WalMart's competitive advantage is a result of several key strategic choices. First, WalMart's choiceof geographic location in rural/small town locations that were not being served by competitorsallowed it to establish itself as the sole discount retailer in these areas. As Sam Walton describes "thekey strategy was to put good-sized stores into little one-horse towns which everybody else wasignoring. If we offered prices as good or better than stores in cities that were �four hours by car,people could shop at home." This key strategic choice of location was completely different fromwhat competitors had done and gave WalMart a first mover advantage in markets that had notpreviously been served by discount retailers. A second key strategic feature is WalMart's inventorymanagement strategy. From the onset, WalMart has been a leader in implementing new and costeffective methods to manage inventory. Merchandise is tailored to local market demand via "traiting"where a product's movements are indexed over a thousand store and market traits. In addition, storemanagers are given local control over which items to display based on customer preferences and howto allocate shelf space based on local demand. Therefore, each store is fine-tuned to best meet localneeds rather than follow a general corporate policy. In addition, WalMart's pricing strategy allowsmore local control again based on geographic demand. Store managers can price to meet localdemand, to maximize sales volume and inventory turnover and to minimize expenses. Pricing variesby geography and by proximity to competitors. This flexible pricing policy allows WalMart toachieve maximal strategic pricing, whereby it remains most price competitive in regions with higherconcentration of competitors yet avoids pricing too low in areas where it is the sole discount retailer.Another key to WalMart's competitive advantage is its operations strategy. WalMart's operations

activities fit well together to achieve maximal efficiency and lower costs. By having multipledistribution centers, WalMart is able to lower a store's square footage that is devoted to inventory to10% versus 25% for competitors. This allows higher efficient use of store floor space for displayingmore goods and generating greater sales volume. Shelf labeling, as opposed to individual productlabeling, minimizes handling of goods thereby keeping costs lower. Inventory is trackedelectronically at the point of sale by UPC scanners and hand held bar code scanners. Thisinformation is communicated to the store's computerized inventory system, allowing for maximalefficiency in inventory tracking and repletion. WalMart implemented electronic scanning in all itsstores two years ahead of competitors such as Kmart. Automated inventory management lowersinventory costs, allows seamless replacement of goods and better meets local demand. Informationregarding sales data is collected and analyzed via satellite network. The ability to do so avoidsoverstocking and deep discounting. Early on, WalMart committed resources towards sophisticatedautomated technology systems such as electronic scanning and satellite systems in order to achievehigher operational efficiency and keep costs significantly lower than its competitors.WalMart's hub and spoke distribution network is another key strategic piece behind its operations.Merchandise brought in by truck to a distribution center is sorted for delivery within 24-48 hours.Logistics management by way of cross docking allows seamless "just in time" inventory delivery andminimizes the cost of inventory sitting idly in distribution centers. WalMart's inbound logistics costs2are 3.7% of discount store sales versus 4.8% for competitors. In addition, distribution centers arehighly automated and run 24 hours a day. WalMart ships more of its

purchases (80%) from its owndistribution centers than competitors such as Kmart (50%), allowing for better control over inventoryand less reliability on the efficiency of suppliers' operations to manage its inventory. Its automatedinventory tracking system at the point of sale allows WalMart to immediately communicate inventorydata to suppliers' distribution centers and headquarters, thereby minimizing lag time in inventoryrepletion.Another key part of WalMart's competitive advantage is its vendor relations. WalMart has madespecific supplier choices along the way that are geared towards minimizing costs and maximizingefficiency. For example, WalMart eliminated manufacturers' representatives at cost savings of 3-4%and calls its suppliers collect. Buying is centralized at headquarters which keeps purchasing costsdown. WalMart has avoided supplier power by not allowing any single supplier to have more than2.4% of its purchases. Therefore, WalMart is better able to control its negotiation position with itssuppliers. WalMart's electronic data interchange allows it to communicate with over 3,600 vendorsregarding inventory orders, forecasting, planning, replenishing, and transferring electronic funds. AsWalMart has grown, it has developed key supplier relations into partnerships. Large key supplierssuch as P&G and GE are able to share information with WalMart electronically and have dedicatedteams to manage products for WalMart. Key suppliers have vendor managed inventory systems,which reduces WalMart's inventory costs and allows suppliers to increase sales for their products.WalMart actively manages its suppliers by communicating its expectations and providing annualstrategic business planning packets to vendors. All of these activities are aligned with maximizingrevenues and efficiency and keeping costs low.Lastly, WalMart's culture is a key source of its competitive advantage. From

the onset, Sam Waltonled by example and emphasized frugality, customer service, and an open book policy. WalMart'sculture focuses on building loyalty among associates, suppliers and customers. Associates are seen asplaying a critical role in the success of WalMart and are given more responsibility and recognitionthan employees of competitors. Training is decentralized, and managers are given greater localcontrol. Efforts are made to actively involve employees in the continued success of WalMart, andemployee suggestions are often implemented at great cost savings. For example, more than 650employee suggestions were implemented in 1993 at savings of $85 million. Compensation is basedon a combination of salary/wages and incentives linked to profitability. Profit sharing and stockownership plans (60% participation) link employee incentives to performance and profitability.Weekly meetings allow repeated emphasis and communication of company goals and strategy.WalMart's organizational structure has a centralized office but lacks regional offices, whichminimizes administrative costs at savings of 2% of discount store sales per year.As mentioned in the case, WalMart derives competitive advantages from its specific activities andcapabilities. For example, its "everyday low prices" strategy allows WalMart to have fewer3promotions and lowers its advertising expense to 1.5% of discount store sales versus 2.1% forcompetitors. WalMart's sophisticated inbound logistics enables it to lower its cost of inboundlogistics to 3.7% of discount store sales compared to 4.8% for its competitors. This figuresignificantly lowers the cost of goods sold. WalMart's incentives to employees helped improveshrinkage costs (via the "shrink incentive plan") to 1.7% of discount store sales versus 2% for

competitors. In addition, WalMart's lack of regional offices and lack of manufactures'representatives during negotiation saves an additional 2% and 3% of discount store sales respectively.Overall, WalMart's competitive advantage enables it to lower its operating expenses to 18.1% ofdiscount store sales versus the industry average of 24.6%. A quantitative estimate of WalMart's costadvantage is approximately 3.4 billion dollars over competitors. (Refer to attached spreadsheet)WalMart's competitive advantage has resulted from its key strategic choices and its ability to use itsresources and capabilities better than competitors. Its competitive advantage meets the fourcharacteristics of sustainability quite well. First, WalMart has achieved heterogeneity by its differentchoice of geographic market. Its choice of location gave it a clear competitive advantage in underservedmarkets. Competitors now wishing to enter those markets will have to expend large amountsof resources and hope to take away market share in a relatively saturated market. This will be adifficult and costly endeavor for competitors. The early mover advantage in these geographicmarkets should continue to deter against entry. At this point, WalMart has established itself as a lowprice leader in the eyes of consumers and its strong "brand" presence also provides continueddeterrence to entry.Second, WalMart has achieved inimitability as a result of its strategic choices and use of capabilities.There are now many impediments to imitation. WalMart's early emphasis on automated technologyallowed it to develop a maximally efficient and committed supplier network at a lower cost. As aresult of its growth, WalMart has been able to form strategic partnerships with key large suppliers,providing it with superior access to inputs than its competitors. It has tied its relationship with keysuppliers such as P&G to their profitability, thereby securing the supplier's

continued interest in thesuccess of WalMart. WalMart's large market size and scale economy makes entry by new discountretailers difficult and economically unfavorable, perpetuating the early mover advantage. Even ifcompetitors decide to enter WalMart's geographic markets, WalMart should continue to benefit fromits intangibles such as its corporate culture, its strong brand presence as the low cost leader, and its setof unique operational activities that provides it with a continued cost advantage. As a whole, theseintangibles will be difficult for competitors to replicate.Third, WalMart benefits from imperfect mobility as best exemplified by its operations. WalMart'sstrategy involves a whole system of activities (cross docking, distribution center management,electronic inventory systems, supplier networks, etc) that are linked to fit and reinforce one another.In addition, WalMart's culture, operations, organizational structure, geographic location, etc arealigned with each other to achieve a sustainable competitive position. If duplicated, none of these4aspects on its own would provide a competitor with WalMart's competitive advantage. The key is thefit amongst multiple resources and activities that ensure sustainability. WalMart clearly has achieved"third order fit" as defined in Porter's article whereby activities are optimized to best fit the strategyrather than just consistent with the strategy. Last, WalMart has demonstrated foresight in developingits competitive advantage. Early on, Sam Walton had the entrepreneurial edge needed to entermarkets that seemed unprofitable. He was able to foresee an unmet market need and subsequentlymade the critical decisions to set up the company in such a way as to best serve the target market.WalMart's diversification into supercenters should be a success for several reasons. Expansion intothe food product line allows WalMart to grow strategically within the

domestic marketplace byfurther leveraging its existing capabilities and competitive advantage. Diversification into foodproducts is a natural extension of WalMart's product line and would provide increased flow intoWalMart stores. Using the food product to drive customer traffic clearly takes market share awayfrom general supermarkets and taps into yet another section of the market. WalMart's activities andcapabilities are well prepared for introduction of food products. For example, WalMart's automatedoperations are well aligned to provide efficient inventory management of food items and local storemanagers are specifically trained to best meet local demand and maximize inventory turnover, acritical component to successful food sales given the perishable nature of the product. Providing lowcost food products also reinforces the WalMart brand for its consumers and makes WalMart a "onestop shop" for all of the customer's needs, obviating the need for WalMart customers to shopelsewhere. Although WalMart will not likely be able to undercut supermarkets on brand name itemsdue to the low margins of the food industry (1-2%), it can provide lower cost yet higher marginprivate label food items ("Sam's Choice" label) that would appeal to its price sensitive customers.International expansion is critical to WalMart's continued long run success. WalMart has historicallyprofited by its foresight to enter key geographic markets and benefit from an early mover advantage.This key piece of strategic positioning fits with international expansion. WalMart can succeedinternationally if it continues to make strategic choices about expansion by remaining focused on itscompetitive advantage. Specifically, WalMart should concentrate on deepening its current strategicposition by leveraging its existing activities and capabilities in the international arena rather thantrying to grow by broadening into other areas in the domestic marketplace

that compromise itscompetitive advantage. In order to "globalize" successfully, WalMart will need to pay particularattention to its execution in each country it enters and should choose to enter a country strategicallybased on local demand and the ability to implement its key set of activities within the chosen country.For example, prior to entry WalMart will need to examine supplier availability and understandsupplier relations, which can often be affected by intercultural variations as well as local marketdynamics. WalMart may need to provide suppliers with needed technology in order to fully automateoperations. A greater initial investment may be necessary to ensure international success. Therefore,success will need to be gauged with a longer-run timeframe in mind. In other words, up frontinfrastructure investments in countries such as China may show less profitability at the outset but5should allow for greater long-term growth and returns. Cross-cultural training of associates will becritical to success at the local level in each different country. This should assure implementation ofthe WalMart corporate culture in a manner that is sensitive to local cultural customs and communityneeds. WalMart can ensure continued supplier access by forming joint ventures/partnerships withlocal large suppliers and providing them with an opportunity for increased profitability via thepartnership. Another alternative is to acquire suppliers of key products in order to ensure consistencyand efficiency of inventory management. To be successful internationally, WalMart should stayfocused on implementing its competitive advantage while at the same time, avoiding a "cookie-cutterapproach" to implementation by understanding and fine-tuning its capabilities to better serve thetarget country. Overall, globalization should be successful for WalMart since it opens up a larger

market within which to implement the company's focused and well-developed strategy.

At [Wal-Mart's] size today, there's all sorts of pressure to regiment and standardize andoperate as a centrally driven chain, where everything is decided on high and passed downto the stores. In a system like that, there's absolutely no room for creativity, no placefor the Maverick merchant that I was in the early days at Ben Franklin, no call for theentrepreneur or the promoter.(Walton 1992: 218)