Walmart’s Competitive Advantage
Walmart is one of the most extraordinary success stories in business history.
Started in 1962 by Sam Walton, Walmart has product tracking systems by using bar code
grown to become the world’s largest technology and checkout scanners. This
corporation. In 2008, the discount retailer information technology enabled Walmart to
whose mantra is “everyday low prices” had track what was selling and adjust its inventory
sales of $410 billion, 7,400 stores in 15 accordingly so that the products found in a
countries and 2 million employees. Some 8% of store matched local demand. By avoiding
all retail sales in the United States are made at overstocking, Walmart did not have to hold
a Walmart store. Walmart is not only large; it is periodic sales to shift unsold inventory. Over
also very profitable. In 2008, the company time, Walmart linked this information system
earned a return on invested capital of 14.5%, to a nationwide network of distribution canters
better than its well- managed rivals Costco and where inventory was stored and then shipped
Target, which earned 11.7%and 9.5%, to stores within a 250-mile radius on a daily
respectively. As shown in Figure, Walmart has basis. The combination of distribution centers
been consistently more profitable than its and information centers enabled Walmart to
rivals for years, although of late its rivals have reduce the amount of inventory it held in
been closing the gap. stores, thereby devoting more of that valuable
space to selling and reducing the amount of
Walmart’s consistently superior profitability
capital it had tied up in inventory.
reflects a competitive advantage that is based
on a number of strategies. Back in 1962, With regard to human resources, the tone was
Walmart was one of the first companies to set by Sam Walton. He had a strong belief that
apply the self-service supermarket business employees should be respected and rewarded
model developed by grocery chains to general for helping to improve the profitability of the
merchandise. Unlike its rivals such as Kmart company. Underpinning this belief, Walton
and who focused on urban and suburban referred to employees as associates. He
locations, Sam Walton’s Walmart concentrated established a profit-sharing plan for all
on small southern towns that were ignored by employees and, after the company went public
its rivals. Walmart grew quickly by pricing in 1970, a program that allowed employees to
lower than local retailers, often putting them purchase Walmart stock at a discount to its
out of business. By the time its rivals realized market value. Walmart was rewarded for this
that small towns could support large discount, approach by high employee productivity, which
general merchandise stores, Walmart had translated into lower operating costs and
already pre-empted them. These towns, which higher profitability.
were large enough to support one discount
As Walmart grew larger, the sheer size and
retailer—but not two— provided a secure
purchasing power of the company enabled it to
profit base for Walmart.
drive down the prices that it paid suppliers,
The company was also an innovator in passing on those saving to customers in the
information systems, logistics, and human form of lower prices, which enabled Walmart
resource practices. These strategies resulted in to gain more market share and hence demand
higher productivity and lower costs than its even lower prices. To take the sting out of the
rivals, which enabled the company to earn a persistent demands for lower prices, Walmart
high profit while charging low prices. Walmart shared its sales information with suppliers on a
led the way among American retailers in daily basis, enabling them to gain efficiencies
developing and implementing sophisticated
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by configuring their own production schedules For all its success, however, Walmart is now
to sales at Walmart. encountering very real limits to profitable
growth. The U.S. market is approaching
By the 1990s, Walmart was already the largest
saturation, and growth overseas has proved
general seller of general merchandise in
more difficult than the company hoped. The
America. To keep its growth going, Walmart
company was forced to exit Germany and
started to diversify into the grocery business,
South Korea after losing money there and has
opening 200,000-square-foot supercentre
found it tough going into several other
stores that sold groceries and general
developed nations, such as Britain. Moreover,
merchandise under one roof. Walmart also
rivals Target and Costco have continued to
diversified into the warehouse club business
improve their performances and are now
with the establishment of Sam’s Club. The
snapping at Walmart’s heels.
company began expanding internationally in
1991 with its entry into Mexico.
Figure: Profitability of Walmart and Competitors
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