Wal-Marts Business Strategy Formulation

Project submitted to: Dr. Harsh Wardhan Mishra

Abhinav Jain (10PGHR03)

Acknowledgement

I would like to take this opportunity to extend my gratitude to Prof. Harsh W. Mishra, whose knowledge and experience has served as a continuous source of encouragement and motivation. Without his invaluable support and guidance, this project would not have been possible. I would also like to thank my colleagues, who have supported me at various points with their valuable inputs and suggestions. Last but not the least; I would like to thank my esteemed institute, Management Development Institute, Gurgaon, for providing the entire infrastructure, without which this project would have remained an unfulfilled dream.

Table of Contents

Executive Summary 4 Introduction .5 Wal-Mart philosophy ..6 External Analysis 7 Internal Analysis .9 Strategic Performance 11 Financial Analysis ..12 Strategy Recommendations 14 Conclusion ..14 References ...15

Executive Summary
Sam Walton, a leader with an innovative vision, started his own company and made it into the leader in discount retailing that it is today. Through his savvy, and sometimes unusual, business practices, he and his associates led the company forward for thirty years. Today, four years after his death, the company is still growing steadily. Wal-Mart executives continue to rely on many of the traditional goals and philosophies that Sam's legacy left behind, while simultaneously keeping one step ahead of the everchanging technology and methods of today's fast-paced business environment. The organization has faced, and is still facing, a significant amount of controversy over several different issues; however, none of these have done much more than scrape the exterior of this gigantic operation. The future also looks bright for Wal-Mart, especially if it is able to strike a comfortable balance between increasing its profits and recognizing its social and ethical responsibilities.

Introduction
Wal-Mart Stores, Inc. is an American public corporation that runs a chain of large discount department stores and a chain of warehouse stores. The company was founded by Sam Walton in 1962, incorporated on October 31, 1969, and publicly traded on the New York Stock Exchange in 1972. Wal-Mart, headquartered in Bentonville, Arkansas, is the largest majority private employer and the largest grocery retailer in the United States. Wal-Mart has 8500 stores in 15 countries, with 55 different names. Wal-Mart is more than just the world's largest retailer. It is an economic force, a cultural phenomenon and a lightning rod for controversy. It all started with a simple philosophy from founder Sam Walton: Offer shoppers lower prices than they get anywhere else. That basic strategy has shaped Wal-Mart's culture and driven the company's growth. To get a sense of just how big Wal-Mart is today, consider these facts: Wal-Mart employs 1.6 million people. To give you an idea of just how many people that is, Idaho, the 39th most populous state, is home to 1.4 million people. Wal-Mart had sales of $312.43 billion in its most recent fiscal year, which ended January 31, 2006. By comparison, the second-largest retailer in the country, Home Depot, posted sales of $81.5 billion. Wal-Mart has 6,200 retail outlets. In contrast, Home Depot has 2,040. Why is Wal-Mart so Successful? Is it Good Strategy or Good Strategy Implementation? -- In 1962, when Sam Walton opened the first Wal-Mart store in Rogers, Arkansas, no one could have ever predicted the enormous success this small-town merchant would have. Sam Walton's talent for discount retailing not only made Wal-Mart the world's largest retailer, but also the world's number one retailer in sales. Indeed, Wal-Mart was named 'Retailer of the Decade' by Discount Store News in 1989, and on several occasions has been included in Fortune's list of the '10 most admired corporations.' Even with Walton's death (after a two-year battle with bone cancer) in 1992, Wal-Mart's sales continue to grow significantly. The slogan of the company is Save Money. Live Better Wal-Mart Stores Mission Statement: "Wal-Marts mission is to help people save money so they can live better."

The Wal-Mart Philosophy -- Wal-Mart is successful not only because it makes sound strategic
management decisions, but also for its innovative implementation of those strategic decisions.

Regarded by many as the entrepreneur of the century, Walton had a reputation for caring about his customers, his employees (or 'associates' as he referred to them), and the community. In order to maintain its market position in the discount retail business, Wal-Mart executives continue to adhere to the management guidelines Sam developed. Walton was a man of simple tastes and took a keen interest in people. He believed in three guiding principles: 1. Customer value and service; 2. Partnership with its associates; 3. Community involvement.

The Customer: The word 'always' can be seen in virtually all of Wal-Mart's literature. One of Walton's deepest beliefs was that the customer is always right, and his stores are still driven by this philosophy. When questioned about Wal-Mart's secrets of success, Walton has been quoted as saying, 'It has to do with our desire to exceed our customers' expectations every hour of every day' (Wal-Mart Annual Report, 1994, p. 5).

The Associates: Walton's greatest accomplishment was his ability to empower, enrich, and train his employees (Longo, 1994). He believed in listening to employees and challenging them to come up with ideas and suggestions to make the company better. At each of the Wal-Mart stores, signs are displayed which read, 'Our People Make the Difference.' Associates regularly make suggestions for cutting costs through their 'Yes We Can Sam' program. The sum of the savings generated by the associates actually paid for the construction of a new store in Texas (The story of Wal-Mart, 1995). One of Wal-Mart's goals was to provide its employees with the appropriate tools to do their jobs efficiently. The technology was not used as a means of replacing existing employees, but to provide them with a means to succeed in the retail market (Thompson & Strickland, 1995).

The Community: Wal-Mart's popularity can be linked to its hometown identity. Walton believed that every customer should be greeted upon entering a store, and that each store should be a reflection of the values of its customers and its community. Wal-Mart is involved in many community outreach programs and has launched several national efforts through industrial development grants.

External Analysis
Global Environment

Wal-Mart's success is mainly based on its concentration of a single-business strategy. This strategy has achieved enviable success over the last three decades without relying upon diversification to sustain its growth and competitive advantages. In a sense, Wal-Marts low prices, service, and smile are their leading marketing strategies. However, there is risk in this strategy, because concentration on a singlebusiness strategy is similar to "putting all of a firm's eggs in one industry basket". On the business side, Wal-Mart is the countrys most sophisticated retailer in terms of using information systems. Their crossdocking inventory and transportation services able them to have the goods needed by the consumer at all times.

In order for Wal-Mart to become a major global retailer, they have closely examined and utilized tactics to profit from their many stores. One great tactic is starting free-trade-zone distribution centers, in turn, saving almost $500,000 annually. Another tactic includes their service from when you walk in the store to when you leave. Also, their bread and butter is again the technology they utilize. They can track how much of one item has been sold on any giving day, and if not a hot commodity at one store, they will ship it out to another where it is being sold much faster. Porters Five Force Model analysis on the industry

Threat from new entrant: Medium pressure o o o Grocers could potentially enter into the retail side. Entry barriers are relatively high, as Wal-Mart has an outstanding distribution systems, locations, brand name, and financial capital to fend off competitors. Wal-Mart often has an absolute cost advantage over other competitors.

Rivalry Among Established Companies: Medium Pressure o Currently, there are three main incumbent companies that exist in the same market as Wal-Mart: Sears, K Mart, and Target. Target is the strongest of the three in relation to retail.

o o o

Targets have experienced tremendous growth in their domestic markets and have defined their niche quite effectively. Sears and K-Mart seem to be drifting and have not challenged K-Mart in sometime. Mature industry life cycle.

The Bargaining Power of Buyers: Low pressure o o o The individual buyer has little to no pressure on Wal-Mart. Consumer advocate groups have complained about Wal-Marts pricing techniques. Consumer could shop at a competitor who offers comparable products at comparable prices, but the convenience is lost.

Bargaining Power of Suppliers: Low to Medium pressure o Since Wal-Mart holds so much of the market share, they offer a lot of business to manufacturers and wholesalers. This gives Wal-Mart a lot of power because by Wal-Mart threatening to switch to a different supplier would create a scare tactic to the suppliers. o o Wal-Mart could vertically integrate. Wal-Mart does deal with some large suppliers like Proctor & Gamble, Coca-Cola who has more bargaining power than small suppliers.

Substitute Products: Low pressure o o o When it comes to this market, there are not many substitutes that offer convenience and low pricing. The customers have the choice of going to many specialty stores to get their desired products but are not going to find Wal-Marts low pricing. Online shopping proves another alternative because it is so different and the customer can gain price advantages because the company does not necessarily have to have a brick and mortar store, passing the savings onto the consumer.

Internal Analysis

The various critical success factors that contribute to the success of Wal-Mart are : Flexibility Dependability Cost Speed The focus of Wal-Mart is that cost-cutting can co-exist with a moral center, which operates on the principle that it can be the cheapest place to shop and the best place to work at the same time. A culture based on profit derived, not from the pricing end, but from the cost end of every transaction. The plan, always, has been to drive costs out of the system in the stores, from the manufacturers' profit margins, and from merchandise brokers and other middlemen, all in the service of driving down prices at the retail level.Wal-Mart tried to keep constructions costs and rent at a minimum. For that reason, Wal-Mart continued to house several of their early stores in primitive facilities

SWOT ANALYSIS

Strengths Wal-Mart is a powerful retail brand. It has a reputation for value for money, convenience and a wide range of products all in one store. Wal-Mart has grown substantially over recent years, and has experienced global expansion (for example its purchase of the United Kingdom based retailer ASDA). The company has a core competence involving its use of information technology to support its international logistics system. For example, it can see how individual products are performing country-wide, store-by-store at a glance. IT also supports Wal-Mart's efficient procurement. A focused strategy is in place for human resource management and development. People are key to Wal-Mart's business and it invests time and money in training people, and retaining and developing them.

Weaknesses Wal-Mart is the World's largest grocery retailer and control of its empire, despite its IT advantages, could leave it weak in some areas due to the huge span of control. 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. The company is global, but has has a presence in relatively few countries Worldwide.

Opportunities To take over, merge with, or form strategic alliances with other global retailers, focusing on specific markets such as Europe or the Greater China Region. The stores are currently only trade in a relatively small number of countries. Therefore there are tremendous opportunities for future business in expanding consumer markets, such as China and India. New locations and store types offer Wal-Mart opportunities to exploit market development. They diversified from large super centers, to local and mall-based sites. Opportunities exist for Wal-Mart to continue with its current strategy of large, super centers.

Threats Being number one means that you are the target of competition, locally and globally. Being a global retailer means that you are exposed to political problems in the countries that you operate in. The cost of producing many consumer products tends to have fallen because of lower manufacturing costs. Manufacturing cost has fallen due to outsourcing to low-cost regions of the World. This has lead to price competition, resulting in price deflation in some ranges. Intense price competition is a threat.

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Fig 1: Operations strategy at Wal-Mart

Strategic Performance

Considering the modest beginning of this company four decades ago, nobody, including the company officials expected Wal-Mart to emerge such a dominant player in the retailing industry . Wal-Mart's success story is a classic example of a company, which became successful by rigorously pursuing its core philosophy of cost leadership, right from the day it began operations in 1962. Wal-Mart was founded by an ambitious entrepreneur, Sam Walton (Walton), who figured out early that retailing was a volumedriven business, and his company could achieve success by offering consumers better value for their money. Wal-Mart's growth during the first two decades was propelled primarily by following the strategy of establishing discount stores in smaller towns and capturing significant market share. The company was able to foster its growth in the 1980s by making heavy investments in information technology (IT) to manage its supply chain and by expanding business in bigger metropolitan cities. In the late 1980s, when Wal-Mart felt that the discount stores business was maturing, it ventured into food

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retailing by introducing Supercenters. In the late 1990s, Wal-Mart launched exclusive groceries/drug stores known as "neighborhood markets" in the US. Though Wal-Mart had achieved huge success over the decades, the company drew severe criticism from industry analysts for its strategies that aimed at killing competition. At the speed at which Wal-Mart was growing, analysts feared that the company would soon face an anti-trust suit2 for its monopolistic practices. Christopher Hoyt, president of Scottsdale, an Arizona-based supermarket store, Hoyt & Company, said, "The only thing that could stop Wal-Mart is if the government gets involved, just as it did with Microsoft."

Financial Analysis
In addition, the baby-boomers are reaching their peak earnings years, when financial and personal priorities change. Thus, savings, not spending, will likely take precedence because most baby-boomers are approaching retirement.

Debt Position: Based on Wal-Mart's position in 1994, which was considered a year of expansion for the company, (Wal-Mart added 103 new discount stores, 38 'Supercenters', 163 warehouse clubs, and 94,000 new associates) interest debt increased 52.3%. The cost paid by Wal-Mart to finance property plants and equipment forced the company to increase long term debt by 4.6 times during the period 1991-1995. Long term debt for 1995 is $7.9 billion. If Wal-Mart continues its expansion plans based on more debt acquisition at 1994 levels, the company may not attain forecasted gains by as early as 1998.

Operating Expenses: Operating expenses will be a key strategic issue for Wal-Mart in order to maintain its position in the market. The challenge is how to run more stores with less operating expenses. According to Bill Fields, '. . . the goal is to increase sales per square foot and drive operating costs down yet another notch' (Saporito, 1994, p. 66). Trends indicate that operating expenses have been growing at a rate of 27.7% in recent years. However, Wal-Mart should reap the benefits of its investments in high technology, and be able to operate more stores without increasing its expenses.

Cost of Sales: Cost of sales historically has been equal to the level of sales. If the company continues to take advantage of its buying power, Wal-Mart can expect to lower its cost of sales.

Wal-Mart's future will depend on how well the company manages its expansion plans. For the coming years, the company will need to justify its expansion plans with consistent growth in sales, in order to

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offset the increases in debt interest and operating expenses.

Wal-Mart needs to address two major areas in order to maintain or to capture an even stronger long term business position: 1) Single-business strategy: Wal-Mart's success is mainly based on its concentration of a single-business strategy. This strategy has achieved enviable success over the last three decades without relying upon diversification to sustain its growth and competitive advantages. Given its current position in the industry, Wal-Mart may want to continue its single-business strategy and to push hard to maintain and increase market share. However, there is risk in this strategy, because concentration on a single-business strategy is similar to 'putting all of a firm's eggs in one industry basket' (Thompson & Strickland, 1995, p. 187). In other words, if the retail industry stagnates due to an economic downturn, Wal-Mart might have difficulty achieving past profit performance.

Also, if Wal-Mart continues to follow Sam Walton's vision of expansion, Wal-Mart will reach its peak in the very near future. When it does, its growth will start to slow down and the company will need to turn its strategic attention to diversification for future growth.

2) Social responsibility: Retail stores can compete on several bases: service, price, exclusivity, quality, and fashion. Wal-Mart has been extremely successful in competing in the retail industry by combining service, price, and quality. However, other merchants may object to Wal-Mart's entry into their community. Because of its ability to out-price smaller competitors, Wal-Mart's stores threaten smaller neighborhood stores which can only survive if they offer merchandise or services unavailable anywhere else. This makes it very hard for small businesses, such as 'mom-and-pop' enterprises, to survive. They, therefore, fight to keep Wal-Mart from entering their locales. Numerous studies conducted in different states both support and criticize Wal-Mart. Nevertheless, Wal-Mart did drive local merchants out of business when it opened up stores in the same neighborhood. As a result, more and more rural communities are waging war against Wal-Mart's entrance into their market. Besides protesting and signing petitions to attempt to stop Wal-Mart's entry into their community, the opposition's efforts can even be found on The Internet. Gig Harbor, a small town in Washington, recently started a World Wide Web page entitled 'Us against the Wal.' The town's neighborhood association promised that they 'will fight them [Wal-Mart] tooth and nail' (PNA/Island Aerie Internet Productions, 1995/1996).

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Strategy Recommendation
In order for Wal-Mart to become a major global retailer, they have closely examined and utilized tactics to profit from their many stores. One great tactic is starting free-trade-zone distribution centers, in turn, saving almost $500,000 annually. Another tactic includes their service from when you walk in the store to when you leave. Also, their bread and butter is again the technology they utilize. They can track how much of one item has been sold on any giving day, and if not a hot commodity at one store, they will ship it out to another where it is being sold much faster. Domestically, Wal-Mart is growing through its Superstores. Traditionally, this business is a very lowmargin space, but with Wal-Mart's competitive advantages in distribution and leverage over suppliers, they can make it a big winner. International expansion has been robust and will continue to be an important part of Wal-Mart's future growth opportunities. Certainly the Internet provides a growth avenue as well that will open a new faucet for them to potentially take over an upcoming market.

I really think that the growth opportunities for Wal-Mart are just beginning. Any company that can grow net income to $4.4 billion and yearly sales of $137 billion should make you do a double take. I personally feel that a trillion dollars in sales is not unreasonable.

Conclusion
The ever-changing market presents continuing challenges to retailers. First and foremost, retailers must recognize the strong implications of a 'buyers' market'. Customers are being offered a wide choice of shopping experiences, but no one operation can capture them all. Therefore, it is incumbent upon management to define their target market and direct their energies toward solving that specific market's problems. Technology, demographics, consumer attitudes, and the advent of a global economy are all conspiring to rewrite the rules for success. Success in the next decade will depend upon the level of understanding retailers have about the new values, expectations, and needs of the customer. If Wal-Mart continues its customer-driven culture, it should remain a retail industry leader well into the next century.

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References
Barbaro, Michael. "Wal-Mart Tries to Find Its Customer." New York Times, February 2, 2006. Fishman, Charles. "The Wal-Mart Effect." Penguin Press, 2006. ISBN 1594200769. Goldman, Abigail. "Proud to Be at the Top." Los Angeles Times, November 23, 2003. Home Depot Web Site http://www.homedepot.com Iritani, Evelyn and Nancy Cleeland. "Audit Stance Generates Controversy." Los Angeles Times, November 24, 2003. "Is Wal-Mart Good for America?" PBS Frontline, November 16, 2004. http://www.pbs.org/wgbh/pages/frontline/shows/walmart/view/ Wal-Mart Web Site http://www.walmart.com Saporito, B. (1994, May). And the winner is still . . . Wal-Mart. Fortune, pp. 62-68. Slezak, M. (1993). Seeds of 'environmental store' planted in 1989. Discount Stores Inc., pp. 2527. Stalk, G., Evans, P., Shulman, L. (1992, March-April). Competing on capabilities: the new rules of corporate strategy. Harvard Business Review, pp. 55-70. Thompson, A. A., Jr. & Strickland, A.J. III. (1995). Strategic management concepts and cases (8th ed.). Chicago: Irwin. Trimble, V. H. (1990). Sam Walton: The inside story of America's richest man. New York: Dutton. Vance, S., & Scott, S. (1994). Wal-Mart: a history of Sam Walton's retail phenomenon. New York: Twayne.

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