How Did Sam Walton Build Wal-Mart’s Sustainable Competitive Advantage? -The Key Success Factors
The year 1962 was called the year of discounting. Hundreds of discounting stores popped up over the whole of USA. In the same year, three big companies started their discount chains. One company called Woolworths opened gigantic stores. Everyone thought that the Woolworths chain of stores would conquer the world. But the company vanished from the scene in a few years. The other company, K-Mart entered discounting with a big bang. The third company, Dayton-Hudson opened its first ‘Target’ store in a big city. All the three were giants and people were looking forward to their growth. And then one guy started a small discounting store called ‘Wal-Mart’ in a small town called Rogers, Arkansas. Nobody gave him any importance. No media covered him. He was considered as one among those hundred small discounting stores waiting to be eaten up by the three giants.
Within 5 years, Kmart had 250 stores with sales of $800 million to Wal-Mart’s 19 stores with sales of $9 million. By 1970, Target reached $200 million revenue with 24 stores — well ahead than Wal-Mart. But…. five decades later, Kmart has 365 stores with the sales of $25 billion to Wal-Mart’s 11,718 stores with the sales of $500 billion. Target’s revenue in 2017 was $72 billion.
Almost 80% of the early discounters have disappeared into thin air though many of them had more capital and visibility than Wal-Mart. Unlike Wal-Mart, almost all discounting stores including Kmart, Target, and Woolco began their operations in larger cities which had more population, more disposable income, and more opportunities. Yet, Wal-Mart remains the top global retailer by now.
How did Wal-Mart succeed and sustain? How did they build their sustainable competitive advantage? What are those success factors?
Note: The below content is part of the following book.
FIGHT AGAINST STATUS QUO BIAS
For fifteen years(Before Wal-Mart), Sam had been running a chain of independent variety stores in smaller towns. Those stores gave the revenues of $1.4 million by 1960s. Things appeared fine. But Sam felt otherwise. He and his team had been working very hard but the business itself appeared to be of limited growth. He could not push the sales beyond a limit. He felt that he had to find an idea with a better payoff for all their efforts.
Observe, Observe, Empathize — Sam visited nearby towns, did detailed research and found out that the future appeared to be headed towards ‘discounting stores’. He saw that some larger stores were doing revenues of more than $2 million from each store while his fifteen stores together generated only $1.4 million.
Sam, then visited more discounting stores all around the country and studied the concept in-depth. It was clear for him that discounting would go and dominate the market. “Buy it low, stack it high, sell it cheap” was the guiding principle of discounting.
Sam had only two choices — Stay in the variety store business which would be going to be hit hard by the discounting wave of future or open a discount store. He wisely chose the second option.
The first and foremost factor for sustainable competitive advantage is to position your brand inside a consumer’s mind. The ways to enter their mind is
a) Becoming a leader in an existing product/service category(It would need huge investments in money, effort & time and not a practical option)
b) Becoming first in any new product/service category. In other words, you need to create a new category.
Finding a Niche Market. One of the formulas for positioning your brand in the consumer’s mind is to start in a small market. Focus on a particular need, work on it, make your product distinctive and dominate the niche market. Smaller the segment, it is easier for the entire company to focus and meet the customer needs, wants and desires. Once you become a leader in the niche market, you could move to the larger markets.
Capabilities — Sam thought a lot about the type of customers he had to target, where the competition would be weak and where he would have enough strengths to gain the market share. He had been running ‘Variety stores’ in small towns where the population was around 6000. Sam lived as one among his consumers in the small community. His everyday interaction with the people of town gave him a sound knowledge of the User behaviour, their needs, desires, and wants. His strength was ‘Knowledge’ about the small town users and he pondered how he could apply that strength to the most promising opportunity?
Weak Market Forces — Kmart and other bigger retailers were not going to towns below 50,000 population. Other medium-size brands like Gibson did not go to towns below 12,000 population. Nobody was ready to provide products at discounted prices to the people living in small towns. But people in smaller towns were well aware of the ‘discounting stores’ as they had friends and relatives in the cities and some of them had even visited those stores. So, the awareness was there. So, Sam Walton was convinced that opening a Wal-Mart store in a small town would be a viable business model.
Always Lowest Price — That time, retailers were selling products with higher margin — A retailer would sell a product costing 80 cents for $1.20. Sam, during one of his research work, found out that by pricing the product at $1.00, a retailer could sell 3 times the volume and the profits were much greater. This tip changed Sam Walton’s idea about retail and his life. His motto became “We Sell For Less — 20% less than the competition”. Discount everything the Wal-Mart carries.
Customer-Centric — Sam learned the importance of ‘Customer Service’ while running the ‘Variety stores’ for 15 years in those small towns. In those years, he and his associates built a strong relationship with customers, who would keep coming back. Loyalty drove the business.
Sam wanted to extend ‘Best Customer Service’ to Wal-Mart’s customers too. To provide the best service, he encouraged his employees to think and act like the customers. Even while arranging the merchandise, he would ask his employees to act as a customer and see how it would improve the experience.
Thus, Wal-Mart’s guiding principle was ‘Low Price’ and ‘Satisfied Customer Service’ which included a Wide assortment of good quality merchandise, friendly service, convenient hours and a pleasant shopping experience
FRUGALITY AS A COMPETITIVE STRATEGY
Sam Walton lived the life of frugality as his childhood coincided with the period of depression(the early 1930s). He knew the value of a dollar. From his school days, he had been working part-time. He sold newspapers, magazines, waited tables in a restaurant in exchange for meals, worked as a lifeguard in a local swimming pool.
Be What You Preach -Though he became rich in the later part of his life, he shunned all unnecessary luxury — He never bought Yacht or an island home or a luxury car. He moved around in an old pickup truck.
In the earlier part of their entrepreneurship journey, Sam and his brother had saved money by washing windows, sweeping floors themselves. They did their own handling, accounting, stock management, services and everything else. Sam always looked for ways to save money. He never allowed Wal-Mart to buy a jet until they approached $40billion in sales and expanded far away places. During business trips, he made it a habit among his executives to sleep two to a room and stay in Holiday Inns, Ramada Inns. He himself stayed in normal hotels and shared rooms. He spread his frugality throughout the whole company. Everybody at Wal-Mart worked like crazy to keep the expenses down and in-turn prices below any other competitors’. Sam always tried to keep the rent down, not to pay more than $1.00 per square foot.
Think ‘How to save money’ in every context than looking for ways to avoid spending money.
Sam never approached frugality as a cost-cutting measure or a response to financial constraint but as a growth strategy. His goal was not to reduce the quality of the product but find ways to cut down on the use of resources so that he could lower the product cost.
Hire Employees Who Value Frugality — While recruiting his employees, he looked for frugality in the candidate. One day, he came across a competitor’s store employee, who was earning around $12000 a year and he found out that the employee had been able to save on his salary. Sam felt that if a fellow could manage his own finances, then he could be successful in managing one of our stores. He recruited the guy and that employee went on to become a regional manager.
Sam’s belief was that Wal-Mart exists to save money for its customers in addition to the valuable service and quality.
He asserted that whenever Walmart spends one dollar mindlessly, it comes right out of our customer’s pockets and if Walmart could save one dollar, that puts the company one more step ahead of the competition.
The heart of Walmart’s competitive strategy is its ‘Ability to Innovate’ and this was possible through their integrated process of experimentation. Through literally thousands of small experiments, Walmart refined its value proposition, fashioned its customer service and shaped its core competencies.
“The most important and visible outcropping of the action bias in the excellent companies is their willingness to try things out, to experiment.” — From the book ‘In Search Of Excellence’.
In the 1950s, Sam was running a store franchise of Butler Brothers. He had to run the store literally by their franchise programme rules. The Butler brothers defined what to sell, for how much margin he had to keep, how to sell, how many people he had to hire, how much to pay and how much to be advertised. Even with those rules, Sam began to experiment. He ran promotional programmes on his own. He began to decide the price margins. He embarked on a mission to buy merchandise directly from the manufacturers and thereby save paying 25% commission to Butler Brothers. He regularly searched for unconventional suppliers or sources so that he could offer choices to the customer and at the same time ‘Lower price’ than anybody. He went far, far away to source products.
Think Like a Customer — At that time, no other shop owner was using the sidewalk in front of the store. Sam, put a lot of things out on the sidewalk and sold it crazily. He installed a soft ice cream machine(No store had a machine like this) on the sidewalk and it was an expensive machine. He took two years to pay but many thronged his store for the ice-cream. He constantly questioned the status quo and tinkered with the system.
Sam encouraged his executives, store employees to experiment on their own. He gave them maximum authority and responsibility so that they could experiment and be creative. He empowered them to make their own decisions. Mistakes were not condemned but critiqued by way of advice and learnings.
Businesses are operating in an uncertain environment. Unless we experiment on a small scale and figure out what works, what doesn’t work, we may not make progress and both the results are important.
TARGET THE FEELING
How to convert Passive lookers in your store to active buyers? How will you change them to buy things?
Impulse Consumer Buying Behaviour — Wal-Mart changed people’s behaviour by targeting their feelings. How? Visual Merchandising — Wal-Mart presented goods in a way to create a desire in the consumer’s mind to purchase the product. Their merchandising was so grand, innovative and visually appealing that in a way influenced consumer’s emotions and memories.
Instead of letting consumers think, analyze and buy, Wal-Mart relied on letting consumers see, feel and buy.
The Leader Who Leads — Sam himself sold many products by huge quantities through innovative merchandising — One day, Sam Walton came across a product ‘Mattress pad’ called Bedmate. He felt that this product had huge potential. He bought a bunch of pads, lowered the price by keeping a very minimal margin and displayed them prominently. He sold millions of Bedmates. Later he tried his hand at Ladies Innerwear, Thermos Flask, Moon Pies, Minnow Bucket and so on. He sold everything in billions.
Don’t Condemn or Complain — Sam encouraged his associates to try innovative visual merchandising. He gave them authority, freedom, and responsibility. One of his executives, Phil was working in a new Wal-Mart store in a town where he had constant competition from a local Kmart. One day, he got a deal to buy ‘Tide detergent’ cheaper. The offer was that if Phil buys some 3,500 cases of Tide detergent, he would get each individual ‘Tide’ box’s price for $1.00. The market price of ‘Tide’ box at that time was $3.97. Phil went and bought 3,500 cases. It was a shocking decision. Everybody thought that Phil made a mistake. Sam was also worried that it would be impossible to sell so many boxes but he strongly felt that for innovation to happen, people need to try some crazy stuff. Phil stacked those boxes as a giant pyramid reaching all the way to the roof. It was so huge. It was one hell of a visual display. He ran a promotion offering ‘Tide’ detergent for $1.99. The visual display was so big, it made news and everybody came to look at it, and everything was sold within a week.
Another day, a vendor called a Wal-Mart’s executive and told him that 200 Eight horsepower riding mowers were available at the end of the season and he could sell it to them for $175. In the market, the same product was selling around $447. What did the executive do? He took all the 200 mowers, unpacked everything and lined up in front of stores — 25 in a row and eight rows deep, created a massive visual display and priced the product with a little margin of profit at $199. He sold every one of the mowers.
Inspire, Give Confidence — All these successes taught not only about visual merchandising but showed the associates(Store Employees) that the stores have full of items that could explode in big volume and big profits if an associate was smart enough to identify them and generate innovative ideas to promote them. Every week, the stores had to send a report to Sam on ‘Best Selling Item’ — All these processes improved the associates’ observational skills, reasoning, understandability & predictability of the trends.
Merchandise-Driven Retail — Sam Walton writes that Wal-Mart being ‘Merchandise-Driven’ retail than ‘Operation-Driven’ retail was one of the major reasons for Wal-Mart’s success. Operation-Driven’s strategy would be toward reducing expenses and improving efficiency. Over a period of time, the company would level off and began to deteriorate. They would fail to make any new innovation. Sales would tail off.
Wal-Mart planned merchandise programmes well in advance. They brainstormed new innovative ideas as a team and took inputs from everyone. Any successful result would be shared across the other stores. In case of failures, the knowledge would be shared.
One of the main reasons why Wal-Mart consistently outperformed the competition was its employees.
Employees are responsible for breakthrough customer experiences and those employees are shaped by the company’s culture.
Sam realized that Wal-Mart’s employees are the interface between the store and the customers. Through their consistent/ inconsistent behaviour, the employees could enhance the brand value or undermine the brand.
If you want your people to take care of the customers, you have to take care of the people in the stores.
Employee Works, Partner Owns — Sam considered people working in his stores, warehouses as partners and called them ‘associates’ rather than employees. He believed that the more he shared profits with his associates, the more profit the company would gain. Other than sharing the profits, Sam gave incentive bonuses, discount stock purchase plans and health benefits to his associates. If the company could treat the associates well, then the associates would treat the customers well. If the customers were treated well, then they would visit the store again and again. Real profits in business lie in ‘repeat customers’.
Act, Not Just Say- Sam made a genuine effort to involve the associates in the business decisions, planning, and execution as he considered them as partners. He was very particular in providing equal treatment to everyone.
Sam Walton requested his managers to trust their associates and give them more authority, responsibility, and freedom. He appealed them to listen to their associate’s ideas and help in implementing them. He wanted every one of his employees to be independent of their own. Any employee can meet the top management, including the CEO at any time and share his problems, ideas or any other concern.
It’s not about us, It’s about them — As Wal-Mart’s stores were in small towns, most of the new hires from the local community had little exposure to the business environment, had natural shyness, barely finished high school and had terrible grammar. Wal-Mart spent a considerable amount of time and money in training them to learn to speak and help the customers. He helped them in learning leadership skills. For many, it was hard to believe that not so well educated rural men could go on to become store managers, regional heads, and national heads.
In the other competitor stores, a new recruit had to have ten years of retail experience before he could even be considered for the store manager. Sam Walton, on the other hand, would take people with hardly any retail experience, train them and if they showed real potential, willingness and real desire to get the job done, he would allow them to manage their own store.
Sharing The Information — Sam realized that one of the ways to show that Wal-Mart considers every employee as a partner is to share every information about the business — be it sales, inventory, purchases, and profits. It gave Wal-Mart many indirect benefits.
- Information sharing built trust between associates and management.
- It gave more freedom to Wal-Mart’s employees. It made them more responsible.
- It helped the associates to generate ideas that were easy to implement and within the constraints.
- It helped the associates to make rapid strides in their own personal development which indirectly benefitted the company.
Appreciate but Be Sincere and Honest — As they say, that all accomplishments of employees may not be incentive-worthy but they are praiseworthy. Sam Walton encouraged his executives to look for things to praise or appreciate their associates. He himself looked for things that they had been doing it right or innovative and let them know that they were doing something outstanding, something good for the company and something important for every one of associates. He made sure that his managers were not insincere in praising the associates.
Sam made sure that the company could share individual success stories, learnings across the chain of stores thereby making the person feel good about his contribution. A simple act of appreciation empowered his employees to take more ownership of the tasks, take on higher responsibilities, exhibit enhanced cordial relationship with his fellow associates and stay with the company for a longer period.
Compatibility — While recruiting, If Sam met a potential person, he would invite them to visit his stores, and then he would take him or her to his house, would dine together with his family, discuss candidate’s family life. Sam was not looking for an employee. He was looking for a partner with whom he could go forward.
Reach The Heart Of Your Employee — As Dale Carnegie says — The only way we can get anyone to do anything is by giving them what they want, Sam Walton always talked in terms of ‘Benefits’ to his employees. If he wanted a person to work for Wal-Mart, he gave him the reasons and explained how it would transform the person’s life. One day, he thought of implementing an idea in all the stores. He requested every employee to greet the customer and ask if he could be of any help whenever the customer comes within ten feet distance. He advised his employee to look in the eye of the customer. As usual, Sam explained the benefits of such an idea to his employees. He told them “If you do this, your natural shyness would fly away. It would help your personality to develop and would help you in becoming a leader and you might become the manager of this store”. Always, he thought and talked in terms of benefits to others.
Sam hired local candidates, helped them to develop as managers and let them have a career in their hometown. This way, Wal-Mart developed a good reputation. This also provided opportunities for women as they would find it tough to move around. Women made great retailers. Wal-Mart also contributed a lot to local community programmes. It gained a great deal of local community support.
REAL ESTATE STRATEGY
Sam Walton, in the first two decades of Wal-Mart, never built stores in the centre of cities or within the cities. He built stores in a ring around the periphery of the city, mainly in suburbs. It widely helped him in future expansions. His rentals were cheaper. It was easier and cost effective for stocking and transportation of goods to and from the stores. He knew that the city would grow soon and waited for the growth to reach his store.
Cluster Of Stores — Wal-Mart kept opening stores in all nearby small towns. The stores were so close to each other. In Springfield, Missouri, Wal-Mart had 40 stores within 100 miles. When Kmart came in there with three stores, they had a tough time to compete. Wal-Mart reinforced its competitive advantage by locating its stores around its regional distribution centres. Most of the stores were located in such a way that it is just a day trip from its warehouse, whereas Kmart’s stores were located far away from each other and also far from their distribution centres. Wal-Mart could drastically save time and money.
Part Of Network — It was widely believed that a large discounting store needs a population base of 50,000 to be profitable and to supply products at a low price. How did Wal-Mart break this wisdom? Or Did they break? Wal-Mart clustered the stores around its distribution centres. Each centre would be supplying goods at least to a minimum of 100–150 stores. If each store was in a town with a population of 5000, then the distribution centre was catering to a population of 5,00,000 in case of 100 stores, which many competitors had totally missed it. Sam Walton did not break the rule of discounting store but gave new meaning. The individual store has no leverage or major advantages but being part of a network gave it enough strength. Store locations around the distribution express the economics of network. An integrated operating network was the basic unit of the company and not the store.
Airplane — Can you believe that an old, small airplane played a major role in establishing a sustainable competitive advantage? Sam Walton in his own words had mentioned that without that plane, Wal-Mart’s massive success would not have been possible.
In the 1960s, as the stores were in small towns and far away, Sam needed an efficient personal transport system to travel quickly between the stores so that he could keep in touch with them and understand the happenings. So, he bought a small, old Airplane. This Airplane helped him in rolling out new stores as fast as possible.
It was a period of no digital maps. Sam would fly over the town and from up in the air, he would check out traffic flows, which way cities and towns would be growing, would evaluate the best ways to transport goods to & from the store, assess the location of competition. He would get down low, would fly sideways to get a better view. Not many founders flew sideways to scout for the best possible location. Good location is so important for the success of the store.
The Airplane turned into a great tool and made Wal-Mart ten years ahead of most other retailers in scouting the location from the air. By the time, competitors realized Sam Walton’s efficient location scouting strategy, the retailer had captured many towns. In the 1980s, when competitors were trying to start 3–4 stores a year, Wal-Mart was launching an average of 50 stores a year.
Wal-Mart went to towns where the population was less than 5000. They kept opening up stores in all nearby small towns and gradually, saturated the market. Most of these towns could not support two discounters. As the customer demand is generally met by the existing Wal-Mart, the competitors had found it tough to compete or change the loyalty of those customers. A new entrant has to spend a lot of money to promote themselves. Even then, the profitability and growth potential are limited, thus discouraging many other competitors. Wal-Mart gained a local monopoly.
VENDOR RELATIONSHIP PROGRAMME
The manufacturer or a brand sell its goods to customers, who buy them from discounting stores or other retailers, The irony is that both the retailers and manufacturers serve the same customers. Both of them work independently and there was no sharing of information and no shared planning. Wal-Mart broke these barriers by initiating a partnership with P&G on sharing the information — Wal-Mart shared consumer behaviour, live sales, and inventory data which helped P&G in figuring out the changing user needs, wants and desires. This further helped P&G to predict the future demand, plan their production, inventory and shipping schedule. The information led P&G to replenish Wal-Mart’s inventory without any delay. It further reduced the cost of the product.
Wal-Mart began to view supplier as a ‘Business Partner’. The vendor partnership programme was extended to other suppliers. The Wal-Mart executives sat down with the vendors, worked out the production and various other costs, margins and planned everything together. Their ultimate aim was to reduce the cost of the product to the end consumer. Honesty improved and the mutual trust earned. Both win and customers win too.
CONTINUOUS REPLENISHMENT SYSTEM
The “continuous replenishment system” sends orders for new merchandise directly to suppliers through a central computer as soon as consumers pay for their purchases at Point-of-sale terminals. It provides accurate product demand forecast and the shipping data. This system helps Wal-Mart to manage the inventory and distribution process. Suppliers can also access Wal-Mart’s sales and inventory data using Web technology. As the system can replenish inventory in a flash, Wal-Mart could save money and time on maintaining large inventories of goods in its warehouses. The system also saved time by eliminating the need for purchase orders and other related documentation. Fewer employees were needed.
As the suppliers knew the customer demands before-hand, they could plan their production and inventory well, thereby saving time and money. They could reduce inventory holding period, reduce the manpower and reduce the overall lead-time resulting in ‘lowering’ the price of the final product. The more you turn your inventory, the less capital is required.
One of the major competitive advantages, Wal-mart established in the 1980s is ‘Communication’. As the stores kept increasing and they were located in small remote towns where the communication network was yet to be established, Wal-Mart had to find a way to be in touch with all the stores. For efficient working of the store, it was essential to understand what to be ordered, what to be marked down, what was selling, what didn’t sell for each store and it had to be communicated quickly to the warehouses, headquarters, and suppliers. If a visual merchandising idea could sell a product in huge volume in any one of the stores, it was important to communicate quickly to other stores and ask them to try it out.
In the year 1978, Sam Walton took a huge risk by investing in the installation of a satellite system -an interactive communication system connecting stores, distribution centre, and central office. The system was launched in 1983. None of the other retailers had thought about this system yet. The system helped Wal-Mart to collect real-time information. Quicker the information, quicker the response. Sam could pull out any data in a moment’s notice. The Wal-Mart team could watch history, data on trends from any region, any district or any single store. Sam and other executives could communicate their ideas to all the stores at a moment’s notice. The system also helped any store associate to communicate his idea to the top management.
Communication system helped Wal-Mart to grow rapidly as it could control the whole network through the collection of data.
SUPPLY CHAIN MANAGEMENT SYSTEM
Sourcing — In the early days of discounting stores, middlemen would supply the goods to stores with 15% commission. Sam didn’t like this practice as he felt that the middlemen were not adding any value to the customers and the customers deserved a better price. Moreover, as Wal-Mart was located in the suburbs of small towns, most of the middlemen distributors were not ready to travel the extra distance to supply the goods. So, Wal-mart was forced to look for direct manufacturers and other vendors. Sam himself went far away places to scout products of good quality and at rock bottom prices.
You’re not negotiating for Wal-Mart, You are negotiating for your customers.
The Growth Challenges — As the stores were far away in remote suburbans of tiny little towns, it was becoming hard for Sam Walton to stay in touch with them. The further they grew, complex the distribution became. Sam and his executives were struggling to collect information about Store’s requirement, what time the stock had to be transferred and how much had to be transferred. There was a terrible delay in getting the freight to stores on time. Improper merchandise assortment, poor inventory replenishment system further stifled Wal-Mart’s growth. Unlike other city retailers like Kmart, Wal-Mart did not have any third party warehouse contractor nearby, so that they could utilize their facilities and systems — WalMart was facing multiple challenges.
The Solution — Wal-Mart’s executives realized that to grow rapidly, they need to build an advanced distribution system or you could say that they were forced to think of investing in sophisticated equipment and technology ahead of other retailers. (One of the main reasons why Wal-mart could roll out so many stores and moved far ahead in the industry). At the same time, Kmart’s management had such strong resistance to any kind of change-including investment in systems.
Sam and his executives kept exploring, visiting places to find ways to build new distribution systems. They were lucky to come across computers. Sam visited many computerized warehouses and data processing facilities with his colleagues. Through their research, they were absolutely convinced that computers were the best way to manage growth and to keep down their cost structure.
Distribution & Warehousing Technology — The Wal-Mart team began to build its first distribution in the year 1978 which were ahead of time — Automated distribution linked by computers both to their stores and to their suppliers. The barcoded-computer tracked the location and movement of every merchandise while it is in the warehouse or in stores — Laser guided conveyor belts handling 2,00,000 cases of goods a day, automated loading into the trucks. The new technology allowed Wal-Mart to create efficient transportation routes.
The first distribution centre could stock over 80,000 items and replenished 85% of inventory compared to competitor’s 50–65%. The system brought down the lead time from five days to two days(It was a minimum of five days for competitors). The system was flexible enough to accommodate efficiently any new consumer demands. The system drastically reduced the logistics costs for a product — The cost was 2.5% compared to 5% for competitors. Sam Walton’s team constantly looked for ways to improve operational efficiency. Finally, Wal-Mart could supply goods at the right time to their stores improving the customer experience.
Decentralization — Many discounting chains of that period were of the belief that ‘decentralization’ was the way forward in the business. Sam Walton broke this rule. Kmart had been practising decentralization from the beginning — They gave more authority to store manager to choose product lines, vendors and set prices. The problem was the lost interaction, collaboration, and coordination among the individual stores. As the stores chose different vendors, negotiated individually, they failed to gain cost benefits of the integrated network of centralized distribution of Wal-Mart. Kmart stores could not learn from each other.
FLEET OF TRUCKS
Can this be an advantage? Wal-Mart had their own private truck fleet whereas the competitors relied on third parties to deliver the goods from their warehouses to stores. Why would a third party’s employee be motivated to work beyond what is needed for the welfare of the store? The truck drivers being part of Wal-Mart felt responsible for the growth of the company as they would also be getting benefited. They responded, worked beyond what they had been asked for. They were true professionals. They were the ambassadors for Wal-Mart on the road. They had a major role to play. As the company values feedback, ideas, from every employee, truck drivers contributed a lot.
Truck Drivers visit the stores more often than anybody else in the company. Sam would often meet the drivers in the early morning and talk for a couple of hours. The drivers would share information about the stores — What difference could they observe from their previous visit, would give an account of store associate’s attitude, would share information about wastage in the stores, would share their views on people’s in the particular community.
Sam Walton imparted the idea that they were not driving the trucks but serving the stores and serving the customers.
SUPPLY SIDE ECONOMICS OF SCALE
In the first decade, Wal-Mart struggled to get deals from bigger companies. P&G gave a 2% discount if Wal-Mart paid within ten days. Every manufacturer had dictated the terms of price and other details. As Wal-Mart invested in communication systems, distribution technology, the tides began to change. Efficiencies in the distribution system gave economics of sale for Wal-Mart. Now, many well-known brands rely on Wal-Mart for more than 20% of its revenues. The retailer wields power over almost all consumer goods manufacturers.
Help Them To Help Yourself — Following it’s guiding principle of ‘keeping prices low’, Wal-Mart had been successful in pushing suppliers to cut prices. With the help of the Wal-Mart team, many suppliers have reduced the price of the product by half.
In the Walmart Effect, author Charles Fishman discusses how Wal-Mart pushed GE to reduce the price of a four-pack of GE light bulbs from $2.19 to 88 cents during a 5-year period. (Source:: Investopedia).
Lakewood Engineering & Manufacturing Company, a fan manufacturer, sell fans through Wal-Mart stores. In the 1990s, the fan was priced around $20. Wal-Mart was not happy with the price. They kept pushing the Lakewood Engineering to cut down the price at every turn without compromising quality. Lakewood automated production with the help of Wal-Mart team. Automation brought down the number of people to assemble a product by two-thirds. Wal-Mart’s suppliers’ team helped the Lakewood company to get some of the components at a lower price. Through their contacts, Wal-Mart helped the Lakewood company to set up a factory in China, thus lowering the costs further. By 2003, the price of a fan in Walmart had dropped to $10.
Wal-Mart team, rather than just forcing the vendor to cut down the cost, works with the vendor’s team to reduce the price of the product. Wal-Mart encourages suppliers to utilize the retailer’s capabilities wherever possible.
BEING SAM WALTON
Sam Walton’s childhood lessons were different from anybody else. The situations he faced in his younger days taught him to be consistently determined in any activity. He sold many products in his schooldays.
When he was young, he was fortunate to get a neighbour, who became rich by running a multi-store chain of business. The neighbour taught him a lot about retail. He was lucky to have a successful businessman as his father-in-law, who gave him sufficient business knowledge.
Curiosity- Sam loved to do a lot of research before trying out an idea. He loved learning new things. He loved to acquire depth of knowledge. He was a keen observer and his skills improved with knowledge. He read every retail publication. He visited as many stores as possible, observed them in detail, took notes, spoke to the employees and collected a whole lot of information. He was not shy or hesitant to talk to the competitor store’s employees. He was open-minded and believed that he could learn from anyone. In stores, he would observe consumers’ in detail. That observation helped him to identify the consumers’ most pressing need and promote the product that could solve the problem. This way he had sold products in large volumes. His observation and inquisitive mind helped him to copy good things from competitors and implement it in his stores.
Friendliness — One of the secrets of Sam Walton was his friendly nature. He would speak to people coming down the sidewalk before they speak to him. If he knew them, he would call them by their name. He was a very good listener. In Newport, Arkansas where Sam opened his first variety store, he knew every person in that small town. He became an essential member of the community. His friendliness and empathetic nature enabled him to build long-term relationships with vendors and associates. He criticised ideas, not persons. He gave honest, sincere appreciation and built trust. His ‘friendliness’ was one of the main reasons behind Wal-Mart’s successful ‘Customer-Friendly’ policy.
Grit — David Glass, one of the close associate of Sam Walton, writes “Two things about Sam Walton that distinguish him from almost everyone else -He gets up every day bound and determined to improve something. Second — he is less afraid of being wrong than anyone ever known. And once he sees he’s wrong, he just shakes it off and heads in another direction”.
It would be tough for any competitor to operate on the volume that Wal-Mart efficiently does with a low cost operating infrastructure. Building such a structure took almost two decades for Wal-Mart.
Wal-Mart’s activities like Supply-Chain Management, Integrated Network, Information System, Customer friendliness etc.. fit and reinforce each other forming an integrated design. Competitors will get little benefit from copying only some elements. A potential rival would have to copy all the elements which would be impractical.
Note: The above content is part of the following book.
References: Sam Walton’s ‘Made In America’, Good Strategy & Bad Strategy by Richard Rumelt, Article in tradegecko.com by Clara Lu, Article by Abigail Goldman and Nancy Cleeland in LA Times, Investopedia, How to Win Friends and Influence People by Dale Carnegie, What Is Strategy-HBR article by Michael Porter, The Five Forces Of Competitive Strategy-HBR article by Michael Porter, What Great Brands Do by Denise Lee.
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