There are a number of threats that Wal-Mart faces in the external environment. These include intellectual property rights, rising cost of production in China, and the threat that is posed by intense competition in its many spaces.
As Wal-Mart expands its retail footprint in emerging markets, especially China, it must take into account that the intellectual property protections are different in other parts of the world. In China, for example, one of the major competitors is Wu-Mart, where name confusion is not only evident but deliberate. Such knock-offs can not only siphon business away from Wal-Mart, but can also reduce consumer impressions of Wal-Mart as well, particularly if the knock-off is inferior. Other countries that have potentially high growth also have weak intellectual property protections.
Another threat that Wal-Mart has is its dependence on China as a source for its goods. Wal-Mart typically deals with third-party suppliers, but many have outsourced production to China. The problem is that China's costs of production are rising, a function of rapid inflation over the past several years (Liu, Li & Yang, 2008). Wal-Mart will either have to pass these rising costs on to customers, or it will need to seek out production from countries whose cost of production remains low. Complicating this issue is the fact that China has a strong relationship with China, something it may need to unwind slightly in the medium to long-term.
The third threat in the external environment lies with Wal-Mart's competition. While Wal-Mart is the biggest player in discount retailing by far, dwarfing Target, it remains subject to threat because companies like Target are very well-run and any weakness on the part of Wal-Mart will likely result in a decline of market share. The two other major businesses for Wal-Mart are online retailing and warehouse clubs, with Sam's Club. Wal-Mart trails Amazon in online retailing, and that company is the established leader in both brand and technology. While Wal-Mart can combine in-store pick-up and online ordering, it still faces an uphill battle against Amazon's established, leading brand. In the warehouse industry, Sam's Club is the number two competitor behind Costco. Again, it does not have the same brand power as Costco. Arguably, Sam's Club also does not have the same pricing power because it is not run as well. Costco is an incredibly well-run organization that poses an existential threat to Sam's Club because it tends to outperform in markets where they both operate.
Each of these threats should be dealt with in turn. Intellectual property is an ongoing battle, something that Wal-Mart must have an in-house legal team to work on. The company should focus on finding alternatives to China, in the face of rising costs of producing goods there. This search can be worldwide in nature, and Wal-Mart has the luxury of time because all of its competitors face the same situation. Dealing with those competitors is more complicated. Wal-Mart has staked out its competitive position as a cost leader. This works in bricks and mortar retailing, but has not been as effective against Amazon. While Wal-Mart's website is growing, Amazon offers a service element that Wal-Mart cannot match. In addition, Sam's Club has struggled to compete against the high service element and low prices at Costco. Wal-Mart needs to take customer service more seriously, which probably means more training and technology if it wants to keep staff costs down.
Wal-Mart has a number of strengths that it leverages to maintain its leadership of the retailing industry. The first strength lies with its size. Wal-Mart is the largest retailer in the world, and this gives it tremendous bargaining power with suppliers. The result of that bargaining power is that Wal-Mart can offer goods at lower prices than competitors can. While most of the company's major competitors also have strong buying power, Wal-Mart has used its legendary bargaining power as a key selling point with consumers, something that competitors will have difficulty overcoming if they do not match Wal-Mart's bargaining power.
A second key strength is the company's technological capabilities, in particular with respect to supply chain management. Supply chain management is a key strategic advantage for Wal-Mart. It has become a master of logistics, tracking goods throughout its supply chain using advanced technology, and takes every opportunity to reduce the amount of inventory in the supply chain. The company then uses this supply chain efficiency to drive down prices more, creating a source of sustainable competitive advantage. Some competitors, like K-Mart, have tried and failed to emulate Wal-Mart's supply chain efficiency (Ketchen & Hult, 2007).
Another strength that Wal-Mart has is its merchandising expertise. Its logistics excellence allows it to get the right goods to the store at the right price, but Wal-Mart is also talented with respect to merchandising. The company ensures that the most eye-popping deals are highly visible. This reinforces with the customer the idea that Wal-Mart has the lowest prices. The consumer then is less likely to question the prices of other items in the store. After the visit, the lowest prices will often still resonate with the consumer, even if he or she did not buy. This reinforces the idea that shopping at Wal-Mart is the way to acquire the best prices consistently, something that creates brand loyalty.
These strengths can be leveraged to create competitive advantage in the marketplace. The size that Wal-Mart has is something that cannot be replicated by any of its competitors, since Wal-Mart is larger than any of them by far. Using this size to gain economies of scale in all of the company's operations has traditionally been a strength that Wal-Mart has leveraged and it should continue to do so. The same can be said for its technological capabilities -- being a technological leader has long been key to Wal-Mart's success. The company's merchandising is an understated component of its success, but is part of company knowledge and culture, since merchandising is a big part of what made Sam Walton so successful. The company leverages all of these strengths to yield competitive advantage and in the case of the first two that competitive advantage appears to be sustainable.
Wal-Mart's strategy for addressing competitors has always been to offer lower prices. In the online retailing space, Wal-Mart is not the industry leader and must therefore grow by either bringing in new customers or by winning customers from Amazon. While Wal-Mart has a price advantage over Amazon, that has not been sufficient to allow Wal-Mart to win market leadership. Amazon remains the technological leader in online retailing (Willcocks & Plant, 2001). In order to win this marketplace, Wal-Mart must make a few strategic changes. The first is that it needs to capture technological leadership. Amazon protects its leadership with patents, and that means that Wal-Mart must focus on developing its own innovative strategies in order to win online consumers to its stores. More likely, however, is that Wal-Mart must find new customers. It has a massive captive audience of people who shop in its stores, so this is the mostly likely source for new online business. These people can be converted to online shopping in part because of their familiarity and acceptance of Wal-Mart and its brand offerings.
Wal-Mart perform relatively well in a downturn. The company's cost leadership is attractive to consumers who are concerned about their economic health. If anything, Wal-Mart should double down on cost leadership and win more consumers during an economic downturn. That means lowering prices further and promoting the store as a viable option for stretching one's budget while still buying quality goods. Wal-Mart should therefore not change its strategy away from cost leadership, because its strategy helps it during downturns (Palmeri, 2008). Additionally, Wal-Mart has built its entire company around the cost leadership strategy. Making moves to adopt any other sort of strategy will undo that work. Wal-Mart is all in with cost leadership, and should not make any dramatic move in response to a downturn, but rather should reinforce that strategy as much as possible.
Wal-Mart already faces intense competition in the domestic market but it also faces competition from major retailer in overseas markets. In China, not only does it face domestic knock-offs like Wu-Mart, but it faces strong competition from Carrefour, which has a massive presence of hypermarkets in Asia. Wal-Mart should respond to this competition in a few different ways. The first is that Wal-Mart should reinforce through marketing its cost leadership. Part of the reason it succeeds in the United States is not only that its prices are low, but consumers believe Wal-Mart to have the lowest prices. In places where competition from European companies is intense, Wal-Mart needs to reinforce this message strongly. It may not have first-mover advantage in some overseas markets, but it also started business the same year as Target and K-Mart -- Wal-Mart has emerged victorious in the past without the benefit of first-mover advantage.