Wal Mart Essay

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Case 4: Wal-Mart Stores Inc. June 2012

1. To what extent is Wal-Mart’s performance attributable to industry attractiveness and to what extent to competitive advantage?

Wal-Mart can attribute most of its success to competitive advantage rather than industry attractiveness. As they expand their product lineup they bring themselves in to more and more competition with business already established in these fields such as grocers, pharmacies and other medical services. Additionally the market is already very saturated with very few untapped markets. Population growth in the US slowing and urbanization is increasing 1 may lead to their strategy of putting good sized stores into one horse towns running in to trouble as many of these one horse towns slowly cease to exist. This as I already alluded to would leave them in markets where their main competitors are established or establishing. When we compare certain financial indicators we find further evidence that the industry isn’t terribly attractive. The only thing that really sets Wal-Mart apart from its competitor’s numbers wise is its scale. It has gross profit margin is ~6% lower than either target or Dollar General for both the years 2010 and 2011. Comparing other margins reveals similar results with Wal-Mart actually lagging behind their main competitors. Their current ratio is not quite 0.9 for both those years, another key area where Wal-Mart is significantly lagging.

What Wal-Mart does have is some incredibly strong competitive advantages. Their immense size has allowed them to create economies of scale and gives them tremendous bargaining power over their suppliers too. As stated in the text, P&G derives 18% of their revenue from Wal-Mart yet their products are only 3% Wal-Marts revenue. Their sales forecasting techniques and EDI extended to all of their vendors make allow them to keep inventory on hand low and product mix finely tuned to the respective markets creating, as close as you can get in their business, just-in-time inventory management. This means that despite having more than 6 times the sales revenue of their nearest competitor they have only 5 times the inventory. Wal-Mart controls its own warehousing and distribution, an outcome of their original business model when they focused mainly on supplying small communities and developing that became a priority for them. It has yielded impressive results as they are a world leader in distribution logistics. It’s fair to say that what advantages they have are a result of competitive advantage but to what extent beyond scale are they really performing better than some of their main rivals?

2/3. In which of Wal-Mart’s principal functions/ activities do Wal-Mart’s main competitive advantages lie and what are the distinctive resources and capabilities in each of these functions/activities?

Purchasing: Wal-Mart’s tremendous size allows them to lean on any suppliers and make them provide their products at as low a cost as possible. In fact many suppliers rely so heavily on Wal-Mart’s business that they have purchasing agents at the Wal-Mart HQ. This comes with the additional distinct advantage that the purchasing agent is isolated from his own organization possibly allowing the Wal-Mart executives to place additional pressure on them. It also gives Wal-Mart the ability to pressure their suppliers on environmental and labor policy. In short: All of their suppliers dance to their tune, a HUGE advantage.

Warehousing and Distribution: In a word: efficient. Their enormous distribution centers rely on a hub and spoke system not dissimilar to the one in effect for airlines. They have optimized this system well enough that even returning trucks are 60% full on backhauls. The use of third party logistics means that they can operate on a five day cycle which is much faster than their competitors. Incremental improvements mean inventory turnover continues to increase and trucks are being packed more tightly. This begs
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