In the study of management is very interesting making an analysis exercise of a market company like Wal-Mart which has revenues greater than the Gross Domestic Product (GDP) of many countries. The last fiscal year, ended January 31 2013, Wal-Mart reported revenues of 466,1 US billion (Walmart Inc., 2013).
This amount is greater than the last GDP reported by Colombia of USD 362,2 billion or Argentina of USD 347,3 (Portafolio 2012). If this company, Wal-Mart, were a country it would rank as a rich country just below South Africa and above Switzerland, Belgium, Venezuela, Austria, Chile and Others (World Fact Book, 2012). Not only is amazing analyzing a company which its revenues are bigger than entire countries’ economies and trying to determine which are the factors for this success, what things has this company constructed, what are its strengths, how is it dealing with competitors, and what are its core competences but also leaves many lessons.
Wal-Mart was founded in 1962 by Sam Walton when he opened the first Wal-Mart Discount City in Rogers, Arkansas. It went public in 1972 when was the first retail stock traded on the New York Stock Exchange. In 1983, it opened the first Sam’s Club membership warehouse and in 1988 opened the first Wal-Mart supercenter, which features a complete grocery department in addition to general merchandise. In 1991 through a joint venture with Cifra, a Mexican retail company, Wal-Mart went global, opening a Sam’s Club in Mexico City. In 1996 Wal-Mart opened its first stores in China.
In 2002 Wal-Mart entered the Japanese market through its investment in Seiyu, and in 2010 Bharti-Wal-Mart, a joint venture, opened its first store in India (Walmart History Timeline, 2013). Today, celebrating more than fifty years, Wal-Mart is operating its everyday low price model at more than 10,700 retail units in 27 countries. Each week, more than 200 million customers and members visit its stores under 69 banners and e-commerce websites in 10 countries. Wal-Mart employs 2.2 million associates around the world - 1.4 million in the U.S. alone. The average, full-time hourly wage is $12.67 (Walmart Investors, 2013). By the end of the fiscal year 2012 Wal-Mart had 10,130 store units.
Of these stores, 4,479 were in the USA and 5,651 were internationally (Walmart 2012 Report). According to this data in 2013 Wal-Mart has started more than 570 store units around the world. For the fiscal year ended January 2013, Wal-Mart increased net sales by 5% to $466.1 billion and returned $13 billion to shareholders through dividends and share repurchases.
Of these $5.4 billion in dividends were paid for the year. Wal-Mart ranked second on the 2012 FORTUNE 500 list of the world’s largest companies by revenue. In the same period, fiscal year 2013, Wal-Mart U.S. net sales were more than $274 billion, and Sam’s Club net sales were more than $56 billion. Today in the U.S., Wal-Mart operates more than 4,600 retail facilities, including Wal-Mart stores and Sam’s Club warehouse. Wal-Mart International net sales were $135,2 US billion.
Wal-Mart has created stores with different styles and formats to fit in with local customer needs and customs. More than 90% of their international stores operate under a banner other than Wal-Mart. The numbers included in the annual report of 2012, the earnings release for Q4 of the fiscal year 2013, the general statements about strategy, management, and projections included in both reports, and the information available in the multiple web pages of Wal-Mart corporate website allows analyze the following strengths, opportunities, weaknesses and threats. Strengths:
Purchase Power. Undoubtedly Wal-Mart is a market leader with unprecedented scale. Today Wal-Mart is the largest retailer in the world. This scale gives Wal-Mart a very large purchasing power and great supplier connections. The purchases of Wal-Mart in 2012 were more than 350 US billions (Earning Release Q4, 2013). Wal-Mart shows an increased Operational effectiveness. It has taken steps to better manage their inventory which leads to an increase in the gross margin as a result of decreased markdown. Wal-Mart is able to ship merchandise from any of its numerous distribution centers in order to provide the cheapest and most efficient route.
It even has its own distribution centers for online orders. The practice of sharing sales data with suppliers through computer programs has allowed Wal-Mart to consistently improve its inventory management. Information Technology in general is an unbelievable strength in which Wal-Mart has invested to improve their company.
Its remarkable logistic system constitutes one of Wal-Mart’s competitive advantages. These improvements can be seen in the financial statements. For 2013 fiscal year, Wal-Mart U.S. grew operating income faster than sales. Operation income for the US grew 5.4%, and net sales grew 3.9%. That means the company increased significantly its operating effectiveness (Earning Release Q4, 2013). Wal-Mart’s internationalization strategy is a strong foundation for growth. More than 5,600 store units overseas represent a “strong foot” abroad. The capitalization expenditures implied in that situation are not easy to replicate for any competitor, and for local competitors is “the big boy” who is coming.
The aggressive growth strategy of Wal-Mart. Growing in more than 570 store units around the world in a year means that it is a strong definition made by the company, and represents a stronger market presence. Wal-Mart is a variety merchandising provider, and it has brand awareness. Wal-Mart has great focus on establish brands within its stores. The major merchandise lines include house wares, consumer electronics, sporting goods, lawn and garden, health and beauty, apparel, home fashions, paint, bedroom, hardware, automotive repair, maintenance items, toys and games, and grocery. The brands have continuity and are clearly defined for each product line.
The company requires high quality products and intends to construct brand recognition. High cash free generation. Wal-Mart reported strong free cash flow of $12.7 US billion for the 12 months ended Jan. 31, 2013, an 18.1 percent increase over last year (Earning Release Q4, 2013). This is an excellent cash flow from operations and allows the company to develop whatever strategy that it establishes. Dividends are paid continually. Since Wal-Mart declared its first dividend in March 1974, dividends have continually increased. The company announced its annual fiscal year 2014 dividend of $1.88 per share, an 18 percent increase or $0.29 per share, over last year's dividend of $1.59 per share (Earning Release Q4, 2013). Weaknesses:
The store formats and its implied size led to low penetration into some urban areas and limit the expansion plans. Although the company’s management believes that there are many opportunities to grow in the metropolitan areas in the US, the availability of space limits such scope for expansion. As the company expands its large format stores, it is leading to cannibalization of existing stores.
This fact has lead Wal-Mart to create other formats as neighborhood stores and other small formats that were 210 stores in the USA by 2012 (Walmart 2012 Report). Management of employees. Having more than two million employees increases exposure to increasing wages and high health care costs: The United States government has increased the minimum wage rate in the last years, causing increased costs. Rising labors costs, coupled with a large labor base, threaten Wal-Mart’s efficiency and performance since rising costs may grow quicker than revenue.
Litigation and labor potential problems: In addition the company is involved in a significant number of legal proceedings, wage-and-hour class action lawsuits, gender discrimination class actions, hazardous materials investigations, and others. Despite the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s Consolidated Financial Statements, litigations affect labor relations adversely, could affect the intend to offer products at low price, and could affect the public reputation of Wal-Mart (Walmart 2012 Report). No detailed mission statement.
The actual is too broad, and it is not focused in core competences. The mission statement for Wal-Mart is a simple statement to focus on consumer needs. “We save people money so they can live better” (Walmart 2012 Report). Wall-Mart has considerable currency exchange exposure. Due to the nature of their business and the international presence in more than 5,600 stores in 26 countries, Wal-Mart has exposure to changes in exchange rates.
Span of control and Lack of flexibility. Due to its size and despite its IT advantages, for Wal-Mart the control of its operation could leave it weak in some areas due to the huge span of control. Is difficult to make a measurement of this point, but with 10,700 stores, 2,2 million associates, 27 countries represent big challenges in control. Since Wal-Mart is a variety merchandising provider across many sectors, it may not have the flexibility of some of its more focused competitors to react against market changes. A part of the Wall-Mart’s business is relaying on Chinese imports. There are many brands and products that are sold by Wall-Mart that are produced in China.
This could lead in two situations. A part of this complex operation is relying in imports from China that are exposed to international political, economic and associate risks, and could face unexpected problems. On the other hand this could lead in the undesirable association of products from Wal-Mart with low-quality products from China. Opportunities:
Continuing international expansion is an opportunity for Wal-Mart. This could be done in two forms. Establishing operations in new countries, and increasing market share in countries where it has operations. There are fourteen countries in South America where Wal-Mart has not operations, but it has the expertise obtained from Mexico, Chile, and others, and it has the knowledge to do that. Wal-Mart has not operations in continental Europe, and this is a huge market to be attended. On the other hand there is actually a great opportunity for growth in developing countries and Asian markets. Increasing market share in these countries could support the Wal-Mart’s growth (Walmart Store Locations, 2013). Growth in Internet retailing to serve larger market:
The US market, by 2014 is expected to reach a value of $13.55 billion, which represents an increase of almost 75% compared with levels in 2009. The traffic through Walmart.com exceeded one billion visits in 2010, growing more than 15% over the previous year through Site-to-Store and home delivery (Walmart Investors, 2013). Increasing operation effectiveness overseas is a great opportunity for Wal-Mart. While in fiscal year 2013 USA operations achieved an operational income/net sales ratio of 7.8%, for the same fiscal year this ratio for international operations was of 4.9.
That means Wal-Mart should be able to increase operational effectiveness for the abroad stores (Earning Release Q4, 2013). Continuing developing of new formats is an opportunity for this company. Wal-Mart has been successful in the implementation of neighborhood markets and others small formats in the USA and abroad. This could lead to an increased market penetration and bigger coverage and could support Wal-Mart’s growth (Walmart 2012 Report).
Threats: Increasing resistance to expansion from local organizations and authorities: Wal-Mart is facing severe resistance from several groups when it plans to open new stores. The huge purchase power and the cost leader strategy from Wal-Mart have represented a serious threat to local stores and markets. It has resulted in local authorities deterring Wal-Mart’s expansion plans. It is becoming increasingly difficult for Wal-Mart to open new stores as the resistance increases. This is affecting the new investments and the time to open new stores for the company.
The actual Volatility in commodity prices and cost inflation will pressurize margins: demonstrate the serious threat to profit margins and the importance of developing new ways to reduce costs by working with suppliers and operations. Information technologies and logistic will play a decisive role in achieving increases in operational effectiveness. As the number one in retail market, Wal-Mart is the target for all its competitors, locally and globally. This intense competition will stress costs and prices and represent a threat for Wal-Mart operations. Conclusion:
The Wal-Mart's success is a case that deserves be studied. This company has reached a very strong competitive position and remarkable global-wide operations. The base for this success has been the management who has performed very well the functions of planning, organizing, leading and controlling. The today situation of the company in all of its business aspects is enviable for its competitors.
However, the past success does not guarantee the next success, and Wal-Mart has a lot of work to do. Maintaining the first place is as challenging, or more, than getting there. It has great strengths and big opportunities, and its weaknesses and threats are challenging but not overwhelming. These weaknesses and threats require attention and could be turned, by an effective management, in new opportunities and strengths.
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