Wal-Mart's Competitive Environment

Wal-Mart's Competitive Environment

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Case Study #2: Wal-Mart
I. Industry
Wal-Mart’s competitive environment is quite unique. Although Wal-Mart’s primary competition comes from general merchandise retailers, warehouse clubs and supermarket retailers also present competitive pressure. The discount retail industry is substantial in size and is constantly experiencing growth and change. The top competitors compete both nationally and internationally. There is extensive competition on pricing, location, store size, layout and environment, merchandise mix, technology and innovation, and overall image. The market is definitely characterized by economies of scale. Top retailers vertically integrate many functions, such as purchasing, manufacturing, advertising, and shipping. Large scale functions such as these give the top competitors a significant cost advantage over small-scale competition.
In general merchandise retailing, Wal-Mart’s primary competitors are Target and Kmart. Retail superstores such as Circuit City and Bed, Bath, and Beyond, also provide retail competition. A survey found that the majority of respondents favored Wal-Mart over stores like Target and Kmart. Respondents claimed Wal-Mart offered lower prices, better variety and selection, and good quality. The needs of consumers is an important economic feature in all competitive environments. What attributes (price, variety, quality, etc.) prompt buyers to choose one retailer over another is very important in the competitive landscape.
In the warehouse segment, Wal-Mart’s Sam’s Club competes harshly with Costco. Costco has fewer warehouses but greater sales and revenues. Costco customers also shop at Costco more frequently than Sam’s Club customers and, on average, spend more each visit as well. Costco’s dominance may be the result of better innovation. Costco offers luxury items and was the first to sell fresh meat and produce, and gasoline. This is important because innovation is a key factor in assessing competitors in an industry.
Last, Wal-Mart is also in direct competition with large supermarket retailers. Production capacity in the grocery industry is quite populated and Wal-Mart poses a serious threat to many supermarket retailers, both large and small. Kroger, Albertson’s, and Safeway are all finding it very difficult to compete with Wal-Mart’s low prices. Because the industry is so crowded, even the large supermarket retailers are seeking to differentiate themselves in order to stay afloat.
In reference to the Five Forces Model, being the largest retailer in the world, Wal-Mart’s position is strong overall. Rivalry among competitors is fairly weak.

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The market is crowded but Wal-Mart has the lowest costs, prices, profits, and market share. The threat of substitute products is also weak. Wal-Mart exerts a great deal of effort in making sure they are innovative and meeting customer demands. The bargaining power of suppliers is weak as well. For most producers, Wal-Mart would be their largest account. Obviously, they would do what Wal-Mart wanted them to do if they hoped to do business. Likewise, the bargaining power of buyers is also weak. There is a very broad base of customers and a significant demand for low prices. Last, the threat of new entrants is weak. Wal-mart has a scale of operation that is so great, it would take years, maybe even decades, for a new company to be on the same level. Even prominent companies today would have an extremely difficult time matching the costs and prices Wal-Mart provides.

II. Wal-Mart’s Strategy

Offering products at everyday low prices is only one of Wal-Mart’s many strategies. The company value chain helps identify activities associated with how Wal-Mart achieves their many strategies. First, Wal-Mart’s supply chain management is extremely cost effective. For example, Wal-Mart has been known to imitate competition’s successful merchandising concepts. Suggestions from all employees are expected and sometimes rewarded. Another cost-effective method in Wal-Mart’s supply chain management is their ability to track the movement of products through the entire value chain. Whether the product is in shipment, in distribution center inventory, in-store inventory or on the shelf, or at the cash register, Wal-Mart can track it in real time. Their capability in streamlining supplies among stores and suppliers has helped them maintain appropriate inventory and track what sells and what doesn’t.
Operations and distribution strategies have also helped Wal-Mart achieve low prices. Wal-Mart’s strategy has been to plot stores outside of large cities and within 200 miles of existing stores. Clustering stores together in small areas, Wal-Mart relies on word-of-mouth advertising to win over consumers in larger cities. Because stores are close together, distribution costs are below average. Furthermore, Wal-Mart seeks to meet different customers’ needs with four distinct retail options; these include discount stores, supercenters, Sam’s Clubs, and neighborhood markets. Each store concept has a specific range of store size, total employment, and estimated sales.
Wal-Mart spends much less on advertising than does their competition. One way they accomplish this is through the clustering of stores in a relatively small area. Because their stores tend to be grouped together, they are able to spread advertising expenses across a single market, minimizing advertising costs. One of Wal-Mart’s foremost strategies is to provide superior service to customers. Every store has a “greeter” near the entrance to welcome customers, offer them a shopping cart, and direct them toward where their items are located. Rule number eight in Sam Walton’s 10 Rules for Building a Business is to “Exceed our customers’ expectations. If you do, they’ll come back over and over.”
Supportive activities related to Wal-Mart’s strategy are related to the above primary activities. Such activities and/or costs include the technology used in tracking product (operations and distribution), relationships with suppliers, employee training, and incentives and compensation policies. All of these activities have proven to be successful overall as Wal-Mart earned $256 billion in revenues and $9 billion in profits in 2004.

In the SWOT analysis above, I’ve listed the strengths, weaknesses, opportunities, and threats Wal-Mart faces. To elaborate on a few, Wal-Mart has a very powerful strategy but it is also one that is hardly measurable or easy to communicate. Wal-Mart has very strong brand recognition but somewhat of a negative reputation as of now. In many ways, Wal-Mart has great customer service. Still, as in the case of stocking questionable CDs and DVDs, there is room for improvement. As for opportunities, management argues there is plenty of room to expand Wal-Mart to two or three times its current size. This may be an opportunity but if there is that much of the market still available, Wal-Mart will face threats of new competitors. Exploiting new technologies is an opportunity Wal-Mart will likely take advantage of but new regulatory requirements is a definite threat to Wal-Mart’s expansion goals.

The Unweighted Competitive Strength Assessment gives an approximate idea of each company’s competitive advantage. In this assessment, Costco has the best advantage. Wal-Mart is a close second, beating Target, Kmart, and Safeway. All of these data are estimates to use in comparing and contrasting each company. Wal-Mart could use this assessment to see where their strong points are and, more importantly, where their weak points are. We can see from this data that Wal-Mart has a weaker reputation than all of the other companies. This may be an area Wal-Mart may want to work on in order to improve their overall standing.

III. Issues and Recommendations
I feel that Wal-Mart’s most challenging issue involves the public’s resentment. Wal-Mart has wiped out numerous retail establishments (too many to count) and will continue to do so unless stopped. So far, some “big box” opponents have stopped Wal-Mart from specific expansions but Wal-Mart is definitely fighting back. From Wal-Mart’s point of view, I think more focus should be spent on global expansion. If specific areas are so against having a Wal-Mart that they pass laws to stop Wal-Mart from building in their area, I think Wal-Mart should stay away. For example, Wal-Mart would have a terrible time expanding into Oakland. I would assume that with the laws that were passed, a great deal of negative press also took place. The time and effort to get a Wal-Mart built in Oakland may not be worth the trouble. This is one of the reasons I feel Wal-Mart should focus on international expansion. There were 1,355 international Wal-Marts in 2004. I definitely feel that expanding this number sounds like it could be very lucrative.
Another issue facing Wal-Mart is the federal lawsuit regarding sex discrimination. From the numbers quoted in the case study, it sounds as though Wal-Mart is clearly discriminating against females. This is somewhat surprising but will hopefully be fixed. Wal-Mart is very thorough in their strategy, maybe they need to be more thorough and/or detailed in their compensation and incentive policies. Wal-Mart definitely needs to end the discrimination. In order to avoid future discrimination, monitoring of wages and salaries should be established. This is especially true for upper management employees, where females are paid significantly less than males in similar positions.
Last, I feel that the compensation and benefits offered to Wal-Mart employees are somewhat of an issue. If only about 60 percent of employees have health coverage (compared to 72 percent in the retail industry as a whole), I think their benefit package needs to be reevaluated. The case study claims that the reason many employees did not sign up for health coverage is because they obtained it through a member of their household. I’m sure that is the case for some, but not all. Furthermore, Wal-Mart does not pay any health care costs for retirees. I feel that both examples are methods Wal-Mart uses to cut costs and both need to be reconsidered.
Although there are a number of dilemmas in which Wal-Mart must take action, I feel that they are doing extremely well overall. They are the largest corporation in many countries as well as the world overall. They may need to improve their image and work out their legal battles but I don’t think they should feel generally threatened. As Sam Walton said, "Recognize that the road to success includes failing, which is part of the learning process rather than a personal or corporate defect or failing. Always challenge the obvious."
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