Sustainable Competitive Advantage of Walmart free essay sample

Wal-MartCase 8: Sustaining Competitive advantage Question 1: What are the isolating mechanisms preserving Wal-Mart’s competitive advantage in the US market? (use readings case 7) Sam Walton was the founder of Wal-Mart. Sam had the idea of reaching small towns in rural areas where the people had to travel many miles to do their shopping. This was a big market that was initially ignored by the major players before Wal-Mart. Eventually Wal-Mart grew to become market leader among the US discount department stores. The core of their success was defined by their technological superiority and the way Wal-Mart treats her associates (customers, employees and suppliers). According to the resource-based theory of a firm, there are two characteristics that resources must have to maintain sustainability of the firm’s competitive advantage: 1 Scarcity 2 Imperfect mobility Concerning Wal-Mart, Imperfect mobility might be more obvious: During the years, Wal-Mart developed a technological superiority that provided the company with almost real-time information about inventory, suppliers and buyers. These capabilities and resources made it possible for Wal-Mart to apply the ‘everyday low prices’ strategy. This sophisticated technology in the sense of experience, know-how and mass investment made it very difficult for competitors to imitate or neutralize Wal-Mart’s competitive advantage. Sustaining this competitive advantage, Wal-Mart made use of several isolating mechanisms: Impediments to Imitation: 1 Legal restrictions: This implies the use patents or other IP means. This is not relevant to Wal-Mart’s story. Superior Access to inputs or Customers: Firms often achieve favorable access to inputs by controlling the sources of supply through ownership or long-term exclusive contracts. Given the fact that Wal-Mart was targeting rural areas, they didn’t have distributors falling over themselves to serve them like competitors in larger towns. Their only alternative: building their own warehouses. Wal-Mart used a two-step, hub-and-spoke distribution network. Wal-Mart trucks bring the merchandise to the distribution center, where it is sorted for delivery to the Wal-Mart stores.80% of the purchases for the Wal-Mart stores were shipped from its own 27 distribution centers. Also because of their Technological superiority, Wal-Mart has access to a lot of detailed, real-time information. This way, Wal-Mart store managers have full access to real-time inventory data. Suppliers have a direct communication with Wal-Mart concerning deliveries, etc. Employees and top management are in close contact through satellite technology. Many insights and opportunities can be discovered in the aggregated customer data. This superior management of information sets Wal-Mart apart from competitors in the US and gives Wal-Mart the competitive advantage to set very low prices. 3 Market size and scale economies: In the beginning, Wal-Mart was the underdog in the market. So it surely did not benefit from economies of scale. Now Wal-Mart is market leader in the US and definitely has economies of scale. But, in my opinion, this may be explained better through other isolation mechanisms. 4 Intangible Barriers to Imitation. Causal ambiguity: causal ambiguity can be explained in situations where the causes of a firm’s ability to create more value than its competitors are obscure and only imperfectly understood. F. e. Tacit knowledge. Employees over time develop certain skills that may be specific for a certain company. Explaining those specific skills to another company may be very hard. Wal-Mart puts a lot of effort in training their employees and motivating them by giving them more responsibility and recognition. F. e.giving their store managers more latitude in setting prices empowered their managers to sell at their optimal price instead of following a general price for every store. This way employees develop a certain expertise, know-how that is very specific to Wal-Mart and can’t be imitated easily by direct competitors. b Dependence on Historical Circumstances: A firm’s history of strategic action comprises its unique experiences in adapting to the business environment. These experiences can make the firm uniquely capable of pursuing its own strategy and incapable of imitating the  strategies of competitors. Wal-Mart started as the underdog in small towns in rural areas. This was a very tough position to start in, but with the dedication of Sam Walton and its associates, Wal-Mart became US leader in discount stores. With that, Wal-Mart cumulated a lot of experience. c Social Complexity: Socially complex phenomena include the interpersonal relations of managers in a firm and the relationship between the firm’s managers and those of its suppliers and customers. Wal-Mart has a very open culture regarding its associates. Employees are motivated to use the â€Å"YesWeCanSam† suggestion program give ideas to simplify, improve or eliminate work. Profit sharing accounts were available for employees after one year. Based on earnings growth, Wal-Mart contributed a percentage of every eligible employee’s wage to his or her profit sharing account, whose balance the employee could take upon leaving the company either in cash or Wal-Mart stock. Basically having a small cut of Wal-Mart’s profit after leaving the company. This way, employees had a very tight bond with Wal-Mart. Wal-Mart also had an ‘open door’ policy: associates such as managers and suppliers were very well informed about the numbers of Wal-Mart. Wal-Mart was known as a no-nonsense negotiator among its suppliers. Very often suppliers evolved into ‘partnerships’. Installing EDI (Electronic Data Interchange) gave suppliers all the information they needed about Wal-Mart. In general, Wal-Mart focused on building loyalty among associates, customers and suppliers. Early-Mover Advantages:  Learning curve: A firm that has sold higher volumes of output that its competitors in earlier periods will move farther down the learning curve and achieve lower unit costs than its rivals. This is definitely true for Wal-Mart. 2 Reputation and buyer uncertainty: Once the firm’s reputation has been created, the firm will have an advantage competing for new customers, increasing the number of customers who have had success ful trials and thus further strengthening its reputation. Quality of services for customers and suppliers are very high at Wal-Mart. Buyer switching costs: Customers have low switching costs at discount stores. Although there might be some switching costs involved for small town folks where the next discount store, next to Wal-Mart, is many miles away. 4 Network effects: The more users in the actual network, the greater the opportunities for communication, and the greater the value of the network. This might not be very relevant for Wal-Mart. Maybe only relevant for its EDI platform for its suppliers. Summary of potential factors: 1 Build own warehouses2 locating stores in isolated rural areas which everyone ignored 3 Obsessed with keeping prices below everybody else’s 4 Workfloor: doing things different, unpredictable, interesting and fun. 5 Walton knew his competitors intimately and copied their best ideas. 6 Staying humble during Wal-Mart’s success. 7 Open-door policy 8 empowering associates, maintaining technological superiority and building loyalty among associates, customers and suppliers. 9 ev eryday-low prices, Wal-Mart had very few promotions. advertising was low. Gives store managers more latitude in setting prices centrally priced, direct competitors 11 Efforts to replace foreign-sourced goods with american-made ones. 12 Quick communication with managers to adjust inflow of products gt; avoid overstocking and deep discounting. 13 Hub-and-spoke distribution network 14 Cross-docking = no inventory gt; immediately shifting goods from the suppliers truck to the Wal-Mart truck. 15 EDI: very close connection with their suppliers 16 Close connection with employees