Case Study-AW-Q205 Online Services
Wal-Mart is the number one retailer in the United States. Geographical growth opportunities are shrinking within the boundaries of the United States. The company needs to evaluate multiple options to determine the best strategy to deploy. The challenge is “keeping the world’s biggest retailer on its phenomenal roll and delivering the huge sales and earnings increases that investors had come to expect from Wal-Mart over the years” (Camerius& Hunger, p. 19-30, 2006).
The company’s current strategic plan is to thrive in the following areas
• Low costs, high customer service, and always low prices
• Product mix
• Logistics and supply-chain management
• International markets
• Domestic growth
• Public relations
I have developed multiple strategic alternatives for the company. They are as follows
• Stability – Pause And Proceed: Pause physical growth then proceed with growth domestically and globally
• Growth – Concentration: Concentrated Internet program to target domestic and foreign markets
• Growth – Concentration: Horizontal Growth with International Entry for global geographical internal expansion
The plan deployed must be consistent with the corporate strategy. Per Sam Walton (1918-1992), the company’s founder, “Our goal has always been in our business to be the very best and, along with that, we believe that in order to do that, you’ve got to make a good situation and put the interests of your associates first. If we really do that consistently, they in turn will cause…our business to be successful, which is what we’ve talked about and espoused and practiced” (Camerius& Hunger, p. 19-10, 2006).
1. Wal-Mart’s performance over the past year is still that of a world-leading organization. 2006 was another record year performance for Wal-Mart. Their annual net sales were $312.4 billion for the year ended January 31, 2006. In addition, their net income reached $11.2 billion another record. Their closest domestic competitor, Target, had net sales of $52.6 billion and net income of $2.4 billion in comparison for the same period.
2. They had over 6,100 stores throughout the world. They were expanding their foreign operations in Argentina, Mexico, Brazil, Japan, Coast Rica, El Salvador, Guatemala, Honduras, Nicaragua, and China. They maintain a state-of-the-art logistics and supply-chain to fully support their worldwide operations.
3. However, there were performance issues in some areas. Wal-Mart had difficulty penetrating foreign markets. Their brand is not fully recognized worldwide and the locals were slow to migrate to the new competitor. Additionally, their business and employment practices were increasingly coming under fire domestically. Finally, their stock price did not reflect the expected returns of a world-class organization. Their stock had decreased 9.9% from January 1, 2001 to April 11, 2005, while Target’s stock had increased 49.6% for the same period.
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Early on in Wal-Mart’s development its mission was, “discount department store chain offering a wide variety of general merchandise to the customer.” They later updated their mission to, “everyday low prices.” Customers can count on low prices without cutting coupons or chasing advertisements.
a. To keep the world’s biggest retailer on its phenomenal growth roll and find new areas to continue that growth. It must build on its market share in the domestic and foreign markets.
b. To deliver consistent sales and earnings increases,which investors had come to expect from Wal-Mart over the years. It must locate new areas to continue its profit growth into the future.
c. To continue to deliver low-cost, high customer service, and everyday low prices. The challenge is to maintain its low-cost operational structure, which relies heavily on its logistics and supply-chain management.
d. To anticipate business and employment practice criticisms. It must develop a public relations strategy to address its critics.
a. The domestic strategy contains two parts – the customers and the associates. Give the customer what they want, when they want it, at the low price they expect. Secondly, treat each other with respect and support the foundation of our success.
b. The growth strategy within the U.S.A. featured rapid plans for moving into other areas with stores, supercenters, Sam’s Clubs, and distribution centers.
c. Give support to the U.S.A. by offering products made in America to Americans. They offer products made in the U.S.A. whenever possible in their domestic stores.
d. Leverage their distinctive competence in logistics and supply-chain management technology to maintain its low cost position.
e. The international strategy targets foreign markets by growing organically, acquiring competitors, and strategic alliances. In 2006, Wal-Mart was focusing on China, Japan, and Central America.
a. Cost containment is imperative to maintain their always low prices.
b. Provide continuous improvement programs for associate development.
c. Manage growth through continuous environmental scanning for strategic alliance opportunities in foreign countries and take advantage of the retail industry market conditions in the U.S. and Canada.
A. Board of Directors
1. The Board carries 13 members, three of which were under the guidance of Sam Walton (company founder), and one of which is Sam’s son. In addition, Sam’s other son is also on the board and together the two sons represent the Walton family LLC’s 41% controlling interest.
2. There are a total of nine independent board members, as defined by the New York Stock Exchange. They have diverse backgrounds and represent a broad cross-section of the population. They have three representatives of international markets, including the former Chair and CEO of Coca-Cola.
3. The BOD plays an important role in the strategic decision making processes of Walmart. They are actively involved in reviewing and approving major changes in the direction of the company. They bring many years of experience to a long term focus on growth and market share improvements.
4. The total shares represented by the board and senior officers are less than 1% of the total outstanding shares of Wal-Mart.
1. The current CEO, Lee Scott, has been with Wal-Mart for over 25 years and at the helm since January of 2000. He began with the company as the manager of their truck fleet. He was personally recruited by David Glass, the second CEO.
2. These two, Scott and Glass, represent the only CEOs to run Wal-Mart since Sam Walton stepped down in 1988, due to health issues.
3. The top managers in Walmart are the most active and vocal leaders in the strategic decision making processes of the company. They are responsible for maintaining a diligent environmental scanning capability, recognizing opportunities and trends, and developing strategic alternatives and recommendations to present to the BOD for discussion and approval. Implementing the corporate directional strategies is the responsibility of the CEO as the lead manager of the company. Top managers’ compensation levels are tied to successful implementations of new strategic alternatives.
4. Wal-Mart has a strong associate development training program and accordingly their management team is promoted from within.
External Environment (EFAS Table; see Exhibit 1)
A. Natural Environment
1. Scarcity of natural energy, specifically oil which impacts every facet of Wal-Mart’s operations and its customer base. Increasing fuel prices are partly to blame for the reduction in earnings from 2005 to 2006. Management has pledged to reduce energy usage in its stores by 30% and improve the fuel efficiency of its truck fleet by 25% over the next three years.
2. Protection from pollution for land, water, and air are becoming an increasing concern for Wal-Mart and its customers. This has prompted the development of a “green” marketing program. The program enables customers to get involved and select environmentally friendly products. They have also persuaded their suppliers to reduce their packaging materials. In addition, they have implemented a plastic recycling program.
B. Societal Environment
a. It is a difficult economic time for retailers with uncertainty, lackluster consumer spending, and slow growth worldwide. Many U.S. retailers have either closed their doors or restructured their business (O).
b. The increasing fuel costs could decrease the discretionary spending of consumers worldwide (T).
a. Wal-Mart is a channel commander for many brand-name products. They are the dominant U.S. retail market leader and have a core competency in promoting their service. Their market leadership has come to be known as the “Wal-Mart Effect.” It ensures low prices, wide selections, and quality service (S).
b. Wal-Mart is slow to adjust tactical strategies to foreign local markets. This is working as a bottleneck (constraining) to sales growth. The “Wal-Mart” brand is not yet established worldwide so there is still work to be done in this area (W).
c. They have been hesitant to launch a counter attack against their critics or promote their efforts in local communities, social responsibility, and green marketing. This has a negative effect on the company’s reputation. A company’s reputation represents a competitive advantage and needs to be promoted and protected (W).
d. Wal-Mart is trending towards a different product mix that includes more quality fashionable merchandise and advanced electronic devices (W).
2. Finance (see Exhibits 4 and 5)
a. One metric derived from Wal-Mart Stores, Inc., Annual Report, p. 22, 2006, is a slower inventory growth as compared to net sales growth. Their inventory growth from 2005 to 2006 was 8.2% verse net sales growth of 9.5% for the same period (S).
b. Wal-Mart’s growth year-over-year in same stores sales is slower than that of its main domestic competitor. Their sales growth is 3.4% as compared to Target at 5.6%. This implies that their closest domestic competitor is gaining market share (W).
c. A distinctive factor in Wal-Mart’s performance is their negative net working capital (current liabilities less current assets). Net working capital is the denominator in two of the performance measures monitored by investors. The ratios are inventory to net working capital and net working capital turnover. Wal-Mart maintains a negative net working capital which is an indicator of a very efficient operation (Kennon, 2011). Wal-Mart can capitalize on sales revenue prior to paying for the product because they move their inventory so quickly. Their 2006 inventory to net working capital was -6.4% and the net working capital turnover was -62.5 (S).
3. Research & Development
a. Wal-Mart has a very strong R&D program to develop new products and to develop new manufacturing processes.
b. Wal-Mart keeps ahead of its competition by continually innovating with new products that are designed with producibility and marketability considerations from the beginning of the design cycle.
c. Wal-Mart’s R&D operations as spread world-wide to ensure that a wide variety of thinking and expertise are employed.
a. They have found success in implementing new retail formats including wholesale clubs and supercenters. The clubs offer memberships to purchase low cost merchandise on a cash-and-carry basis, while the supercenters are large combination facilities that offer generalmerchandise and groceries (S).
b. Wal-Mart has developed fundamental benchmarks to gauge their operating performance. There is a focus on cost-cutting, eliminating inefficiencies, and pressure to reduce supplier’s costs while delivering just in time inventory. These practices were honored with the “Retailer of the Century” award from Discount Store News in 1999 (S).
c. Wal-Mart has deployed an inventory control system which is the most sophisticated in the industry. It has automated the entire inventory process, right down to the shelf location. This system is instrumental in detecting sales trends and adjusting market reaction times and has earned them a competitive advantage (S).
d. They also designed and developed computerized distribution centers. This allowed them to open new stores efficiently, which helped to control their low operating costs (S).
5. Human Resources
a. Wal-Mart is the largest private employer in the U.S. Their associate relations are strong. They offer many advantages to their associates including management training, seminars, development, awards, and profit sharing. Their cost for hourly labor compared to its competitors is approximately 20% lower. This is a competitive advantage for Wal-Mart (S).
b. Wal-Mart has been criticized, by many outside forces, for its employment practices. They have been the defendant in multiple legal actions. Their pay and benefits are below other unionized stores. Less than one-half of their employees have health insurance (W).
c. They have been accused of hiring illegal workers in the U.S., poor conditions in supplier’s facilities abroad, and blocking access for workers to unionize (W).
6. Information Systems
a. Wal-Mart created a state-of-the-art logistics and supply-chain management system. This system gives it a distinct competency in this area. They understand the importance of these systems on their ability to contain their costs (S).
b. They took technology one step further and implemented a data warehouse to collect and analyze customer shopping habits. It gave them the knowledge to provide the products customers desired most in each and every store. This technology had never been implemented in the retail industry, which gave them a significant competitive advantage (S).
D. Summary of Internal Factors
1. There are four major areas in the strategic internal environment that Wal-Mart must grapple with in deciding the way ahead for the company. The first two are strengths and the second two are weaknesses.
2. First, Wal-Mart’s core competency in implementing their corporate strategy is a very significant strength to use in the future to shape the marketplace both domestically and internationally. Next, the distinctive competency Wal-Mart possesses in the logistics and supply chain management arena is an exceptional asset to use in the future as Wal-Mart expands its operations domestically and internationally. These two attributes have empowered Wal-Mart’s past success and can be very influential in future success.
3. Wal-Mart doesn’t have too many weaknesses as they are the industry standard across-the-board. But Wal-Mart has not performed very well in its penetration of international markets. The lack of success here is a big detractor for future expansion efforts unless Wal-Mart improves their market penetration strategies and tactics. Finally, Wal-Mart has a slow unresponsive public relations program that has not performed well in preparing for nor thwarting attacks on the Wal-Mart reputation or business practices.
Corporate Directional Strategy
1. The global geographic internal expansion growth strategy concentrates on Wal-Mart’s current services in foreign markets through growth in established operations. It will further leverage its logistics and supply-chain to deliver top quality products for horizontal growth. In addition, it will focus a well developed strategic plan to establish the “Wal-Mart” brand in these markets.
2. The President/CEO will develop, announce, deploy, and support the strategy. The Board of Directors will review the strategy prior to distributing to the SBU Vice Chairmen within 1 month of its full development. The plan will then be distributed to Marketing, Global Procurement, and the President of SBU within 2 weeks of the Chairmen’s review.
Supporting Business Strategy
1. The business strategy to support this growth is the competitive lower cost strategy. Wal-Mart has core competencies in their lower cost strategy. They will continue to use a cooperative strategy with established strategic alliances in its foreign market operations. In addition, new strategic alliances will be forged as appropriate.
2. The Vice Chairman International will review the assemble suppliers and distributors program in Phase II of the strategy. The program is implemented by the EVP Global Procurement. They will work closely with the EVP Logistics, and President/CEO International SBU to identify additional resources, secure contracts (within 1 month of securing locations), and negotiate cooperation with established alliances (revise contracts as necessary within 1 month).
Supporting Functional Strategies
1. Marketing – The Vice Chairman International will review the marketing plan as implemented by the EVP CMO. The EVP CMO will work in conjunction with the EVP Global Procurement, President/CEO International SBU, and SVP Finance to research (45 days), develop (30 days), and deploy the local marketing plan (30 days). The plan focuses on current operations. It creates a customized store product mix and layout for the local market. Allchanges to staffing will be immediately communicated to EVP People. In addition, the advertising will be specially developed for the local market. This is all implemented within Phase I.
Marketing – Phase II, the Vice Chairman International will review the new stores marketing plan as implemented by the EVP CMO. The EVP CMO will work in conjunction with the EVP Global Procurement, President/CEO International SBU, and SVP Finance to research (45 days), develop (30 days), and deploy the local marketing plan (30 days). The plan focuses on new store operations within the 15 countries that Wal-Mart operates currently. It develops a customized store product mix and layout for the local market. All changes to staffing will immediately be communicated to the EVP People. In addition, the advertising will be specially developed for the local market and deployed 30 days prior to each store opening.
2. Finance – Phase I and Phase II, the SVP Finance will implement a plan to secure all required capital to support the marketing and growth plans as determined above. The EVP/CFO will review the plan monthly.
a.Operations (Government) – This part of the plan is complete in Phase I. The EVP Corporate Secretary, accompanied by the President/CEO International SBU will implement the regulatory approval plan. They will complete the following: review requirements and develop timelines for each of the 15 countries where expansion is targeted; complete timeline within 30 days of receipt of requirements; prioritize distribution center groundbreaking based on shortest time to secure approvals; distribute timeline directly to each person involved in implementation or review; and work to meet or outdo each date specified on the timeline. The EVP/CFO and Vice Chairman International will co-review the regulatory approval plan.
b. Operations (Distribution Center) – The locate operations plan begins at the end of Phase I and continues through Phase II. The EVP Realty will identify desired locations in each targeted area based on the timeline identified in the regulatory approval plan. Then prioritize the distribution centergroundbreaking based on shortest time to secure approvals. Then secure locations within 2 weeks after government approvals are received. Open 1 distribution center per country (15) within 5 years. A communication for capital is sent to the SVP Finance upon identification of locations. The EVP Logistics and President/CEO International SBU will work with the EVP Realty to implement this plan. The Vice Chairman International will review the plan on a monthly basis.
c. Operations (Store Operations) – The locate operations plan begins at the end of Phase I and continues through Phase II. The EVP Realty will identify desired locations within proper distances of the distribution center in each targeted area based on theprioritized list from the regulatory approval plan. Open 3 stores per distribution center (45) within 5 years. They will determine the store layout appropriate for the market within 1 week of securing the location. A communication for capital is sent to the SVP Finance upon identification of locations. The EVP Logistics, President/CEO International SBU, and EVP CMO will work with the EVP Realty to implement this plan. The Vice Chairman International will review the plan on a monthly basis.
4. HR – This orientation development plan is contained within Phase II. The EVP People will locate, interview, and hire store managers 6 months prior to scheduled store completion and staff 3 months later. Training of managers and staff will begin 2 months prior to opening. The EVP Risk Management will assist in the implementation of the plan and the Vice Chairman International will review progress monthly.
5. Information Technology – The implement technology action plan is the final tactical strategy in Phase II. The EVP CIO (and President/CEO International SBU) will oversee the installation of the systems per established timelines for the distribution centers and stores. All systems will be fully operational 2 months prior to location opening. The plan will be reviewed monthly by the Vice Chairman International.
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