Wal-Mart Case Study

To what extent is Wal-Mart’s performance attributable to industry attractiveness and to

what extent to competitive advantage?

Wal-Mart’s performance is not attributable to industry attractiveness due to the high

internal rivalry within the retail sector. Such rivalry results in margin compression and lower

growth for Wal-Mart.

By using Porter’s 5 forces, we see that supplier power for Wal-Mart is weak because

many of Wal-Mart’s suppliers are consumer product companies. These companies are

commodity companies since their product has little differentiation. As a result, they have little

bargaining power against retailers with large market share such as Wal-Mart. Buyer power for

the consumer is average because there are a large amount of substitutes. Buyers can easily go to

another retailer such as Target or Kmart for their shopping needs. Internal rivalry is high as the

market is very competitive. Many retailers are forced to lower prices in order to compete. As a

result, some retailers are forced to file for bankruptcy. Substitutes for retailers such as Wal-Mart

are moderate. This is because there are many alternatives such as local grocery stores,

department stores, and local mom and pop stores. Barriers to entry for Wal-Mart are high due to

the high fixed costs associated with running retail stores as well as the economies of scale Wal-

Mart has. Retail stores require substantial capital to purchase inventory in bulk similar to that of

Wal-Mart and is very difficult to achieve.

Overall, Wal-Mart’s success was primarily due to the competitive advantages the firm

has over its competitors. These advantages are its distribution network, partner relationships,

data mining, workforce culture, and low prices.

 First, Wal-Mart had a very strong distribution system, allowing the company turnover its

inventory rather quickly while minimizing costs. Distribution costs for Wal-Mart were about 2-

3% of revenue when compared with 4-5% for its competition. This was made possible because

of the company’s innovation in a large scale “cross-docking” system. This system allowed Wal-

Mart to transfer merchandise directly from in-bound trucks to out-bound trucks, resulting in

greater efficiency and less inventory at hand. Also, they used RFID technology, minimizing the

need to unload inventory.

Second, Wal-Mart developed partnership relationships with suppliers particularly in the

form of Wal-Mart Retail Link. This system provides suppliers computers with point of sale

information allowing an accurate estimation of demand. Furthermore, suppliers also had to invest

in this IT infrastructure on their end, allowing frequent exchange of information between these

groups.

Furthermore, data-mining through retail link also provided a significant competitive

advantage over its competitors. This allowed Wal-Mart to remerchandise its product mix based

on what consumers were purchasing.

Also, the company’s workforce culture was a differentiator. The company paid its

employees well, offering profit-sharing plans and an open door policy. As a result, Wal-Mart

employees were further incentivized to provide good service to employees. Furthermore, sales

per store were significantly greater than their competitors.

Lastly-Wal-Mart’s main competitive advantage was its low price point. The company

emphasized “always low prices” as its slogan. On average, there was a 2-4% price differential

between Wal-Mart and its best competitors. In the case, Kmart went bankrupt trying to match

Wal-Mart’s low prices. This results in a strong competitive advantage for Wal-Mart.
In which of Wal-Mart’s principal functions does their competitive advantage lie? What are

the distinctive resources and capabilities in each?

Wal-Mart’s principal functions such as management, IT investment, and product

assortment have significant competitive advantages over their competition. Management was

done differently at Wal-Mart because of the principles that Sam Walton passed onto the

company. He emphasized that the responsibility of the stores should belong to the workers.

Therefore, there was much less micromanaging in the Wal-Mart culture. Because of this culture,

management of the company was very centralized, with as many as 15.4% of its managers

located at headquarters. There was a lack of a regional headquarters, which saved Wal-Mart as

much as 2% of sales. Because of this setup, many regional vice presidents, who were

responsible for as many as 100 stores, traveled to Wal-Mart headquarters on Saturday morning to

report on what was occurring at the store level.

Secondly, Wal-Mart had significant investments in IT. These investments have led to

better communication with suppliers as they developed an accurate system to track point of sales

data. The large investments in IT also led to greater productivity in its employees. Cross-training

and better utilization of workers was made possible because of better technology.

Also, Wal-Mart had a competitive advantage in its product assortment. The company

emphasized hard good such as hardware, housewares, automobiles and less on soft goods such as

apparel, linen, and fabrics. As a result, Wal-Mart receives higher sales per square foot when

compared with its competitors. Wal-Mart also tailors its inventory at the local level by looking at

detailed sales data. More qualitative factors are also used as impulse to buy is also used.
How sustainable is Wal-Mart’s competitive advantage in discount retailing?

Wal-Mart’s competitive advantage in discount retailing is highly sustainable. One reason

for this is because the company has strong IT capacities and continues to innovate in this area.

The company uses advanced data mining techniques for its products, which allow the company

to easily adapt to changes on consumer trends. As a result, this IT system will help Wal-Mart

remain competitive in the discount retailing space.

Another reason that I believe that Wal-Mart will always have a competitive advantage in

discount retailing is because the company has strong relationships with its suppliers. These

suppliers have invested a lot of money into the existing IT infrastructure and are incentivized to

use Wal-Mart as its retailer of choice. Wal-Mart has significant market share in the discount

retailing and has strong control over the pricing it receives from suppliers. Therefore, suppliers

must pay on terms that are favorable to Wal-Mart due to the large orders and economics of scale

that Wal-Mart provides. As a result, Wal-Mart has a sustainable position in the discount retailing

space.

Wal-Mart’s competitive advantage in discount retailing is furthered by the company’s

expansion into international markets. The company has focused on acquiring retailers in

developed nations such as Mexico and Japan rather building stores up from scratch. This allows

Wal-Mart to grow internationally with a discount retailing infrastructure already built. Also, this

allows Wal-Mart to grow faster overall since the company is fully penetrated in the United

States.