Case Study: Wal-Mart’s Competitive Advantage

Wal-Mart’s competitive strategy is to dominate every sector where it does business. It measures success in terms of sales and dominance over competitors. Its strategy is to sell goods at low process, outsell competitors, and to expand. Generally, Wal-Mart does everything it can to win over competitors.

A typical Wal-Mart model is to build more stores, make existing stores bigger, and to expand into other sectors of retail. Every step of the way, it strives to make money and dominate its competitors, to the point of putting some of them out of business.

The corporate mission of Wal-Mart can be stated as follows:

As Wal-Mart continues to grow into new areas and new mediums, our success will always be attributed to our culture. Whether you walk into a Wal-Mart store in your hometown or one across the country while you’re on vacation, you can always be assured you’re getting low prices and that genuine customer service you’ve come to expect from us. You’ll feel at home in any department of any store…that’s our culture.

The company has three “Basic Beliefs” or core philosophies Sam Walton built the company on.  Those beliefs are: (1) Respect for the Individual, (2) Service to Our Customers, and (3) to Strive for Excellence. Respecting the individual is a call for treating their employees well and pushing them to excel in what they do. The commitment to their customers is a goal whereby the stores respect a pricing philosophy to always sell items as low as they can while providing excellent customer service. The third belief is to strive for excellence, that is, to expand the store, innovate or reach further in to new markets and to grow.

Other beliefs include, exceeding customer expectations with “aggressive hospitality” such as using door greeters. The store also features patriotic display and themes in its US stores. Another goal for the company is to support efforts in the local community via charitable contributions.  Wal-Mart identifies several affiliations with charities such as the United Way and the Children’s Miracle Network.

During the 1970s, the retail industry became highly competitive, but, at the same time the economy became weak due to inflation. Sears was the leading retailer in the nation, during the 1970s, however, the recession of 1974 – 1975 and inflation affected Sears adversely. Sears targeted middle class families and expanded its overhead. Wal-Mart’s strategy was to compete with its rivals and lower overhead expenses. Compared with Sears, which consisted of more than 6,000 distribution centers, Wal-Mart had only 2,500 comparable units.

Wal-Mart centered on small-towns first then tried to move to large cities. This happened while other retailers centered on larger urban centers. However, as the economy faced a downturn, people wanted low price stores. Furthermore, as people became mobile, they moved to small towns and suburbs and were willing to travel further to buy low price products.

During the 1980′s, local chambers of commerce supported Wal-Mart because they believed that the company helps a local economy by providing good quality products at low prices. Unfortunately, critics contend that the success of Wal-Mart hurts the existing local independent merchants. Despite the criticism that Wal-Mart destroys small-town competitors, the local chambers of commerce endorsed Wal-Mart. In addition, the chambers of commerce account that the arrival of Wal-Mart provided jobs for people and a more diverse opportunity for local merchants by adapting to the new business environment.

When Wal-Mart first arrived on the scene with their low prices, K-Mart stores was unable to discount brand-name products. Customers wanted to buy good quality brand-name products. K-Mart provides non-name brand goods cheaply; however, it could not maintain constant low prices with its name-brand products. K-Mart and Sear could not beat Wal-Mart due to several reasons: First, Sears’ prices are higher than Wal-Mart’s because the Sears infrastructure gives it higher overhead costs. K-Mart declined in customer appeal because it neglected its store environment and could not provide satisfactory levels of service for its customers. Widespread complaints of poor customer service at K-Mart began to surface while Wal-Mart placed emphasis on customer satisfaction and neat store environments.

Wal-Mart is also on top of their game because of the management strategies they employ. The management strategies of Wal-Mart emphasize its workforce and its corporate culture; that being a morally conservative, religious, and family-oriented business. Wal-Mart emphasizes how it listens to the needs of its workforce so that each employee is able to suggest improvements to company policy and practice. At Wal-Mart, store employees are called “associates”.

The company offers generous financial rewards for employees by means of profit-sharing plans such as stock-purchase options. Furthermore, the company provides comprehensive training programs for all employees.

Wal-Mart’s Control System

Each store constituted an investment center and was evaluated on its profits relative to its inventory investments. Data from over 5,300 stores on its such as sales, expenses, and profit and loss were collected, analyzed, and transmitted electronically on a real-time basis, rapidly revealing how a particular region, district, store, department within a store, or item within a department is performing. Information enables the company to reduce the likelihood of stock-outs and the need for markdowns on slow moving stock, and to maximize inventory turnover.

To reduce the costs of shoplifting and pilferage, Wal-Mart addressed this issue by instituting a policy that shared 50% of the savings from decreases in a store pilferage in a particular store, as compared to the industry standard, among that store’s employees through sore incentive plans.

The “Sundown Rule” is a corporate directive whereby all Wal-Mart employees, be they store “associates,” management, or corporate staff, must reasonably answer a customers or supplier request or question within 24 hours.

The “Ten Foot Rule” states that store employees must greet, smile, and attend to a customer in a store when within 10 feet of them.  It’s a type of aggressive hospitality policy.  Wal-Mart also compels its staff to engage in morning “cheers” where they recite company sayings.

A final, yet important rule, which is a strong part of the corporate culture is Sam Waltons’ “Pricing Philosophy” which underlines the company strategy of selling items for less than their competitors, “always.”

Wal-Mart pushed the retail industry to establish the universal bar code, which forced manufacturers to adopt common labeling. The bar allowed retailers to generate all kinds of information — creating a subtle shift of power from manufacturers to retailers. Wal-Mart became especially good at exploiting the information behind the bar code and is considered a pioneer in developing sophisticated technology to track its inventory and cut the fat out of its supply chain.

Wal-Mart became the first major retailer to demand manufacturers use Radio Frequency Identification Technology (RFID). The technology uses radio frequencies to transmit data stored on small tags attached to pallets or individual products. RFID tags hold significantly more data than bar codes. During the first eight months of 2005, Wal-Mart experienced a 16 percent drop in out-of-stock merchandise at its RFID-equipped stores.

Though Wal-Mart may have been the top customer for consumer product manufacturer, it deliberately ensured it did not become too dependent on any one supplier; no single vendor constituted more than 4% of its overall purchase volume. In order to drive up supply chain efficiencies, Wal-Mart had also persuaded its suppliers to have electronic ‘hook-ups’ with its stores and adapt to its latest supply chain technologies like RFID which could increase monitoring and management of the inventory.

Wal-Mart used a “saturation” strategy for store expansion. The standard was to be able to drive from a distribution center to a store within a day. A distribution center was strategically placed so that it could eventually serve 150-200 Wal-Mart stores within a day. Stores were built as far away as possible but still within a day’s drive of the distribution center; the area then was filled back (or saturated back) to the distribution center. Each distribution center operated 24 hours a day using laser-guided conveyer belts and cross-docking techniques that received goods on one side while simultaneously filling orders on the other.

The company owned a fleet of more than 3,000 trucks and 12,000 trailers. (Most competitors outsourced trucking.) Wal-Mart had implemented a satellite network system that allowed information to be shared between the company’s wide network of stores, distribution centers, and suppliers. The system consolidated orders for goods, enabling the company to buy full truckload quantities without incurring the inventory costs.

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]
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