Wal-Mart’s Low-Cost Provider Strategy

Executive Summary

Wal-Mart employs a low-cost provider strategy. The business model that allows the company to sell the lowest priced products in the market is the main reason why Wal-Mart is the number one business organization in the world. The strategy to become a low-cost provider is not a new concept. There are several companies all over the world that uses the same business model. However, Wal-Mart is one of the few companies that have developed the needed business model, and supply chain management strategies, that enable the company to accomplish this goal (Wal-Mart, 2014).

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Aside from the decision to lower the price of the commodities sold inside every Wal-Mart store, the company’s founder believes that there is a way to drive the prices down even further. As a result, there is no competitor that can match the prices offered by Wal-Mart. (Thompson, Peteraf, Gamble, & Strickland, 2014). The goal to offer everyday low prices was made possible through the astute application of strategies that enables the company to reduce its operating costs. At the same time, the same set of strategies enable Wal-Mart to compel suppliers to lower the cost of production so that the items delivered to Wal-Mart stores are the cheapest in the country. Prices are also lower because of the effective implementation of money saving schemes, such as, the use of Information Systems that enhances the sharing of information between different groups of stakeholders (Thompson, Peteraf, Gamble, & Strickland, 2014).

Wal-Mart is the number one company in the world. It is earning hundreds of billions of dollar per year. However, the company is showing signs of decline, especially if observers will look closely at the phenomenal growth of the company in the past few decades. There are two main reasons for the decline. First, the desire to lower prices using every means possible has created unwanted effects for the company. Second, the high turnover rate of employees makes it harder for the company to reduce operating costs. A high turnover rate means the inability to retain skilled and experienced workers. Without the service of skilled and experienced workers, the quality of the service provided to the customers will be affected. In addition, the company spends more by training new recruits. Thus, the negative effects will pile up, until Wal-Mart will begin to post negative growth in the coming years.

In order to bring back Wal-Mart’s glory days, it is important to develop alternative strategies that will help the company to streamline its business operations, and to take a bigger slice of the market share in the retail industry.

The three alternative strategies will produce the following initiatives: 1) an online shopping facility; 2) an acquisition of a rival company; and 3) the creation of business alliances with companies that are based overseas.

The application of a vertical integration strategy will lead to the creation of an online shopping facility. This means added revenue for the company, because customers who are trying to save gas money will opt to use the online shopping facility to buy goods from Wal-Mart.

The acquisition of a rival business organization on the other hand will immediately increase the number of loyal customers, because the merged companies will enjoy the patronage of their respective clients. At the same time, there is now less pressure to lower the prices of commodities, because there is no need to compete with another company that also employs the low-cost provider strategy.

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An alliance with a business partner overseas can help improve the performance of Wal-Mart in the international scene. There are regions all over the world that are attractive investment targets, but these are hampered by less than ideal bureaucratic red tape. Business alliances can help Wal-Mart enter hard-to-penetrate markets. More importantly there is no need to start from scratch.

A successful implementation of the aforementioned strategies will immediately increase Wal-Mart’s revenue. However, there are several unpredictable variables that can backfire on the company. With regards to vertical integration, and the creation of an online facility, Wal-Mart will have to spend a great deal of money to develop the needed IT infrastructure. In addition, the company has no experience with this type of business feature. The company has to make significant investment not only on the IT infrastructure alone, but also on the feasibility of the whole project.

With regards to the merger and acquisition of a rival company, Wal-Mart is in a disadvantageous position because it has to absorb underperforming assets and bad debts of the acquired company (Kubasek, Brennan, & Browne, 2009). At the same time, Wal-Mart is not certain if it can actually lower the cost of the products since it has no direct influence over their suppliers.

With regards to the creation of business alliances with companies that are based outside the United States, Wal-Mart is again at a disadvantageous position because it has so much to lose and very little to gain from such a partnership. Wal-Mart has to invest in feasibility studies and consultation with experts in order to find out if it is profitable for the company to implement the said strategies.

External Analysis

Wal-Mart is the best in its category because of the successful application of key success factors and competitive capabilities. It has necessary resources, competencies and capabilities. The company’s net sales totaled a staggering $473.1 billion (Fortune 500, 2014). For fiscal year 2014, the company’s sales figures were computed to be 1.6 percent higher than last year. The reason for this success is attributed to the company’s superb supply chain management capabilities (Massengill, 2013).

Aside from the presence of competitive abilities that will make it difficult for other retail companies to compete with Wal-Mart, the company has another major advantage. It is Wal-Mart’s strong balance sheet that enables the company to expand or to implement new strategies, and create higher barriers of entry for other competitors. At the same time, the ability to access surplus funds means that the company can invest in initiatives that could further improve its supply chain capabilities, and lower the prices of commodities.

Without a doubt, Wal-Mart is the undisputed leader in the retail marketing industry. However, changes had to be implemented to sustain the growth of the company (Wal-Mart Stores, 2014). There are opportunities when it comes to establishing Wal-Mart stores overseas. There is also an opportunity to increase revenue by increasing the type of products sold in every Wal-Mart store. By adding additional products, customer experience is enhanced and this can lead to significant improvements to customer satisfaction levels, and customer loyalty.

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Although there are many opportunities for the company to grow and expand to new markets, company executives must be wary of threat coming from competitors. One of the major sources of external threat is online shopping. There is a lower barrier of entry for online stores. At the same time, it is cheaper to buy online, because there is no need to leave the comfort of home in order to buy needed items.

Internal Analysis

Wal-Mart is the number one company in the retail industry. At the same time it is the number one company in the world in terms of revenue. In the list of the world’s biggest companies Wal-Mart sits on top, followed by Exxon Mobil, Chevron, and Berkshire Hathaway (Fortune 500, 2014). This goes to show the extent of the company’s resources and how difficult it is to dislodge Wal-Mart from the number one position in the industry where it belonged.

The company has developed an effective system that enables it to sell goods at the lowest price. As mentioned earlier, the company invested in the use of IT infrastructure that enables it to lower the cost of the business operation. The company was also able to develop a long-term relationship with suppliers; therefore, it is easy for the company to persuade them to develop cost-cutting measures to reduce the cost of operations (Thompson, Peteraf, Gamble, & Strickland, 2014).

Although the company enjoyed positive growth, it must be pointed out that in the present time, Wal-Mart is experiencing decline in performance when compared to its phenomenal growth in the past few decades (Rubin, 2103).

Problem Statement

Compared to Wal-Mart’s revenue in the past years, corporate executives are worried of declining revenue rates. Wal-Mart also suffers from less than stellar performance when it comes to the international market. Therefore, Wal-Mart needs to increase sales in both local and international stores. Aside from the problems in terms of increasing the revenue of the company, Wal-Mart must also focus on its workforce.

Criteria for Evaluating Strategic Alternatives

In order to develop an effective strategic alternative, it is imperative to consider 4 problem areas for the company. First, there is evidence of declining sales in Wal-Mart stores.

Aside from the challenge of improving the performance of local stores, it is also important to find ways on how to improve the profitability of international stores. It is also imperative to enhance the quality of customer service. A high quality service is characterized by the availability of the product that is needed by the customer.

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Aside from the aforementioned problematic areas, company executives must also find ways on how to monitor employee turnover rate (Krishna, Roy, & Bahree, 2012). Without a doubt the company spends unnecessary resources just to control the negative impact of employee turnover (Banjo & Krishna 2013). It is an added burden to the company every time an employee has to resign, or leave the company because the working environment was no longer an attractive place to work.

Three Strategic Alternatives and Evaluation

In order to reduce employee’s turnover rate, the company must find ways on how to increase its revenue in order to enhance the remuneration package for employees (Kaufman, 2003). One of the strategic alternatives that fit into the requirements needed to improve the company’s performance is the use of vertical integration strategies. One of the best examples is the establishment of online shopping facilities. In this particular strategy Wal-Mart is able to increase its market share because it will attract more customers.

The second strategic alternative that Wal-Mart executives must consider is the strategy that is based on mergers and acquisitions. Although Wal-Mart is experiencing decline in sales, the company has access to hundreds of millions of dollars in revenue. Therefore, the company has enough cash reserves to buy a company and initiate a merger. The third strategic alternative is to forge strategic alliances with other business partners outside the United States.

Recommendation and its Implementation

Wal-Mart is known for its aggressive adoption of new technologies, especially when it comes to increasing the efficiency of the business operation. Thus, the same mindset must be present in the proposal to develop online stores. The best IT infrastructure must be made available to the one developing the new approach.

All the influential leaders within the organization must be on board for the implementation of the new strategic move to bolster the performance of Wal-Mart. If all the important personnel are made aware of the project, then, it is easier to change the culture of the company. Furthermore, it is easier to embrace the new system that was in place.

In order to implement a successful merger and acquisition strategy it is important to study the company that Wal-Mart wants to acquire. It is imperative to find out if Wal-Mart will gain more in terms of streamlining the operation, cutting cost, and increasing the market share as loyal customers from the previous business is added to Wal-Mart.

With regards to the need to forge strategic alliances with business partners overseas, leaders must first figure out if the alliance can help increase the value of the company. After a thorough background check on the business partner that will help Wal-Mart increase its presence overseas, corporate leaders must determine how to leverage the resources that were created due to the said alliances.

Limitations and Critiques of Recommendation

Vertical integration that enables the company to establish an online presence is a promising venture into online shopping. There is a high probability of increasing the company’s revenue because this enables Wal-Mart to access certain types of markets that were inaccessible in the past. Consider the impact of not having to leave the comfort of home in order to buy supplies and other needed commodities that are available through Wal-Mart’s extensive product lines.

It is a good idea to develop an online shopping infrastructure for the company. However, there are also pitfalls that company executives must consider before funding this project. First, the company will need the assistance of people with specialized skills to establish the said system. Second, company executives are not familiar with online shopping or online purchase of grocery items. Thus, there is a possibility of not being able to use the system in the most cost-efficient manner. Finally, the establishment of an online shopping facility may prove to be very expensive for the company to finance (Baltzan, 2011).

Mergers and acquisition can be a short-term solution to some of the problems that have plagued Wal-Mart. Declining sales is the result of several factors, and this includes pressure from competitors. Thus, if the company decides to merge with another retail giant, then, Wal-Mart is able to eliminate one competitor.

Mergers and acquisitions seemed to be an immediate solution to a pressing need to increase revenues. However, mergers and acquisition may not be the best alternative solution for the company considering that Wal-Mart was able to lower the cost of its products for several decades even in the face of tough competition. This simply means that corporate executives are able to lower the cost of the items that they are selling even without the help of others. Although it is true that costs can be reduced even further, there is no guarantee that Wal-Mart will be able to successfully merge two companies. It is also difficult to predict whether Wal-Mart is able to absorb the problems that are built into the system or business model of the other company. In most cases, the one initiating the merger has to absorb the debts and bad assets of the other company. From its current position Wal-Mart will find very little incentive to consider mergers and acquisitions.

The same thing can be said of creating alliances with business partners overseas. There is very little incentive for Wal-Mart to enter into a partnership with other companies that are based in other countries. The only exception to this assertion is if there is a need to penetrate a market that has unique rules and regulations so that it is extremely difficult for Wal-Mart to establish a store in that region.

Although the three alternative strategies are fraught with risks, Wal-Mart must find a way to successfully implement these initiatives. The best starting point is to fund feasibility studies and to deploy research teams to find out the impact of the said strategies on Wal-Mart’s future.

References

Baltzan, P 2011, Information systems, McGraw-Hill, New York.

Banjo, S & Krishna, J 2013, ‘Wal-Mart pulls back in India’, Wall Street Journal, p.1.

Fortune 500, 2014, Wal-Mart stores, Web.

Kaufman, B 2003, Industrial relations to human resources and beyond: the evolving process employee relations management, M.E. Sharpe, Inc., New York.

Krishna, J, Roy, R & Bahree, M 2012, ‘Walmart India suspends employees in bribery probe’, The Wall Street Journal, p.3.

Kubasek, N, Brennan, B & Browne, N 2009, The legal environment of business: a critical thinking approach, Pearson-Prentice Hall, New Jersey.

Massengill, R 2013, Wal-Mart war: moral populism in the 21st century, New York University Press, New York.

Rubin, B 2013, ‘Doug McMillon to become Wal-Mart CEO, succeeding Mike Duke’, Wall Street Journal, p.1.

Thompson, A, Peteraf, M, Gamble, J, & Strickland, J, 2014, Crafting and executing strategy: the quest for competitive advantage, concepts and cases, McGrawhill, New York.

Wal-Mart, 2014, Save money: live better, Web.

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