Chapter 6 The case places a strong emphasis on the role that

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CASE 6

Wal-Mart Stores Inc., June 2015

TEACHING NOTE

■ SYNOPSIS ■

By 2015, Walmart was not only the world’s biggest retailer; it was also (in terms of sales revenue) the

world’s largest company. During the 50 years since Sam Walton opened his first discount store in Rogers,

Arkansas, Walmart has experienced continuous growth and consistently high profitability—remarkable in

an industry characterized by brutal price competition and thin margins. In the process Walmart has

transformed itself from a small chain of discount stores into a retailing colossus, operating 11,453 stores

in 25 countries through multiple retail formats (discount stores, warehouse clubs, supercenters,

neighborhood stores, and online sales) and with 2.2 million employees.

To make recommendations about whether and how Doug McMillan should adjust Walmart’s strategy

requires insight into the basis of Walmart’s competitive advantage. The case allows students to identify

and assess Walmart’s resources and capabilities through reviewing its main functions and major operating

activities, including: purchasing, distribution and warehousing, in-store operations, marketing,

By outlining the basis of Walmart’s competitive advantage, the case poses the issue of whether Walmart

will be able to sustain its competitive advantage into the future in the face of increasing size, continued

success, internationalization, and need for top management to spend less time with the basic issues of

merchandising and financial performance and more with management of external relations.

The mixed performance of Walmart’s overseas businesses poses important questions about its ability to

transfer its retailing capabilities from the US to countries with very different cultures, retailing conditions,

The challenges facing Walmart do not relate only to its expansion into new countries and new retail

formats: the sustainability of its competitive advantage in its core US discount retailing operations is far

from assured. To what extent is Walmart’s competitive advantage sustainable against:

(a) imitation by competitors?

■ TEACHING OBJECTIVES ■

I use the case to introduce the analysis of resources and capabilities. The case allows students to identify

Walmart’s resources and capabilities in a systematic fashion, then to appraise the extent to which these

different resources and capabilities confer competitive advantage.

its core business into overseas markets and diversified activities.

■ POSITION IN THE COURSE ■

I use this case in the section of my strategy courses that addresses resources and capabilities and their link

with competitive advantage.

■ ASSIGNMENT QUESTIONS ■

1. How well is Walmart performing? To what extent is its performance attributable to industry

attractiveness and to what extent to competitive advantage?

The case can also be used to analyze issues of corporate strategy—both in relation to international scope

and product scope (i.e. different types of retailing and different retail formats). To explore these issues

more deeply may require augmenting the case with some additional information from the Walmart

website or from other sources (e.g. more detail on WM’s international operations and their performance.)

An assignment question might be:

To what extent has Walmart been able to transfer the competitive advantage it established in

discount retailing in the US (a) to other countries, (b) to other retail sectors and formats? Why has

WM’s overseas performance to date been so patchy?

■ READING ■

R. M. Grant, Contemporary Strategy Analysis (9th edn.), John Wiley & Sons, 2013, Chapter 5:

“Analyzing Resources and Capabilities.”

■ CASE DISCUSSION AND ANALYSIS ■

Walmart’s Performance

I start by asking the class how good Walmart’s performance has been. The answer (should be): pretty

spectacular. Between 2003and 2015, ROE has averaged 21.9%. Walmart has also sustained continuous

Explaining Profitability

A key issue for any company experiencing superior performance is to explain why. Concentrating on

Walmart been successful because of location in an attractive industry?

Industry analysis

There is not much evidence in the case on industry profitability. Other discount retailers (Target, Costco,

and Dollar General) have earned respectable rates of profit in recent years. However, these are the more

successful firms in the industry – more generally, discount retailing is a brutally competitive industry

where bankruptcies and losses are common. Walmart’s long-time competitor, Kmart, has been locked in a

downward spiral for several decades. Although the case offers limited evidence on the discount retailing

sector, the key structural features of the industry include:

 Supplier power: some strong manufacturers of branded products (e.g., P&G) but overall it is the

major retail chains that hold the more powerful bargaining position.

Wal-Mart’s choice of geographical segments

The fact that the retailing industry comprises many distinct local markets explains one element in

Walmart’s superior profit performance. As the description of Walmart’s history outlines, its early strategy

was to locate stores in small and medium-sized towns that other discount chains had ignored.

Walmart’s Competitive Advantage

The observation that Walmart is more profitable than its rivals (see Table 4 in the case) is evidence that

the primary source of its stellar profitability record is its competitive advantage over its nearest rivals. I

ask students whether Walmart’s competitive advantage is a cost advantage or a differentiation advantage.

So, where are the sources of Walmart’s superior cost efficiency?

The DuPont formula allows us to break down return on capital employed into two elements:

Identifying and Appraising Walmart’s Distinctive Resources and Capabilities

To analyze the sources of Walmart’s competitive advantage – especially its superior efficiency – we need

to dig down into its resources and capabilities.

In relation to each of Walmart’s value chain activities – purchasing, warehousing and distribution, in-

For example, on the evening prior to the class, I might e-mail individual students to notify them that they

will be called upon to comment on a particular function or activity. My goal is to gain insight into what

Walmart’s organizational capabilities are and what are the superior processes and practices on which they

are based. To this end, I may probe with the following questions:

 What does Walmart do differently from other retailers?

Some of the key points I look for include:

 Purchasing – Walmart’s buying power derives from the huge size of its purchases (its critical

resource in this area). However, it is also organized to maximize the impact of this buying

potential through:

a) centralizing its buying

 Warehousing and distribution – Walmart’s distribution system is distinguished by the fact

that: (a) it undertakes most of the physical distribution of its goods to its stores; (b) its

distribution is configured as a hub-and-spoke system. How does this differ from other

retailers? They rely more on their suppliers to undertake delivery. Because they didn’t expand

in so systematic a fashion, they have less well integrated and less well-positioned hub-and-

spoke systems. Is Walmart’s system superior? Yes! Why? Because it:

a) gives Walmart control – it has total control over scheduling its deliveries to

 In-store operations – Two (you have FOUR points below) key features characterize

Walmart’s in–store management:

a) decentralization of decision making. A key feature of Walmart’s system is the

level of autonomy given to store managers over pricing and merchandising. This

decentralization is extended down to individual departments within stores. The

result is flexibility to adjust to local conditions (stocking products that meet local

 Marketing – The hallmark of Walmart’s approach to the market is simplicity and consistency.

Its “Everyday Low Prices” and “Save money. Live better” themes position Walmart as the

low-price retailer while also allowing major economies in advertising and promotion. Note

 Information technology – Walmart has long been a leader in applying IT to retailing (e.g., it

pioneered EDI with suppliers, EPOS data gathering, satellite communication, etc.). Key

aspects of Walmart’s IT systems are:

a) They are closely tailored to Walmart’s decision–making needs. The IT system

provides a very rapid flow of information (in many cases in real time) to

 Human resource management – Fundamental to Walmart’s capabilities across all its activities

is the motivation, flexibility, and cooperation of its employees. What is different about

Walmart’s employees? The interesting feature is their sheer ordinariness. The huge majority

of the 2.2 million employees are working-class individuals with modest educational

attainments doing relatively low-skilled jobs for pay that is not very far above minimum

wage. So what is it that makes their performance so remarkable? Two factors seem critical:

a) Walmart’s culture. Walmart’s culture has its roots in the principles and values of

Sam Walton, principles which themselves are a reflection of the society of which

b) Walmart’s people management. Human resource management is based on the

Walmart culture and Sam Walton’s management principles. However, Walmart’s

HR practices receive radically different interpretations and assessments. The

 Organization and management – The peculiarities of Walmart’s top management structure

are not always apparent to students, so establishing the distinctive features of Walmart may

take a bit of drawing out. If the students have difficulty articulating the key features of

Walmart’s management structure and methods, I ask: “Would you like to be a manager at

Walmart?” or “How many Harvard MBAs do you think are working at WM?” I encourage

 Internal promotion ensures that WM’s managers are steeped in the company’s culture

and have close links with the rest of WM’s workforce.

 The system of decision, particularly the role of the Friday and Saturday meetings,

ensures a remarkably close linkage between the corporate headquarters and local

Is Walmart’s Competitive Advantage Sustainable?

Having established the resources and capabilities that underpin Walmart’s competitive advantage, the key

issue concerns their sustainability.

I broach this issue by asking: “Why haven’t other retailers been able to replicate Walmart’s resources and

Time allowing, I find it useful to run through the chain of activities from purchasing to top management

structure and systems and ask what can be copied and what can’t. Some resources are apparently easily

replicable: there is nothing to stop Kmart or Target from installing state-of-the-art IT and communication

systems. WM’s hub-and-spoke distribution system and techniques of warehouse management can also be

imitated. However, even with these items, the problem for other retailers is twofold:

 To imitate Walmart’s assets, systems, and processes, other retailers must first dismantle what

they already have—this need to dismantle existing facilities and processes imposes additional

costs on the imitators. This raises issues of path dependency – Walmart is what it is because it

Other resources and capabilities may be difficult—even impossible—to replicate. Walmart’s in-store

management capabilities, its HRM capabilities, and its general management capabilities depend on a key

resource – the Walmart culture. This is something that is unique to Walmart. Although a rival might do a

good job of replicating every aspect of Walmart’s tangible resources, and its management methods and

systems, the magic ingredient that makes it all work is the culture – the values, beliefs, and behavioral

norms that provide the organizational glue holding the bits together.

Extending Walmart’s Competitive Advantage: (1) To Different Retail Formats

How successful has Walmart been at extending its competitive advantage to other types of retailing?

Answer: moderately. The only financial data we have relates to Sam’s Club (Table 2). Here margins are

lower than in the Wal-Mart Stores division; however, these margins may be offset by greater capital

Extending Walmart’s Competitive Advantage: (2) To Different Geographical Areas

How has Walmart performed outside the US? The first thing to note is that Walmart was very successful

in expanding beyond its home base to other regions of the US. In the sophisticated retail markets of the

east and west coasts, Walmart confounded its critics, showing that it could retain its culture and its

systems while adapting to different customer requirements.

In contrast with its US expansion, Walmart’s overseas expansion has not involved any standardized,

systematic market entry and market development strategy – there has been a mixture of acquisition, joint

venture, minority acquisition, and full acquisition. Analyzing the desirability and the design of Walmart’s

international strategy requires considering the following issues:

 Can Walmart replicate its resources and capabilities in an overseas company (either from scratch

Sustaining Wal-Mart’s Performance into the Future

What kinds of threats does Walmart face?

The introduction to the case identifies several of the threats that Doug McMillon faces. Issues include:

Risks of growth and maturity. Will success kill Walmart? The more it grows in size, the more it risks

diluting its unique culture and loosening the bonds that create a family-like atmosphere. Similarly, the

Growth also makes Walmart a bigger target for competitors, labor unions, governments, and grassroots

activists. If Walmart is perceived less as a champion of consumer interests and more as a powerful

corporate juggernaut, will the loss of social legitimacy and diversion of management time to defending

the company against its critics sap its vigor?

Risks of overseas expansion. Walmart’s overseas experiences have been mixed. Overseas markets are

inherently more attractive than the US in terms of lower levels of competition and being later in their

Purchasing, supply chain management, and in-store management are different in each. As we have noted,

the evidence is mixed. Most telling is the fact that, unlike IKEA, Walmart has nothing approaching a

global strategy. In every country its approach has been mixed – even experimental.

Risks of imitation. As Walmart’s retail practices continue to become better known and better understood,

Risks of innovation. The most significant threats that Walmart faces are from competitors with new,

innovatory strategies. Retailing has followed a process of creative destruction in which market leaders are

continually being displaced by newcomers (see page 212, Figure 8.3 in Chapter 8). However, Walmart

has already survived several new retailing waves: it has been a successful player both in warehouse clubs

and online retailing.

Strategy recommendations

Recommendations for Walmart’s strategy need to grow directly from the analysis of its

resource/capability strengths and the potential threats that it faces in the upcoming years.

Some of the most critical issues relate to international expansion, since it is here that Walmart faces the

greatest opportunities and the greatest risks. However, my preference is to acknowledge the international

Students are likely to propose a number of possible areas for recommendations:

 How does Walmart sustain its key resources – especially the unique corporate culture? As Sam

Walton and his personality and philosophy become more distant and Walmart moves further from

 Continuous improvement through innovation and upgrading capabilities. Walmart cannot stand

still. There are threats to its competitive advantage from imitation and, more significantly, the

emergence of new retail forms. It needs to build continuously on its competitive advantage, using

■ KEY TAKE-AWAYS FROM THE CASE DISCUSSION ■

1. A straightforward approach to identifying and appraising a firm’s resources and capabilities is to

begin with a simple value chain – a sequence of the major functions and activities that the firm

performs. Thus, to ask: What is distinctive or different about how the firm performs these

activities (compared with other firms)? And do these characteristics confer either cost or

2. To assess the ability of a firm to sustain its competitive advantage over time, we need to consider:

a) The potential for competitors to imitate that competitive advantage through acquiring or

building the resources and capabilities that the target firm possesses. This requires assessment

of the extent to which a firm’s resources and capabilities are transferable and replicable.

3. To assess the likelihood that a firm can extend its competitive advantage to new markets (either

geographical markets or product markets), the key consideration is whether it can transfer or

replicate its core resources and capabilities within the new market, and whether these resources

and capabilities are relevant to success (i.e., do they match the key success factors in the new

market?).