Contemporary Strategy Analysis of Walmart

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Contemporary Strategy Analysis of Walmart

Introduction to the Company

Walmart Incorporated (hereinafter “Walmart”, “Company”) founded in 1962 and incorporated 1969., is an American multinational retail corporation. It operates a vast, extensive and formidable chain of discount stores and hypermarkets, and is currently of the largest retailers on the planet. To be more specific, Walmart holds first place as the biggest company in the world by revenue and the number of employees, as well. Walmart’s headquarters is in Bentonville, Arkansans, and despite its initial efforts to target geographical areas to HQ’s vicinity in the South and Midwest, Walmart has throughout the years expanded not only all over the United States but has entered 27 different countries all around the world.

Walmart, since its very inception, has sought to lead on price while simultaneously differentiating on ease of accessibility and delivering a positive, accommodating and memorable experience. The core of Walmart’s strategic excellence lies not only within their everyday low prices (“EDLP”) cultural mentality but also within their modus operandi toward customers. Namely, according to Sam Walton, the very founder of Walmart himself, “every associate is reminded daily that our customers are why we’re here. We do our best every day to provide the greatest possible level of service to everyone we come in contact with.” Such way of interacting with customers, one which tends to exude mutual respect, undoubtedly represents one of the key differentiating approaches when it comes to its industry peers. Walmart’s vision statement best describes the observable characteristics of this retail giant: “Walmart helps people around the world save money and live better.”

To fulfill such high ambitions postulated in the vision statement, Walmart’s operations are comprised out of three reportable business segments.

Walmart U.S., the largest segment operating across all 50 states
Walmart International, comprising of 27 different countries
Sam’s Club, consisting of membership warehouses

SWOT framework analysis

1. Strengths

As far as Walmart’s strengths go, there’s plenty of material. Not only are they in pristine financial health, with historically stable yet substantial profit margins (5.1% and 5.2% net profit margin for years 2013 and 2014, respectively), but they’ve also achieved operational excellence with the superb use of their own distribution centers, efficient supply chain, and innovative approach toward IT implementation.

2. Weaknesses

Continuing with Walmart’s internal capabilities, albeit on the negative spectrum, we can observe its negative outlook on its employees. Namely, with relatively low pay, high expectations and a stressful environment, the reason why Walmart has been included in multiple labor-related lawsuits is beyond obvious. On top of that, through its past (unsuccessful) endeavors, Walmart has demonstrated an inability to replicate achieved success in domestic market in some other international markets such as Germany.

3. Opportunities

For a company like Walmart, especially in nowadays market landscape, many opportunities arise due to financial stability and sheer company size. Walmart, even though it has already entered international markets, still has an opportunity to exploit the growth of established markets. Additionally, further establishment of supplemental sale channels in the form of online shopping platforms might fuel Walmart’s growth in the future if they can stay competitive.

4. Threats

On the other hand, despite the enormous potential of online retail opportunities, there exist an equivalent threat of e-commerce giants; e.g. Amazon. On top of that, due to developed internationalization, risk of unstable, volatile and fluctuating currency pairs might present a problem which can, however, be minimized with thorough hedging. Finally, certain movements, such as labor unions, or simply governmental legislative measures, in the form of restrictions (monopoly restriction) might present problem in the foreseeable future.

Performance

What one can incredibly quickly realize upon examining Walmart’s performance is that it’s nothing short of stellar. This retail giant’s Return on Equity has ranged from 21% to 24.6% in the previous 12 years which is, as observable from the exhibit below, way higher than Walmart’s respective industry peers, especially on a such a long-term timeframe.

To top it all off, Walmart’s growth hasn’t displayed signs of stopping. Even though it has been growing at steady, but confident pace (app. 5.92% CAGR) which can usually imply detrimental effects to sustainable profitability, Walmart’s ROE has remained somewhat constant.

However, in order to explain such movements, it is necessary to not only consider firm-level resources and capabilities but also evaluate the environment in which Walmart competes in – we will begin with the industry analysis.

As postulated at the beginning, Walmart operates and competes in the retail industry. Based from the case alone, it’s rather difficult to completely asses the attractiveness of the industry as a whole, however, we shall once again consult the differences in ROE benchmark (Exhibit 2.) between Walmart’s closest competitors – Target, Dollar General and Costco, respectively. What is, once again, immediately observable is Walmart’s dominance. More specifically, Walmart’s ROE outperforms its respective peers by roughly 10% in the worst (Dollar General) and almost 100% in the best (Target) possible case. Therefore, once could assume that, instead of complete industry attractiveness, it’s actually Walmart’s resources and capabilities which are the main drivers of Walmart’s success.

In order to examine the complete industry profile, Exhibit 4. displays the adequate framework for an analysis of such nature.

Although concise and somewhat condensed, the attached framework analysis suggests that there has to be an additional factor for Walmart’s individual success – one which isn’t industry related for it implies the industry is highly competitive.

As far as advantages that give Walmart the competitive edge versus its respective competitors on the company level go, they can be observed within a plethora of different key performance indicators.

Walmart is virtually outperforming every competitor (except Costco) on every financial metric both in the terms of (lower) costs and turnover performance. Since we have considered slightly more extensive collection of metrics, and Walmart still comes out on top, we might conclude that Walmart’s very resources and capabilities are responsible for creating a competitive advantage. However, in order to further elaborate the sheer essence of Walmart’s competitive edge, further analysis of Walmart’s principal activities is needed.

Analysis of principal activities

1. Purchasing

What distinguishes Walmart and ultimately gives it elaborate purchasing power is the sheer size of its respective purchasing activities. In other words, Procter & Gamble, Walmart’s largest supplier, accounts for ONLY 3% percent of Walmart’s sales. Once centralized purchasing and Walmart’s involvement into suppliers’ employment policies is taken into account the overall environment intricacies become clearer. On top of that, acting as a technological pioneer, Walmart has introduced electronic data interchange (EDI) by collaborating with its suppliers. Since such actions cut costs, they benefit both parties and undoubtedly aided Walmart in increasing its purchasing power.

2. Distribution and warehousing

Pivotal characteristics which distinguish Walmart’s distribution and warehousing activities from its peers are so called “hub-and-spoke” configurations. Namely, 82% of Walmart’s purchases are shipped to Walmart’s own distribution centers and only later distributed to Walmart transportation vehicles. Such centers, which operate 24/7 and serve between 75 and 100 stores, offer numerous benefits to Walmart:

Truck unloading and reloading is expedited due to cross-docking;
Walmart has complete control of import logistics in international markets since the procurement system purchases directly from overseas suppliers;
Similar to the introduction of EDI with its suppliers, Walmart has also implemented radio frequency identification (RFID) for logistic purposes.

3. In-store operations

Walmart’s in-store operations can be somewhat exhaustively divided into two sections:

Decentralization of store management: Store managers enjoy a higher degree of autonomy when making decisions regarding merchandising and pricing. Such infrastructure allows Walmart’s operational units to be more flexible to local conditions regarding increasing sales and cutting costs.
Customer service: Even though Walmart’s key competition strategy is cost leadership, they also seek to leave a substantial impression to its customers with proactive, personal and preferential treatment. Such a differentiation strategy undoubtedly has a positive influence on the targeted customer base.

4. Marketing and External Relations

Walmart’s key positioning is centered around their slogan: “Everyday Low Prices”. By thoroughly competing with an emphasis on this strategy, they avoid excessive advertising expenditures compared to its rivals (Walmart’s advertising/sales ratio in 2012 was 0,55% while its peers outperformed the ratio by a factor of 3 and/or 6).

5. Human Resource Management

It has been mentioned that Walmart, as one the most fundamental principles of its HRM policy, values proactivity, flexibility and motivation. Their employees are given more responsibilities compared to industry peers which they, in turn, reciprocate by immersing themselves into a responsible modus operandi when interacting with both customers and business operations, as well. On that note, the reason why Walmart’s HRM yields positive results is the fact that 75% of Walmart’s managers are comprised of employees which started as mere hourly employees. This strategy incentivizes advancement through upholding Walmart’s culture and values – “thrift, hard work and friendliness.”

6. Information Technology

Information technology is, rightfully so, an area in which Walmart has not only been a leading pioneer, but also a role model when it comes to the successful implementation of multiple IT solutions to various stages of the supply chain. Walmart has demonstrated its ingenuity with the implementation of EDI with suppliers and RFID for logistics etc. Most of these tools allow real-time inflow/outflow of information which facilitates the decision-making process.

7. Organization and Management

Walmart’s key differentiator is the management style it employs within its organization. As postulated beforehand, unlike other retailers, Walmart managers are often previous hourly employees with highly applicable local knowledge and expertise. They offer flexibility and responsiveness, and additionally also share gathered insights on weekend meetings. Those managers, which rose through the ranks with dedication and hard work now make decisions during the weekend meeting, and upon returning to their local unit they are able to implement new strategies to preserve the competitive advantage and stay relevant with respect to current market needs.

Sustainability

With such a formidable position in the marketplace, one which hasn’t ceased to improve, a logical question arises as to what extent can Walmart sustain its competitive advantage. One way of approaching this question lies in the extent of replicability of Walmart’s principal activities. Since the principal activities which yield the competitive edge have been defined in the previous segment, estimating the possibility of replication presents no difficulty. On that note, virtually all of the activities, especially infrastructural and operational ones, can be easily replicated with enough resources from a particular company. However, while doing so, companies might deteriorate their future growth, and development and lose market share. For example, imitating Walmart’s “hub-and-spoke” systems or IT capabilities might get competitors closer to Walmart’s efficiency, but in the process they might inflict irreparable damage to their pre-existing infrastructure. Other activities, like HRM and purchasing, are more difficult to replicate. HRM is deeply rooted to Walmart culture postulated by Sam Walton himself and virtually all of Walmart’s organizational structure is based on it. While other retail chains prefer to employ people outside of the company, Walmart’s agents have matured, developed and risen through the ranks – Walmart is essentially their home. As far as purchasing goes, it is highly unlikely another company, especially among Walmart’s competitors, reach such tremendous volume.

Challenges and Recommendations

As this retail giant grows in size numerous challenges are bound to emerge. Especially regarding its unique culture and value system. The more Walmart expands outside of it original location, Bentonville, the more it risks diluting the corporate value systems. A potential remedy might present itself in the forms of internal trainings, open communication channels and promoting employees based on merit. Although minimal, Walmart is also exposed to risk of imitation which will most likely arise from so far unpenetrated markets. Walmart needs to keep a close eye on the market situation in unexplored countries and act quickly with either a partial or full acquisition. Additionally, a risk that has already presented itself in the past years is the risk of unionized workers and governmental pressures. Growth might, especially in the following decades, slow down to an extent that might deteriorate profit margins, and in turn, deteriorate the opportunity for advancement, overall motivation and willingness to excel in daily activities. Finally, there always exist a risk of a better competitor or, more specifically, a competitor with a better strategy. Much alike how Walmart seized the market with its superior strategic frameworks, there exist a possibility of a new strategy emerging, one we might not even conceive at this moment, which can inflict a hit on Walmart’s market share. However, given its size, Walmart can surely utilize its increasing disposable cash flows and acquire a stake in such a company – one could say that as long as Walmart upholds its values, it’s too big to fail.