The Wal-Mart Success Story

Table of content

1. Introduction

2. The Wal-Mart Success Story - Overview of the Business

3. SWOT-Analysis

4. Retail Industry Analysis - Porter’s Five Forces
4.1 Bargaining Power of Buyers
4.2 Bargaining Power of Suppliers
4.3 Threat of New Entrants
4.4 Threat of Substitutes
4.5 Intensity of Rivalry

5. Competitive Advantage
5.1 Causal Ambiguity
5.2 Wal-Mart’s Business System

6. Internationalisation
6.1 Wal-Mart International
6.2 Wal-Mart Germany
6.2.1 Why is Wal-Mart not successful in Germany?
6.2.2 The Strategy Of Wal-Mart in Germany - and why it failed

7. Wal-Mart’s Corporate Identity
7.1 Workforce Conditions
7.2 Unionisation Difficulties
7.3 Expansion in Other Sectors

8. Conclusion: Strategy Advices

Illustration: Wal-Mart’s Business System

Bibliography

1. Introduction

This report should call attention to the success story of Wal-Mart and reveal by using appropriate strategic framework why they are one of the most controversial companies. Subsequently, the goal of this strategic analysis is to examine Wal-Mart’s quest to dominate international markets. In addition Wal-Mart’s corporate identity will be discussed and several solutions to the challenges will be proposed.

2. The Wal-Mart Success Story - Overview of the Business

Even for American standards Wal-Mart must be considered as an outstanding success story.

43 years after its start-up Wal-Mart developed by constant growth rates to the largest retailer worldwide. (Young; O’Byrne, 2000) According to the „Fortune 500“ index, Wal-Mart is not only the number one retailer of 2005, but also the largest company worldwide, surpassing even Exxon Mobil the fourth year in a row. (CNN Money, 2005) For this reason Wal-Mart can be seen as the wealthiest and most powerful corporation in the world. How did Wal-Mart establish its favourable market position?

The retailer launched its business in small towns in the USA, in particular in the before unsatisfactory supplied rural area. (Scott, 1994) By this approach Wal-Mart revolutionized the American retail industry. Today, most Wal-Mart stores are still located in towns of 5,000 to 25,000. (Shah et al, 2003)

Wal-Mart’s core retail business in the USA can be divided into four divisions: Wal-Mart Stores, Supercenters, Sam's Club warehouses and Neighborhood markets. Supercenters constitute the company’s fastest-growing division. (Shah et al, 2003) On the other hand Wal- Mart Stores is the largest segment, with 67.3% of the 2005 sales. (Wal-Mart Annual Report, 2005)

In 1979 Wal-Mart’s annual sales reached a billion dollar for the first time. In 1993 this value was obtained in only one week, and in November 2001 even on only one day. (Wefing, 2003) Currently, Wal-Mart is enjoying a record year again. For the last financial year Wal-Mart announced revenues of $285,2 billion (Wal-MartFacts.com, 2005), whereof about 19,7% were gained abroad - a rise of 18,3% compared to 2002. (Wal-Mart Annual Report, 2005) This means a slightly worse operating profit than in 2004 because of hurricanes and increased operating expenses. (Waters, 2005)

The outcome is a total profit of $2.37 billion in Q3 2005, up 3.8% from a year-ago (Waters, 2005), which corresponds to a current return on equity of 21,8%. (Reuters, 2005) In contrast a rather modest return on investment (ROI) of only 6% appears to the international business. (Grose, 2001)

After Wal-Mart had achieved the dominating position on the domestic market, they decided to develop an ambitious internationalization strategy, in order to be able to maintain its fast company growth. Actually, Wal-Mart has 1,587 branches in nine countries (Wal- MartFacts.com, 2005), which contribute total sales of $56,3 billion. (Wal-Mart Annual Report, 2005) About 138 million customers per week visit Wal-Mart stores worldwide. (Wal-Mart Annual Report, 2005) In 2006 Wal-Mart plans to open 530 new stores in the USA and 165 worldwide. (Wal-Mart Annual Report, 2005)

3. SWOT-Analysis

When Sam Walton created Wal-Mart in 1962, he declared the following core values: “Respect for the individual, service to the customers and striving for excellence.” (Wal-Mart Annual Report, 2005, 4) Today, Wal-Mart focuses primarily on the objects of providing customer satisfaction. (Wal-MartStores.com, 2005) By emphasizing that customers are essential to the company, Wal-Mart has proven to be extremely profitable.

However, what are the sources of Wal-Mart’s phenomenal success? Wal-Mart’s corporate strategy is based on the following strengths: Dominance in the American retail market, expansion in international markets and exploration of new retail sectors. Wal-Mart's corporate management strategy involves selling high quality and brand name products at the lowest price. (Scott, 1994) In order to keep low prices, the company possesses the strength to reduce costs by the use of advanced electronic technology and well-established warehousing. (Scott, 1994) Wal-mart is able to maintain its low price through complete expense control and highly automated distribution networks. Its computers are directly linked with vendors, so deliveries are faster. (Grant, 2005) Additionally, Wal-Mart has one of the world’s largest private satellite communication systems to control distribution. (Shah et al, 2003) Wal-Mart’s financial strength with large profits and revenues is supported by the brand recognition in the domestic market. The ability to exceed customer expectations by pricing philosophies like “Every Day Low Prices” (Wal-Mart-Stores.com, 2005) can be seen as a further strength.

Opportunities exist to form strategic alliances with other global retailers, focussing on Europe or growth markets like China and India.

To be the biggest retailer means to be the main point of attack for competitors. Additionally, because of outsourcing to low-cost regions manufacturing costs have declined. Hence, price competition can be a possible threat for Wal-Mart.

Wal-Mart’s basic weakness might be that it is not well known in global markets. Wal-Mart’s major competitors could go internationally, stealing Wal-Mart’s chance of globalisation. Cultural weaknesses can be seen in the suppressions of employees by inventing the “Wal- Mart Cheer” or the “10 Foot Rule”, which requires every employee to greet customers within 10 feet distance. (Wal-Mart Culture, 2005)

4. Retail Industry Analysis - Porter’s Five Forces

Is the retail industry an attractive industry? In order to examine the industry surrounding WalMart, it is advisable to address Porter’s Five Forces Model. (Porter, 1980)

4.1 Bargaining Power of Buyers

The first force in Porter’s Five Forces Model is the bargaining power of buyers. Customers do not have to bargain with Wal-Mart for low prices, higher quality or more services because Wal-Mart has already established these issues in its business philosophy. Wal-Mart has many pricing philosophies including “Every Day Low Price”, “Rollback”, and “Special Buy” (Wal-Mart.com, 2005) to ensure that its customers get the lowest price possible. Because of low switching costs in the retail industry there tends to be a lack of customer loyalty. Not so for Wal-Mart, because its price advantage seems to be the most important factor for customers.

4.2 Bargaining Power of Suppliers

The second force in Porter’s Five Forces Model is the bargaining power of suppliers. Suppliers can exert power by threatening to raise prices or reduce the quality of purchased goods. That will not happen for Wal-Mart and their customers because Wal-Mart hand picks its suppliers and has a good and long standing relationship in order to maintain their pricing philosophies. In fact “Wal-Mart buys from more than 68,000 U.S. suppliers.” (Wal-Mart Annual Report, 2005)

4.3 Threat of New Entrants

Wal-Mart does not have to worry about the threat of new entrants because they can utilise economies of scale, which spread the costs of production over the number of produced units. As a result the cost of product per unit declines as the volume increases. (Quickmba.com, 2005) Wal-Mart has sufficient capacity to produce more in order to lower the cost. Wal-Mart has product differentiation with strong brand identification and customer loyalty. The access to distribution channels with secure distribution for their products is one main feature of their strategy. Technology plays also an important role in helping Wal-Mart stay customer focused. There are high entry barriers for companies aspiring to come into the market because Wal-Mart possesses unique resources and capabilities that are hardly substitutable.

4.4 Threat of Substitutes

The fourth force in Porter’s Five Forces Model is the threat of substitute products and services. Many of Wal-Mart’s competitors have tried to imitate Wal-Mart’s unique and successful business system, but failed. Wal-Mart has an excellent customer service that is unique to their value chain. Everything possible is done to ensure that shopping at Wal-Mart will be an experience. In this context Wal-Mart maintains a „satisfaction guaranteed“ program to promote customer goodwill and acceptance. (Shah et al, 2003)

4.5 Intensity of Rivalry

The fifth force in Porter’s Five Force Model is the intensity of rivalry among competitors in an industry. Actually, Wal-Mart's main competitors in the retail market are Kmart, Sear and Target. (Grant, 2005)

Kmart and Sear could not beat Wal-Mart due to several reasons: First, Sears' prices are higher than Wal-Mart's because the Sears infrastructure has higher overhead costs. (Scott, 1994) Another issue is Kmart’s decline in customer appeal because it neglected to provide satisfactory service for its customers. While Wal-Mart concentrated on customer satisfaction, complaints of poor customer service began to surface at Kmart. (Turner, 2003) As a result Kmart could not maintain constant low prices with its name-brand products.

In addition Wal-Mart’s sales are approximately four times Kmart’s sales. (Grant, 2005) WalMart’s discount stores are larger than Kmart’s and produce sales of “twice the amount of Kmart’s”. (Shah et al, 2003, 54)

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