What is Walmart’s Competitive Advantage?

Walmart is one of the most extraordinary success stories in business

history. Started in 1962 by Sam Walton, Walmart has grown to become the
world’s largest corporation. In 2008, the discount retailer, whose mantra is
“everyday low prices,” had sales of $410 billion, 7,400 stores in 15
countries, and 2 million employees. Some 8% of all retail sales in the
United States are made at a Walmart store.
Walmart is not only large; it is also very profitable. In 2008, the company
earned a return on invested capital of 14.5%, better than its well- managed
rivals Costco and Target, which earned 11.7% and 9.5% respectively. As
shown in the accompanying figure, Walmart has been consistently more
profitable than its rivals for years, although, of late, its rivals have been
closing the gap.
Walmart’s persistently superior profitability reflects a competitive advantage
that is based upon a number of strategies. Back in 1962, Walmart was one
of the first companies to apply the self- service supermarket business
model developed by grocery chains to general merchandise. Unlike its
rivals such as Kmart and Target who focused on urban and suburban
locations, Sam Walton’s Walmart concentrated on small southern towns
that were ignored by its rivals. Walmart grew quickly by pricing lower than
local retailers, often putting them out of business. By the time its rivals
realized that small towns could support large discount general merchandise
stores, Walmart had already preempted them. These towns, which were
large enough to support one discount retailer, but not two, provided a
secure profit base for Walmart. The company was also an innovator in
information systems, logistics, and human resource practices. These
strategies resulted in higher productivity and lower costs than rivals, which
enabled the company to earn a high profit while charging low prices.
Walmart led the way among American retailers in developing and
implementing sophisticated product tracking systems using bar code
technology and checkout scanners. This information technology enabled
Walmart to track what was selling and adjust its inventory accordingly so
that the products found in a store matched local demand. By avoiding
overstocking, Walmart did not have to hold periodic sales to shift unsold
inventory.

Over time, Walmart linked this information system to a nationwide network

of distribution centers where inventory was stored and then shipped to
stores within a 400- mile radius on a daily basis. The combination of
distribution centers and information centers enabled Walmart to reduce the
amount of inventory it held in stores, thereby devoting more of that valuable
space to selling and reducing the amount of capital it had tied up in
inventory. With regard to human resources, the tone was set by Sam
Walton. He had a strong belief that employees should be respected and
rewarded for helping to improve the profitability of the company.
Underpinning this belief, Walton referred to employees as “ associates.” He
established a profit- sharing strategy for all employees and after the
company went public in 1970, a program that allowed employees to
purchase Walmart stock at a discount to its market value. Walmart was
rewarded for this approach by high employee productivity, which translated
into lower operating costs and higher profitability.
As Walmart grew larger, the sheer size and purchasing power of the
company enabled it to drive down the prices that it paid suppliers, passing
on those savings to customers in the form of lower prices, which enabled
Walmart to gain more market share and hence demand even lower prices.
To take the sting out of the persistent demands for lower prices, Walmart
shared its sales information with suppliers on a daily basis, enabling them
to gain efficiencies by configuring their own production schedules to sales
at Walmart.
By the 1990s, Walmart was already the largest seller of general
merchandise in America. To keep its growth going, Walmart started to
diversify into the grocery business, opening 200,000- square- foot super-
center stores that sold groceries and general merchandise under the same
roof. Walmart also diversified into the warehouse club business with the
establishment of Sam’s Club. The company began expanding
internationally in 1991 with its entry into Mexico. For all its success,
however, Walmart is now encountering very real limits to profitable growth.
The U.S. market is approaching saturation, and growth overseas has
proved more difficult than the company hoped. The company was forced to
exit Germany and South Korea after losing money there, and has found it
tough going into several other developed nations such as Britain.
Moreover, rivals Target and Costco have continued to improve their
performances and are now snapping at Walmart’s heels.

Walmart’s Bargaining Power over Suppliers

When Walmart and other discount retailers began in the 1960s, they were
small operations with little purchasing power. To generate store traffic, they
depended in large part on stocking nationally branded merchandise from
well- known companies such as Procter & Gamble and Rubbermaid. Since
the discounters did not have high sales volume, the nationally branded
companies set the price. This meant that the discounters had to look for
other ways to cut costs, which they typically did by emphasizing self-
service in stripped- down stores located in the suburbs where land was
cheaper (in the 1960s, the main competitors for discounters were full-
service department stores such as Sears that were often located in
downtown shopping areas).
Discounters such as Kmart purchased their merchandise through
wholesalers, who in turned bought from manufacturers. The wholesaler
would come into a store and write an order, and when the merchandise
arrived, the wholesaler would come in and stock the shelves, saving the
retailer labor costs. However, Walmart was located in Arkansas and placed
its stores in small towns. Wholesalers were not particularly interested in
serving a company that built its stores in such out- of- the- way places.
They would do it only if Walmart paid higher prices. Walmart’s Sam Walton
refused to pay higher prices. Instead he took his fledgling company public
and used the capital raised to build a distribution center to stock
merchandise. The distribution center would serve all stores within a 300-
mile radius, with trucks leaving the distribution center daily to restock the
stores. Because the distribution center was serving a collection of stores
and thus buying in larger volumes, Walton found that he was able to cut the
whole salers out of the equation and order directly from manufacturers. The
cost savings generated by not having to pay profits to wholesalers were
then passed on to consumers in the form of lower prices, which helped
Walmart continue growing. This growth increased its buying power and
thus its ability to demand deeper discounts from manufacturers. Today
Walmart has turned its buying process into an art form. Since 8% of all
retail sales in the United States are made in a Walmart store, the company
has enormous bargaining power over its suppliers.
Suppliers of nationally branded products, such as Procter & Gamble, are
no longer in a position to demand high prices. Instead, Walmart is now so
important to Procter & Gamble that it is able to demand deep discounts
from them. Moreover, Walmart has itself become a brand that is more
powerful than the brands of manufacturers. People do not go to Walmart to
buy branded goods; they go to Walmart for the low prices. This simple fact
has enabled Walmart to bargain down the prices it pays, always passing on
cost savings to consumers in the form of lower prices. Since the early
1990s, Walmart has provided suppliers with real- time information on store
sales through the use of individual Stock Keeping Units (SKUs). These
have allowed suppliers to optimize their own production processes,
matching output to Walmart’s demands and avoiding under- or
overproduction and the need to store inventory. Efficiencies that
manufacturers gain from such information are passed on to Walmart in the
form of lower prices, which then passes on those cost savings to
consumers.

Human Resource Strategy and Productivity at

Walmart

Walmart has one of the most productive workforces of any retailer. The
roots of Walmart’s high productivity go back to the company’s early days
and the business philosophy of the company’s founder, Sam Walton.
Walton started off his career as a management trainee at JCPenney. There
he noticed that all employees were called associates, and, moreover, that
treating them with respect seemed to reap dividends in the form of high
employee productivity. When he founded Walmart, Walton decided to call
all employees “associates” to symbolize their importance to the company.
He reinforced this by emphasizing that at Walmart, “Our people make the
difference.” Unlike many managers who have stated this mantra, Walton
believed it and put it into action. He believed that if he treated people well,
they would return the favor by working hard, and that if he empowered
them, ordinary people could work together to achieve extraordinary things.
These beliefs formed the basis for a decentralized organization that
operated with an open door policy and open books. This allowed
associates to see just how their store and the company were doing.
Consistent with the open- door policy, Walton continually emphasized that
management needed to listen to associates and their ideas. As he noted:
The folks on the front lines— the ones who actually talk to the customer—
are the only ones who really know what’s going on out there. You’d better fi
nd out what they know. This really is what total quality is all about. To push
responsibility down in your organization, and to force good ideas to bubble
up within it, you must listen to what your associates are trying to tell you.
For all of his belief in empowerment, however, Walton was notoriously tight
on pay. Walton opposed unionization, fearing that it would lead to higher
pay and restrictive work rules that would sap productivity.
The culture of Walmart also encouraged people to work hard. One of
Walton’s favorite homilies was the “sundown rule,” which stated that one
should never put off until tomorrow what can be done today. The sundown
rule was enforced by senior managers, including Walton, who would drop
in unannounced at a store, peppering store managers and employees with
questions, but at the same time praising them for a job well done and
celebrating the “heroes” who took the sundown rule to heart and did today
what could have been put off for tomorrow.
The key to getting extraordinary effort out of employees, while paying them
meager salaries, was to reward them with profi t- sharing plans and
stockownership schemes. Long before it became fashionable in American
business, Walton was placing a chunk of Walmart’s profi ts into a profi t-
sharing plan for associates, and the company put matching funds into
employee stock- ownership programs. The idea was simple: reward
associates by giving them a stake in the company, and they will work hard
for low pay because they know they will make it up in profit sharing and
stock price appreciation.
For years, this formula worked extraordinarily well, but there are now signs
that Walmart’s very success is creating problems. In 2008, the company
had a staggering 2.1 million associates, making it the largest private
employer in the world. As the company has grown, it has become
increasingly difficult to hire people that Walmart has traditionally relied on—
those willing to work long hours for low pay based on the promise of
advancement and reward through profi t sharing and stock ownership.
The company has come under attack for paying its associates low wages
and pressuring them to work long hours without overtime pay. Labor unions
have made a concerted but so far unsuccessful attempt over time to
unionize stores, and the company itself is the target of lawsuits from
employees alleging sexual discrimination. Walmart claims that the negative
publicity is based on faulty data, and perhaps that is right, but if the
company has indeed become too big to put Walton’s principles into
practice, the glory days may be over.