The Industry Life Cycle of Wal-Mart - Case Study Example

-1My 2 May 2007 Wal-Mart Business Operations Section A This section is based on the case study, and answers four questions. In question #1 we analyse the three major areas of the external environment: general environment; industry environment; and competitor environment. We then summarise the main opportunities and threats. Factors in the general environment include: demographic, economic, sociocultural, global, technological, and political/legal factors. Factors in the industry environment include: threat of new entrants, power of suppliers, power of buyers, product substitutes, and intensity of rivalry. Together with the competitor environment, these factors make up the external environment. Tools for analysing the external environment include: PESTEL for the general environment. The industry environment tools include: industry definition, industry life cycle, and Porter's five forces. The competitor environment can be analysed by the framework explained in chapter 2; comparison of critical success factors; and market commonality or resource similarity. The industry life cycle is a bell-shaped curve which begins as industry introduction, and moves through the stages of growth, maturation and decline. Competitor analysis components take into consideration future objectives, current strategy, assumptions and capabilities in order to decide on a response. Comparison of critical success factors (CSFs) between Wal-Mart and other companies can be made using a chart where each company is ranked on it strength (strong/moderate/weak) in separate categories. A framework of competitor analysis takes into consideration the high or low level of market commonality, simultaneously with the high or low level of resource similarity. The portfolio of resources of two different firms are examined to find the degree of market commonality and resource similarity, and this is displayed graphically as shaded area. In the following, we summarise the key opportunities and threats we have identified from the analysis of the external environment. In question #2 we analyse the internal environment, which consists of: tangible resources, intangible resources, capabilities, core competencies, competitive advantage, and value chain analysis. We then summarise the main strengths and weaknesses that we have identified from the analysis of the internal environment. Question #2 is answered using the case study and tools such as SWOT matrix/SWOT analysis, Ansoff's matrix, Grand Strategy matrix, etc. These tools are used to identify strategic options available to Wal-Mart. We then critically assess these strategic options. The components of internal analysis leading to competitive advantage and strategic competitiveness include the internal environment factors considered above. In addition, the category of discovering core competencies involves four criteria of sustainable advantages: valuable, rare, costly to imitate, and nonsubstitutable. Discovering core competencies also includes value chain analysis, that can be outsourced. In addition to competitive analysis is strategic competitive analysis. Tangible resources include financial resources, such as the ability to generate internal funds; organizational resources, which consist of the reporting, planning, controlling and coordinating systems; physical resources, such as access to raw materials; and technological resources, such as patents and trade secrets. Intangible resources include human resources, such as knowledge; innovation resources, such as ideas and capacity to innovate; and reputational resources, such as brand name. For a sustainable competitive analysis, McKinsey & Co. suggest a company strive for three to four core competencies. More than this number may cause a company to lose its focus. A value chain analysis is a tool that lets a company see where its value lies, and what elements of the company do not hold value. Value chain analysis is also used to understand the company's cost position. In a value chain, company activities are divided into primary and support categories. In a SWOT analysis, the strengths and weaknesses of a company are listed along the top of the matrix. Opportunities and threats of the company are listed along the left of the matrix. The rest of the matrix is filled in by considering two cells simultaneously. Other tools for analysis of the strategic options open to a company include Ansoff's matrix, which considers a chart of existing and new products versus existing and new markets. The Grand Strategy matrix is another tool that can be used; it contains four quadrants, with rapid market growth versus slow market growth plotted along the vertical direction; and strong competitive position vs. weak competitive position plotted along the horizontal direction. We now critically assess the strategic options. This may be done by using tools such as the options evaluation matrix. However, in this section we use a SWOT analysis in order to show examples of how Wal-Mart can simultaneously take advantage of the strategic options available to it and improve its image among the public. In this section we will use an example of a SWOT analysis for Wal-Mart. The strengths that can be listed for Wal-Mart include: always lower prices, reputation for giving the best bargain, business environment strongly structured to take advantage of any opportunity to cut costs. Wal-Mart weaknesses include: bad reputation for using cheap overseas labor, bad reputation for sexism in promoting workers to managerial positions, bad reputation for ruining local economies and eliminating local small businesses and causing their well-paid workers with benefits to lose their jobs. Wal-Mart opportunities include offering more upscale stores that cater to customers looking for a coffee shop with Wi-Fi; potential to expand overseas; and potential to restructure the company by offering unionization and allowing women's organizations to make suggestions to increase fairness in hiring and promotion practices. Threats to Wal-Mart include companies such as Target taking away customers who are looking for more value as opposed to lowest price; and lawsuits against the company for some of their unfair business practices. To further the SWOT analysis, these four different categories can now be used in order to find ways the strengths can now be used to capitalise on the opportunities; ways for the strengths to eliminate the threats; ways for the opportunities to be used to overcome weaknesses; and ways for reducing weaknesses to reduce threat. For example, Wal-Mart could use their strength of having a good reputation for providing the best bargain on a product to capitalise on the opportunity of the potential for overseas expansion. An example of using an opportunity to eliminate a weakness is: Wal-Mart could use their opportunity for overseas potential to expand to promote women to managerial and executive position in charge of new overseas enterprises. They could also use this opportunity to make sure they are using environmentally-sound practices in their new enterprises, as well as moving away from cheap labor at any cost. Section B In this section, three questions (question #4-6) pertaining to diversification of operations; modes of global entry; and reasons for acquisitions and problems faced by Wal-Mart operations are discussed. This section is not based on the case study, but rather on the principles outlined in the PowerPoint presentation and on research into the business practices and policies of Wal-Mart. Question #4 considers the reasons why companies diversify their operation. These reasons can be categorized as: value-creating; value-neutral; and value-reducing. The issue of creating value using a related diversification strategy versus an unrelated diversification strategy is also considered. Low levels of diversification get most of their revenue from a single business or a dominant business. A moderate to high level of diversification can be two different types: related constrained businesses that share linkages of products, technology and distribution; or related linked, where there are only limited links between businesses. A very high level of diversification contains unrelated businesses, and less that 70% revenue is from the dominant business. Value-creating diversification strategies have different levels of operational relatedness and corporate relatedness. Examples of the reasons for value-creating diversification include: business restructuring; the related diversification of economies of scope and market power; and blocking competitors through multipoint competition. In 1998 Wal-Mart diversified into the grocery business. They have now gained a large share of the grocery market, and are competing with large grocery stores through the Wal-Mart hypermarkets that combine retail and grocery sales. This seems to be an example of a value-creating diversification by reason of blocking competitors through multipoint competition. Wal-Mart has also recently diversified into more upscale supercenters which will cater to a more affluent demographic, in an effort to compete against companies such as Target. In 2006 Wal-Mart opened a supercenter in Texas with a "sushi-bar, a coffee/sandwich shop (with free Wi-Fi access) and higher-end items" ("Wal-Mart"). This again is an example of a value-creating diversification, which can be seen as blocking competitors such as Target, or as increasing market power. Examples of reasons for value-neutral diversification are: low performance, uncertain future cash flows, and antitrust regulation. Reasons for value-reducing diversification include diversifying managerial employment risk and increasing managerial compensation. Wal-Mart does not appear to use value-reducing diversification in order to increase managerial compensation. Wal-Mart is against worker unions, and pays its employees a lower than average wage, usually less than $9/hr. In addition, Wal-Mart executives are expected to fly coach and stay in budget hotels. At Wal-Mart, everything is about cutting cost. Although, "Wal-Mart store managers earn about $95,000 annually, including bonuses, according to the company. Supercenter managers earn $130,000" (Goldman & Cleeland). Value-reducing diversification at Wal-Mart may be seen as lowing value and decreasing employee benefits in efforts to cut costs. Question #5 considers three international corporate-level strategies: multidomestic; global; and transnational. The modes of entry for international expansion are: exporting; licensing; strategic alliances; acquisition; and new wholly owned subsidiary. The three international corporate-level strategies have different levels of needs for global integration and local responsiveness. A multidomestic strategy has a high need for local responsiveness, but a low need for global integration. Conversely, a global strategy has a high need for global integration, but a low need for local responsiveness. A transnational strategy has a high need for both global integration and local responsiveness. Five different types of global market entry are considered: exporting, which has high cost and low control; licensing, which has low cost, risk and returns and little control; strategic alliances, which has shared costs, resources and risks and problems of integrating two corporate cultures and other integration problems; acquisition, which has high cost, quick access to new markets, complex negotiations, and problems of merging with domestic operations; and new wholly owned subsidiary, which has the potential to be complex, costly, time-consuming, high risk, maximum control, and holds potential for above-average returns. Wal-Mart has had to use a strategic alliance within India, where there are laws against a foreign company operating independently. But Wal-Mart usually seems to prefer acquisition of any potential competitors during its attempts at global entry. Wal-Mart has an official presence in nine foreign countries: Argentina, Brazil, Canada, China, Germany, South Korea, Mexico, Puerto Rico and the United Kingdom. The types of stores are a combination of discount stores, supercenters, Sam's Clubs, and neighborhood markets. The Wal-Mart focus is on buying goods as cheaply as possible, and they often accomplish this by importing from Asia and China, where workers are paid cheaply (Smith & Young). Wal-Mart formed PREL (Pacific Resources Export Limited) to provide Asian buying without the appearance of Wal-Mart's presence. Question #6 considers the reasons for acquisitions and problems in achieving success. Wal-Mart has had problems overseas; for instance, sustained losses and a highly competitive market caused it to sell its retail operations in Germany and South Korea in 2006 ("Wal-Mart"). Wal-Mart has also been the center of controversy over its business practices and policies; the company has been charged with sexism, causing negative impact on the local economy, using foreign product sourcing to a large degree, and much more. Wal-Mart has a history of acquiring stores internationally. Wal-Mart acquired the Woolco division of Woolworth Canada; this was its first time operating in Canada. The reason for these foreign acquisitions are both to gain entry into a different country, as well as to eliminate any potential competitors by buying them out. Wal-Mart has continued recently to make foreign acquisitions. In 2004, Wal-Mart bought Bompreco of Brazil, which was the largest supermarket chain there. They went on to acquire control of other supermarket chains in Brazil. These supermarket names were unchanged, but Wal-Mart operates them. Since 2006 Wal-Mart has also been entering into a joint venture in India. Wal-Mart is also striving to compete in UK markets with the Wal-Mart controlled ASDA stores. Works Cited Goldman, Abigail and Nancy Cleeland. An Empire Built on Bargains Remakes the Working World. Los Angeles Times, 23 Nov 2003. Retrieved 3 May 2007 from http://www.pulitzer.org/year/2004/national-reporting/works/walmart1.html PowerPoint presentation. Revision 2.ppt Smith, Hedrick and Rick Young. Is Wal-Mart Good for America' PBS and WGBH Educational Foundation. Retrieved 3 May 2007 from http://www.pbs.org/wgbh/pages/frontline/shows/walmart/ "Wal-Mart." Wikipedia. Retrieved 2 May 2007 from http://en.wikipedia.org/wiki/Wal- Mart#_note-7. Read More