Walmart Casewrite-Up

Wal*Mart Case Study Write-Up

Name: Anand Das

• Using the case data, how does Wal*Mart’s financial performance (e.g., sales, sales growth, profitability) compare with that of its competition?

Wal*Mart was comfortably the largest player in the discount retail market in the US, with 70% more sales than its nearest competitor (Kmart) and almost 4 times the 2nd largest competitor (Target) in 1993. In terms of store count as well, the company was only second to Kmart.

Despite being the largest discount retail player in the US, Wal*Mart still continued to lead the industry in terms of sales growth, both in near term (17.5% growth in 1993) as well as medium term (28.2% over last 5 years).

From a profitability standpoint, Wal*Mart was again leading all the way with its Operating income margins of 7.5% almost twice that of competitor’s average (3.9%). The better profitability profile versus competitors appears to be primarily because of lower operating expenses.

• What is Wal*Mart’s strategy?

Wal*Mart’s primary strategy was to be a low-price leader in the market – as reflected in their promotional strategy of “every day low prices”. All of Wal*Mart’s corporate strategy revolved around reducing costs at all points of supply chain – from procurement to distribution to store operations. In turn, the company passed on some of these cost savings to its customers as a lower price and maintain its lowest cost position in the market. As mentioned through most of the case and Exhibit 5, Wal*Mart almost had the lowest price amongst all the categories.

The key to Wal*Mart’s growth strategy was the strategic location of its stores. The stores were often located in isolated areas that were ignored by competitors.  

Wal*Mart’s ability consistently to outperform other discount retailers is based on a business system that responds quickly and effectively to changes in demand and competition. Wal*Mart’s store level promotion and pricing flexibility allow it to ward-off local competition. In addition, using the data on inventory and sales, the store manager decides the product placement in the store.

• To what extent do/do not Wal*Mart’s resources and activities reinforce this strategy?

To maintain its price competitiveness sustainably, Wal*Mart needs to ensure that the cost savings are squeezed in from every point in the supply chain. So far, Wal*Mart appears to be doing all the right things, including:

• Low supplier power. Given the scale of Wal*Mart, it always had the upper hand over its suppliers and always managed to push for lowest procurement costs
• Lower rental costs (3.0%) on its stores versus competitors (3.3%)
• Lower inbound logistic costs, driven by efficient distribution systems (“cross-docking”). Also,
• Leveraging technology to drive pricing efficiencies and minimize inventory losses.
• Profit sharing plans with employees to incentivize them to perform better.  

• How sustainable is Wal*Mart’s competitive advantage?

Wal*Mart’s flexibility linked to customers demand and pricing strategy are key elements that help sustain its competitiveness.

The sustainability of competitive advantages can be assessed as follows:

• Distribution capabilities: With an existing state of art distribution system infrastructure, Wal*Mart have already made significant investments that may act as a significant barrier to entry against a new entrant.
• Supplier relationships: Given the volumes that Wal*Mart purchases from its supplier, it would be hard for any supplier to switch away from Wal*Mart. The length of relationship with the strategic suppliers also brings in a degree of integration of suppliers with the Wal*Mart supply chain, which may not be very easy to replicate.
• Technology prowess: Wal*Mart has invested heavily in technology to maintain its competitive advantage. While competitors are stepping up their IT spending, Wal*Mart may always have the scale advantage and in turn the capital available to further upgrade its system. Although, a totally disruptive technology can also cause a change in business model in the discount retail industry that may shrink Wal*Mart technology advantage.
• Workforce: Wal*Mart is recognized as one of the best places to work for. The work culture and employee incentive plan may be difficult for other competitors to replicate overnight. However, any future attempts to unionize workforce (similar to some other industries like auto, steel, etc.) may unfavorably impact labor costs for Wal*Mart.

• How should Wal*Mart respond to Target’s superior performance in recent years? Is organic products or “upscaling” a good idea? Can Wal*Mart be beaten?

Wal*Mart, rather than trying to spread its reach outside of its core market of discount retailing, should further consolidate its leadership position among its loyal customer base. Given that Wal*Mart has been a price leader in its core offerings, it has a more recession-resistant position versus Target.