Internal and External Environment Analysis of Wal-MartHome »
Wal-Mart was founded in 1962 by Sam Walton with a philosophy to save people’s money so that they can live better lives. The company was incorporated on Oct. 31, 1969 as Wal-Mart Stores, Inc. In 1972, the shares of the company got listed on the NYSE. It has over 8,613 retail outlets under 55 different banners in 15 countries. It has over 2 million employees globally. Its headquarters are in Bentonville, Arkansas. It is the largest grocery retailer in the United States. In the U.S., it operates through discount stores, supercenters, neighborhood markets, and through walmart.com (About us 2012).
Wal-Mart’s basic strategy revolves around low costs and high volumes. The company’s strategic planning aims at maintaining low prices and offering quality customer service so that customers could be fully satisfied. If the average operating expenses throughout the industry are compared against that of Wal-Mart’s, then still the operating expenses of Wal-Mart turns out to be relatively lower. The reason for such low operating costs lies in its high quality and efficient distribution network. The distribution network derives its efficiency from the fact that it locates its stores in a strategic manner, manages supply and order related information efficiently through latest information technological tools, makes use of cross-docking, and strategic expansion designs. The pricing strategy being followed by Wal-Mart is of market penetration, as it concentrates on offering “everyday low prices”. It captures significant market share through this strategy and takes advantage of economies of scale in production, and produces on a mass scale. Another vital strategy that is instrumental to its success and growth is the quality customer service it offers. High quality customer service in comparison to other discount retailers is derived through employees who are high in morale, prices that are relatively low, and customer information that is managed efficiently. As there are a wide range of products available in the stores of Wal-Mart, therefore it is very convenient for the customers to shop for all their needs at just one destination (Kneer 2009).
The mission of Wal-Mart is to improve the living standard of a common man by means of relatively low priced and quality goods offered by the company, along with the superior customer service. One of the significant aspects of the success of Wal-Mart has been its choice strategic location of its stores. Wal-Mart used to set up its stores at locations where none of its direct competitors’ stores exist. The central part of its general strategy is to keep costs low, which it achieves by higher volumes and keeping level of inventory low. Supply chain efficiency also contributes in reducing the distribution costs. The efficient supply and distribution network of Wal-Mart is a result of strategic relationships with suppliers and implementation of high end information technology tools. Wal-Mart also makes use of sophisticated data-mining techniques to collect information on buying behavior of customers in order to forecast demand, enhance customer service, and keep inventory levels low. Some of the new aspects of the Wal-Mart strategy are its increased focus on internationalization, opening up of different formats other than supermarkets, and extension of product range. Since the United States market of Wal-Mart is fast approaching a mature state, therefore the company is on the lookout for foreign destinations to expand its operations globally. In order to accomplish this task, Wal-Mart is adopting a range of strategies from strategic alliances to mergers and acquisitions. Another new aspect of its strategy is to offer a more comprehensive range of products to its customers so its customer base gets increased and thus there would be an increase in its business. Under this, services like banking, insurance, and travel are now being offered to its customers. Formats like neighborhood stores are a new initiative of Wal-Mart (Munzer 2009).
Universal bar codes were introduced in the retail industry by Wal-Mart, which forced manufacturers to adopt common labeling. Over the years, Wal-Mart has used the information behind the bar code to its advantage and developed latest technology to track its inventory and cut the costs out of its supply chain. Wal-Mart not so long ago, pioneered the usage of radio frequency identification technology, popularly known as RFID, and demanded the producers for its usage. In this technology, data is transmitted through radio frequency, and small tags can be used for the storage of such data, and in comparison to the bar codes more data could be stored in such RFID tags. The use of this technology has significantly reduced out-of-stock merchandise levels (Wilbert 2012). Wal-Mart has been extremely successful in the past, and has a very promising future ahead of them. But it is faced with opposition from small stores in small communities, as well as employees. In order to address these issues, Wal-Mart has already taken giant strides to be seen as a more environmentally friendly organization, as well as to increase the benefits of its employees. Once Wal-Mart has invested in their image in their home country, they should also focus on increasing their market share in the international markets which hold the greatest growth potential.
External Environment Analysis
Political Factors: Wal-Mart is facing a certain problems in expanding to other international markets currently. There are restrictions on foreign direct investment in multi-brand retail in certain countries, like India. This situation is proving negative for its expansion plans.
Economic Factors: The purchasing power of customers in the United States is quite substantial, which is a good sign for the business of Wal-Mart in the United States. However, the after effects of recession and global economic slowdown do not present desirable scenario for its business. However, the growth in the economies of developing nations is a positive sign for its international business.
Social Factors: In the context of Wal-Mart’s global expansion, it may have to face certain social challenges. There are a number of countries where people do not like to travel a great deal in order to buy their daily rations. Therefore, it would translate into loss of business for Wal-Mart as it cannot open stores in every nook and corner. In certain countries, it has to face the opposition of local retailers too as it is a threat to their small retail businesses. Wal-Mart’s did not able to adjust according to the preferences of South Koreans and Germans, and thus had to leave those markets (Kneer 2009).
Technological Factors: There has been abundant use of technology in the retail sector worldwide, and Wal-Mart is also leveraging technology to its advantage in supply and distribution, and online sales (An Introduction to Walmart.com 2012).
Environmental Factors: There are no adverse environmental factors for Wal-Mart in conducting its worldwide operations.
Legal Factors: Wal-Mart is facing numerous law suits filed by its employees in relation to various HR issues, which hampers its brand image as an employer.
Porter’s Five Forces Network Analysis
Bargaining Power of Buyers: Wal-Mart has the philosophy that its customers should get the lowest prices in order to lead better lives. It make this happen, it has schemes like “Every Day Low Price”, “Rollback”, and “Special Buy” (Wal-Mart.com 2012). Wal-Mart enjoys customer loyalty even though there are low switching costs in the retail industry. Therefore, there is very low pressure from the customers’ side (Kneer 2009).
Bargaining Power of Suppliers: Wal-Mart offers a lot of business to manufacturers and wholesalers because of the massive market share it has. Wal-Mart could even vertically integrate. But Wal-Mart believes in healthy long term relationships with its suppliers (Kneer 2009). All suppliers must have competitive prices, financial stability, proven success in the marketplace, and offer excellent products in order to receive contracts with Wal-Mart (Walmart Standard For Suppliers 2010).
Threat of New Entrants: Wal-Mart can sell products more cheaply than any new entrants because its huge buying power gives it economies of scale. Wal-Mart can significantly reduce the costs because it has sufficient capacity to produce more goods. It has product differentiation and its customers are loyal. For new entrants, there are high entry barriers because Wal-Mart has access to established distribution channels and latest technology (Kneer 2009).
Threat of Substitutes: There are not many substitutes that can offer the convenience and low prices that Wal-Mart offers. Many had tried to imitate the business model of Wal-Mart but have failed. Wal-Mart has customer oriented approach and has “satisfaction guaranteed” program in place to enhance customer goodwill (Kneer 2009).
Rivalry among existing players: At present, Sears, K Mart, and Target are the main competitors of Wal-Mart. Among the three, Target is the strongest. In domestic markets, it has grown tremendously and established a niche for itself. Sears and Kmart left behind. Sears could not match the lower prices of Wal-Mart (Vance and Scott 1994). Kmart failed to match the customer satisfaction standards of Wal-Mart (Turner 2003). Its sales are approximately four times the sales of Kmart. Kmart’s stores are smaller than Wal-Mart’s discount stores and have only half the sales of Wal-Mart stores.
Strategic Group Analysis
Strategic groups are those groups of companies within an industry that pursue the same sort of strategies. A company’s strongest rivals are found within its own strategic group, and not in other strategic groups within the industry. In case of Wal-Mart, its strategic group is consists of companies like Kmart, Target, and Fred Meyer, all of which pursue the strategy of offering products to their customers at discounted prices. All these companies follow discounting business model, and therefore form a strategic group within the retail industry. This strategic group also has different set of competitive forces than the rest of the retail industry (Hill and Jones 2007).
Internal Environment Analysis
Market Capitalization: Wal-Mart has market cap of 208.37 billion US dollars which is the highest in discount, variety stores industry (Direct Competitor Comparison 2012). This makes Wal-Mart a mega cap company and financially very sound and very attractive for investors.
Human Resource Capital: People are key to Wal-Mart’s business and it invests time and money in training people, and retaining a developing them. The policy of sharing stocks and profits with its employees is another important strength which distinguishes it from other organizations.
Technology: IT also supports Wal-Mart’s efficient procurement. A website has allowed for increased sales all over the world. Walmart.com goal of providing easy access to more of Wal-Mart is evident in the more than 1,000,000 products available online (An Introduction to Walmart.com 2012).
Customer oriented approach: The most important strength of Wal-Mart is its customer oriented approach. It has a reputation for value for money, convenience and a wide range of products all in one store. It allows SAM’s club members to buy in bulk. It also has satisfaction guaranteed programs which promotes customer goodwill (Kneer 2009).
Exit from South-Korean and German markets: Wal-Mart had to exit from the South-Korean market because of its inability to cater to the taste of the local consumers, slowness in opening more retail outlets and inability to compete with aggressive Korean discounters.
Product Recall: Wal-Mart was involved in several product recalls lately like ‘Holiday Times’ candle holders, ‘Hip Charm’ key chains, etc. Frequent product recalls indicate lax quality control measures (Kneer 2009).
Numerous Legal Issues: Wal-Mart is involved in a number of legal issues like the suit which alleged it of showing gender discrimination at the time of promotions, pay, training and job assignments. Such proceedings may adversely affect employees’ perception about the company.
Unmanageable product range: Since Wal-Mart sell products across many sectors (such as clothing, food, or stationary), it may not have the flexibility of some of its more focused competitors (Böhm 2009).
Expanding brand portfolio: Wal-Mart offers products under a number of private labels. The company plans to increase is private label portfolio. Wal-Mart incurs lower operational costs on these private labels. Further, as private brands are high-quality low price alternatives to national brands, they have greater demand. These factors benefit the company in gaining higher margins.
Rising US healthcare spending: The US has the highest per capita health care spending in the world. The 65-and-above age demographic segment represents a prime consumer segment for pharmaceuticals.
Increasing online sales: Online shopping has steadily grown in popularity in the US. In addition to physical store operations, Wal-Mart sells its merchandise through online portals like www.walmart.com and www.samsclub.com.
Global Expansion and Acquisitions: There are opportunities to take over, merge with, or form strategic alliances with global retailers, focusing on specific markets such as Europe, China, India and Africa. Wal-Mart has the opportunity to leverage its experience from around the world to more effectively serve customers (Kneer 2009).
Intense Competition: Wal–Mart is facing stiff competition from numerous of companies in the retail market worldwide including Carrefour, Tesco, Target, Home Depot, Sears and local companies. The company also faces competition from Internet based retailers and catalog businesses.
Government Policies: Being a worldwide retailer means that Wal-Mart is exposed to political troubles in the countries that it operates in.
Opposition and resistance from communities: Small retailers fear that the low price offered by Wal-Mart may force them out of business. Growing opposition to new stores from local communities and entry into international markets is likely to reduce the company’s expansion plans.
Negative Brand image: Bad media exposure for Kathie Lee Brand had also affected the image of Wal-Mart to a certain extent (Böhm 2009).
|IFE Matrix of Wal-Mart Stores, Inc.|
|Key Internal Factors||Weight||Rating||Weighted Score|
|Human Resource Capital||0.15||3.5||0.525|
|Customer oriented Approach||0.2||4||0.8|
|Exit from foreign markets||0.2||4||0.8|
|Unmanageable Product Range||0.05||2.5||0.125|
|EFE Matrix of Wal-Mart Stores, Inc.|
|Key External Factors||Weight||Rating||Weighted Score|
|Expanding Brand Portfolio||0.15||3||0.45|
|Rising US Healthcare Spending||0.1||3||0.3|
|Increasing Online Sales||0.15||3||0.45|
|Global Expansion and Acquisitions||0.2||4||0.8|
|Opposition and resistance from communities||0.05||3||0.15|
|Negative Brand Image||0.05||2.5||0.125|
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