Walmart strategy


Wal-Mart the world’s largest retailer in 2006, next to only Exxon Mobil, with an 8.9% retail store market share in the US and a global turnover of $312 billion, is the most famous example of a successful retail strategy. However, Wal-Mart’s international operations spread across 14 markets outside US, has been a mixed bag of experiences for the company. Despite Wal-Mart’s impressive track record and strength, the question is, “How can it stay ahead?” given the rapidly changing retail landscape, newly emerging markets and aggressive global competitors.

Business Model

Wal-Mart operates under nine different retail formats through primarily three retailing subsidiaries: Wal-Mart Stores Division U.S., Sam’s Club, and Wal-Mart International.

As per the Generic Strategies Framework of Michael Porter, Wal-Mart has adopted a strategy somewhere between “Focused Low-Cost” positioning and “Cost Leadership” where-in, -Market scope— Global operations cater to a diverse customer base. In the US price conscious low and middle income consumers with a focus on smaller towns. -Source of competitive advantage—consistently low prices with high customer service and stringent cost control measures.

Global Strategic Intent:-Dominate the retail space across the world

-Cash on the retail boom in emerging economies and capture market share -Replicate the success achieved in the US markets and become the world’s largest retailer

Financial Data For the last 5 years

YearSales(in $mn) Revenue Grth (YoY)NI(in $mn)ROAROE2006$312,427 9.53818411,2318.90%22.50%2005285,22211.2718410,2679.30%22.60%2004256,32911.633779,0549.20%21.30%2003229,61612.550797,9559.20%20.90%2002204,01112.846066,5928.40%19.40%2001$180,787 6,2358.60%21.30%

The United States Strategy

In the United States, Wal-Mart’s chief competitors in low-end general merchandise include Home Depot, Sears Holdings Corporation’s Kmart chain and Target. The following are its strategy highlights:

Related Diversification:Wal-Mart’s move into the grocery business has also positioned it against major grocery chains Subsection of some stores known as “Pennies-n-Cents” in response to the dollar store retailers. Venturing into web-based retailing through

Cost and Quality EmphasisPrivate Brand Labels which enjoy the average US consumer’s mind share Focus on popular brands i.e. fast moving goods”Everyday Low Prices” strategyHigh labour productivity and low low labour costsSuperiors bargaining power vis-à-vis suppliers

Recognizing ComplementorsUnderstanding that manufacturer / supplier is an economic partner Power brands like P&G working closely with Wal-Mart and reduce costs in its supply chain

Wal*Mart’s Differentiated Peak: Competitive Advantage

Resource Commitments and Capabilities

Logistics and Supply Chain Management

Wal-Mart‘s Retail Link-system, the backbone of its sophisticated inventory management and logistics infrastructure, is the biggest civilian database in the world (second only to the Pentagon’s, but holding three times more data than the US Internal Revenue Service’s mainframes).

It is operating the world’s biggest private satellite communications system, allowing it, amongst other things, to track sales, to replenish inventories and to process payments in real-time, and to regulate the temperature in individual stores. IT Infrastructure

Wal-Mart’s aggressive adoption of information technology to improve logistics and back-office efficiency has also been a major driver of productivity. Because of its heavy investment in information technology, Wal-Mart has worked hard to keep competitors from learning its secrets to success.

Each Wal-Mart store is electronically connected via a secure private network to Wal-Mart headquarters in Bentonville, Ark. It is able to track sales volume of each individual item rung up on cash registers at each store and automatically re-order and replenish inventory, across thousands of stores.

Corporate Culture

A strong emphasis on customer service, and highly motivated personnel (helped by a quasi-religious corporate culture) has been nurtured over the years. In doing so, Wal-Mart ratcheted up its own overall productivity — and made it impossible for any competitor to survive without emulating its template. All the same its corporate culture has lent it a certain strategic complexity that makes it difficult to emulate.

Economies of Scale

The scale of Wal-Mart’s operations has given it primarily two advantages: -Learning curve effect: Un-matched expertise in retail business in the US has lead to very high productivity levels. Years of trial and error with various store formats and distribution channels has resulted increased organizational leaning and reduced operational costs.

-Cash Reserves: This enables Wal-Mart to respond to changes in the environment and competitor moves very quickly. It also enables expansion plans with exactly causing a “lock-out” since there is no dearth of funds.

International Business Strategy

Internationally, the Company operated units in Argentina (12), Brazil (294), Canada (278), China (63), Costa Rica (133), Germany (85), Guatemala (122), Honduras (37), Japan (391), Mexico (828), Nicaragua (36), Puerto Rico (54), El Salvador (59), South Korea (16) and the United Kingdom (323).

Comparative Analysis of the Top 4 Global RetailersWal-MartCarrefourTescoHome DepotSales Revenue ($ mn)316,427106,603 71,862.2081500Net Profit ($ mn)112131,831.902,957.045800No.of employees1,600,000 436,000389,258325,000Foreign presence141913 3No.of storesHome country4467166410002048foreign18404098500–

Strategy Vulnerabilities

Wal-Mart has exhibited a failure to capture any foreign market. Attempts to enter new economies and cash on opportunities has been a tall order for Wal-Mart despite its superior operations, marketing strategies and other competitive advantages.

Late entry into foreign markets thus losing first mover advantageFlawed entry strategies in mature European markets like unsuitable store formats Rashly made acquisitions without judgment (e.g. acquisition of 85 small stores in Germany with did not even account for 3% of market share) Poor scanning of customer requirements and improper product selection (e.g. in the UK markets Wal-Mart has not focused on the food and groceries section which is a high growth segment)

Poor understanding of foreign customer psyche (e.g. in Japan the Seiyu stores are suffereing losses because Japanese customers are less price sensitive and associate low prices with low quality) Anti-union stance leading to union battles and workers’ lawsuits Poor relations with the local community mention citizens’ groups who bemoan the retailer’s impact on local culture and mom-and-pop businesses (e.g. clearly cited in wide protests against Wal-Mart opening in Mexico in 1992) Imposition of American ways on consumers.

Lack of Strategic planning is the main reason for Wal-Mart’s failure in foreign markets. Huge investments in these markets have resulted in a lock-in of funds. In some economies the company has sustained losses for nearly a decade (Germany, South Korea etc.). Withdrawal from unsuccessful ventures subsequently has not only resulted in huge losses but also a severe blow to the company’s goodwill and brand image.

Future Triggers of Change in the Retail Landscape:

-The industry is being challenged on many fronts, including catalog sales, home shopping by Internet and television, and the growth of electronic commerce. -The growing purchasing power of the Asian economies is a strong signal for change. Increasingly Asian consumers are seeking wider product range, quality products and better lifestyles in general.

Current formatsFuture formatsDiscount storesHypermarketsMom-pop storesSingle brand retail outletsCash and carry wholesale clubsSupermarketsSupermarketsOne-stop shops

-The current Wal-Mart strategy focuses on providing fast moving goods. Product selection is based largely on procurement price from suppliers. From here it needs to move to a more consumer driven approach.

Strategic Recommendations

Develop high “signal-to-noise” ratios

The reason for a late take-off to foreign markets was Wal-Mart’s failure -to foresee the trends emerging in the consumption pattern in the Asian economies -to predict the stagnation in the US market due to economic slowdown Competitors however forayed into Asian economies and gained first mover advantage. A good example is the early capture of 30% market share in Taiwan by Netherlands-based Makro, making it difficult for Walmart to carve a niche there.

Understanding local markets

Cultural gap: This is particularly relevant for Asia since it is not a homogenous entity. Even more importantly, Asian countries are more and more traversed by cultural flows permeating the region: cinema, music and fashion trends. Branding and brands do not operate in vacuum, but are closely linked to developments in society, to people and to cultures.

Consumer preferences: The store format selection has to be made after proper study of market conditions. The failure in Korean markets can be partly attributed to unsuitable store formats which did not appeal to the female customers. In Japan fresh foods were lacking in the Seiyu stores.

Marketing environment: Perceived threat to local businesses must be properly handled.

Critical Evaluation of Wal-Mart’s Mission Statement

“Always low prices” which has driven the Wal-Mart business must now be re-examined in the light of the latest events in the Wal-Mart chronology. Huge resource commitments have already been made in propagating this format. However, some economies are moving ahead. Although undeniably “low-cost leadership” is a guaranteed strategy in most cases, the Europe and Asia operations of Wal-Mart tell a different story all together.

The company must understand that that there is more to retail than excellent prices, particularly in culture driven traditional markets like Europe and Asia