Wal-mart is an excellent example of a company that has prospered in a highly competitive marketplace.  An analysis of the company’s strategies can provide a useful guide for other businesses to compete successfully in their own marketplaces.

Wal-Mart Pre-1990

Discounting emerged as a retailing merchandising strategy in the 1950’s. The U.S. discount retailing industry enjoyed fast-paced growth in earlier years and attracted many players; the number of stores grew from 1329 in 1950’s to 7400 by 1970’s. High number of entrants saturated the market and growth slowed.  In the 1960’s, the industry started to become a zero-sum game where only the largest chains would survive.

In the early and mid 1970’s, the discount retailing industry was not particularly attractive.  Industry analysts had negative views of the future growth potential of discounters.  The industry was characterized by increasing market saturation, rising costs associated with expansion and decreasing profitability.  Beginning in 1960, discount retailers pursued an aggressive growth strategy, which led to a quadrupling of the number of stores over a 17-year period.  This led to market saturation and forced the stores to begin competing with each other for discount shoppers.  Since the discounters relied on high customer demand to generate sufficient returns, this saturation was detrimental to the profitability of the entire industry.   During the mid 1970’s discount chains were unable to sustain their profitability as well as cover the costs of their continued expansion.  Numerous bankruptcies and mergers followed.

Although the overall discount retailing industry was not attractive at this time, the bankruptcies and mergers of large players provided openings for new competitors.

Wal-mart took advantage of the changing industry conditions and began their expansion (Exhibit 1). In doing so, the company targeted smaller communities that had all but been ignored by the competition.  

By analyzing the retail industry conditions as well as Wal-mart’s specific strategies, it is  possible to evaluate the reasons for the company’s continued success.

Industry Analysis

Wal-Mart has enjoyed compound average sales growth of 32% in the discount-retail industry from 1981 to 1990 (Exhibit 2). It has sustained this impressive growth rate due to a very focused business strategy that provided it with a unique competitive advantage. The Five-forces model is useful for analyzing the business environment that allowed Wal-mart to become the market leader (Exhibit 3).

1. The Threat of New Entrants: The discount retailing market was dominated by large players, which by themselves, served as substantial barriers to entry for new players.  At the micro-level this was accomplished by:

  1. Capital Requirements and Economies of scale: A typical Wal-mart store spanned almost 80,000 square feet compared to the average supermarket, which was typically 40,000 square feet.  The sheer size of the stores and the variety of products that they carried thwarted any competition from small and mid-size retailers.  Warehouse club stores were even larger, allowing for more economies of scale and lower costs.
  2. Strategies:  Firms focused on long-term strategies to compete against their rivals in the future.  For example, Wal-Mart began opening stores only if it had the capacity to expand at a later date. Over the years, this excess capacity became a substantial deterrent for new market competitors.
  3. Cost Advantages: Retailers gained absolute cost advantages by utilizing:
  • Reducing operating costs
  • Identifying markets with the least competition
  • Strengthening and exerting influence over vendor relationships
  • Promoting continuous improvement from the grass-roots level
  • Buying goods from countries where labor-costs were cheaper

D. Product differentiation: In an industry where product differentiation was minimal, retailers tried to position themselves as superior service providers. Wal-Mart on the other hand, built its brand name around superior service combined with low cost products. The company also used a motto of “Everyday Low Prices”, which led consumers to think they were getting the lowest price, even if there was only a few cents difference between the pricing at a competitor’s store.

E. Distribution: Firms built efficient distribution networks to reduce costs. Innovative techniques led to lower inventory costs, increased product availability and shorter lead-times.

2. Competition from Substitutes: Discount retail firms faced stiff competition from substitutes as the majority of their sales were generated from nationally advertised, branded products carried by a variety of retailers. However, discounters slowly introduced their own private labels that provided higher margins and exploited store loyalty they had built over the years. Major substitute retailers for Wal-Mart were Target, K-mart, Service Merchandise, Price Club, etc.

Join now!

3. Bargaining power of Buyers: Intense competition among retailers led to a market where buyers had the option to purchase the same product from a number of retailers. As a result, buyers’ decisions were made primarily on price, convenience and perceived image of the store. Accordingly, buyers had the strongest bargaining power in the model.

 4. Bargaining power of suppliers: Firms benefited from strategic long-term relationships with their suppliers that allowed them to leverage significant discounts.  Suppliers initially benefited from these relationships by receiving feedback on customer preferences, having stable demand for their products and lower inventory costs.  Nevertheless, as the purchasing ...

This is a preview of the whole essay