Wal-Mart’s Key Competitive Advantages
Industry’s successful firms often employ a Cost Leadership generic strategy (Appendix 2), with competitive advantages coming from cost reduction capabilities that are difficult to replicate, sustainable and easy to communicate. This is well reflected by Wal-Mart marketing slogan “Always low price – Always”, which is matched by Tesco’s “Every little helps”. Kmart, in contrast, which stepped into diversified superstores declared bankruptcy in 2002.
- Scale
Wal-Mart revenues were 245 billion in 2002, three times the size of the number 2 retailer, Carrefour. This gives Wal-Mart economies of scale where size matters – purchase prices, inventory and distribution costs. Wal-Mart’s size also helps it to outspend it competitors and be the first adopter of new communication and information technologies, making the business process management more efficient. Wal-Mart’s spending power allows it to undercut its competitors thereby squeezing out the competition. The size advantage is sustainable as long as Wal-Mart can maintain a large gap relative to its competitors. This is becoming increasingly difficult though due to industry consolidation and the mixed performance of Wal-Mart internationally.
- Culture - Frugality & Simplicity
Parsimony pervades the whole company, as does their desire to do things simply. Wal-Mart’s culture is based on profit; derived not from the pricing end, but from the cost end of every transaction, and manufacturers, brokers and middlemen’s profit margins. It is not easy for a competitor to replicate this culture in a short period of time. Wal-Mart’s culture eliminates organizational slack and helps drive up the residual efficiency. When times are hard and consumers “trade down” as happened in 2008-09 Wal-Mart is there at the expense of high-end food retailers like Whole foods. This culture is sustainable as the company actively promotes and enforces it.
- Operational Excellence
With Porter’s Value chain model (Appendix 5), we believe that Wal-Mart had the foresight to adopt and integrate new technologies e.g. Universal Production Codes, electronic scanning, satellite communication and information systems years ahead of its competitors. This enabled them to collect sales and inventory data, and use it to improve their operations. This helped lower Wal-Mart’s operational expense ratio and gave them key competitive advantages. It is willing to spend a higher percentage of its operational expenses than competitors for IT solutions that can bring additional revenues in the future. This is relatively difficult to replicate and sustainable when combined with advantages.
- Supplier Partnerships
Wal-Mart shares its sales and operational data with its key suppliers for forecasting, planning, shipping and replenishment of merchandise. This helped Wal-Mart receive merchandise directly from the suppliers and enable cross docking to reduce supply chain, inventory and distribution costs; a great example of business process management innovation. Wal-Mart will allocate space to a supplier and have them explain how they will increase revenue for Wal-Mart. If the supplier can demonstrate this well they have the potential to obtain more store space allocated and ultimately create a win/win situation. This may be difficult to sustain as it is a standard practice now in the industry.
Recommendations (Also see Appendix-6)
Appendix 1Supermarket Retail Industry Analysis using Potter’s Five-Force Model
Appendix 2
Porter’s Generic Strategies from
Appendix 3
Analysis of Demand and Competition in Supermarket/Discount Retailing (adapted from Grant 2010 page 88 with our own interpretations)
Appendix 4
Analysis of Profit Drivers in Supermarket/Discount Retailing (adapted from Grant 2010 page 90 with our own interpretations)
Appendix 5
Porter’s Value Chain Model
Appendix 6
Since Wal-Mart is already a cost leader it will have to excel in the areas of store factors, service excellence, product quality and trend leadership to create better customer value proposition for future growth.
Store factors:
Improve store look and feel. Studies have shown that customer’s emotional responses and perceptions are influenced by the store’s look and feel and have a pronounced effect on the time and money they spent in the store.
Customer Service Excellence:
Help customers in their decision making by providing personalized information so they can make informed decisions. Guide customers to the merchandise and help them finding it either on the shelves or online. Help customers to understand the services being provided (checkout, returns) and solve any problems they are having so customer have a truly enjoyable shopping experience.
Merchandise:
Establish trend leadership by providing unique, first mover and quality merchandise. More product variety should be made available to customers by providing access to merchandise outside of inventory.
Adapted for our report from
“Retailing in the 21st Century” by Manfred Krafft and Murali Mantrala 2006/2010