Wal Mart: An Example Of Operating Efficiency
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Published: Wed, 12 Apr 2017
Marketing experts ascribe Walmart’s remarkable success to its strategy of local dominance. It is also argued, amongst other competing explanations, that Walmart’s superior returns are due to its size and its purchasing power (Greenwald & Kahn, 2005). The company is also regarded to be an example of operating efficiency, even as detractors allege that its operational success stems from an exploitation of its labour force (Greenwald & Kahn, 2005).
1. Application of Porter’s Generic Strategy Model to Walmart’s Growth Story
Porter’s Generic Strategy Model, first advanced in 1985, states that a firm’s relative intra-industry position is driven by its choice of strategy for achievement of competitive advantage in terms of (a) cost leadership versus differentiation, and (b) competitive scope. Competitive scope differentiates between firms that target broad industry segments and those that concentrate on narrow segments. Generic strategies are valuable since they exemplify strategic positions at the broadest and simplest levels. Table 1 below represents the different alternatives available to firms for choice “generic strategy” (Stanford, 2010).
Table 1: (Stanford, 2010). Porter’s Generic Strategies (source: Porter, 1985, p.12)
Whilst all important participants in the retail sector offered the same range of extensive merchandise offerings, unexciting clean stores and welcoming sales personnel, Walmart differentiated itself with its ground-breaking approach to stores layouts and formats and its exceptionally efficient distribution system. The company’s revolutionary distribution system facilitated the development and implementation of its “Everyday Low Price” (EDLP) stratagem and helped in raising its market share in the US from 9 % in 1987 to 31% in 2000 (Akella, Manvika & Roberts, 2003).
Walmart’s ELDP process has remained its core company value since the launch of its first store in 1962 and has been the key driving force behind Walmart’s sustained growth (MarketWatch, 2010). With value-for- money being an important determinant of consumer behaviour worldwide, the company’s continued focus on prices and quality through the optimisation of its supply chain and strict control over administrative and workforce costs have been instrumental in its growth. The company’s rigid attitude towards its workforce has, however, hurt its penetration in foreign markets like Germany. More attention to its labour policies could have possibly helped the company in strengthening its service without sacrificing costs and improved its efficiencies as well as its image.
2. Alternative Strategies
Globally, and even within the US warehouse stores format, Walmart’s operating strengths are commonplace where other retailers enjoy similar operating advantages of advertising, distribution and store supervision. Sam Walton’s brilliance lay in recognising these realities, first by establishing control over a core region, followed by assailing weaker rivals on the territorial fringes, wherein his core advantages could be layered with comparative ease (Greenwald & Kahn, 2005).
Walmart’s operating advantages have had limited impact in its overseas markets (Greenwald & Kahn, 2005). Walmart’s overseas returns, on invested capital or on sales, are less than half its domestic margins. Despite Wal-Mart’s more efficient and competitive operations, such advantages are diluted in overseas markets, even where they are controlled by domestic companies with less advanced technologies and operations (Greenwald & Kahn, 2005). Alternative successful strategies could have involved a greater focus on domestic urban markets in the earlier years. The overseas market expansion should have been done only after better appreciation of the cultures of overseas target markets.
It is acknowledged that Walmart’s market supremacy lies in its distinctive logistics capabilities, which render the company its competitive advantage. Its “cross-docking” inventory coordination system ensures that merchandise movement between two loading docks occurs in less than two days (Fahy, 1996). Walmart has gained from this, not only in terms of reduced cost of sales, (by 2-3%), but also in curtailing inventories (Fahy, 1996), interest outlays, and working capital cycles. The system helps in value generation and augments competitive advantage (Fahy, 1996).
It is extremely complex to replicate such advanced communication and synchronisation amongst the suppliers, distribution centres, sales outlets and depots. It is this ability to erect high barriers to replication that confers Walmart with its competitive advantage (Fahy, 1996).
3. Use of Generic Strategy Model for analysis of competitor activity and charting of future growth
Market experts state that Walmart’s success does not come about just because of its lower prices (Cowgill, 2005). Comparisons of various product category prices reveal that 80 to 85% of Wal-Mart’s merchandise is more expensively priced than at its competitors (Cowgill, 2005)With many of its competitors selling at lower prices, the company’s extraordinary success is felt to be due to its expertise in manipulating perceptions regarding its cost leadership (Cowgill, 2005). It is this lack of understanding of Wal-Mart’s strategies and its organisational efficiency that has prevented competition from overtaking it (Cowgill, 2005).
The majority of successful retailers focus on raising market share and turnover to improve financial results. Their focus now and in the past has been on increasing asset utilisation/turnover (Willard, 2006). Walmart’s Inventory Reload and Remix schemes emphasise its different focus. Deload refers to the broad-based endeavour to shrink inventory levels (the biggest asset on most retailer balance sheets) at both stores and distribution centres (Willard, 2006). Project Remix centres on the velocity of individual SKU (semi-knocked-down unit) sales (Willard, 2006).
The end goal at Walmart’s is to boost inventory holding power and simultaneously move the goods from the backroom onto the rack swiftly and efficiently (Willard, 2006).
Walmart has however not paid enough attention to the serious repercussions of its overzealous cost leadership. It has relentlessly pursued cost-cutting at the cost of its workforce. It has ruthlessly eliminated its neighbourhood competition and has extracted unbearable price reductions from its suppliers and service providers. Its biggest worry now is a larger stakeholder and public opinion.
With local activists halting planned new stores, former employee groups initiating class-action discrimination legal suits, the media condemning the company’s miserly benefits and voters in Europe calling for legislation for the protection of small retailers, adverse public opinion has turned cost leadership into the single largest threat to the future profitability and growth of Walmart. Company executives have conceded that its recent stock price weakness is linked to its deteriorating image (Carr, 2006). Wal-Mart’s strategy for damage control in this respect is criticality for its future growth.
4. Use of Porter’s Five Forces and SWOT analysis to understand Wal-Mart’s current position and recommendations for future strategy
The Porter’s Five Forces Model (1980) for analysis of competitiveness encompasses the five forces of New Entrants, Substitutes, Supplier or Buyer Power and Existing Competitors (Lever, 2008).
Walmart manages its intensely competitive environment well. It deploys its clout and negotiates the lowest possible prices, stretching suppliers beyond their limits (Bysani, 2003). The negotiating power of buyers and suppliers is low since Wal-Mart has established dominance in its domestic marketplace and its overseas market share is also growing (Bysani, 2003).
The prospects for new entries are limited because of considerable setup costs and regulatory restrictions. The threat from substitute retail formats appears to be low (Bysani, 2003). Internecine competitive rivalry among industry participants is, however, high (Bysani, 2003).
Whilst Porter’s 5 forces technique is simple, its weakness is its external focus (Lever, 2008). It is based purely on microeconomics (Recklies, 2001). The last few years have seen the emergence and growing dominance of deregulation, globalisation and digitalization, developments that are outside the realm of the Five Forces Model (Recklies, 2001). It is thus inadvisable to develop an analytical strategy based solely on Porter’s model (Recklies, 2001).
SWOT, an analysis of internal and external environment, is a popular strategic tool that encompasses 4 key organisational dimensions, namely strengths, weaknesses, opportunities and threats (Lever, 2008).
Walmart is the largest global retailer. This bestows the company with worldwide intra-industry status and recognition (Bysani, 2003). Its logistics capabilities, distribution centres and supplier relationships are key strengths that add value to its entire system (Bysani, 2003). Apart from Walmart’s domestic urban marketplace opportunities, the growing middle class in emerging markets like India and China offers Wal-Mart a remarkable expansionary opportunity. E-commerce provides the organisation with another growth opportunity (Bysani, 2003).
Walmart demonstrates less adaptability to overseas markets and cultures. Weaknesses also exist in its anti-trade and exploitative labour policies (Bysani, 2003). Threats to the company encompass anti-globalisation factions, resistance from customers in new markets, recent wars and outbursts, increased competition in mature European markets, zoning regulations and rising trade blocks (Bysani, 2003).
Strengths and weaknesses identify and are identified by opportunities and threats (Valentin, 2005). Strengths help in thwarting impending threats and in recognising visible opportunities, whereas weaknesses leave a business defenceless or work against the generation of value to its stakeholders (Valentin, 2005). The SWOT framework, however, does not accept tradeoffs (Valentin, 2005). SWOT guidelines are limited further because they not only mix accomplishments with strengths but also lack norms for prioritising SWOTs (Valentin, 2005).
Wal-Mart’s future strategy has to fundamentally sustain competitive advantages in addressing its trade practices in adopting best-in-class supply chain, customer relationships and environmental management. The company should also focus on non-exploitative and fair practices towards all its stakeholders, especially its workforce.
Section B: Domino’s Pizza in India
Pavan Bhatia took over as the CEO of Domino’s Pizza India Ltd. in November 1999 and led the company till May 2001.The operations of the company under his leadership is a better-known case study of fast food retail chains in developing economies.
Domino’s outlets, during this aggressive phase, were opened swiftly across the country and multiplied by four times to 100 from March 2000 to January 2001. Such expansion of outlets at Domino’s had not until then been witnessed in any of the 63 countries in which it operated. The company’s growth rate increased from an average 4 stores per year in its initial 4 years of operations to over 100 outlets across 30 cities during these 10 months (Icmrindia, 2001). Bhatia’s expansion initiative, whilst accepted by Domino’s officials, did not find favour with the Board and led to the company’s reorganisation.
Jubilant Food Works Limited (JFL) now operates the Domino’s pizza chain within the Indian domestic market. Its master franchise agreement with Domino’s is valid till 2024. JFL is India’s first quick-service restaurant (QSR) chain to be publicly listed (Chelluri, 2010).
Bhatia’s main objective for Domino’s India
Bhatia was extremely ambitious for Domino’s India and his main objective was to make it the largest fast-food chain in the country (Icmrindia, 2001). In early 2001 Domino’s India announced plans to invest Rs. 500 million during 2001and add a hundred outlets each year (Icmrindia, 2001).
Bhatia tied up with Jet Airways in India in 2000 in order to introduce their ‘ultimate deep dish’ and ‘sweetie pie’ food products on all Jet flights (Icmrindia, 2001). He announced that “For Domino’s, the sky is the limit. We like to deliver hot, fresh pizzas everywhere, anytime. This tie-up with Jet Airways takes our commitment to customers on the move even a step further”. Domino’s also signed an agreement with Indian Oil Corporation (IOL) to offer food products from IOL’s 7,500 outlets across India (Icmrindia, 2001).
The situation became complicated, post the March 2001 board meeting, wherein Domino’s top management decided that Pavan Bhatia’s performance had not been satisfactory during his tenure of 18 months (Icmrindia, 2001). The board opined that Bhatia’s expansion strategy was “reckless and not properly thought out”. Not many analysts, however, agreed with the board’s decision and believed that the board was disregarding the probable long-term advantages of his strategy (Icmrindia, 2001). Whilst Domino’s officials felt that there was nothing wrong with the pace of opening outlets, Hari Bhartia, a rival Board Member, felt the expensive organisational infrastructure, including the distribution centres set up in 1999, needed to be better utilised (Icmrindia, 2001).
Domino’s, contrary to other fast-food chains, which operated either on the franchise or self-owned outlets models, or both, operated through company-owned premises. This entailed huge investments in back-end infrastructure and analysts felt that the company’s business model could not support such overheads and yet implement the proposed marketing plan (Icmrindia, 2001).
2. Application of STEP and Porter’s 5 Forces to Domino’s Adopted Strategy
The STEP model is a variation of the popular PEST analytical business measurement tool (Businessballs.com, 2010).The PEST model is useful for understanding environmental factors, more specifically the ‘Political, Economic, Social and Technological’ factors, which are important for the activities of specific business firms (Businessballs.com, 2010).
The Indian food and food-processing industry are burdened with scores of legislations. Domino’s India realised that too many resources, effort and time was being diverted to unproductive and burdensome work, whether it related to acquiring scores of permits for every store in every city or whether it concerned issues like licensing, city laws, realty brokers, infrastructure, title, lease agreements, water, power, signage, markets and dealing with contending restaurants (Icmrindia, 2001). India also had a significantly low per capita income (of less than 30 USD per month in the early 2000s.
Bhatia, despite such environmental indicators, launched Domino’s outlets in numerous cities and small towns between March 2000 and January 2001. Pizza consumption in many of such places was extremely low. Analysts also felt that many Pizza consumers felt Domino’s prices to be high and unaffordable (Icmrindia, 2001). The uncertain viability of certain outlets led to their closure, not just in small cities but also in prosperous Delhi and Ludhiana.
Michael Porter’s 5 Forces theory argues that the competitiveness of an industry depends upon five dimensions, namely (a) existing competitive rivalry between suppliers (b) threat of new market entrants (c) bargaining power of buyers (d) power of suppliers and (e) threat of alternate products (counting technology change) (Businessballs, 2009).
Domino’s future in India is fraught with competition, despite having the first-mover advantage over competitors like Pizza Hut (Chelluri, 2010).
The negotiating power of buyers and suppliers is not very high as Domino’s has established some control over the marketplace. The threat of new entrants is high and is expected to arise from local quick service restaurants. Domino’s competitors, apart from stand-alone pizza outlets and domestic and global pizza chains include casual dining and other food service establishments.
The threat from substitute goods is high as new cuisines continue to be introduced across Indian markets. Customers can choose to consume food and food add-ons at highly competitive price points from diverse local and non-local food establishments. The array of offerings varies from simplistic takeaway fare to the major dine-in alternatives of wider range and better quality. Competitive rivalry in the food sector is intense and numerous food establishments open and close every year.
The use of STEP and Five Forces analytical tools corroborates that the expansion strategy adopted by Pavan Bhatia was hasty and inappropriate to prevalent circumstances. Expansion strategy has to be customised to the needs of particular markets and should take account of the different concerns that emerge from STEP and Five Forces analysis.
3. Application of Force Field Analysis to facilitate Stakeholder Analysis
Force Field Analysis, propounded by Kurt Lewin in 1951, is extensively utilised for decision-making, especially in organisational planning and executing change management programmes (ODI, 2009). It is a potent method for obtaining a comprehensive synopsis of the various forces impacting a potential policy issue, and for evaluating their source and strength (ODI, 2009). Force Field Analysis naturally follows the Problem Tree Analysis, which is used for identification of policy changes. The stakeholder Analysis is a constructive continuation of Force Field Analysis and involves the recognition of particular stakeholders, who are in favour of or against change, along with their influence and interests (ODI, 2009).
Stakeholder analysis aims to categorise the stakeholders (external or internal) that are impacted by the outcomes of specific performance improvement project (Alvord, 2010). Such an analysis helps in the determination of all perspectives and allows them to be represented in the “performance project design process”. No particular perspective is permitted to dominate a process in such circumstances (Alvord, 2010).
Stakeholders depict individuals or enterprises that stand to benefit or lose from the achievement or failures of performance improvement effort. Their interests, in terms of needs and expectations in such matters, can be professional, monetary, cultural, personal, or can even arise from a horde of other motivations (Alvord, 2010).
Stakeholders characteristically have positive or negative perspectives regarding a particular project, and frequently disagree amongst themselves, making it difficult to resolve diverse viewpoints (Alvord, 2010). Influence signifies a stakeholder’s comparative power and control over and in a project. Influence is described as the degree to which a stakeholder can influence project operations and hence shape project outcomes (Alvord, 2010). Management need to strategise and implement satisfactory decisions for the benefit of all or most stakeholders. They must otherwise make efforts to ensure that influential and genuine stakeholders are not too dissatisfied (Alvord, 2010).
The most vital stakeholders, as inferred from a Stakeholder Analysis are the shareholders, franchisees, technology partners, and customers, the first three due to their ownership, project funding, franchising and technological capabilities, and the last for their purchasing power and income generating capability.
The primary facilitator in the entire project performance is the workforce, (including the management), which is administered and self-managed by the senior management of the company. The management is accountable to the Board of Directors and it is the relative influence of constituents of the Board that decides the formulation and implementation of the organisational strategies and policies. The Board is ultimately accountable to the shareholders. The suppliers and service providers are next in relevance due to their lesser influence on the operations.
Section C: IBM
1. Application of Porter’s Generic Strategy Model to explain IBM’s Competitive Advantage before the 1980s
Porter’s Generic Strategy Model avers that the position of an enterprise relative to its industry is led by its selection of a strategy for attaining competitive advantage, with relation to choosing between cost leadership and differentiation, and its competitive scope. Generic strategies represent strategic positions at the simplest and broadest levels (Stanford, 2010).
Competitive advantage comes about when a company’s product or service generates more value (symbolic, as well as in its features) for the customer than a contending product or service. To illustrate, IBM’s introduction of the Selectric typewriter offered both kinds of value for users and buyers (Heide, 1992).
There are two approaches, (which are not mutually exclusive), of deploying IT to gain competitive advantage, firstly, as an important product or service seller or service provider in the market to external customers, and secondly, as an organisational support system, which is transparent to the customer, for a product or service (Heide, 1992)
IBM dominated the computer markets during the 1960s and the 1970s. Its superior service, during this period, was the source of its competitive advantage. The adage “No data processing manager was ever fired for ordering IBM” implied the unmatched commitment to service. Improved broad-based computer reliability in contemporary times, along with the technology led shift towards workstations and personal computers, has however made competition in the industry more difficult, counteracting IBM’s distinct competency as a basis of sustainable advantage (Werther & Kerr, 1995).
It is difficult to sustain a specific competitive advantage in IT-based products and services in the contemporary era as competitors replicate successful moves swiftly (Heide, 1992). The product life cycle in several high-tech sectors like semiconductors and personal computers is normally as low as three to five years (Heide, 1992). Companies in such industries launch upgraded or radically novel products with short development cycles, much before the competition or the subsequent generation of products eats into their profits (Heide, 1992). Companies deploying such “differentiation” strategies (Porter, 1980) gain competitive advantage through the unique design, quality, creativity, customer support, and inherent research of their products or services (Heide, 1992). Other companies, intra-industry, often follow with lower-cost substitutes (Porter, 1980) (Heide, 1992).
2. Application of Porter’s Generic Strategy and Ansoff Models to Illustrate the Regaining by IBM of its Differentiated Position
Michael Porter’s Generic Strategies model postulates that companies have three fundamental strategic alternatives for garnering competitive advantage, namely (a) Cost Leadership (b) Differentiation and (c) Focus (Stanford, 2010).
The Ansoff matrix, on the other hand, helps organisations in deciding their growth strategies. It provides strategic alternatives on the products or services an organisation should offer and on the marketplaces that are crucial its growth and success (Verbera, 2009).
The Ansoff matrix provides four feasible product/market permutations, namely market penetration, market development, product development and diversification (Ansoff 1957, 1989) (Verbera, 2009). Diversification is a popular strategic option for companies in the current competitive business environment.
IBM owes much of its gains in recent years to its policy of carefully thought out and consistent diversification (Verbera, 2009). The company previously pursued a vertical integration stratagem, involving its entry into new industries to reinforce its core business, model. It benefited from backwards vertical integration with the disk-drive sector and forward vertical integration with the computer software and consulting services industries (Hill et al, 2007). IBM’s vertical integration policy was previously an important source of competitive advantage (Verbera, 2009).
IBM’s subsequent policy of diversification, entailing the acquisition of over 400 businesses, was felt to be high risk by market observers. Its significant success is now however attributed to the company’s business foresight and effective control mechanisms. The use of the Ansoff Matrix helps in analysing IBM’s strategic choices for regaining its position of differentiation from other market participants and leads to the conclusion that organisations need to modify their strategic alternatives in accordance with the changing competitive scenario (Verbera, 2009).
The emergence of the desktop computer in the 1980s changed the fundamentals of IBM’s markets. The company during this period tried to reposition itself quite a few times. It sometimes appeared that different groups favoured different strategies and by 1992, the company was contemplating a break-up strategy. Louis Gerstner, CEO of IBM from 1993 to 2002 is credited with bringing about strategic changes that changed organisational fortunes and reinstated the company’s erstwhile important position in the computer industry (Kelly, 2004).
Gerstner did not veer IBM on a new course. He was, in fact, instrumental in taking it back to its roots. IBM had for decades stayed with its strategy of offering one-stop shopping to large companies for their information services, (IS); a strategy termed as “singleness.” It strayed from the strategy during the 1980s, alienated its clients, and under Gerstner’s leadership reverted back to it. The company went back to being a full-service provider for its clients and administering their technological integration. This singleness strategy has been formulated for the current IS environment (Mills, 1996). Gerstner kept the company together, refocused on the IT services sector, and embraced the Internet. His efforts resulted in one of the most extraordinary revivals in business history.
3. Application of the Boston Consulting Group Matrix to Analyse and Justify IBM’s Products and Service positions
The BCG Matrix provides a useful method for portfolio planning, through the evaluation of the health of different players within a portfolio of businesses or product lines (Mixner, 2006). Developed by Bruce Henderson at the Boston Consulting Group during the early 1970s, the BCG growth-share matrix evaluates businesses or products as high or low performers, based on their comparative market growth rate with regard to the market share of the next best competitor (Docstoc, 2010).
Different businesses or products, in the BCH Matrix, are categorised as Cash Cows, Stars, Question Marks, or Dogs on the basis of their performance (Docstoc, 2010). The BCG concept calls upon organisations to appreciate that Stars represent the best place for an investment of limited funds, because of their potential to achieve high market share within a high market growth segment, for the production of optimal profits (Mixner, 2006).
There are difficulties with this analysis. The various problems with such an approach include the high expected expenditure associated with the growth of market share, difficulties of increasing profitability in challenging marketplaces and the possibly incorrect supposition of confirmed market growth (Mixner, 2006).
IBM, based on the BCG Matrix portfolio analysis, appears to have a number of star businesses in the Systems and Technology Group. These have lead positions in their market segments and continue to maintain the high overall business growth rate in spite of emerging competitors. The Consulting and IT & ITES services segments can be considered as Cash Cows, because of their strong market share and their potential to sustained profits and cash flows.
The hardware segment within computer technology has seen commoditization over the last several years due to plummeting prices (Korzeniowski, 2003). This would require it to be placed, either in the Question Mark or Dogs category, because of inadequate profitability and steep competition. These businesses can be divested at appropriate valuations.
4. Strategic Recommendations for IBM with the Application of Porter’s Generic Strategy and BCG Matrix models
The use of Porter’s Generic Strategy and BCG matrix models and a study of IBM’s current and envisioned product lines reveals that IBM has a few enormously exciting models that should sustain and thrust its future growth. The company should focus on cloud computing, BPTS (Business-Performance-Transformation services) and grid computing. Inorganic investments in related enterprises, emerging or otherwise, will facilitate sustained ‘star’ performance and maintain its eminent position in the overall IT & ITES space.
IBM CEO Sam Palmisano states that BPTS, involving a combination of IT and business-process outsourcing (BPO) with intelligent software and consulting services, has a potential $500 billion market. Consultants from IBM Business Consulting Group assist customers in deploying BPTS services for streamlining and re-engineering self-styled SG&A (selling, general and administrative) processes like finance, accounting, and HR management ( McDougall, 2005).
IBM has also recently announced its “suite of cloud computing solutions, IBM Smart Business cloud services portfolio and IBM CloudBurst systems”, which essentially comprise of pre-integrated software, hardware and services’ offerings that offer customers novel delivery models for IT & ITES capabilities (MacSweeney, 2009).
The IBM Mass Lab is generating software to manage some of the world’s most complicated process and infrastructure projects in areas like railroads, food traceability, water management and healthcare modernisation. Much of software demand is being generated by the requirement to modernise and automate nearly every system, for example, energy management, et al through smart grids (Ebizq, 2010). The IBM Mass Lab is generating software to cater to the new era of enterprise mobile computing for more efficient convergence and integration to support an exponentially increasingly mobile workforce (Ebizq, 2010). Grid computing has regained favour and is helping IBM in retaining its position of a chief industry vendor (Korzeniowski, 2003).
Both the Porter’s and BCG models necessitate the recommendation that IBM focus and deploy all its assets (physical, information and intangible) in achieving differentiation for each of its product and service segments to remain in the star quadrant of the BCG Matrix. The company should however seriously think of exiting its slow-moving hardware business.
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