Wal-Mart faces an industry that is generally challenging, but its strength in the industry results in the industry being favorable. Wal-Mart's success is predicated on excellence execution of key components of the discount retail value chain -- procurement, logistics and merchandising. Wal-Mart has numerous strengths, but as befits the world's largest company it has relatively few weaknesses. In its intensely competitive businesses, Wal-Mart sees many threats, but there are still tremendous opportunities that Wal-Mart can take advantage of. In general, the external environment is favorable for Wal-Mart to continue to use its strengths to capitalize on its opportunities.
Porter's Five Forces. Wal-Mart's industry is intensely competitive, but the five forces work differently on Wal-Mart as an established, dominant player than they would on a new entrant. The five forces are power of suppliers, power of buyers, threat of substitutes, threat of new entrants and intensity of rivalry (QuickMBA.com, 2010). Supplier power is very low for Wal-Mart. The company's high volume allows it to dictate not only prices but other terms to its suppliers. In addition, many suppliers become dependent on Wal-Mart's volumes (Schmitt, 2009). The power of buyers is relatively high however. Wal-Mart depends on high traffic volume in its stores. Buyers have low switching costs and high price sensitivity, so Wal-Mart must continually entice buyers in order to maintain the high traffic volume needed to remain profitable.
There is a moderate threat of substitutes, at least for some customers. Wal-Mart competes as a cost leader, which attracts a wide range of clients. Many customers, however, have the option to shop at higher-end stores and can easily substitute this option for the Wal-Mart experience. During economic downturns, this substitution often works in Wal-Mart's favor, but during boom times the company may customers as they trade up (Iwata, 2008). The threat of new entrants is relatively low. Entering the retail business is easy, but to seriously challenge the likes of Wal-Mart is exceptionally difficult. There are high capital requirements, the need for strong brand identity, there is a steep proprietary learning curve and in the discount industry established firms have absolute cost advantages that put new entrants at a disadvantage. The intensity of rivalry among existing firms is high. Within Wal-Mart's key businesses, there are typically one or two major competitors that serve as direct rivals (Target in general retail, Costco in warehouses, Amazon online). There are high fixed costs in the industry, intermittent overcapacity and relatively low product differences. As well -- and in particular for Wal-Mart's rivals -- there are high corporate stakes in the competition.
The five forces analysis reveals an industry that is largely unfavorable for all but the existing dominant players. For Wal-Mart, the industry is highly favorable. The company may not have much pricing power over buyers, but its high degree of pricing power over suppliers allows it to maintain its margins even during periods of intense competition. Wal-Mart benefits from the high barriers to entry in the industry and in general has been able to deflect the threat of substitutes for the vast majority of its target audience. Put together, Wal-Mart has been able to maintain strong growth and profitability over the long-term, and is favorably positioned within its industries to continue earning profits and growing its operations.
Value Chain Analysis. Wal-Mart's value chain is focused almost entirely on delivering on its cost leadership strategy. This is the case for most of its main competitors as well. The cost leadership strategy relies on two main components -- getting goods from suppliers to the store at a lower price than competitors, and then driving enough volume from those goods to cover the high fixed costs. The top competitor in each of Wal-Mart's two main businesses will be considered in this value chain analysis.
Table 1
Value Chain Analysis
Business Process
Wal-Mart
Target
Costco
Management
Strong
Strong
Strong
R&D
IT, logistics focus
IT, logistics focus
Not a significant focus
HR
Critical at management level
Good
Excellent HR strategy
Procurement
Excellent
Very good
Excellent
Inbound Logistics
Key driver of cost reductions
Excellent
Excellent
Operations
Highly efficient
Highly efficient
Very highly efficient
Outbound Logistics
Excellent merchandising
Very good
Excellent merchandising
Sales
Strong
Strong
Strong
Service
OK
OK
Very good
For firms focused on cost leadership in general retail, positions this strong are only achieved through excellence in both back end tasks (procurement, inbound logistics) and front end task (sales, outbound logistics). All three...
Maintaining limited inventories is critical to these companies, and at Costco the company also has a policy of eliminating accounts receivable and payable as well. The sales function and outbound logistics are critical elements of the strategy, because they drive the volume necessary to derive profits from every low margin sale. Site location is a critical element of outbound logistics and merchandising is critical to increasing the average ticket and to attracting customers to the store. Wal-Mart has an edge over Target in merchandising and inbound logistics, but Target is a strong competitor in most respects. Costco competes even more vigorously, adding a strong service function to excellence in logistics and merchandising.
Integration of Concepts. Wal-Mart's strategic intent is to compete as a cost leader in the general retail industry. The company has three main lines of business -- retail, warehouse stores and online. Its competitive strategy is more or less the same in all three. Where Wal-Mart derives value in its organization is in getting goods cheaply from suppliers and then undercutting its competition at the retail level. High volumes of traffic and sales are essential for the maintenance of this strategy. Indeed, a reinforcing feedback loop is created when high volumes allow the company to win greater economies of scale. This lowers prices further, which in turn drives higher customer volumes. Wal-Mart has effectively worked this feedback loop since its inception.
Wal-Mart's industry is highly competitive, and the firms against which Wal-Mart competes are generally very strong. These firms -- Target, Costco, Amazon and others -- are all at the very good or excellent level in the attributes that firms need to have to succeed in these industries. This creates high barriers to entry for new firms, but also increases the intensity of rivalry for the firms already established in the industry. There are times when these retailers are so dominant in a given market that they function almost as an oligopoly.
Key Takeaways. Wal-Mart is a highly successful company that has become dominant in its industry by excelling at the key success drivers of the industry. Excellence in procurement and logistics supports Wal-Mart's ability to offer low prices, and these low prices drive high volumes. The company has opportunities throughout the world, as its business model and buying power are largely transferable. The intensity of competition that Wal-Mart faces in virtually every market in which it competes has forced it to become a highly effective competitor, but also places constant pressure on the company to execute its strategy.
Stakeholder Identification. There are dozens of stakeholders in Wal-Mart. The most important of these are the customers, the employees, the shareholders, managers, suppliers, communities and regulators. The customers value low cost goods. Employees value jobs, pay and benefits. Shareholders seek returns on their investment. Managers act as agents for the shareholders, but also have jobs, pay, benefits and careers to worry about. Wal-Mart's suppliers typically have strong, complex business relationships with Wal-Mart, but they want to be profitable. Communities want the jobs that Wal-Mart can create and the taxes that it pays. Regulators value the company's ability to operate within the confines of securities law.
General Force Analysis. Wal-Mart is generally immune to business cycles, and even benefits from slumps. Thus while the economic environment provides the general conditions for growth and profitability, it is not essential to the company's success. The social environment impacts Wal-Mart in part because it guides the company's priorities. Wal-Mart's target market is almost everybody, so the company must be responsive to social trends. The recent push for sustainability and enhanced environmental practices at the company largely comes from the customers. Demographics are generally in Wal-Mart's favor, in particular areas of high population and/or income growth create opportunity for Wal-Mart to expand into new markets.
The technological market is important to Wal-Mart as a source of innovation that can help the company to drive down costs further. Wal-Mart relies on technological advances to stay ahead of its competition. The political/legal environment is generally favorable to Wal-Mart at present, as the company depends on good trade relations, particularly with China. Wal-Mart may at times be impacted by labor or environmental laws, but in general those are not a major impediment for Wal-Mart at present.
SWOT. Wal-Mart has a number of strengths that have helped it reach its dominant position. The most critical of these are its buying power, its logistics systems, its merchandising skills, its healthy balance sheet, its geographic diversification, its widely recognized brand, its close relationship with China and its management team. As the largest company in the world, and one that is relatively immune to the business cycle, Wal-Mart has few weaknesses. The company does have a questionable reputation in a number of areas that can turn off some customers. Wal-Mart is dependent on China as a supplier, which…
