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Running head: EXTERNAL ENVIRONMENTAL ANALYSIS 1 Executive summary The paper starts by introducing the topic and explaining how it affects businesses. It proceeds with a highlight about the company’s background. It highlights issues of economic, political, regulatory and legal, societal, technological, and environmental factors and trends. The paper further addresses the issues of current external environment and uses five forces analysis by EXTERNAL ENVIRONMENTAL ANALYSIS-WAL-MART CORPORATION 2 Porter (2008) on the same. The five forces highlighted include supplier power, buyer power, threats of new entrants, competitive rivalry, and threats of substitution. Introduction External environmental environment analysis highlights information regarding a business's political, industry, competition, and social settings. These factors influence the business although they are out of its control. For example, when a new political party takes power and amends regulations, which may in turn require the company to spend in new assets or EXTERNAL ENVIRONMENTAL ANALYSIS-WAL-MART CORPORATION 3 modify its products. Another example is the change of customer’s base due to changing demographics, trends and needs such as an aging population. Managers of businesses need to be conscious of these situations in order to take full advantage of opportunities and reduce the impact of threats. Information gathering can be done through scanning and general surveillance to identify early signs of changes; monitoring and close consideration to particular developments; and follow actions of rivals through competitive Intelligence. There are two areas of analysis namely, general and competitive environment. General environment comprise as economic, political, regulatory and legal, societal, technological, and environmental factors and trends (Becher, 2005). On the other hand, competitive environment include Porter Five-Forces concept to determine the attractiveness of an industry, business key success factors, competitive changes in times of industrial evolution, strategic groups and national competitive advantage. Wal-Mart Corporation is a retail store chain that is headquartered in the US and with many domestic and international stores. Its mission is to help its targeted audience to save money so they can live better. Its goal is to be an international brand while the vision entails working together to lower costs. Wal-Mart corporation target customer includes persons with modest incomes and shoppers sensitive in prices although the target base is continually changing as the environment dictates. Its main competitors include Target, Amazon, Costco, Home depot, Kroger, Staples, and Office depot among others. The company’s focus is to offer the best value to customers for the lowest price. External environmental scan/five forces analysis Assessment of external factors applying five forces EXTERNAL ENVIRONMENTAL ANALYSIS-WAL-MART CORPORATION 4 Michael Porter (2008), five forces tool is a primary yet dominant tool to understand where power lies in a business situation. It assists to understand existing competitive strength and possible strength of the envisioned position (Porter, 1996). Knowledge and clarity of strength in a competitive situation will help Wal-Mart to take advantage of its strength and modify weak areas. Supplier power This assesses the ability of Wal-Mart suppliers to drive up price. Abilities of these suppliers to influence Wal-Mart will be influenced by the number of providers on key inputs, distinctiveness of their products, and the sunk cost. The few the supplier alternatives for WalMart the more the balance of power incline in favor of suppliers. The number and size of suppliers for Wal-Mart is large both domestic and internationally and provide goods for mass market. Wal-Mart has the agility and flexibility, and it can easily move from one supplier or brand to another. Its turnover is big and enjoys huge economies of scale which can easily attract any potential supplier. Its many stores provide it with an advantage in regard to appeal for potential business partners. Wal-Mart has continued to enhance introduction of private label, and this pushes power in its favor. Buyer power It refers to the ease for purchasers to force prices down. Factors persuading this include number of buyers, value of individual buyers, and cost to switch to others. Wal-Mart transacts with many buyers and it has a distinct value proposition. Although the price is a key factor for most Wal-Mart customers, it is attracting customers who are not entirely price sensitive but are seeking convenience and quality. Buyers are located within proximity, and who runs into EXTERNAL ENVIRONMENTAL ANALYSIS-WAL-MART CORPORATION 5 millions hence their individual acts may not drastically influence the power. It is therefore clear that the balance of power lies with Wal-Mart. Competitive rivalry This aspect revolves around the numbers and capabilities of rivals. Target, Amazon, Costco, Home depot, Kroger, Staples, and Office depot are some of the principal competitors for Wal-Mart Corporation. These competitors offer equally attractive products and even at competitive prices. This scenario implies that customers can easily change allegiance if they do not get expected value from Wal-Mart. The move to global markets is mainly influenced by domestic competition. Wal-Mart has been received well in international markets especially Canada, and this sounds well for the company. Wal-Mart has a strong customer loyalty base in spite of the low degree of product differentiation in the industry. This in essence reduces the intensity in competition. Wal-Mart has sustained its competitiveness through innovation in products and systems as a means of reducing prices and increasing efficiency. Threats of substitution Online platforms, neighborhood retail shops, mom and dad stores provide alternatives options for Wal-Mart customers. Most buyers are flexible and can move to other options easily without adjustment cost or significant inconvenience. Its products are not vastly differentiated and switching information is readily available. This setting gives the balance of power skewed in favor of consumers and the industry. Threats of new entrants Generally, new entrants change the industry environment. High returns in an industry attract new players and accordingly affect the profitability. Existing players and industry formation can obstruct new player’s entry through patents, rights, and resource requirements. The retail industry is a high obstacle and low exit sector making it good for existing players but a EXTERNAL ENVIRONMENTAL ANALYSIS-WAL-MART CORPORATION 6 challenge for new players. Wal-Mart has a strong brand name and has considerable economies of scale. New entrants will face significant challenges of access to the distribution network, sunk costs, resource requirements, faithful existing customers, small profit margins, cost disadvantages, and government policies. The current environment favors Wal-Mart. Political factors Refer to how and to what level an administration intervenes in the economy. This may include tax guidelines, labor regulations, tariffs, environmental law, trade restrictions, and political stability (Thompson et al, 2011). They may also entail goods and services which the administration needs or does not need. The government ensures competitive tax regimes for enterprises. There are several trade restrictions and tariffs to protect local industries. Wal-Mart imports many items from cheaper and competitive production destinations. There are strong workers unions and consumer organizations that consistently protect workers and consumers respectively. Recently trends show a move towards a sensitive population in regard to the environment. Many laws are legislated to protect the environment from landfills and other environmental hazards. Economic factors Comprise economic growth, exchange rates, interest rates, and the inflation rate. For example, interest rates influence a company’s cost of capital and hence growth and expansion of business. Foreign exchange rates influence the costs of exports goods and price of imported goods in an economy. Wal-Mart operations depend heavily on imports from competitive sources. Social factors EXTERNAL ENVIRONMENTAL ANALYSIS-WAL-MART CORPORATION 7 Embrace the cultural aspects that include health awareness, population growth, age range, and emphasis on safety. Trends in social aspects shape the demand for a company's products and services. For instance, an ageing American population may imply a smaller labor force hence increasing the cost of labor. In addition, Wal-Mart may adjust strategies in marketing to adapt to these social trends. Technological factors Entail environmental aspects, such as R&D functions, computerization, and technology inducements. They can influence, minimum efficient production level, systems competitiveness and persuade outsourcing decisions (Barney, 1991). Further, its changes can affect expenditures, quality, and innovation. Logistical functions at Wal-Mart heavily rely on technology. Classification Opportunities Huge potential market in Asia and other emerging economies. One stop shopping preference by shoppers Increase in liberalized economies and investment friendly destinations Adaption and embrace of strategic alliances such as acquisitions and integration Internalization of markets Enhancement of e-commerce Threats Emerging new retail shopping concepts Exposed to competitions political challenges, cultural and practice divergences Intense price rivalries Large international competitors in global scale Slow economic growth Instabilities in some strategic markets such as in the middle East References Barney, J.B., (1991), Firm Resources and Sustained Competitive Advantage. Journal of Management; 17, (1), pp.99–120 Becher, J. D. (2005). Operational alignment: Bridging the gap between strategy and EXTERNAL ENVIRONMENTAL ANALYSIS-WAL-MART CORPORATION 8 execution. Business Performance Management Magazine, 3(1), 11. Michael E. Porter. (2008). "The Five Competitive Forces that Shape Strategy", Harvard Business Review, January 2008, p. 86-104 Porter, M. (1996). What is strategy? Harvard Business Review 74(6), 61–78. Thompson, A., Peteraf, M., Gamble, J., & Strickland, A.J. (2011). Crafting and executing strategy: The quest for competitive advantage: Concepts and cases. (18th ed.) New York: McGraw-Hill.