Definition of Main Problem: There can be no argument that Wal*Mart has revolutionized the discount retailing industry. Furthermore, CEO Glass and COO Soderquist have stepped in at the helm of this company and continued to take it in the right direction by quadrupling sales and profits from 1987 to 1993. The main problem they now face is how to sustain their phenomenal performance, and becoming number one has magnified this issue. No longer can they just sneak into small towns where the only competition is the local merchant’s shop. No longer can they copy larger companies like Sears and J.
C. Penny’s because of their size and scope. The fact is, Wal*Mart is bigger than these companies and their direct competitors Kmart and Target are doing everything in their power to close that gap. They are lurking not so quietly in the shadows, benefiting from Wal*Mart’s past choices, successes, and failures. They are there to blow the whistle if Wal*Mart steps outside the lines. Wal*Mart may be growing, but at a rate under 10% for the first time in years.
Shareholders are concerned, the press is relentless, and many obstacles lie in their path if they hope to continue the trends Sam Walton set so ambitiously in 1962.
Analysis: With one of their main issues being sustained profitability, Wal*Mart is at a critical time in their life. They are no longer the hero, a place commonly reserved for competitors striving to be number one, because Wal*Mart is number one. No one can debate how effective they have been in getting here. Through their focus on superior technology and low cost leadership, Wal*Mart reigned supreme. They are redefining Porter’s five forces model in the discount retailing industry, and are in the enviable position of having first mover’s advantage.
Yet this blessing is also a curse. By virtue of their efficient, effective system and its proven success, companies like Kmart and Target are watching closely and both emulating and improving upon this system. An analysis of the five forces model will show Wal*Mart’s main competitive advantages in supplier power and barriers to entry. A look into their distribution centers and how they have been instrumental in reducing supplier power will be followed by an analysis of how effective first mover advantage has been and where they must take it next.
Early in the history of the company, Walton recognized the importance of backward integration as a means to pass on lower prices to consumers. Though supplier power is high in the retail discounting industry, Wal*Mart changed the game with their two-step hub-and-spoke distribution network.
Though building 1,000,000 square foot distribution centers seems costly, it allows Wal*Mart to purchase from their suppliers at a significantly reduced cost and deliver to their stores with 48 hours, sometimes even 24 hours. The network’s become so effective that 80% of their inventory comes directly from these 27 centers. In contrast, Kmart has only 50% of their products coming from distribution centers with a full half being shipped directly from suppliers into their stores, thus raising costs to Kmart and their customers. Systems such as “cross-docking” are also aiding Wal*Mart in their fight to streamline every process by reducing inventory and restocking costs.
Another decision that demonstrates Wal*Mart’s commitment to the future is their unyielding emphasis on superior information technology. Beginning in 1983 and standard by 1988, electronic scanning of Uniform Product Codes was installed in Wal*Mart stores.
This and similar programs were effective in ensuring accurate pricing and reducing shrinkage, yet Kmart recognized its importance as well, and by 1990, had similar systems in place in its stores as well. Secondly, a $700 million investment in satellite systems made communication between headquarters, distribution centers, and stores much more effective. With this in place, sales data could be analyzed immediately and effectively, and Wal*Mart could better control inventory levels as well. Also instrumental as a means to achieving these ends was electronic data interchange. While UPC and satellite systems allowed sales to be collected and analyzed daily, EDI enabled 3,600 vendors to receive orders and interact with Wal*Mart electronically. All of these systems provided Wal*Mart the leeway to charge lower prices than their competitors, and though no supplier accounted for .