Wal Mart And Discount Retailing Industry

Published Date: 02 Nov 2017

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Category: Business

Autor: guillaume 02 March 2011

Words: 3602 | Pages: 15

In the 1950s, Wal-Mart started with few discount stores situated only in small and rural towns.

From the beginning, Sam Walton has built a culture with "low-cost" products, a unique value culture where value are preferential to luxury.

Nowadays, Wal-Mart is the most valuable firm in the world. According to the 2008 Fortune 500 index, Wal-Mart Stores Inc. is the number one retailer.

In 2008, Wal-Mart stores, Inc. possessed 971 discount stores, 2447 supercenters, 591 Sam's Clubs, and 132 Neighborhood Markets in America. Wal-Mart in addition operates overseas, in 12 countries that include Canada, Mexico, UK and China.

No other company has been growing to achieve such rapid growth as Wal-Mart due to its specific management, high technology and superior logistics. Everywhere, Wal-Mart is admired like a giant.

The following paper outlines four main questions in order to understand why and how Wal-Mart became a superpower. The first part will define the attractiveness of the business in the 1950s, followed by a description of Wal-Mart's competitive advantage. Then, the RBV model (Resource Based View) will be applied to explain the competitive advantage and end with an explanation of sustainability.

QUESTION 1  How attractive was the discount retailing industry in the USA when Wal-Mart first began operations in the 1950s ?

During the 1950s, Wal-Mart possessed only small supermarkets, located in rural and small towns. Sam Walton focused on a unique niche, where no other American discounters were located. People did not need to travel up three hours to do shopping. It was a very simple business with no information technology, no computer, and unluxurious fixtures. Moreover, ancillary services, for example delivery and in-store selling were scarce. In addition, discount stores charged gross margins 10-15% lower.

At this time, Sam Walton's main goal was to sell a wide range of services and products at low prices, in big quantities. For these reasons, Wal-Mart built its own warehouses. The second aspect for growing Wal-Mart was a pattern of expansion.

By offering a wide range of cheap products in small areas Sam Walton seeked to become a pioneer of the discount retailing. As a result, in 1962, the first Wal-Mart discount store opened. From day one, Wal-Mart's founder created a value culture in which low costs are preferred to luxury. American people, well-informed by TV advertising, were ready to accept the "discount".

Between the end of the 1950s and the beginning of the 1960s, the debate to how making profit in industry attractiveness was growing. By attractiveness within an industry, it is meant to make supernatural profits, in other words, economic rents to create value for companies. To describe how and why Wal-Mart was an unattractive industry, Porter's five Forces framework, is essential. Because of the attractiveness of an industry change all the time, it has been decided to focus here only in the 1950s period. The framework as follows, establishes the competitive strength and consequently the attractiveness of the market:

Figure 1- Porter's five Forces

Source: http://www.thebusinessofamericaisbusiness.biz/Porters_five_forces.PNG

Below is the Porter's five Forces model for Wal-Mart in the 1950s:

- Force 1- the degree of rivalry: high

- The industry is made of numerous small players (Kmart, Target), it is a fierce competition.

- The degree of rivalry is increased by a low industry growth with high fixed costs and a lack of product differentiation.

- The degree of rivalry is also characterized by behavioural determinants. Competitors were diverse, thus they have to face high exit barriers in order to compete aggressively.

- Force 2- the threat of entry: high

- At this time, the retail industry, are protected by high barriers to entrance, for example, grocers cannot easily set up in the retail industry. When a competitor wants to enter in the industry they need a high capital to buy in bulk, therefore they need high economies of scale. Moreover, because competitors sell their product at very low prices, it will be difficult to do better.

- Force 3- the threat of substitutes: low

- The threats of substitutes open to buyers are low. All its products are relatively the same as other competitors. This is a real threat to Wal-Mart in the term that it did not seek to differentiate its products, which lead to a threat in its competitive advantage. However, Wal-Mart remain the only discounter in 1993, compared to the others top ten discounters in 1962.

- Force 4- buyer power: low to middle

- The power of buyer is quite low and influences the value created by an industry. There were not many substitutes available for the buyers. For instance, customers in rural towns had to travel 3 hours or more to reach a supermarket. The buyer power can also be considered as middle because customers have only similar products, they compared aggressively on prices.

- Force 5- supplier power: strong

- Mirror of the buyer power, the power of supplier is strong, at the end of the 1950s. Fewer suppliers there are, the more power they have on Wal-Mart. Pressure on retailers is consequently high. Retailers have to preserve a good cooperation and relation as well as competitive elements with their supplier. Otherwise, they risk to be driven out of business and have no more sources of goods.

- A supplier becomes stronger with the switching costs as the cost to switch to a new supplier rises.

- This section summarizes that when the supplier power is strong, the market is unattractive.

Looking outside the firm allows to mapping the business landscape and identifying the company's competitive position in it. One important factor to consider is that the environment is not constant.

To sum up, the industry can be qualified as unattractive in the 1950s and means that it is not profitable. The potential to make profit and create value were weak.

QUESTION 2  With reference to the key components of its Business Model, describe the sources of Wal-Mart's competitive advantage.

Assessing the industry attractiveness is looking at the business model and how it makes money. From Wal-Mart business model, it will describe its competitive advantage.

Porter's generic strategies, below on the figure 2, defined three different strategies.

Figure 2- Porter's generic strategies

Differentiation

Overall cost leadership

Source: adapted from Ghemawat, 1999

A firm that chooses a differentiation's strategy can have the price premium by increasing customer's performance or decreasing their costs. A firm as Wal-Mart competes on a strategy cost game, called: overall cost leadership. A famous marketing slogan reinforces the strategy: "Always low prices". A third strategy has been identified by Porter: the focus strategy, which is the worst because firms stuck in the middle. They do not have a real strategy.

In 1985, Porter suggested the value chain, which regroups functions into support and primary activities. The value chain is divided into 4 support activities, firm infrastructure, human resource management, technology development and procurement; and 5 primary activities, inbound logistics, operations, outbound logistics, marketing & sales and after-sales service (appendix 1). These activities can be linked and connected to the value chain to determine some factors of a competitive position and show how these activities add value to the customers (appendix 2).

 Analysis of the value chain

Marketing & Sales activity establishes that Wal-Mart has a price below all its competitors, using a strategy of "every day low pricing" with limited advertising. This confirms Wal-Mart's low cost strategy.

Two main support activities will show that Wal-Mart also uses a differentiation through its technology development and its human resource management.

The powerful technology is linked with inbound logistics activity and operations.

In 1983, a satellite system was installed to communicate between distribution centres, stores and the head office. Information via satellite is helpful for managers, to know which goods were moving, and also for suppliers to plan their production and know what it is selling in a real-time. In addition, the distribution was notably accelerated using a "cross-docking" technique: products were transferring directly "from in-bound vehicles to store-bound vehicles" (Ghemawat & Bradley, 2002).

"Wal-Mart's supply chain features a hub-and-spoke distribution system" (Grant, 2005) and exploit the IT and communication to permit point-of-sale data to coerce decisions making through the complete value chain. The large database of purchasing information enables Wal-Mart to set the right item at the correct price and in the right store.

Concerning the human resource management at Wal-Mart, it can be affirmed that it is a company with motivated people where everybody's opinion was equally considered. Employees are considered like associates and managers have a high autonomy. Through its superior management and communication, Wal-Mart created an advantage.

 Positioning

To show precisely Wal-Mart's competitive advantage, it is recommended to study its position and relation with the competitors.

Firms make choices: they choose their strategy, as it has been already demonstrated in Porter's generic strategy. Below is a diagram showing Wal-Mart's business positioning.

Figure 3- Wal-Mart's business positioning compared to the competition

Source: adapted from Ghemawat, 1999

First of all, Aldi has a low-cost strategy, which means no high-value product, no differentiation and innovation product. It focuses on a specific market, which is "poor people". In a low price strategy no fresh products are sold because it is costly. Wal-Mart also possesses a low-cost strategy with relatively similar product, totally coherent with Aldi's strategy. However, Wal-Mart uses a developed technology and a wide range of product, as a differentiation. The satellite navigation system controls all the distribution in a real time.

By contrast, M & S or Harrods have a high-differentiation strategy. Customers are willing to pay more than Wal-Mart's customers.

 Wal-Mart's dual advantage and value net

Does Wal-Mart have a dual advantage? Two concepts have to be defined before assessing if Wal-Mart has a dual advantage or not. Firstly, it is meant by willingness to pay, an important aspect in Wal-Mart, the maximum that a customer can pay. Secondly, the supplier opportunity cost is the minimum that a supplier can receive. Value can only be created with customers and suppliers, in other words with willingness to pay and opportunity cost.

Figure 4- How can a firm create value?

Customers Willingness to pay

Firm

Suppliers Suppliers opportunity cost

Source: adapted from Ghemawat, 1999

Higher is the gap between customers and suppliers, the more competitive advantage has a firm. Firms adopt a strategy in order to create value.

Wal-Mart wants to create a lot of value that is why its willingness to pay is higher than the average willingness to pay in the industry (shown on the figure 5 below). For instance, at the end of 1993, "Wal-Mart's sales per square foot were nearly $300, compared with the industry average of $210" (Ghemawat & Bradley, 2002).

Figure 5- Wal-Mart and the industry average

Source: adapted from Ghemawat, 1999

Due to its technology (satellite system, POS, EDI) Wal-Mart can buy in bulk and has a high bargaining power to its supplier. In doing so, Wal-Mart can have lower prices.

The most important factor is that Wal-Mart's costs are inferior to the average industry and its revenue is superior (shown on the figure 6 below).

Because its revenue exceeds its costs, Wal-Mart creates value. The industry is unable to compete as Wal-Mart does it.

Figure 6- Interplay between cost and differentiation

Source: adapted from Ghemawat, 1999

To make big profit and gain a competitive advantage, Wal-Mart developed high technology development in small towns! This differentiation allows Wal-Mart to play with two strategies at the same time, called dual advantage. Aldi cannot have such profit because it sells few quantities of goods. In comparison to Aldi, Wal-Mart has a wide variety of goods with quite good quality (for example, Procter & Gamble). This large range of products spreads out from house wares to pharmaceuticals to jewellery. Due to its high technology, Wal-Mart is able to compete and sell more than its competitors at low prices, which is a great competitive advantage. The company is able to buy and sell in bulk, which permit large economies of scale. Wal-Mart's technology returned on investment due to the biggest quantity of goods sold.

Wal-Mart possesses this scarce dual advantage creating a coherent in the value chain. Finally, it can be said that a competitive advantage is even more important than the industry attractiveness. Wal-Mart is proud of its strategy by "doing things differently" (Ghemawat & Bradley, 2002).

QUESTION 3  Which strategy perspective best explains Wal-Mart's competitive advantage- Positioning / Activities or RBV?

A business strategy is a paradox between the market and the resources. It is defined by market an "Outside-In" perspective, referring to the positioning/activities. On the other side, there is the "Inside-Out" perspective referring to the resource-based view model.

 The Resource-Based View theory

R.M. Grant, the main protagonist of the Resource-based view theory, focuses on resources –organisational features – and capabilities.

In the model, resources must be rare, valuable, inimitable and unsubstituable. Resources are classified in three categories: tangible, intangible and indirect. Theorists say that intangible resources are the most source of competitive advantage and generate high economic rent. Reputational, intellectual and human assets are much more difficult to copy than physical and financial assets –tangible resources (Haberbeg & Rieple, 2008).

Capabilities are the competences of a firm. Capabilities and resources are linked to the competitive advantage and the strategy, as shown below:

Figure 7- The Resource based-approach

Source: adapted from Marsden, 1998

Now, Wal-Mart will be applied to the RBV model:

Table 1- Wal-Mart and the RBV model

Resources Capabilities Competitive advantage Strategy

- Tangible:

 many stores located in small areas, grouped together near the distribution centre,

 computer system,

 high research & development in technology (POS, satellite, cross-docking, EDI, UPC, inventory system);

 huge capital.  High bargaining power across their suppliers

 Superior logistics management

 Good customer services

 Combination between a large range and quality product at inexpensive price with an attractive technology

 Target geographically, with always lower prices than its competitors

- Intangible:

 brand name reputation "always low price";

 information database;

 know-how (values and culture, own philosophy);

 experience (Ben Franklin franchise);

 good reputation with suppliers (partnership);

 Skills of manager.

- Indirect:

 fun working environment.

The table shows that Wal-Mart's RBV model is coherent and efficient to its strategy. Due to its many intangible resources, that cannot easily be copied, Wal-Mart has a real competitive advantage.

 Positioning / Activities

Positioning strategy or "Outside-In" perspective is directly linked with the value chain. Porter means by strategy a unique position involving a diverse set of activities linked with the external environment. Porter recommends selecting inimitable activities, different from its competitors.

Firms, which can position themselves, have the possibility to become very lucrative even when the industry is unfavourable.

Now, Wal-Mart will be applied to the positioning / activities strategy:

Table 2- Wal-Mart and the positioning

Variety-based positioning

Need-based positioning Access-based positioning

This position cannot be applied to Wal-Mart because it focuses only on particular products and targets all customers. This position is neither valuable nor efficient for Wal-Mart because it focuses on a particular group of customer serving all their needs. This is the most coherent positioning for Wal-Mart. The position requires specific customer geography, as Wal-Mart did.

As the table demonstrates, Wal-Mart chose to focus on the access-based positioning. This position best defined Wal-Mart. For example, the company principally located its stores on small areas (customer geography). Possessing its own distribution centre, Wal-Mart can easily negotiate lower price with their suppliers due to its location: there is few or no competitor located in the same area. In addition, "rural versus urban-based customers are one example of access driving differences in activities" (Marsden, 1998). Wal-Mart has chosen to perform its value chain's activities differently from its rivals but this model can be copied, for example, own its distribution centre, or the POS system.

 Comparison of both model:

RBV Positioning

Good Aspects - Resources can't easily be copied so the framework is better than positioning.

The firm's own resources and capabilities may be more stable basis on which to define.

choosing to performs activities differently from its rivals or to perform different activities doing the right things

positioning has a big influence on marketing strategy

Negative Aspects - focus too much on operational effectiveness: necessary but not sufficient (doing the things right)

-do not take into account the changes of the environment

Resources alone, however, are not a basis for competitive advantage. It is the way in which resources are integrated with each other to perform a task or an activity that provides the capability for an organisation to compete successfully in the marketplace.

can be copied so RBV do not believe positioning

over emphasises the importance of the industry as a determinant of company performance whereas the industry attractiveness is not a necessary condition in the future profitability of the firm (e.g Wal-Mart)

Porter states that the Resource-based view model focuses too much on operational effectiveness, which is not a strategy. The RBV model rejects the positioning strategy because it is "too static for today's dynamic markets and changing technologies" (Porter, 1996) and it can be copied. RBV is consequently better, even if it does not take into account the environment. To establish its strategy, ‘doing things right’ is necessary but not sufficient. To be effective, a firm has to focus on ‘doing the right things’.

Strategy involves a different set of activities, which creates a unique position. Wal-Mart chose the efficient strategic positioning due to a different strategy to its competitors.

Resources alone are not a real competitive advantage.

That is why Wal-Mart accesses its strategy on positioning and resources. Both are essential and complementary, as it can be seen on the figure 8 below. Moreover, Wal-Mart is very efficient and has great competitive advantages because it "does the right things".

Figure 8- Three Interplays, Three Tests

Source: adapted from Ghemawat, 1999

QUESTION 4  How sustainable is Wal-Mart's competitive advantage in discount retailing?

This question, on sustainability, focuses on four threats describing below. A firm is considering having sustainable advantage if its assets and capabilities stay valuable when the environment changes.

Figure 9- Responding to Threats to Sustainability

Source: adapted from Ghemawat, 1999

Starting with imitation, Wal-Mart has large barriers that protect it:

- Scale economies: there was no place for another discounter as Wal-Mart was located in small towns. Possessing a hub-and-spoke distribution system and dealing strongly with its suppliers, it was able to exploit regional and national economies of scale.

- Time lags, upgrading and strategic complexity: due to its powerful logistics and technology, it has constantly upgrading its capabilities. It would take a very long time to imitate its complex activity system or its culture.

- Threats of retaliation: with a fierceness reputation on low price, Wal-Mart has a chilling effect on competitors or new potential entrants. Managers are able to beat the lowest competitive price.

- Learning/private information: the company knows how to unpack boxes, load trucks to reduce storage space, schedule part-time labour because Wal-Mart has a significant leg up on retailing.

- Switching costs and relationships: Wal-Mart is seen as having inexpensive products and services even where it does not. Relationships with its suppliers are high due to daily and in a real-time computerized access on inventories and sales.

For the giant, the main substitution threat has been the risk that "its discount retailing operations might be replaced by a new format" (Ghemawat, 1999). But Wal-Mart has known to adapt its stores, for instance, it creates warehouse clubs and Neighborhood Markets. These substitutions' formats were a success.

The next threat is about slack, where Wal-Mart appears to have experienced limited. Walton family "owns 39% of the company stock" (Ghemawat, 1999).

Particularly store-manager and above employee are motivated across incentives, tight performance monitoring and performance improvement. A recent action was in UK, when it acquired ASDA (wholly-owned). Nevertheless, slack could be an issue for the leader in the future.

Finally concerning holdup, two aspects should be distinguish, suppliers and employees. Wal-Mart has built a strong bargaining power towards its suppliers, even large suppliers (Procter & Gamble). Suppliers have to pay for displays, promotions because of a hard bargaining from Wal-Mart. However, suppliers have benefits, such as real-time information and expertise.

Labour holdup is a real issue for Wal-Mart. Attributing very low wages to its employees, it resulted from unflattering public portrayals and employee demotivation. Another threat is about complementors, which are necessary to create value, even if the competition is fierce.

A model which is not sustainable can be copied. However, Wal-Mart is sustainable because it has managed a successful business model, different from its competitors and attractive for customers. But sustainability is not forever!

Conclusion

Wal-Mart began with an unattractive industry in the 1950s, where no value was created. However, today, Wal-Mart is a leader in the discount retailing industry.

With only fifteen Ben Franklin franchise, Wal-Mart has known how building a coherent business model, through a low cost strategy in small areas, associated of purchasing in bulk at low prices and operating frugally.

Wal-Mart's success is associated with Sam Walton's culture: in every store there are low prices.

The resource-based view model shows that Wal-Mart possesses many intangible resources, not easily copied. Due to insufficient resources, the company utilises the positioning/activities strategies.

As the landscape shifts all the time, Wal-Mart has to be careful about its future.

Nonetheless, with many adaptability and evolution, technologic notably, Wal-Mart has built a sustainable business model by "doing the right things".