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Cost Leadership and


Differentiation Strategies
@Walmart
Submitted by: Samrat Basu

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INDEX

Walmart Origin
Walmart Mission/Vision
Corporate Culture@ Walmart
Competitive Position of Walmart
Strategies @ Walmart
Private Label and Store Layout
Conclusion
Appendix
References and Bibliography

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Wal-Mart- Origin
Wal-Mart was the product of Sam Walton, a businessman from Arkansas. In the late 1940s,
in USA, a retailer who was successful in obtaining a sufficient discount for his products from
the whole-seller, used to sell the products at full price to the customers and thus enjoyed a
substantial amount of profit. Sam Walton during that time was working as a retailer at a J.C.
Penney store in Des Moines, Iowa.(Walton & Huey, 1993) Incidentally while working there,
he was introduced to Butler Brothers, a big retailer who had chains of variety stores known as
Ben Franklin and Sam was offered a store in Arkansas. There Sam excelled in operating the
stores and soon huge amount of sales were generated which far exceeded the expectations.
But during the lease renewal of the store, there were some problems and as a result an
agreement could not be reached. This drove Sam in opening a new Ben Franklin franchise in
Bentonville, Arkansas and called it Waltons Five and Dime. The prices of the goods were
marked quite low than the competitors. Walton realized that instead of pocketing the extra
money that was generated through retailing, he could better earn profit by volume and pass
on the savings to his customers. Sam was a firm believer of the fact that his customers should
be provided with what they want. In his autobiography, Sam said "The secret of successful
retailing is to give your customers what they want. And really if you think about it from
the point of view of the customer, you want everything: a wide assortment of quality
merchandise; the lowest possible prices; guaranteed satisfaction; friendly,
knowledgeable service; convenient hours; and a pleasant shopping experience. You love
it when a store exceeds your expectations, and you hate it when a store inconveniences
you, gives you a hard time, or pretends you're invisible."(Walmart, 2010)

1962-Walmart
Begins

1972-Walmart Goes
Public

1980-Walmart
Comes Of Age

21st Century-One Of The


Most Successful
Retailers in the World

Sam studied discount retailing and undertook an


extensive tour round the country.
Came to conclusion that American consumers
needed a new type of stores.
Put 95% money for the 1st Walmart store they
launched in Arkansas.
By 1970 , 15 Walmart stores were opened.
In 1972 Walmart was listed in New York Stock
Exchange.
By 1980 Walmart had grown to 276 stores in 11
states in USA and sales revenue touched $1 Billion.
In 1983, the first Sam's Club members -warehouse
opened.
In 1988, the first Supercenter comprising of grocery
and 36 departments of merchandise opened.
By 1989, 1402 Walmart stores, 123 Sam's Club
locations opened and revenue increased to $26
Billion.

8692 stores , 15 countries


2.1 million associates,176 million customers
in a year.

Source: www.walmartstores.com

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Walmarts Mission/Vision Statement
Sam Walton initially started his career in the retail trade for a Chicago-based retail store.
While working there he felt that the retail industry had a lot of opportunities and that the
disposable incomes of the people in USA were on the rise. So he had developed this idea of
giving the people a retail store with some differences from the J.C. Pennies of the time. He
had a simple idea of starting a discount retail store which would provide discount margins
and would be similar to a wholesale price and it would also offer a friendly and an easy
shopping experience with a friendly service. The USP of the stores would be that it would be
located in the small towns as he believed there was a lot more business in those towns
than people ever thought. (Murphy, 2010)
The Mission Statement of Walmart and its advertising slogan when it first started were the
same:
We save people money so that they can live better.
Apart from the mission statement, the company has a statement of purpose for their
stakeholder that is the Vision Statement that says: If we work together, well lower the
cost of living for everyonewell give the world an opportunity to see what its like to
save and have a better life.
The companys vision gradually went on changing as it expanded.
The Vision for Walmart in 2000 was to Become a $125 billion company by the year
2000
However from the 2000 Annual Report of Walmart we can see that revenues of the
company had shot to $219.8 Billion with a profit of $6.7 Billion.
So we can say that Walmart has been able to achieve its vision.
Corporate Culture@ Walmart
Walmarts business has been built upon unique values and morals. The values and ethics
followed by Walmart have helped it in gaining respect as one of the most admired companies
in the world. It strives hard to build and maintain relationship with the stakeholders.
Walmart follows the culture as shown below:-

Sundown Rule-Any
queries from
stakeholders would
be solved the day it
would be received

Grass Roots
Process-Capture
ideas from the
associates and work
on concern and
suggestions

3 Basic Beliefs and


Values-Respect for
the Individual,
Service to our
customers, Striving
for Excellence

Ten-Foot RuleMaking eye contact,


greeting and offering
to help customers
who come within 10
feet

Open Door
Policy-Managers
are easily
approachable by
any employees.

Culture
Walmart Cheer-A
typical hymn created
by
Sam Walton and
Sou
used as an anthem
by all associates
everyday.

Source: www.walmartstores.com

Servant
Leadership-Leaders
are always available
for their teams.

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Competitive Position of Walmart
The Five Force analysis of any organization helps to determine and analyze its competitive
environment. It is used to make decisions about the different aspects of competition the
organization is facing and how effectively it could try to cope up with the competition.

Low Pressure

Medium Pressure

Low to Medium
Pressure

Low Pressure

Medium Pressure

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Bargaining Power of Customers
Walmart faces comparatively very low pressure or no pressure at all from the customers or
the individual buyers. However some consumer advocate groups have raised certain issues or
complaints on the pricing technique used by Walmart, but still that is very negligible. Though
the customers can also purchase items from its other competitors at a comparable price, but
still the expediency that is provided by Walmart is its unique selling proposition.
Threat of New Entrants
Walmart faces medium to low pressure from the other retailers who provide discounts or the
grocery shops as the most important task they would be faced with upon entry is that they
have to cost leaders as the wholesale giant has already achieved a tremendous amount of
economies of scale as it is already in the market for decades. Moreover the brand recognition
of Walmart is very much higher and its vast product portfolio under a single roof is its most
important differentiating factor from the new entrants. However these new entrants can
temporarily drop prices but in the long run it is very difficult to oust the giant from the
industry.
Threat of Substitute Products
Though there are a lot of similar products which any retail store like Walmart can offer, but
the convenience and low pricing that is provided by Walmart is very rare for any competitors.
Though the customers can go to different specialty stores for each of their different products,
but Walmart wholesales every item under one roof and that too at a price which is much
lesser than the outside individual shops. Moreover the online shopping also provides another
advantage as the customer need not be physically present to buy the product and can simply
make an order and have the items delivered at his doorstep.
Bargaining Power of Suppliers
The bargaining power of suppliers is very negligible. Walmart however forces its suppliers to
cut their margins and provide quality products. Though many suppliers have criticized but
they are forced to meet the requirements as Walmart is a very big buyer and accounts for
almost 40-50 % of their supply. So the switching cost for Walmart to another supplier is also
very less as that supplier might only be supplying about 5% of Walmarts requirements. So
Walmart holds a great amount of power and hence bargaining power is practically nil.
Competitive Rivalry within Industry
The retail sector is quite heavily associated with many different big players including some
biggest US Grocery/Discount Retailer Industry. Some of the major competitors which
Walmart faces are K-Mart and Target which in turn again faces stiff competition from big
wholesalers such as Costco. For this reason, Walmart has to adopt a cost leader generic
strategy. However most firms have failed time and again to match with the slogan of Walmart
everyday low prices. However the apprehension is that Walmarts economies of scale and
efficient supply-chain management could easily be ravaged and imitated by its competitors
who could provide more discount than Walmart. So Walmart has to constantly check its
profit margins. (Walmart Five Force Analysis, 2010)
Strategies @Walmart
Walmart focuses on its strong distribution, inventory management, differentiated pricing, cost
leadership strategies coupled with a strong usage of IT and innovations in developing its
strategies which has led Walmart in growing to the top retailer of the world.

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Distribution, Inventory and Supply Chain Strategies@ Walmart
Walmarts urge in becoming the number 1 retailer in the world was only possible through its
effective pricing strategies and the use of technology, branding, imports and broad supplier
and labor relations. Many argue that Walmart has this unique ability to cut down their
complex business strategies by focusing more and more on a centralized communication
channels rather than focusing more on the design intricacies.
According to Friedman (2005), Walmarts greatest strength is its inventory control which is
achieved through its effective distribution centers which he labels as Walmart symphony
with no finale; it just plays over and over (Friedman, 2005, pg 152).
Walmart has strategic locations where in it efficiently brings the products and uses a
technique known as cross-docking. The Walmart stores are located in vicinity of its
distribution center and Walmart closely associates with the suppliers to simplify the
deliveries. Grant (2003, pg 87) noticed the cross-docking process and how the company
eliminates third party product handling and receives goods directly from the manufacturers.
As a result, the store inventory overflows are eliminated. Inbound and outbound trucks are
immediately unloaded and reloaded to minimize warehouse inventory time. Walmart
removed the entire concept of wholesalers/distributors and they became the pioneers in
discount format leader. According to Petrovic & Hamilton (2006, pg 108), Walmart
maintains a high-class relationship with its suppliers and has been called as market-making
phenomenon as it literally shapes, contracts and conducts a set of standards, which the
manufacturers must follow in order to supply goods to Walmart. So the manufacturers cannot
compromise with the quality of goods they are supplying to Walmart.
Pricing Strategy @Walmart
Walmart has always been known for its low prices. Even its slogan says everyday low
prices. This has helped in all the major decisions at Walmart including the use of
technology, marketing, and distribution. According to Ortega (1998), Walmarts simple
mission was offer the lowest price. Cut costs to the bone, and keep cutting so you can
offer the lowest price. Ever since inception of Walmart, the mantra has been to price the
products at the minimum so that more and more consumers can buy from Walmart and as a
result, the concentration can be made into volume sales rather than margin. Initially when
Walmart was started, focus was made to target small USA towns, which have an average
population of about 5000. These towns were neglected by the competitors at that time and so
to grab their potential, Sam Walton had introduced the concept of every day low price
(EDLP). This EDLP had promised customers of a wide variety of products ranging from
branded and unbranded products at a low price. Even the advertising communication of
Walmart said Because you work hard for every dollar, you deserve the lowest price we
can offer every time you make a purchase. You deserve our Every Day Low Price. The
products were usually 15-20 % cheaper than the other competitors and as a result Walmart
gained the loyalty of the rural masses and as a result of larger volumes, the Balance Sheet of
Walmart showed higher and higher profits. (ICMRIndia, 2010) According to Walton By
cutting your price, you can boost your sales to a point where you earn far more at the
cheaper retail price than you would have by selling the item at the higher price. In
retailer language, you can lower your markup but earn more because of the increased
volume.(Walmart, 2010)
Some people however have a different opinion about the pricing of Walmart. According to
Cowgill of Zenith Management Consulting, Walmarts strategy is not low price. Rather
Walmart has been called as Master of Manipulating Perception.
Walmart creates a perception in consumers that the prices of its products are lower and they
become stuck in a self-reinforcing loop that keeps them shopping at Walmart. A very low-

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priced, high-velocity item is placed at the opening price point spot in each store section. As
a result the customer perception is such created that since the staring item is less priced hence
all other items are low-priced. (Cowgill, 2005)
Cost Leadership Strategies @ Walmart
One of the most important strategies that an organization should take into account is that it
has to be a market leader and especially in the retail sector when there is a huge competition
from the different large players, you have to be a cost leader so as to drive the competition
away. Walmart specially has used this cost leadership strategy and integrated cost leadership
with the Porters five forces and has created some sort of a price barrier for the new entries.
The new entries would think twice that they have to compete with Walmart when they would
like to enter the retail market. Walmart has made cost leadership their philosophy.
Any firm who would like to be a cost leader should try to imitate and learn from Walmart.
The slogan of Walmart Always Low Prices. Always has given the company a unique
selling point as the consumers are always attracted to buy items from a place where they can
get a good value for money proposition. Walmart buys goods in bulk at lower costs per unit.
Moreover the store layouts and designs of the Walmart stores are very simple and not at all
complicated like other mega marts. From the start, Wal-Mart imposed a strict control on
its overhead costs. The stores were set up in large buildings, while ensuring that the rent
paid was minimal. The company imposed an upper limit for its rent payment at $1.00
per square foot during the late 1960s. Not much emphasis was laid on the interiors of
the stores. (ICMRIndia, 2010) Moreover the employee number is also not that great. It has
even created a culture of cost-cutting measure even among the executive posts. When the
managers need to travel from one location to another the company pays for the coach rather
than a flight ticket and they are even encouraged to put up in an affordable hotel so as to
minimize costs. According to data published by Harvard Business School, Walmart
maintains a 0.3% to 3.0% cost differential in all its value chain activities over its direct
competitors. The only exception is in the area of Information Technology where their
costs exceed their competitors by 0.2%. This is however acceptable as Walmarts
superior IT helps in the effective operations. (Bradley & Ghemawat, 2002)
The company has a very strict monitoring process and has established a Universal Code in an
attempt to keep a constant check in the product flows within one area to another. The
company can thus efficiently have a check on its inventories, sales, process orders, etc.
Effective data analysis from a huge Walmarts database is efficiently done and all these
improvements have helped Walmart in reducing wastage and hence minimize the cost of
production. This is why it is an exemplary cost leader. (Sedy, 1992)
IT and Innovations @Walmart
The stores for the worlds largest company and worlds largest private employer can be found
everywhere in USA. Infact the store locations are such that each one of them is about an hour
drive from each other. Walmart has often evicted many of the small retailers and carved out a
giant retail space for itself and as a result is often regarded as an evil. A key senator has often
called Walmart as a giant money grabbing evil corporation. It also comes under fire for
outsourcing a majority of its manufacturing particularly in China. Walmart has created
competitive advantage by a proper mixing and use of IT and innovations. Walmarts first
major use of IT came in 1975, when the company leased an IBM computer system for
tracking inventory and distribution centers. In 1975 it was a cutting edge and gave Walmart
advantage over other retailers. Another revolutionary use of IT was Walmarts
implementation of Barcodes for scanning products in 1983. With barcodes all that was
needed was a quick scan and the computer did the rest. This greatly sped up check out time

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and made tracking inventory and data collection easier for both customer and employees
alike and had since become an industry standard for products. In 1987 as information became
more essential for the company, Walmart completed its own private satellite network. This
network allowed for a direct two way communication between the head quarter and
individual stores so that the instant information on inventory, sales could be viewed directly
by the upper management. At that time it was the largest private satellite network across the
globe and allowed the company to relay information around the globe. In 1992, Walmart built
a 125000 sq ft data centre near its headquarter Arkansas. It was like a giant bunker and
surrounded by barbed fence. It could accommodate data twice the size of the internet. So it
could be seen that Walmart through its constant innovation and technology carved its path to
be at the top. (http://www.youtube.com/watch?v=b5K1yrICMII)
RFID@ Walmart
Radio-frequency identification (RFID) is a technology that uses communication via
electromagnetic waves to exchange data between a terminal and an electronic tag attached to
an object, for the purpose of identification and tracking. Some tags can be read from several
meters away and beyond the line of sight of the reader. Walmart has been one of the pioneers
in using RFID.
From 1st August, 2010 onwards, Walmart has started using RFID tags for the mens wear at
the initial level. According to Walmart, the tags are crucial and they could improve the
logistics and help in proper maintaining of the inventory levels. The tags can be implanted in
the garments and can be read by scanners. According to Walmart officials, the
implementation of the tags has helped in speeding up of the operations and accuracy level
with a check on inventory levels. This ability to wave the wand and have a sense of all
the products that are on the floor or in the back room in seconds is something that we
feel can really transform our business, crows Raul Vasquez, Wal-Marts
representative for its stores in the western states.
However, according to many critics, this RFID interferes with the privacy of the buyers as the
RFID constantly emits a signal and could be used by anybody. So even after the goods are
brought home, one can easily track the person if he/she wants and thereby affects his/her
privacy directly. However by the use of this technology, Walmart takes a step ahead than
many of its competitors and could have a timely check at its inventories. Thus it could be said
that Walmart is a pioneer in the usage of this technology as many of the other big retailers
like JC Penny, etc are also on the verge of implementing this technology. The Wall Street
Journal reports that several other U.S. retailers, including J.C. Penney and
Bloomingdales, have begun experimenting with smart tags on clothing to better ensure
shelves remain stocked with sizes and colors that customers want. (The NewAmerican,
2010)
Private Label
The big retailers have already been using the private labels and the local brands of the
different stores in order to increase profitability and enhance the store image. David Glass
had introduced this concept of private labels in Walmart. During the recession these private
labels really play a good role in increasing sales for the company. Walmart has started store
brands containing pet foods, snacks, sodas juices etc in huge volumes through these private
labels. According to analysts, these private labels account for about 10% of the sales of
Walmart and so they have huge prospects of growth. Walmart also focuses on todays teens
as they would be the future prospect buyers of the products. So a lot of teen-targeted
cosmetics and youth-targeted clothes are produced at Walmart. (Branding and Private
Label, 2002)

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Store Layout of Walmart


The layout of a store plays an important role in the operations of the store and maximizes
sales by minimizing retail space loss. Store layouts generally show the size and location of
each department, any permanent structures, fixture locations and customer traffic patterns.
Each floor plan and store layout will depend on the type of products sold, the building
location and how much the business can afford to put into the overall store design. The WalMart stores are of different layouts depending upon the local needs and the type of the retail
format. For example in the diagram below, as we see there are two entry gates, one is for the
shopping entrance where all the shopping can be done and the other is for the Grocery, Dairy
and Bakery entrance where all the food items are available. So it is a clear indication about
the efficient planning ideas as people can come for shopping or some might come for buying
food items only.

Source: www.images.google.com

Inventory and Financials@ Walmart


Analyzing a companys inventories and receivables is a reliable means of helping to
determine whether it is a good investment play or not. Companies stay efficient and
competitive by keeping inventory levels down and speeding up collection of what they
are owed. Inventory turnover measures how quickly the company is moving
merchandise through the warehouse to customers. (Investopedia, 2010)
Walmarts inventory ratio (cost of goods sold/average inventory) in 2007 was about 7.68,
while in 2008 it was about 7.96. In 2009 it was about 8.9. So it can be inferred that Walmart
has efficient operations and hence it has been able to turnover its inventory approximately in
7 days. We can see that the inventory ratio has slightly been increased in 2009. This could be
due to the fact that in 2008-09, the economies of the country suffered from the greatest
recession of all times and hence the buying power of the common man has decreased to some
levels. In 2008 however, Walmart had great financial performance with annual revenues
exceeding $370 Billion which was a sharp increase from previous year. The net sales had

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grown by about 8.5 % which was also impressive considering the fact that comparable
growth in USA was about 1.5 %. (Walmart Annual Report, 2009)
Walmart vs Target: - If we compare financials of Walmart with Target which also one of
the top retailers, after Walmart, we can see that Walmart generated 4 times more cash flows
than Target in the past year. Walmart generated $23.1 Billion in cash from its operations
while Target had taken up a blow of $1.3Billion to cover its future bad debts. Both Walmart
and Target however efficiently made use of comparatively large amount of short term and
long term debts to finance their operations. They even utilized sufficient amount of cash flow
to pay dividends and repurchase shares, but Walmart was able to outperform Target by
utilizing more than $7 Billion. (Fuhrmann, 2010)

Conclusion
The above small attempt to analyze the worlds largest private employer brought into light a
few concrete conclusions about the company. The company showed a steady performance
even during the financial crisis and it turned out to be the top out of the competitors.
The working culture, the customer-oriented focus and its steady aim in achieving its vision
has made it different from rest of the competitors. Its pricing and cost leadership strategies
coupled with the effective use of technology has helped transform Walmart to a huge
corporation.
Walmart invests in providing a better shopping experience to customers. The new product
lines such as energy saving products, advancements in healthcare, pharmacy and efficient
implementation of IT systems to control the operations all over its stores has paved the way
to experience a sustainable growth in the future.

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Appendix:-

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References and Bibliography
1) Murphy, JJ., The Concepts of Vision & Mission Revisited[online]
[Available at: http://www.calumcoburn.co.uk/articles/articles-vision-mission/]
[Accessed on: 26th November, 2010]
2) Walton, S., Huey, J., 1993, Sam Walton: Made in America: My Story. New York:
Bantam,
[Accession Number: ISBN 0-553-56283-5]

[Available at: www.google.com]


[Accessed on: 26th November, 2010]
3) Walmart Five Force Analysis[Online]
[Available
at:
http://www.oppapers.com/essays/Walmart-Five-ForcesAnalysis/165282]
[Accessed on 26th November, 2010]
4) Petrovic, M., Hamilton, G., 2006, .Making Global Markets:Wal-Mart and its suppliers
Pg.10741
5) Grant, R., 2003,Wal-Mart Stores, Inc. May 2002., Cases in Contemporary Strategy
Analysis, ed. Pg 71-97, Oxford Blackwell, 3rd Edition, pg 71-97

6) Friedman,TL.,2005.,The World Is Flat: A Brief History of the Twenty-First Century,


New York: Farrar, Straus& Giroux
7) Walmarts Aggressive Pricing[Online]
[Available
http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy2/WalMart%20Cost%20Leadership.htm]
[Accessed on: 29th November, 2010]

at:

8) Cowgill, R.,2005, Case Study: How to Exploit Walmarts Weaknesses[pdf]


[Available at:www.zenith-consulting.com/research/walMart/Wal-Mart-Strategy.pdf]
[Accessed on: 29th November, 2010]
9) Bradley, Stephen, P., Ghemawat,P., Wal-Mart Stores, Inc., Case Study 9-794-024,
Harvard Business School Publishing, 2002.
10) Sedy, H., 1992, The Two Sides of Wal-Mart, The New York Times
11) Fuhrmann, RC., 2010, Wal-mart Outmuscles Target[online]
[Available
at:
http://stocks.investopedia.com/stock-analysis/2010/Wal-MartOutmuscles-Target-TGT-WMT-SHLD-M-DDS0126.aspx]
[Accessed on: 3rd December, 2010]
[Last Updated: Jan 26, 2010, 14.33 PM]
12) http://www.idxs.eu/technology/technology.html

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13) Wolverton, J., 2010,Wal-mart to Embed RFID Tags in Clothing Beginning August
1[online]
[Available
at:
http://www.thenewamerican.com/index.php/tech-mainmenu30/computers/4157-wal-mart-to-embed-rfid-tags-in-clothing-beginning-august-1]
[Accessed on: 30th November, 2010]
[Last Updated on: Wednesday, 28 July 2010 11:45]
14) http://www.youtube.com/watch?v=b5K1yrICMII
15) Branding and Private Label[pdf]
[Available at: www.supermarketalert.com/pdf%20docs/2Brand&PrivateLabel. pdf]
[Accessed on: 1st December, 2010]
16) http://www.investopedia.com/articles/stocks/05/04405.asp
17) www.walmart.com