Wal-Mart’s Business Strategy in the Real Market

Introduction

Business strategy has been important to the area of business studies for many decades. However, the general idea about strategy is made of many concepts, terminologies, jargons, and scholarly publications. Furthermore, the importance of this small word to business is undeniable. For the very simple reason that all successful and star performing companies have followed a strategic plan in order to achieve their goal. The question that everybody always thinks about is what made the star performing companies like GE, Toyota, and Mitsubishis of the world be on top? How to achieve this depends on strategy of the organization and this is what we will see from the following review of literature on strategy. Even though it is such an important concept, very few people actually know what it is. Therefore, it is important to explain business with the basic concepts of strategy and its applications.

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Real world Business strategy

The instantiation of market structure is a widespread phenomenon. In terms of a quantitative portrayal of market, the four-firm concentration ratio is commonly made use of to describe their nature. This assessment denotes the market share of each of the four most dominating companies in a market in terms of a percentage. Competition in an oligopoly can bring about a wide diversity of varied upshots. Under certain circumstances, the market participants may adopt a restrictive trade approach (collusion, market sharing etc.) to inflate prices and confine production volumes in a similar fashion to that occurring in a monopoly. In cases wherein a formal agreement in relation to such collusion exists, a situation which is known as a cartel arises. Nevertheless, a formal agreement need not exist in terms of the collision occurrence. (Selmer & de Leon, 321-338) Under different circumstances, competition amongst participants in an economy may be cutthroat, with comparatively low costs and high rate of production being the market parameters. This may indirectly be advantageous to the markets as such conditions tend to perfect competition. The investigation into the details of product differentiation in markets reveals that extreme levels of differentiation may arise so as to cope with competitive factors. (Pinheiro and Bates, 167)

A lot of major strategic choices companies make entail discrete decisions like making a decision about the site for a new business facility, deciding on how to position a particular product in the product space, or on provisos stipulated in a service contract. Such decisions are rather intricate and characteristically involve the deliberation over several demands, price, and other competitive issues. (Cooper, 303-325) Analysis of such discrete choices poses a challenge for the reason that they are either influenced or affect the decisions made by other market players. The evaluation of the nature of strategic businesses is founded on game theory. The companies attempt to predict the manner in which their competitors may respond in case they adopt a particular approach in relation to their pricing policy. (Verbeek, 45-48)

As a result of the severe price competitiveness induced by this ‘sticky’ demand curve, companies generally use a non-price competition to facilitate yielding of better revenue figures and greater market share. Such non-price competitive aspects include advertising, greater product differentiation and brand proliferation. (Wauthy, 345-350)

Economic theory to explain the strategy

There are quite a few potential bases for competitive advantage for existing companies as compared to potential competitors. It may be due to the already incurred and stabilized capital and infrastructural costs. New entrants, in contrast, have to invest in capital equipment in addition to accounting for variable costs on market entry. In addition, already existing firms may draw on their leverage so as to compress remunerations and hence reduce their labor expenses as compared with significant labor overheads incurred by new entrants that have to provide competitive compensation packages. (Slack and Lewis, 44)

A contestable economic markets structure facilitates investigation about numerous divisive issues concerning the Wal-Mart’s strategy with respect to retailing markets. Till the very recent past it had been complicated to investigate into such issues thoroughly due to of the composite character of the competitive contestable markets. Nevertheless, latest research techniques have been successful in analyzing the dynamic relations shared by Wal-Mart and other players, not only in the retailing context, but also in the general economic scenario. (Schmidt, 78)

To comprehend how a solitary company like Wal-Mart has an effect on the economy, one has to resort to a counterfactual hypothesis. In this case the hypothesis looks into a scenario where the economy might have operated devoid of any contribution of the firm over a particular time period. This framework must subsequently account for the dynamic modifications that might have been triggered by companies in the nonexistence of Wal-Mart. In this paper we extensively refer to the Global Insight study which made use of the aforementioned hypothesis and employed a general equilibrium framework to model the manner in which the U.S. economy might have operated in case Wal-Mart was nonexistent during the time period ranging from 1985 to 2004. This initiative also takes account of the dynamic modifications that might have ensued in the retailing as well as in the general economic context. The influence of Wal-Mart is implicated through alterations in national productivity, product prices, remunerations, customer purchasing capability, employment rates, and inflation-attuned earning levels. (González-Benito, 87-102)

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An explanation/assessment of the real world strategy

Wal-Mart’s Market Share of the Retailing Industry

Undoubtedly, Wal-Mart has undergone a rapid development and growth phase, gaining a significant share of the retailing markets based in the United States. The Wal-Mart division controls large scaled supermarket procedures across the nation, boasting of a market share of a staggering 20% in the supermarket sector worth $479 billion. Wal-Mart has in addition expanded insistently to penetrate overseas retailing markets as well. Latest joint venture initiatives and takeovers in countries like Brazil, Japan, Central America, U.K and other key countries have helped Wal-Mart emerge as a key market entity in overseas and domestic markets alike. (Bissell, 335)

Price Competition

The findings of The Global Insight research initiative pointed out that the speedy growth of Wal-Mart in the retailing sector was principally the consequence of a fierce price competition. Several prior researches have documented that the firm drastically cut down consumer prices, and the Global Insight study corroborated these assertions.

The effect of Wal-Mart over the duration ranging from 1985 to 2004 was a cumulative drop of 9.1% in terms of food-at-home prices, a 4.2% drop in prices of commodities and goods, and moreover a 3.1% fall in consumer prices on the whole as computed by the Consumer Price Index (CPI). Wal-Mart was successful in assertively cut back on prices on account of dynamic competition. Dynamic competition was triggered by means of high scaled capital investment in product distribution and inventory management expenses, reduced importation prices, and superior productivity of supply chain activities. (Shaked and Sutton, 3-13)

In addition to cost savings on account of capital investments and reduced importation costs, further residual cost savings due to Wal-Mart’s influence on total factor output needs to be mentioned. This rise in total factor productivity is consequential of enhanced technological and prolific approaches of the firm. (Carl & Hal, 229)

In the context of contestability in the retailing sector, it was a possibility that already existent firms had a significant competitive advantage with reference to Wal-Mart’s position in retail sectors during the initial phases of this duration. Nevertheless, the barriers to entry which might have arisen for Wal-Mart were crumpled due to the dynamic competition presented by Wal-Mart. In light of the prevalent market position of Wal-Mart it might be argued that Wal-Mart has of late acquired a status wherein it is able to exercise such market leverage to holdup or put off new entry to the markets. However, in that case Wal-Mart’s influence in cutting down market prices would have been less dynamic since its market share grew over a period of time. In fact, it has been documented that Wal-Mart played a principal part in prices falls all through the aforementioned time period. (Tirole, 28)

Wage Compression

In light of the prevailing status of Wal-Mart in the retailing sector, it may also be argued that Wal-Mart is capable of utilizing the market influence to compress wages. Wage compression might lead to lower labor expenses for Wal-Mart as compared to rivals in retailing. Analysis of a significantly sized sample of Wal-Mart data for workforce wages categorized by organizational position and site in comparison to the remuneration data from the Bureau of Labor Statistics (BLS) revealed that there is practically no substantiation of Wal-Mart paying notably lower wages and their remuneration structure is proportionate with retail sector averages for the employees analyzed.

However, there is a certain section of workers in the retail markets that receive salaries appreciably higher than the compensation paid to other Wal-Mart recruits. This employees section, grocery personnel operating under a union in major cities, has earnings which is 20–40% higher than similar groups of employees working in Wal-Mart. However, the higher salaries for unionized employees translate into inflated prices in those grocery sections. (Bresnahan, 457-482)

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Profit Rates

If Wal-Mart used its market influence to setback or prevent new market entry and increased competition, this would be reflected in superior profit records. As per various statistical data, over the aforementioned time duration Wal-Mart underwent speedy growth in terms of sales and overall income; yet, profit margins on sales have continued to hover around the 3.32–3.59% mark.

As per the contestable markets economic theory, market authority would be manifested in the form of profit rates that are superior to the industry averages. When the profit rates of Wal-Mart are compared with other businesses in the retailing sector the data reveals that the firm’s profit rates are very much similar to that of its market rivals. As compared with its closest challenger, Costco, Wal-Mart’s revenues per share are a little lower, whilst yield rates are comparatively better. Factors like return on equity and pre-tax margin rates are appreciably higher than that of other market players. (Greene, 256)

Recommendation

Once a retailing firm achieves a predominant authority in the market, it starts manipulating a major part of the yields of a lot of its suppliers. Consequently, such firms can at times use more control in terms of products positioning and brand image than even the producer. (Werther & David Chandler, 332) In an oligopoly firms try to take advantage of economies of scale. Big retailers reduce costs by acquiring larger quantities at once. They market and distribute these articles resourcefully to numerous strategically placed outlets and stores to optimize transportation and other overheads. Pure magnitude symbolizes the single largest resource lead which market giants like Wal-Mart have. (Miguel, 311-321) Utilizing scale economies, large retailers usually set prices that cannot be contended with by petite competitors. Thus, most undersized competitors find it hard to cope with large retailers solely on price in an oligopoly. (Kotler, 276) Typically, large retailers deal with a wide range of products. Putting up varied products for sales significantly amplifies store traffic. However, product lines for general commodity retailers like Wal-Mart are not as diversified as compared to their specialized competitors. In the case of general commodity retailers only those products that exhibit substantial sales volume are carried forward, inducing greater levels of economies of scale. (Doraszelski and Draganska, 125-149)

Works Cited

Bissell, B, Resistance Change, Auckland: Ebsco publishing, 2006.

Bresnahan, T.F. “Competition and collusion in the American automobile industry: the 1955 price war”. Journal of Industrial Economics 35.4 (2004): 457-482.

Carl Shapiro, Hal R. Varian. Information rules: a strategic guide to the network economy. Boston, MA: Harvard Business School Press, 1998.

Cooper, Danielle. ‘Understanding multinational organizations in China’. Journal of Organizational Behavior 28.3 (2007): 303-325

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Doraszelski, U. and Draganska, M. “Market segmentation strategies of multiproduct firms”. The Journal of Industrial Economics 54.2 (2008): 125-149.

González-Benito, J. “A review of determinant factors of motivation proactivity” Business Strategy and the Environment 15.2 (2007): 87-102.

Greene, W.H. Econometric Analysis. (5th ed.). Upper Saddle River, NJ: Prentice Hall, 2003.

Kotler, P. Marketing Management: Analysis, Planning and Control. NJ, Englewood Cliffs: Prentice Hall, 1984.

Miguel, Cunha. “Ecocentric management: an update.” Corporate Social Responsibility and Environmental Management 15.6, (2007): 311-321.

Pinheiro, J. and Bates, D. Mixed-Effects Models in S and S-Plus. New York, NY: Springer-Verlag, 2000.

Selmer, Jan & Corinna de Leon. ‘China: Organizational acculturation in foreign subsidiaries’. The International Executive 35.4 (2004): 321-338

Slack, Nigel, and Michael Lewis. Operations Management: Critical Perspectives on Business and Management. London: Routledge, 2003.

Schmidt, S.J. Econometrics. New York: McGraw-Hill, 2005.

Shaked, A. and Sutton, J. “Relaxing price competition through product differentiation”. Review of Economic Studies 49.1 (2006): 3-13.

Tirole, J., The Theory of Industrial Organization. Cambridge, MA: MIT Press, 1989.

Verbeek, M. A Guide to Modern Econometrics. (2nd ed.). NJ: John Wiley & Sons, Hoboken, 2004.

Wauthy, X. “Quality choice in models of vertical differentiation”. Journal of Industrial Economics 44.3 (2007): 345-353.

Werther, William B & David Chandler; 2006; Strategic Corporate Social Responsibility: Stakeholders. New York: SAGE.

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