Analysis Of The E-commerce Strategy Employed At Walmart (Research Paper Sample)

Wal-Mart’s E-commerce Strategy
Name
Institution
Wal-Mart’s E-commerce Strategy
Abstract
The activity-based costing (ABC) approach provides a different perspective of an organisation’s costs. By determining costs on the basis of the activities involved in producing a good or service, the approach enables an organisation to make more accurate resource allocation and pricing decisions. The approach, therefore, presents an ideal opportunity for Walmart, a traditionally brick-and-mortar retail firm, to create competitive advantage as it reinforces its presence in the e-commerce market. If properly implemented, the ABC approach would enable the organisation to eliminate non-value adding activities, accurately evaluate product and/or customer profitability, optimise operating costs, as well as deliver more value to its customers in the fiercely competitive e-commerce environment.
Introduction
Ensuring optimal costs is an important priority for any organisation. This explains why organisations constantly engage in cost-cutting measures such as staff rationalisation and technology adoption. Activity-based costing (ABC) is one of the methodologies a firm can use to estimate the cost of its production activities. The method, which essentially involves assigning a cost to each activity involved in producing a good or a service, enables an organisation to eliminate activities or costs that do not add value (Stefano & Freitas, 2014). Whereas ABC has historically been used in the manufacturing industry, it is increasingly becoming relevant for service industries, particularly in the e-commerce environment. Based on an ABC approach, Wal-Mart Stores, Inc. (Walmart) can transform their brick-and-mortar company into a competitive e-commerce business and attain success in the e-commerce environment. This paper demonstrates how Walmart can benefit from the ABC approach. First, a comprehensive definition of ABC is provided. Next, a brief background of the organisation is provided. Attention is then paid to the relevance of ABC for Walmart, specifically focusing on steps involved in implementing ABC as well as the associated benefits and challenges.
Defining ABC
The ABC method essentially involves calculating production costs based on the activities involved in producing a good or a service (Stefano & Freitas, 2014). In essence, all production activities are listed and each activity assigned its associated costs (both direct and indirect) based on cost drivers. Activity costs are then distributed to each good or service. This approach differs from the traditional approach, which relies on factors such as production volume and other quantity-oriented factors to determine prices (Chen & Wang, 2016). Indeed, there are a number of costs that are unrelated to production quantity such as research and development (R&D) and marketing. Such costs tend to vary with factors such as product variety. Cost estimates may, therefore, be inexact, resulting in poor decision making. The ABC approach enables a firm to make more effective pricing decisions (Suntichai & Punsathitwong, 2009).
There can even be greater accuracy in price determination by using what is referred to as time-based ABC, a modified version of ABC (Kaplan & Anderson, 2007). Dissimilar to the original ABC approach, time-driven ABC introduces the element of time (Basuki & Riediansyaf, 2014). The method determines not only the cost, but also the time associated with each activity. For, a customer service department, for instance, it may be determined that processing customer orders takes 60% of the overall time, while addressing queries and complaints takes 40% of the time. Incorporating the element of time in cost calculation provides greater visibility to capacity utilisation and process efficiency, and gives consideration to changing circumstances (Basuki & Riediansyaf, 2014). Firms exist in a highly dynamic environment, and what may be relevant at a particular point in time may be irrelevant in another.
Organisational Background
Walmart, an American multinational retail firm, is the largest retail chain worldwide by revenue. The retailer was founded in the 1960s and has over the years extended its operations to more than 25 countries across the world, including North America, Latin America, Europe, and Asia. Walmart is also one of the most valuable firms in the world. With a low-cost strategy, Walmart boasts an extensive base of loyal customers, which has been a crucial source of competitive advantage for the retail firm. Though Walmart mainly operates the brick-and-mortar model, it has recently paid more attention to e-commerce, with online sales in the quarter ended July 31, 2016 growing by 11.8% (Wahba, 2016). Indeed, Walmart has added more items to its online marketplace, expanded online grocery retailing, and introduced a mobile payment app in an effort to bolster its e-commerce activities. Arguably, Walmart may be the next e-commerce giant.
Relevance of ABC for Wal-Mart
The ABC approach presents a valuable costing methodology for Walmart as it increases its presence in the e-commerce environment. It is important to first understand the steps involved in implementing the ABC approach. The implementation process involves a number of steps. First, it is crucial to determine the organisation’s infrastructure and capabilities as well as ABC needs (Kujacic et al., 2015). Given its size, Walmart has the necessary resources (financial, human, and technical) to undertake the process. The second step involves determining and classifying all activities associated with producing the good or service (Onat et al., 2014). This is a particularly vital step as leaving out some activities may be detrimental to the effectiveness of the system. As a retail firm, Walmart’s production activities relate to not only establishing and maintaining stores, but also activities such as sourcing suppliers, marketing (offline and online), and consumer research.
Once all activities are listed, the next step is to determine cost drivers (Onat et al., 2014). This basically entails determining how or the rate at which the various activities consume resources. Determining cost drivers enables the organisation to identify non-value adding activities. For Walmart, identifying activities that do not add value would be important. It would be the first step to minimising unnecessary costs. This stage may also involve determining the amount of time required to accomplish each activity (Chen & Wang, 2016). Next, costs (resources) are allocated to the various identified activities (Onat et al., 2014). The last step of the process involves interpreting results and preparing management reports to support decision making (Kaptanoglu & Akinci, 2015). Based on the analysed data, the management can decide which activities, processes, or products to eliminate, as well as what adjustments to make to prices.
Literature has documented the benefits of the ABC approach. In a study aimed at examining the applicability of ABC in an after press services firm, Suntichai & Punsathitwong (2009) found that the approach resulted in more accurate allocation of costs, consumption of resources, and determination of prices compared to the traditional costing method. Other scholars have also demonstrated the usefulness of the ABC approach in ensuring accurate price determination (Kaptanoglu & Akinci, 2015; Chen & Wang, 2016). Setting prices can often be a daunting undertaking for an organisation. It is common for organisations to resort to a low-price strategy in an effort to gain competitive advantage in the marketplace. Nonetheless, since the pricing strategy is often based on the traditional costing method, losses may result as production costs may surpass the selling price. On the other hand, if the organisation prices its offerings too high, its competitive ability may be reduced as the high prices may turn customers away. With the ABC approach, however, the organisation would more effectively determine prices as the approach provides a more accurate allocation of costs and eliminates activities and costs that do not add value.
Effective pricing would be a particularly important advantage for Walmart. The retailer’s competitive advantage has historically come from its low-cost strategy, among other factors. By taking advantage of economies of scale, the retailer has been able to offer goods at comparatively lower prices. With the ABC approach, there is a possibility for the retailer to offer even more competitive prices, thereby increasing its competitive advantage in the rigorously competitive retail industry. The ABC approach can help the company reorganise its brick-and-mortar operations to less costly e-commerce operations. The organisation would eliminate non-value adding activities or less profitable stores. In fact, brick-and-mortar stores involve a flurry of processes that may have little or no significance in an increasingly technology-oriented world. With a brick-and-mortar approach, a retailer has to keep on opening new stores, which may somewhat be a setback as consumers are increasingly favouring online shopping. Under e-commerce, however, the retailer would require a smaller number of physical stores, which would significantly reduce operating costs.
Another advantage of the ABC method is that it facilitates a better analysis of customer or product profitability (Chen & Wang, 2016). The method enables a firm to more accurately determine customers or product lines that are less profitable. This would also be a vital benefit for Walmart. The retailer has operations across the world, and presents tens of thousands of products to hundreds of millions of customers. With the ABC approach, the firm can more accurately determine less profitable product lines or customer segments. Act...