To formulate an effective competitive strategy that is suitable for both the industry and the firm, comprehensive understanding of the industry as a whole is necessary. Michael Porter (1998) presents five competitive forces that can be used to analyse industry attractiveness for long-term profitability, and underlying factors.
In his book Competitive Strategy, Michael Porter (1998) also described about how those five forces change overtime and can be influenced through a well-played strategy. This is proven again and again by many successful firms, and in this case, Wal-Mart.
While competition in U.S retail industry and international markets is fierce, Wal-Mart is top U.S retailer in terms of dollar sales, and operating largest or second-largest retail chains in international markets as well. Kmart and Target, which also operate superstores like Wal-Mart, have not grown nearly as fast as Wal-Mart (Graff, 2006). The figures in the case study showed that U.S market is biggest for Wal-Mart, as it accounts for 63.7% of net sales in fiscal year 2009.
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According to annual report from US Census Bureau, the total amount of sales for the U.S Retail Industry (inclusive of food service and automotive) in 2009 was $4.13 trillion. Compared with the annual reports from 2008 and 2007, it was second annual decline. First decline was in 2007. The declines indicated as a result from U.S recession. However, Wal-Mart's sales from 2007 to 2009 didn't decline. According to Table 5.2 from the case study, the sales during 2007 to 2009 period kept growing, albeit at somewhat slower rates than previous years.
However, in Table 5.4 of the case study, it shows that Wal-Mart's competitors such as Target and Costco are not doing as fine as Wal-Mart. Such differences in financial performance attribute largely to each firm's strategy and competitiveness, but it also shows that industry attractiveness alone is not what put Wal-Mart as a top retailer in U.S retail industry.
Another factor attributable to Wal-Mart's successful performance is competitive advantages it has built over the years. The magnitude of its competitive advantage has significant impact on its position in the industry, as well as some factors among the five forces Michael Porter has described.
Its expert logistics systems are often attributed for Wal-Mart's success (Ellickson, 2006; Westerman, 2001), and its cost-conscious "corporate culture" as indicated in the case study. By all accounts, technology and economy of scales are at the core of Wal-Mart's core key advantages over its competitors. Wal-Mart's technological innovation and edge is apparent in its expert logistics systems, distributions and warehousing, inventory control and many more.
Wal-Mart is also currently at the forefront in data mining and using that data to do precise sales forecasting. Such edge in technology gives Wal-Mart several advantages over its competitors, mainly in cost cutting, sales forecasting and efficient distribution. Basker and Van (2007) argue Wal-Mart's better technological edge has allowed it to grow faster, and the growth has lowered its operating costs through economies of scale.
Because of Wal-Mart's size and tremendous growth, it gives another edge over the suppliers. The bargaining power of Wal-Mart is relatively bigger than bargaining power of its suppliers. It is achieved through Wal-Mart policy of limiting its total purchases from any one supplier. Since Wal-Mart is accountable for major stakes in U.S retail market, and also operating large retail chains in international markets, Wal-Mart accounts for major percentage of sales for any of its suppliers. in 2006, it accounted for 14% of Kraft and Kellogg's sales, 16% of General Mills' sales, and 11% of Pepsi's sales (Warner, 2006). Wal-Mart's competitive advantage and its choice of competitive strategy has pushed Wal-Mart to be a leading business in retailing industry, in both U.S and international markets. It's biggest and perhaps most obvious effect is its lower prices for consumers.
2.0 Wal-Mart Strength and Capabilities
The uniqueness of each company and the key to profitability is not through doing the same as other firms but rather through exploiting differences (Cohen, 2004). Mao Tse Tung (1978) says, "To achieve victory one must as far as possible make the enemy blind and deaf by sealing his eyes and ears, and drive his people to distraction by creating confusion in their minds." It is all about having multiple strengths that will not only make it hard to imitate but also enable the company to exploit upon and create success.
Always on Time
Marked to Standard
The economies of size enable the organization huge opportunities to deal with many suppliers, all negotiation are done directly with the manufacturers only. These allow them to get low price goods. This is in line with their strategy of "Everyday Low Price". Wal-Mart's do not dependence solely on any one supplier and the international has increased it purchasing power through global procurement. Good rapport with her supplier.
2.2 Warehousing & Distribution
Being the world leader s in logistic, it has excellent logistics and distribution network. Majority of the purchases was directly shipped to Wal-Mart own distribution center then to the respective store. It efficient use of the trucks by grouping store together, proper route planning and packing it more tightly enable efficient delivery. The "remix" systems introduce was design to reduce inventories, speed deliveries to store and eliminate stock-outs. Wal-Mart largest distribution center in Baytown, give it greater control over its supplies this avoids the delays of products.
2.3 In-Store Operations
Wal-Mart retail store was based upon creating customer satisfaction through low prices, offering wide range of quality merchandise that are carefully tailored to customer needs and providing a pleasing shopping experience. The decentralization gives the store manager considerable autonomy in decision making, product range and pricing. "Greeter" was hire and employees are expected to be polite and friendly enhance the shopping experience. "Satisfaction- Guaranteed" program was also introduce to encourage customer loyalty, keep them attached to Wal-Mart.
The strategy of "Everyday Low Price" makes their product value for money. It relies heavily on the word-of-mouth communication for advertising. These reduce of having to spend large amount of budget for advertising and promotion, 0.55% was spend for advertising it was three times lesser than its rival. Despite having a budget of over $2 billion for advertising, it was one of the world's biggest advertisers.
The strength on marketing was also to instill the values that Wal-Mart projected traditional American virtues of hard work, thrift, individualism, opportunity, and community. It creates strong emphasis on patriotism and national causes, an American icon and making it a place to visit to buy value for money product.
2.5 Information Technology
Information and communication technology was the most important linking and integration of the entire Wal-Mart value chain. Using information technology to handle logistics, this helps the organization to solve the major issues of control, monitor and alert. It is use to for the daily managerial process, inventory control and data mining. It create data analysis to forecast, replenish and merchandise the product, at the same time providing them with information in understanding what the customer tend to buy and their needs. Speed is a crucial factor in creating competitive advantage (Cohen, 2004). Wal-Mart allows their supplier to have access to the systems, helps to keep the inventories in control, and the delivery of lowest-cost product to the customers.
2.6 Human Resources Management
Organizations can never success without its people (Noe et al, 2008). People are the important element, strength or assets to be successful to gain competitive advantage (Kermally, 2004). Communication is one of the vital areas it leverage upon to enhance its effectiveness.
Associate title is given to executive level and below employees. The organization relation with its associate bases upon respect, high expectations, close communication and clear incentive. Associates enjoy high degree of autonomy and are constantly inform of the organization performance. Benefits like company health plan and a retirement scheme for all employees with a years or more service. Together with profit incentive and stock purchase plan. It "open door" policy give people a channel to voice out concern to the managers for all levels, and allow managers to show concern for his or her workers. All these create a "Paradox" in generate enthusiasm among employees to support the strategy of Wal-Mart.
2.7 Organization and Management Style
Wal-Mart's management style believes in executive work closely in touch with each other to provide information sharing and resolve issues face for the entire operation of the business. This close relation that is build between store managers and headquarter based on Sam Walton's principles and values allow Wal-Mart to have fast response management system that is able to resolve issues or take action whenever it occurs. High expectations are the key to everything (Bergdahl, 2006).
3.0 Wal-Mart sustainable advantages
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Wal-Mart has a highly sustainable competitive advantage as it was able to identify the source of the advantage, implementing them and defending it from being duplicated by its rivals. All the three areas give organization its competitive advantage.
3.1 Cost Leadership
Wal-Mart implement cost leadership approach has two main benefits. Firstly, it allows the attaining of higher profit margin (Baird, 1994). Secondly, the organization can afford to lower price and having an edge over all its competitors in the business environment (Baird, 1994) Wal-Mart is committed to saving their customers money so they can live better by providing a large varieties of merchandise and services everyday at low price, this gives them an edge over its rivals. Mature industries like Wal-Mart also tend to be those that had achieved the most substantial reductions in overhead costs.
The cost leadership was achieved by the economies of scale in production. Wal-Mart is feared by many manufacturers as it has a large bargaining power as a customer. If a supplier is accepted to be the vendor, they will be able to access to a huge share of the U.S. retail market. Taking advantage of it, Wal-Mart has the ability to squeeze their cost margins, offering their product at very low prices to their customers.
3.2 Marketing Strategy
Wal-Mart's marketing slogan "Everyday Low Prices" managed to appeal to customer. The relationship build with its customers make marketing easier for Wal-Mart as customer trusted them in offering the best and low prices in the market. Wal-Mart rely heavily on word of mouth communication of its merits and was able to spend very little on advertising and other forms of promotion compared to their rivals, this give them a higher profit margin.
3.3 Differentiation Strategy
Wal-Mart opened large store which offered large varieties of products in small towns, believe that it will do equally well, unlike its rival who believed only in large populated town could sustain a huge discount store. This strategy of putting large store into smaller town was ignored by other competitors. It was the pioneer discount store to offer online shopping experience for its customers giving it an advantage in the heavily rely on information technology century. Wal-Mart expand its horizon beyond the U.S. marker into international market like Europe, Mexico, China, South Korea and Japan allow it further enhance its strategies and giving its rivals more pressure in wanting to catch up with Wal-Mart.
4.0 Wal-Mart in preventing imitation
Competitive advantage is subject to erosion by the intensive competition (Grant, 2010). Sun Tzu says that speed is the essence of war. To win one has to take advantage of the enemy's unpreparedness, travel by unexpected routes and strike him where he has taken no precaution (Giles, 2009). It is the same case for Wal-Mart, Wal-Mart has to take advantage of its leading and continue progress and come out with new ideas to prevent being imitated. Four requirements for imitation are identification, incentives for imitation, casual ambiguity and resources acquisition capability (Grant, 2010).
The theory of limit pricing from a firm that holds a strong market position sets prices at a level that is unattractive to new entrants (Grant, 2010). Sam Walton adopted a unique business strategy during the early days of Wal-Mart in placing great importance on thrift and value which lead him to undercut competitor's prices as much as possible. Being the market leader, Wal-Mart can set very low prices on the essential needs as they can afford due to the large economies of scale. This low pricing strategy makes it very difficult and unattractive for new entrants to compete in this market.
4.2 Incentive for imitation
Wal-Mart makes large investment into their distribution and information technology by having a large freight service and distribution centers. In 2005, they invested in new technology call "Remix System". In information technology, it invested 24 million dollars to enhance its current systems. All these huge investment make by Wal-Mart makes it look very profitable for other competitors to imitate their strategy at the same time it signal to them that it require a large amount of financial resources are needed.
Competitors such as K Mart face difficulties to determine which strategic decision made by Wal-Mart actually generates their huge success in discount retailing. Wal-Mart adoption of multiple organizational strategies such as in store location where most of store locations are in small town and do not faces direct competition from competitors. Organization and management style which corporate executive keep close relationship with customers and store operation, their fast response management system due to the close relationship and communication allow the solving of problem faces. All these creates ambiguity for competitors as it becomes very difficult from them to identify the actual cause of their success and any attempt to try to imitate any of these strategies may not guarantee success (Grant, 2010). Sun Tzu identifies this as deception. Even though you are competent, appear to be incompetent. Though effective, appear to be ineffective (Giles, 2009). Blinding the enemy by creating a confusion of not knowing what you are capable of.
4.4 Resource Acquisition
Wal-Mart's resource capabilities lie in their strong purchasing and vendor relationship, and warehousing distribution techniques makes it difficult for competitors to imitate their competitive advantage.
Purchasing and vendor relationship
Wal-Mart's resources ability to purchase large amount of inventory gives them the advantage to obtain rock bottom prices from suppliers enables them to sell their product at very low retail prices. Wal-Mart strong financial resources which other competitors lack of will not be able to beat Wal-Mart in the industry.
Warehousing and Distribution
Wal-Mart is a leader when it comes to logistic. Using their financial resources and investing heavily in logistics system to make it cheaper, faster and more efficient. Having own freight services to do delivery instead of relying heavily on suppliers. Wal-Mart introduce of Remix System allowed them to order from suppliers on five day basis rather than a four week basis which reduce inventories in their distribution and retail stores.
5.0 Future of Wal-Mart
Sustaining is one of the key issue faces by many organizations around the world. The question that always post to organization leader is, "How do I keep my business going?" Jack Trout and Al Ries (1981) say, "The basic approach of positioning is not to create something new and different, but to manipulate something that's already there." The message want bring across that build upon the strength and minimize the weakness of the organization to remain sustainable for the future.
Wal-Mart was able to be sustainable throughout the years as reflect in the Net sales and Net Income in Table 5.3 of the financial summary 1998 - 2009. In addition, it also had beaten its competitor in term of the sale revenue, gross profit margin and Total Net Income in Table 5.4 of the Wal-Mart and its competitors: performance comparisons by more than six times the figure. Number are important to the development of strategy as they create valuable input but the incredible abilities of human brain to implement give it greater chance for success, and reach predictable result (Cohen, 2004). Wal-Mart has to win with ability, not with numbers if it wants to sustain and being able to deal with threat.
5.1 Organization Management, Strategy and Culture
Wal-Mart has to simplicity its organization structure, philosophy, strategy to fit into the reality of the business world. The more simple it is the more clear and concise the strategies plan is and make it easier to implement giving less chance that it can go wrong along the way (Cohen, 2004). It has to create a culture that there is no alternative, but have to go all out to achieve the strategy. Management must not microscope it view to current situation, but to harness it present advantages and build up on its strength.
5.2 People and Leader
Employee and Leader is the pillar to the success of any businesses. Strategy cannot be implemented without people and leader. The future of the organization is closely link to the people and leader (Ward et al, 2007). It is not how much more they can earn but how much more they can contribute to the organization (Noe et al, 2008). Prepare the people can enhance the capability of the people. Wal-Mart can prepare them through culture development and sharing of successful implementation throughout the organization. Getting people from different part of the business together can improve commitment and allow sharing of experience with each other. It will improve its efficiency, loyalty of the people and service quality standard.
Wal-Mart needs to develop young capable man and woman that are able to lead the organization and develop them to be tough and capable to lead and learn.
5.3 Saving cost and growth
The growth cannot be autonomous, it has to growth according to demand and services. Wal-Mart needs to remove all ineffectiveness and inefficiency to improve the organization or there will be no business. It can adopt a vertical integration strategy in the business to further reduce the cost of the administrative cost hence bringing more affordable and low price product to its customers.
There is a saying, "You can imitate the product, by developing the best; get the best person through poaching, but one things that organization cannot imitate. That is the commitment and the love of the people that devote into the organization that cannot be imitate." The secret to the success is having strategy that fit the reality, making the right strategy choice and successful implementation of the strategy. It is often due to these reasons and the well planned business strategies that allow the organization to be in the forefront of its competitors and remain the leader of the industry.