Case 3: Has Wal-Mart Achieved a Sustainable Competitive Advantage?

Competitive advantage can be achieved by either from responsiveness to change or from innovation. In this case, Wal*Mart achieved a sustainable competitive advantage thanks to high responsiveness toward outside environment as well as inside environment. Outside environment includes demand and competition. Inside environment includes distribution and inventories management as well as the ability to encourage new initiatives.

Wal*Mart’s ability consistently to outperform Kmart and other discount retailers is based on a business system that responds quickly and effectively to changes in demand and competition. Using inventory and sales data, the local store manager decides which products to display, and allocates shelf space for a product category according to the demand of his or her store. In term of competition, Wal*Mart does not centrally set the price. At places when Wal*Mart and Kmart were located next to each other, Wal*Mart’s prices were roughly 1% lower. When Wal*Mart, Kmart and Target were separated by 4-6 miles, Wal*Mart’s average prices were 10.4% and 7.6% lower, respectively. In remote locations where there is no direct competition from large discounters, its price was 6% higher than where it was next to Kmart. Wal*Mart’s flexibility regarding customers demand and pricing strategy are key elements that sustain Wal*Mart’s competitiveness.

Wal-Mart’s distribution and purchasing are driven by point-of-sale date, resulting in low inventories, few stock-outs, and few forced markdowns. Using point-of-sale, A Wal*Mart store devoted 10% of its square footage to inventory, compared with an industry average of 25%. This give Wal*Mart cost advantage compared with other competitors in the industry.

Finally, in the heart of Wal-Mart’s fast response capability is the encouragement and rewarding of initiative at all levels of the company. The “shrink incentive plan” provided associate yearly bonuses if there store held shrinkage below the company’s goal. Shrinkage cost was estimated to be approximately 1.7% of Wal*Mart’s discount store sales in 1993, compared with an average 2% of direct competitors.

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