Walmart investment analysis using SWOT framework

Walmart

The decision about whether or not to invest in a company must take a number of different variables into consideration. Wal-Mart is the world's largest retailer. It has sales of $446 billion last year and on that it earned $15.699 billion in profit (MSN Moneycentral, 2012). The company has major operations in the U.S., Canada, China, Mexico and also has some operations in Europe. Wal-Mart is not only the number one discount retailer in the U.S. But is also the number two warehouse store, one of the top five online retailers and it is the largest grocery chain in the country. This paper will analyze Wal-Mart's operations in order to determine whether or not investing in Wal-Mart is a good idea.

SWOT Analysis

One of the best tools for understanding a company is to undertake a SWOT analysis, featuring the strengths and weaknesses on the internal side and opportunities and threats on the external side. No company becomes the world's biggest retailer without having a lot of strengths on which to draw on. The thing that makes Wal-Mart special is the number of strengths that it has and the cohesive manner in which the different strengths support each other. The first such strength lies with the company's size and scope. Wal-Mart competes primarily in the discount retail sector with a cost leadership strategy. Size and scope give Wal-Mart two things: buying power and market saturation. The company sells incredible volumes of goods, which makes it attractive for companies that are also looking to sell large volumes. Wal-Mart uses this leverage, plus information to exert a tremendous amount of bargaining power over buyers. Being able to acquire goods at a low price from suppliers is one of the key success factors for a company with a cost leadership strategy.

Another strength for Wal-Mart is with its finances. The company has executed its strategy so effectively that even though its margins are miniscule it earns high profits and as a result is one of the wealthiest firms in America. Wal-Mart's balance sheet shows that the company has over $8.6 billion in cash (MSN Moneycentral, 2012). This supply of cash allows Wal-Mart to basically undertake any investment that it feels like. With these resources and a mandate to consistently improve efficiency, Wal-Mart is one of the most innovative companies in the retail sector. The company is open to any initiative that will cut costs or improve efficiency. One of the outcomes of this is that it is nimble, able to move quickly on new ideas and technology in order to gain competitive advantage.

A couple of other strengths contribute to Wal-Mart's business excellence. The company has an incredible logistics network. The company's suppliers deliver to its warehouses using in just-in-time model. Wal-Mart then utilizes cross-docking to move the goods out of the warehouse and to the stores as quickly as possible. This system works because of the company's size -- it is doing this with full truckloads. The company tracks its goods using satellite technology and this technology is also used by the company's independent transportation partners as well. This feeds into the vast IT network the company has. An example of the high quality of information that the company taps into is that store managers receive sales figures in real time, allowing them to make merchandising decisions as quickly as they are capable.

A company as successful as Wal-Mart does not have too many weaknesses, but there are some. The company has suffered in terms of its reputation in recent years. Sometimes the knocks are nothing serious, but there have been several instances where residents fought to keep Wal-Mart out of their cities, something that has hurt Wal-Mart's income levels. In addition to being shut out of some markets, Wal-Mart has also struggled with foreign market entry in some cases. While it has succeeded in markets that are similar to the U.S. market, and also in China, Wal-Mart failed when it went to Germany. There appear to be some cultural issues that make Wal-Mart unattractive in some markets and it remains unclear if the company has an answer for those problems. Another weakness that Wal-Mart has is that the company has become highly dependent on China as a critical element in the supply chain. The problem is that China is facing high rates of inflation, especially for labor. It might be a challenge to continue with a cost leadership strategy and China-sourced goods. New suppliers might need to be found in order to maintain cost advantage.

Wal-Mart, despite its size, still has a few good opportunities that it can capitalize on, in addition to the current businesses. One major opportunity lies with geographic expansion. While Wal-Mart has struggled in some countries there are many that the company has not yet entered that would be good candidates for market entry. Major markets like Russia, Brazil, Indian, South Africa and Argentina all hold potential, along with a re-entry in Europe or a stronger presence in Asia. Geographic expansion holds tremendous potential for this company. Additionally, Wal-Mart can make profit gains through increased efficiency. The company has always seen efficiency as an opportunity to improve performance. Its current sustainability drive is generally guided by increased efficiency for the sake of profit.

There is also the possibility that Wal-Mart can expand into new business. The company has traditionally done well when it has entered new businesses. A good example would be when it entered the grocery business. Today, Wal-Mart sells more groceries in the U.S. than any other company. The company has also had success with its entry into pharmaceuticals. For Wal-Mart, there remain opportunities to capture major markets in the U.S. like dental and medical care. These industries have high profit potential, strong demand conditions and in the case of medical are often not run very well and certainly not very efficiently. Adding Wal-Mart management practices could be transformative for these industries and a huge windfall for Wal-Mart.

The external environment contains a lot of threats. The overall health of the economy is a threat that has hurt Wal-Mart in the past. The recession in 2008 was initially seen as beneficial to Wal-Mart because the company was a place where people worried about their next paycheck could stretch their incomes. However, the bad economy eventually suppressed demand enough that even Wal-Mart saw its revenues fall. If recession returned to the U.S. - or any of the company's other markets for that matter -- the company could suffer adverse impacts again.

Another adverse threat to Wal-Mart is that posed by competition. While Wal-Mart is dominant in the discount retail sector, it does not lead two other major sectors. Sam's Club has a market share lower than that of Costco, and while Wal-Mart is a force in online retailing, the market leader is Amazon. The companies that compete against Wal-Mart, including smaller discounters like Target, are also very well-run companies. In Wal-Mart loses its competitive edge for any length of time, it would see its market share diminish quickly. A last threat lies with changing tastes. Wal-Mart meets the needs of American consumers today, but those needs change for any reason, Wal-Mart will need to move quickly to retain customers.

Stakeholders

There are two general types of stakeholders, the internal and the external. Internal stakeholders include management, employees, and shareholders. The shareholders have an interest in ensuring that Wal-Mart continues to be a well-run company that earns profits for them, and increases the value of their equity holdings. Management and the employees both have a stake in the ongoing stake in the company. The employees in particular could be subject to layoffs if the company was to struggle.

The list of external stakeholders is larger. Some of the major external stakeholder groups are the suppliers, the logistics partners, China, the United States (given the company's contribution to the GDP and to the balance of payments), competitors and non-customers. A company as large and ubiquitous as Wal-Mart has significant impact beyond its immediate surroundings. Suppliers often become highly dependent on Wal-Mart because they depend on the volume. They are forced to adopt he same high-volume, low-margin tactic that Wal-Mart utilizes for itself. Logistics partners are another form of suppliers, and their input is critical to maintaining the success of the Wal-Mart inventory system.

Other stakeholders include governments. The company has seen civic governments fight to keep it out of their cities, but Wal-Mart is so large that it affects the broader U.S. economy as well, ranging from balance of payments to the unemployment rate to how much tax the U.S. government collects. Wal-Mart is unique in that it is so large that it actually has a duty of care to the well-being of the country.

In general, Wal-Mart meets the needs of its stakeholders. The company offers low prices to consumers, and it keeps its suppliers in business for the most part. It contributes both employment and tax dollars to the countries in which it operates. Wal-Mart is a very well-run company and they tend to push their suppliers and partners to improve as well. If Wal-Mart does not meet a stakeholder need, it is with the employees. Many Wal-Mart employees earn less than a living wage, they receive paltry benefits and some would say the working conditions and forced enculturation are strong negative factors. That said, there are few complaints from actual Wal-Mart employees.

Overall when considering a company for investment, understanding its operating conditions is important, and in that Wal-Mart is doing well with a number of strengths and very few weaknesses. Wal-Mart is a highly profitable company. Its different strengths all support its business model as well, something that allows them to be uniquely successful.

The investment decision can also reflect how well Wal-Mart meets the needs of its stakeholders. The analysis illustrates that for all of the people complaining about Wal-Mart it actually meets stakeholder needs fairly well. Any company with good growth prospects that understands how to please its key stakeholders would make a good investment. Therefore I feel that Wal-Mart would make a good contribution to the mutual fund. The company is stable and its prospects are generally quite good, and as a result it gets a buy rating.

Works Cited:

MSN Moneycentral. (2012). Wal-Mart Stores. Retrieved November 19, 2012 from http://investing.money.msn.com/investments/stock-income-statement/?symbol=WMT

Wal-Mart 2012 Annual Report. Retrieved November 19, 2012 from http://www.walmartstores.com/sites/annual-report/2012/WalMart_AR.pdf

Salter, C. (2012). Walmart. Fast Company. Retrieved November 19, 2012 from http://www.fastcompany.com/mic/2010/profile/walmart