Competitive advantage is the achieved advantage over rivals when a company’s profitability is greater than the average profitability in its industry. Wal-Mart’s return on equity over the last 10 years is more than double K-Mart and ROIC is rather high (Exhibit 1), indicating the company has managed to maintain above-industry profitability, thereby creating a sustained competitive advantage. Wal-Mart has successfully operated as a discount store according to their “Everyday Low Price” philosophy since 1970. The discount store industry is a saturated market, with competitors like K-Mart opening stores in nearly all Wal-Mart locations. The industry is in its maturity stage, and therefore, in order to have superior profitability, Wal-Mart’s success lies beyond the industry and can be found within its strategy. There are four building blocks to competitive advantage: efficiency, quality as excellence/reliability, innovation, and customer responsiveness. Wal-Mart places strong emphasis on efficiency (as per their cost-leadership strategy) and customer responsiveness. Wal-Mart has taken a superior position in the discount industry based on the following strategies: 1) Efficient purchasing/distribution system, 2) Productive store operations, 3) Competitive marketing, 4) Differentiated human resources, 5) A dynamic administration, and 6) A strong diversification strategy. The following will analyze these strategies to ascertain the secret to Wal-Mart’s success.
Wal-Mart uses an efficient information system, which is centralized purchasing. Unlike its competitors, the company uses an in-store terminal to wire merchandise requests to a centralized computer. This system enables the company to reduce the amount of time it takes to get merchandise into a store. In terms of distribution, the company utilizes a central computer that is linked to several of their vendors, increasing efficiency. Furthermore, Wal-Mart does business with a multitude of vendors, with no vendor accounting for more than 2.8% of the company’s total purchases, which increases its buying power. It is widely known that Wal-Mart exerts a lot of purchasing power over its suppliers and vendors, which has directly enabled them to lower costs. A key competency attributed to Wal-Mart’s competitive advantage is its superior support value chain activities. In terms of materials management and more specifically, in-bound logistics, by setting up their own distribution centres in optimal locations (ie: close to as many stores as possible) and by developing a two-step hub-and-spoke distribution network, whereby one delivery truck could resupply two or three stores on a single trip, they have managed to significantly reduce their cost structure.
In terms of store operations Wal-Mart has also managed to significantly reduce its costs. By using a computer system to perform the sales tracking/accounting for inventory, their superior competency in inventory management has increased inventory turnover and SKUs, and at the same time reduced inventory-holding costs. Furthermore, in order to improve productivity, Wal-Mart switched to electronic scanning of the Uniform Product Code (UPC) at the point of sale. This sped up checkouts and simplified inventory management. Although the UPC investment was quite expensive, in the long run, it attributed to Wal-Mart’s efficient operations. Lastly, although its store appearances are quite similar to its competitor K-Mart, by reducing their back-room storage requirements via their distribution network, they were able to have more selling space for their merchandise. With regards to their product offering, Wal-Mart focused more on hard goods (hardware/small appliances), which generated more sales per square foot, built up more traffic, and required fewer markdowns, which adds to the promise of Everyday Low Price, and thus customer responsiveness.
Wal-Mart’s strong national marketing strategy has attributed greatly to its success in responding to