Wal-Mart succeeds in the United States simply by selling branded products at low cost. But that doesn't explain it all. Following is an analysis of Wal-Mart's competitive strategy.1 Purchasing
Wal-Mart enjoyed scale economies in purchasing as a result of its more than 50 percent market share position in discount retailing. Though Wal-Mart may be the top customer for consumer product manufacturers, it deliberately did not become too dependent on any one vendor (no single vendor constituted more than 4 percent of its overall purchase volume). Further, Wal-Mart had persuaded its nearly 3,000 vendors to have electronic "hook-ups" with stores to reduce overall order entry and processing costs for itself and its vendors.
About 85 percent of all the merchandise that Wal-Mart sold was shipped through its distribution system to the stores (competitors averaged less than 50 percent). Wal-Mart used a "saturation" strategy for store expansion. The standard was to be able to drive to a store within a day from a distribution center. A distribution center was strategically placed so that it could eventually serve between 150 and 200 Wal-Mart stores within a day. Stores were first built as far away as possible but still within a day's drive of the distribution center; then the area was filled in back to the distribution center. The distribution centers operated 24 hours a day using laser-guided conveyer belts and cross-docking techniques that received goods on one side while simultaneously filling orders on the other. The company owned a fleet of more than 3,000 trucks and 12,000 trailers (most competitors outsourced trucking). Wal-Mart had implemented a satellite network system that was used to share information between the company's network of stores, distribution centers and suppliers so orders could be consolidated, enabling the company to buy full truckloads without incurring excess inventory costs. Wal-Mart's distribution and logistics infrastructure saved transportation costs (2 percent to 3 percent cost advantage relative to competitors), increased flexibility, insured 100 percent in-stock position and increased store selling space (by reducing the space required for back-room inventory storage).
As a result of better management of stores, Wal-Mart enjoyed cost advantages and sales per square foot advantages versus competitors. These advantages were derived from several sources.
Store location: In the early years, Wal-Mart's strategy was to build large discount stores in small rural towns. The locations resulted in lower operating expenses, especially payroll and rent. Competitors, such as Kmart, which were focused on large towns with populations of more than 50,000, ignored Wal-Mart. This built effective entry barriers as it became highly uneconomical for competitors to enter regions Wal-Mart had already saturated.
Human resource management: Wal-Mart created a dedicated work force - with higher labor productivity, lower turnover and excellent customer service - offering profit sharing, incentive bonuses and discount stock purchase plans; promotion from within; promotion and pay raises based on performance, not seniority, and an open door policy.
Management information and control systems: Wal-Mart's management information and control systems helped the company manage its more than 3,000 stores in remote places thousands of miles away from headquarters. Store-level data were collected, analyzed and transmitted electronically to see how a particular region, district, store, department within a store or item was performing. This eliminated stock-outs, reduced the need for markdowns on slow-moving stock and maximized inventory turnover. The benchmark information across stores was also a valuable tool to help "problem" stores.
Shoplifting controls: Wal-Mart has cut its pilferage-related losses by instituting a policy in which 50 percent of the savings created by pilferage decreases in a particular store (versus the industry standard) is shared among store employees.
Wal-Mart's marketing strategy was to guarantee "everyday low prices" as a way to attract customers. The traditional discount retailer, which relies on "sales," not only has to do more advertising and promotions but also has to rely more on catalog mailing, buildup of inventory before a sale, markdowns on the unsold inventory, etc.
1 Abstracted from a 1996 case study of Wal-Mart by Rob Lynch, M.B.A., Tuck School of Business Administration.