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Oil, which is known be a source of energy, affects all economies in the world. For globalized retailers high oil prices mean reduced profitability, and for retailers that rely on commercial vehicles as their primary distribution channel, a small increase in oil prices can be detrimental. Moreover, Macintosh and MacLean (2014) argue that fluctuations in oil prices influence the strategies employed by an entity, which acts in response to market dynamics with the goal to sustain its competitive advantage. Some of the global retail giants that were affected by the fluctuations in oil prices include Wal-Mart, Target, Tesco, Carrefour, Dollar Tree and Zara. Wal-Mart is a globalized retailer that runs discount warehouses and superstores (PwC 2015). Since its establishment in 1926, the company has expanded its retail operations beyond the United States. In other words, it became a multinational organization (Chen 2007). Currently, Wal-Mart operates in 28 economies and owns at least 11,500 stores under 65 banners worldwide (Wal-Mart 2016b). Further, the company serves nearly 260 million customers employing 2.2 million people globally (1.4 million in the United States alone). The company’s global operations comprise three segments: Walmart International, Walmart U.S., and Sam’s Club. The supply of and demand for oil, electricity, refined petroleum products and natural gas affect organizational strategies a company implements in the market in which it operates. This observation leads to the conclusion that fluctuations in oil prices, especially in the United States due to the high concentration of stores, have a profound impact on the strategic management of Wal-Mart. This paper explores how the fall in oil prices affected the strategies of Wal-Mart during the year 2015.
Oil and Oil Price as Factor, Uncertainty and Risk in Wal-Mart’s Markets
A drop in oil price results in a reduced extraction (Tverberg 2014). America has proved to be very resilient. The output declined only slightly despite the collapse of the number of rigs operating in the United States oilfields. However, the number of oilrigs in the United States declined by about 60% from the peak of 2014 (DiChristopher, Schoen & Wells 2015). As the price gets lower, production of oil-dependent products may also fall. Further, low oil prices results in a series of secondary effects including bank failures, a collapse of exporters, job loss and deflation. In addition, oil prices also tend to cause debt defaults, which affect bank deposits and cross-border trade. Oil price shocks have real effects on economies (Bjørnland 2000). For example, a higher oil (energy) price affects the output by reducing the net energy used in production process. In other words, oil price shocks affect the aggregate production function. Additionally, the aggregate demand also shifts in response to the fluctuations in oil prices. Fluctuation in oil prices also results in fluctuations in food prices (Tverberg 2014). For example, a drop in oil prices tends to result in a drop in food prices, as well as decreases cost of production. Logically, a fall in oil prices should induce a reduction of the cost of growing food or of agricultural raw materials such as cotton. The net result may be deflation.
According to Wal-Mart (2016b), demand for and supply of particular commodities and their prices, including the prices of refined petroleum products, natural gas, crude oil and electricity, were the factors that affected the way the company operated. Other risks or uncertainties that are directly linked to fluctuations in oil prices include inflation, market selling price of diesel fuel and gasoline, fluctuations in rates of interest, currency exchange rate volatility, disruptions in financial markets, and the monetary policies of the central banks. The world has moved past oil’s golden era when price of oil was relatively stable (IEA 2015). Thus, the fall in oil prices influenced the strategies used by Wal-Mart to create or sustain its competitive advantages. Observably, oil prices and the related risk factors are external in nature. Therefore, to understand the impact of oil on the company, it is logical to conduct an external environmental analysis of the company (Capon 2008). The following section will analyze how fluctuation in oil prices have affected Wal-Mart’s strategies, profitability and growth.
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Strategic management entails strategy analysis, formulation and implementation with the goal to enhance or sustain competitive advantage of an organization (Ansoff 2007; Lynch 2008; Macintosh & MacLean 2014). The fact, that employees were receptive to market dynamics and business transformation, played an important role in Walmart’s achievements. Wal-Mart continuously assessed its rationalism and performance requirements, what sustained its internal competencies and capabilities (Cardy & Leonard 2011; Wal-Mart 2016a). The other strength of Walmart is its continuous stable relationships with customers and strong supply chain partnerships. Walmart is an innovative retailer that employs the most recent technological breakthroughs to improve customer satisfaction. In the present competitive business landscape, technology-based firms must formulate and implement a hybrid of global and local (glocal) strategy to sustain their competitive advantages (David 2009; Sandberg 2008; Rothaermel 2012). According to Volberda et al. (2011), the glocal strategy enables entities to use global brands and localize them to meet the demands of a particular economy or foreign client (Volberda et al., 2011).
Despite the fall in oil prices, Walmart continued to rely on digital marketing, which involves the use of electronic devices in engaging with stakeholders. Some of the popular platforms used in digital marketing include websites, electronic mail and social networks (Zarrella 2010). Walmart’s core strategy is to lead on price, invest in differentiating access, deliver a great experience and be competitive on assortment. The company’s sustainable differentiation emanates from the benefits of unique human capital, core competencies and efficient management of customer support services. According to Porter (1990), a hybrid of the cost leadership and differentiation strategies creates and sustains competitive advantage. In line with Porter (1990), Iacobacci (2014) pointed that integration of differentiation and cost leadership strategies leads to superior performance. Successful implementation of the best-cost strategy requires the company to improve the skills, competencies and resources to be able to offer unique features at more affordable prices than competitors.
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Another competitive aspect of the company is underpinned by the fact that it serves the needs of its customers regardless of their location. In line with Janvier-James (2012), the company considers setting up distribution centers in different locations as a critical pillar in gaining competitive advantages irrespective of fluctuations in oil prices. Additionally, Walmart’s distribution centers focus to sustain high throughput levels. Giannakis (2011) stresses that throughput is a very important element in strategic supply chain management that can be exploited to sustain competitiveness. The significant role Walmart’s distribution centers play is to provide a connection between customers and suppliers (Macintosh & MacLean 2014), implying that locating distribution centers have an effect on revenue, operational cost and customer satisfaction. In simple terms, Walmart considered several strategic factors when established the company’s distribution facilities (Barney 2001; Martínez-Jurado & Moyano-Fuentes 2014; Morris, Kuratko & Covin 2010; Wal-Mart 2016a). Some of the factors that were taken into account are speed-to-market, local infrastructure, market life cycle and capital investment strategy.
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Growth and Profitability
Falling oil prices may seem beneficial, but the costs may outweigh the benefits (Warner 2014). For example, lower prices substantially inflate pre-existing export surplus of Europe and China, create macroeconomic imbalances and deflationary pressures in the global village. While there are numerous oil companies in the United States and other markets in which the company operates, a handful of dominant suppliers operate oil business. This implies that suppliers have a high bargaining power. Macintosh, MacLean (2014) and Porter (1990) agree that dominant oil companies have a considerable control over oil prices. On the other hand, falling prices may result in a reduction in cost and expenses thereby, improve the revenues. For example, Wal-Mart’s net sales increased from $473,076 in 2014 to $482, 229 in 2015 (Wal-Mart 2016a). Similarly, costs and expenses increased from $352, 297 to $365,086 in 2014 and 2015 respectively.
VISA (2015) noted that oil price expectations changed consumers’ spending behavior. As of March 2015, 70% of consumers expected oil price to increase within the next quarter. Interestingly, 19% expected the price to stay the same while the rest expected the price to decrease. Consequently, most consumers saved the windfall from the lower oil prices. For instance, 52 % saved more, while 30% spent more in other areas (VISA 2015). Similar to other entities, Walmart recognized that oil price drop is a temporary scenario because extraction continued to rise. Since the price drop is impermanent, the company was cautious and made only the changes that required minimal capital investment. Consequently, the fall in oil prices was accompanied by a slight revenue growth from $ 476,076 (2014) to $482,229 in 2015.
A drop in crude oil price is expected to boost an economy or help company grow, but there are limits to growth. For example, it can enhance GDP if prices stay low, and it can help companies and industries that largely depend on transportation costs. However, given that oil prices are volatile, the net positive impact is often temporary. Strategic management plays a critical role in creation and sustenance of competitive advantages, especially in the current unmerciful and globalized retail industry. The success of Walmart is linked to its flexible cost leadership and differentiation strategies. Despite the fall in oil prices, the company managed to register a slight growth in sales and revenue. In contrast to the expectations, the costs and expense of the business did decrease with the fall in oil prices. The observation is attributed to the fact that the fall in oil prices changed consumer financial behavior throughout the year with over 52% savings in their income.
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