Strategic Management - Challenges of Walmart - Case Study Example

Strategic Management Strategic management is an area of study which deals with the major emergent and intended initiatives taken by companies by considering available resources of the organization and situation of the external environment (Thompson and Martin, 2005). Strategic management entails developing plans and policies of the organization, its vision, mission and objectives, and allocating resources in order to implement those programs, plans, procedures and policies. Thus strategic management is considered to be an important element for the organizations success. According to Hunger & Wheelen, organizations that have engaged into strategic management practices always have an upper hand over the competitors. Moreover, it is also important for the organizations to formulate appropriate plan that matches with the structure, strategy and environmental condition as this helps to improve the overall performance (Piccolo, 2011). Some of the areas where strategic management plays vital roles are managing functions and processes, managing turbulent business environment, scanning environment, and formulating strategic plans of action for the company. However, the most important task of strategic management is to ensure companies deal effectively with the competition. Competition is one of the major determinants of the failure and success of a firm. It also determines the suitability and aptness of the activities of a firm which contributes towards improving the productivity and performance. Some of the common strategies to deal with competition are cohesive culture, innovation and appropriate implementation. Therefore, competitive strategies can be defined as the plans formulated and implemented by the companies to create a favourable competitive positions for themselves in the market place (Hansen and Wernerfel, 1989). The competitive strategies adopted by the companies also help them to establishing a sustainable and profitable position. However, there are two central questions on the basis of which a company formulate its competitive strategy. The first one is the attractiveness of the industry in terms of long term profitability and the second one is the relative competitive position of the company within the industry (Porter, 2008). Therefore, from this finding it is evident that companies are required to evaluate certain aspects of the business environment before formulating any strategies. As the world is becoming increasingly complex and dynamic, strategic management is getting extensively used by organizations around the world. One of the rationales of using strategic management is to manage both internal and external environment efficiently. Strategic management is a broad area and embraces several concepts and competitive advantage of a firm is one of them. In this context, the generic strategies proposed by Michael E. Porter are of utmost importance. This generic strategy of Porter sheds light on how a company can gain competitive advantage. According to the author, a company should strive hard to gain some kind of advantage over the competitors in the market for ensuring long term sustainability. On the other hand, companies which fail to achieve competitive advantages may struggle for their existence. Hence, it is imperative for every organization to create a favourable market position for them (Evans, Stonehouse and Campbell, 2010). One of the major steps towards the development of competitive strategies of the organizations came with the development of porter’s generic strategies. Michael E. Porter suggested three broad generic strategies by which organizations can gain sustainable competitive advantage. The generic strategies of Porter were developed for the principal intention of ensuring a company pursuing either of these strategies enters and competes successfully within a given industry. The origin of generic strategies dates back to 1980, when Michael E. Porter first described about these strategies in his book Competitive Strategy: Techniques for Analysing Industries and Competitors. His theory was mainly focused on how a company can gain competitive advantage by formulating and implementing certain strategies. One of the major causes of the evolution of generic strategies can be increasing level of competition (Porter, 1980). Michael Porter has pointed out three different strategies by implementing which a company can gain competitive advantage over the rivals. The strategies are cost leadership strategy, differentiation strategy and focus or niche strategy. Apart from the aforementioned strategies, Porter has also identified another strategy, which is also adopted by some companies to gain an upper hand over the competitors. He called this strategy as "Stuck in the Middle" (Mun, 2010), where companies try to adopt all the three aforementioned strategies. The strategies are described below more elaborately: - Figure 1 – Porter’s Generic Strategies (Source: Stonehouse, Campbell, Hamill and Purdie, 2007) Cost Leadership Strategy: - Cost leadership is an idea put forward by Michael E. Porter in the year 1980. Cost leadership is a strategy pursued by organizations to deal effectively with the prevailing competition. In addition it can be also described as plan or tactic to gain competitive advantage. In simple words, cost leadership means “lowest operation cost”. Hence, the company pursuing cost leadership strategy should have the lowest cost of operation within the industry (Stankevičiūtė, Grunda and Bartkus, 2012). The strategy basically involves a company winning market share with the help of low pricing of the products and services and targeting customers who are price sensitive or cost conscious in nature. However, along with winning and maintaining high market share, it is equally important for the company to maintain the desired profitability margin. With low price offerings, sometimes it becomes difficult for the companies to maintain the desired profitability. The only solution to these issues is to reduce the cost of operation. Hence, from this discussion it is evident that, in order to succeed at a low price offering strategy and continuously achieve high return on investment companies should reduce the cost of operation. Some of the most common ways by which a company can reduce its operation cost are achieving a high asset turnover, gaining control over the procurement or supply chain for ensuring low costs and achieving low indirect and direct operating costs. One of the biggest advantages of pursuing cost leadership strategy is that companies are able to generate economic values with the help of low operation cost than the competitors. For example, Walmart has been able to generate high economic values for themselves by pursuing cost leadership strategy (Cascio, 2006). Differentiation Strategy: - Differentiation strategy is another competitive strategy proposed by Porter, which states that a company should differentiate its products and services from the competitors and offer customers with unique and innovative items (Spencer, Joiner and Salmon, 2009). A number of scholars have stated that a company executes differentiation strategy when it seeks to become unique in the market place with its product and service offerings. However, some authors also mentions that differentiation strategies can be pursued if the activities of the company are distinct and unique and are better than the competitors. For example, firms can differentiate their offerings in terms of the characteristics or features of the products, quality of the services, delivery system, channel of distribution etc. However, the only exception is the price offerings, which falls into the category of price leadership. It has been observed that a company which has executed differentiation strategy targets mass market. In addition, a differentiation strategy is mostly suitable for the companies which target customers, who are not enough price sensitive, have specified needs and the market where they are operating is either saturate or intensely competitive. In addition, the firm should also posses’ unique resources and capabilities. Some of the companies which pursue differentiations strategy are Hero Honda, HLL, Perstorp BioProducts Nike athletic shoes, Apple Computer, Asian Paints, and Mercedes-Benz automobiles (cite a source if you get one). One of the biggest advantages of pursuing differentiation strategy is that companies are able to generate economic values by offering the distinctive products and services to the customer. For, example Harley-Davidson has been able to achieve high economic values for themselves by pursuing differentiation strategy. Focus or Niche Strategy: - Focus or Niche strategy is again a competitive strategy where the company principally focuses on a single group of customers and manufactures a differentiated product for that group (George and Jones, 2002). The concept of focus strategy is almost similar to that of the differentiation strategy. The only difference is that in focus strategy, the target group of customer is relatively small and focuses only on a particular segment. A company pursuing focus strategy aims to become popular with that group and tries to gain competitive advantage by satisfying the wants and needs of the niche market segment. This is the reason why this strategy is also known as narrow scope strategy as it concentrates on a narrow market segment. The principal intention of the companies pursuing this strategy is to offer extra benefit and superior value to a particular market. It has been observed that focused strategy is mostly practised by smaller firms, which competes with larger firms in the same market, where the small companies manufacture products for targeting only a certain segment. In addition, it has been also found that the prices of the products or services under this strategy remain high. Some of the companies which are practicing this strategy are Bentley, Roll Royce, and Saga among others. In terms of the generic strategies pursued by the companies, Porter (1985) has stated that the decision of a company to pursue one of the strategies is purely dependent on their internal capabilities and the objectives of the company. Stuck in the middle Strategy - Porter has identified another strategy where he found that companies are using a combination of cost leadership, differentiation and focus strategy. Some business houses try to adopt all three strategies and are trying everything to improve their business. The author has mentioned that a company which pursues a combination of all the aforementioned strategies does not have clear business strategies. Moreover, such strategies tend to create confusion within the organization and increases the operating cost as it is impossible to satisfy the need of every customer segment of the society. The companies which are stuck in the middle are obvious to witness low profitability or loss of market share due to unclear mission, vision and objectives. Blurred corporate culture and a conflicting organizational arrangement are also some common traits of such firms (Nagarajan, 2010). The concept proposed by Porter is equally important in today’s business world also. It has been observed that even nowadays companies around the world rely heavily on the generic strategies proposed by Porter. For example, companies such as Roll Royce, HLL, Saga, Perstorp Bio Products, Bentley, Mercedes-Benz automobiles, Asian Paints, Nike athletic shoes, Hero Honda, Apple Computer, and Walmart pursues generic strategies as proposed by Porter. The 21st century is characterised by immense competition and turbulence in the business environment. The situation is such that a number of companies are facing extreme difficulties in sustaining in the market place. This is the reason why companies are adopting different strategies to ensure long term presence in the market. Companies are now bound to create a favourable market position for themselves so as to ensure higher profitability. Michaels Porter’s generic strategy is one such strategy which is highly accepted even in present business environment. Some authors even believe that the importance of Porter’s generic strategies has been amplified nowadays, compared to what it used to be in the early or late 80s. The reason cited by these authors is the increasing competition within the industry. Moreover, a number of reports from the eminent scholars such as Bordean, Borza, Nistor and Mitra (2010) suggest that the importance ofP generic strategy is equally important in each industry. Their study reflected that the generic strategies stated by Porter are of great importance in the hotel industry. In addition, the application of Porter’s generic strategy can be found in a large number of companies around the world. The study has earlier revealed that companies such Roll Royce, HLL, Saga, Perstorp Bio Products, Bentley, Mercedes-Benz automobiles, Asian Paints, Nike athletic shoes, Hero Honda, Apple Computer, and Walmart use the generic strategies proposed by Porter extensively. However, in this study, the case of Walmart will be presented to showcase the application of porter’s generic strategies in the real world. The Application of Porter’s Generic Strategies in Walmart: A Case Study Walmart is a US based multinational retail grocery outlet that runs warehouse and department stores. The company is best known for its low price and large discount offerings. It was founded in the year 1962 by Sam Walton and is currently headquartered at Bentonville, United States. With the passage of time the company has witnessed colossal growth due to its sheer performance. The good performance of the company has been also acknowledged by a number of establishments around the world. For example, the company is the third largest publicly traded corporation of the world and is the biggest private employer of the world. In addition, the company also features in the Fortune Global 500 list of 2012. The company now operates with 8,500 stores and has presence in almost 15 countries of the world. The employee strength of the company is around 2.2 million. Some of the bestsellers of the company include Apparel/footwear specialty, discount store, hypermarket/supercenter/superstore, cash & carry/warehouse club supermarket. It has been also reported that the company has a strong online presence and operates with e-commerce website in 10 different countries. The sales figure of the company in the fiscal year 2013 was $466 billion (Walmart, 2013). Challenges of Walmart In the initial days of operation, the company used to operate with a handful of retail stores. However, with the passage of time the company was able to grow and started operations in different parts of the world. Although the company witnessed growth but it was limited to certain areas. The company was also facing a number of challenges regarding its operation in the market place. The major issue was however related with the intensity of competition. The global retail industry is considered to be one of the competitive industries of the world and players belonging to this industry come up with new initiatives and strategies every day. Therefore every company from the grocery retailing industry is required to bring strategic changes so as to sustain for a longer period of time. In the similar manner Walmart also faced tough competitions from the other grocery retailers such as Kmart, Target Corporation, Kroger, Meijer, ShopKo, Winners, and Giant Tiger. Apart from these direct competitors, the company also faced severe competition from the indirect competitors such as Zara, Toys "R" Us and Best Buy etc. Apart from the issue related to intense competition, the company was also facing some other issues. One such issue was the shift of retailers towards globalization. Prior to the concept of international marketing, companies used to operate only within the home country, but as soon as the trade regulations were relaxed and the concept of globalization came into light several companies of the world started making their presence felt by expanding into other countries apart from their home base. The companies belonging to the retail industry are one of the quickest movers. A number of retailing giants made their presence at different places of the world; however Walmart was late in making their presence in the international arena.. This has also affected the company adversely. The company also lost its market share and the sales volume also decreased to a large extent (Jui, 2011). At the same time, the company was also facing challenges pertaining to its internal environment. Some of the evident ones were controlling labour cost, creating a good image and several other employment related issues such as health care coverage of the employees, job assignments, trainings, promotion, job transfer, and allegation of sex discrimination. However, it is believed that all the aforementioned issues came up due to the core concern which was the company’s poor performance. The root cause for this problem was identified to be intense competition, which forced the company to reconsider its operation as well as entire business strategy (Cascio, 2006). Walmart’s Response to the Challenges The company assessed the situation and found that the only way to surmount those issues was to bring in strategic changes within the organization. The brilliance and determination of Sam Walton has greatly helped the company to prevail over the challenges. His simple idea of selling products that people consume every day, at a little cheaper price than what the competitors offer paid off to a large extent. The founder also stated that “if the company can offer low price all the time, customers will always gather to buy the products” (Cascio, 2006, p.26). Hence the company decided to adopt cost leadership strategy. According to Porter, a company is said to have adopted cost leadership strategy if it has the lowest cost of operation within the industry which in turn helps them to offer the customers with low product price. Walmart also adopted the same strategy, where the company concentrated on reducing its total operation cost and offer low price to the customers. The tagline of the company also reflects the same as it states Save Money. Live Better (Walmart, 2013). In addition, the company is also focused at offering customers greater value for the products. On the basis of its low price offerings, the company has also initiated several other programs to attract more customers. One such initiative is everyday discount, where the company offer discount on every products regularly (Baroto, Abdullah and Wan, 2012). However, the biggest question was how the company succeeded to offer large discounts to the customers and maintained high profitability. A detailed analysis of the company reflected that the principal reasons towards Walmart’s ability to maintain low operation cost was due to the following reasons: - Efficient operations and distribution strategies Buying products at a rock-bottom price Efficient Inventory management The execution of the cost leadership strategy not only helps the company to regain its market share but it went on to become the largest grocery retailer of the world. References Baroto, M. B., Abdullah, M. M. B. and Wan, H. L., 2012. Hybrid strategy: A new strategy for competitive advantage. International Journal of Business and Management, 7 (20), pp. 120-133. Bordean, O. N., Borza, A. I., Nistor, R. L. and Mitra, C. S., 2010. The use of Michael Porter’s generic strategies in the romanian hotel industry. International Journal of Trade, Economics and Finance, 1(2), pp. 173-178. Cascio, W. F., 2006. Decency means more than “Always Low Prices”: A comparison of Costco to Wal-Mart’s Sam’s Club. Academy of Management Perspectives¸ pp. 26 -37. Evans, N., Stonehouse, G. and Campbell, D., 2010. Strategic management for travel and tourism. Burlington: CRC Press. George, J. M., and Jones, G. R., 2002. Understanding and managing organizational behaviour. 3rd Ed. London: Prentice-Hall. Hansen, G. S. and Wernerfel, B., 1989. Determinants of firm performance: The relative importance of economic and organizational factors. Strategic Management Journal, 10 (5), pp. 399-411. Jui, P., 2011. Walmart’s downfall in Germany: A case study. [online] Available at: < http://journalofinternationalmanagement.wordpress.com/2011/05/16/walmarts-downfall-in-germany-a-case-study/> [Accessed 18 March 2013]. Mun, H., 2010. Global business strategy: Asian perspective. New Jersey: World Scientific. Nagarajan, R., 2010. Stuck in the middle’ retailers may soon face extinction. [online] Available at: < http://seekingalpha.com/article/242254-stuck-in-the-middle-retailers-may-soon-face-extinction> [Accessed 18 March 2013]. Piccolo, R. F., 2011. The importance of strategic management. [online] Available at: [Accessed 18 March 2013]. Porter, M. E., 1980. Competitive strategy: Techniques for analyzing industries and competitors. New York: Free Press. Porter, M. E., 2008. Competitive Advantage: Creating and Sustaining Superior Performance. New York: Simon and Schuster. Spencer, X. S. Y., Joiner, T. A. and Salmon, S., 2009. Differentiation strategy, performance measurement systems and organizational performance: evidence from Australia. International Journal of Business, 14(1), pp. 83-103. Stankevičiūtė, E., Grunda, R. and Bartkus, E. V., 2012. Pursuing a cost leadership strategy and business sustainability objectives: Walmart case study. Economics and Management, 17 (3), pp. 1200-1206. Stonehouse, G., Campbell, D., Hamill, J. and Purdie, T., 2007. Global and transnational business: strategy and management. New Jersey: John Wiley & Sons. Thompson, J. L. and Martin, F., 2005. Strategic management: awareness and change. 5th ed. Connecticut: Cengage Learning EMEA. Walmart, 2013. Our Story: Saving people money so they can live better. [online] Available at: < http://corporate.walmart.com/our-story> [Accessed 18 March 2013]. Read More