Assignment for Wal-Mart

1. How was Wal-Mart successful early on? What were its sources of competitive advantage? Sam Walton had been an owner of several Ben Franklin franchises for many years. When his idea for opening up stores in small towns was turned down by the Ben Franklin organization, he and his brother Bud decided they would do it on their own. In 1962 Sam and Bud opened their first Wal-Mart Discount city store. By 1970, Walton had grown his chain to 30 discount stores in rural Arkansas, Missouri, and Oklahoma. One big challenge early on, was that they had poor service from their distributors because they were in such remote places. Sam decided that he had no other choice but to build his own warehouse so he could buy in volume at attractive prices and service his own stores.

To raise the kind of money needed to build a warehouse, about $5 million, Sam took the company public and were able to raise over $3 million in the initial public offering. There were two key sources that gave Wal-Mart a competitive advantage early on. The first was location. They decided to put their stores in small towns that everyone else was ignoring, thus they had very little competition. Second was there pattern of expansion. As David Glass explained, “We were always pushing from the inside out.

We never jump and then backfill.” Sam intimately studied his competitors, and if he felt like they had a good Idea, he would copy it and incorporate it into Wal-Mart. He took great care of his employees, who he called associates, and treated them appropriately. He always believed that for his associates to treat the customer’s properly, that he and Wal-Mart needed to treat the in kind. Wal-Mart aimed to excel by empowering associates, maintaining technological superiority, and building loyalty among associates, customers, and suppliers

2. How did Wal-Mart’s costs compare with those of its competitors in around 1990? Be specific; you can use information in Exhibit 6 and in the text to lay out a detailed comparison of costs between Wal-Mart and the rest of the industry. What does this comparison tell you about the sources of Wal-Mart’s competitive advantage and the factors that drove their competitive advantage over time? As we can see from Exhibit 6 Wal-Mart was enjoying a higher operating income than their competition, almost by a two to one margin. Even though Wal-Mart’s Cost of Goods Sold was higher than most of their direct competitors, they were more than making it up in Operational Expenses.

Wal-Mart merchandise was tailored to individual markets, and local managers were given authority to tailor each store to the customs and needs of their respected clientele. Wal-Mart believed in “everyday-low-prices” so they didn’t need to spend a lot of time and money on “special events” that others seemed to be running all the time. This kept their advertising expense about 30% less than their competitors. They also had a “satisfaction guarantee” policy where customers could return merchandise with no questions asked. Wal-Mart ran there store operations very lean also.

They leased about 70% of their buildings and were able to keep their rental expense about 10% lower than the competition. They would only put building in locations that could be expanded at a later date. In 1990, almost half of all Wal-Mart buildings were less than 3 years old, and were getting about $300 per square foot. Compare that with Target at $209 and Kmart’s at $147. Because of the distribution centers, Wal-Mart only devoted 10% of its square footage to inventory, while the rest of the industry was closer to 25%. Walton always believed in staying ahead of the game when it came to technology. Wal-Mart installed Electronic scanning of Uniform Product Codes (UPC) two years ahead of his major competitors.

This greatly improved store efficiency, accurate pricing, and helped reduce shrinkage. This led to the installation of a satellite system, which further enabled Wal-Mart to improve communications between stores and corporate. Being able to track things in real time helped them to avoid overstocking of slow moving merchandise. For any given period, Wal-Mart had the ability to compare sales, inventory, and labor between stores or even departments within a store. Wal-Mart really developed a strategic advantage with its distribution. Wal-Mart’s distribution centers averaged about one million square feet and were highly automated. About 80% of purchases came from their own distribution centers-as opposed to50% at Kmart.

The balance was delivered directly from suppliers, who stored merchandise for Wal-Mart and wouldn’t bill them until the merchandise left the warehouse. When it came time to negotiate with it suppliers, Wal-Mart played hardball. In fact, they cut out the manufactures sales representatives all together which they estimated saving an extra 3%-4%. All the purchasing was centralized at the head office, and no one supplier accounted for more than 2.4% of the total. Over time these relationships with suppliers grew into symbiotic partnerships. The sharing of information and technology with the installation of electronic data interchange (EDI) enabled most of its vendors to receive orders and interact electronically.

As a result, Wal-Mart and its suppliers benefited from reduced inventory costs and increased sales. Wal-Mart has always believed in treating their associates right and making them feel like they were an important part of the company. In the “Yes We Can Sam” suggestion program, associates were asked to suggest ways to simplify, or improve the work environment. In 1993, over 650 suggestions were implemented with a savings of $85 million. They were also given the opportunity to engage in a profit sharing program. For instance, an associate that started in 1968 at $1.65 an hour would be able to retire and take over $200,000 in 1989 earning $8.25 an hour. Wal-Mart created a family atmosphere that an associate could buy into and feel at home for their entire career.

3. How has Wal-Mart’s competitive advantage changed over time, say between the mid-1970s and the time of the first case? Early on Wal-Mart placed stores in locations that nobody else wanted or thought they could succeed. They obviously proved their critics wrong. With little or no competition from major retailers in these smaller markets, they developed an organization strong enough to take them on head to head in bigger markets. By continually trying, and succeeding to be more efficient in all aspects of the daily operations, Wal-Mart steadily increased their strategic advantages over the rest of the industry.

4. How sustainable is that competitive advantage? Why?

In a truly free market system, no advantage can last forever. Any competitor can copy any strategy or duplicate any process. Throughout its corporate life, Wal-Mart has been an industry innovator in almost every aspect of retailing. This innovation has given them the strategic advantage to become one of the world’s most successful companies. As long as Wal-Mart continues to embrace technology, continues to demand efficiency from every aspect of the business, and continue to stay connected to its associates, it will continue to dominate for years to come.

5. Wal-Mart in 2011 finds itself in a challenging position. If you were to propose a single strategic action for them to take, what would it be? Defend your choice. We believe the internet to become more and more of a dominant force in retailing. We would focus more on the online marketing and go at Amazon.com like they went after Target and Kmart. They already have the infrastructure in place with stores and distribution centers strategically placed throughout the country and world.

They already have a reputation for low prices, which most online shoppers are looking for. One of the biggest advantages that we can see is the ability to pick merchandise up the same day. Many times we have browsed Amazon.com and would have bought something then and there if it would have been available to have same day in store pick up. With the “no question asked” return policy, they would have a constant stream of used or refurbished merchandise to resell. With the world wide exposure of the internet, they would have the opportunity to reach people in places that was not quite ready for a brick and mortar Wal-Mart. New consumers the world over could start building shopping habits many years before ever stepping into a store.