Merchandising:
- The Local store manager had absolute freedom in using inventory and sales data. He could also decide on the products to be displayed based on customer preferences. He could allocate shelf spaces for the goods so identified, according to his own discretion.
- Wal*Mart’s promotional strategy of ‘everyday-low-prices’ meant offering customers brand-name merchandise for less than department and specialty store prices. Wal* Mart had few promotions. While other major competitors typically ran 50 to 100 advertised circulars annually to build traffic, Wal*Mart offered 13 major circulars per year.
- In 1993, Wal*Mart’s advertising expense was 1.5% of discount store sales, compared with 2.1% for direct competitors. In addition Wal*Mart offered a “satisfaction guaranteed” policy which meant that merchandise could be returned to any Wal*Mart store with no questions asked.
Cost leadership, Differentiation in markets and Merchandising.
- This was the end result of all the components of the Cost Leadership strategy. When it came to pricing, Wal*Mart was very competitive in terms of prices, and gave its store managers more latitude in setting prices than did “centrally priced” chains such as Caldor and Venture.
- Wal*Mart’s prices were roughly 1% lower than K-Mart when the two were located next to one another and when they were separated by 4-6 miles, Wal*Mart’s average prices were 10.4% and 7.6% lower respectively. In remote locations where Wal*Mart had no direct competition from large discounters, its prices were 6% higher than at locations where it was next to K-mart. By the early 1990s there was, typically a 2% to 4% pricing differential between Wal*Mart and its best competitors in most market.
- Wal*Mart was known for its national brand strategy, and the majority of its sales consisted of nationally advertised branded products. Later private labels were also given place. Sam’s choice, which was considered the company’s premium quality line, offered an average 26% price advantage over comparable branded products, with the range of the advantage being 9%-60%.
Distribution: Process Redesign
- Cost leadership strategy requires control over the distribution channels as well. In the case of Walmart, when it came to distribution, about 80% of purchases for Wal*Mart stores were shipped from its own distribution centers as opposed to 50% of K-Mart. A technique known as “cross docking’ was being introduced to transfer products directly from in-bound vehicles to store-bound vehicles enabling goods to be delivered continuously to warehouses, repacked, and dispatched to stores often without ever sitting in inventory.
- By early 1994, roughly 10% of Wal*Mart’s merchandise was “cross-docked” at four distribution facilities that were equipped for it. In 1993, analysts estimated Wal*Mart’s cost of in-bound logistics, which was part of cost of goods sod, to be 3.7% of discount store sales, compared with 4.8% for its direct competitors.
Thus we see above that the company followed the principles of Cost leadership with continuous Process redesign for maximum benefits of costs.
Vendor Relationships: Sqeezing the supply chain for benefits.
- Wal*Mart eliminated manufacturers’ representatives from negotiations with suppliers at the beginning of 1992, at an estimated savings of 3%-4%. The company made it a practice to call its vendors collect and centralized its buying at the head office with 2.4% being the maximum a supplier could account for. Electronic invoicing was used with more than 65% of its vendors.
Diversification: Sustained Capital Investment
- Another hallmark of an overall cost leadership is sustained capital investment with constant access to capital. The company used its margins to constantly reinvest and plough back in the company. The diversification drive was made possible because of this.
- Hypermarkets were introduce by Wal*Mart in 1987. This helped it earn gross margins of 13%-14%. Based on its learning from its experiment with hypermarkets, Wal*Mart dropped the format in favour of smaller markets.
- Further, there were many schemes introduced by the company like the Sam’s Clubs. Sam’s clubs were first introduced in1983. The philosophy was to offer a limited number of SKUs in pallet size quantities in a no frills warehouse type building. There was an increase in sales in Sam’s club by 19.5% in 1993 from the previous 31% in 1992.
2. Discuss how Walmart organises its various functional activities to support its competitive position.
We have used McKinsey’s 7S framework to analyze this problem
Let us now look at each aspect of the 7S framework in the context of Wal*Mart
- STRATEGY:
Wal Mart has been consistently following a low cost policy. It has successfully applied this strategy by various means such as:
- Excellent inventory and working capital management
- Exploiting economies of Scale
- Very good management of relationship with suppliers
- Religiously following its tag line of “Always low prices- Always”
- High degree of automation in a number of operations
- Limited number of SKU’s (Stock Keeping Units)
Other elements of Wal Mart’s strategy include
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Dominance in the Retail Market- Wal Mart had always been obsessed in catching up with the very biggest retailers. In fact, in its quest to do so, it managed to successfully replicate many of their successful strategies. The total number of Wal Mart Stores and even sizes of their individual stores are 2nd highest in the US market. (Ref. Exhibit 5.3)
- Expansion in the U.S. and International Markets- One of the key aspects of Sam Walton’s plans for growing Wal Mart was to locate stores in isolated rural areas and small towns. The second aspect was their pushing from inside out.
In fact, WalMart’s supercentre format, Sam’s Clubs, chose to cannibalize its own sales by opening clubs close to one another in many markets, rather than give competitors any openings.
Now WalMart is also entering foreign markets such as Mexico and Canada, by liaising with existing retailers in those markets.
- Branch Out into New Sectors of Retail- WalMart has evolved itself from merely being a discount store to other retail formats such as Supercentres, Bud’s and Sam’s Clubs.
- STRUCTURE:
WalMart is decentralized. Individual retail stores have a great deal of autonomy to make pricing and inventory decisions as per prevalent local conditions. Merchandise is tailored to individual markets, and in some cases individual stores.
Management did spend a lot of time on the road communicating directly with various stores and also via the company satellite.
- SYSTEMS:
The noticeable features of Wal Mart’s Systems include:
-
High degree of automation and a lot of use of Information systems- Wal Mart spent over $700 million on its satellite communications network, computers and related equipment. It used various systems like “traiting” to index product movement, electronic scanning of Uniform Product Codes (UPC), centralized inventory tracking systems, sharing of sales data through satellite, and sharing of data with vendors as well.
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Hub and Spoke Distribution network- The logistics of Wal Mart were very well maintained. Stores got replenishment of their orders within 48 and in some cases as less as 24 hours. A technique known as cross docking was introduced to transfer products directly from in bound vehicles to store bound vehicles
- STYLE:
Wal Mart’s culture and style is characterized by Sam Walton’s legacy. He called his employees associates and tried to instill in them the idea that Wal Mart has its own way of doing things. He tried to make company life unpredictable, interesting and fun. He and his company spent a lot of time in getting to know the practices of their competitors. To ensure that his associates take care of the employees, he tried to ensure that he is taking care of his associates. He was irked by the way people whom Wal Mart had made millionaires flaunted their money.
- STAFF:
Wal Mart Staff is referred to as associates. It is amongst the largest employers in the US. It’s a lean operation that does not believe in “superstars”. The people “live to work for the glory of Wal Mart”. Many programs have been instituted to involve the associates in the business, such as “yes we can Sam” and the concept of “store within a store”. At weekly merchandise meetings, all people talk with passion of their ideas. Every body’s ideas count and are taken into consideration. There are regular Saturday meeting for the purpose of combining informal entertainment with sharing of information and rallying the troops of associates.
- SKILL
Wal Mart’s core competency lies in the fact that it can recognize potential areas of cost cutting and really act upon them. In a lot of ways, Wal Mart has been a trend setter, be it setting up of stores in rural areas , the large scale use of IT, the kind of relationships it shares with its suppliers, systems to track inventory, etc. What it did not innovate, Wal Mart was successfully able to replicate, such as new formats for retail stores. All its activities are centered around cutting costs, hence that is the USP of Wal Mart. Its personnel are characterized by their passion for ideas and their shared love for Wal Mart.
- SHARED VALUE:
Top leadership such as Sam Walton and Don Soderquist have been characterized by their frugality. Walton was a firm believer in the value of the dollar and was obsessed with keeping prices down. That is possibly the philosophy that has been driving the entire organization harder and harder towards achieving its cost leadership strategy and the concept of Always low prices- Always. The service orientation of the organization is embodied in systems such as the “People Greeter”. There is a lot of openness and information sharing in the culture. All people are treated at par, and Wal Mart takes good care of its employees in terms of compensation.
3) IS THE COMPETITIVE POSITION OF WAL-MART SUSTAINABLE?
There are two main core competencies that set Wal-Mart apart from its competitors which are its Low-price strategy and Customer Service
With the above strategies and the aggressive expansion of the retail stores helps Wal-Mart maintain its leadership. However there are many pitfalls in the above strategies.
Low-price strategy:
Perhaps the biggest pitfall of a low-cost provider strategy is getting carried away with overly aggressive price cutting and ending up with lower rather than higher profitability. A low-cost provider strategy results in profitability only if (1) prices are cut by less than the size of the cost advantage or (2) the added gains in unit sales are large enough to bring in a bigger total profit despite lower margins per unit sold. A company with a 5% percent cost advantage cannot cut prices 20% and end up with volume of only 10% and still expect to earn higher profits.
A second pitfall is not emphasizing avenues of cost advantage that can be kept proprietary or that relegate rivals to playing catch-up. The value of a cost advantage depends on its sustainability. Sustainability, in turn, hinges on whether the company achieves its cost advantage in ways difficult for rivals to copy or match. At this moment Wal-Mart is able to achieve the same. But with the economy and the industry’s growth decreasing, Wal-Mart may find it difficult to keep up with its low-cost strategy,
A third pitfall is becoming too fixated on cost reduction. Low cost cannot be pursued so zealously that a firm’s offering ends up being too features-poor to generate buyer appeal. Furthermore, a company driving zealously to push its cost down has to guard against misreading or ignoring subtle but significant market swings like growing buyer interest in added features or service, declining buyer sensitivity to price or new developments that start to alter how buyers use the product. A customer may prefer buying online products rather than going to Wal-Mart and getting it for lesser price. Here convenience may be more important than price. A low-cost zealot risks getting left behind if buyers begin to opt for enhanced quality, innovative performance features, faster service and other differentiating features. Even if these mistakes are avoided, a low cost competitive approach still carries risk. Cost-saving technological breakthroughs or the emergence of still lower cost value chain models can nullify a low-cost leader’s hard won position. The current leader may have difficulty in shifting quickly to the new technologies or value-chain approaches because heavy investments lock it in to its present value chain approach.
Another problem that Wal-Mart is likely to face is the increasing law suits against it for selling products at such a low price. These might get expensive and can eat into the profits of the organization
If it wants to expand to other countries like India, low-cost strategy may not work as the sales will not cover even the marginal cost the company incurs.
Customer Service:
All of us are aware of the fact that Wal-Mart’s culture is all about serving the customer. With growing technology and internet usages, the number of people coming to malls would drastically reduce in the future. So Wal-Mart may find competition in retail stores that offer online shopping facility vis-à-vis normal retail shopping. Although Wal-Mart may continue to offer the best of customer service, if it doesn’t move on to state of art selling like online shopping, it would start losing customers. Because technologically savvy customers are growing by the day and they would prefer the convenience of online shopping.
The current position of Wal-Mart is certainly sustainable as long as the company takes decision as per the changes that occur in business environment.
So in order to maintain its competitive position, they should certainly look into the disadvantages of some of the strategy that they follow and see to it that they do not make any mistakes in any of the business decisions.
4) RECOMMEND A SUITABLE STRATEGY FOR WALMART
The competitive position of industry leaders normally range from stronger than average” to “powerful”. Wal-Mart right now enjoys the status of being a powerful leader.
- Return on equity highest at 31.2% whereas Venture being the second highest at 28.7%
- The sales growth for Wal-Mart is 28.2% while Family Dollar being a distant second at 14.4%
- Wal-Mart is also leader in Earnings per Share Growth
The main strategic concern for a leader revolves around how to defend and strengthen its leadership position, perhaps becoming the dominant leader as opposed to just a leader. However, the pursuit of industry leadership and large market share per se is primarily important because of competitive advantage and profitability that accrue to being the industry’s biggest company. Three strategies are open to companies who are industry leaders.
1. Stay-on-the-offensive strategy:
This is nothing but first mover strategy. It rests on the principle of staying a step ahead of the competitors and forcing rivals into a reactive, catch-up mode is the surest path to industry prominence and potential market dominance. This mans continuous improvement and innovation. Technological improvements, more attractive performance features, quality enhancements, improved customer service, ways to cut operating costs etc. They must set pace for cost reduction and must constantly initiate new ways to keep its products/services away from imitations and substitutes. Company can expand overall demand-making more suitable for customers etc. and attracting new users.
It can aim at growing faster than the industry as a whole.
2. Fortify and defend strategy:
This strategy is to make it harder for challengers to gain ground and for new firms to enter. The goal is to hold on to the strong market share, strengthen current position and protect whatever competitive advantage the firm has.
- Increase spending on advertising, higher levels of customer service etc.
- Adding personalized services that boost customer loyalty
- Building capacity ahead of demand
- Investing enough to be cost-competitive and technologically progressive
- Signing exclusive contracts with best suppliers and dealer distributors.
This strategy works for firms that have already achieved industry dominance and don’t wish to risk anti-trust action. But this strategy always entails trying to grow as fast as the market as a whole and requires reinvesting capital in the business to protect the leader;s ability to compete.
3. Muscle-flexing strategy
Here the leader plays the competitive hardball. Specific responses include quickly matching and sometimes exceeding competition’s price-cuts, using larger promotional campaigns to counter challenges and offer better deals to customers. Leaders may also court distributors to dissuade them from carrying rival’s products. They even try to fill vacant positions by making attractive offers to better executives of rival companies.
They use arm twisting tactics to put pressure on customers. They even resort to granting special discounts. The company has to be careful and judicious in using the above strategies and take care not to cross the line.
Of the three strategies discussed above, Wal-Mart should adopt the second for the following reasons:
- Since Wal-Mart is already a leader, it should strengthen the lead further and prevent other players from catching up. They can do the following:
- Start online shopping service for customers who prefer that mode of shopping
- Continue to sell products at competitive prices keeping in mind the pitfalls discussed above
- Investing more on technology and create innovative mode of selling products like free home delivery etc.
- Developing and strengthening relationships with suppliers which would prevent other players from selling the products thus increasing Wal-Mart’s customers.
- It should definitely not adopt the third strategy for the simple reason that aggression goes against the culture and vision of Wal-Mart. If they adopt that strategy, they would loose employees, customers and it would have serious effect on the profits and sales of Wal-Mart
- As for the first, Wal-Mart operates in a industry that leaves little for innovations and product enhancements etc. So it clearly does not have an advantage in that sense. The best option for Wal-Mart would be to follow the second strategy.
