Case study-Toyota Motor Company Limited

How has Toyota Company used strategic purchasing to create competitive advantage.
Introduction
Company's background.
Toyota Motor Co. Ltd. (TMC) was first established in 1937 as a separated company from Toyoda Automobile Loom
works, the leading manufacturing of weaving machinery.1 The Toyota Automobile Loom works was then headed by
Saki chi Toyoda, the king of investors. TMC was then founded by Kiichiro Toyoda, Saki chis son. It has since
blossomed into the leader it is today. The giant automaker faced its one and only strike in 1950. This event,
however, supplied Toyota an important philosophy, giving it the labor and management system which helped
Toyota to gain mutual growth and success in both domestic and overseas markets. Today, this philosophy is very
important to the structure of Toyota.
Definitions.
A competitive advantage.
Is simply the advantage or ability a firm has over its rivals in the industry; or the ability a firm has to outperform its
industry rivals. A firm is said to have a competitive advantage when it has the capabilities or means to push out its
rivals in striving for the favour of customers. This applies internationally or locally as well as to both services and
products. Thus, a sustainable competitive advantage is the persistence the firm applies despite efforts by competitors
or potential entrants to copy or overtake it. Sustainability therefore, requires that strategic assets are not easily
available to others and imperfectly mobile. This will be considered later.
Porter (1990) states that, though not all nations are in the forefront of competition, the home nation which shapes the
competitive advantage is the starting point for a firm's competitive advantage and also from which it must be
sustained. However, in whatever field of endeavor, competitive advantage creation must be a choice of management
and it must really fit to achieve results. It must be noted here that competitive advantage can normally be traced to
one of three roots:
Strategic purchasing.
Is a methodology used in many organizations to realize the greatest amount of benefit to the company while still
effectively managing the costs associated with the acquisition of raw materials and operational components. As
opposed to tactical purchasing, which tends to see the purchasing process as somewhat distanced from other
functions within the corporate structure, strategic purchasing attempts to promote the most efficient use of all
materials throughout the company. The goal of strategic purchasing is to increase the bottom line of the company
through the most judicious use of purchasing approaches and strategies.


Porter's approach to industry analysis.
Michel Porter, an authority on competitive strategy, contends that a corporation is most concerned with intensify of
competition within its industry. The level of this intensity is determined by basic competitive forces. "The collective
strength of these forces", he contends, "determines the ultimate profit potential in the industry, where profit potential
in the industry, where profit potential is measured in terms of long run return on investment capital". In carefully
scanning its industry, the corporation must assess the importance to its success of each of the 5 forces, those are as
follows: threat of new entrants, rivalry among existing firms, and threat of substitute products or services, bargaining
power of buyers, bargaining power of suppliers. The strong each of these forces, the more limited companies are in
their ability to raise prices and earn greater profits. A high force can be regarded as a threat because it is likely to
reduce profits. A low force in contrast, can be viewed as an opportunity because it may allow the company to earn
profits. In the short run, these forces act as constraints as a company's activities. In the long run, however, it may be
possible for a company, through its choice of strategy, to change the strength of one or more of the forces to the
company's advantage
It must be noted here that competitive advantage can normally be traced to one of three roots:
-Superior resources
- Superior skills
-superior positions.
Competitive strategy is one of the ways in which a business relates to its environment by competing with other firms
who are also trying to adapt within the operating environment. It is with this aspect- the competitive strategy which
if appropriately chosen and implemented appropriately give the firm a competitive advantage over its rivals.
It must be noted here that the prescriptive view of strategic planning emphasizes the importance of the
organizational environment as a source of threats and opportunities and the need for effective responses by the
organization if survival was to be assured and the success achieved. The response is later formulated into plan which
formulates major decisions about entry into new markets or development of new products and services guided by set
goals. Under the influence of Porter's writings in the 1980s the emphasis shifted from the plan to the selection of an
appropriate generic strategy to position the business unit in its competitive environment. Porter, arguing that the
environment poses threats and brings opportunities than with trends and events, suggested that the environment
could be analyzed using the five forces analysis to identify the issues which affect the level of competition in an
industry; after which a strategy is formulated to combat it.
The resultant strategy, which he referred to as generic, distinguished some strategic options the firm can possess:
Cost leadership: the business could position itself as offering a low cost product as a standard price i.e. cost
leadership strategy. Costs are reduced at every element of the value chain. Producers can exploit the benefits of a
bigger margin than the competitors. Toyota is a good example of an organization that produces quality cars at low
price coupled with a brand and marketing skills to use a premium pricing policy.
It could offer a product that was different from that offered by rivals. I.e. differentiation. This allows companies to
make prices less sensitive and focus on value that generates a comparatively higher price and a better margin. Even
though additional costs will be incurred pursuing differentiation, it is possible that this will be offset by the increased
revenue generated by the sales.
By focusing on a small but well-defined part of the market, for instance a particular buying group or product area or
geographical area. Also known as niche, this is usually suitable for a small company i.e. focus strategy.
Generic Competitive strategy, usually used after competitive analysis or as a response to competitors advantage,
is defined as the basis on which a strategic business unit (SBU) might achieve or counter competitive advantage in
its market. (Johnson and Scholes, 5
th
Edition.)
Building on Porter's (1980) generic competitive strategies, Bowman et al argues that organizations achieve
competitive advantage by providing their customers with what they want, or need better or more effectively than
competitors and making it difficult for competitors to imitate. This was later developed into five generic strategies
which would be used in this discussion. Thus, the generic competitive strategies are the fundamental activities on
which an SBU seeks to achieve a lasting advantageous position in its environment and gaining the favour of
stakeholders by meeting the expectations of buyers, users or other stakeholders
The following are Bowman's five-generic competitive strategy options and examples of organizations who applied
them to gain competitive advantage: no frills strategy, low price strategy, hybrid strategy, focused
differentiation strategy and added value or differentiation strategy.
In brief, no frill strategy combines a low price, low perceived added value and targets a price-sensitive market. No
frills strategy is now a popular strategy with low-cost airlines Easy Jet and Ryan air seeking to enter the airline
industry to compete with likes of Virgin and is a determinant in the market. This, therefore, affords the firm the
needed competitive edge over its competitors who charge higher price. This strategy is a success because there could
possibly be a segment of the market that overlooks the low quality of the commodity provided it fulfills the same
purpose.
To obtain the competitive advantage using no fills strategy revenues must increase and the product must really
be price-sensitive. Easy Jet frills strategy seems to be going on well as a result of the cost savings techniques they
are using. For instance no ticketing, no ticket agents, no in-flight food or drink for customers as well as the short-
haul flight. Now, almost all supermarkets in the UK use no frills strategy by introducing own brands the price of
which have been reduced to attract customers in order to gain a competitive advantage.
The next generic strategy is the low price strategy. This strategy pursues a lower price than pertains in the market
whilst trying to maintain similar value of product or service as those offered by competitor alike. There is the
potential of price war among competitors and in the long run consumers are likely to lose as the firms might not be
able to sustain the lower-price-good-value strategy. Notwithstanding the price war and low margins, there are some
suggested ways in which a low-priced strategy can bring about a firms competitive advantage. The market segment
must be low-price sensitive, and also the SBU has a cost advantage over its competitors.
However, in practice, the lower price strategy usually brought about by lowering operational cost alone does not
give the firm the competitive advantage if the firm is not able to sustain it in the long-term as there are now more
firms entering the market because of low or no entry barriers like small capital requirements and also how efficient
the staff might be.
Hybrid competitive strategy seeks to achieve differentiation and a price lower than that of competitors
simultaneously. This is not an easy strategy to pursue because to differentiate a product or service involves some
money and increases cost the very thing the low price seeks to reduce. This strategy is fit for the DIY industry as the
likes of Robert Dyad are not able to stand the competition. The success of this is dependent on providing unique
more efficient products or services to consumers whilst at the same time operating at a lower cost to be able to lower
its price below the industry level. The success of this strategy could further be enhanced if the firm has economies of
scale and can increase volume of sales more than its competitors, thereby, reducing its base cost as a result. Asda's
George brand is an example of a generic hybrid strategy in a SBU.
Another strategy is differentiation strategy. This seeks to provide products or services completely different from
those of its competitors by adding features valued by consumers. The main objective of using this is to either
maintain the market share or increase market share relative to its competitors. A clear example of this is aircraft
manufacturer Airbus's wider fuselages, cockpits designed for use in more than one aircraft and electrical rather than
mechanical flight controls.
The fifth generic competitive strategy is the focused differentiation strategy which seeks to provide high perceived
value; justifying a substantial price premium usually to a selected market, segment. It is usually adopted to counter
or to compete others in seemingly similar segment. This could therefore be argued that focused differentiation is just
an extension of any of the four strategies so far considered depending on the competitors in this new segment which
is usually middle to high income earners. A convincing example is the introduction of Lexus in 1989 by Toyota to
compete with other luxury brands of BMW and Mercedes Benz new series.
For the focused differentiation strategy to be used to obtain a competitive advantage over competitors in the
industry, the business unit must find ways to make the production more efficient to be able to pass on the savings to
customers. The business unit must identify new segments and must also be prepared to aggressively create new
market segment where it is believed first movers get huge advantage. Again Toyota prides itself in this by being the
first to introduce a brand scion ,specifically for young buyers in January, 2003 which was a success and the
introduction of hybrids in 1997 selling 127,000 far more than Honda.( Hybrid uses two engines and is
environmentally friendly.) (Fortune, Europe Edition, Number 24 December 22 2003; pp57).
The essence of the various strategies discussed so far is to create or add value to the products or services in order to
give improved and or enough satisfaction to the customer so that the firm will gain a competitive advantage over its
rivals. However, it is one thing for a firm to gain a competitive advantage and another to sustain the competitive
advantage so gained. So when a firm is able to get a competitive advantage over its competitors, it becomes
expedient to try to sustain this advantage.
Some of the ways to sustain the competitive advantage is by what is described as isolating mechanism. This is the
application of forces like barriers of imitation which limit the extent to which a competitive advantage can be
duplicated or matched or even possibly scrapped through the resource creation activities of other firms. Though
similar in principle to the barrier of entry force, whereas the entry barriers protect profitability of an entire industry,
isolating mechanisms sustain the competitive advantage of a single firm. For example legal barriers like trademarks,
patents or intellectual property rights as in Microsoft's case.
It could also be for the mere fact that the leading firm makes it difficult for the competitor to catch up with the firm's
technology because it entered the market earlier and it continues to research and might be able to move to a superior
position by the time its competitors catch up. This is known as the early mover advantage. Because the business
unit has entered the market earlier, the past success in the market is believed to sustain the firm.
Nevertheless, no matter how discrete the strategy adopted to gain the sustainable competitive advantage or enough
satisfaction that the customer may get as well as the mechanisms put in place to sustain the competitive edge, simple
economics has proved that man's needs are insatiable and with the information technology age, there is an
improved dynamism in business that products and services can become obsolete before they even reach the next
user.
The question is can the firm continue to create more economic value than its competitors now than then?
Now with the advent of information systems and technology, this traditional way of competitive advantage or
competitive edge has, therefore, taken a different turn. Information gathering and I mean a competitive information
gathering in deed can to some large extent make a difference to a firm's position in an industry and for that matter
affect its competitive advantage one way or the other.



Analysis of porters competitive forces and how it was used to attain competitive advantage.
Threat of new entrants:
New entrants to an industry typically bring to its new capacity, a desire to gain market share and substantial
resources. They are, therefore, threats to an established corporation. The threat of entry depends on the presence of
entry barriers and the reaction that can be expected from existing competitors. Global entrants may pose a threat to
Toyota's market share, especially from other Asia, Europe & U.S.A. car market leaders. Toyota as global car
manufacturing company started
its production of vehicle outside Japan in 1959. Toyota has established its own car manufacturing plant in different
countries in Europe and successfully operating its business activities. In terms of car manufacturing company index,
the following companies are as
follows:
1) Ford.
2) BMW.
3) Jaguar.
4) Vauxhall.
5) Mitsubishi.
6) Suzuki.
Ford, BMW & Jaguar already has secured market position in the British market environment, therefore their
threat is made all the greater as they now have knowledge of the British market system and are building their
customer and loyalty base. On the other hand Toyota is trying to adopt the market share in Europe. Toyota as a
multinational enterprise has already launched its product to the online market and is currently mature stage of online
product cycle.
However Toyota's online venture is in mature stage besides this they are always aware of what the potential
threats to its business are. More established online car manufacturing company, who have already identified and
possibly combated the risks to their market share, may gain a competitive edge here, like rival Ford. In a price
sensitive and competitive industry achieving profits where prices are nailed down, low cost production is
particularly difficult, especially if there is elasticity of demand, the loyalty of the customer may not be gained or
retained unless cost incentives and quality assurance are customary. The purpose of online sales facilities is to boost
more sales and gain profit. Customers are prone to repeat orders; the backbone of business profit, therefore
switching costs is not such as threat if brand loyalty is a prevalent sales feature. Therefore Toyota may be viewed as
a threat to other car manufacturing company such as Toyota.

Threat of substitute products or services:
Substitute products are those products that appear to be different but can satisfy the same need as another
product. Substitute products on the market could pose a threat to Toyota's if customers are price sensitive. Ford,
BMW, Vauxhall, Mitsubishi. All private goods at affordable prices and target the lower end of the quality conscious
customers. If Toyota's car prices are competitive as a result of the quality of the vehicle or service being acceptable
inferior and the production cost are low, this will ultimately challenge Toyota's cost leadership pricing strategy.
The threat of cheap imitations may an irresistible challenge for the customers, if brand loyalty is not an issue and
so may be able to benefit from the cheaper prices if willing to compromise quality. The more indirect the substitute
and the more cleverly packaged the imitation, the less likely that the price and performance will be comparable and
switching costs for customers will be made easier.

Bargaining power of buyers:
Buyers affect an industry through their ability to force down prices, bargain for higher quality or more services
and play competitors against each other. The customer is ultimately king when they are car
companies' consumers. They can exert more power over Toyota's online than offline as the technology involved
offers them the freedom of choice not just of product but also of vehicle companies as it is convenient to switch.
Brand loyalty is an important issue as most end users will stay with the same product and most likely will switch to
online and stay loyal. However the convenience factors of online
purchasing makes it easy for consumers to target specific brand products from other online car manufacturing
companies, thereby reducing the amount of overall spend per car manufacturing companies as this is now split
among the choices available. Bargaining power of end users is not necessarily exerted on line regarding price
sensitively of goods. The sensitively surrounds the pricing strategy used by Toyota's as cost leadership and
differentiation. Toyota's consumers are looking for quality goods and a good serve.

Bargaining power of suppliers:
Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods and
services. Toyota's look to their internal means and market share to determine whether they
have power over the supplier and exert to gain their competitive edge. Suppliers are forced into comprise, lowering
their already competitive prices. Toyota also looks to improve their own efficiencies in choosing
their suppliers. This strategy is entitled, together faster, simpler. A program to improve the quality levels of service
from the supplier the force is to then pass this on to the customer. As the industry is subject to inflation, interest rate
increases, exchange rate fluctuations and labor laws, Toyota as a car manufacturing company aware of their low cost
strategy and look to competitive pricing to begin with the supplier, so that the internal competing demands for
finances are prioritized.

Rivalry among existing firms:
In most industries, corporations are mutually dependent. A competitive move by one firm can be expected to
have a noticeable effect on its competitors and thus may cause relation or counter efforts. For example: car
manufacturing industries dominated by Toyota, Honda, BMW, Ford, and jaguar increased all level of competitive
activity to such an extent that any price reduction or new product introduction is now quickly followed by similar
moves from other car manufacturing companies. The same is true of prices in the U.S. computer industry. Porter
contends, it is important to look beyond one's immediate competitors, as there are other determinants of profitability.
Specifically there might be competition from substitute products or services. Buyers may perceive these alternatives
as substitutes, even though they are part of a different industry. An example would be plastic bottles, cans and glass
for packaging soft drinks. So not all competition lies the same industry.
There may also be a potential threat of new entrants, although some competitors will see this an opportunity to
strengthen their position in the market by ensuring, as far as they can, customer loyalty may be built out of trust and
familiarity possibly based on quality. Finally, it is important to appreciate that companys purchase from suppliers
and sell to buyers. If these forces are powerful they are in a position to bargain profits away through reduced margin,
by forcing either costs increases or price decreases.

Strategies Adopted By Toyota
Since it was established in 1937, Toyota Motor Corporation has contributed to the development of the
automobile industry and society by providing people with automobiles. Toyota is now world's third
largest manufacturer of automobiles in unit sales and net sales and has established a well-balanced sales structure
that is strategically positioned between the world's three major markets. By fiscal 2002,
Toyota's consolidated world sales are 5.54 million units of which the Japanese accounted 2.22 million units, North
America 1.78 million units and Europe and other regions 1.54 million units.
Toyota's central philosophy is to grow in harmony with society producing automobiles that enjoyed and
cherished the world over. Now-a-days in every corner of the world the drivers have significant diverse needs. Some
are looking for an environmentally friendly vehicle while others emphasis on safety and performance. Then there are
people who look beyond the vehicle itself to value added services.
Therefore Toyota's success is lies within its strategies, according to the company Annual Report 2001 these include:
i) Focusing investment on the development of new technologies for the
environment, safety and information and communications.
ii) Promoting further globalization within Toyota.
iii) Enhancing cost competitiveness to provide higher quality products
and services at a more affordable price

iv) Expanding Toyota's value chain with a specific focus on building
financial operations.
Analysis of the Four Key Strategies
1. Focusing investment on technological development:

From the late 1990s, the global auto industry entered an era of tough competition in technological development.
This new era is all about the speed of commercialization new technologies that enhance not so much the vehicles
themselves, but their interaction with society and individual lives. As a global company Toyota is at the forefront of
these technological innovations. Based on its recent R&D activities, the company is now working to build cars that
accelerate a beneficial relation between people, cars and society.
Nevertheless Toyota is tackling the construction of advanced transport system through its Intelligent Transport
System (ITS) technologies to improve the performance of its vehicles. During fiscal 2002, the
company made progress towards the practical application of its Intelligent Multimode Transit System (IMTS). Using
this system the vehicles are driven automatically, running single- file on special
roads, which is widely utilized for the public transport sector. For example, driverless operation of three buses
together in a single-file "platoon" has been underway since October 2001 at a theme park on
Awaji Island in Hyogo Prefecture, Japan. Besides in recent years the company has launched Fuel Cell Hybrid
Vehicle, FCHV-5 (2003), Estima Hybrid (2001), and Pirus (1997). The advantages of these newly developed models
are: more than one source of fuel can be used and they are not causing Global Warming.
2. Promoting further globalization:
One of the key strategies of Toyota is to deliver to its customer in every corner of the world high quality,
affordable vehicles with more attractive features. This absolute commitment is the driving force
behind Toyota's accelerating globalization. The company has a well regional balanced marketing network
comparing to its competitors. Each of its three core regions- Japan, North America, and Europe & Other regions-
represents one-third of total net sales.
Therefore through insistent localization of its operations, Toyota is now going ahead to work on the development
of automobiles that met the diverse needs of different regions while at the same time determined to benefit local
communities.

3. Enhancing cost competitiveness:
At present there is fierce competition in automobile industry, which appears ready to heat up, even further in the
21st century. Overcoming two seemingly contradictory challenges, raising quality and lowering cost, Toyota Motor
Companys is entirely successful to face the competition created by its competitors. To provide its customers "the
right cars, for the right place, at the right time", Toyota is adopting various cost reduction strategies ingrained in
various steps of manufacturing process such as development, production, and purchasing. One of these cost-
reducing drives is CCC21 (Construction of Cost Competitiveness for the 21st century), which is being currently
implemented by Toyota. This three years cost reduction program, initiated in July 2000 aims to achieve large-scale
cost reduction for about 170 components that account for 90 % of Toyota's total component purchasing costs
(Annual report 2001). For example, in purchasing, Toyota is currently adopting an initiative called "Four-in-one"
Concurrent Frontloading Concept. By using this concept, company is working to achieve its enduring mission of
purchasing. (Annual report 2001)

4. Expanding the value chain:
Toyota's goal is to become a Total Mobility Services Provider. The company wants to be a lifelong partner to its
customers, offering them a full range of services that reach beyond the automobile. To do so the company is
connecting with customers more than ever before. In this way Toyota tries with its best to bring a greater comfort
and convenience to the customers' lives, and the process reinforces its corporate value chain.
Nevertheless, Toyota is currently expanding its value chain by providing its IT business. Followings are the
major initiatives form the crux of its actions:
- the Gazoo.com automotive e-commerce site.
- The TS3 CARD, which will cover the way for the company's entry into
-the business of processing and setting consumer purchases.
- Intelligent Transport System (ITS) implemented at commercializing
the next generation of highway travel.
- Information terminals designed to add value to automobiles through
increasingly sophisticated car navigation systems.
- Network to support the above four initiatives.
It is evident from launch of the TS3 CARD, a new Toyota credit card, that company's goal is to support
customers throughout the life of their vehicles and offer one-stop financial services. In particular,
Toyota always seeks to offer a wide range of services and link them together; thereby creating synergies that will
yield great convenience and benefits.

Toyotas Global sourcing strategies as a means of attaining competitive advantage.
Consolidation centers.
Toyota has this counter measure strategy which consists of introducing a consolidation center for deliveries near
global suppliers in order to consolidate load units with products from multiple suppliers. Thus, suppliers in the
consolidation center area, instead of sending products directly to the customer, send products more frequently to the
consolidation center. This allows more frequent deliveries to the customer for smaller batches of products. A similar
solution was also highlighted by Das and Hand field (1997) and Wu (2003). Thus, Toyota Company has used some
this strategy for the consolidation of deliveries in order to increase frequency of deliveries.

Use of a Local supplier next to the global supplier.
Toyota Company has maintained, in the case of components and products globally sourced, local supplier. The local
supplier could guarantee the supplies continuity in case of problems. This also makes the customer less dependent
from the global supplier. Nonetheless, this countermeasure seems to be very useful to face the problem of demand
peaks and to reduce inventory levels to face demand variability. Toyota has used of a local supplier to set-up and to
test for quality components before sending them to the global supplier for massive production. In addition, local
supplier is also used for possible reworks and to reduce non quality costs.




Quality control at supplier location.
As a strategy used by Toyota Company to control quality at supplier location, aims at reducing non quality costs, by
avoiding useless long travels of goods. For instance, one of the companies interviewed exploits its Chinese facility
to carry out quality control before sending products to Italy. Toyota carries out quality control in the consolidation
center, in order to create a sort of quality control pooling for products with similar characteristics.

Delivery services.
Reducing and focusing just on more reliable delivery companies is a countermeasure employed by Toyota
Company as a strategic measure of selecting suppliers in terms of service delivery. This strategy lead to the
reductions in inventory levels, reduction in the lead time from purchasing and delivery, reduction in stock-outs,
reduction in space required for inventories. Toyota adopted the Lean principles companies as well in order to reduce
impacts of Global Sourcing.

WAL-MART INDUSRIAL ANALYSIS ON THE SOURCES OF COMPETITIVE ADVANTAGE.
Wal-Mart history.
At the beginning of 2009, Wal-Mart top management faces the question of whether the same strategy that it has
been adopting in the past can be used to maintain the companys remarkable performance and growth in the next
decade.
In the last 10 years, Wal-Mart has achieved strong and constant growth in sales and net income. It has maintained
the leading position in the U.S. discount retail industry and has become the largest retailer in the world. With the
maturity of the industry, coupled with the intense competition from rivalry companies, maintaining the current level
of high performance becomes very challenging.

INTRODUCTION.
The Porters Five Forces analysis reveals that the competition among rivals is the driving force of the industry, in
which price is the most critical factor. The value chain analysis and resource based view analysis show that Wal-
Mart has been very successful in implementing the strategy as the low-cost leader by inculcating cost efficiency in
its corporate culture, management style, and operations. It has been the pioneer in adopting cutting edge technology
to streamline its supply chain, and to understand and respond timely to customer demand. Wal-Mart has developed
much strength that help guard its leading position and open door to many opportunities for expanding the business.
However, it also faces threats from growing too big and in many areas, which makes it vulnerable to losing control,
weakened cooperation among stores and regions, and competition in multiple fronts.
Wal-Mart should be caution in its growth strategy, especially in the expansion of its international presence.
Although its financial strength, management skills, and operation efficiency allow it to enter many overseas
markets, it should be selective in choosing the destinations. Wal-Mart can focus on emerging markets where
customers are price sensitive such as China and India in Asia. In Latin America, it should focus on Mexico and a
few key markets that it previously achieves success. In Europe, it can target regions that lack the presence of large
retailers such as Tesco and Carrefoure. Although Wal-Marts common practice of acquiring existing small local
chains to enter a market has helped Wal-Mart lower its market penetration costs and quickly adapt to local market
demands and culture, this practice also raises the issues of diluting corporate culture and weakening the companys
ability to reinforce coherent management practices and strategy. Therefore, international expansion should be
implemented patiently and carefully.

Over the last four decades, Wal-Mart has achieved significant successes to become the worlds largest retailer. The
company has maintained sustainable growth in a fiercely competitive U.S. retail market environment. It has been
continuously expanding both in the range of goods and services, and in the number of stores in the U.S. and
worldwide. While this expansion has generated handsome profits for its stakeholders and put the company in a
strong financial position, it has also presented significant challenges for sustaining growth and performance, and
managing a company that is incessantly becoming larger. Top management now is trying to address whether the
same strategy that the company has been pursuing is suitable for maintaining and strengthening its current growth
rate and market position, as well as for leading the company into the next decade.
Analysis
1) An analysis of the external environment of the company.
2) A discussion of the companys internal resources and capabilities.
3) A diagnosis of the external and internal factors.
4) Recommendations of how the company should move forward.

MARKET BASED VIEW OF WAL-MART
1. External Environment
In this section, an analysis of the Porters five forces of the discount retail industry and Wal-Mart is presented. For
each force, the discussion first provides a general overview of the industry in the U.S., and then focuses on Wal-
Mart.
Potential entrants: the threat of potential entrants is considered low due to the following reasons:
Discount retail industry is a highly competitive environment with mostly big players competing for
market shares.
Price is mainly the key factor for competition.
Existing companies have established strong and stable supplier networks.
Wal-Mart has a superior logistics and distribution system, cutting edge technology to support all phases
of its operation, a well-established brand name, a large number of stores nationwide, and a deep financial
resource.
Wal-Mart also has cost advantage over its competitors due to its large purchase volume.
Wal-Mart can deter potential entrants.
Substitutes: the threat of substitute is low.
Consumers can buy from small mom-and-pop stores or specialty stores, but these stores do not offer a
wide range of products, nor do they offer competitive prices.
On-line purchase can be a substitute means for shopping; however, it may not be a good choice for goods
that are consumed daily because shipping costs may lead to higher final prices, and shipping time can
delay the needs fulfillment.
Industry competition: the competition among existing firms is high because:
This is a mature industry.
There are few but large competitors, who dominate the majority of the market.
Price is the focus of competition, and firms are forced to cut cost to stay competitive.
Bargaining power of suppliers: the power of suppliers is low.
In general, most suppliers rely on retailers to distribute their products to the end consumers; therefore, the
role of retailers in the distribution channels is critical.
Wal-Mart not only carries a wide range of products, but also possesses thousands of stores in the U.S.
and worldwide. This combination places Wal-Mart in a very strong negotiation position with suppliers
and gives it great flexibility in choosing and working with a wide range of suppliers and vendors. As
stated in the case, Wal-Mart is both desired and feared by manufacturers.
With a fleet of 4,000 trucks, Wal-Mart also has capability to independently operate part of its
transportation logistics without relying solely on outside vendors.
Wal-Mart also carries some of its own Great Value private-label products tailored to local demand.
Bargaining power of buyers: the power of buyers is considered moderate.
Switching costs of buyers is low.
Buyers are price-sensitive. They can be easily lured to competitors to buy products that are offered at a
lower price.
The differentiation in the products and brands among different discount retail stores in this industry is
low.
Since most of the products offered are commodity, buyers usually choose the store that is closest to their
home or their workplace for convenient shopping.
Wal-Mart provides a wide range of products and services, and offers very low prices. In addition, it has
many stores serving different geographical areas. Hence, it has a large and loyal customer base.
Interest groups such as organized labor unions, environmentalists, and human rights activists can interrupt
the business. When a retailer expands internationally, it can face political challenges, as well as differences in
culture and practices which may support or deter both the establishment and growth of a company in a country.

RESOURCE AND CAPABILITY BASED VIEW OF WAL-MART.
In the discount retail industry customers focus on a few elements, including price, convenient location, range of
products, and good service. Therefore, the key success factors of the industry require that the firms need to;
(1) Maintain low cost by having efficient and effective operations, making bulk purchases from vendors to enjoy
volume discounts, and paying low wages.
(2) Create differentiation by having large stores carry a wide range of products, easy and accessible locations for
convenient shopping, and products that meet local customer preferences and needs.
(3) Fast response to market demand.
The nature of the external environment of the discount retail industry dictates that potential entrant firms can only
achieve moderate profit. The driving force of the whole industry is the high competition among rival companies, in
which price is the most critical factor. In order to survive and be profitable, firms have to offer competitive prices.
This translates into high efficiency in operation, low costs of goods sold, and low operating expenses. The industry
may discourage small investors, but because the U.S. is one of the worlds largest retail markets, it can attract
potential investors with strong financial strength, especially international retail chains, to enter the U.S.

Internal resources and capabilities
Wal-Marts purpose is revealed in its founder Sam Waltons statement, If we work together, well lower the cost of
living for everyonewell give the world an opportunity to see what its like to save and have a better life. Its
mission statement is, Saving people money so they can live better. Its mission statement is very brief and broad,
but it reflects the purpose of the company and its founder. With the way that mission statement is written, it can be
considered as the companys vision statement because of its broad sense.
Wal-Marts corporate strategy is to be a low cost leader, which reflects precisely the purpose of the companys
existence. In the past decade, its strategy has been very effective and successful. It has been continuously growing
in sales revenues and net profits from 1998 to 2009. Specifically, net sales increased from US$118 billion in 1998
to US$401.2 billion in 2009, and net profit increased from US$3.5 billion in 1998 to US$13.4 billion in 2009. The
company also has a strong balance sheet with ample cash balance. Relative to its rivals (e.g. Target, Dollar General,
and Costco), it has higher percentages on return on assets and return on equity. Wal-Marts growth strategy is
expanding in products and services, as well as in geographical areas. It has been successful in Canada and Mexico,
and established presence in other countries.
Below is a value chain model analysis that examines the companys current key activities and evaluates the
effectiveness of these activities. In addition, wherever possible, the discussion also points out the differences from
the rival companies and how these activities add value.

Support Activities:

General administration. Wal-Mart has very unique practices. The communication flows are direct between each
individual store and headquarter in Bentonville. People from headquarter are sent to local stores to obtain
information about competitors and learn about what is happening in the local stores. This practice is different from
its competitors who require their people from local stores go to regional offices to report activities and discuss
issues. This unusual practice creates a close connection between headquarter and local stores. Therefore, Wal-Mart
can timely respond to customer demand, make corrective actions, and react to rivals moves to stay ahead of the
competition. Collectively, these capabilities help add values to the end users by providing the products at low
prices, meeting customers demand, and resolving any big issues that affect their buying decision.
The Saturday morning meetings are the trademark of the company managements style. This activity forms
a very unique culture and is considered Wal-Marts spirit. By having a common ritual, Wal-Mart has created a
workplace that bonds people together and creates a sense of belonging for its associates.

Human Resource Management. Human resource and interaction practices between the company and its associates
are based on respect, high expectations, close communication, and clear incentives. Employees receive low pay but
enjoy other benefits such as health care plans, retirement schemes, profit incentives, and stock purchase plans. The
facts that employees have high degree of autonomy and the company offers open door policy and great promotion
opportunities create a very unique culture of Wal-Mart. While this culture is unusual in large retail organizations, it
adds values to the value chain by creating a good working environment for employees to devote to their jobs and
best serve their customers. The low wage, on one hand, allows the company to keep price low; on the other hand, it
exposes the company to employee abuse issues and criticisms from interest groups.

Technology integration. Technology integration is one of the primary focuses of the company because of its vital
role in the companys success. Technology has helped integrate Wal-Marts entire supply chain so that each stage
of the value chain is very effective and efficient, which allows it to promptly offer the right products at low prices to
its customers.

Procurement. Wal-Mart deals directly with manufacturers, and purchasing is centralized at headquarter. It
requires manufacturers to cut their margin and meet its employment policies. It also has close collaboration with its
big suppliers such as P&G to facilitate inventory control. All of these practices have enabled Wal-Mart to buy its
inputs at the lowest cost and to save inventory holding costs, which allow it to offer low price products.

Primary activities:

Inbound logistics and outbound logistics. Wal-Mart has superior logistics system. It adopts the concepts of
distribution centers and hub and spoke arrangement. This is very effective for keeping the inventory level at each
local store low and reducing transportation cost. While other retailers rely on either suppliers or 3
rd
party logistics
companies, Wal-Mart is quite independent from outside logistics companies. It also takes control of import logistics
from overseas suppliers. In addition, it always strives for cheaper, faster, and more reliable logistics systems by
implementing methods such as cross docking systems and remix systems. These practices not only help Wal-Mart
reduce expenses but also give it more control and flexibility in handling purchases.

Operations. Wal-Marts goal is to offer a wide range of quality products at low prices in a pleasant shopping
ambience. It carries both nationally branded products and its own Great Value private label products tailored to
local demand. It also continuously expands its product brands to meet different customer needs such as the
inclusion of upscale brands such as Apple, Sony, and Kitchen Aid.
A very distinctive feature of Wal-Marts operation structure is the decentralization of store management. Store
managers are empowered to make decisions related to product range, product display location, and pricing.
Department managers within the store can implement their own ideas in order to increase sales and reduce expenses.
This is very different from other retailers where these decisions are made at the regional or headquarter offices. This
empowerment allows it to best serve its customers, because only local managers are able to best understand local
competitors, and demand and shopping behaviors of their local customers.

Marketing and sales. Wal-Mart creates low price appeal to its customers. Its marketing strategy relies on word-of-
mouth communication and focuses on everyday low prices, which means that customers can buy the products at the
lowest price all the time. This strategy aligns well with its objective of minimizing cost and adds value for the
customer because the savings from advertising and promotion allow it to offer products at low prices.
The facts that Wal-Mart issues its annual report on ethical sourcing and commits to environmental
sustainability programs by shifting product mix towards environmentally friendly products are good moves. They
not only generate a good image for the company, but also create values for its customers by offering environmental
friendly products to those who concern about the environment. In a broader sense, it has promptly responded to the
trend of conserving the environment, which has become a very hot topic in the current business community.

Services. Wal-Marts goal is to create a pleasant shopping experience for its customers. It has achieved this by
having greeters at the entrance door and implementing 10-foot attitude that requires employees to greet a customer
within 10 feet. It also guarantees customers satisfaction by accepting returned goods on a no-questions-asked basis.

The value chain analysis reveals that Wal-Marts core competencies include a supply chain with integrated
technology, an ability to generate large sales volume, superior logistics systems, operations that are decentralized, a
strong and unique culture, a close knit management style between the headquarter and individual stores, a
management team that makes things happen with great autonomy, and effective management routines and practices.
An analysis based on the Resource Based View model is conducted to identify whether these core competencies are
sustainable. Please refer to the VRIN table in Appendix 1 for conclusions. Based on the VRIN table, it can be
concluded that: a) a supply chain with integrated technologies is a competitive parity; b) an ability to generate large
sales volume to enjoy low price from suppliers, superior logistics system, operation decentralization, human
resources are temporary competitive advantage; and c) strong culture and management routine and practices are
sustainable competitive advantages.
Wal-Marts strong culture and management routines and practices are very unique. Although at the individual level,
many of Wal-Marts core competencies are temporary competitive advantages, but in combination, these
competencies form a sustainable core competency for Wal-Marts superior profitability. In order for a competing
firm or a potential entrant to compete, it requires a very strong financial capability to invest in integrated technology
of supply chain and superior logistics system. It is also very difficult for any company in the industry to achieve the
large sales volume like Wal-Mart does to have such a bargaining power over suppliers. The structure of the
companys management and communication styles, operation autonomy inside Wal-Mart, and management team
though imitable and substitutable but can hardly be the same. These core competencies make it difficult for rivals to
identify which core competency is critical for Wal-Marts success. Therefore, the combining of these core
competencies forms a sustainable core competency for Wal-Mart for many years to come.
Diagnosis
The external environment reveals that competition among existing firms in the industry, specifically price
competition, is the most critical driving force of the industry. The key success factors include low price, wide
product range and convenient location, and fast response to market demand. Wal-Marts strategy of being a leader
in reducing cost is aligned with the condition of the external environment that it is in, and cost efficiency is
embedded in its management systems and its corporate culture. It has been continuously striving to achieve the
lowest cost in every aspects of its business. For example, Wal-Marts constant efforts can be found in the
investment and successful adoption of cutting edge technology in supply chain and logistics systems, making them
one of the best systems in the world.
Compared to its competitors, Wal-Mart has much strength. It has a very strong brand name with reputation for low
prices and wide range of products. Its enormous sales volume allows it to have very strong bargaining power over
its suppliers. Integrated technology in supply chain enables Wal-Mart to achieve high operation efficiency. Due to
its superior logistic systems, Wal-Mart saves transportation costs and is independent from outside logistics. Wal-
Mart has capable managers who contribute to the success of the company. However, capable people may not be
enough without a very strong culture and values that are shared among associates at all levels. And Wal-Mart does
have both. It not only leads the U.S. market, but also is very successful in Canada and Mexico.
Along with the strengths, Wal-Mart also has weaknesses. It can only attract price sensitive customers; those who
demand higher quality will stay away from shopping at Wal-Mart. For example, Wal-Marts Sieyu chain failed in
Japan due to its inability to attract quality-obsessed shoppers. The expansion plan in both product and service range
and geographic areas also comes with the cost of losing control in some areas and can negatively affect its ability to
compete.
In terms of future opportunities, Wal-Mart has big potential markets in Europe and Asia. With its financial strength,
it can either make direct investments through building its own stores or acquire small local chains, or form strategic
alliances with leading chains in specific markets.
Wal-Mart also faces several threats. It is always under pressure to sustain its market leader position. Carrying a
wide range of products makes it exposed to competition from different fronts, especially from those rivals who are
more focused on their merchandise offerings. Being an international retailer, Wal-Mart also faces political problems
as well as differences in cultures and practices overseas. The intense price competition put all the players in the
industry in a mode of continuously striving to cut costs and achieving high operation efficiency. Foreign giant retail
chains such as Tesco or Carrefour can compete with Wal-Mart in both the U.S. and international markets. A
summary of Wal-Marts strengths, weaknesses, opportunities, and threats can be found in the SWOT table of
Recommendation
Wal-Marts strategy of being a low cost leader is very successful. This same strategy should be maintained and
focused in the future. To sustain its success, Wal-Mart should capitalize on its current strengths, minimize
weaknesses, capture opportunities, and limit threats.
The companys adoption of cutting edge technology to learn about customer demand and needs as well as to achieve
high operation efficiency must be done on a regular and ongoing basis. Maintaining Wal-Marts culture and
practices is very important to maintain success. The trademark Saturday morning meetings should be resumed to
weekly, because it is very Wal-Mart and it helps strengthen Wal-Marts associates spirit. The company can get
larger and larger, but the companys uniqueness should not be fading or being replaced.
Currently, Wal-Mart only attracts price sensitive customers, those who are more quality obsessed or brand conscious
are not shopping at Wal-Mart. Wal-Mart should not change or do anything to minimize this weakness because the
companys strategy is being a low cost leader, and it is impossible to satisfy all the market segments. It is believed
that companies that stretch thin in different market segments can easily be stuck in a position without a target
market.
Wal-Mart has strong opportunities to enter more markets in Europe and Asia. However, its current growth strategy
of both widening product ranges and expanding geographically put the company at risk of stretching its resources,
losing operation control, and weakening strategy coherence. It is recommended that Wal-Mart focuses its growth
strategy on expanding product ranges to meet various demands. As for international expansion, it should only focus
on the markets that it can do well, such as Canada and Mexico. It should consider dropping any international
markets that are not performing well (i.e. any unsuccessful markets in Latin America). Before entering Asia and
Europe markets, market research should be done thoroughly and Wal-Mart should only focus on a few markets that
have the best potential and less competition. The companys past international expansion faced strategic and
organization issues, and therefore, its success has been inconsistent in foreign markets. This is a sound evidence of
losing focus and losing control.
By maintaining its strengths, Wal-Mart can continue to beat the competition and minimize its threats. Wal-Mart
has responded well to the pressure from environmentalists, womens and childrens rights advocates, and anti-
globalization activists. Although these pressures do not currently affect Wal-Marts bottom line but successes in
responding to them have helped form and maintain a positive image for the company. It should continue its
programs of ethical sourcing and environmental sustainability. Regarding low wage issue, it should maintain its
current pay schemes. First, the rates are slightly above the general retail trade. Second, Wal-Mart offers other
benefits in addition to basic salary, including profit incentives, stock purchase plan, and promotion opportunities.
By continuously focusing on its strengths and finding ways to increase operation efficiency, Wal-Mart will stay
ahead of the price competition from rivals, and deter potential competitors from entering the mark
Strengths
Strong brand name
Weaknesses
Only attract price sensitive shoppers
Strong bargaining power over suppliers
Integrated technology of supply chain
Superior logistics system
Strong culture
Capable associates
Strong presence in Canada and Latin America
May lose control and lack of coherent strategy
due to huge expansion plan nationally and
internationally
Opportunities
Big potential market in Europe and Asia
Threats
Sustain market leader position
Exposed to competitions from various fronts
Face potential political problems, cultural and
practice differences
Intense price competition
Large foreign competitors entering U.S. and
international markets where Wal-Mart is
present


References.
-Jmbruton.com/images/walmart_case_FINAL.doc
-Cousins Lamming et al. Strategic Supply Management, Principles, Theories and Practice prentice Hall (2008) : -
Persons Education Limited.
-Lecturers notes.
-Harvard Business journals.
-Michael Porters Competitive advantages and Value chain journal.
International Supply Chain Management Journals.