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Wal-Mart is one of the greatest corporate success stories of the 20th century. Wal-Mart started off as a small chain of discounts stores in Arkansas, Missouri and Oklahoma in the 1970s. Since then, Wal-Mart has gone through tremendous transformations throughout the years to become a company with the worlds second highest revenues. However, the companys success has been strongly dependent on its position in the industry and its strong social culture. The industry is rapidly changing; the companys methods are no longer effective and efficient as before. There is a strong risk of Wal-Marts performance declining due to new entrants reducing industry concentration, increasing rivalry and competitors reducing costs and prices through new technology. We propose that: Wal-Mart invests in cutting edge technology and improves its supply-chain management. Wal-Mart invests in staff training to improve knowledge of the companys cultural values and goals.
During the early days, Wal-Mart was able to achieve monopoly power in the market through the set-up of its stores within small cities, leading to high profitability and the beginning of its success. Wal-Mart was a discount retail store offering many products and services different to those of its competitors. Being the only discount retail store in the area, hinted they had monopoly power in the industry. Using Porters Five Forces Framework we can determine whether or not Wal-Mart was a monopoly and the extent of its profitability. Looking at the intensity of rivalry, Wal-Mart was the only discount retail store in the area that differentiated its products and services to its local competitors. This meant Wal-Mart did not have any direct competition and that rivalry was low. The threat of substitutes was quite little, Wal-Mart being a large discount retail store, provided a wide variety of products. Even if there was a close substitute for a product, there was a high chance it was offered at Wal-Mart.
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Lei Song
The threat of entry into the market was also low as the capital requirements were high. Being in a small environment resulted in a small customer base, meaning the levels of potential profits were relatively small for another company to establish a store and compete against Wal-Mart. In order to gain levels of brand awareness and brand goodwill like Wal-Mart, there were high costs for new entrants to advertise and promote. Looking into bargaining power of buyers, it is clear that Wal-Mart had a strong position with its customers. Their everyday low prices and differentiated products and services gave them this power. With regards to their bargaining power of suppliers, Wal-Marts negotiating abilities combined with the size of their purchases placed them in a position desired and feared by suppliers. To strengthen their bargaining power, Wal-Mart limited their total purchases from any one supplier to avoid dependence on a particular one. Through the application of Porters Five Forces Framework, we see Wal-Mart was indeed a monopoly in its early stages of success. The market industry consisted of only one discount retail store: Wal-Mart and had high entry and exit barriers. There were also potential for product differentiation and the availability of information was imperfect. Wal-Marts monopoly power allowed them to achieve high levels of profits, at the same time improved upon the companys image. Through the success during this period, the company further expanded their name across the country and worldwide. Wal-Marts new expansion meant the company was no longer a monopoly in the industry; they now had direct competition with companies such as Kmart and Target. The company can no longer rely on the industry structure as before and must look at alternative strategies to maintain their level of profitability and success. Monopoly power was not the only key factor for Wal-Marts early success; the company had a competitive advantage over its rivals through its cost leadership strategy. Their mission slogan Everyday Low Prices emphasised
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on building a strong reputable image for the company through providing low prices every day to its customers. In order to provide low prices, the company needed to establish low costs. Wal-Mart achieved this through a combination of information technology, supply chain management and their social culture. Information technology, supply chain management and Wal-Marts culture were the key components for an effective cost leadership strategy to maintain the companys remarkable performance worldwide. Wal-Mart knew the importance of Information Technology to their company and for gaining a competitive edge against its rivals. Since the 1970s, the company has invested a lot of money into information and communication technology to support decision making, promote efficiency and customer responsiveness. Wal-Mart used information technology to link their stores and cash register sales with supply chain management and inventory control. By doing so, it allowed linking and integrating WalMarts whole value chain together, creating a faster and efficient system for their customers. Furthermore in the 1990s, Wal-Mart had invested in data mining to help them forecast, replenish and merchandise on a product-by-product and store-by-store level. This enabled them to meet customers needs and to provide a greater level of service. Wal-Marts supply chain management has played a key role in their success in the past and present. Like Information Technology, it has given the company an edge against its competitors. Their effective distribution system has been vital to the companys success, allowing them to achieve low costs, resulting in lower prices for consumers. Looking at Porters Five Forces Framework, Wal-Marts bargaining power with suppliers has increased due to their size and image, giving the company the ability to sustain low costs contributing to lower prices as well.
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Lei Song
Wal-Marts greatest input into achieving competitive advantage is their long social culture. They have established strong customer loyalty through brand recognition, customer service and low prices. This has helped them strengthen their bargaining power with buyers as there is more trust in what the company has to offer. Consumers are more willing to pay higher prices for Wal-Marts product instead of a cheaper imitation, adding to their profitability. Wal-Marts cultural image is well known across America and is key factor for their success. However, on an international level, their image is not as famous and indicates why their local success has not been replicated. The three factors discuss above have been an important part in achieving competitive advantage for the company through cost advantage. Wal-Marts cost leadership strategy has been so effective throughout the years and even still today. Referring to Appendix: A, Table 5.3, we can see from 2000-2009, Wal-Marts sales have increased constantly each year. This indicates emerging competitors are not having much of an effect on Wal-Marts sales. If we now refer to Appendix: A, Table 5.4, in 2007 and 2008, Wal-Mart dominated its competitors in terms of sales revenue, gross profit and total net income. This strongly suggests that despite the changes in the industry and the challenges in the past, Wal-Mart has been able to overcome these obstacles to become a bigger name and success in the industry. The industry is constantly changing, Wal-Marts future is unclear and the challenges that they face are uncertain. However, the events and outcomes from the past provide a good indication of what is to come in the future. The main challenges Wal-Mart has faced in the past and present are new competitors entering the industry and current rivals reducing costs and prices through new technology. When new competitors enter the industry, this threatens Wal-Marts potential levels of profits due to a deduction in industry concentration. Newer competitors also try and attract Wal-Marts customers through product differentiation and cheaper product imitations. Current rivals try and take customers away by making use of new
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technology in order to lower their costs and prices to match those of Wal-Mart. These challenges are typical ones that all companies must face in the future. Wal-Mart should prepare itself to meet these challenges as it has done so in the past. Wal-Mart should continue with their cost leadership strategy as it has been so successful throughout the companys history. There is no reason for Wal-Mart to switch from a cost advantage to a differentiation advantage strategy, as the company has the foundations already to achieve low costs and hence low prices. Wal-Marts culture is based upon providing low prices, making the switch is costly and throws away a generation of established culture. The company should focus on improving their current strengths and competitive advantage further. Wal-Mart should continue to invest in information technology and techniques to improve supply chain management. These two are significant to the company establishing low costs to set low prices. Wal-Mart should also look into potential quality suppliers from emerging countries, to help them reduce costs. Lastly, Wal-Mart should be confident in the culture they have established throughout these years. They should focus on staff training to increase staff knowledge of the companys cultural values and goals as well as policies. This will enable staff to excel in serving customers, meeting customers needs and providing a better overall shopping experience.
The success of Wal-Mart throughout the years has been achieved through excellent implementation of strategy and not just plain luck. The companys resources and capabilities have been carefully selected to be improved, to give the company a competitive advantage. Wal-Mart should stand by their cost leadership strategy and further improve specific components to extend the gap between its competitors. The company should continue their investments in information technology, improvements in supply chain management and building a stronger social culture through staff training to help prepare for the future.
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Lei Song
APPENDIX: A TABLE 5.3 2000 Net Sales 165.0 2001 191.3 2002 217.8 2003 229.6 2004 256.3 2005 285.2 2006 312.4 2007 345.4 2008 374.5 2009 401.2
Reference: Contemporary Strategy Analysis: Case 5 Wal-Mart Stores Inc, pg 559
Reference: Contemporary Strategy Analysis: Case 5 Wal-Mart Stores Inc, pg 560
