Case Study #2: Wal-MartI. Industry Wal-Mart’s competitive environment is quite unique. Although Wal-Mart’s primary competitioncomes from general merchandise retailers, warehouse clubs and supermarket retailers also presentcompetitive pressure. The discount retail industry is substantial in size and is constantly experiencinggrowth and change. The top competitors compete both nationally and internationally. There is extensivecompetition on pricing, location, store size, layout and environment, merchandise mix, technology andinnovation, and overall image. The market is definitely characterized by economies of scale. Top retailersvertically integrate many functions, such as purchasing, manufacturing, advertising, and shipping. Largescale functions such as these give the top competitors a significant cost advantage over small-scalecompetition. In general merchandise retailing, Wal-Mart’s primary competitors are Target and Kmart. Retailsuperstores such as Circuit City and Bed, Bath, and Beyond, also provide retail competition. A surveyfound that the majority of respondents favored Wal-Mart over stores like Target and Kmart. Respondentsclaimed Wal-Mart offered lower prices, better variety and selection, and good quality. The needs ofconsumers is an important economic feature in all competitive environments. What attributes (price,variety, quality, etc.) prompt buyers to choose one retailer over another is very important in the competitivelandscape. In the warehouse segment, Wal-Mart’s Sam’s Club competes harshly with Costco. Costco hasfewer warehouses but greater sales and revenues. Costco customers also shop at Costco more frequentlythan Sam’s Club customers and, on average, spend more each visit as well. Costco’s dominance may bethe result of better innovation. Costco offers luxury items and was the first to sell fresh meat and produce,and gasoline. This is important because innovation is a key factor in assessing competitors in an industry. Last, Wal-Mart is also in direct competition with large supermarket retailers. Production capacityin the grocery industry is quite populated and Wal-Mart poses a serious threat to many supermarketretailers, both large and small. Kroger, Albertson’s, and Safeway are all finding it very difficult to competewith Wal-Mart’s low prices. Because the industry is so crowded, even the large supermarket retailers areseeking to differentiate themselves in order to stay afloat.
In reference to the Five Forces Model, being the largest retailer in the world, Wal-Mart’s positionis strong overall. Rivalry among competitors is fairly weak. The market is crowded but Wal-Mart has thelowest costs, prices, profits, and market share. The threat of substitute products is also weak. Wal-Martexerts a great deal of effort in making sure they are innovative and meeting customer demands. Thebargaining power of suppliers is weak as well. For most producers, Wal-Mart would be their largestaccount. Obviously, they would do what Wal-Mart wanted them to do if they hoped to do business.Likewise, the bargaining power of buyers is also weak. There is a very broad base of customers and asignificant demand for low prices. Last, the threat of new entrants is weak. Wal-mart has a scale ofoperation that is so great, it would take years, maybe even decades, for a new company to be on the samelevel. Even prominent companies today would have an extremely difficult time matching the costs andprices Wal-Mart provides.II. Wal-Mart’s Strategy Offering products at everyday low prices is only one of Wal-Mart’s many strategies. Thecompany value chain helps identify activities associated with how Wal-Mart achieves their many strategies.First, Wal-Mart’s supply chain management is extremely cost effective. For example, Wal-Mart has been
known to imitate competition’s successful merchandising concepts. Suggestions from all employees areexpected and sometimes rewarded. Another cost-effective method in Wal-Mart’s supply chainmanagement is their ability to track the movement of products through the entire value chain. Whether theproduct is in shipment, in distribution center inventory, in-store inventory or on the shelf, or at the cashregister, Wal-Mart can track it in real time. Their capability in streamlining supplies among stores andsuppliers has helped them maintain appropriate inventory and track what sells and what doesn’t. Operations and distribution strategies have also helped Wal-Mart achieve low prices. Wal-Mart’sstrategy has been to plot stores outside of large cities and within 200 miles of existing stores. Clusteringstores together in small areas, Wal-Mart relies on word-of-mouth advertising to win over consumers inlarger cities. Because stores are close together, distribution costs are below average. Furthermore, Wal-Mart seeks to meet different customers’ needs with four distinct retail options; these include discountstores, supercenters, Sam’s Clubs, and neighborhood markets. Each store concept has a specific range ofstore size, total employment, and estimated sales. Wal-Mart spends much less on advertising than does their competition. One way they accomplishthis is through the clustering of stores in a relatively small area. Because their stores tend to be groupedtogether, they are able to spread advertising expenses across a single market, minimizing advertising costs. One of Wal-Mart’s foremost strategies is to provide superior service to customers. Every store hasa “greeter” near the entrance to welcome customers, offer them a shopping cart, and direct them towardwhere their items are located. Rule number eight in Sam Walton’s 10 Rules for Building a Business is to“Exceed our customers’ expectations. If you do, they’ll come back over and over.” Supportive activities related to Wal-Mart’s strategy are related to the above primary activities.Such activities and/or costs include the technology used in tracking product (operations and distribution),relationships with suppliers, employee training, and incentives and compensation policies. All of theseactivities have proven to be successful overall as Wal-Mart earned $256 billion in revenues and $9 billionin profits in 2004.
Strengths Weaknesses Powerful strategy Overly complex strategy Strong financial condition High turnover rate Strong brand name Weak reputation Economy of Scale Behind rivals in e-commerce Cost advantages over rivals Doesnt survey customers Pricing advantages over rivals Questionable management Inexpensive advertising Anti-union Good supply chain management Good customer service Wide geographic coverage Strong dealer network Opportunities Threats Open market share Increased competition Rising consumer demand Slow market growth Serving new market segments Entry of new competitors Expanding into new geographic areas Loss of sales to substitutes Increase online sales Growing bargaining power of suppliers Falling trade barriers in foreign markets Growing bargaining power of customers Acquiring rival firms Adverse demographic changes Entering into alliances Restrictive trade policies Exploiting new technologies New regulatory requirements In the SWOT analysis above, I’ve listed the strengths, weaknesses, opportunities, and threats Wal-Mart faces. To elaborate on a few, Wal-Mart has a very powerful strategy but it is also one that is hardlymeasurable or easy to communicate. Wal-Mart has very strong brand recognition but somewhat of anegative reputation as of now. In many ways, Wal-Mart has great customer service. Still, as in the case ofstocking questionable CDs and DVDs, there is room for improvement. As for opportunities, managementargues there is plenty of room to expand Wal-Mart to two or three times its current size. This may be anopportunity but if there is that much of the market still available, Wal-Mart will face threats of newcompetitors. Exploiting new technologies is an opportunity Wal-Mart will likely take advantage of butnew regulatory requirements is a definite threat to Wal-Mart’s expansion goals.
Unweighted Competitive Strength Assessment Key Success Factors Wal-Mart Target Kmart Costco SafewayQuality/Product Performance 9 9 8 10 9Reputation/Image 7 9 8 10 9Manufacturing Capability 10 9 9 10 9Technological Skills 10 9 9 10 8Dealer Network/Distribution 10 9 9 9 9New Product Innovation 8 9 10 9 9Financial Resources 10 8 8 10 7Relative Cost Position 10 8 9 9 8Customer Service 10 9 8 10 8Unweighted Overall StrengthAssessment 84 79 78 87 76 The Unweighted Competitive Strength Assessment gives an approximate idea of each company’scompetitive advantage. In this assessment, Costco has the best advantage. Wal-Mart is a close second,beating Target, Kmart, and Safeway. All of these data are estimates to use in comparing and contrastingeach company. Wal-Mart could use this assessment to see where their strong points are and, moreimportantly, where their weak points are. We can see from this data that Wal-Mart has a weaker reputationthan all of the other companies. This may be an area Wal-Mart may want to work on in order to improvetheir overall standing.III. Issues and Recommendations I feel that Wal-Mart’s most challenging issue involves the public’s resentment. Wal-Mart haswiped out numerous retail establishments (too many to count) and will continue to do so unless stopped.So far, some “big box” opponents have stopped Wal-Mart from specific expansions but Wal-Mart isdefinitely fighting back. From Wal-Mart’s point of view, I think more focus should be spent on globalexpansion. If specific areas are so against having a Wal-Mart that they pass laws to stop Wal-Mart frombuilding in their area, I think Wal-Mart should stay away. For example, Wal-Mart would have a terribletime expanding into Oakland. I would assume that with the laws that were passed, a great deal of negativepress also took place. The time and effort to get a Wal-Mart built in Oakland may not be worth the trouble.This is one of the reasons I feel Wal-Mart should focus on international expansion. There were 1,355
international Wal-Marts in 2004. I definitely feel that expanding this number sounds like it could be verylucrative. Another issue facing Wal-Mart is the federal lawsuit regarding sex discrimination. From thenumbers quoted in the case study, it sounds as though Wal-Mart is clearly discriminating against females.This is somewhat surprising but will hopefully be fixed. Wal-Mart is very thorough in their strategy,maybe they need to be more thorough and/or detailed in their compensation and incentive policies. Wal-Mart definitely needs to end the discrimination. In order to avoid future discrimination, monitoring ofwages and salaries should be established. This is especially true for upper management employees, wherefemales are paid significantly less than males in similar positions. Last, I feel that the compensation and benefits offered to Wal-Mart employees are somewhat of anissue. If only about 60 percent of employees have health coverage (compared to 72 percent in the retailindustry as a whole), I think their benefit package needs to be reevaluated. The case study claims that thereason many employees did not sign up for health coverage is because they obtained it through a memberof their household. I’m sure that is the case for some, but not all. Furthermore, Wal-Mart does not pay anyhealth care costs for retirees. I feel that both examples are methods Wal-Mart uses to cut costs and bothneed to be reconsidered. Although there are a number of dilemmas in which Wal-Mart must take action, I feel that they aredoing extremely well overall. They are the largest corporation in many countries as well as the worldoverall. They may need to improve their image and work out their legal battles but I don’t think theyshould feel generally threatened. As Sam Walton said, “Recognize that the road to success includes failing,which is part of the learning process rather than a personal or corporate defect or failing. Always challengethe obvious.”