Introduction
Wal-Mart is one of the largest discounted retailers in the U. S. With over 5000 stores all around the country, it occupies a stable position in the market and remains the favorite retail company of many middle-class Americans due to its accessibility, competitive pricing, strong customer focus, and impressive brand history. However, since Wal-Mart’s steep expansion began to falter in the mid-2000s, the company’s managers started to look at the various opportunities and threats that had to be addressed for the company to hold its position as the world’s largest retailer.
Wal-Mart has been far more profitable than its peers in discount retailing. What might account for its continued success? What are its sources of competitive advantage?
Competitive Position
The U. S. retail market is one of the most competitive markets in the world, occupied primarily by industry giants, such as Target, Costco, and Wal-Mart. The company occupies a stable position in the market:
- As of 2015, Wal-Mart was the world’s largest retailer. It had more than 2 million associates all around the world and $482 billion in annual sales.
- Wal-Mart has extensive geographical coverage of the United States territory. Over 70% of Wal-Mart’s revenues are made in the United States. It has thousands of shops of various sizes and formats that are accessible to customers of every single state.
- According to the National Retailer Foundation, Wal-Mart’s revenues surpass the revenues of its top five competitors combined, including industry giants such as Costco and Target.
- In a 2013 customer survey, Wal-Mart scored first in eight out of twelve categories, whereas its major competitor Target won in the rest of the categories.
- Wal-Mart International, on the other hand, has spread to 26 countries and over 6 000 locations and accounts for more than a quarter of the company’s total revenue.
However, it seems that even the largest businesses have their limits, as Wal-Mart’s growth began to slow down in the early 2000s, achieving a mere 8.8% increase in stock in 2014, compared to Kroger’s striking 84.4%, Costco’s 25.4%, and Target’s 21.7%. There are several reasons for this decrease in growth:
- The company’s experience with the international market was not as smooth as it might seem: for instance, in 2006, Wal-Mart was forced to exit Germany and South Korea due to the inability to achieve a significant competitive advantage in these markets.
- Wal-Mart has experienced difficulties in the grocery market, both U. S. and global. Despite Wal-Mart’s efforts to maintain the lowest prices in the U. S. market and its dedication to innovations in the food business, new competitors, such as discount food retailers, had a strong influence on the company’s position in the market.
- The change in customer’s shopping tastes and preferences in the last few years has also affected Wal-Mart in a bad way: Consumer Satisfaction Index rates Wal-Mart far behind its main competitors, such as Target and Costco.
In spite of these negative factors, the company has managed to maintain a firm position as the leader of the retail market in the United States, which is justified both by the company’s image built during its entire development process and the current competitive advantages.
History of Development
The first Wal-Mart store was opened by Sam Walton and his brother in 1962. Walton was interested in the field of discounted retail and had previous experience working in retail management. Back then, discount shops had a simple design and few customer services available, which allowed them to decrease the sale prices by 10-15% from the market average and to accommodate a larger variety of products. At that time, the field of discount retail had already been well-developed and was occupied by several large businesses. Walton’s innovation, however, was to ensure the accessibility of Wal-Mart to the Americans living in rural areas. Whereas larger cities had a higher population density, the supply of discounted retail services was already enough to accommodate the needs of urban populations. Small towns, however, remained neglected by Wal-Mart’s major competitors. With higher demand, less competition, and a lower price of labor, rural areas represented an entirely new retail business niche for the company to occupy. However, to become successful, Walton still had to build a careful pricing strategy and optimize all the operations and logistics to minimize the costs of business.
For instance, one way of making business processes more cost-effective was the reduction of expenses associated with the managers’ trips to suppliers. Walton introduced the rule to keep business trip expenses for managers to less than 1% of purchases, thus encouraging his managerial team to stay in low-cost hotels and rent inexpensive cars. The decision to buy products directly from the manufacturer has also allowed to decrease the cost of products and to optimize the operations by eliminating the intermediary supplier altogether.
Another feature that accounted for Wal-Mart’s success was its approach to pricing. Instead of setting product prices at the head office, Wal-Mart delegated this task to local managerial teams. This allowed determining prices separately for each region based on the prices in the competitors’ stores. As Walton noted, $0.20 decrease compared to the average market price was enough to attract customers and to ensure a stable flow of sales, and thus there was no need to decrease the prices further. Looking at the prices set by the competitors allowed Wal-Mart not to underprice its items while at the same time achieving the same volume of sales.
Major investments in information technology (IT) were not common among the retail companies of the time. Wal-Mart, on the other hand, became one of the first retailers to adopt IT innovations such as automated distribution systems and scanning and was also early to start EDI with suppliers instead of traditional connection methods. The use of IT innovations and systems allowed the company to reduce costs while at the same time improving the effectiveness of operations. For customers, this resulted in better stock availability and better service, as the expenses saved from the use of IT could be reinvested into training the employees.
The remote locations of many of Wal-Mart’s shops affected the distribution options available to the business. Deliveries from warehouses located closer to the large cities were expensive and lengthy, which is why the company decided to start opening its own warehouses. Using its own facilities allowed the company to dramatically reduce the delivery time to minimize the possibility of stockouts and overstocks, which also resulted in better product availability and also allowed the business chain to expand to other areas by decreasing regular distribution expenses.
Overall, the primary factors that contributed to the company’s success were the choice of location, optimization of costs and processes, and a thoughtful approach to pricing. These features allowed the company to achieve its position as the market leader. Today, however, there are different competitive advantages that help Wal-Mart to maintain its success.
Current Competitive Advantages
Whereas many discount stores do not see customer service as important, one of the main competitive advantages of Wal-Mart is its customer focus. Walton was a great manager who understood the processes that occurred in the customer’s mind and taught the staff to use them to ensure greater customer satisfaction and raise sales. To this day, the company is determined to ensure the continuous improvement of its customer service using employee training and marketing, such as addressing customers with welcome signs at each store.
Wal-Mart had also managed to diversify its store format in the U. S.:
- When the density of large stores became sufficient, Wal-Mart introduced warehouse clubs, or Sam’s clubs, offering a limited number of the most demanded products to club members at a lower price than in larger stores.
- The introduction of European-style supercenters and neighborhood markets allowed to the expansion of the range of products sold by adding groceries; the supercenters now account for more than a half of the company’s sales, whereas small neighborhood markers allowed to ensure the brand presence in more areas at once, thus increasing the population coverage.
Diversity of distribution channels is a strong competitive advantage as it promotes the company’s flexibility and availability while at the same time attending to a wider variety of customers: for instance, customers with large families are more likely to shop at supercenters, whereas people who live on their own are the regular customers of neighborhood markets.
Other current competitive advantages include Wal-Mart’s low prices, a wide range of products available at any time with no delivery delays or stockouts, as well as its history of reliability and great brand awareness.
What are some of the threats to the sustainability of its strategic position? Where do the threats originate? Which particular set of organizational resources might be losing their effectiveness?
Threats
The main threats indicated in the present case study include difficulties with the communities and unions, as well as the lack of decent online shopping opportunities:
- Ever since the company achieved major popularity and expanded to many areas of the country, Wal-Mart’s pricing policy started causing trouble for smaller local businesses. For instance, an estimated 50% of the decline in the number of local private stores is attributed to Wal-Mart’s expansion strategy. This contributed to the rise of unemployment following the opening of new Wal-Mart’s sites, which in turn caused difficulties in further expansion of the company. Unions and grassroots groups united with town administrations so as not to let the company expand to certain states and areas. The company’s poor relationship with the local communities gained publicity, thus affecting the overall image of Wal-Mart.
- Today, many customers choose to shop online instead of driving to the nearby store to find what they need. Online shopping is quick and easy and can be done on the go or during a 5-minute break at work. Whereas many companies have their own online shops, Wal-Mart’s use of this type of service is limited. The company has an online shop, but many people do not know about it and decide to shop on Amazon instead, which affects Wal-Mart’s revenues and poses a major threat in case there are no attempts to introduce a better online shopping option.
Organizational Resources
The company’s human resources are a major area of concern. Due to Wal-Mart’s low-cost policy, the majority of the company’s employees receive wages that are too small to cover their everyday expenses. Furthermore, they do not receive a comprehensive health plan and are often subject to gender discrimination, which has led to several large lawsuits against the company since 2000. Having a reputation for being a mean employer is damaging for the brand and, indeed, the court processes with relation to employee mistreatment, as well as the company’s difficult relationship with labor unions, both had a negative effect on the customers’ perception of the brand. Moreover, the company has a high staff turnover, which affects the quality of customer service and increases expenses on training. All of these factors are threats to brand stability, and thus, Wal-Mart’s use of human resources has to be addressed to ensure the company’s stable competitive position.
What advice would you give the CEO regarding the intent to move upscale?
Wal-Mart’s intent to upscale the shopping experience it provides is far from surprising. Some of the principles set by Walton are now outdated, and there are very few opportunities for growth available in other areas of business. Generally speaking, it is true that many customers today have different needs and wants from what they had before. After the economic crisis and the recent rise in unemployment, the makeup of Wal-Mart’s customer population has shifted to include more people who used to have a higher than average income. These people are used to a certain quality of service and surroundings, which is why the low-price brands that address these needs are more likely to gain their loyalty.
There is also an increasing polarization in the U. S. population’s shopping preferences; Wal-Mart’s potential customers today seem to have divided into two categories:
- The first category of customers makes shopping decisions based on the price only. For these customers, the quality of the shopping experience is not a major concern; however, the price of the products is, which is why they often opt to spend money in dollar stores instead of shopping at Wal-Mart. If Wal-Mart were to move upscale, these customers would view it not as a more expensive alternative to dollar stores but rather as a new option for regular shopping, where below-average prices are complemented by a pleasant design and good customer service.
- The second category of customers values the quality of the shopping experience. They are used to a particular standard of customer service and store surroundings. Wal-Mart’s current reputation as a low-cost low-service retailer does not seem favorable to these customers. Nevertheless, moving upscale and changing the company’s marketing strategy would attract this category of customers.
On the other hand, the rise in wages and training expenditures to improve customer service and renovation programs to enhance the overall image of the facilities could result in a price rise, which might affect the company’s large pool of existing customers.
Overall, to minimize the changes to pricing strategy, it would be crucial to complete an audit in order to determine the least profitable lines of business and the most expensive processes and to compose a strategy for minimizing the costs of these to compensate for the money spent on human resources. Moreover, it would also be essential to find out more about the customer’s view on the change by either conducting a survey or implementing the concept in several main stores before any large-scale changes are made to see if there is indeed an increase in customer satisfaction.