1.Please describe the sources of Wal-Mart’s Competitive Advantage in discount retailing.
In 1962 the first Wal*Mart store founded by Sam Walton opened in Rogers, Arkansas. Over the following years Wal*Mart became very successful in the United States and later on the largest retail chain, with a market value of 214 billion US$ and the largest company by sales worldwide in the year 2007. Nowadays Wal*Mart employs more than 2.000.000 people (balanced 2008) and each week about 100 million customers visit Wal-Mart’s US stores. This success story is based on several strategical aspects which will be explained in detail below. Sam Walton developed an unusual but effective strategy, which leads to a competitive advantage in discounting against the other discounters; for example Kwart or Target.
First of all it is important to know that Wal*Mart owns different types of stores who facilitate distribution and appeal to various consumer groups. Among those divisions are the Wal*Mart ‘discount stores’, offering convenience and low-priced goods. Wal*Mart ‘Supercenters’ are the biggest stores, being open 24/7 hours and selling all kinds of groceries and general merchandise. Wal*Mart ‘neighborhood markets’ are specified in providing pharmaceuticals and fresh produce groceries such as diaries and meat. The fifth category, the so called ‘Sam’s club stores’ are the biggest members-only stores, offering goods in large volumes.
The first innovative step taken by Walton was the selection of the locations. Wal*Mart stores are opened in smaller cities where hardly no competitors can be found. The second criteria was the possibility to expand further which means to have the opportunity to build stores in near distance or expand the existing once (“pushing from inside out”). Right from the start the whole company was orientated to set prices always under the average. So that competitors can be trumped any time. In order to guarantee these small prices Wal*Mart had to reduce costs in other sectors such as distribution or advertising.
In addition prices are tailored to particular needs by allowing the store manager latitude in the price setting process. Instead of running expensive advertising campaigns, Wal*Mart concentrates mainly on a good after-sales service. For example the “satisfaction guarantee” which implies that every customer can return a product in case of dissatisfaction without giving reasons. This service leads to a trustful and durable relationship between Wal*Mart and the customers since there is no risk in buying a certain product. In addition a “People Greeter” can be found in the entrance of every store and hands out shopping carts in order to relieve the purchasing. Due to the fact that most Wal-Mart stores send out only 13 circulars per year, compared with 53 or more for their competitors, the turnovers display that this strategy is more successful.
One further competitive advantage is the “American brand strategy” which contains that Wal*Mart trades only with American suppliers and thus offers mainly American products. The American population is renowned as patriotic and land-based so these kind of products may have more value for the customers and they are proud to buy products manufactured by their compatriots. In combination, Wal*Mart is famous for its national brand products and their private label apparel. By virtue of these self-made products Wal*Mart is able to put them up for sale for 26% lower prices than comparable branded products.
An other advantage emerges in the distribution sector of Wal*Mart. 2500 truckers with more than 2000 trucks are able to deliver goods within 24 hours of the original request. So night- and accelerated deliveries are possible as well. In order to guarantee this fast distribution a strategy named ‘cross-docking’ was invented (see appendix 1) which makes it possible to deliver goods directly to the store without being stocked. In addition Wal*Mart possesses over 27 distribution centers who support the strategy and ship about 80% of the whole purchases. Wal*Mart spend also 700 million US $ to develop a satellite system and a electronic data interchange(EDI) which reduces costs in certain sectors. It improves for example the internal communication between the Wal*Mart stores and the distribution centers.
A bar code reader scans every product and gives information about sales and stocking so the manager is able to analyse the selling process. Furthermore information are send to a central unit to get necessary information about the stock and required goods. The system is also used to communicate and receive orders with estimated 3,600 vendors. Besides it is an immane saving of rent cost because less storage space is needed. Wal*Mart has also a 35 time higher data base then for example amazon.com (Newspaper The Economist, 25.2.2006). Working with Wal-Mart is very profitable for suppliers as well. The purchase of Procter & Gamble’s products equals about 10% of their annual revenue for example.
Through developing electronic invoicing and annual strategic business planning packages for the communication with the vendors, it is possible for Wal*Mart to reduce inventory costs and increase sales. Human Resources originate another competitive advantage. The retailer is anxious to employ just people who are concordant with the philosophy of Wal*Mart and invest their effort in achieving the most possible success. Furthermore, it is common to recruit students directly after graduation.
In order to create motivation, employees are involved actively into suggesting improvements in day to day operations, resulting in cost savings of 85 million US-$ in 1993. Additionally, it is possible for the employees to participate in shareholding and to gain dividends of Wal*Marts profits. Looking at the head of the company, it is insignificant, which position a member takes in the organization process. During weekly meetings, everyone is allowed to produce new innovative ideas. Altogether, these facts lead to Wal*Marts uniqueness as a discount retailer and make them the most successful discounter worldwide.
2.Please describe the future sustainability of Wal-Mart’s position in discount retailing
Wal*Mart managed to become the biggest discount retailer by sales worldwide. Furthermore their turnover almost equal the sales of the ten largest competitors combined. Hence, it is obvious that the company has got a very dominant position in this sector. The historical data implies that the tendency of Wal*Mart’s future is a consistent growth; operating results doubled from 32billion US$ (1990) to 67billion US$ (1993) . So the prediction can be made that Wal*Mart has the premises to keep its position as market leader, owing to several advantages in terms of cost-savings, publicity and locations.
The Fortune magazine elected the discounter as top selling company worldwide. This commendation and other ratios show that Wal*Mart seems to be very stable and therefore financially sustainable. The historical approach of building long-lasting and future-oriented vendor relationships is a sign for Wal*Mart’s sustainability as well. In this regard the partnership with P&G, Wal*Mart’s largest customer, can be mentioned. A main challenge is also the treatment of the rapid growth rate. Since Wal*Mart has been continuously growing, they can make use of their existing expansion capacities and specified knowledge. During the planning phase of every store an expansion was included. Thus there is no need for acquiring bigger properties.
Especially the trend towards ‘Supercenters’, which require higher square footage, is favoured by this approach. Furthermore the locations chosen are profitable since a lot of stores do not face direct competition and are located in rural areas. An other aspect how Wal*Mart tries to keep sustainability is their environmental engagement. Wal*Mart tries to save the environment by reducing packaging, ensure recyclability and offering reusable bags. By dint of this strategy the company tries to create a good image and attract ecology-minded customers. The management style of Wal*Mart also supports sustainability as it gears to tie the employees down to the company and its philosophy. An other advantage refers to the fact that Wal*Mart usually hires their manager directly after finishing college. Accordingly they are young, motivated and have new innovative ideas.
Every manager and worker has a voice, is able to announce own ideas and get involved in meetings without any hierarchy. So the internal communication is considered to be essential to build a foundation for future success. Even though Wal*Mart has the premises to maintain as market leader and defend this position it will be difficult to expend in the same degree as they used to do over the last decades.
The market concerning discounter is virtually saturated thus it proves to be difficult to open new stores in the US since Wal*Mart already owns a store in almost every area. In addition it will become more difficult to decentralize the decision-process, the training and the individual scope for development. It will become harder to keep up the good working environment (e.g. health-care benefits, profit-sharing plan) because the competition may adapt Wal*Mart’s operating strategy and become more competitive. Belt- tightening measures would need to be taken and the employees would be the first one affected.
This development can be seen in the growing costs of sales and the decreasing operating expenses. Since Wal*Mart guarantees with its slogan to set prices always lower than the competitions the costs of sales increase, creating a smaller profit margin. The decrease in turnover has to be compensated by reducing operating expense, which includes the salary and hourly wage of employees. Taking all aspects concerning the future sustainability of Wal*Mart into consideration, it can be assumed that the position as market leader can be maintained in case the company uses their unique advantages to prevail over national and international competitors.
3.Please predict how effective their diversification into the food industry will be.
The food industry is one of the highly competitive sectors worldwide and profit margins are typically so low that it is often sophisticated to achieve profitability. Even though, the food market has to grapple with problems such as a low growth rate, high costs for energy and the changing consumer tastes, Wal*Mart has the premises to enlist in this industry. By reason of various advantages Wal*Mart is in a good position against the other competitors. Experiences collected through the last decades and a sophisticated strategy concerning logistics and distribution leads to the the necessary knowledge to diversify.
Wal*Mart’s financial situation also supports the diversification since there is no existence threatening risk by virtue of a breakdown. The huge capacities which can be relieved enables Wal*Mart to cut costs and to offer food products at low prices and thus eliminate direct competitors. Moreover, the discount retailer benefits from a high level of recognition and a good reputation, offering high-quality brand products cheaply. Consequently, consumers developed a strong bond towards Wal*Mart and thus start to buy products of the new food range. Nevertheless, the combination of a retailer and a supermarket is of capital importance. Wal*Mart’s targets to attract as many costumers as possible, thus combining these two sectors is highly effective.
Taking into consideration that a lot of Wal*Mart stores do not face direct competition, each shopping trip for groceries and merchandise can be combined by simply going to Wal*Mart. The development trend of a growing convenience concerning food and shopping facilitates a possible success for Wal*Mart in case of a diversification as well. Since 1998 Wal*Mart opened 128 so called ‘Neighborhood stores’ which offer a selection of groceries, pharmaceuticals, health and beauty aids, photo developing services, and a limited range of merchandise. The revenues of 4.8 billion US$ in 2007 demonstrate the success of the diversification of Wal*Mart in the food industry.