Case Study Solution: Wal-Mart Stores, Inc.
Wal-Mart Stores, Inc.
1) Please describe the sources of Wal-Mart’s Competitive Advantage in discount retailing!
The global player Wal-Mart operates in 14 different markets all around the world, serving 176 million customers every week. Today, the second biggest company of the world, concerning turnover which amounts to 312,427 million US-$, categorizes its operational facilities into five divisions. 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 employing a workforce of 350 people, selling all kinds of groceries and general merchandise at the lowest possible price. Wal-Mart neighborhood markets are specified in offering 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.
Wal-Mart started to build up its stores in smaller cities having a population ranging from 5000-25000 inhabitants, where hardly any other competitors were located. Consequently, consumers stopped driving to other cities to do their shopping, but started to shop at Wal-Marts stores in their own towns. By the mid 80’s Wal-Mart had one third of its stores in regions where no direct competitors could be found. The discount-retailer gained therefore more influence on the customer, eliminating the prejudice that discount retailing is only possible and profitable in larger cities. Sam Walton strived for his vision to offer his products and merchandise always below competition. The whole company was oriented to do so from the very beginning as well as saving costs in all business decisions and areas. As a result out of this policy, Wal-Mart was able to build up high amounts of monetary reserves to resist long-term price conflicts with other competitors.
Concerning the merchandise, Wal-Mart allowed its store managers to find out which product ranges are preferred by the local customers, based on each stores sales data.
Thus, it was not necessary to broadcast regional advertisement campaigns on a regular basis as every customer knew about the specialized product ranges offered at Wal-Mart. Compared to an average of 50-100 advertisement circulars of Wal-Mart’s competitors, the discount retailer launched only 13 circulars as a reminder. Consequently, costs for advertisement were 0.6% lower than the competitors that spent 2.1% of their store sales. While offering its prices 1 % below in direct competition, Wal-Mart sold its products 6 % higher in those areas where no direct competitors, such as Target and Kmart were located. In this way, additional costs could be saved.
Another reason for Wal-Marts success is the national brand strategy which implies that orders are made preferably with American suppliers, in order to avoid expensive imports of goods. Furthermore, this program corresponded with the typical values of the American customer and encouraged him to buy especially at Wal-Mart.
Basically, it took 120 days from laying the first brick to complete the construction of a new Wal-Mart store. All of these stores were built with the possibility to be extended in its size if it was necessary to do so. Compared to the industry average of 25%, Wal-Mart dedicated only 10 % of its floor space for inventory, being able to store a higher amount of goods in each store. This leads to a saving in operating expenses of 6.5% compared to the industry average of 24.6%. To improve the efficiency of internal communication, Wal-Mart nearly spent nearly a billion US-$ on its own satellite system, providing information about sales, stocking and developments in stores on a daily basis. That information is used to maximize store sales and at the same time to save costs.
Various competitive advantages are also to be found in the distribution channels of the discount retailer. The basic strategy in distribution is known as cross-docking that makes it possible to deliver every good directly to the store without being stocked. Moreover, it was possible to deliver several Wal-Marts on a single tour, because of the special store arrangements. Thus it was possible to save in-bound logistics costs. Vendors were not allowed to provide more than 2.4% of Wal-Marts purchases, making the discount retailer independent and dominating its suppliers. Nevertheless, working with Wal-Mart is very profitable; the purchase of Procter & Gamble’s products equals about 10% of their annual revenue. Through developing electronic invoicing and annual strategic business planning packages for the communication with the vendors, it was possible to reduce the inventory costs and to increase sales.
Human Resources bear another competitive advantage of Wal-Mart. The retailer
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