even through the internet. How competition might influence their strategy Competition could have a key role to play in deciding how Wal-Mart implements its future growth strategies. While on cost front, there might be little influence of the competition as it is more internal organisation based, the external expansion strategies could be significantly affected by the nature of competition. For setting up new retail formats (convenience stores), if a competitor moves into a locality before Wal-Mart, it could effectively rule out Wal-Mart from moving into this territory due to the low volumes expected from these formats. Next, e- and m-commerce, could also be a similar first mover advantage game, like in the past we have seen for e-bay and Amazon. A competitor moving into this field early with relative success could prolong the time for Wal-Mart to establish credibility in this format. For example, if a competitor were to acquire a leading e-retail solutions company, Wal-Mart would need to develop its own solution which could take time to implement and get into the market. For international markets, competition could force Wal-Mart to enter the market through acquisitions only which could be costly and ultimately prove to be not attractive enough for Wal-Mart. Possible Competition reaction to actions taken by Wal-Mart The actions taken by Wal-Mart could invite several reactions from the competitors. As Wal-Mart tries to move into the small store format based retailing, existing retailers could either lock them out through lobbying or other retail competitors could move into this market offering small businesses wholesale products by citing that eventually Wal-Mart is going to become their competitor. On the international expansion front, the most important reaction is expected to come from large retailers in Europe. Since, most of them are not presently operating in the US, they might look to enter the home base of Wal-Mart as Wal-Mart enters their home markets in Europe. On the internet–based retailing, the competition could also be expected to enter this market. Since, in the short-term the internet retail volumes are expected to be low, this might make the whole market less attractive due to high cost of deliveries. Conclusion Wal-Mart has several options to address its strategic challenges to ensure sustainable and profitable growth. On the cost front they could implement a supply chain closely resembling the “Just-in-time” models of Dell and Toyota, allowing them to reduce their inventory holding cost. New operating store formats are increasingly becoming a must-have for Wal-Mart in order to grow especially in the US where the sales are reaching a plateau. On the e-commerce and m-commerce front, they could be best respond to the market needs by acquiring some existing firms in this business. However, most of these strategic changes could be influenced largely by competitor actions and by the expected reaction of competitors to these strategies. Wal-Mart must therefore look for the strategies that it believes it can best execute despite competitors’ threat. References WalMart. (2011). Retrieved October 24, 2011, from Walmart Corporate: http://walmartstores.com/ Walmart. (2011). Walmart 2011 Annual Report. Retrieved October 24, 2011, from Walmart Corporate: http://walmartstores.com/sites/annualreport/2011/financials/Walmart_2011_Annual_Report.pdf Read More