The discount retailing industry, in which Wal-Mart competes, suffered slower growth in industry sales and in new store increases by reaching maturity. This resulted in a shakeout that has left the industry very concentrated.
These trends are likely to continue due to intensified competition driven by companies seeking to expand market share by gaining efficiencis and economies of scale in distribution and purchasing. Indeed, in 1993 the top 5 discounters accounted for over 70% of total industry sales. Consequently, barriers to entry are high. Other barriers to entry include the high capital expenditure requirements of leasing or buying the stores; promotional costs; vast capital costs of leasing or buying warehouses and distribution channels in order to buy and store the product; costs of training and hiring the work-force to provide high-quality customer service. Finally, the threat of subsitution is high, for all the merchandize is readily available at many types of stores; this reinforces the need to compete on prices, costs and customer-focus.
As growth in this industry slowed securing more market share is the critical way to compete as only then are you able to leverage your economies of scale to build cost advantages. The nature of Wal-Mart’s competitive priorities are based on the foundational of minimizing all its costs vis-a-vis its competitiors so that it may provide the lowest cost merchandise, and thereby boost its market share. Wal-Mart aims to differentiate itself, and enhnce it’s competitiveness, by making technology, its advanced computer and telecommunication system, a core competency. This maintenance of superior technology greatly enhances Wal-Marts ability to focus on building and maintaining relationships with its customers, suppliers and employees; for example, it cuts down on unnecessary large inventory levels and enables intimate and timely contact with suppliers. Wal-Mart further competes on cost, value of the dollar’ philosophy, and also performance quality, by adding value through its training program and its corporate culture which increases customer satisfaction.
However, Wal-Mart’s management which initially portrayed itself as the lowest cost provider had to change this policy partially because it became too competitive and faced critism as well as lawsuits for harming smaller shops. Wal-Mart’s growth strategy, “. . from the inside out,” strongly suggests how it targeted untapped’ markets first, in primarily rural areas with low population density’s, where there was little competition, and only then did it expand outwards towards more densely populated areas. This pattern of growth, allowing it to build market share and secure volume advantages quickly, through large expenditures on warehouses, is also evident in the manner in which Wal-Mart built its stores.
Wal-Mart stores were initially built of a smaller average size than its direct competitors and only if there was space in the location for future expansion; this increased Wal-Mart’s flexibility and it helped reduce unnecessary costs, as indicated by Wal-Marts lower proportion of rental expense and its significantly higher sales per square foot. Indeed, this is just one manner in which Wal-Mart, unusually for a service industry, was able to create a real competitive advantage. However, because this advantage is clearly imitable Wal-Mart has been aggressive in maintaining its technological lead. Wal-Mart’s promotions and advertising expenses, in proportion to discount store sales and in terms of circulars offered, was significantly less than competitors; rather it touted itself, and gained recognition for, as offering everyday-low prices’ on national brands.
Most of the products it sold were nationally advertised baranded products, although a growing proportion were private label goods, which further decreased a need for advertising expenses. In addition, due to its de-centralized structure it gave its store managers great flexibility, which they used to set prices so that they were consistently lower than their competitors; this allowed Wal-Mart great advantages for it is able to raise or lower its prices depending on the competition it faced.Furthermore, due to its advanced information systems, Wal-Mart store managers were able to select their products and allocate shelf space according to local demand and conditions; this allowed Wal-Mart to maximise its sales volume and inventory turnover and minimize its expenses.Wal-Mart enjoyed a competitive advantage because its sizable investment in technology, such as the installation of electronic data interchange in conjunction with developing and exploiting .
