WAL*MART STORES, INC.

Competitive Strategy – 299 E1 Professor Meghan Busse September 11, 2002 Fibi Cobarrubias

Automated inventory management lowers inventory costs. This information is communicated to the store’s computerized inventory system. Pricing varies by geography and by proximity to competitors. WalMart’s choice of geographic location in rural/small town locations that were not being served by competitors allowed it to establish itself as the sole discount retailer in these areas. As Sam Walton describes “the key strategy was to put good-sized stores into little one-horse towns which everybody else was ignoring…. Merchandise brought in by truck to a distribution center is sorted for delivery within 24-48 hours. Store managers can price to meet local demand. First. each store is fine-tuned to best meet local needs rather than follow a general corporate policy. allowing for maximal efficiency in inventory tracking and repletion. Therefore. minimizes handling of goods thereby keeping costs lower. By having multiple distribution centers. as opposed to individual product labeling. Another key to WalMart’s competitive advantage is its operations strategy. to maximize sales volume and inventory turnover and to minimize expenses. Information regarding sales data is collected and analyzed via satellite network. people could shop at home. WalMart committed resources towards sophisticated automated technology systems such as electronic scanning and satellite systems in order to achieve higher operational efficiency and keep costs significantly lower than its competitors. allows seamless replacement of goods and better meets local demand. whereby it remains most price competitive in regions with higher concentration of competitors yet avoids pricing too low in areas where it is the sole discount retailer. WalMart’s pricing strategy allows more local control again based on geographic demand. WalMart implemented electronic scanning in all its stores two years ahead of competitors such as Kmart.WalMart’s competitive advantage is a result of several key strategic choices. This flexible pricing policy allows WalMart to achieve maximal strategic pricing. A second key strategic feature is WalMart’s inventory management strategy. If we offered prices as good or better than stores in cities that were four hours by car. From the onset. WalMart’s hub and spoke distribution network is another key strategic piece behind its operations.” This key strategic choice of location was completely different from what competitors had done and gave WalMart a first mover advantage in markets that had not previously been served by discount retailers. WalMart’s inbound logistics costs 1 . WalMart’s operations activities fit well together to achieve maximal efficiency and lower costs. Shelf labeling. This allows higher efficient use of store floor space for displaying more goods and generating greater sales volume. Merchandise is tailored to local market demand via “traiting” where a product’s movements are indexed over a thousand store and market traits. store managers are given local control over which items to display based on customer preferences and how to allocate shelf space based on local demand. Inventory is tracked electronically at the point of sale by UPC scanners and hand held bar code scanners. WalMart has been a leader in implementing new and cost effective methods to manage inventory. Logistics management by way of cross docking allows seamless “just in time” inventory delivery and minimizes the cost of inventory sitting idly in distribution centers. The ability to do so avoids overstocking and deep discounting. In addition. WalMart is able to lower a store’s square footage that is devoted to inventory to 10% versus 25% for competitors. Early on. In addition.

allowing for better control over inventory and less reliability on the efficiency of suppliers’ operations to manage its inventory. Compensation is based on a combination of salary/wages and incentives linked to profitability. WalMart ships more of its purchases (80%) from its own distribution centers than competitors such as Kmart (50%). Training is decentralized. distribution centers are highly automated and run 24 hours a day. For example. For example. As WalMart has grown. WalMart is better able to control its negotiation position with its suppliers. Its automated inventory tracking system at the point of sale allows WalMart to immediately communicate inventory data to suppliers’ distribution centers and headquarters. Efforts are made to actively involve employees in the continued success of WalMart.600 vendors regarding inventory orders. Weekly meetings allow repeated emphasis and communication of company goals and strategy. WalMart’s organizational structure has a centralized office but lacks regional offices. Another key part of WalMart’s competitive advantage is its vendor relations. Profit sharing and stock ownership plans (60% participation) link employee incentives to performance and profitability. WalMart has made specific supplier choices along the way that are geared towards minimizing costs and maximizing efficiency. Sam Walton led by example and emphasized frugality. All of these activities are aligned with maximizing revenues and efficiency and keeping costs low. WalMart’s electronic data interchange allows it to communicate with over 3. which minimizes administrative costs at savings of 2% of discount store sales per year. In addition. WalMart derives competitive advantages from its specific activities and capabilities. it has developed key supplier relations into partnerships. WalMart eliminated manufacturers’ representatives at cost savings of 3-4% and calls its suppliers collect. and managers are given greater local control. and employee suggestions are often implemented at great cost savings. suppliers and customers. planning. As mentioned in the case. Therefore. Lastly. Associates are seen as playing a critical role in the success of WalMart and are given more responsibility and recognition than employees of competitors. WalMart’s culture is a key source of its competitive advantage. replenishing.8% for competitors. WalMart actively manages its suppliers by communicating its expectations and providing annual strategic business planning packets to vendors. Key suppliers have vendor managed inventory systems.are 3. thereby minimizing lag time in inventory repletion. From the onset. which reduces WalMart’s inventory costs and allows suppliers to increase sales for their products. and transferring electronic funds. Buying is centralized at headquarters which keeps purchasing costs down.4% of its purchases. WalMart’s culture focuses on building loyalty among associates. and an open book policy.7% of discount store sales versus 4. WalMart has avoided supplier power by not allowing any single supplier to have more than 2. forecasting. For example. more than 650 employee suggestions were implemented in 1993 at savings of $85 million. Large key suppliers such as P&G and GE are able to share information with WalMart electronically and have dedicated teams to manage products for WalMart. its “everyday low prices” strategy allows WalMart to have fewer 2 . customer service.

5% of discount store sales versus 2. WalMart’s sophisticated inbound logistics enables it to lower its cost of inbound logistics to 3. As a whole. distribution center management. these intangibles will be difficult for competitors to replicate. geographic location. Its competitive advantage meets the four characteristics of sustainability quite well. There are now many impediments to imitation. WalMart has established itself as a low price leader in the eyes of consumers and its strong “brand” presence also provides continued deterrence to entry. WalMart’s competitive advantage enables it to lower its operating expenses to 18. This will be a difficult and costly endeavor for competitors. WalMart’s large market size and scale economy makes entry by new discount retailers difficult and economically unfavorable. WalMart’s early emphasis on automated technology allowed it to develop a maximally efficient and committed supplier network at a lower cost.1% of discount store sales versus the industry average of 24. A quantitative estimate of WalMart’s cost advantage is approximately 3. Its choice of location gave it a clear competitive advantage in underserved markets. perpetuating the early mover advantage. operations.7% of discount store sales compared to 4. etc are aligned with each other to achieve a sustainable competitive position. This figure significantly lowers the cost of goods sold. WalMart’s strategy involves a whole system of activities (cross docking. WalMart should continue to benefit from its intangibles such as its corporate culture. WalMart’s lack of regional offices and lack of manufactures’ representatives during negotiation saves an additional 2% and 3% of discount store sales respectively. WalMart has been able to form strategic partnerships with key large suppliers.4 billion dollars over competitors. At this point. etc) that are linked to fit and reinforce one another. WalMart has achieved inimitability as a result of its strategic choices and use of capabilities. Competitors now wishing to enter those markets will have to expend large amounts of resources and hope to take away market share in a relatively saturated market. First. providing it with superior access to inputs than its competitors. WalMart’s incentives to employees helped improve shrinkage costs (via the “shrink incentive plan”) to 1.8% for its competitors. In addition. thereby securing the supplier’s continued interest in the success of WalMart.7% of discount store sales versus 2% for competitors. and its set of unique operational activities that provides it with a continued cost advantage.6%. WalMart benefits from imperfect mobility as best exemplified by its operations. its strong brand presence as the low cost leader. WalMart has achieved heterogeneity by its different choice of geographic market. supplier networks. none of these 3 . electronic inventory systems. The early mover advantage in these geographic markets should continue to deter against entry. As a result of its growth.1% for competitors. Even if competitors decide to enter WalMart’s geographic markets. In addition. Second. It has tied its relationship with key suppliers such as P&G to their profitability. (Refer to attached spreadsheet) WalMart’s competitive advantage has resulted from its key strategic choices and its ability to use its resources and capabilities better than competitors. WalMart’s culture. If duplicated. Third.promotions and lowers its advertising expense to 1. organizational structure. Overall.

WalMart can succeed internationally if it continues to make strategic choices about expansion by remaining focused on its competitive advantage. A greater initial investment may be necessary to ensure international success. a critical component to successful food sales given the perishable nature of the product. Early on. WalMart’s automated operations are well aligned to provide efficient inventory management of food items and local store managers are specifically trained to best meet local demand and maximize inventory turnover. WalMart’s diversification into supercenters should be a success for several reasons. WalMart should concentrate on deepening its current strategic position by leveraging its existing activities and capabilities in the international arena rather than trying to grow by broadening into other areas in the domestic marketplace that compromise its competitive advantage. For example. Providing low cost food products also reinforces the WalMart brand for its consumers and makes WalMart a “one stop shop” for all of the customer’s needs. He was able to foresee an unmet market need and subsequently made the critical decisions to set up the company in such a way as to best serve the target market. Although WalMart will not likely be able to undercut supermarkets on brand name items due to the low margins of the food industry (1-2%). This key piece of strategic positioning fits with international expansion. In other words. WalMart has historically profited by its foresight to enter key geographic markets and benefit from an early mover advantage. WalMart’s activities and capabilities are well prepared for introduction of food products. which can often be affected by intercultural variations as well as local market dynamics. WalMart clearly has achieved “third order fit” as defined in Porter’s article whereby activities are optimized to best fit the strategy rather than just consistent with the strategy. WalMart has demonstrated foresight in developing its competitive advantage. prior to entry WalMart will need to examine supplier availability and understand supplier relations. WalMart may need to provide suppliers with needed technology in order to fully automate operations. WalMart will need to pay particular attention to its execution in each country it enters and should choose to enter a country strategically based on local demand and the ability to implement its key set of activities within the chosen country. it can provide lower cost yet higher margin private label food items (“Sam’s Choice” label) that would appeal to its price sensitive customers. Specifically. Diversification into food products is a natural extension of WalMart’s product line and would provide increased flow into WalMart stores. Using the food product to drive customer traffic clearly takes market share away from general supermarkets and taps into yet another section of the market. up front infrastructure investments in countries such as China may show less profitability at the outset but 4 . Expansion into the food product line allows WalMart to grow strategically within the domestic marketplace by further leveraging its existing capabilities and competitive advantage. The key is the fit amongst multiple resources and activities that ensure sustainability. International expansion is critical to WalMart’s continued long run success. Last. obviating the need for WalMart customers to shop elsewhere. Therefore.aspects on its own would provide a competitor with WalMart’s competitive advantage. Sam Walton had the entrepreneurial edge needed to enter markets that seemed unprofitable. In order to “globalize” successfully. For example. success will need to be gauged with a longer-run timeframe in mind.

Overall. WalMart should stay focused on implementing its competitive advantage while at the same time.should allow for greater long-term growth and returns. To be successful internationally. globalization should be successful for WalMart since it opens up a larger market within which to implement the company’s focused and well-developed strategy. WalMart can ensure continued supplier access by forming joint ventures/partnerships with local large suppliers and providing them with an opportunity for increased profitability via the partnership. This should assure implementation of the WalMart corporate culture in a manner that is sensitive to local cultural customs and community needs. Another alternative is to acquire suppliers of key products in order to ensure consistency and efficiency of inventory management. avoiding a “cookie-cutter approach” to implementation by understanding and fine-tuning its capabilities to better serve the target country. 5 . Cross-cultural training of associates will be critical to success at the local level in each different country.

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