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CASE ASSIGNMENT

CEO Lee Scott and Chairman Rob Walton have scheduled a strategic planning session to prepare for the 2007 Wal-Mart Annual Shareholders’ Meeting. You have been invited to join the discussion of key strategic issues and to present a suggested course of action for Wal-Mart's leadership to take during the upcoming fiscal year.

To have a full understanding of the issues facing the company, everyone participating in the meeting has received the planning department's current Situation Analysis. New to the group, you decide to follow the strategic management process model to prepare for the meeting.

  1. Based on the company's external and internal environmental analyses, outline the primary factors impacting Wal-Mart's strategy. Organize these factors by Stakeholder Group to prioritize expectations and identify conflicting pressures on the organization.
  2. Review Wal-Mart's business-level and international strategies and evaluatetheir potential for success, given the strategic inputs outlined above. Determine their strategic fit with the environment.
  3. Based on your complete assessment, present your recommendations for an integrated and coordinated set of commitments and actions which will exploit the company's core competencies, stimulate and sustain growth, strengthen competitive advantage, establish direction for the company, and maximize the value of the firm.

The meeting agenda is outlined below. To be fully prepared for the discussion, be sure that your proposal provides a solution and supports your position for each of these items.

  • How can Wal-Mart Stores and Sam’s Club increase same-store sales?
  • How should the company capture share of middle- and upper-income wallets?
  • Should Wal-Mart Stores fully retreat from fashion-forward merchandising and marketing? Will its neighborhood-store-localization strategy increase sales enough to offset the associated costs? What should it do to make its new three-types-of-customers segmentation strategy work?
  • Should the company spin off Sam’s Club? If not, what should it do to compete more effectively against Costco?
  • Is Wal-Mart expanding the right kind of new stores at the right pace and in the right places? How and where should the company continue to grow internationally? Should Asda buy J. Sainsbury?
  • What will it take to restore the company’s reputation in the United States?
  • Should Lee Scott change Wal-Mart’s course? If so, how?
  • Should Rob Walton replace Lee Scott? If so, when and with whom?

STRATEGIC MANAGEMENT INPUTS

  1. Based on the company's external and internal environmental analyses, outline the primary factors impacting Wal-Mart's strategy. Organize these factors by Stakeholder Group to prioritize expectations and identify conflicting pressures on the organization.

Product Market Stakeholders
Strengths / Weaknesses / Opportunities / Threats
Largest American corporation - size and scale - most stores, revenues, and net income / Same-store sales growth is weak and
expansion growth has slowed, U.S. and abroad / Internet sales and use of growing electronic commerce to spur online sales, even with low-income consumers / Industry-wide trend of low same-store sales growth
International revenue - a constant source of sales and income growth (17.8%) - especially from Asda (in the U.K.) / International stores under-perform domestic stores in revenues per store* / International sales growth - trade barriers continue to lower and technology enables greater access to new markets / Largest percent of sales (65.6%) in slowest growing segment (discount stores growing at only 8.7% past three years)
Supercenters - competitive strength in non-membership discount format / Club store sales growth and membership renewals - customer loyalty is low / Improve club store performance / Success of Costco
Market leadership - number one retailer in 77 of 100 largest general merchandise markets / Apparel segment - even with 12% of the market (and 10% of Wal-Mart sales) - attempts to do better with fashion have failed / Casual fashion retailing - good quality at low price point / Target's competitive performance
Dominant retailer in the South and in mid-sized and small communities / Public image / U.S. population is aging and becoming more diverse, income inequities are increasing / Public image and lost market appeal

*International stores represent 40.6% of Wal-Mart's total number of stores, yet the segment's revenues are only 22.4% of Wal-Mart's total revenues. 59.3% of total stores are Wal-Mart discount stores, and they generate 65.6% of total sales. Even the Sam's Club segment has 8.5% of stores and 12.1% of sales.

Product Market Stakeholders (cont.)
Strengths / Weaknesses / Opportunities / Threats
Large control of specific product segments - dry grocery, non-food grocery, health and beauty aids, general merchandise, and toys / Successful segment categories are consumable products that need to be replaced regularly - promotions for routine and repeat buyer programs to lock buyers into Wal-Mart / Strong competitor performance - urgency to protect market share - Target, Kroger, and Family Dollar are growing revenue faster than Wal-Mart and threatening its dominance
Procurement systems -
Leverage against suppliers, dictate terms and prices / Centralized merchandising decision making - customer contact not factored into decisions / Front-line, customer-driven merchandising / Ability to compete for prime retail locations - some resistance to Wal-Mart's local presence
Technology-driven cost position and supply chain management / Single focus on cost reduction has negatively impacted store image - cleanliness, crowding, associate satisfaction, and service levels / RFID developments to drive costs down further / Pressures for social responsibility, compliance with legal requirements, and government authority can drive up costs and drain management resources
Serving low-income shoppers / Attract middle-income shoppers to improve sales growth
Convenience, price, merchandise diversity, and proliferation of stores - a difficult combination to duplicate
Organizational Stakeholders
Strengths / Weaknesses / Opportunities / Threats
Associate satisfaction levels are low - Union attempts to organize / Ability to attract and retain quality employees
Capital Market Stakeholders
Strengths / Weaknesses / Opportunities / Threats
Strong returns on equity and assets -
EPS and dividends have more than doubled since 2000 / Profit as percent of revenue and return to investors are below par (some improvement over last 3 years, but still weak) / Emphasize results achieved. / Profit margins held down by grocery business, especially in Neighborhood stores
Strong, active Board of Directors - Ownership concentration to monitor managers and coordinate their actions / Stock price is stagnant - Not meeting performance expectations / Tap into the experience and background of board members - vast knowledge resource for leadingthe organization to achieve goals / Shareholder power to shake things up

The parties that are affected by the outcomes of Wal-Mart's performance are outlined below, along with their expectations and the measures of success that influence stakeholder satisfaction.

Product Market Stakeholders. Satisfying the needs of customers, suppliers, host communities, and unions in the product market should receive the company's full attention to define their expectations and meet their measures of success. The summary above establishes that Wal-Mart's product market stakeholders have the greatest stake in the firm's strategies and success.

Customers, as stakeholders, generally demand reliable products at the lowest possible prices. Wal-Mart's customers will ultimately determine if the company succeeds based on satisfaction measures such as product quality, product features, and level of service (including timeliness, courtesy, consistency, convenience, completeness, and accuracy).

With its discount general store concept, and a focus on wide assortment, good quality merchandise, lowest possible prices, guaranteed satisfaction, friendly and knowledgeable service, convenient hours, free parking, and pleasant shopping experience, Wal-Mart is poised to satisfy its customers. The company needs to be sure to measure each of these factors and react to areas that are slipping. In particular, it needs to immediately take steps to improve store image and customer interactions (input and feedback systems) and to reward employees for anticipating and responding to customer needs and expectations.

Supplierstypically seek loyal customers who are willing to pay the highest sustainableprices for theirgoods. Driven by the opportunity to move large volumes of product through the distribution chain, suppliers have acceptedWal-Mart's rigid terms and continuous pressure to reduce coststo support its low price strategy. However, supplier reaction to Wal-Mart's "strong-arming" should be monitored, and Wal-Mart needs to understand the types of actions required by suppliers to meet its demands. Moving production to countries with unsavory employment practices (such as child labor) and conditions, negatively impacting the environment through unsafe waste disposal, or reducing product quality are some of the undesirable outcomes from pushing suppliers beyond their ability to viably produce items. Wal-Mart needs to measure successful relationships with suppliers not by cost alone and minimize the unintended consequences of its relentless quest for lower prices. By partnering more closely with suppliers, Wal-Mart can help them achieve mutually-beneficial goals without the abuse of resources or damage to the environment.

The public and host communities associate the social issues mentioned above with Wal-Mart and view the company's actions as ruthless corporate behavior. Many activists even contend that Wal-Mart is breaking antitrust laws by using its power to micromanage the market through carefully coordinatedmaneuvering of thousands of firms from a position above the market. As a result, anti-Wal-Mart press has risen. The company is charged with “destroying America.” Communities and national interest groups have even begun rejecting the expansion of Wal-Mart stores. Although consumers like low prices, they also want corporate neighbors who respect the local community, are willing to be long-term employers and providers of tax revenue without placing excessive demands on public support services. Wal-Mart's image has suffered dramatically as the public becomes aware of the high cost of low prices. The company is perceived as a greedy corporation, rather than as a champion of the consumer. The company cannot move quickly enough to reverse the damage to its reputation.

Governmentstakeholders are concerned with political issues related to trade, healthcare, the environment, discrimination, worker pay, and general anticorporate sentiment. Wal-Mart’s handling of hazardous waste has prompted local, state, and federal officials to initiate formal action against the company. Legal issues itfaces include environmental violations, child labor law violations, use of illegal immigrants by subcontractors, andclass-action employee lawsuits. The political ramifications for activist and government attention also influence the company's success.

Ongoing damage to its reputation has an increased financial cost to Wal-Mart. Some guess that these issues have cost the company $16 billion in market capitalization and an unknown amount of lost business in each store category or business segment.

Additionally, union groups who are interested in securing jobs and desirable working conditions for employees are at odds with Wal-Mart. Their concerns are aligned with employee considerations, which are discussed in the Organizational Stakeholders section below.

Organizational Stakeholders. Employees expect firms to provide dynamic, stimulating, and rewarding work environments. They are usually satisfied working for a company that is growing and actively developing skills. Workers who learn how to use new knowledge productively are critical to any organization's success. Collectively, the education and skills of the workforce is a competitive weapon that influences the success of strategy implementation. Strategic leaders are charged with fully utilizing human potential and creating organizations where people can grow and learn, while still achieving a common objectiveand nurturing the human spirit.

Human resource policies that dictate wages, health care, fair employment practices, working conditions, staffing levels, and morale directly address the expectations of this stakeholder group.

Again, in its quest for low prices at all costs (productivity, productivity, productivity), Wal-Mart's human resources have been compromised. Associate dissatisfaction not only attracts costly union attention, but ultimately impacts the customer market through low service levels and poor shopping conditions. Associates are the "face" of the company, and interactions with customers are the experiences that define Wal-Mart's image.

Wal-Mart's human resource policies need to continuously address employee issues. Input from experienced associates can provide valuable feedback on their needs. Most importantly, empowered management practices and strategic reward systems that are matched to the goals of the organization will maximize associate effectiveness and achieve the superior retail experience the company is seeking. Again, employee attitudesare passed along to customers and will ultimately determine the company's success at the local level.

Capital Market Stakeholders. Shareholders and lenders expect financial returns that exceed industry performance and the potential returns from alternative investment opportunities. A look at Wal-Mart's financial performance helps to identify measurements that determine the success of Wal-Mart's strategy for capital markets:

  • Stock price - stable, but not increasing in value
  • Earnings per share - up 117% since 2000
  • Dividends - up 235% since 2000
  • Current ratios - less than 1.0 (quick ratio is .25, strongly suggesting the inability to pay current debt without liquidating inventory)
  • Debt to equity ratios - also high, suggesting leverage beyond equity value to fund expansion
  • Sales growth - still growing, but growth rate has slowed in past three years - revenue and income growth are particularly strong internationally
  • Profitability - operating profit margins trending upward, but slowly and net profit margins increased very slightly since 1997, but dipped by 8.3% in 2007

Despite good returns, key strategic challenges facing Wal-Mart are slowing growth rates, tentative margin improvement, and potentially serious leverage issues. The company's capital market is dissatisfied with stock performance, even though their earnings are strong. In addition, it is worth noting that 42% of outstanding shares are held by insiders (41% are held by the Walton holding company and institutional and mutual funds hold 37%.) Inside stockholders are less likely to demand dramatic changes in strategy, whereas institutional stockholders are more attentive to short-term performance measures and push for visible action that will maximize shareholder wealth.

STRATEGIC ACTIONS: STRATEGY FORMULATION

  1. Review Wal-Mart's business-level and international strategies and evaluate their potential for success, given the strategic inputs outlined above. Determine their strategic fit with the environment.

Wal-Mart's worldwide mission is to "save people money so that they can live better." The company strives to provide savings on life's essential items and wants its customers to know that Wal-Mart is the low price leader on everyday items, as well as those products that enhance their lives.

Wal-Mart's relentless core generic strategy of cost leadershipyields an everyday low price position that is the foundationof its business. The cost leadership strategy is an integrated set of actions taken to provide goods and services with features that are acceptable to customers at the lowest cost, relative to that of competitors. Firms using the cost leadership strategy commonly sell standardized goods or services (but with competitive levels of quality) to the industry’s most typical customers. Cost leaders’ goods and services must have competitive levels of quality (and often differentiation in terms of features) that create value for customers.

Similar to most cost leaders, Wal-Mart concentrates on finding ways to lower its costs and "unlock value" relative to its competitors by constantly rethinking how to complete its primary and support activities. The company creates value for customers with a highly efficient and innovative supply-chain management operation. This operation combines tough, low-cost procurement tactics, leading-edge information systems and “rocket-science” logistics. In fact, it has been successful at creating a competitive advantage in terms of logistics, which creates more value when using a cost leadership strategy than when using a differentiation strategy (which is something to keep in mind if the company would ever choose to change its business strategy).

At the extreme, concentrating only on reducing costs can result in unforeseen and harmful consequences. As the environmental analysis above reveals,an overemphasis on cost has had a negative impact on Wal-Mart's product market and organizational stakeholders. This becomes evident when the inroads that competitors have been making in the marketplace are considered. A more balanced measurement of strategic and financial goals is needed to correct this condition (a balanced scorecard).