Strategic Management: Cost Leadership, Case 10

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Wal-Mart’s Cost Advantages

Wal-Mart has always been focused on achieving the lowest possible costs. As the
firm began to expand and grow there were two main sources of cost advantage: 1) a
growth pattern of rural locations surrounding distribution centers, and 2) information
technology. Wal-Mart’s careful selection of rural locations created cost advantages
because of relatively cheap land and very efficient distribution through its distribution
centers. Stores were typically located along interstate highways and/or heavily
traveled crossroads. There was usually very low demand for the land purchased for
these locations because other retailers were uninterested in rural locations. However,
these stores had incredible drawing power. People flocked to the stores in search of
low prices and a wide product offering. Distribution was also relatively inexpensive
because Wal-Mart’s trucks could easily get to these locations from interstate
highways. One large distribution center could efficiently handle all the stores within a
day’s drive.

These location advantages were coupled with Wal-Mart’s information technology

which was always state-of-the-art. Highly efficient inventory management, facilitated
by IT systems, allowed Wal-Mart to achieve costs significantly lower than its
competitors. Wal-Mart knew which items were selling and which were not. It knew
how much of which products were needed and where they were needed. And, it could
distribute these products quickly and efficiently.

Wal-Mart has heavily advertised low prices. People tend to associate Wal-Mart with
low prices. However, careful shoppers in some markets have realized that
competitors sometimes offer lower prices, especially on food items. Thus, it would
appear that Wal-Mart is in the enviable position of having low costs but not having to
charge the lowest prices on all products all the time.

This pricing advantage can be very frustrating for competitors. Wal-Mart has a policy
of beating competitors’ prices whenever a customer points out that a competitor has a
lower price. If a competitor attempts to compete vigorously on price, Wal-Mart will
simply lower its price and it can better afford to do so. One store manager from a
competing food retailer stated his frustration this way:

“People just assume that Wal-Mart has the lowest prices on everything, but they
don’t. I have sent professional shoppers to compare prices and we have better prices
on many items. But, if I advertise lower prices on any specific item, Wal-Mart will
beat my price and I’m worse off.” Wal-Mart is able to offer low prices and still make
a profit because of its low costs. One remarkable aspect of Wal-Mart’s success is that
it has operated in a business that is highly competitive. Wal-Mart appears to have
achieved competitive advantage with its cost leadership strategy.

What would you do if you are a store manager competing with Wal-Mart?