Case Analysis: Wal-Mart Stores, Inc.: Management’s Efforts to Transform the Company Stop
Ongoing Bashing
1
Wal-Mart Stores, Inc.
Jimmy D. Morgan
Business Policy 421OL
Thomas Edison State College
Dr. Lawrence Ness
Case Analysis: Wal-Mart Stores, Inc.: Management’s Efforts to Transform the Company Stop
Ongoing Bashing
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Introduction
Wal-Mart’s journey from its humble beginnings in the 1960s as a discount retailer
to a juggernaut in 2008 is a result of strategic management initiatives. A business
culture has developed in which the management is always alert to solve issues or
problems that arise by initiating rapid but effective initiatives. “This culture has enabled
all stakeholders to contribute in the process of decision making and thus enhance
collaborative efforts that drive the business towards achieving the company’s long and
short term objectives” (Hayden, Lee, & Pereira, 2002, p. 2). This analysis will identify
the issues leading to the current situation at Wal-Mart, Inc., identify its competitive
advantage, examine the strategic efforts to combat Wal-Mart bashing, and make
recommendations on how the company can improve its performance.
An overview of Wal-Mart’s case
Wal-Mart like many other successful corporations is faced with criticism from
individuals, groups, and competitors about its business activities. As Sam Walton (CEO)
states, “This is especially crucial in the future performance of the company” (Thompson,
2008, p. 3). The success of the business is an obstacle in changing the business with
the changing environment as no one can foresee this need including the leadership
team. The criticism is a clear evidence of a changing business environment, which can
deny an organization a better position in the market, if the warnings are ignored. By
initiating several plans within the stores, Wal-Mart has an opportunity to lead in the retail
market in various aspects including ethical and environmentally friendly sourcing.
“Wal-Mart’s strategy encompasses a number of tactics that ensure product
differentiation and cost reduction initiatives” (Hayden, Lee, & Pereira, 2002, p. 1). It
Case Analysis: Wal-Mart Stores, Inc.: Management’s Efforts to Transform the Company Stop
Ongoing Bashing
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focuses on cost-efficient operations, reduced prices, a mix of name-brand and private
merchandise, wide selection, multiple store formats, customer friendly environment,
limited advertising, astute merchandising, customer satisfaction, regulated expansion to
new markets, and entering foreign markets through acquisitions. The firm has pursued a
low-cost leadership strategy in building its customer base by winning their loyalty with
extensive loyalty programs such as discounts. The multiple store formats ensures that
the company meets its customer needs while acquisitions have paved the way for the
company to increase its global market share.
Unfortunately, Wal-Mart is faced with issues that compromise its future. Since
2003, the organization has been subjected to ceaseless criticism from restless
individuals and groups about its cost efficiencies. The critics have raised issues about
labor standards, substandard wages, insufficient medical benefits, irregularities, and
political corruptness. “The organization has been facing legal charges on malpractices,
women discriminations at work, and other incidents that have negatively affected the
company’s public image” (Lal, 2005, p. 4). This in turn has affected not only the
company’s growth rate but its expansion plans as well. Therefore, a major problem that
has always faced Wal-Mart since the start of these issues is how to retain its image in
the face of the criticisms leveled against it.
Analysis: Determining Wal-Mart’s Financial Strength
As depicted in Thompson and Gamble’s case study of Wal-Mart, “Wal-Mart store
enjoys high liquidity ratios and working capital deficits” (p. C-368). The low quick ratios
are a result of Wal-Mart being a retail store and having to maintain inventory levels.
What this really means is most of Wal-Mart revenue is tied up in inventory. This is a
Case Analysis: Wal-Mart Stores, Inc.: Management’s Efforts to Transform the Company Stop
Ongoing Bashing
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good sign because the company enjoys a small turnover ratio, meaning it effectively
manages its inventory. The long-term Debt to Equity ratio is lower than the industry
average showing that the company relies on equity financing more, rather than debt
financing. This means that when and if the Company borrows money, it is mostly for
short-term need; hence, they do not rely on long-term debt to fund their operations.
Wal-Mart’s Return to Equity ratios and Net Profit Margin are within the industry
average. According to Wal-Mart’s Company’s Website, “The organization is profitable
as evidenced by the Price per Earning ratio for year 2007 and 2008” (p. 2). In view of
the fact that this ratio is a measure of investors’ expectation from the company, WalMart proves to be a good investment. The Gross Profit Margin for 2007 and 2008 is
24.4% and 24.365 respectively, and Net Profit Margin for the same duration under
consideration is 3.24% and 3.36 respectively. This indicates that the operating
expenses of the company are very high, however quite normal for a retail industry. Such
companies depend on voluminous sales and lower Net Profit Margins.
The operating cycle is a representation of duration involved in buying raw
materials, processing products, and selling or distributing the products. The cash
conversion cycle is a representation of net interval of time between the collection of
receipts from sales and the payments for different resources used by the company. The
operating cycle equals the sum of the period spent in converting inventory and
receivable conversion period. “The cash conversion cycle equals the operating cycle
minus payable deferral period. Operating Cycle for Wal-Mart has decreased in 2007
and 2008 from 49.52 to 48.34 respectively. Additionally, this indicates an increase in
sales higher than the growth rate” (Wal-Mart, Inc., 2008, p. 3). The two years cash
Case Analysis: Wal-Mart Stores, Inc.: Management’s Efforts to Transform the Company Stop
Ongoing Bashing
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conversion cycle is negative indicating high liquidity indicating that the company is
managing resources efficiently.
From the analysis, it is clear that Wal-Mart represents a good investment
although the return on equity averages that of the retail industry. The belief is that WalMart is a less risky investment, supported by high price earnings ratios and the
expected growth rate that indicates the company’s financial strength. Investors have
faith in Wal-Mart’s operations and management, which is also reflected in the high price
earnings ratio. The company as evidenced by percentage increase in return on equity,
which is coupled with percentage change in dividends per share over the same period,
can easily achieve a steady growth rate. The company also manages its assets
efficiently to provide an improved return on investment indicated by the turnover figures
and working capital management.
Figure 1. 2009/2010 Financial Performance
Income statement
2010
2009
Net sales/revenues
405.05
401.09
Gross profits
100.39
97.03
Operating income
23.95
22.79
Total assets
170.41
163.23
Total liabilities
99.95
98.14
Shareholders’ equity
70.47
65.28
Balance sheet
Case Analysis: Wal-Mart Stores, Inc.: Management’s Efforts to Transform the Company Stop
Ongoing Bashing
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Figure 2.
Key ratios
Company
Industry
Gross margin
24.7
24.9
Net profit margin
3.7
3.6
Debt/equity ratio
0.87
0.78
Current ratio
0.9
1.1
Quick ratio
0.3
0.4
ROE
22.6
20.8
Wal-Mart Resource Strengths and Competencies
Wal-Mart’s success in initiating the cost leadership strategy has greatly been
influenced by its management team starting from the CEO to the store managers. “The
success flowed from Walton’s cheerleading management style, his persistent insistence
on continuous improvement, his ability to inspire the principles and management
philosophies that he preached into the company’s culture, and his habit to associate
with both shoppers and stakeholders” (Thompson, 2008, p. 3). The management team
has also been keen to develop focused plans that ensure that short term as well as long
term goals has been met.
However, the continued success of Wal-Mart has made the managers to become
reluctant in addressing issues in a timely manner evidenced by Scott and other top
executives’ ignorance to the bad publicity and criticism. Notably, they concentrated on
running the business until company’s sales growth decreased and expansion plans
were blocked. As Lal (2005) noted, “A focused plan has been developed targeting
human resource management and development. Human resource is a key to Wal-
Case Analysis: Wal-Mart Stores, Inc.: Management’s Efforts to Transform the Company Stop
Ongoing Bashing
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Mart’s business and the firm invests money and time in training, retaining, and
developing them” (p. 5).
Wal-Mart being a powerful retail brand has a reputation for value, convenience,
low cost and a wide range of products, all in one store. This is perhaps the very factor
that has made many customers become loyal to its products despite the current wave of
criticism. The company has been able to customize its product depending on their
customers needs. The multiple store formats employed by the firm has been able to
attract and satisfy customer’s needs, which is a key ingredient for winning their loyalty.
Nevertheless, the cost of producing such a wide variety of consumer products has
significantly fallen due to low manufacturing costs. Many believe that these costs have
fallen due to outsourcing to other low cost regions of the world. Unfortunately, this
outsourcing has been one of the problems leading to the company’s current situation.
The Wal-Mart store has a core competence in its use of information technology in
supporting its international transport and logistics system. This has enhanced its speed
and efficiency in delivering its products and services. With increased efficiency, the
company has been able to establish a large supplier base, which in turn reduces their
bargaining power and therefore low inventory cost. The company has been able to
achieve its cost leadership strategy through a streamlined system of suppliers.
However, the huge span of control has presented some weak areas despite the use of
information technology.
The Competitive Position of Wal-Mart Stores
Despite the problems facing Wal-Mart, it is still presenting remarkable success,
which is evidenced by the huge profits gains. The company’s strategy has enabled it to
Case Analysis: Wal-Mart Stores, Inc.: Management’s Efforts to Transform the Company Stop
Ongoing Bashing
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be a leader in the retail market due to its focus on satisfying customer needs at low
prices. However, the success of the strategy is restricted to business performance only.
Thus, this leaves other people outside the firm to question its activities. “There are clear
trends emerging in the business environments that must be confronted such as the
aging of the world population, income inequality, a multi-polar balance of power,
increased demand for energy, and disruptive power of technology” (Thompson, 2008, p.
4). My analysis reveals that these concerns in one way or the other have been left out
during the implementation of its strategy and hence the issues witnessed.
Wal-Mart is enjoying a number of competitive advantages, which is evidenced by
its incredible success. “The company is the largest employer in the US and is one of the
few places available for people to get a decent job regardless of their academic
achievements” (Paikala, n.d, 2011, p. 3). The company has the second largest net sales
globally. These huge sales are due to the company’s aggressive growth strategy and
increased customer demand for supercenters has encouraged the company to add
more and more stores.
A significant competitive advantage for Wal-Mart is its remarkable logistic system
(Paikala, n.d, 2011, p.5). The company is able to ship products from any of their many
distribution centers in order to provide the most efficient and cheapest route. The firm
even has its own distribution center for its online orders. The innovation of sharing sales
information with suppliers via computer programs has enabled the company the
advantage of consistently stocking its stores with popular items.
Although Wal-Mart has been facing criticism for its low wages, the company is
actually doing well for lower income earners. The company can beat out most of the
Case Analysis: Wal-Mart Stores, Inc.: Management’s Efforts to Transform the Company Stop
Ongoing Bashing
9
competitors with its aggressive pricing strategy. The company has been able to attract
higher income earners by opening stores in more urban areas. Customer service
offered at Wal-Mart stores is an advantage as well as they are creating a strong friendly
image. The company is also paying close attention to environmental issues while
pushing for higher wages. Therefore, Wal-Mart’s competitive position is growing
stronger and stronger. The comprehensive transformation program initiated by Scott is
expected to enable the company, to not only control the negative impacts of the lost
reputation but also create a deeper relationship with the customers, employees, and the
community at large.
Conclusion
This analysis indicates that the continuous success of Wal-Mart has restricted
the management to focusing on the business alone regardless of the changing market
environment. The company’s strategy has not obviously achieved satisfactory success,
which is evidenced by the current issues. This analysis additionally shows the company
is financially strong with many competitive advantages that it can exploit to better its
position in the market, and meet the demands of the changing environment. However,
continuous failure to do this will result in the company gradually loosing its face and
eventually being unable to stop the bashing.
Recommendations
Wal-Mart has enjoyed tremendous success in the past, and still has a promising
future in the retail market. Unfortunately, there always exists a negative side to success.
Wal-Mart is faced with opposition from individuals who share the same interests as the
“common man”. The mere fact that Wal-Mart has the resources and ability to be such a
Case Analysis: Wal-Mart Stores, Inc.: Management’s Efforts to Transform the Company Stop
Ongoing Bashing
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big competitor scares some people in the retail industry. Both small retail stores in small
communities and employees target Wal-Mart simply because such a large company has
the resources at hand to defend itself.
For Wal-Mart to improve its image in the face of these people, it must address
these problems head on. The company has already taken big steps to increase the
benefits of the employees and to be seen as an environment friendly company. The
analysis indicates that the company needs to continue with this approach, probably
even more publicly than other competitors in the retail industry do. The company could
also start a campaign to assist the “common man”. With their global impact, the issues
raised by the firm will obviously receive a great deal of attention. In such a campaign,
the firm should focus on supporting other small stores in the community especially
those, which specialize. They could additionally assist in advertising local retailers who
do not sell competing products. The company could change their image to one that
cares about the community, rather than taking sales past them.
This analysis suggests that employee focus is very important. Giving employees
benefits publicly will add to their morale as well as the company’s image. After investing
on its image in United States, Wal-Mart could further focus on increasing its market
share internationally. Other countries present greatest growth potential, and Wal-Mart
needs to consider these areas seriously.
Case Analysis: Wal-Mart Stores, Inc.: Management’s Efforts to Transform the Company Stop
Ongoing Bashing
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References
Gamble, J., Strickland, A.J., Thompson, A. (2010), Wal-Mart Stores, Inc. in 2008:
Management’s Initiative to Transform the Company and Curtail Wal-Mart
Bashing, Crafting & Executing Strategy 17th Ed., McGraw-Hill Irwin, p. C-367 thru
C-400.
Hayden, P., Lee, S., & Pereira, M. (2002). Wal-Mart: staying on top of the fortune 500.
Retrieved on 03/02/2011 from:
http://allman.rhon.itam.mx/~oromero/Wal_Mart_CaseStudy.pdf.
Lal, V. (2005). Wal-Mart story. Economic and Political Weekly, pp.2477-2478
Paikala, V. (n.d). Wal-Mart: the retail superpower. Retrieved on 03/02/2011 from:
http://www.vinodp.com/documents/investing/WalmartValuation.pdf
Thompson, A. A. (2008). Wal-Mart Stores Inc. in 2008: Management’s initiatives to
transform the company and curtail Wal-Mart bashing. The University of Alabama
Wal-Mart Company website, (2008). Wal-Mart 2008 financial review. Retrieved on
03/02/2011 from:
http://walmartstores.com/sites/annualreport/2008/docs/full_financial_report.pdf.