Importance of Capabilities and How They Contribute To Competitive Advantage at Walmart - Essay Example

? Managing Capabilities Contents Contents 2 Introduction 3 Organizational Resource and Capabilities 3 Importance of Capabilities and How They Contribute To Competitive Advantage at Walmart 5 Wal-Mart’s Competitive Advantage 5 Wal-Mart’s Capabilities 7 VRIN analysis 8 Diagnosing and Evaluating Strategic Capability 9 Value Chain (V.C) 9 Ratio analysis 11 Financial position of the company can be showed in the following manner; 11 Conclusion 12 References 13 Introduction Focal point of any business strategy is to determine key resources and capabilities for a firm and how a firm can use its resources to achieve competitive advantage. This research paper will throw light on understanding the linkage between resource capabilities and competitive advantage which is applicable in the practical world of business environment. For this study, Walmart retail giant has been selected which is a renowned retail Store and has presence in more than 60 countries across the globe. In the first part, the study will try to identify the concept of resource based view, and importance of capabilities for the sustainable competitive advantage of an organization. This will help in developing theoretical background of this paper. Resources capabilities of Walmart will be critically analyzed and the strategies will also be evaluated. In the last part, the study will analyze strategic capabilities of Walmart in terms of value chain analysis and VRIN and Ratio Analysis. Organizational Resource and Capabilities Seminal research has suggested that, competitive advantage should be measurable for companies otherwise it will be hard for companies to understand the scalability of the advantage that can help them move ahead in competition (Porter, 1980). According to Porter (1985 and 1991), companies can achieve competitive advantage with the help of cost leadership, product differentiation and by catering to demands of customers in focused manner. In order to establish a competitive advantage every organizations plans and implements strategies. The aim is to outperform their competitors and gain a higher profit within the industry. A superior competitive advantage can be achieved by creating more values, which in turn depends on the resources and organizational capabilities to utilize these resources (Besanko et al, 2003). Sustainability of the organizational strategies is very essential for long term growth (Cullen and Parboteeah, 2005). Sustainability is critical and it implies that the strategies are not easily attacked or neutralized by the competitors (Aaker, 1989). It also ensures a persistent competitive advantage even if potential entrants or competitors disrupt by imitating or neutralizing the strategies adopted (Barney, 1991). The resource based theory was developed during early 1990s and according to this theory each organization is a pool of resources and capabilities. These resources and capabilities determine the performance and strategies of a company. If organizations start having resources similar to each other, then the value created by these firms will be similar and there will be no competitive advantage in the concerned industry. A resource based view of a firm thrust upon path dependency and heterogeneity. This is because every organization has a unique resource bundle. The theory also argues that to retain a sustainable competitive advantage, a company should have resources and capabilities that are valuable, not substitutable, imperfectly mobile and difficult to imitate. These four resources can lead to differences in the capabilities and the strategies followed by the companies and can be responsible for a sustainable and competitive environment. These characteristics can be reinforced or induced through isolating mechanisms (Rumelt, 1984). These mechanisms are the forces that limit the duplication or neutralization of competitive activities of other organizations. This isolating mechanism consists of two groups. The first is impediments to imitation which means strategies that block the potential entrants and the existing firms from imitating or neutralizing the resource and capabilities. These strategies can be legal restrictions, scale-based barriers, intangible barriers or superior access to inputs or customers. These strategies depend on social complexity and historical circumstances. The other isolating mechanism is early mover advantage. This enhances the power of the competitive advantage for a long time. This includes strategies such as buyer uncertainty, buyer switching costs, learning curve, reputation and network effects. Because of the above advantages and well crafted applications, resource based theory has gained a worldwide acceptance (Peng, 2001). Several reasons can be attributed to this. First is that this theory is perceived to be advantageous because it focuses on firm level determinants of the company’s performances and strategies. Secondly, resource based view has got a compatible acceptance from both behavioural and economic schools of thought (Mahoney and Pandian, 1992). Thirdly, resource-based theory has a simple logic and it easy to understand (Rogers, 1983). Apart from this, other reason which increases the acceptance of resource based theory is that this theory has got support from high level forums and major events and the credibility of this theory is considered instrumental. Because of the above attributes this theory is adopted by majority of the firms all over the world. Organizational capability is essential for a company to manage its resources and gain competitive advantage (Grant, 2005). Meeting customer demand should be the prime focus of an organization. Anything the company does which improves the business and differentiates it in the market can be considered as that organization’s capability. Cultivating and developing organizational capabilities can help a business gain an advantage which is profitable and competitive. This can be done by focusing on areas where the companies excel. Creating organizational capability can be advantageous in various ways. Competitive Advantage- Organizational capabilities help a firm gain competitive advantage in the market place. When an organization constantly manages and creates new organizational capabilities and keeps developing the existing ones, the firm gains a competitive advantage over its competitors. The capabilities that give necessary competitive advantage can include knowledge, innovative designs and product licenses etc. Flexibility and Responsiveness- The responsiveness of an organization is characterized by its ability to change and adapt in response to customer demand. Skilled and knowledgeable employees play a crucial role in enhancing an organization’s capability as they have the ability to adapt and remain flexible in the changing business environment and respond to customer demand in an effective way. Knowledgeable Workforce- The knowledge and skills of the employees allows an organization to direct those skills for the achievement of company’s goals and objectives. Education assistance, training programs and effective hiring and recruiting strategies are organizational capabilities that provide a knowledgeable workforce. To maintain this capability, the company should make sure that the workforces have the necessary resources and training programs to enhance their skills continuously. Importance of Capabilities and How They Contribute To Competitive Advantage at Walmart Wal-Mart’s Competitive Advantage The brand name of Walmart has become synonymous to value for money over the course of time. Wal-Mart is the largest corporation in the world (Fortune, 2003). Wal-Mart is also the biggest private employer in the United States of America (Yoffie and Wang, 2002). However, the company was first established as a self-service discount store by Sam Walton, in the year 1962. At the end of 1993, Walmart was one of the top discount departmental stores in the world. About 10 billion dollars are saved by the American customers by shopping at Wal-Mart (Buffet, 2003). Though Wal-Mart shows little adaptability to its formats in overseas expansions, most of its store operations are leaders in their local areas (Colla and Dupuis, 2002). The fundamental principles followed by the company are providing everyday low prices, commitment to customer service, maintaining technological superiority and establishing loyalty among suppliers and associates. The company is headquartered at Bentonville, Arkansas, United States. The company has established more than 8500 stores across the globe. Product portfolio of the company includes, apparel, warehouse club, footwear specialty, cash & carry, supercenter, superstore, discount store, hypermarket, supermarket. Competitive advantage for Walmart lies in its ability of cost differentiation and strong distribution channel across the globe. Boston matrix analysis of the product mix of Walmart can be depicted in the following manner.     Market Share     High Low Market Growth Rate High Supermarkets Healthcare Segment Low Sam's Club, Discount Stores Neighbourhood Market BCG Matrix Boston Matrix of Walmart product portfolio is showing that the Sam’s club and the discount stores of Walmart are profit making cash cows, Supermarkets of Walmart in international location has less financial risk due to bulk sales hence it can be inferred as star, the newly launched Healthcare segment of Walmart is still in the introduction phase hence it can be inferred as question mark and neighbourhood markets is poor performing among product portfolio of Walmart, because of the new entrants and existing local suppliers, hence it can be inferred as dog. Walmart follows cost differentiation and leadership strategy in order to provide quality and value for money products and to customers and deliver service quality in accordance to changing customer demands. Cost leadership and distribution strategy of Walmart has created barrier for competitors to copy the strategy of Walmart. Expanded distribution channel of the company has helped them to sell products to large base of customers and increase market saturation for competitors. Wal-Mart’s Capabilities Walmart follows a low cost and leadership strategy (Johnson and Scholes, 1999). Macroscopic view of Wal-Mart’s competitive strategy shows that the company uses resource based model in order to develop a value chain proposition which can’t be matched by competitors. With the help of the resource based view (RBV) model, it can be summarized that Walmart has three major resources which are tangible, intangible and human resources, in order to create and maintain strategic capabilities. Resource capabilities of Walmart can be explained in the following manner. Tangible Resources- Physical resource for Walmart include warehouse property, supermarket and departmental store, infrastructure, design of the stores, latest production and maintenance equipments, in house and efficient transportation facility and quick logistics (Sternquist, 1997). On the other hand, financial resources for the company include monetary capital for developing and enhancing new products and services, investing in new product development, financial assets to channelize the risk associated with investing in new product or new market. High return on investment increases the confidence of shareholders and loyal partners. Intangible Resources- Walmart has created a strong brand image in last 50 years. This strong brand image has not only attracted new customers but has also successfully increased trust and loyalty among shareholders. Value for money, product diversification, presence in various locations of different countries over the globe has provided significant contribution in making Walmart a global leader in retail industry. Marketing capability and efficient customer service are other important intangible resources for the company. Human Resources- Wal-Mart supports development of internal staff and more than 60 percent of their stores managers are given internal promotions (Rugman and Girod, 2003). The company focuses on hiring people looking towards getting into customer service and provides them training in accordance with the company’s strong values. Every day, the employees are cheered to enhance their efficiency and to make them a part of the firm (Arnold, 2002). The company nurtures a sense of ownership among employees which is evident from the fact that around 70 percent of the employees hold the shares of the company and even incentives are given in stock options (Goddard, 1997). Capabilities- Access to both tangible and intangible resources has helped Walmart to achieve the capabilities which has established the department chain as a global market leader. Maintaining store as per customer convenience, deliver products and services in accordance with the changing customer demand and many others contribute to the capabilities of Walmart. Access to latest technological facilities such as computer based technology, point of sale system and satellite system to monitor the logistics and supply chain has enhanced the technological capabilities of the company. Delivering new products to customers in cost efficient manner through deploying technological resources has helped in decreasing the overall cost of the company. Efficient and responsive human resource pool has helped the company to decrease the service delivery gap and increase customer loyalty. Walmart maintains a qualified human resource pool including, marketing team, buying and merchandising team and real estate agents in order to increase its strategic capabilities. Strong financial position and market reputation helps the company to get loan from financial institutions, which has further increased the strategic capability the company to develop new product portfolio or new distribution channel by investing capital. VRIN analysis VRIN analysis of the resources of the company can be briefed in the following manner. Valuable Rare Difficult to Imitate Non- Substitutable Nature of Competitive Advantage Integrated supply chain technology Yes Yes Yes Yes Sustainable Ability to produce large scale volume Yes No No Yes Competitive disadvantage Superior logistics system Yes Yes Yes Yes Sustainable Operational decentralisation Yes Yes Yes No Temporary Strong Culture Yes Yes Yes Yes Sustainable Human Resource Yes Yes Yes No Temporary Diagnosing and Evaluating Strategic Capability Value Chain (V.C) The study will use following value chain model, which has been given by porter (1985) for analyzing strategic capabilities of Walmart. Role of support activities such as infrastructure, human resource management, technology development and logistic service in building strategic capability of Walmart has already been discussed hence in this part; the study will only focus on discussing the value chain activities of Walmart. (Source: Porter, 1985) Inbound Logistics and Outbound logistics- The logistics system of Walmart is of superior quality and involves a fast and responsive transportation system. “Hub and spoke” arrangement and maintaining distribution centers are two major concepts followed by Walmart. This arrangement helps in keeping a low inventory level at each store and reducing the cost of transportation. There are more than 7000 company owned trucks which service various distribution centers. These trucks helps in shipping of the goods and services from the distribution centers to the stores in two days and also enables replenishment of store shelves twice weekly. For these trucks, experienced drivers are hired and their movements are continuously monitored through ‘Private Fleet Driver handbook’. This increases the awareness of terms and conditions among drivers and safe transportation of Walmart goods. While other retail organizations depend on either or 3rd party logistics companies or suppliers, Wal-Mart is quite different and is independent from logistics companies. It takes control of import of logistics from foreign overseas suppliers. Walmart uses a logistics strategy called cross- docking for better efficiency. In this system the final goods are directly picked up from the supplier manufacturing site, sorted out according to locations and directly supplied to the customers. This system reduces handling and storage of finished goods, almost eliminating the role of warehouse stores and distribution centers. Due to this cross docking strategy, the system changed from supply chain to demand chain. This means that instead of retail store managers pushing products into the retail system, the customers now pull or take products anytime they require. Operation- Wal-Mart’s objective is to offer a wide range of value for money products, lowest possible price and a pleasant shopping ambience. It stores both national branded products and the company’s own private labelled value for money products which are tailored for local demand. It is also involved in continuous expansion of its product range and brands to meet the changing customer demand by including brands such as Sony, Apple and kitchen aid products. A very distinctive strategy of Wal-Mart’s operations is the decentralization of store management. Store managers are given powers to make decisions related to product display, product range, pricing and location. Department managers can implement their own ideas within the store in order to scale up the profits and reduce expenses. This is unlike other major companies where majority of strategies are made by the higher level authorities and come from regional and headquarters. . This empowerment helps the managers to serve its customers in the best possible way, because only local managers understand fully the local competitors and shopping and demand behaviours of the local customers. Marketing and Sales- Wal-Mart maintains low price and value for money appeal to its customers. The sales are generally on cash and carry basis and self-service strategy. The marketing strategy of Walmart depends on word-of-mouth communication and it focuses on everyday lowest prices. This strategy is in right alignment with the objective of adding value to the customer’s purchase by minimizing cost. Cost savings from promotions and advertising allows the company to further reduce its products and gain a cost leadership advantage. The innovation network of Walmart encourages new products and service ideas. Service- Wal-Mart’s objective is to create a desirable and pleasant shopping experience. The company provides a 24x7 opening hours to satisfy the customer demands. The company has appointed greeters at the entrance of each store of Walmart who follow and implement 10-foot attitude, according to which the employees are required to greet the customers within 10 feet (O’Higgins and Weigel, 2002). It also established customer satisfaction by accepting returned goods without and discrimination Ratio analysis Financial position of the company can be showed in the following manner; Ratio Formula 2013 2012 a. Net Profit Margin Net Profit/Net Sales 0.036233 0.035125 b. Return on Asset Net Income/ Average Total Assets 0.083696 0.035125 c. Current Ratio Current Asset/ Current Liabilities 0.83461 0.882424 d. Assets turnover Ratio Sales/ Average Total Asset 2.309948 2.310942 e. Debt Equity Ratio Total Liability/ Total Stockholders’ Equity 1.660427 1.711996 (Source: Walmart, 2013) According to financial ratios, decrease in debt to equity over the course of time is showing that financial stability of the Walmart has increased. Increment in return on asset ratio is showing that asset of the company has increased over the course of time whereas decrease in the current ratio is indicating that the liquidity position of the firm is detiorating. Rise in net profit margin is showing that the company is earning profit from its value chain activities year after year. Conclusion Net margin of the Starbucks during the period of recession was quite impressive in contrast to their other peer group. Hence, it can be said that the company has maintained financial sustainability during the time of recession. Wal-Mart’s strategy of low cost leadership has been very successful. The company should maintain the same strategy and remain focused in the coming future. To sustain the flow of its success, the company should capitalize on its current strengths, capture opportunities, minimize weaknesses, and limit threats. 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