The impact of Porter’s model of competition in Wal-Mart

The impact of Porter’s model of competition in Wal-Mart

Executive summary

The paper explores the impact of Porter’s Model of competition at Wal-Mart. Competition determines the success or failure of business organizations. It determines the effectiveness of a company’s that improve its performance, such as the use of technology, cohesive culture or quality or products and services. Analysis of Porter’s Model of competition helps the management to identify factors that affect profitability and success in the retail industry. The five forces of competition include new entrances, supplier bargaining power, buyer bargaining power, threats from substitute products and competition. These five forces determine the profitability of the industry and the success of companies in markets. The analysis of Wal-Mart’s competitiveness using Porter’s Model of competition reveals that the strategic directions of Wal-Mart are meant to respond to the competitive forces in the industry. The threat of new entrance is medium, bargaining power of suppliers a weak force, the bargaining power of buyers is weak, and the threat of substitute is weak while competition is strong. It has strong bargaining power over suppliers; therefore, acquire goods at a lower cost and sell them relatively prices compared to the competitors. The force of buyer bargaining power is low, while the force of threat from substitute products is weak and does not threaten the profitability of Wal-Mart. It is recommended that Wal-Mart should have a strategic plan that prioritizes the competition and the arrival of new players in the industry.

The impact of Porter’s model of competition in Wal-Mart

One of the models that can help companies become competitive in the market is the Porter model of competition. The model outlines five forces that lead to competition, and they include threats of new entrances, supplier bargaining power, buyers bargaining power, threats from substitute products and competition. These five forces determine the profitability of the industry and the success of companies in markets. A company that can control the forces becomes competitive, just like Wal-Mart. The analysis of the forces mentioned above enables the management to identify factors that affect profitability and success in the retail industry. Also, an understanding of the forces of competition helps the management to shape them in their favour. This essay examines the impact of Porter’s model of competition in Wal-Mart. I argue that Wal-Mart controls the five forces of competition and turn them to its advantages.

Wal-Mart

Wal-Mart is a multinational retail company that runs a chain of retail stores in many countries all over the world. Its headquarters is at Bentonville, Arkansas, and the founder is Sam Walton (Jorgensen, 2016). It offers a wide range of products and services in different categories such as groceries, furniture, electronics, beauty products, packaged foods, books, movies and many more. The success of the company has not been a walk in the path. The company faced and continues to face five forces of competition. However, its success relies on its extraordinary ability to manage the forces and turn them to its advantage. The variety of competition that Wal-Mart faces compels it to develop and implement strategies to shield the business forces that may affect its profitability (Jorgensen, 2016). Porter’s model of competition can best help us understand the external forces that the company is grappling to contain. Such forces are part and parcel of the retail industry, and unless a company manages then, it loses.

Porter’s Competition Model

Porter’s model of competition is a model that Michael Porter published in 1985. He noted that five forces have a significant impact on the success of business organizations. These five forces are today known as Porter’s five forces of competition. They include the threats of a new entrance, supplier and buyer bargaining power, the threat from substitute products and rivalry amongst the industry players (Omsa, Abdullah, & Jamali, 2017). They are used in the current business environment to determine the intensity of competition, profitability, and attractiveness of a market or industry. Porter’s model of competition is an integrated strategy scheme that takes strategic decision making from an analysis of the current competition (Omsa, Abdullah, & Jamali, 2017). When it comes to Wal-Mart, the model focuses on how the company can establish a sustainable competitive advantage in the retail industry. It can also help the management to look for profitable opportunities in the retail market.

The five competitive forces do not solely result from intrinsic industry characteristics. Therefore, the competitive strategy does not heavily rest on selecting the right market and industry to invest or understanding and controlling the forces better than rivals. However, there are critical tasks and steps that business organizations such as Wal-Mart Inc should take to gain and sustain competitive advantage (Omsa, Abdullah, & Jamali, 2017). When it comes to the retail industry, the structure of the sector does not restrict firms. The five forces are not static; therefore, Wal-Mart, through its strategies, influences them to its advantage. The company has managed to adopt effective strategies that shift the rules and forces of competition. It changes the structure of the industry, thereby making it attractive. Even though all five forces are not equally important, most of them are equally important in the retail industry (Omsa, Abdullah, & Jamali, 2017). For example, Wal-Mart cannot ignore strong supplier bargaining power at the expense of low bargaining power of buyer or ignore threats of the new entrants.

All five forces collectively affect competition; therefore, retailers should manage all of them equally. The porter model of competition enables companies to see through complexity and identify factors that are vital to competition in the industry. Also, it allows companies to identify the strategic innovations that can improve the industry as well as its profitability (Omsa, Abdullah, & Jamali, 2017). The model does not eradicate the importance of creativity in discovering new methods of competing in the market. Instead, it directs the management’s creativity efforts towards the prospects of the industry structure that are vital to long term profitability (Omsa, Abdullah, & Jamali, 2017). Some of the strategies that can alter the structure of an industry can act as a double-edged sword. This is because a company can destroy the structure of an industry and profitability besides improve it.

How Porter’s forces impact Wal-Mart

The entrance of new players

The threat of the new entrance is a medium force in the retail industry and does not strongly threaten Wal-Mart. Even though it is easy to enter the retail market and compete with exiting players, Wal-Mart is far much ahead (Gupta and Sshay, 2015). The threat of new entrances exerts medium pressure on its operations. It is easy and cheap to set up retail stores.

Moreover, the cost of running small retail stores is moderate. Generally, small retail stores incur a lower-cost operation compared to large stores. Therefore, small retailers can get into the retail industry and compete with Wal-Mart by choosing convenient locations. The company is one of the largest retailers in the world. It has a strong brand and high visibility which new entrances cannot match (Ghazzawi, Palladini & Martinelli-Lee, 2015). It takes many years for a large scale retailer to establish a brand and amass a considerable percentage of the market share. Wal-Mart has deep roots in the supply chain that only a handful of upcoming retailers like Amazon can match. It has many loyal suppliers because the company is a bulk purchaser.

Moreover, it has a robust delivery system with a fleet of vehicles and systems that ensure timely restocking (Ghazzawi, Palladini & Martinelli-Lee, 2015). Such kind of a distribution and supply chain is difficult to set up, and it takes decades. Therefore, new entrances are likely not to catch up with Wal-Mart.

Moreover, the company has invested in its human resources for decades. It has managed to maintain a large skilled workforce for many years thanks to its financial ability. Furthermore, the current player is struggling to keep up with the cost leadership strategy. Wal-Mart offers low prices for all its products and services ever. It is known as the cheapest retail store (Ghazzawi, Palladini, and Martinelli-Lee, 2015). Its financial, human resource, supply chain, and other resources mitigate the risks from new players. Therefore, the threat of the new entrance is a medium force for the retailer. However, new entrances can set up retails, operate at low cost, take advantage of convenience and location to grow and compete with Wal-Mart. Therefore, the company must continue to address the medium intensity of threats of the new entrance before it becomes strong.

Supplier power of bargain

Bargaining power is the ability of suppliers to control the prices at which the retailer’s purchase goods and raw products. When the bargaining power is high, then the retailers cannot dictate the prices of goods. Therefore they buy goods and sell them expensively (Alexandros & Metaxas, 2016). The company that has higher bargaining power over suppliers acquire goods at a lower cost and sell them relatively prices compared to the competitors. Remember that most customers are middle-income earners, and they are price sensitive. Therefore, low prices appeal to many clients (Mahdi & Sadrinia, 2014). The supplier power of bargaining is a weak competition force for Wal-Mart. It is always a great deal for many suppliers to work with Wall-Mart. Therefore, the company chooses which one to work with and at what price. Suppliers are essential in business, and whenever they have a stronger purchasing power than a company; they dictate the price to them (Aithal, 2016). Therefore, a company which has gripped them strongly has a competitive advantage over the other.

Wall-Mart has outshined its competitors by having control over larger suppliers. Since it is a bulk purchaser, it can dictate price and reduce the bargaining power of the supplier. This has enabled it to get large discounts and cut on costs and maintain the ever low pricing strategy (Natto, 2014). There are many suppliers in the retails market, and companies can jump from one to another, depending on prices.  Wal-Mart being a large firm, attracts many suppliers, most of which lower prices to entice it (Mahdi & Sadrinia, 2014). The availabilty of large potential suppliers have weak impacts on the company. The high availability of suppliers hinders their ability to negatively impact the profitability and growth of Wal-Mart (Aithal, 2016). The company, therefore, secures goods at the lowest prices from the suppliers to sustain the cost leadership advantage (Natto, 2014). In a nutshell, the company experiences a weak force of suppliers’ bargaining power due to the high numbers of suppliers competing for limited space in shelves, stiff competition among the suppliers and abundant supply.

Buyers’ power of bargain

The force of buyers’ power of bargain is weak for a large retailer such as Wal-Mart. The retailer operates in highly populated urban centres, towns, and cities across the world. Therefore, a large number of customers make it hard for them to exert intense pressure on the company (Alexandros & Metaxas, 2016). Wal-Mart enjoys weak buyer’s bargaining power due to the massive population of customers, highly diversified consumer population, and relatively small size if individual consumer’s purchase. Individuals have an insignificant impact on revenue. The higher the diversity of consumers, the harder it becomes for customers to collectively exert pressure on business organizations (Aithal, 2016). Wal-Mart locates its stores at convenient places and offers a variety of products at low prices, thereby weakening the ability of buyers to affects its business. The ever low price strategy reduces the force of the bargaining power of consumers (Mahdi & Sadrinia, 2014). However, consumer association and advocates can pile pressure on the company, but it is not a significant threat. In a nuts shell, Wal-Mart has managed to control the force of buyer bargaining power and turn it to its advantages. The company enjoys high traffic in its stores leading to high sales volume and profits.

Threat from Substitute Products

Wal-Mart is one of the leading retailers that offer thousands of products and services under one roof. The threat from substitute products is a weak force that does not threaten the profitability of the company (Prieto, Phipps and Addae, 2014). Generally, possible substitutes are not a threat to the retail industry. The retailer sells a wide range of products and offers a variety of services that have little or no substitute at all. Some of the external factors that weaken the force are moderate availability of substitutes, high cost of substitutes and a narrow range of substitutes (Omsa, Abdullah, & Jamali, 2017). Even though there are readily available substitutes, they are costly compare to the goods that Wal-Mart offers. Therefore, buyers have no choice but to go for cheaper products at the stores.

Wal-Mart is aware customers prefer substitutes if the main products are expensive or not available in the stores. Therefore, the management adopted the strategy of a one-stop-shop, meaning everything under one roof (Prieto, Phipps and Addae, 2014). It is rare for a consumer to walk in Wal-Mart stores and fails to get the goods or services. This is because, the retailer many products such as groceries, electronics, furniture, books, movies, software, computers, CCTV, video recorders, camcorders, household appliances and stationary. It also offers health services such as medical, prescriptions and pharmacy. Besides, the retailer provides entertainment services, transfer and withdrawal of money, photography and many more. The buyers can either visit the store physically or order online and receive the products in less than 24 hours (Prieto, Phipps and Addae, 2014). The company also provides a secure, clean and larger parking space. Therefore, one can argue that the threat of substitutes is an irrelevant force for Wal-Mart due to the availability of a wide variety of cheap products.

Competition

The force of competition is strong in the retail market. Wal-Mart faces a strong competition force due to a high number of companies in the retail business, a wide variety of retail companies and aggressive of large retail firms. Many companies of varying sizes are competing in the retail industry. The increasing number of small retailers in cities, estates and urban centres act as a threat to Wal-Mart. There are also a variety of large retails companies that are highly aggressive (Alexandros & Metaxas, 2016). Therefore, Wal-Mart is experiencing strong forces from the external business environment that shapes the competition paradigm in the retail industry. The large numbers of small and large retailers intensify competition in the industry. Therefore, the different variety of companies foists challenges in establishing competitive advantages due to the diverse approaches that the competitors use. Also, the high number of aggressive firms creates a tighter competitive rivalry.

The company faces tight competition from several sectors. Its position as the leader in the retail industry is under threat every day. Companies employ new innovative strategies to outdo Wal-Mart by all means. Also, it is exposed to cultural risks, and political challenges and strong competition from foreign stores in the United States threatens its dominance. Indeed rivalry is intense, and the closest competitor to Wal-Mart is Amazon (Hosken, Olson and Smith, 2018). Amazon has managed to outdo Wal-Mart in e-commerce and is slow venturing into physical stores. Also, when it incomes the grocery segment of the business, the retailer is involved in throat rivalry with several grocery retail stores and supermarkets.

In the last few years, Wal-Mart has been consistently losing its market share as its rival gains. Therefore, Wal-Mart strives to remain aggressive to remain competitive. It keeps on growing and expanding to maintain its position as the world’s largest retailer. Wall-mart has been able to maintain its large market share through its adoption of an ever-low pricing strategy. Doing it has gained customer loyalty, and it is not affected by inflation. The company has minimized its operation costs and has remained a giant in the retail market.

Recommendations

Wal-Mart seems to have understood Porter’s model of competition better than its competitors. Therefore, it maintains its position as the leading retailer. However, the force of rivalry of competition is becoming stronger and stronger each day (Hosken, Olson and Smith, 2018. Also, the force of the threat of new entrances has the potential of reducing the profitability of the retailer. Therefore, I recommend the management of the company to have a strategic plan that prioritizes the competition and the arrival of new players in the industry.

Based on the Porter model of competition and analysis of the five forces, there is a need for Wal-Mart to enhance its capabilities to maintain its competitive advantages continuously. It should be innovative and leverage technology rather than solely relying on cost leadership strategy (Petrakis, Kostis & Valsamis, 2015). Even though its growth and generic strategies set the foundation to grow and keep the business competitive, it needs more enhancements to keep up with the competition. It would be better if the management invests more in the automation of its business processes such as inventory and supply chain. By doing so, the company would witness an overall improvement in cost-effectiveness. Also, the company should adopt strategic human resource management to develop and maintain a highly skilled and committed workforce. The internal automation and improvement of human resource management would help to counteract the strong forces of new entrances and stiff competition.

Conclusion

The essay aimed to examine how the Porter model of competition impacts Wal-Mart. I have argued that the five forces mentioned in the model enable Wal-Mart to gain and sustain a competitive advantage in the retail industry. An analysis of Porter’s five forces of competition reveals that the threat of new entrances is the medium, bargaining power of suppliers a weak force, the bargaining power of buyers is weak, and the threat of substitute is weak while competition is strong. The threat of new entrances is a medium force in the retail industry, however; the company that has higher bargaining power over suppliers acquires goods at a lower cost and sells them relatively prices compared to the competitors. Besides, the force of the bargaining power of suppliers is weak for a large retailer such as Wal-Mart. The retailer operates in highly populated urban centres, towns, and cities across the world. Also, the force of threat from substitute products is weak and does not threaten the profitability of Wal-Mart. Analyzing the Porters five forces of competition, enable the management to identify factors that affect profitability and success in the retail industry. Also, an understanding of the forces of competition helps the management to shape them in their favour. Indeed, Wal-Mart understands, controls turn the five forces of competition to its competitive advantage.

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