Competitive Strategy and the Wal-Mart
Threat: Positioning for Survival and Success
John A. Parnell, University of North Carolina-Pembroke
Donald L. Lester, Middle Tennessee State University
No class of retailer has influenced the business
landscape in recent years more than the big box,
and no big boxer is more prominent than Wal-
Mart. Big boxers like Wal-Mart not only apply
pressure to suppliers and alter the mix of shop-
ping alternatives for consumers, but they also
greatly influence the competitive behavior of
traditional retailers. The academic and business
press has chronicled the wide-ranging effects of
the mega-retailer over the past two decades
(McCune, 1994; McGee and Peterson, 2000;
Stone, 1993). Although there is growing evi-
dence that Wal-Mart's hold on retail may be
slipping, it remains a competitive nightmare for
many of its competitors, particularly small rivals
in local markets (McWiltiams, 2()07a. 2007b).
A number of authors (e.g.. McGee and
Peterson, 2000; Edid, 2005; Spector, 2005) have
suggested or inferred competitive responses for
smaller retailers when a big box like Wal-Mart
comes to town. This paper builds on such work
by providing a more comprehensive and theory-
based analysis of strategic alternatives available
to retailers specifically facing a threat from Wal-
Mart. Toward that end, the remainder of the
paper begins with an overview of the big box
phenomenon and a framework for understanding
how the big box influences the strategic land-
scape. Three theory-based potential strategic
responses are evaluated, followed by conclu-
sions and opportunities for further research.
Wal-Mart and the Big Box Phenomenon
The emergence of big box retailers in the United
States has changed the retailing landscape con-
siderably. The term "big box" typically refers to
discount retailers whose stores exceed 50.000
square feet, with many as large as 200,000
square feet. Big boxers usually implement a
limited number of store designs across markets
14
and seek profits through high volume via low
markups. Their facades are standardized with
lai"ge windowiess single-story buildings. Ample
parking is usually available, although customers
may be required to walk a considerabie distance
to enter the store.
Store traffic patterns spell the success of big
boxers, particularly in the United States. During
the la.st 15 years, the number of consumer trips
to the shopping mall has been cut in half, a trend
that has not always held true for malls anchored
by a big box like Wal-Mart or Target (Chittum,
2005), In addition, a growing percentage of
American teenagers have access to a credit card.
Teens are making more and more purchase
decisions and are frequenting shopping malls
less and shopping more at big boxers, entertain-
ment-oriented retailers, and online retailers
(Barta. Martin, Frye, and Woods. 1999; Etter,
2005; Raymond, 1999; Spector. 2005).
A big box store that operates primarily in a
specialized market may also be referred to as a
"category killer." Toys "R" Us is widely refer-
enced as the first category killer; others in the
U.S, include Best Buy, Circuit City. Lowe's,
Blockbuster, and Home Depot. From a strategic
perspective, general merchandise big boxers and
category killers are similar in a number of ways,
with the primary distinction being the breadth of
the product line (Spector, 2005). Wai-Mart, for
example, sells office supplies like Office Depot,
electronics like Best Buy, and hardware like
Home Depot, but does not offer as wide a selec-
tion as their specialized counterparts.
Wal-Mart is the perennial general merchan-
dise big-box retailer in the United States, al-
though rivals Costco and Target are also
prominent examples. Wal-Mart boasts 23 miles
of retail selling space in the U.S., where 70%
of its approximately 5,500 stores are located.
SAM ADVANCED MANAGEMENT JOURNAL
Annual revenues for 2004 were slightly over
$288 billion (Revell. 2005). making it number
one on the Fortune 500 ranking. By 2005, Wal-
Mart had slipped to second place on the Fortune
500 (McGirt, 2006) with revenues of $315
billion, just behind Exxon Mobil. However, in
2006 it regained the top spot as revenues ex-
ceeded $350 billion (Useem. 2007), with its
headcount nearing two million.
Because of its prominence and ability to trim
costs, Wal-Mart is often the brunt of criticism
from politicians, activists, union leaders, and
others. Detractors, for example, contend that
Wal-Mart's aggressive negotiating tactics ulti-
mately annihilate U.S. manufacturing firms and
send American jobs overseas. Some charge that
the mega-retailer seeks to render obsolete small
businesses in the communities in which it oper-
ates (Edid, 2005: Quinn, 2000). Others cite
positive influences, however, noting such factors
as job creation and the benefits of low prices
(Etter, 2005; York, 2005). When Albertson's —
the second largest grocer in the U.S. with 2,500
stores — searched for a buyer in 2005, it was
another reminder that Wal-Mart can destroy
smaller competitors and have a staggering effect
on the success of large retailers as well (Berman,
Adamy and Sender. 2005). Besides Albertson's,
a host of formerly successful discount chain
stores were bankrupt by the late 1990s, includ-
ing Heck's. Arlans, Federals, Ames, E.J. Kor-
vette, Atlantic Mills, iind W.T. Grant (Camerius,
2006).
Wal-Mart critic Arindrajit Dube suggests that
Wal-Mart's relatively low wages resuit in an
annual wage loss in the retail sector of almost $5
billion. Hollywood producer Robert Greenwald
even produced a movie about the giant retailer,
"WAL-MART: The High Cost of Low Price,"
chronicling the plight of an Ohio-based hard-
ware store when Wal-Mart moved to town (York.
2005). Indeed, the liberal segment of the U.S.
has adopted Wal-Mart as its cause de jour with
such a vengeance that one writer has labeled
their obsession WMDS — Wal-Mart derange-
ment syndrome (Goldberg. 2006). Senator John
Kerry (D. Mass.) has been quoted as saying that
Wal-Mart is "disgraceful" and a symbol of
"what's wrong with America" (Will, 2006b). He
is basing his remarks on Will's (2006b) claim
that Wal-Mart costs about 50 retail jobs for
every 100 jobs that it creates.
Critics are aghast at Wal-Mart's wages and
lack of health care coverage, siding with unions
in their efforts to organize Wal-Mart workers.
SPRING 2008
They argue that Wal-Mart takes advantage of
American blue-collar workers who, due to
downsizing and outsourcing, cannot find viable
employment elsewhere. They also suggest that
much of the outsourcing can be blamed on Wal-
Mart's coercive tactics in dealing with suppliers
and costs. Through laws and ordinances, the
union push has even led several states and cities
to try to force Wal-Mart and other big-box
retailers to spend at least 8% of its payroll on
health care or pay a minimum of $ 13 an hour to
hourly employees (Novak, 2(X)6: Will. 2006a).
When Wal-Mart announced its intention to move
into inner city areas of Los Angeles, for ex-
ample, voters rejected its effort (Kaplan. 2006),
choosing instead to rely on small mom and pop
merchants that some suggest have historically
overcharged local residents who lack basic
transportation.
Not all press has been negative, however. As
Jason Furman of New York University notes,
Wal-Mart's economic benefits cannot be ignored
as the retailer saves its customers an estimated
$200 billion or more on food and other items
every year (Mallaby, 2005). As for health insur-
ance, Wal-Mart offers 18 different plans lo its
employees, with one having monthly premiums
as low as $11 (Will, 2()()6a). All togethei; over
86% of Wal-Mart employees have some form of
health insurance, witb about half being insured
through the company. With over 1.3 million
workers in the U.S., Wal-Mart accounted for
13% of the country's productivity gains in the
scondhalfofthe 1990s.
The competitive issue for the future is how
constrained Wal-Mart's domestic growth will
become due to this class war being fostered by
the more liberal segment of U.S. society. If
legislation takes hold on a widespread basis to
limit Wal-Mart's penetration of untapped U.S.
markets, will that create opportunities for other
firms to expand their operations to take up the
slack?
The Big Box and the Strategic
Landscape
Traditional economic theory suggests that the
rules governing firm success and failure tend to
evolve over time as a result of the collective
activities of numerous competitors in an indus-
try. This economic ideal is marked by free and
open competition and assumes that no single
finn is able to rise head and shoulders above tbe
crowded field and dominate the industry. The
problem, bowever, is that all firms in an industry
15
are neither equally competifive nor equally
lucky. In many cases, this results in one or more
rising to prominence. Such is the case with big
boxers.
Industrial organization (10) economics em-
phasizes the influence ofthe industry environ-
ment on firms. The central tenet of industrial
organization Iheory is che notion that a firm must
adapt to influences in its industry to survive and
prosper; thus, its financial pertbrmance is prima-
rily detennined by the success of the industry in
which it competes. Industries with favorable
structures offer the greatest opportunity for firm
profitability (Bain. 1968). Recent research has
supported the notion that industry factors tend to
play a dominant role in the performance of most
competitors, except for those that are the notable
industry leaders or losers (Hawawini,
Subramanian, and Verdin. 2003).
The IO perspective assumes that a firm's
perfonnance and ultimate survival depend on its
ability to adapt to industry forces over which it
has little or no control. According to 10, strate-
gic managers should seek to understand the
nature of the industry and formulate strategies
that feed off the industry's characteristics. Be-
cause 10 focuses on industry forces, other
factors including strategies, resources, and
competencies are assumed to be fairly similar
among competitors within a given industry.
If one firm deviates from the industry norm
and implements a new, successful strategy, other
firms will attempt to rapidly mimic the higher-
performing firm by purchasing the resources,
competencies, or management talent that have
made the leading firm so profitable. Hence,
although the 10 perspective emphasizes the
industry's influence on individual firms, it is also
possible for firms to influence the strategy of
rivals, and in some cases even modify the struc-
ture ofthe industry, albeit in a limited fashion
(Barney. 1986; Seth and Thomas. 1994).
Perhaps the opposite of IO, the resource-based
view (RBV) considers performance to be a
function of a firm's ability to utilize its resources
(Barney. 1986). Although environmental oppor-
tunities and threats are important, a firm's
unique resources compo.se the key variables that
allow it to develop a distinctive competence
(Lado. Boyd. and Wright, 1992) and enable il to
distinguish itself from rivals and create competi-
tive advantage. A firm's resources include all of
its tangible and intangible assets, such as capital,
equipment, employees, knowledge, and informa-
tion. An organization's resources are directly
16
linked to its capabilities, which can create value
and ultimately lead to profitability for the fimi.
Hence, re source-based theory focuses primarily
on individual firms rather than on the competi-
tive environment.
The increasing speed of business activity and
the notion of ephemeral competitive advantage
have prompted researchers to emphasize dy-
namic strategy positioning models. This ap-
proach does not refute the tenets of IO and the
RBV per se, but challenges their static assump-
tions in favor of strategies that are more flexible
and adaptive to changing market conditions.
This is especially true in industries where suc-
cess depends on a constant flow of new offerings
(Bamett. 2006; Fiegenbaum and Thomas. 2004;
Selsky, Goes, and Baburoglu. 2007).
The IO, resource-based, and dynamic strategic
positioning perspectives can be useful tools for
understanding competitive behavior in industries
where big boxers thrive. Contrary to 10 assump-
tions concerninfi the limited power of any sinfile
firm, however, hig boxers set — or at least influ-
ence significantly — the competitive rules in
their industries. For example, big boxers shift
the power relationship between retailer and
producer in favor of the retailer, a move that can
effectively reduce the level of differentiation
among producers. When a retailer becomes a
dominant player in ils industry, it begins to
control a large percentage of the output of many
of its suppliers. As a result, the retailer can
sometimes exercise more influence on a prod-
ucts position and image than the manufacturer.
10 and strategic group models acknowledge only
minimal influence on the part of a single com-
petitor. Industry factors dictate critical success
factors, and even large flrms must adapt to them.
In contrast, big boxers leverage their size and
scope in such a way that rivals, suppliers, and
buyers must reorient their competitive strategies
accordingly. As Hannaford (2005) relates, firms
with market dominance in the past would have
charged above-market prices, earning above-
average returns for their oligopolistic position.
Wal-Mart, however, charges below-market
prices, forcing suppliers who wish to take advan-
tage of their vast market to keep their costs and
prices low.
Consider the case of Wai-Man and Vlasic
pickles. In 2003 Wai-Man priced a gallon of
Vlasic pickles at $2.97, thereby selling a
gallon ofthe nation's top-.selling brand for less
than most other retailers charged for a quan.
The move was a good one for Wai-Man as it
SAM ADVANCED MANAGEMENT JOURNAL
strengthened the retailer's image as a deliverer
of value. Unfortunatety, the move undermined
efforts Vlasic had made for years to establish its
position as a producer synonymous with the
pickle itself. If Vlasic had chosen not to sell to
Wal-Mart, the producer would have paid a great
price in terms of market share. Ultimately,
Vlasic had little choice but to allow Wal-Mart to
sell its pickles in whatever way the retailer saw
fit (Fishman, 2003).
Consider another case involving Wal-Mart
and Levi Strauss. In 2002, Levi and Wal-Mart
announced that the retailer would begin selling
Levis in its stores. Levi had experienced declin-
ing market share in the decades prior, closing
58 manufacturing plants in the U.S. and out-
sourcing 25% of its sewing between 1980 and
1991. After rebuilding and posting a record $7.1
billion in sales in 1996, Levi experienced six
years of decline. The Wal-Mart deal was de-
signed to revive the brand. The problem was
that half the jeans sold in the U.S. in 2002 cost
less than $20 a pair, a year in which Levi sold
none for less than $30. Clearly Wal-Mart, the
country's leading clothing retailer, would not be
interested in selling premium jeans at a premium
price. Levi had to develop a fresh line of less
expensive jeans for Wal-Mart, the Levi Strauss
Signature brand. As expected, Levi sales in-
creased shortly after its new line of jeans were
introduced in Wal-Mart (Fishman, 2003). At
least some of the Wal-Mart sales cannibalized
those of Levi's more profitable premium brands
in other outlets, however. In addition, the sale of
Levis at Wal-Maii tarnished the image of the
century-and-a-half old American icon.
Big boxers adopt a resource-based perspective
to a great extent, seeking to develop resources
and competencies that cannot be readily dupli-
cated by rivals. Although competitive strategies
can vary among big boxers, the general approach
is based on four pillars:
Build economies of scale. Big boxers lower
costs by purchasing larger quantities. They
distribute these products efficiently to a large
number of stores strategically located to mini-
mize transportation and related costs. Sheer size
represents the single greatest resource advantage
possessed by the big boxer.
Offer everyday low prices on most items.
Leveraging scale economies, big boxers typi-
cally offer prices that simply cannot be tnatched
by rivals. As a result, most competitors find it
difficuh to compete with the big boxers solely
on price.
SPRING 2008
Sell a wide variety of products. Selling lots of
products increases store traffic. A customer may
visit the big box to purchase one or two prod-
ucts, but will likely leave with more. Product
lines for general merchandise big boxers like
Wal-Mart are not as deep as they are at their
specialized rivals. Only products that sell consid-
erable volume are carried, fueling even greater
economies of scale.
Offer a consi.stent, predictable shopping
experience across time and locations. Econo-
mies of scale and low prices are achieved when
all stores sell the same products. Predictability
enables customers to plan their shopping trips
accordingly.
The four-pronged strategy employed by the
typical big box like Wal-Mart can be lethal to
competitors, but the approach is not without its
shortcomings and can be attacked effectively by
smaller retailers. Specific plans for addressing
the Wal-Mart threat are outlined in the following
section.
Strategies for Confronting the Wal-Mart
Threat
Big boxers reduce the relative size of otherwise
"large" retailers. To effectively confront the big
box threat, smaller, often sizable and established
rivals must account for the influence of the big
boxer on the industry and formulate their strate-
gies accordingly. Specifically, the first step in
confronting Wal-Mart is to understand the
threats it creates, as well as the opportunities it
affords traditional retailers. While the competi-
tive threat posed by the entry of a Wal-Mart
store into a locale previously dominated by
traditional and specialty retailers is substantial, it
does not necessarily create a hopeless situation
for smaller rivals. Competitive strategy is about
choices, some of which are mutually exclusive.
By its very nature, a big box like Wal-Mart
possesses key competitive strengths and weak-
nesses that should be understood before crafting
a response.
Wal-Mart's strengths are forthright and
widely acknowledged. With its size and access
to capital, Wal-Mart can sustain even a low-
performing store for the long term when moving
into a region, a luxury not afforded many small,
family-based businesses. Distribution and
supply chain efficiencies enable the retailer to
offer exceptionally low prices that are difficult
for rivals to match. Its wide product assortment
— especially in superstores where both grocer-
ies and general merchandise are offered —
17
generates store traffic and suppons a one-stop
shopping experience for the consumer. And. its
cost-control-oriented corporate culture, which
includes a reliance on low-cost, pan-time labor,
keeps costs down.
Wa!-Man's business mode! has its shoncom-
ings, however. Ofthe five primai-y dimensions to
retailing — quality, service, convenience, selec-
tion, and price — and Wai-Man wins only on
price and selection (Rigby and Haas. 2004).
Since Wai-Man typically captures about 30% of
a Iocal market, 70% remains for its rivals, in-
cluding local retailers, other big boxers, and
smaller-store chains. While Wai-Man is often
referenced as the "500-pound gorilla," maintain-
ing such a stature is not easy. As a big box
seeking to secure maximum market share from a
broad audience. Wal-Mart simply lacks the focus
and resolve to battle competitors along the
periphery, thereby creating opportunities for
retailers that can compete on quality, service,
and convenience. The success enjoyed by fiim-
ily-owned businesses such as Berlin Myers, Ji.,
owner of a lumber company in Summerville.
South Carolina, bearing the family name, sug-
gests that superstores and other retailers can
coexist, often with the smaller outlets supple-
menting what the large ones carry. The big
boxers typically do not compete directly with
smaller retailers unless they are attacked first
(McCune, 1994).
Because of its reliance on distribution and
supply chain efficiencies. Wal-Mart retailers are
challenged to alter product assonments and
tailor offerings to the specific needs of a region.
In addition. Wai-Man's approach assumes that
price is the primary factor consumers evaluate
when choosing a retailer. While Wal-Mart is able
to offer high-demand products at low prices, its
sheer size makes it difficult for associates to
deliver exceptional customer service on a consis-
tent basis, a key component in the consumer
shopping experience. Wai-Man's image as
Goliath in a David versus Goliath battle can be a
liability if consumers become sensitive to the
plight of family-owned businesses defending
themselves against the onslaught of a retail
invasion.
In general, Wai-Man's competitive responses
target large general merchandise retailers or
grocers (e.g.. Home Depot, Best Buy, and
Kroger), not small niche-oriented specialty
retailers. As category killers fight more among
themselves, their success is less connected with
an ability to dwarf smaller retailers, than with an
18
ability to attack and defeat other category killers
(Barta. Manin. et al, 1999). The sale of Toys-R-
Us in 2OO.'i demonstrates the rise ofone category
killer and its subsequent fall at the hands of
other big boxers.
The process of formulating a competitive
response to Wal-Mart can be a challenge to
small retailers if their managers do not under-
stand local demographics or how customers
make shopping decisions. The Wal-Mart threat
is greatest for a retailer whose survival has been
historically based on a lack of competition, not
on proflciency in meeting the needs of certain
customers. Clearly, such businesses are not in
a position to evaluate altemative strategic re-
sponses to Wai-Man until they develop a clear
understanding of their own resource advantages
and vulnerabilities.
Patience can be a vinue when battling a cat-
egory killer like Wal-Miul. It is not unusual for
the new category killer to offer steep discounts
and an abundance of helpful employees at the
outset, only to ease prices higher and eliminate
some of the extra help after some of the smaller
competitors will have been eliminated from the
scene (Grantz and Mintz, 1998). Existing retail-
ers often suffer the most during this initial time
period, but not always.
Wal-Mart's effects on other retailers are not
universally negative. When a large general
merchandiser like Wai-Man comes to town it
often increases the "pull factor," resulting in an
overall increase in sales revenue for the commu-
nity as a whole. Total general merchandise sales
for the town may increase by as much as 50% or
more during the first year or two. but usually
begin to decline after five years. Revenues from
some stores, like those specializing in home
fumishings. typically benefit from Wal-Mart's
presence. The effect on other outlets such as
clothing stores is not as evident. Nonetheless,
tax revenues from sales in the "Wai-Man town"
generally outpace those in communities without
a Wai-Man, which is why effons to convince
politicians to block entry into a community are
generally ineffective (Stone, 1993).
Big boxers affect retailers within close prox-
imity, with two imponant caveats. First, not all
retailers are affected equally. Retailers with
similar product lines may be affected more
directly than those with altemative or comple-
mentary product lines. Restaurants, for example,
typically benefit from a big box locating nearby
because ofthe increased traffic in the immediate
area.
SAM ADVANCED MANAGEMENT JOURNAL
 Second, retailers Iocated miles away may be
adversely affected when a new big box opens.
Traffic patterns tnay shift as consumers located
closer to a traditional retailer decide to drive a
longer distance to shop at the big box. This
effect is exacerbated when other retailers "clus-
ter" around the big box, drawing even more
potential store traffic away from retailers in
other locales.
Given Wal-Mart's array of resource strengths
and shortcomings, three strategic approaches
may be utilized vis-a-vis Wal-Mart. Porter's
(1980) strategy typology serves as a useful
framework for illustrating the first two of these
alternatives, as elaix)rated below.
• Strategy 1: Focus-Low Costs
"We can beat Wc/Z-Mart at its own game as long
as we fight on our own turf."
According to the focus-low cost strategy, the
retailer should compete on the basis of costs,
hut not target the mass market. Online auction
facilitator eBay is replete with microbusinesses
selling a few products at rock-bottom prices. In
many cases these sellers undercut the big boxers
by marketing only a iimited number of products
to a highly defined end user. By minimizing
overhead, targeting specific buyers, and offering
convenience — no trip to the store is required —
these microbusinesses beat the big boxers at
their own game, but only on a very small piece
of turf. This approach mimics what Porter
(1980) termed a focus-low cost strategy. Em-
pirical research supports the effectiveness ofthis
approach among select small retailers, especially
those that operate in hostile and intensely com-
petitive environments (McGee and Rubach,
1996/1997).
It is difficult for rivals to match the
superstores on price because they typically lack
the volume to negotiate better deals from their
suppliers. In some cases, however, a smaller
retailer can emphasize a limited number of"
products and achieve a substantial volume.
Alternatively, a small retailer can join with those
in other communities to strengthen its bargain-
ing power. Trade associations may be abie to
direct small retailers to "co-ops" that are already
engaged in this process. Co-ops typically wel-
come newcomers in an effort to drive volumes
even higher.
Interestingly, Wal-Mart prices are not always
the lowest. One study reports that prices at the
big box are actually higher for approximately
SPRING 2008
one-third of their products compared with other
major competitors in key U.S. markets (Craw-
ford and Mathews. 2001). Astute competitors
may be able to compete with WaKMart on price
within the boundaries of specific product lines
and customer groups.
Aldi provides an example of a not-so-big box
that competes effectively by employing a focus-
low cost strategy. Aldi is an intemationai retailer
that offers a limited assortment of groceries and
related items at the lowest possible prices. Func-
tional operations are all focused on minimizing
costs, and efforts are targeted to consumers with
low-to-moderate incomes.
Aldi minimizes costs a number of ways. Most
products are private label, allowing Aldi to
negotiate rock-bottom prices from its suppliers.
Stores are modest in size, much smaller than
those of a typical chain grocer. Aldi only stocks
common food and reiated products, maximizing
inventory turnover. The grocer does not accept
credit cards, eliminating the 2-4% fee typically
charged by banks to process the transaction.
Customers bag their own groceries and must
either bring their own bags or purchase them
from Aldi for a nominal charge. Aldi also takes
an innovate approach to the use of its shopping
carts in its U.S. stores. As in many Canadian
stores, customers insert a quarter to unlock a
cart from the interlocked row of carts located
outside the store entrance. The quarter is re-
turned when the cart is locked back into the
group. As a result, no employee time is required
to collect stray carts unless a customer is willing
to forego the quarter by not returning the cart.
Like Aldi. rival chain Save-A-Lot has found a
way to compete successfully against Wal-Mart.
The grocery store pursues locations in urban
areas rejected by Wal-Mart and offers prices
competitive with the big box. Save-A-Lot gener-
ates profits by opening small, cheap stores
catering to households earning less than $35,000
a year. Save-A-Lot stocks mostly its own brand
of high-turnover goods to minimize costs and
eschews pharmacies, bakeries, and baggers
(Adamy, 2005).
Dollar General is an example of a general
merchandiser that has adopted a focus—low cost
strategy, coupled with an emphasis on customer
access. Prices are kept to a minimum, although
they may not be as low as those at Wal-Mart for
common items. Dollar General also offers
deeply discounted store-branded products. The
key, however, is that unlike Wal-Mart, Dollar
General positions its stores for easy access.
19
Customers can easily park, enter the store, and
make their purchases (Crawford and Mathews,
2001).
• Strategy 2: Focus-Differentiation
"Wal-Mart simply cannot meet the needs of our
customers."
One approach for successfully competing
against a big box requires a recognition that
costs must be kept under control, but that low
costs — and low prices — cannot serve as an
effective basis for that competition. Retailers
adopting a focus-differentiation strategy eschew
price competition and compete on the basis of
other factors such as quality, selection, conve-
nience, and service. There is mounting evidence
thai a number of Wal-Mart's smaller rivals are
employing this approach effectively against the
big box (McWilliams, 2007a).
Michael Porter's low cost-differentiation
dichotomy illustrates the conundrum faced by
most businesses. Simply stated, differentiating
products or services requires resources, thereby
raising one's cost position relative to others in
an industry. On the other hand, a strong empha-
sis on minimizing costs may limit the use of
advertising, product development, and the like,
all of which enable a firm to differentiate its
output. In the end, there is a tendency for low
costs and differentiation to work against each
other. A business attempting both strategies
simultaneously can end up "stuck in the middle"
(Porter, 1980) because implementing the combi-
nation strategy is generally more difficult than
implementing either the low-cost or the differen-
tiation strategy alone.
In many cases, however, it is not necessary to
abandon cost containment to pursue differentia-
tion. The key point is this: Consumers may be
willing to pay a somewhat higher price for a
product similar to one offered by the hig box if
they believe that other factors — quality, conve-
nience, location, service, favorable terms, etc. —
compensate for the higher price. At some point,
however, the perceived worth ofthe nonprice
factors may not be substantial enough to warrant
the higher price, or the price difference will be
too great for potential customers to afford. As
Toby Kaye, owner of two computer stores in
Baltimore put it, the smaller retailer does not
need to match prices, but they need to be "within
striking distance" (McCune. 1994). The problem
is that many small retailers do not consider what
the market will bear when pricing their merchan-
20
dise. They may simply add a set percentage to
their costs instead of viewing pricing strategies
as a competitive weapon. One proven approach
in the convenience store market segment is to
price commonly-purchased goods such as milk
and bread at competitive prices but make it
necessary for customers to walk past dozens of
other products that are priced at a premium to
get to those goods, hoping impulse buying will
occur.
Specialization can also be an excellent ap-
proach to combating the big box. Stores like
Wal-Mart are masters of breadth, not depth.
Due to the smaller margins, big box stores are
usually able to carry only high-demand products.
Smaller retailers can carve out a niche by carry-
ing related items or product lines that the big
boxers do not. Examples can be found through-
out America's small towns in areas such as
hardware, auto parts, and sporting goods.
Small retailers are also better equipped to
tailor their product and service lines to local
tastes. Limited product line variations are com-
mon among big boxers and are necessary to
achieve economies of scale. In many lines of
business, however, local tastes may differ sub-
stantially from the generic approach, providing
opportunities to rivals to fulfill these needs.
Empirical research supports the effectiveness of
this type of "focus" approach among select small
retailers, especially those that operate in hostile
and intensely competitive environments (McGee
and Rubach, 1996/1997). Smaller retailers may
even succeed by cooperating with their big box
rivals, not competing with them.
As the world's largest retailer, Wal-Mart is a
lightning rod for attention, negative publicity,
and legal confrontations, resulting in almost
5,000 lawsuit defenses in 2004 alone (Willing,
2001). Simply stated, the volume of business
transacted at a big box such as Wal-Mart can
readily take a toll on customer service. Hence,
providing consistent service is always a chal-
lenge, particularly at the big boxers where em-
ployees may lack expertise in their respective
departments. Today's consumer is strapped for
time and more selective than in the past. Women
are spending less time shopping, and many
consumers are shopping more on the Intemet
(Barta, Martin, Frye, and Woods, 1999; Spector,
2005).
Rigby and Haas (2004) suggest that com-
peting with Wai-Man requires some retailers
to segment their customer bases and "wow'
the ones that matter. This can be done through
SAM ADVANCED MANAGEMENT JOURNAL
expanding signature categories, customizing
local assortments, focusing on personal atten-
tion, and raising loyalty benefits to customers.
Consider the case of Dick's, a small grocery
chain in the Midwest. Dick's culls names of
newcomers and birth and wedding announce-
ments from local newspapers. New arrivals and
newlyweds receive letters of congratulations and
coupons from Ihc nearest store. Follow-up letters
are sent to lure customers into stores on a consis-
tent basis (Kawasaki, 1995).
The emphasis on service among grocers has
extended to the implementation of loyalty cards.
A number of grocers have implemented loyalty
programs to track purchase behavior and reward
repeat customers. Given Wal-Mart's emphasis
on efficiency and low prices, the big box is not
in a position to get to know individual customers
and local buying patterns like other retailers may
be. Such programs have met with mixed results,
however.
Department store Nordstrom's emphasizes
exceptional service. The typical Nordstrom's
department store carries 150,0(X) pairs of shoes
of virtually every size and width, with an on-line
inventory of over 20 million pairs. The retailer
also provides shoe shines, spas for women, and
even a concierge service (Spector, 2001).
Although Wal-Mart's wages are competitive,
they are not as high as many of their competi-
tors. Competitors may be able to recruit innova-
tive employees with above-market wages,
providing them with opportunities to be more
creative in their work. Developing and empha-
sizing distinctive competencies is critical, and
human resources can be a key means of doing so
(McGee and Peterson, 2000).
• Strategy 3: Value Orientation
"Wal-Mart might offer a htXX&v price, but we
offer a better value."
Rather than focus solely on costs and prices or
means of differentiation, a distinct approach
seeks to blend the two into a superior value
proposition for the retailer. Such rivals compete
on the basis of value by controlling costs vigor-
ously whenever such costs do not directly and
significantly enhance the attractiveness ofptod-
ucts or .services. Value can be viewed as a form
of differentiation, but it is distinguished by its
co-emphasis on cost leadership.
Value can be expressed as the ratio of per-
ceived worth to price and can rise when the
product or service's perceived worth increases or
SPRING 2008
its price decreases. In essence, Wal-Mart has
taken the simplest approach to create value,
minimizing prices. Other formulas for creating
value exist, however, aithough they require a
detailed understanding of consumer tastes and
preferences as they relate to a given retailer's
line of business.
Wal-Mart's one-size-fits-all approach pre-
cludes it from exploring some of these alterna-
tives in an efficient manner, especially at the
local level. One way to improve one's value
proposition reiative to that of Wal-Mart is to
add relatively inexpensive features or services
when they increase the perceived value of the
offering considerably, especially when Wal-
Mart is not in a position to integrate a similar
approach. Delivery — whether free or for a
nominal charge — is a common example of a
means of enhancing perceived value, as are
expertise ;md repair, real services after a sale.
The value orientation strategy begins with an
organizational commitment lo quality products
or services, thereby differentiating a firm from
its competitors. Because customers may be
drawn to high quality, demand may rise, result-
ing in a larger market share, providing econo-
mies of scale that permit lower per-unit costs in
purchasing, manuf'acturing, fmancing. research
and development, and marketing. In this regard,
a firm can seek to provide maximum value by
differentiating products and services only to the
extent that any associated cost hikes can be
justified by increases in overall value and by
pursing cost reductions that result in minimal. If
any, reductions in value.
Conceptually, this strategic approach may be
viewed as a hybrid of the other two. although it
is qualitatively different. Value-oriented retailers
do not merely seek a middle position between
the low-cost and differentiation strategies, an
approach Porter (1985) suggested can leave
competitors stuck in the middle. Alternatively,
such retailers consciously seek cost and price
positions that may be nominally higher than
those of big boxers like Wai-Mart, but also
enhance their offerings so that additional value is
created. Store managers can be trained to recog-
nize pricing opportunities or vulnerabilities in
their individual markets. In addition, supply
chains must be examined, labor deployment
managed, and overhead wastes eliminated if this
value orientation is to be viable (Rigby and
Haas, 2004).
In a study of independent drugstores, McGee
and Peterson (2000) found that competitive
21
advantage could be achieved through ati image
of high-quality service. This perception of high
quality by the customer is driven by an ability to
act decisively, control retail programs related to
price, and overwhelm customers with service,
particularly the handling of complaints. They
reported thai these drugstores were successful
tlirough the implementation of three compe-
tency-based constructs and only one perfor-
mance-based construct.
Arkansas-based grocer Harp's, for example,
has grown to about 50 stores by maintaining
competitive prices, but also emphasizing service
and freshness. By maintaining price levels close
to those at Wal-Mart, Harp's is able to lure
customers who are willing to pay a little more
for enhanced services and produce freshness.
Harp's has discovered how to balance price and
other competitive factors to produce value for its
customer base.
Conclusions
The Wal-Mart footprint has created numerous
challenges for competitors, particularly small
retailers whose managers are not well prepared
when the big boxer opens a store nearby. In
2006, Wal-Mart began to implement a low-cost/
differentiation strategy, focusing at first on six
demographic groups in the U.S. (Zimtnerman,
2006). The decades-old layaway plan was dis-
continued and a celebrity line of home decor
from Colin Cowie was added (Kabel, 2006).
Store upgrades include specialists in the area of
electronics for consumers interested in those big
ticket items, products targeting Hispanic shop-
pers, more upscale merchandise for affluent
consumers such as those who shop at the Piano.
Texas. Wal-Mart, and a better variety of products
that appeal directly to the African-American
community {Zimmemian, 2006). Early indica-
tions of this attempt to attract upscale consumers
to the supercenters are negative as It appears the
strategy is not taking hold (McWilliams. 2007b).
As if this wasn't daunting enough. Wal-Mart
has embarked on a "green" strategy of environ-
mental conservation and protection that not only
includes its stores but also the suppliers of its
product lines (Gunther, 2006). Early goals in-
clude 25% increased vehicle efficiency, 30%
reduction in energy consumed by stores, and a
25% reduction in solid waste. Eventually, CEO
Lee Scott wants to get rid of chemicals in the air
around production facilities, smog in cities, and
anything bad that is now going into a river
(Gunther, 2006). The concept of going green
22
originated with Sam Walton's son, Rob, but was
propelled to fruition by two things: Wal-Mart
has been fending off criticism for its environ-
mental unfriendliness for years, costing it ap-
proximately 8% of its former customers, and the
"green" strategy might just save the firm money
in the long run.
These challenges can be addressed success-
fully, however, when retailers understand how
their resource strengths and weaknesses compare
with those of the big boxer. Under certain situa-
tions, a retailer may be successful by focusing
on a market niche in conjunction with either low
costs or differentiation, or by incorporating a
value orientation. Dynamic strategic positioning
models can also be utilized to augment these
approaches. By emphasizing flexibility and
adaptability, a dynamic strategy approach can
enable a small, nimble firm to respond to indus-
try and environmental changes more rapidly than
big boxers like Wal-Mart.
Although a number of published studies have
identified various examples of retailers that have
competed effectively with big boxers like Wal-
Mart, no panacea has emerged. This paper
provides a number of examples as well, but
integrates them with three strategic approaches
built on existing theory. A focus—differentiation
strategy may be the most intuitively appealing
for many retailers. Indeed, this basic approach
seems to be the strategy of choice for many
researchers investigating the big box phenom-
enon, although it is not optimal for all retailers.
When a retailer combines this approach with a
flexible, dynamic competitiveness perspective,
such as the development of a network of suppli-
ers that provide enough variety to rotate several
product-supported themes through the store
during the year, providing a different look every
few months, it can devise a strategy that a big
boxer cannot duplicate. However, Wal-Mart's
recent interest in smaller iind higher-end stores
— if executed — might create a strategic re-
sponse problem for smaller, higher-end competi-
tors {McWilliams, 2007b).
The most appropriate strategic approach
depends on the firm and its unique situation.
Indeed, each strategy has its own strengths and
vulnerabilities, as summarized in Table 1. A
focus—low cost strategy can be attractive be-
cause it limits the areas in which a retailer must
compete with Wal-Mart on price, but it is highly
vulnerable to a competitive response because it
relies on the very strategic dimension that is core
to the big boxer's success, low price. On the
SAM ADVANCED MANAGEMENT JOURNAL
 Table 1. Strategic Response Alternatives for Confronting Wal-Mart
Strategy Attractiveness Vulnerability Examples

Focus-Low Cost: A moderate size retailer may complete
effectively with Wal-Mart on price
"We can heat Wal-
when proper product-line decisions
Mart at its own are made. Tliis strategy can be
game as long as we effective when a retailer has
fight on our own experience serving a distinct customer
turf." market and the ability to amass
sufficient volume to be price
competitive.
HIGH: Competing with
Wal-Mart on the basis of
costs—even with a focus
orientation—can make a
retailer vulnerable to price
competition.
Grocers Aldi and Save-A-
Lot generate substantial
volume by offering a limited
product line of no-trills
products targeted to low-
income consumers.

Focus- A smaller retailer may compete
Differentiation: efTectively with Wal-Mart in market
segments where the giant retailer Is
"Wai-Marl simply unwilling or unable to fulfill customer
cannot meet the
needs. Prt>ducl advice and service, for
needs of our
example, maybe substandard in many
customers."
product areas at Wal-Mart.
LOW: If Wal-Mart lacks
the expertise or interest
necessary to fulfill the
needs of a particular
market niche, it is
possible to avoid direct
competition.
A bicycle shop oOers high-
quality bicycles,
accessories, and expertise,
or a paint store offers expert
advice and interior design
advice not available at Wal-
Mart.

Value Oricntatiou: Factors such as service, expertise, and
delivery are very Important in some
""Wal-Mart might product lines. If Wal-Mart lacks the
offer a better price, infrastructure to address these factors,
iyui we offer a better a small retailer with a moderate level
value." of volume may be able to be
somewhat price competiiive while
excelling in other areas important to
customers.
MODERATE: If Wal-
Mart can offer lower
prices and the
convenience of one-stop
shopping, offering a better
value will be ditficult.
AutoZone's prices are
typically a little higher than
those at Wal-Mart, but its
product line is much more
extensive and its sales
personnel can provide the
expertise and advice
necessary to help customers
repair their vehicles.

Other hand, a focus—differentiation strategy can
be attractive to many retailers because it avoids
direct competition with Wal-Mart, thereby
eliminating the low-price vulnerability. A value-
orientation strategy can be attractive because it
enables a retailer to blend price competitiveness
with other resource strengths in its competitive
positioning. Its vulnerability is moderate, how-
ever, as Wai-Mart also excels in a form of value
orientation based primarily on low price.
Purely as an aside, there is one other option
that isn't nonnally discussed regarding Wal-
Mart's strategic vulnerability. With the recent
interest of Tesco PLC food markets and Japan-
based FamilyMart convenience stores in Califor-
nia, foreign-based retailers are expanding their
U.S. presence (MeWilliams. 2007a). Is it pos-
sible for some firm, foreign or domestic, to take
its core business, such as groceries for Kroger or
Tesco, and expand its dry goods offerings to
eventually rival Wal-Mart? Perhaps a foothold in
regional markets where Wal-Mart has not fared
well, such as California or New York, could
provide a base for a gradual expansion across the
U.S. and beyond. It seems somewhat unlikely
that a competitive threat of global proportions
could occur to Wal-Mart, but there are prece-
dents for such a result. Clearly Circuit City, a
pioneer in the supercenter concept for electron-
ics and sophisticated point-of-scale systems, has
been outpaced by Best Buy for several years, as
Best Buy has taken Circuit City's model and
updated it, improved it. and made it more hip for
younger consumers.
There is no substitute for knowing one's
customers, markets, and resources as a founda-
tion for formulating a successful strategy. Such
knowledge becomes the input for crafting and
refinitig a retailer's competitive strategy regard-
less of the strategic option chosen. As such,
there is more than one way a retailer can imple-
ment each of the three strategic options.
Future research on retailer survival vis-a-vis
Wal-Mart should focus on models for assessing
resource strengths and weaknesses so that an
optimal strategic response can be incorporated.
Regardless of the option chosen, a successfui
strategy can only be developed when a retailer
has the appropriate knowledge and tools re-
quired to make the best choice and tailor it
specifically to the firm's unique array of strate-
gic resources.'

SPRING 2008 23
Dr. Parnell has published over 200 basic and
applied reseaich articles, presentations, and
cases in strategic management and related
areas. Dr. Lester has published works in numer-
ous journals in the fields of strategic manage-
ment, entrepreneurship. and organizational
theory.
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