The Generic Strategy Followed by Wal Mart and Leadership by Sourcing from Suppliers - Research Paper Example

 1. Introduction Wal Mart is a leading global retail stores that has successfully adopted successful strategy over the years to help it consolidate its position in the retail discount stores industry. While it has generally been successful in its international endeavors, its notable failures have included it attempts to enter international markets like Russia, Germany and South Korea. Owing to intense competition and pricing wars in the retail industry, it has been increasingly difficult to maintain leadership, given the aim of Wal-Mart to offer every day low prices always to its customers. While the closest competitors are K-Mart and Seers Roebuck, there is increasing need o expand into more national and international markets in view of saturation of existing markets and the opportunities offered by new countries like China, India, Israel or France. China and India offer further expansion opportunities while France and Israel hold promise for future expansion and further international growth. Indeed, Wal-Mart has less international presence compared with some other multinational enterprises like McDonalds or IKEA. It is in this context that this paper examines the strategies adopted by Wal-Mart and recommends further international expansion for sustaining its competitive advantage within its industry. More specifically, the paper undertakes an examination of France as possible target market for future expansion of Wal Mart. 2. Strategy and competitive advantage-some concepts A business organization is essentially driven by need to maximize its profitability. Hence, it adopts specific strategy in achieving this end. By so doing, the firm gains competitive advantage in its specific industry. The strategy also helps the firm sustain its profitable business operations. Hence, strategy can be viewed as the identification of organization purpose and the formulation of policies and plans to achieve this purpose (Andrews, 1987). Strategy can be of three basic types based on levels in the organization. Thus, at the business level, it is competitive strategy that is important; at the group level, strategy is termed as corporate strategy while at the functional level, the strategy is operational strategy. Among the three types, corporate strategy is seen as the set of objectives, goals or purposes as well as the policies and plans needed to achieve them; as such it is stated in terms of defining the company’s business or kind (Kay, 1993). Lynch (p. 7) identifies three broad business areas in which corporate strategy is focused, viz. managing organizational resources, coping with the external environment and the addition of value. Mintzberg defined strategy in five different ways as a plan, a pattern, a position, a perspective and finally, a ploy or tactic (Mintzberg, Ahlstrand & Lampel, 1998). For him, strategy was a paradox and the strategic approach needed to be more comprehensive (p. 373). However, Porter lent the theory an entirely new dimension by defining and introducing the theory of competitive advantage. According to Porter, strategy is the very essence of organizational management and consists of defining the firm’s strategic position, attaining its sustainability through trade-offs and achieving fit among the various activities; strategy is also dependant on the firm’s competitive environment and seeks to create unique value (Porter, 1996). 3. Method of analysis Competitive advantage is gained by employing some generic strategies viz., cost leadership, product differentiation and focus (Porter, 1985). It is in the light of Porter’s theory that this paper seeks to examine the strategy followed by Wal-Mart and also understand what future strategy the company should adopt for pursuing further expansion in national and global markets. In so doing, the paper also incorporates other theoretical concepts. It uses commonly employed strategy analysis tools like Porter’s Five Forces Framework, Prahalad and Hamel’s Core Competency model and SWOT analysis among others. The aim is to understand the internal and external environment in which the company operates, and the characteristics of the particular industry as well as the core competencies and capabilities that exist within the organization and which help it drive firm strategy. Strategy is also examined in relation to its business and corporate levels and includes an analysis of a host of concepts like its corporate objectives as defined by its mission and vision statements, PESTEL, Porter’s Diamond, organizational ethics and corporate social responsibility, critical success factors, and cultural analysis. The paper also analysis briefly the strategy of Wal Mart according to game theory and also seeks to understand the suitability of France as possible target market of the company by standard analytical methods and arrives at key recommendations. 4. Wal-Mart: A brief history Wal Mart was founded by Sam Walton whose main aim was to provide quality products at every day low prices (EDLP). A powerful retail brand and discount stores, Wal Mart is a global company with several units located outside the USA where it is headquartered at Bentonville in Arkansas State. The company opened the first discount store at Rogers, Arkansas in 1962. It first traded stocks as a public company in 1970 and got listed on the New York Stock Exchange in 1972. The first international store opened in 1991 in Mexico City followed by Puerto Rico in 1992 and then subsequently stores at other international locations. The year 2005 saw the company launch its sustainability initiative with new focus. It also saw Wal Mart engage in philanthropic activities by donating to the US hurricane relief efforts. The company now has 8747 stores and clubs in 15 nations employing 2.1 million associates to serve 176 million customers a year (www.walmartstores.com). Wal-Mart has had its share of failures, most notably its foray into South Korea, Germany and Russia. It has also entered relatively less international markets as compared to several possibilities that exist globally. 5. Wal-Mart: Products, structure and business approach Wal-Mart sells a variety of products like fresh food, health and wellness products, office products and consumables. Wal-Mart thus sells health and beauty aids, family apparel, electronic items, fabrics, toys, crafts, shoes, jewelry, and other general merchandise. The company also has a pharmacy, a Tire and Lube Express and a photo processing center (www.walmart.com). Wal-Mart thus sells quality products which are branded at the lowest prices possible and often negotiates directly with manufacturers thereby doing away with cost enhancing intermediaries (Vance & Scott, 1994). Wal-Mart also emphasizes environmental efforts and community participation. While initially, the company established stores in smaller towns, it was only gradually that it expanded in most large cities. While cutting its overheads, Wal-Mart sought to continuously offer best value of its products to customers. The decline in economy also favored low price retail stores like Wal-Mart. As a business model Wal-Mart has adopted a niche concept by dividing its retail division into Wal-Mart Super centers, Wal-Mart stores, Sam’s Clubs and Wal-Mart Neighborhood Stores. The Wal-Mart stores and Super stores provide the family-shopping experience by selling all kinds of groceries and general merchandise while Sam’s Clubs constitute warehouse clubs that cater only to members. The Neighborhood Markets offer customers convenience of shopping locally for groceries, fresh foods, pharmaceuticals and other merchandise. The Wal-Mart combination of deep discounts and lowest prices of goods countered competition most effectively and helped it sustain competitive advantage. The nearest competitors like Seers and K-Mart had obvious disadvantages. Thus, Seers had higher prices compared to Wal-Mart while K-Mart could only offer non-branded products at cheaper prices, unlike Wal-Mart which could negotiate directly with manufacturers and also restricted itself to small towns in the beginning. The atmosphere at Wal-Mart was also that characterizing any family-owned business. Wal-Mart even termed its employees associates and there were patriarchal power structures that operated within the company. Indeed, Sam Walton’s individual style of functioning and his own core values came to signify the company values and the way it did business. 6. Wal-Mart mission, vision and values Wal-Mart’s mission or vision statement emphasizes its purpose of striving to provide money savings to people so that they can live better. Its slogan also runs thus: Wal Mart. Always low price. Always. This only reflects its commitment to its basic vision that it needs to provide the best products at cheapest prices possible. Wal-Mart also emphasizes its three basic values of excellence always, respect for individuals and best customer service. Wal Mart’s every strategy is modeled according to the mission, vision and values that are a legacy of Sam Walton’s outlook towards the way business should be done. All company processes and activities also revolve around these same basic ideals or concepts deeply ingrained into the organizational culture of Wal-Mart. 7. Analyzing Wal-Mart strategy The essence of Wal Mart strategy was built upon here key beliefs as envisioned by the company founder, Sam Walton. These key beliefs were that, the individual must always be respected, best service should be provided to company customers and all at Wal Mart should strive for excellence. However, other beliefs include aggressive hospitality to customers, engagement in charitable work and displaying patriotic themes in stores which thus constitute a markedly “American” culture, pride and values. Essentially, Wal-Mart sought to carve out a market for itself by emphasizing cheapest prices for the best quality products. It first entered only smaller towns and successfully overcame local competition, Later on only it expanded into larger towns and cities. Gradually it also diversified into more products, all the time striving to provide best products at lowest prices. In so doing, it effectively countered its nearest competitors like Seers, Target or K-Mart to become undisputed leader in discount retailing first in the USA and then internationally. However, its international presence is limited to a few countries only and in several markets like South Korea, Russia and Germany it has had to surrender to local business dominance and leave. Wal Mart’s strategy essentially comprised the following (Hayden, et al., 2002) 1. Try and dominate the retail industry 2. Expand its business first in the USA and then internationally 3. Create a brand name for Wal-Mart synonymous with customer satisfaction because of best prices, quality of products and excellence of service 4. Gradually diversify into sectors like sales of pharmaceutical products, auto parts and other general merchandise. a) SWOT Analysis Strengths The company enjoys significant price leadership in the US owing to its cost advantages due particularly to economies of scale. Wal-Mart is also a powerful brand, having built itself into a formidable retail chain globally owing to its lowest prices and quality assurance. Wal Mart also has strong financials to help drive its future expansion. Its focus on customer satisfaction also contributes to significant customer loyalty and enhanced market position. Wal Mart stores offer convenience, a wide range of products and value for money. Wal Mart’s strength is also in its culture that emphasizes same day service to customers (sundown rule) as also its teamwork. Wal Mart has also undertaken several strategic acquisitions of brands like ASDA (UK) that has added to its international strengths in retail sector. An advanced information technology strategy also strengthens its international logistics and procurements divisions. Wal Mart also perceives human resources as vital to its growth and hence invests substantially in training and human resource development. Weaknesses Wal Mart operates in a vast geographical network and this can often make its strategic controls weak with respect to smaller competitors. Smaller rivals also have greater flexibility in as much as these players do not have diversified businesses that Wal Mart has. Wal Mart also has less presence internationally and is generally concentrated in the American sub-continent. Also, its very American culture and values as embedded by Sam Walton has often acted to counter its interests, for instance in Germany or South Korea. Another area that contributes to its disadvantage is that its employees are paid lower wages than in many rival firms and this has led to discontent on numerous occasions. Opportunities Owing to the global economic downturn, consumers are generally expected to go for low price alternative products. There is also much scope for increased global presence of companies like Wal Mart owing to scale they operate in. There is scope for diversification of products as well as for some strategic acquisitions in various countries. There is also a marked consumer preference for consumer super stores. Also, the company can offer pre-paid debit cards that can complement its product marketing. Opportunity also exists in adopting green marketing concepts that can lead to greater global acceptance and increased customer loyalty. Threats As the company has emerged into a number one brand globally, it is constantly threatened by rival firms in the retail industry. Global business is also exposed to political and economic uncertainties and adverse events. Government policy may or may not be conducive for its growth in some countries. Also, the trend in outsourcing most production activities and procurements mean that costs of production is less for many of its rivals. This means further that Wal Mart is increasingly threatened by close competitors in maintaining its low prices and faces danger of price cutting by them. Wal Mart also faces stiff local competition in the international markets. It faces threat of competition from Amazon owing to the emergent innovation of e-commerce that is more cost efficient than traditional business models that companies like Wal Mart still follow. Lastly, the growing incidents of crime and loss suffered due to this by the company cross its international business network points to the weak security systems in place. b) Entering France as market destination: A PESTLE Analysis Analyzing the country in which Wal Mart operates or plans to enter is essential in order to evolve successful firm strategy. This constitutes an analysis of the external environment in which Wal Mart operates. This can also be used to understand the conditions in France a probable market for further global expansion that Wal Mart may pursue. The present international markets include Argentina, Nicaragua, China, Brazil, Chile, El Salvador, Japan, Canada, Guatemala, Mexico, Costa Rica, Honduras, India and the UK. However, there are other possibilities for expansion, perhaps into Israel, France, or even other European countries like Italy or Belgium. In particular, this paper examines only country, France as an example of strategy analysis of the company. Political The political situation in any country in which Wal Mart operates or seeks to enter hold great significance to the company. Whether the country is a democratic country or dictatorship, whether it pursues an open economic policy, whether the political rulers have a specific ideology, all of these impact the business prospects of a company. France, for example, has a presidential form of government with a strong National Assembly, thereby lending it some parliamentary elements. France is also a strong advocate of the EU. Economic Economic factors like economic growth, rate of interest and currency or exchange rates that determine the cost of capital and purchasing power of the company. France is at second position behind the USA in agricultural resources, which constitute a major source of inputs for Wal Mart business. It is also the fourth largest exporter of goods among all countries. It also has a well develop transportation system as also a state-of-the art communications network. Thus, France is the fourth largest economy after the USA having GDP of 2649390 million USD in year 2009. French labor productivity is among the highest among OECD countries (Hoj & Wise, 2006). The inflation rate also generally hovers around 1 percent and the unemployment rate was 9.4 percent in Jun 2009 (EEN, 2008). France has also adopted the Euro as currency. Socio-cultural France also has a population coming from various ethnic groups. Around ninety percent of the French people are also Roman Catholics. France boasts of a rich culture and heritage and is famous for its perfumes and fashion. The French customer is brand oriented and can well afford any brand. An increase of interest in American lifestyle and culture as also growing number of young consumers has also led to greater demand for food and other merchandise from the USA. Technological Technology is a significant contributor for a firm’s performance and the infrastructure that exists in France is complex and conducive towards business growth. Additionally, Wal-Mart has adopted advanced technology in logistics and procurements which are an advantage to its expansion in any country. Environmental France is a leading country committed to promoting environmental conservation and has adopted several measures to improve business ethics and corporate social responsibility. Wal-Mart’s own efforts in this are is also notable and the company can help promote broader environmental objectives for the good of the community at large. Legal The laws of a country can help a business prosper or it can impede its growth. France has a record of higher taxes, both income tax and other taxes. France also has in place a mandatory social security system that is financed by employers (45 percent of gross pay) and by employees (16 percent of gross pay (Ernst & Young, 1999). Employment contracts are strictly regulated. Social charges are borne by the government unlike in the USA. Employers have to pay a mandatory overtime allowance for non-executive employees who work beyond 35 hours a week. The government also has in place a legal minimum wage (Ernst and Young, 1999). d) Porter’s Five Forces Analysis This is an analysis of micro-environmental factors. For the retail industry in France, where Wal Mart can possibly enter, the following are arrived at through analysis. The five competitive forces reveal what actually drives industry competition and also what are the competitive threats are important (Porter, 2008). 1. Threat of competition from competitors The industry in France is highly competitive. Many large companies generally exist and have entered into strategic acquisitions in the past. Top retail companies include Intermanche, which is also among the world’s largest retail groups. Then there is Promodes and Carrefour which have a significant global presence and are among the top ten retail chains in the world. Carrefour owns several hypermarkets and supermarkets and also has many discount stores, convenience stores and frozen food units worldwide. Promodes is a leading retailer of food in Europe and also operates several supermarkets, hypermarkets, and discount stores. The high-profile nature of the industry as also the economies of scale advantages prevents smaller firms from entering the market. 2. Threat of new entrants France has a strong economy and several factors conducive to business growth. However, the market tends to get saturated quickly and the profit margins are also generally lower. Hence, this acts as barrier to new firms contemplating entering the country. 3. Threat of substitute products The products in the retail sector are generally daily use goods and only branded products can suffer in case of selling of illegitimate products similar to branded ones. Also, generally, departmental and discount stores face intense competition from dedicated retail stores like garment or electronics stores that showcase extensive items in large spacious showrooms. 4. Buyer power Consumers have become more sophisticated and increasingly seek quality of products and value for money. They have several choices available readily in a consumer’s market. This also leads to increased price competition among retailers. The consumers also exert significant power over retailers and manufacturers by seeking better information and better service excellence. 5. Power of suppliers Since the products sold are diverse, there are as many suppliers of inputs. However, the inputs are usually standardized and switching costs are significantly low so that suppliers wield little power over retail chains like Wal Mart. 8. Game theory and Wal Mart strategy Research suggests that firms generally follow a high-low pricing or HLP format unlike Wal-Mart which has consistently followed an everyday low price (EDLP) policy. The success of Wal-Mart in logistics, supply chain management and technology use has meant that the company’s costs have been lowered and it has therefore become a leading player in the global retail business (Jones, 2004). The question as to why Wal-Mart has followed EDLP whereas the general tendency of firms is to follow a HLP policy can be explained by using game theory. Thus, game theory experts maintain that supermarket chain stores usually engage in a game of competition and which game is quite difficult to play in a consistently low price environment. It follows that any firm that departs from a low price regime into a high price one, as is commonly evident in the retail industry, stands to gain that firm. This also explains why few firms follow EDLP strategies and also why few competitors can hope to equal the success of Wal Mart. 9. Porter’s Diamond Analysis Porter’s Diamond analysis can be performed for determining the national attractiveness for a particular industry. The analysis essentially comprises examining the four determinants as propounded by Porter (1990, 1998).The first is that of factor conditions which refers to the factors of production, i.e. land, raw materials and labor. The abundance of agricultural produce in France would make that country ideal, for instance, for basing a firm’s food retail business. The next one determinant is that of demand for the company’s products. France has high GDP and a very choosy consumer base who emphasize quality of products and service and who want service excellence and convenience. It is this sophistication that also helps France to retain many industries like fashion and perfumes at the cutting edge for long. A third determinant is the related and support infrastructure for an industry that a country provides. France has an advanced infrastructure and communications network that can aid any business wishing to set up base there. France also has the financial capital and labor skills which make it a leader in R&D, and other areas vital for business growth. Lastly, another determinant is the characteristics of the industry, rivalry and strategies that define business growth in a particular country. Thus, France can boast of specific industries like perfumes and fashion which makes it a leader in these two sectors. 10. Strategic capabilities and critical success factors The unique resources and core competencies of Wal Mart constitute its strategic capabilities. Its unique resources include its internal organizational culture, the advanced IT expertise, it skilled workforce, its supply chains and logistics. Its core competencies include its ability to provide always low priced products, its customer service excellence and value for money proposition. All these contribute to its strategic capabilities that are difficult to imitate, and which contributes to its competitive advantage in the retail industry. The competencies can be classified also as distinctive competencies which include customer focus, quality orientation, flexibility and adaptability, niche products and so on. The success of Wal Mart’s strategy also relies on some critical success factors based on its unique resources and core competencies. Such critical success factors include its diverse products base, quality of products, service excellence, techno-driven logistics and procurement divisions that drive customer convenience and cost efficiency, its market share that make the company a world leader in retail business, the organizational culture as ingrained by Sam Walton in his famous policy of always lowest prices for products, quality of service and professional excellence, the brand value of the Wal-Mart brand, the proactive human resources development policy, the sound financial position, the long experiential learning curve inherited by top level management and so on. 10. Choice of future markets France has been examined as a probable future market for Wal Mart. However, other countries like Israel, Sweden, Denmark or any other country, for that matter, which has an enabling political environment, has sound economic growth and also has a market oriented governmental policy can well serve the interests of Wal Mart equally well. In any country, Wal Mart will have to consider that country’s legal, socio-cultural and political factors as also the support structures available for basing a suitable entry strategy on. However, Wal Mart needs also to consider its ethical and environmental obligations as well as model its strategies in accordance with local needs and environment in order to succeed. 11. Recommendations and conclusion The major recommendations would be to go for further expansion in the global market, either to France or Israel whose trade relationships with the USA are beneficial or on the upswing. Also the political and economic conditions of France, in particular, make that country an attractive target market for Wal Mart, albeit this is quite challenging given that already several top retailers exist in that country. The commonly followed strategy of going in for collaborations or acquisitions in the target country is what is recommended. Again, Wal Mart also needs to redefine its global operating structure which has become increasingly large and unwieldy, perhaps by assuming leaner model and segregated into more sharply defined functional departments or units for better control. The generic strategy followed by Wal Mart that emphasizes cost leadership by sourcing directly from suppliers has been largely successful and can also be relied upon to strengthen future expansion of the company in both national and global markets (Fig. 1). The company can also invest in specific areas or products and hope to sustain its growth in both existing and new markets (fig. 2). The basic strategy to be followed by it for its overseas expansion could comprise any one or more of concentric diversification, vertical integration or concentration (Fig. 3). It also needs to rely o both competitive capability and diversification in a shrinking market dominated by a few major players like Target, Seers or K-Mart if it wants to sustain its competitive position globally (Fig. 4). Choice of country for expanding its overseas operation would of course need to be based upon a consideration of the four determinants as outlined above and as proposed by the Porter’s Diamond (Fig. 5 and 6). Lastly, the company would do well to understand the reasons for its failure in Russia, South Korea or Germany and better align its strategy with local conditions and needs in the country that it targets. 12. References Andrews, K, 1987, The Concept of Corporate Strategy, Homewood, IL: Irwin Enterprise Europe Network (EEN), 2009, ‘Fact-sheet on France’, Dublin Chamber of Commerce, Dublin, Ireland Ernst and Young, 1999, ‘France: Labor Force and Employee Benefits’, Ernst & Young Guide Hayden, P., Lee, S., McMahon, K., & Pereira, M. 2002, ‘Wal-Mart: Staying on Top of the Fortune 500 A Case Study on Wal-Mart Stores Inc’, Report for the Corporate Strategy and Public Affairs Lecture, The Graduate School of Political Management, George Washington University, Washington DC, Apr, 2002. Hoj, J., & Wise, M., 2006, ‘Product market competition and economic performance in France’, Economics Department Working Papers No. 473, OECD, ECO/WKP (2006)1 dated Mar, 20, 2006, pp. 1-51. Jones, E., 2004, ‘Supermarket Pricing and Game Theory: The Presence of Wal-Mart’, Selected Paper prepared for presentation at the American Agricultural Economics Association Annual Meeting, Denver, Colorado, August 1-4, 2004, Copyright 2004 by Eugene Jones, pp. 1-24 Kay, J., 1993, Foundations of Corporate Success, Oxford: Oxford University Press Mintzberg, H., Ahlstrand, B., & Lampel, J., 1998, Strategy Safari-A guided tour through the wilds of strategic management, New York: The Free Press. Porter, M.E., 1985, Competitive advantage-Creating and sustaining superior performance, New York: The Free Press. Porter, M.E., 1990, The competitive advantage of nations, New York: The Free Press Porter, M.E., 1996, ‘What is strategy’, Harvard Business Review, Nov-Dec 1996, Copyright @ 1996 by the President and Fellows of Harvard College, pp. 59-78. Porter, M.E., 2008, ‘The five competitive forces that shape strategy’, Harvard Business Review, Jan 2008, pp. 1-19 Vance, S.S. & Scott, R.V., 1994, Wal-Mart-A History of Sam Walton's Retail Phenomenon, New York: Twayne Publishing 13. Appendix Fig. 1(Copyright by Authors Tom Koplyay and David Goldsmith July 1998) Fig. 2(Copyright by Authors Tom Koplyay and David Goldsmith July 1998) Fig. 3(Copyright by Authors Tom Koplyay and David Goldsmith July 1998) Fig. 4(Copyright by Authors Tom Koplyay and David Goldsmith July 1998) . Fig. 5 (Copyright by Authors Tom Koplyay and David Goldsmith July 1998) Fig.6 (Porter’s Diamond) (Source: Porter, M.E., 1990, The competitive advantage of nations, The Free Press, Read More