WAL*MART STORES, INC.

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

WalMarts competitive advantage is a result of several key strategic choices. First, WalMarts choice of geographic location in rural/small town locations that were not being served by competitors allowed it to establish itself as the sole discount retailer in these areas. As Sam Walton describes the key strategy was to put good-sized stores into little one-horse towns which everybody else was ignoring. If we offered prices as good or better than stores in cities that were four hours by car, people could shop at home. This key strategic choice of location was completely different from what competitors had done and gave WalMart a first mover advantage in markets that had not previously been served by discount retailers. A second key strategic feature is WalMarts inventory management strategy. From the onset, WalMart has been a leader in implementing new and cost effective methods to manage inventory. Merchandise is tailored to local market demand via traiting where a products movements are indexed over a thousand store and market traits. In addition, 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. In addition, WalMarts 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. Pricing varies by geography and by proximity to competitors. This flexible pricing policy allows WalMart 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. Another key to WalMarts competitive advantage is its operations strategy. WalMarts operations activities fit well together to achieve maximal efficiency and lower costs. By having multiple distribution centers, WalMart is able to lower a stores 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. 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. This information is communicated to the stores computerized inventory system, allowing for maximal efficiency in inventory tracking and repletion. WalMart implemented electronic scanning in all its stores two years ahead of competitors such as Kmart. Automated inventory management lowers inventory costs, allows seamless replacement of goods and better meets local demand. Information regarding sales data is collected and analyzed via satellite network. The ability to do so avoids overstocking and deep discounting. Early on, WalMart committed resources towards sophisticated automated technology systems such as electronic scanning and satellite systems in order to achieve higher operational efficiency and keep costs significantly lower than its competitors. WalMarts hub and spoke distribution network is another key strategic piece behind its operations. Merchandise brought in by truck to a distribution center is sorted for delivery within 24-48 hours. 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. WalMarts inbound logistics costs

are 3.7% of discount store sales versus 4.8% for competitors. In addition, distribution centers are highly automated and run 24 hours a day. WalMart 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. Its automated inventory tracking system at the point of sale allows WalMart to immediately communicate inventory data to suppliers distribution centers and headquarters, thereby minimizing lag time in inventory repletion. Another key part of WalMarts competitive advantage is its vendor relations. WalMart has made specific supplier choices along the way that are geared towards minimizing costs and maximizing efficiency. For example, WalMart eliminated manufacturers representatives at cost savings of 3-4% and calls its suppliers collect. Buying is centralized at headquarters which keeps purchasing costs down. WalMart has avoided supplier power by not allowing any single supplier to have more than 2.4% of its purchases. Therefore, WalMart is better able to control its negotiation position with its suppliers. WalMarts electronic data interchange allows it to communicate with over 3,600 vendors regarding inventory orders, forecasting, planning, replenishing, and transferring electronic funds. As WalMart has grown, it has developed key supplier relations into partnerships. Large key suppliers such as P&G and GE are able to share information with WalMart electronically and have dedicated teams to manage products for WalMart. Key suppliers have vendor managed inventory systems, which reduces WalMarts inventory costs and allows suppliers to increase sales for their products. WalMart 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. Lastly, WalMarts culture is a key source of its competitive advantage. From the onset, Sam Walton led by example and emphasized frugality, customer service, and an open book policy. WalMarts culture focuses on building loyalty among associates, suppliers and customers. Associates are seen as playing a critical role in the success of WalMart and are given more responsibility and recognition than employees of competitors. 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. 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. Weekly meetings allow repeated emphasis and communication of company goals and strategy. WalMarts organizational structure has a centralized office but lacks regional offices, which minimizes administrative costs at savings of 2% of discount store sales per year. As mentioned in the case, WalMart derives competitive advantages from its specific activities and capabilities. For example, its everyday low prices strategy allows WalMart to have fewer

promotions and lowers its advertising expense to 1.5% of discount store sales versus 2.1% for competitors. WalMarts 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. WalMarts incentives to employees helped improve shrinkage costs (via the shrink incentive plan) to 1.7% of discount store sales versus 2% for competitors. In addition, WalMarts lack of regional offices and lack of manufactures representatives during negotiation saves an additional 2% and 3% of discount store sales respectively. Overall, WalMarts 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 WalMarts cost advantage is approximately 3.4 billion dollars over competitors. (Refer to attached spreadsheet) WalMarts competitive advantage has resulted from its key strategic choices and its ability to use its resources and capabilities better than competitors. Its competitive advantage meets the four characteristics of sustainability quite well. First, WalMart 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, WalMart has established itself as a low price leader in the eyes of consumers and its strong brand presence also provides continued deterrence to entry. Second, WalMart has achieved inimitability as a result of its strategic choices and use of capabilities. There are now many impediments to imitation. WalMarts 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, WalMart has been able to form strategic partnerships with key large suppliers, providing it with superior access to inputs than its competitors. It has tied its relationship with key suppliers such as P&G to their profitability, thereby securing the suppliers continued interest in the success of WalMart. WalMarts large market size and scale economy makes entry by new discount retailers difficult and economically unfavorable, perpetuating the early mover advantage. Even if competitors decide to enter WalMarts geographic markets, WalMart 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. Third, WalMart benefits from imperfect mobility as best exemplified by its operations. WalMarts 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. In addition, WalMarts 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 WalMarts competitive advantage. The key is the fit amongst multiple resources and activities that ensure sustainability. WalMart clearly has achieved third order fit as defined in Porters article whereby activities are optimized to best fit the strategy rather than just consistent with the strategy. Last, WalMart 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. WalMarts diversification into supercenters should be a success for several reasons. Expansion into the food product line allows WalMart 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 WalMarts product line and would provide increased flow into WalMart stores. Using the food product to drive customer traffic clearly takes market share away from general supermarkets and taps into yet another section of the market. WalMarts activities and capabilities are well prepared for introduction of food products. For example, WalMarts 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 WalMart brand for its consumers and makes WalMart a one stop shop for all of the customers needs, obviating the need for WalMart customers to shop elsewhere. Although WalMart will not likely be able to undercut supermarkets on brand name items due to the low margins of the food industry (1-2%), it can provide lower cost yet higher margin private label food items (Sams Choice label) that would appeal to its price sensitive customers. International expansion is critical to WalMarts continued long run success. WalMart 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. WalMart can succeed internationally if it continues to make strategic choices about expansion by remaining focused on its competitive advantage. Specifically, WalMart should concentrate on deepening its current strategic position by leveraging its existing activities and capabilities in the international arena rather than trying to grow by broadening into other areas in the domestic marketplace that compromise its competitive advantage. In order to globalize successfully, WalMart will need to pay particular attention to its execution in each country it enters and should choose to enter a country strategically based on local demand and the ability to implement its key set of activities within the chosen country. For example, prior to entry WalMart will need to examine supplier availability and understand supplier relations, which can often be affected by intercultural variations as well as local market dynamics. WalMart 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 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 WalMart corporate culture in a manner that is sensitive to local cultural customs and community needs. WalMart can ensure continued supplier access by forming joint ventures/partnerships with local large suppliers and providing them with an opportunity for increased profitability via the partnership. Another alternative is to acquire suppliers of key products in order to ensure consistency and efficiency of inventory management. To be successful internationally, WalMart 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 WalMart since it opens up a larger market within which to implement the companys focused and well-developed strategy.