Q1. Key source of competitive advantage in discount retailing: Choice of geographic location: 1.

Rural/small town locations that were not being served by competitors allowed it to establish itself as the sole discount retailer in these areas. 2. As Sam Walton describes the key strategy was to put good-sized stores into little one-horse towns which everybody else was ignoring. This key strategic choice of location was completely different from what competitors had done and gave Wal-Mart a first mover advantage in markets that had not previously been served by discount retailers. Inventory management strategy: 1. From the onset, Wal-Mart has been a leader in implementing new and cost effective methods to manage inventory. 2. 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. Therefore, each store is fine-tuned to best meet local needs rather than follow a general corporate policy. 3. In addition, Wal-Mart s pricing strategy allows more local control again based on geographic demand. Store managers can price to meet local demand, to maximize sales volume and inventory turnover and to minimize expenses. 4. Pricing varies by geography and by proximity to competitors. This flexible pricing policy allows Wal-Mart to achieve maximal strategic pricing, 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. Operations strategy. 1. Wal-Mart s operations activities fit well together to achieve maximal efficiency and lower costs. By having multiple distribution centers, Wal-Mart is able to lower a store s square footage that is devoted to inventory to 10% versus 25% for competitors. This allows higher efficient use of store floor space for displaying more goods and generating greater sales volume. 2. Shelf labeling, as opposed to individual product labeling, minimizes handling of goods thereby keeping costs lower. Inventory is tracked electronically at the point of sale by UPC scanners and hand held bar code scanners. 3. This information is communicated to the store s computerized inventory system, allowing for maximal efficiency in inventory tracking and repletion. 4. Wal-Mart implemented electronic scanning in all its stores two years ahead of competitors such as Kmart. 5. Automated inventory management lowers inventory costs, allows seamless replacement of goods and better meets local demand. 6. Information regarding sales data is collected and analyzed via satellite network. The ability to do so avoids overstocking and deep discounting. Early on, Wal-Mart 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.

Hub and spoke distribution network: 1. Merchandise brought in by truck to a distribution center is sorted for delivery within 24-48 hours. 2. 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. 3. Wal-Mart s inbound logistics costs are 3.7% of discount store sales versus 4.8% for competitors. 4. In addition, distribution centers are highly automated and run 24 hours a day. Wal-Mart ships more of its purchases (80%) from its own distribution centers than competitors such as Kmart (50%), allowing for better control over inventory and less reliability on the efficiency of suppliers operations to manage its inventory. 5. In addition, distribution centers are highly automated and run 24 hours a day. Wal-Mart ships more of its purchases (80%) from its own distribution centers than competitors such as Kmart (50%), allowing for better control over inventory and less reliability on the efficiency of suppliers operations to manage its inventory. Vendor relations: 1. Wal-Mart has made specific supplier choices along the way that are geared towards minimizing costs and maximizing efficiency. 2. Buying is centralized at headquarters which keeps purchasing costs down. 3. Wal-Mart has avoided supplier power by not allowing any single supplier to have more than 2.4% of its purchases. Therefore, Wal-Mart is better able to control its negotiation position with its suppliers. 4. Wal-Mart s electronic data interchange allows it to communicate with over 3,600 vendors regarding inventory orders, forecasting, planning, replenishing, and transferring electronic funds. As Wal-Mart has grown, it has developed key supplier relations into partnerships. 5. Large key suppliers such as P&G and GE are able to share information with Wal-Mart electronically and have dedicated teams to manage products for Wal-Mart. Key suppliers have vendor managed inventory systems, which reduces Wal-Mart s inventory costs and allows suppliers to increase sales for their products. 6. Wal-Mart actively manages its suppliers by communicating its expectations and providing annual strategic business planning packets to vendors. All of these activities are aligned with maximizing revenues and efficiency and keeping costs low. Wal-Mart s culture: 1. From the onset, Sam Walton led by example and emphasized frugality, customer service, and an open book policy. 2. Wal-Mart s culture focuses on building loyalty among associates, suppliers and customers. Associates are seen as playing a critical role in the success of Wal-Mart and are given more responsibility and recognition than employees of competitors. 3. Training is decentralized, and managers are given greater local control. Efforts are made to actively involve employees in the continued success of WalMart, and employee suggestions are often implemented at great cost savings. For example, more than 650 employee suggestions were implemented in 1993 at savings of $85 million. 4. Compensation is based on a combination of salary/wages and incentives linked to profitability. Profit sharing and stock ownership plans (60% participation) link employee incentives to performance and profitability.

5. Weekly meetings allow repeated emphasis and communication of company goals and strategy. 6. Wal-Mart s organizational structure has a centralized office but lacks regional offices, which minimizes administrative costs at savings of 2% of discount store sales per year.

Wal-Mart derives competitive advantages from its specific activities and capabilities. For example, 1. its everyday low prices strategy allows Wal-Mart to have fewer promotions and lowers its advertising expense to 1.5% of discount store sales versus 2.1% for competitors. 2. Wal-Mart s sophisticated inbound logistics enables it to lower its cost of inbound logistics to 3.7% of discount store sales compared to 4.8% for its competitors. This figure significantly lowers the cost of goods sold. 3. Wal-Mart s incentives to employees helped improve shrinkage costs (via the shrink incentive plan ) to 1.7% of discount store sales versus 2% for competitors. 4. In addition, Wal-Mart s lack of regional offices and lack of manufactures representatives during negotiation saves an additional 2% and 3% of discount store sales respectively. 5. Overall, Wal-Mart s competitive advantage enables it to lower its operating expenses to 18.1% of discount store sales versus the industry average of 24.6%. A quantitative estimate of WalMart s cost advantage is approximately 3.4 billion dollars over competitors. Q2. Sustainable advantages: 1. Wal-Mart s competitive advantage has resulted from its key strategic choices and its ability to use its resources and capabilities better than competitors. 2. Wal-Mart has achieved heterogeneity by its different choice of geographic market. Its choice of location gave it a clear competitive advantage in underserved markets. 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. This will be a difficult and costly endeavor for competitors. The early mover advantage in these geographic markets should continue to deter against entry. At this point, Wal-Mart has established itself as a low price leader in the eyes of consumers and its strong brand presence also provides continued deterrence to entry. 3. Wal-Mart has achieved inimitability as a result of its strategic choices and use of capabilities. There are now many impediments to imitation. Wal-Mart s early emphasis on automated technology allowed it to develop a maximally efficient and committed supplier network at a lower cost. As a result of its growth, Wal-Mart has been able to form strategic partnerships with key large suppliers, providing it with superior access to inputs than its competitors. 4. It has tied its relationship with key suppliers such as P&G to their profitability, thereby securing the supplier s continued interest in the success of Wal-Mart. 5. Wal-Mart s large market size and scale economy makes entry by new discount retailers difficult and economically unfavorable, perpetuating the early mover advantage. 6. Even if competitors decide to enter Wal-Mart s geographic markets, Wal-Mart should continue to benefit from its intangibles such as its corporate culture, its strong brand presence as the low cost leader, and its set of unique operational activities that provides it with a continued cost advantage. As a whole, these intangibles will be difficult for competitors to replicate.

7. Wal-Mart benefits from imperfect mobility as best exemplified by its operations. Wal-Mart s strategy involves a whole system of activities (cross docking, distribution center management, electronic inventory systems, supplier networks, etc) that are linked to fit and reinforce one another. 8. In addition, Wal-Mart s culture, operations, organizational structure, geographic location, etc are aligned with each other to achieve a sustainable competitive position. If duplicated, none of these aspects on its own would provide a competitor with Wal-Mart s competitive advantage. 9. The key is the fit amongst multiple resources and activities that ensure sustainability. 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. 10. Last, Wal-Mart has demonstrated foresight in developing its competitive advantage. Early on, Sam Walton had the entrepreneurial edge needed to enter markets that seemed unprofitable. 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. Q3. Wal-Mart s diversification into Food distribution: These should be a success for several reasons. 1. 2. 3. 4. Expansion into the food product line allows Wal-Mart to grow strategically within the domestic marketplace by further leveraging its existing capabilities and competitive advantage. Diversification into food products is a natural extension of Wal-Mart s product line and would provide increased flow into Wal-Mart 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. Wal-Mart s activities and capabilities are well prepared for introduction of food products. For example, Wal-Mart 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, a critical component to successful food sales given the perishable nature of the product. Providing low cost food products also reinforces the Wal-Mart brand for its consumers and makes Wal-Mart a one stop shop for all of the customer s needs, obviating the need for WalMart customers to shop elsewhere. Although Wal-Mart will not likely be able to undercut supermarkets on brand name items due to the low margins of the food industry (1-2%), it can provide lower cost yet higher margin private label food items ( Sam s Choice label) that would appeal to its price sensitive customers. International expansion is critical to Wal-Mart s continued long run success. Wal-Mart has historically profited by its foresight to enter key geographic markets and benefit from an early mover advantage. This key piece of strategic positioning fits with international expansion. Wal-Mart can succeed internationally if it continues to make strategic choices about expansion by remaining focused on its competitive advantage. Specifically, Wal-Mart 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. In order to globalize successfully, Wal-Mart 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. For example, prior to entry Wal-Mart will need to examine

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supplier availability and understand supplier relations, which can often be affected by intercultural variations as well as local market dynamics. Wal-Mart may need to provide suppliers with needed technology in order to fully automate operations. A greater initial investment may be necessary to ensure international success. Therefore, success will need to be gauged with a longer-run timeframe in mind. In other words, up front infrastructure investments in countries such as India, China may show less profitability at the outset but should allow for greater long-term growth and returns. Cross-cultural training of associates will be critical to success at the local level in each different country. This should assure implementation of the Wal-Mart corporate culture in a manner that is sensitive to local cultural customs and community needs. Wal-Mart can ensure continued supplier access by forming joint ventures/partnerships with local large suppliers and providing them with an opportunity for increased profitability via partnership. Another alternative is to acquire suppliers of key products in order to ensure consistency and efficiency of inventory management. To be successful internationally, Wal-Mart should stay focused on implementing its competitive advantage while at the same time, avoiding a cookie-cutter approach to implementation by understanding and fine-tuning its capabilities to better serve the target country. Overall, globalization should be successful for Wal-Mart since it opens up a larger market within which to implement the company s focused and well-developed strategy. Q 4. Transferable advantages of Wal-Mart moves into new formats and especially into new international locations? A. New Formats: Currently, Wal-Mart is considering neighborhood stores as a new format. a. Advanced data mining: Wal-Mart s IT capabilities can be easily adapted. Wal-Mart s assortment will be different in other formats, customer demand will be different, but all this will be easily manageable by Wal-Mart s existing IT. b. Everyday low prices (EDLP): It s questionable whether Wal-Mart s cost structure for this new format will be good enough to support EDLP for the new format. In particular, rental costs/ sq ft are expected to be higher given the urban locations. Urban locations also create higher distribution costs (more frequent, smaller deliveries, delivery problems due to traffic congestion). However, Wal-Mart may be able to partially offset some of these costs through reduced inventory costs resulting from high inventory turnover. c. Workforce culture: The corporate culture can be transferred easily to new formats. New employees are no harder to socialize at neighborhood stores than at supercenters. d. Distribution capability: The neighborhood stores can benefit from the existing distribution system. In fact, locations are chosen so that neighborhood stores can be served as part of runs to supercenters. This is probably the biggest plus for the new format; the increased volume will generate cost savings in distribution for both the existing formats and the new neighborhood stores. e. Partnership with vendors: The neighborhood market will use the current suppliers; there are no transfer issues. Concerns: If the same economics of the successful supercenters are transferable to any new formats? a. Supercenters are money machines: the non-food section provides the customer span and profit; the food section provides the frequency and low price image.

b. New format neighbor hood stores being primarily the food and grocery stores may have issues in terms of profits as these categories are generally low cost margin categories. c. To summarize, the competitive advantages are transferable, but Wal-Mart should carefully consider its price-level and assortment to make new formats profitable. B. Current formats in other countries. 1. Expanding the existing formats to other countries is intuitively appealing. A low cost volumebased strategy offering superior customer satisfaction seems appealing anywhere we can identify a sizeable middle class (or aspiring middle class) and decent population growth. Though when reviewing the competitive advantages, one notices that Wal-Mart might prefer a mature and developed retail market to realize its low-cost advantage on the one hand, but an underdeveloped, emerging slowly growing retail market to have time to grow corporate culture perspective. a. Advanced data mining ,customer insight, Technology advancement and trained employees are the key requirements for implementing the IT system abroad. Though this is not a barrier to overcome, shopping and consumption habits differ across most countries making it hard to build on the US data. b. Mature retail countries as Western Europe are preferable over emerging modern-retail countries as China given i. the countries availability of technology/infrastructure and ii. its similar consumption habits to the US. c. EDLP: Despite the fact that Wal-Mart is the inventor, there are different retailers in different countries adopting an EDLP strategy. There is very little problem in copying this part of the strategy. d. Customer oriented workforce: The corporate culture is related to a number of factors. i. The entry strategy: if Wal-Mart grows organically in a new country, it can build its own corporate culture. ii. Though when it acquires a retailer, it has to convert the existing corporate culture, which has proven to be difficult. iii. On the other side organic growth in an emerging country brings the major disadvantage that volume grows slowly which limits the economies of scale. iv. The culture of the country: the Wal-Mart culture is atypical and not all workforces might cope with it given their nation s culture v. The role of the partner: most retailers enter a new country through a partnership to increase the rate of success. This requires a mutual understanding and a fit between the two corporate cultures to work together effectively. vi. Organic growth is the preferred option to build a similar customer oriented workforce. Though this may not be trivial if Wal-Mart needs to acquire volume fast. e. Distribution capability: The distribution network has to be build from scratch in a new country. This limits the optimal choice of a target country: i. In order to get the competitive cost advantage, volume is needed. This means that acquisition is a preferred tool from a cost perspective. ii. A decent infrastructure is needed so all goods can be transported efficiently. iii. The country is preferably large so economies of scale can be attained. That means similar assortments, and therefore similar consumer tastes, across large

regions So from a distribution point of view, a large developed retail market is the preferred choice. f. Partnership relationship with vendors: Wal-Mart can work with the same suppliers in other countries to the extent that: i. The assortment is affordable to the population and fits with the local taste. In clear terms this means that western countries are preferable ii. The supplier is present in these other countries and/or has the financial power to develop it in these countries. iii. This means that from a supplier s perspective, mature western oriented countries are preferable. g. Economics of the format : for the economics of the supercenter format, this format has to fit with local purchasing habits: i. Weekly stocking of items: there may be consumers in countries where they do not have the habit of stocking items on a weekly basis. Wal-Mart s existing formats as the supercenter may therefore clash with the local shopping habits. ii. Mobile population: the population has to be mobile, willing to travel to the WalMart s large stores and able to transport large quantities of goods easily home. This may not be trivial: imagine carrying 20 bags home using public transport. Conclusion: Transferring the different competitive advantages puts different and sometimes conflicting requirements on the country that Wal-Mart wants to enter. This is in line with their experience: when acquiring the Wertkauf retail chain, they had large difficulties in converting the existing corporate culture towards the customer-oriented culture (it took a while before German employees wanted to open the day with shouting in group: the customer is the king! ). Q5. Dollar stores and Amazon.com: 1. Wal-Mart, as planned, should open more Wal-Mart express stores with more emphasis on categories to be carried. 2. It should carry more private label (for better margins), knick-knacks, RTE products and general merchandise like plastics, durables and other such stuff. 3. It can also introduce small store in store concepts for services like banking, insurance, travel, one minute photo etc. 4. In addition, they can also cash on their EDLP concept which has proved itself as a great customer puller. 5. To counter amazon.com, walmart.com can always use it s physical stores for offering same day delivery, 6. By introducing more categories for sale on line, 7. Using existing suppliers for better margins, 8. Using its extensive distribution network for quick deliveries, 9. Promoting walmart.com within the stores and any customer communication,