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Wal-Mart Stores, Inc.: Under Attack Save Money.

Live Better Everyday low prices SOME KEY POINTS Wal-Mart Stores, Inc. was not only the largest retail organization by sales volume in the U.S. in 2006, but also the largest company in the world. As of January 31, 2006, Wal-Mart Stores, Inc. was structured into three business units, Wal-Mart Stores USA, SAMS CLUB, and Wal-Mart International. The Wal-Mart Stores unit had 3,289 locations and included the companys Supercenters, discount stores, and Neighborhood Markets in the U.S., as well as Walmart.com. The SAMS CLUB unit had 567 locations and included the warehouse membership clubs in the U.S. plus samsclub.com. Wal-Mart International had 2,285 locations in 10 countries. Sales and profits for the year ending January 31, 2006 were a record high $312.4 billion and $11.2 billion, respectively. Of special concern to management was the behavior of the companys stock. Contrary to the upward direction of the firms sales and profits, the price of Wal-Marts stock had fallen from $56.98 in January, 2002 to $46.11 in January, 2006 and to $45.06 in March, 2006. Even though the board of directors had both repurchased stock and continually raised dividends, the stock had failed to respond. The case ends with CEO Lee Scott seeking an expansion program to grow both sales and profits, both at home and abroad. The company also needed a strong program to pre-empt its social critics, instead of always being on the defensive. Scott realized that Wal-Mart could not allow itself to emphasize social over business objectives. CASE OBJECTIVES To discuss the growth and competitive strategies that made Wal-Mart the largest company by sales in the U.S. To analyze Wal-Marts international growth strategies. To identify the impact of the founder upon Wal-Marts corporate culture. To consider the impact of Wal-Marts corporate culture upon management decision making and actions. To conduct a stakeholder analysis of Wal-Marts task environment. To understand the impact of social responsibility on financial performance. To evaluate managements response to increasing stakeholder criticism. To discuss if and how Wal-Mart can sustain its growth strategies and competitive advantage. To discuss the interaction of corporate with country culture. To identify Wal-Marts core and distinctive competencies. To demonstrate the importance of marketing strategy in an established retail organization faced with a dynamic environment. THINGS TO THINK ABOUT On a 5-point scale which retail store offers: (1) lowest price, (2) best quality for the price, (3) best designed stores, (4) best customer service, and (5) best selection of merchandise. (e.g. Kmart, Sears, Wal-Mart, Target, J.C. Penney, local chain, etc.) Think about the importance of marketing strategy in an established retail organization, which was faced with a dynamic environment, had record sales and profit growth, benefited from entrepreneurial leadership, and had a unique expansion strategy. An organization in an accelerated development stage refines its merchandising and operating methods to sustain its growth. KEY QUESTIONS What are the strengths and weaknesses of Wal-Mart? What are the opportunities and threats facing Wal-Mart? What are the strategic factors facing Wal-Mart? Does Wal-Mart have any core competencies? If yes, what are they? Does Wal-Mart have a distinctive competency? If yes, what is it? Discuss the role of international expansion for Wal-Mart as a growth strategy. Discuss Porters industry analysis forces and how each force pertains to Wal-Mart. What was Sam Waltons philosophy of management?

Wal-Mart Stores, Inc.: Under Attack

How important is corporate culture in this company? In what ways does it help the company and in what ways does it hurt the company? Explain why you feel that Wal-Mart was so successful in the retailing industry in the 1980s and 1990s. What is the competitive environment of the retail industry in the 2000s? How is it different from that of the 1990s? Why was Wal-Marts management so successful in the 1990s when so many retailers were in financial trouble? Describe Wal-Marts growth strategies. Will these strategies still be effective in the twenty-first century? Does Wal-Mart face any limits to growth? Why is Wal-Mart facing so much criticism from its stakeholders? This could be a good question to role play by breaking the class into different stakeholder groups and having them present arguments for and against the companys business practices. Evaluate Wal-Marts record of social responsibility and how social responsibility can interact with financial performance. This is a good role play exercise. Divide the class into two main groups: Those that support WalMarts business practices and those that dislike its business practices. Discuss the role of market segmentation in Wal-Marts strategic management.

ANALYSIS OF THE COMPETITIVE ENVIRONMENT By 2006, Wal-Mart, the master of the low cost competitive strategy, was faced with only one other strong U.S. competitor, Target. Target has successfully followed a differentiation competitive strategy to place itself one step above Wal-Mart in terms of quality. To continue its growth in sales, Wal-Marts management was attempting to imitate Targets success in higher margin discretionary goods by improving its image. A danger of this approach could be a blurring of Wal-Marts low price image and increasing pressure on the companys low cost position. DISCUSSION QUESTIONS AND ANSWERS Identify and evaluate the marketing strategies that Wal-Mart pursued to maintain its growth and marketing leadership position. What factors should a firm consider in the development of its marketing strategy? A marketing strategy can be defined as selecting and analyzing a target market (the group of people whom the organizations wants to reach) and creating and maintaining an appropriate marketing mix (product, distribution, promotion, and price) that will satisfy those people. In retailing, this mix is often interpreted to mean financial planning, location, the merchandise buying and handling process, pricing merchandise, promotion, store design and atmosphere and servicing the retail customer. In the development of an appropriate retail mix, management should follow an environmental orientation, which would allow it to adapt to external forces in the environment. The following programs or strategies, which can be considered market-based, are a part of the Wal-Mart retail mix: The development of a human relation/human resource base corporate culture linked to the satisfaction of consumer needs and wants in the marketplace. The team spirit, employees as "associates," training programs, Saturday morning meetings, stock ownership, and profit-sharing programs are part of this plan. Market segmentation/target market positioning strategy of operating a discount store in small communities, offering name-brand merchandise at "everyday low prices" and offering friendly service. Market dominance strategy of first opening a distribution center, dominating a market area with Wal-Mart stores, and then growing by expanding to contiguous areas. Offering a wide variety of general merchandise to the customer in 36 different departments with specialty centers at some locations. Developing a competitive differential advantage by being able to "strike a delicate balance needed to convince [Wal-Mart] prices were low without making people feel that its stores were too cheap." People greeters, paper sacks, warm colors, wide aisles were considered part of this strategy. Liberal refund and exchange policies were part of a "Satisfaction Guaranteed" program. Corporate programs like developing new retail formats like SAMS Clubs and Supercenters, and Neighborhood Markets. Programs to emphasize contemporary social issues like the Buy American Program and Green Marketing. Power-based programs to establish Wal-Mart as a leader in its channel of distribution. Inventory control system which links stores with distribution centers and headquarters staff.

Wal-Mart Stores, Inc.: Under Attack

Is it fair to condemn Wal-Mart as a predator destroying local business and failing to offer a living wage and benefits? As pointed out early in the case, Wal-Mart has been increasingly criticized for the very management practices that had made it so successful. Its low prices, wide selection, and courteous service generated high sales and profits, but its stores tended to drive local mom and pop stores out of business, especially in small towns. The United Food and Commercial Workers union contended that the only reason the company could offer such low prices was that Wal-Mart underpaid its workers and offered them substandard benefits. Wal-Marts almost legendary hard stance with suppliers was being portrayed as an abuse of power. Lawsuits alleging discrimination against women and underage workers operating dangerous machinery, among other examples, added to the firms public relations problem. It appeared that the company had become a lightning rod for any and all criticism against big business. In an article Whats Right about Wal-Mart by Jack and Suzy Welch in the May 1, 2006 Business Week (p. 112), the authors propose a rebuttal to Wal-Marts many critics. They admit that Wal-Marts business model is threatening to its rivals and its purchasing power frightening to suppliers. Nevertheless, they argue that this doesnt make Wal-Mart bad just a big target for critics who refuse to concede how much the company improves lives. For example, no other retailer offered so many good products for so little. The net effect was the Wal-Mart Effect. According to the Welchs, the company did more to hold down household expenses than any social or governmental program. The authors also admitted that Wal-Mart has meant the end for many local stores. They argue, however, that this was caused by local customers choosing to shop at Wal-Mart because low prices meant more to their quality of life than a wave and a smile at the local higher-priced store. This was not a conspiracy, just the free market at work. The arguments against Wal-Mart in favor of small business suggest some underlying issues. Should small businesses deserve a protected monopoly position in their local area? How is this good for society? When small local businesses cant compete on the open market, should they, like the family farm, receive subsidies from the government to protect a valued life style? The Welchs point out that yesteryears local business owners rarely shared the wealth with their employees. Then, as now, employees rarely had life insurance or health benefits and certainly did not receive much in training or large salaries. Even now, how many waiters and waitresses at local restaurants earn more than the minimum wage and have health benefits? Retailing is notorious for being low paid and having poor benefits. In this regard, Wal-Mart is no worse than its competitors It is just a bigger target. Although the Welchs do agree that Wal-Marts market share gives it enormous leverage with suppliers, they argue that the company has not been found to act unethically or unfair just tough. Jack and Suzy Welch conclude by stating that there will be casualties of Wal-Marts success: competitors that go broke and jobs lost. In this way, Wal-Mart is no different from Toyota when it arrived in the U.S. in the 1970s. It also was accused of upsetting the status quo. According to the Welchs: Decades later, most people accept that Toyota simply had a better way of doing business. Its value proposition to consumers was a wake-up call to the auto industry, raising standards and requiring companies that had lost their edge to reinvent themselves and start making better cars for a lot less. SAMPLE STRATEGIC AUDIT CURRENT SITUATION Performance Wal-Mart is largest retailer, discount store chain and company in both U.S. and world measured by sales. Record 2006 sales and earnings. More than 6,100 stores worldwide. 20% of sales from outside U.S. Slowing comparative store sales growth and falling stock price are red flags that growth may be slowing. STRATEGY Current Mission (Not stated; Implied from case)

Wal-Mart Stores, Inc.: Under Attack

To be the number one retailer by providing the customer selection and quality for value given.

Current Objectives (Not stated; Implied from case) To provide customers with what they want, when they want it, and with value. To develop and maintain team spirit with its associates. To continue as largest retailer, discount chain, and company in the U.S. To pursue growth while maintaining growth in sales and profits. To be the very best in the business. To be the largest retailer outside the U.S. To provide customers a clean, pleasant and friendly shopping experience. Current Strategies International horizontal growth strategy via acquisition. U.S. horizontal growth strategy through new store openings, expansion to urban locations, remodeling existing stores, opening new distribution centers. Concentric diversification strategy into new retailing formats in multiple markets. Marketing strategy of market development. Low cost competitive strategy. Economies of scale in supply chain management. Current Policies To sell products that are environmentally friendly (green marketing policy). Satisfaction Guaranteed refund and exchange policy. Everyday low prices. Maintain highest standards of honesty, morality, and business ethics People first HRM policy. Loyalty expected. Continual search to reduce costs. Deal only with top officials of suppliers to ensure price and quality. EXTERNAL ENVIRONMENT Societal Environment Opportunities International expansion by retailers. Consumers switch toward a one-stop shopping center for convenience. Increasing fuel prices: Consumers shop for good value. Outsourcing raises concern to save U.S. jobs by buying American. Environmental (green) issues increasing in importance. Threats Higher oil prices may increase inflation and reduce economic growth globally. Increasing hostility toward big box stores in favor of local businesses. Lack of action by government on health care system. Increasing restrictions on immigrants. Increasing concern with foreign sweatshops of suppliers. Consumers may choose to boycott retailers who outsource to foreign countries. Task Environment Opportunities Kmart & Sears managements distracted by merger. Many retail stores declared bankruptcy. Urban U.S. locations and older suburban shopping malls. Joint venture possibilities in many countries. New retailing formats to fit new market segments.

Wal-Mart Stores, Inc.: Under Attack

South American & Asian countries where not currently located.

Threats Targets success with differentiation strategy could provide scale economies needed to cut prices. Factory outlets in U.S. that offer drastic price reductions. Specialized stores that achieve merchandise dominance in product categories. Discount retailing reaching industry maturity. States requiring firms to increase employee benefits. Slippage of customer ratings of courtesy & friendliness. INTERNAL ENVIRONMENT A. Corporate Structure U.S. Stores are located around a major hub warehouse. Decentralized operational decision making at the stores; centralized strategy choice at the corporate level. Decentralized international store management Corporate Culture The Wal-Mart Way is intense and highly integrated. Based on Middle-American conservative small town values. HRM a high priority. Employees expected to be loyal. Cultural values based on founders values. Not a good fit with new urban locations and other countries cultures. Constant emphasis on cost reduction and customer service. Marketing Strengths Large-scale ad campaigns. Environmentally sound products and American-made products stressed heavily. Wal-Mart well known for Everyday low prices. Strong emphasis on customer. Market development strategy saturates markets. Value = Quantity x Price, recognized by consumers. Core competence of company. Weaknesses Lower sales of discretionary items compared to Target. Low price image restricts opportunity to upgrade offerings and obtain larger margins. Lack of Wal-Mart identity and image in other countries leads to low market share. Finance Strengths Increasing sales easily supports debt. Over 40 years of record sales and profits. Earning per share at record high levels. Return on equity above 20% since 2002. Weaknesses Comparative store sales growth falling since 1999. Asset turnover (sales/total assets) in continuous decline since 2001. Long-term obligations for leases are high ($3.7 billion in 2006 from $2.0 billion in 1996). Return on assets declining. Stock price falling. Long term debt increasing to finance acquisitions.

Wal-Mart Stores, Inc.: Under Attack

Research and Development Wal-Mart pays close attention to societal trends and supply chain technology. Tremendous research of competitors and their strategies in order to learn from their mistakes. Management monitors demographics & preferences of consumers. Operations Strengths Maintains excellent service with discount prices. Excellent up-to-date computerized inventory system. Strategically located distribution centers are a distinctive competency. Large number & size of U.S. stores achieves economies of scale necessary for low cost competitive advantage. Weaknesses Slowing of comparative store sales growth indicates stores may need upgrading or are being located too close to each other. Customer ratings of staff friendliness & courtesy dropped 20% since 1999 now below industry average. Lack of economies of scale in many international locations due to low market share. Acquired foreign stores tend to be too small with limited parking. Human Resource Management Strengths Wall-Mart jobs highly desired, e.g., new Chicago store. Corporate policy dedicated to improve employee involvement and expertise through seminars & training. Not unionized. Loyal employees. Special awards for employee performance. Employees encouraged to ask questions and offer suggestions. Weaknesses Drop in customer rating of staff is a red flag for potential people problems. Poor history of integrating staff of acquired foreign store chains into Wal-Mart. Poor history of promoting women & minorities into management led to law suits. Poor employee benefit package creates resentment. Anti-union stance may antagonize employees & customers especially in other countries. Information Systems Strengths Most sophisticated inventory control system in U.S. retailing - A distinctive competency. Computer links between stores and general offices ensure accurate and timely merchandise replenishment. Weaknesses Not as sophisticated in acquired stores in other countries. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY Maintain Current Strategy (Horizontal Growth): Enter new countries and saturate existing countries with more stores in diverse formats. Internal growth is U.S. and growth by acquisitions in other countries. Pro: Creates a larger market share and even more economies of scale. Already being implemented by top management. Very successful in Canada, Mexico, and South America. Con:

Wal-Mart Stores, Inc.: Under Attack Requires higher debt load. U.S. expansion has already picked low hanging fruit and forces company into hostile and more costly locations in U.S. and world. Established global competitors like Carrefour make easy entry difficult. Poor success rate in Europe and Asia thus far. Growth Through Concentric Diversification (adding a related product/market): Slow international growth and focus on growth in North America. Purchase a U.S. retail chain that does not directly compete or only competes in one area with Wal-Mart stores. One option is a department store chain like May Company with an up-scale image and higher quality goods. A second option is a specialty (category killer) retailer like Toys R Us. A third option would be to create through internal development a new type of store in the U.S. called Wal-Mart UpTown. This store would be a more upscale Wal-Mart and would be designed to fit into urban areas and suburban shopping malls. Pro: Will obtain good locations in shopping malls and downtown areas. Already have excellent experience in largescale, consumer-orientated operations. Additional range of goods could increase economies of scale for both firms. Con: Expensive. Not clear if Wal-Mart can financially acquire or manage another companys large chain. Internal development would take time. Based on European experience, doubtful if Wal-Marts culture would mesh well with a high quality, high cost retail outlet. Stability: Slow Sustainable Growth Maintain current operations and slow, sustainable growth. Emphasize growth in comparative store sales. Place new U.S. stores only in highly desirable locations with support from local communities. Change international strategy to one of internal growth in existing countries. Add new countries only when contiguous with existing stores and when can add to economies of scale. Change objective from sales growth to profit growth. Pro: Not expensive. Sales continue to increase even without new stores. Most U.S. competitors are struggling and would not pose a serious threat. Con: Giving up potential sales growth. U.S. market share could be absorbed by Target, Sears Holdings, or smaller competitors. International growth may be pre-empted by global competitors who create high entry barriers. Recommended Strategy The company is having difficulty with its current acquisitions in Europe and Asia and needs to get its house in order before expanding into other countries. Wal-Mart should slow its international expansion outside North America. Wal-Mart should either acquire another U.S. retail chain with an upscale image or develop internally an upscale set of stores (Wal-Mart Uptown) to expand into U.S. metropolitan areas and compete directly with Target. IMPLEMENTATION Focus future growth on North America (U.S., Canada, & Mexico) Wal-Mart management should form a task force to examine the idea of operating a more upscale chain of discount stores that to use for expansion into urban and suburban locations especially in shopping malls Management needs to consider both the internal development of a Wal-Mart Uptown chain of stores or the purchase of an existing department store chain Expansion into more foreign countries should be put on hold until the International business unit is able to build each countrys sales and market share The set of stores in each country should be examined for growth potential Follow the GE policy of getting rid of any set of stores that dont have the potential of becoming first or second in market share Low performing European stores should be kept only they can gain supply chain economies across the European Union Develop policies, programs, and procedures for managing a more upscale set of stores. EVALUATION AND CONTROL Wal-Mart already is a leader in the industry for control and timeliness.

Wal-Mart Stores, Inc.: Under Attack

The company needs to focus more on increasing net income over sales growth. Develop measures that are appropriate for a higher margin chain of stores Set market share targets for each set of international stores

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