WalMart's competitive advantage is a result of several key strategic choices.

First, WalMart's choice

of geographic location in rural/small town locations that were not being
served by competitors
allowed it to establish itself as the sole discount retailer in these areas. As
Sam Walton describes "the
key strategy was to put good-sized stores into little one-horse towns which
everybody else was
ignoring. If we offered prices as good or better than stores in cities that
were four hours by car,
people could shop at home." This key strategic choice of location was
completely different from
what competitors had done and gave WalMart a first mover advantage in
markets that had not
previously been served by discount retailers. A second key strategic feature
is WalMart's inventory
management strategy. From the onset, WalMart has been a leader in
implementing new and cost
effective methods to manage inventory. Merchandise is tailored to local
market demand via "traiting"
where a product's movements are indexed over a thousand store and market
traits. In addition, store
managers are given local control over which items to display based on
customer preferences and how
to allocate shelf space based on local demand. Therefore, each store is finetuned to best meet local
needs rather than follow a general corporate policy. In addition, WalMart's
pricing strategy allows
more local control again based on geographic demand. Store managers can
price to meet local
demand, to maximize sales volume and inventory turnover and to minimize
expenses. Pricing varies
by geography and by proximity to competitors. This flexible pricing policy
allows WalMart to
achieve maximal strategic pricing, whereby it remains most price
competitive in regions with higher
concentration of competitors yet avoids pricing too low in areas where it is
the sole discount retailer.
Another key to WalMart's competitive advantage is its operations strategy.
WalMart's operations

activities fit well together to achieve maximal efficiency and lower costs. By
having multiple
distribution centers, WalMart is able to lower a store's square footage that is
devoted to inventory to
10% versus 25% for competitors. This allows higher efficient use of store
floor space for displaying
more goods and generating greater sales volume. Shelf labeling, as opposed
to individual product
labeling, minimizes handling of goods thereby keeping costs lower.
Inventory is tracked
electronically at the point of sale by UPC scanners and hand held bar code
scanners. This
information is communicated to the store's computerized inventory system,
allowing for maximal
efficiency in inventory tracking and repletion. WalMart implemented
electronic scanning in all its
stores two years ahead of competitors such as Kmart. Automated inventory
management lowers
inventory costs, allows seamless replacement of goods and better meets
local demand. Information
regarding sales data is collected and analyzed via satellite network. The
ability to do so avoids
overstocking and deep discounting. Early on, WalMart committed resources
towards sophisticated
automated technology systems such as electronic scanning and satellite
systems in order to achieve
higher operational efficiency and keep costs significantly lower than its
competitors.
WalMart's hub and spoke distribution network is another key strategic piece
behind its operations.
Merchandise brought in by truck to a distribution center is sorted for
delivery within 24-48 hours.
Logistics management by way of cross docking allows seamless "just in
time" inventory delivery and
minimizes the cost of inventory sitting idly in distribution centers. WalMart's
inbound logistics costs
2
are 3.7% of discount store sales versus 4.8% for competitors. In addition,
distribution centers are
highly automated and run 24 hours a day. WalMart ships more of its

purchases (80%) from its own

distribution centers than competitors such as Kmart (50%), allowing for
better control over inventory
and less reliability on the efficiency of suppliers' operations to manage its
inventory. Its automated
inventory tracking system at the point of sale allows WalMart to
immediately communicate inventory
data to suppliers' distribution centers and headquarters, thereby minimizing
lag time in inventory
repletion.
Another key part of WalMart's competitive advantage is its vendor relations.
WalMart has made
specific supplier choices along the way that are geared towards minimizing
costs and maximizing
efficiency. For example, WalMart eliminated manufacturers' representatives
at cost savings of 3-4%
and calls its suppliers collect. Buying is centralized at headquarters which
keeps purchasing costs
down. WalMart has avoided supplier power by not allowing any single
supplier to have more than
2.4% of its purchases. Therefore, WalMart is better able to control its
negotiation position with its
suppliers. WalMart's electronic data interchange allows it to communicate
with over 3,600 vendors
regarding inventory orders, forecasting, planning, replenishing, and
transferring electronic funds. As
WalMart has grown, it has developed key supplier relations into
partnerships. Large key suppliers
such as P&G and GE are able to share information with WalMart
electronically and have dedicated
teams to manage products for WalMart. Key suppliers have vendor managed
inventory systems,
which reduces WalMart's inventory costs and allows suppliers to increase
sales for their products.
WalMart actively manages its suppliers by communicating its expectations
and providing annual
strategic business planning packets to vendors. All of these activities are
aligned with maximizing
revenues and efficiency and keeping costs low.
Lastly, WalMart's culture is a key source of its competitive advantage. From

the onset, Sam Walton

led by example and emphasized frugality, customer service, and an open
book policy. WalMart's
culture focuses on building loyalty among associates, suppliers and
customers. Associates are seen as
playing a critical role in the success of WalMart and are given more
responsibility and recognition
than employees of competitors. Training is decentralized, and managers are
given greater local
control. Efforts are made to actively involve employees in the continued
success of WalMart, and
employee suggestions are often implemented at great cost savings. For
example, more than 650
employee suggestions were implemented in 1993 at savings of $85 million.
Compensation is based
on a combination of salary/wages and incentives linked to profitability.
Profit sharing and stock
ownership plans (60% participation) link employee incentives to
performance and profitability.
Weekly meetings allow repeated emphasis and communication of company
goals and strategy.
WalMart's organizational structure has a centralized office but lacks regional
offices, which
minimizes administrative costs at savings of 2% of discount store sales per
year.
As mentioned in the case, WalMart derives competitive advantages from its
specific activities and
capabilities. For example, its "everyday low prices" strategy allows WalMart
to have fewer
3
promotions and lowers its advertising expense to 1.5% of discount store
sales versus 2.1% for
competitors. WalMart's sophisticated inbound logistics enables it to lower its
cost of inbound
logistics to 3.7% of discount store sales compared to 4.8% for its
competitors. This figure
significantly lowers the cost of goods sold. WalMart's incentives to
employees helped improve
shrinkage costs (via the "shrink incentive plan") to 1.7% of discount store
sales versus 2% for

competitors. In addition, WalMart's lack of regional offices and lack of

manufactures'
representatives during negotiation saves an additional 2% and 3% of
discount store sales respectively.
Overall, WalMart's competitive advantage enables it to lower its operating
expenses to 18.1% of
discount store sales versus the industry average of 24.6%. A quantitative
estimate of WalMart's cost
advantage is approximately 3.4 billion dollars over competitors. (Refer to
attached spreadsheet)
WalMart's competitive advantage has resulted from its key strategic choices
and its ability to use its
resources and capabilities better than competitors. Its competitive advantage
meets the four
characteristics of sustainability quite well. First, WalMart has achieved
heterogeneity by its different
choice of geographic market. Its choice of location gave it a clear
competitive advantage in underserved
markets. Competitors now wishing to enter those markets will have to
expend large amounts
of resources and hope to take away market share in a relatively saturated
market. This will be a
difficult and costly endeavor for competitors. The early mover advantage in
these geographic
markets should continue to deter against entry. At this point, WalMart has
established itself as a low
price leader in the eyes of consumers and its strong "brand" presence also
provides continued
deterrence to entry.
Second, WalMart has achieved inimitability as a result of its strategic
choices and use of capabilities.
There are now many impediments to imitation. WalMart's early emphasis on
automated technology
allowed it to develop a maximally efficient and committed supplier network
at a lower cost. As a
result of its growth, WalMart has been able to form strategic partnerships
with key large suppliers,
providing it with superior access to inputs than its competitors. It has tied its
relationship with key
suppliers such as P&G to their profitability, thereby securing the supplier's

continued interest in the

success of WalMart. WalMart's large market size and scale economy makes
entry by new discount
retailers difficult and economically unfavorable, perpetuating the early
mover advantage. Even if
competitors decide to enter WalMart's geographic markets, WalMart should
continue to benefit from
its intangibles such as its corporate culture, its strong brand presence as the
low cost leader, and its set
of unique operational activities that provides it with a continued cost
advantage. As a whole, these
intangibles will be difficult for competitors to replicate.
Third, WalMart benefits from imperfect mobility as best exemplified by its
operations. WalMart's
strategy involves a whole system of activities (cross docking, distribution
center management,
electronic inventory systems, supplier networks, etc) that are linked to fit
and reinforce one another.
In addition, WalMart's culture, operations, organizational structure,
geographic location, etc are
aligned with each other to achieve a sustainable competitive position. If
duplicated, none of these
4
aspects on its own would provide a competitor with WalMart's competitive
advantage. The key is the
fit amongst multiple resources and activities that ensure sustainability.
WalMart clearly has achieved
"third order fit" as defined in Porter's article whereby activities are optimized
to best fit the strategy
rather than just consistent with the strategy. Last, WalMart has demonstrated
foresight in developing
its competitive advantage. Early on, Sam Walton had the entrepreneurial
edge needed to enter
markets that seemed unprofitable. He was able to foresee an unmet market
need and subsequently
made the critical decisions to set up the company in such a way as to best
serve the target market.
WalMart's diversification into supercenters should be a success for several
reasons. Expansion into
the food product line allows WalMart to grow strategically within the

domestic marketplace by
further leveraging its existing capabilities and competitive advantage.
Diversification into food
products is a natural extension of WalMart's product line and would provide
increased flow into
WalMart stores. Using the food product to drive customer traffic clearly
takes market share away
from general supermarkets and taps into yet another section of the market.
WalMart's activities and
capabilities are well prepared for introduction of food products. For
example, WalMart's automated
operations are well aligned to provide efficient inventory management of
food items and local store
managers are specifically trained to best meet local demand and maximize
inventory turnover, a
critical component to successful food sales given the perishable nature of the
product. Providing low
cost food products also reinforces the WalMart brand for its consumers and
makes WalMart a "one
stop shop" for all of the customer's needs, obviating the need for WalMart
customers to shop
elsewhere. Although WalMart will not likely be able to undercut
supermarkets on brand name items
due to the low margins of the food industry (1-2%), it can provide lower cost
yet higher margin
private label food items ("Sam's Choice" label) that would appeal to its price
sensitive customers.
International expansion is critical to WalMart's continued long run success.
WalMart has historically
profited by its foresight to enter key geographic markets and benefit from an
early mover advantage.
This key piece of strategic positioning fits with international expansion.
WalMart can succeed
internationally if it continues to make strategic choices about expansion by
remaining focused on its
competitive advantage. Specifically, WalMart should concentrate on
deepening its current strategic
position by leveraging its existing activities and capabilities in the
international arena rather than
trying to grow by broadening into other areas in the domestic marketplace

that compromise its

competitive advantage. In order to "globalize" successfully, WalMart will
need to pay particular
attention to its execution in each country it enters and should choose to enter
a country strategically
based on local demand and the ability to implement its key set of activities
within the chosen country.
For example, prior to entry WalMart will need to examine supplier
availability and understand
supplier relations, which can often be affected by intercultural variations as
well as local market
dynamics. WalMart may need to provide suppliers with needed technology
in order to fully automate
operations. A greater initial investment may be necessary to ensure
international success. Therefore,
success will need to be gauged with a longer-run timeframe in mind. In other
words, up front
infrastructure investments in countries such as China may show less
profitability at the outset but
5
should allow for greater long-term growth and returns. Cross-cultural
training of associates will be
critical to success at the local level in each different country. This should
assure implementation of
the WalMart corporate culture in a manner that is sensitive to local cultural
customs and community
needs. WalMart can ensure continued supplier access by forming joint
ventures/partnerships with
local large suppliers and providing them with an opportunity for increased
profitability via the
partnership. Another alternative is to acquire suppliers of key products in
order to ensure consistency
and efficiency of inventory management. To be successful internationally,
WalMart should stay
focused on implementing its competitive advantage while at the same time,
avoiding a "cookie-cutter
approach" to implementation by understanding and fine-tuning its
capabilities to better serve the
target country. Overall, globalization should be successful for WalMart since
it opens up a larger

market within which to implement the company's focused and welldeveloped strategy.
At [Wal-Mart's] size today, there's all sorts of pressure to regiment and
standardize and
operate as a centrally driven chain, where everything is decided on high and
passed down
to the stores. In a system like that, there's absolutely no room for creativity,
no place
for the Maverick merchant that I was in the early days at Ben Franklin, no
call for the
entrepreneur or the promoter.
(Walton 1992: 218)