You are on page 1of 5

Abstract:

By successfully adopting a cost leadership strategy over the decades, Wal-Mart has emerged as the largest company (in terms of revenues) in the world. The case examines in-depth the key elements of the cost leadership strategy followed by WalMart. It discusses how the cost leadership strategy generated above-average returns for the company and acted as a defense against competition in the industry. Finally, the case discusses the plans and challenges faced by Wal-Mart in early 2004.

Issues:
Understand the important components of Porter's cost leadership strategy and examine how it has been applied by a company Understand how a company can emerge as an industry leader by effectively implementing a generic strategy

Keywords:
Cost leadership strategy, decades, Wal-Mart, in-depth, key elements, cost leadership strategy, Wal-Mart, above-average, returns, defense, competition, plans, challenges, Wal-Mart, 2004

Introduction
For the financial year ending January 31, 2003, retailing giant Wal-Mart reported revenues of $244.5 billion, making it the world's largest company. The company topped Fortune's list of the world's largest companies for the second year in succession (Refer Exhibit I). Considering the modest beginning of this company four decades ago, nobody, including the company officials expected Wal-Mart to emerge such a dominant player in the retailing industry (Refer Exhibit II). Wal-Mart's success story is a classic example of a company, which became successful by rigorously pursuing its core philosophy of cost leadership, right from the day

it began operations in 1962. Wal-Mart was founded by an ambitious entrepreneur, Sam Walton (Walton), who figured out early that retailing was a volume-driven business, and his company could achieve success by offering consumers better value for their money. WalMart's growth during the first two decades was propelled primarily by following the strategy of establishing discount stores in smaller towns and capturing significant market share. The company was able to foster its growth in the 1980s by making heavy investments in information technology (IT) to manage its supply chain and by expanding business in bigger metropolitan cities. In the late 1980s, when Wal-Mart felt that the discount stores business was maturing, it ventured into food retailing by introducing Supercenters. In the late 1990s, Wal-Mart launched exclusive groceries/drug stores known as "neighborhood markets" in the US (Refer Exhibit III for the various types of Wal-Mart stores). Though WalMart had achieved huge success over the decades, the company drew severe criticism from industry analysts for its strategies that aimed at killing competition. At the speed at which Wal-Mart was growing, analysts feared that the company would soon face an anti-trust suit2 for its monopolistic practices. Christopher Hoyt, president of Scottsdale, an Arizona-based supermarket store, Hoyt & Company, said, "The only thing that could stop Wal-Mart is if the government gets involved, just as it did with Microsoft."3

Wal-Mart's Aggressive Pricing


On July 2, 1962, Samuel Moore Walton (Walton), a merchant with over 15 years of experience in retailing, set up his first discount store in Rogers, a small town in the state of Arkansas, US. The store offered a wide variety of branded merchandise at a competitive price. During the initial years, Walton focused on establishing new stores in small towns, with an average population of 5,000. These towns were largely neglected by leading retailers like Sears Roebuck & Company, K-Mart and Woolco, which concentrated more on larger towns and big cities. In his efforts to attract people

from the rural areas to his stores, Walton introduced the concept of every day low prices (EDLP). EDLP promised Wal-Mart's customers a wide variety of high quality, branded and unbranded products at the lowest possible price, offering better value for their money. Wal-Mart's advertisement describing EDLP said, "Because you work hard for every dollar, you deserve the lowest price we can offer every time you make a purchase. You deserve our Every Day Low Price. It's not a sale; it's a great price you can count on every day to make your dollar go further at WalMart."4 From the very beginning, Walton made efforts to procure products at the lowest prices possible from manufacturers. He always shared these savings with customers by charging them lower prices, thus giving them the maximum value for their money. Wal-Mart's products were usually priced 20% lower than those of its competitors. Walton's pricing strategy led to increased loyalty from price-conscious rural customers. It helped the company to generate more profits due to larger volumes. Explaining his pricing strategy, Walton said, "By cutting your price, you can boost your sales to a point where you earn far more at the cheaper retail price than you would have by selling the item at the higher price. In retailer language, you can lower your markup but earn more because of the increased volume."5 EDLP was extremely attractive to rural customers and emerged as the key contributor to Wal-Mart's growth over the years...

Achieving Cost Leadership


Offering products at EDLP, especially during its early years, when Wal-Mart was not an established retail player, was quite difficult. The company aggressively followed a cost leadership strategy that involved developing economies of scale and making consistent efforts to reduce costs. The surplus generated was reinvested in building facilities of an efficient scale, purchasing modern business-related equipment and employing the

latest technology. The reinvestments made by the company helped it to maintain its cost leadership position. From the start, Wal-Mart imposed a strict control on its overhead costs. The stores were set up in large buildings, while ensuring that the rent paid was minimal. The company imposed an upper limit for its rent payment at $1.00 per square foot during the late 1960s. Not much emphasis was laid on the interiors of the stores. The company did not invest on standardized ordering programs and on basic facilities to sort and replenish the stock...

Wal-Mart in the 1990s


In the early 1990s, Wal-Mart started focusing on its Supercenters and Sam's Clubs to fuel growth. Wal-Mart expanded its operations into the Northeast and West of the US by placing a lot of emphasis on the groceries business through its Supercenters. The modus operandi was to first establish discount stores, after which the best performing stores were to be converted into Supercenters. By 1991, Wal-Mart's mammoth retail network comprised of 1,355 discount stores, 120 Sam's Clubs and three Supercenters being served by 16 distribution centers. However, at this time, Wal-Mart had yet to enter as many as 23 states in the US. In the early 1990s, it was estimated that the size of the groceries business in the US was three times that of the discount store business. So, Wal-Mart decided to focus on Supercenters to propel its growth. Following Walton's death in 1992, David Glass (Glass) succeeded him as the CEO of Wal-Mart. Glass viewed food retailing as a key driver to increase revenue growth in the 1990s...

The Growth Continues

By the beginning of the new millennium, Wal-Mart was one of the world's largest companies, with revenues of $165 billion in fiscal 2000. Wal-Mart's rapid growth continued in the initial years of the new millennium. While continuing its aggressive expansion in the food business, the company started launching innovative programs to further penetrate the US markets. For instance, in 2001, Wal-Mart launched a program, called 'Store of the community.' Under the program, Wal-Mart began remodeling its discount stores and Supercenters in the US to fulfill the needs of customers they served, in line with what the customers wanted. Explaining the program, Tom Coughlin, President and CEO of Wal-Mart Stores Division, said, "The one-size-fits-all concept simply doesn't work anymore in the retail industry. Customers tell us what they want and it is our responsibility to meet those needs. Our store associates live and work in each store's community and interact with over 100 million customers each week...

Plans And Challenges


Wal-Mart has chalked out an aggressive expansion plan to accelerate its growth in the near future. By the fiscal year ending 2007-08, Wal-Mart aims at achieving a revenue target of $500 billion. The company plans to achieve this by expanding aggressively in international markets. In the US, Wal-Mart plans to increase its store count and to introduce new product categories. The company plans to increase the total number of stores in the US from 3,400 to 5,000 in the next five years. By 2008, Wal-Mart plans to open 1,000 Supercenters in the US. Analysts and media reports are expressing doubts as to whether Wal-Mart will be able to achieve its ambitious $500 billion revenue target. Given the size of its operations, some analysts felt that Wal-Mart may also face the danger of anti-trust suits. However, not all analysts agree on this issue, as Wal-Mart enjoys significant customer support, and the customers are the ultimate beneficiaries of low prices...