How Did Sam Walton Build Wal-Mart’s Sustainable Competitive Advantage? -Business Strategy and The Key Success Factors

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The year 1962 was called the year of discounting. Hundreds of discounting stores had popped up all across the USA. In the same year, three big companies started their discount chains. One company, 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 three were giants and people were optimistic about their growth. And then one guy started a small ‘discounting store’ called ‘Walmart’ in a small town called Rogers, Arkansas. Nobody gave him any importance. He received no media coverage. He was just one among those hundred small discounting store owners waiting to be eaten up by the three giants.

Within 5 years, Kmart had 250 stores with sales of $800 million to Walmart’s 19 stores with sales of $9 million. By 1970, Target reached $200 million in revenue with 24 stores — well ahead of Walmart. But…. five decades later, Kmart has 365 stores with sales of $25 billion to Walmart’s 11,718 stores with 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 enjoyed more capital and visibility than Walmart. Unlike Walmart, 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, today Walmart is the top global retailer.

How did Walmart succeed and sustain? How did they build a sustainable competitive advantage? What are the success factors?

Note: The below content is part of the following book.

How Brands Built Its Sustainable Competitive Advantage? by Shah Mohammed M On Amazon.com.

FIGHT AGAINST STATUS QUO BIAS

Observe, Observe, Empathize — Sam visited nearby towns, did detailed research and found out that the future seemed to favor ‘discounting stores’. He found that some larger stores were achieving 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 of discounting stores in-depth. It became increasingly clear that discounting would dominate the market in the future. “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 hit hard by the discounting wave of the future or open a discount store. He wisely chose the second option.

POSITIONING

a) Becoming a leader in an existing product/service category (This would need huge investments in terms of money, effort & time and thus, was not a practical option)

or

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, the easier it is for the entire company to focus and meet customer needs, wants and desires. Once you become a leader in the niche market, you can move to the larger markets.

Target Customers — Sam gave much thought to the type of customers he had to target, where the competition would be weak and where he could utilize his strengths to gain market share. He had been running ‘Variety stores’ in small towns with a population of around 6000 people. Sam lived as one among his consumers in the small community. His everyday interaction with the locals gave him a sound knowledge of user behavior, needs, desires, and wants.

His strength was his ‘Knowledge’ about the small-town users and he pondered how he could apply it to the most promising opportunity that came his way.

Weak Market Forces -Kmart and other big retailers were not interested in opening stores in town with a population of fewer than 50,000 people. Other medium-sized brands like Gibson did not want to enter towns with a population of less than 12,000. 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 these stores. The awareness was there and this is what convinced Sam Walton to open a Walmart store in a small town as a viable business model.

VALUE PROPOSITIONS

CUSTOMER-CENTRIC -Sam had learned the importance of ‘Customer Service’ while running the ‘Variety stores’ for 15 years in small towns. In those years, he and his associates had built a strong relationship with loyal customers. Loyalty drove the business.

Sam wanted to extend ‘Best Customer Service’ to Walmart’s customers too. Accordingly, he encouraged his employees to think and act like their customers. Even while arranging the merchandise, he would ask his employees to think from the customer’s perspective and see how it would improve the experience.

Thus, Walmart’s guiding principle was ‘Low Price’ and ‘Satisfied Customer Service’ which included a wide assortment of good quality merchandise, friendly service, convenient hours and pleasant shopping experience.

FRUGALITY AS A COMPETITIVE STRATEGY

BE WHAT YOU PREACH -Though Sam Walton became rich in the latter part of his life, he shunned all unnecessary luxury — he never bought a 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 and sweeping floors of their stores themselves. They had done their handling, accounting, stock management, services and everything else. Sam was always on the lookout for ways to save money. He didn’t allow Walmart to buy a jet until they had approached $40billion in sales and needed to expand to 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 or Ramada Inns. He stayed in normal hotels and shared rooms. Sam always tried to keep the rent down, never willing to pay more than $1.00 per square foot. His frugal habits were filtered down to the rest of his company. Everybody at Walmart worked like crazy to keep the expenses down and in-turn prices below the competition.

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, Sam looked for frugality in the candidate. One day, he came across an employee from a competitor’s store who was earning around $12000 a year and was judiciously saving on his salary. Realizing that a person who could so successfully manage his finances would be able to do wonders to his store, Sam immediately recruited him. This employee then went on to become his regional manager.

Sam was of the firm view that Walmart should help its customers save money and at the same time, enjoy enviable customer service.

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.

EXPERIMENTATION

“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 named Butler Brothers following the franchise program rules. The Butler brothers defined what to sell, how much margin he had to keep, how to sell, how many people he had to hire, how much to pay and how much he could use to advertise. Keeping well within the gambit of the rules, Sam began to experiment by running promotional programs on his own, deciding on price margins, etc.

One of his earliest experiments was to buy merchandise directly from the manufacturers and with this, he was able to save paying 25% commission to Butler Brothers. He regularly searched for unconventional suppliers or sources so that he could offer more choices at lower prices to his customers. He traveled far to source products.

ALWAYS QUESTION -At that time no other shop owner was using the sidewalk in front of the store. Sam was the first to leverage the space to sell his products. He installed an expensive soft ice cream machine(no store had a machine like this) on the sidewalk and while it took him two years to pay it off, it helped bring in customers by the scores. He constantly questioned the status quo and tinkered with the system.

Sam also encouraged his executives and store employees to experiment on their own, giving them ownership, authority and responsibility to experiment and be creative. He also 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

IMPULSE CONSUMER BUYING BEHAVIOUR

How?

Visual Merchandising — the company displayed goods in a way to create a desire in the consumer’s mind to purchase the product. Their merchandising was grand, innovative and visually appealing and this helped to influence the consumer’s emotions and memories.

Instead of letting consumers think, analyze and buy, Walmart 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, he came across a product ‘Mattress pad’ called Bedmate, which he felt had great potential. He bought a bunch of pads, lowered the price by keeping a very minimal margin and prominently displayed them in his stores, and was successful in selling millions of them. He then went on to experiment with Ladies Innerwear, Thermos Flask, Moon Pies, Minnow Bucket and with each product he gained huge success.

DON’T CONDEMN OR COMPLAIN -Sam encouraged his associates to experiment with innovative visual merchandising. He gave them authority, freedom, and responsibility. One of his executives, Phil was working on a new Walmart store in a town where he had constant competition from a local Kmart. One day, he got a deal to buy ‘Tide detergent’ at a cheap rate. The offer was that if Phil bought some 3,500 cases of Tide detergent, he would get each individual ‘Tide’ box’s price for $1.00. The market price of the ‘Tide’ box at that time was $3.97. In a bold move, he went ahead and bought 3,500 cases. Everybody felt he had made a mistake. Sam too was worried that it would be impossible to sell so many boxes but he strongly felt that for innovation to happen, people needed to try some crazy stuff. Phil stacked those boxes like a giant pyramid reaching to the roof. 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 Walmart’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 each. 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. He also priced the product with a little margin of profit at $199 and was successful in selling all of them.

INSPIRE, GIVE CONFIDENCE -These successes also brought in their share of learnings especially on visual merchandising. It also showed the associates(Store Employees) that the stores are full of items that could explode in big volume if an associate was smart enough to identify them and 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, their reasoning ability, and made them more sensitive to understand and predict trends.

MERCHANDISE-DRIVEN RETAIL -Sam Walton writes that Walmart was more a ‘Merchandise-Driven’ retail than ‘Operation-Driven’ retail and this was one of the major reasons for the company’s success. The operation-driven strategy would be toward reducing expenses and improving efficiency. Over some time, the company would level off and began to deteriorate. They would fail to make any innovation and sales would begin to tail off.

Walmart planned merchandise programs well in advance. They brainstormed new innovative ideas as a team and took inputs from everyone. Any successful results would be shared across the other stores. Knowledge-sharing also happened in case of failures to avoid similar mistakes.

INTERNAL CULTURE

Employees are responsible for breakthrough customer experiences and they are in turn, shaped by the company’s culture.

Sam realized that Walmart’s employees are the interface between the store and the customers. Through their consistent/ inconsistent behavior, they could enhance 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

ACTION BIAS

Sam Walton requested his managers to trust their associates and give them more authority, responsibility, and freedom. He appealed to them to listen and implement the ideas provided by the associates. He wanted every one of his employees to be independent in their own right. Any employee can meet the top management, including the CEO at any time and share his/her problems, ideas or any other concerns.

IT’S NOT ABOUT US, IT’S ABOUT THEM

In the competitor stores, a recruit had to have ten years of retail experience before he could even be considered for the role of a 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, allow them to manage their store.

SHARING INFORMATION

This gave Walmart many indirect benefits.

  • Information sharing built trust between associates and management.
  • It gave more freedom to Walmart’s employees and made them more responsible.
  • It encouraged the associates to generate ideas that were easy to implement and within specified constraints.
  • It helped the associates to make rapid strides in their personal development which indirectly benefited the company.

HONEST AND SINCERE APPRECIATION

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/her contribution. A simple act of appreciation empowered his employees to take more ownership of the tasks, be more responsible, exhibit enhanced cordial relationship with his fellow associates, and stay with the company for a longer period.

HIRING RIGHT PEOPLE

REACH THE HEART OF EMPLOYEE

Sam Walton always talked in terms of ‘Benefits’ to his employees. If he wanted a person to work for Walmart, 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 all his employees to greet their customers and ask if they could be of any help, whenever they were within ten feet distance. He advised them to look into the eyes of the customers. As usual, Sam explained the reasons for and benefits of his new idea. 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, Walmart has developed a good reputation and provided opportunities for women who at that time found it difficult to be mobile. Women made great retailers. Walmart also contributed a lot to local community programs and gained a great deal of local community support.

REAL ESTATE STRATEGY

CLUSTER OF STORES

PART OF NETWORK

Walmart clustered the stores around its distribution centers with each center supplying goods to at least 100–150 stores. If each store was in a town with a population of 5000, then the distribution center was catering to a population of 5,00,000 in the case of 100 stores, a figure which many competitors had failed to reach. Sam Walton did not break the rule of discounting store but gave it 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 the network. An integrated operating network was the basic unit of the company and not the store.

AIRPLANE

In the 1960s, as the stores were in small towns and far apart, Sam needed an efficient personal transport system to travel quickly between them and remain updated about all its activities. So, he bought a small, old airplane that played a crucial role in helping him roll out new stores as fast as possible.

This was a period of no digital maps. Sam would fly over the town and from up in the air, check out the traffic flows, in which directions the cities and towns would be growing. He used this first-hand information to evaluate the best ways to transport goods to & from the store and assess the location of the competition. He would fly down low and sideways to get a better view of the location. Not many founders flew sideways to scout for the best possible location. A good location is so important for the success of the store.

The airplane turned into a great tool and put Walmart ten years ahead of most other retailers helping Sam to scout for locations from the air. By the time competitors realized Sam Walton’s efficient location scouting strategy, the retailer had already captured many towns. In the 1980s, when competitors were trying to start 3–4 stores a year, Walmart was launching an average of 50 stores a year.

MARKET SATURATION

VENDOR RELATIONSHIP PROGRAMME

Walmart began to view suppliers as ‘Business Partners’. The vendor partnership program was extended to other suppliers. Walmart 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. Transparency improved and mutual trust was earned by both parties. Both won and so did the customers.

CONTINUOUS REPLENISHMENT SYSTEM

As the suppliers knew the customer demands before-hand, they could plan their production and inventory well, thereby saving time and money. They could also reduce the inventory holding period, the manpower and the overall lead-time resulting in ‘lowering’ of the price of the final product. The more you turn your inventory, the less capital is required.

COMMUNICATION NETWORK

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 centers, and central office. The system was launched in 1983. None of the other retailers had thought about establishing this system yet. The system helped Walmart to collect real-time information. Quicker the information, the quicker the response. Sam could pull out any data in a moment’s notice. The Walmart 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 a store associate to communicate his/her idea to the top management.

With an efficient Communication system in place, Walmart could leverage data to make informed decisions. This further helped the company to expand its footprints to new towns.

SUPPLY CHAIN MANAGEMENT SYSTEM

You’re not negotiating for Walmart, you are negotiating for your customers -Sam Walton.

THE GROWTH CHALLENGES -As the stores were far away in remote suburbs of tiny little towns, it was becoming hard for Sam to stay in touch with them… The further they grew, the more complex the distribution became. Sam and his executives were struggling to collect information about what each store required, 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 the company’s growth. Unlike other city retailers like Kmart, Walmart did not have any third-party warehouse contractor nearby whose systems and facilities they could utilize — the company was facing multiple challenges.

THE SOLUTION -Walmart’s executives realized that to grow rapidly, they needed 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 Walmart could roll out so many stores and move far ahead in the industry). On the other hand, Walmart’s competitor Kmart’s management had such strong resistance to any kind of change-including investment in systems.

Sam and his executives kept exploring and visiting new 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 convinced that computers were the best way to manage growth and keep down their cost structure.

DISTRIBUTION AND WAREHOUSING TECHNOLOGY

The first distribution center could stock over 80,000 items and replenish 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 efficiently accommodate any new consumer demand. It 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 their operational efficiency. Finally, Walmart could supply goods at the right time to their stores, thus, improving the customer experience.

DECENTRALIZATION -Many discounting chains of that period believed that ‘decentralization’ was the way forward in the business. Sam Walton was the first to break away from this rule. Kmart had been practicing decentralization from the beginning — They gave more authority to store managers to choose product lines, vendors and set prices. The problem was the lack of interaction, collaboration, and coordination between the individual stores. As the stores chose different vendors, negotiated individually, they failed to gain cost benefits of an integrated network of centralized distribution that was being practiced by Walmart. Kmart stores could not learn from each other.

FLEET OF TRUCKS

Why would a third-party employee be motivated to work beyond what is needed for the welfare of the store? The truck drivers, being part of the Walmart setup, felt responsible for the growth of the company as they would also be benefited. They responded and worked beyond what they had been asked for. They were true professionals and ambassadors for Walmart while on the road. They had a major role to play. As the company valued feedback, ideas, from every employee, truck drivers made a major contribution.

Truck drivers visited stores more often than anybody else in the company. Sam would often meet and interact with them in the early morning. The drivers would share information about the stores — what difference they observed from their previous visit, gave an account of the store associate’s attitude, share information about wastage in the stores and also their views on people in the particular community.

Sam Walton imparted the idea in them that they were not driving the trucks but serving the stores and customers.

SUPPLY SIDE ECONOMICS OF SCALE

HELP YOUR CUSTOMERS TO HELP YOURSELF -Following its guiding principle of keeping prices low, Walmart had been successful in pushing suppliers to cut prices. With the help of the Walmart team, many suppliers reduced the price of the product by half.

In the Walmart Effect, author Charles Fishman discusses how Walmart pushed GE to reduce the price of a four-pack of GE light bulbs from $2.19 to 88 cents for 5 years. (Source: Investopedia).

Lakewood Engineering & Manufacturing Company, a fan manufacturer, sold fans through Walmart stores. In the 1990s, the fan was priced at around $20. Walmart was not happy with the price and kept pushing Lakewood Engineering to cut down the price without compromising quality. Lakewood automated production with the help of the Walmart team, which helped to bring down the number of people to assemble a product by two-thirds. Walmart’s suppliers’ team also helped the company to source some of the components at a lower price. They also used their contact to help Lakewood set up a factory in China, thus, lowering the costs further. By 2003, the price of a fan in Walmart had dropped to $10.

The Walmart team, rather than just forcing the vendor to cut down the cost, worked with him to reduce the price of the product. Walmart encourages suppliers to utilize the retailer’s capabilities wherever possible.

BEING SAM WALTON

When he was young, he was fortunate to get a neighbor who had become rich by running a multi-store chain of business. The neighbor 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.

HUNGRY FOR KNOWLEDGE -Sam loved to do a lot of research before trying out an idea. He loved learning new things and acquire in-depth knowledge. He was a keen observer and his skills improved with knowledge. He read every retail publication and 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 which helped him identify their most pressing need and promote the product they wanted. This way he was able to sell products in large volumes. His observation and inquisitive mind helped him imitate good ideas from his competitors and implement them in his stores.

INFLUENCING PEOPLE -Sam Walton was friendly by nature and this held him in good stead in the long run. He would speak to people coming down the sidewalk before they spoke to him. If he knew them, he would call them out by their name. He was a very good listener. In Newport, Arkansas where Sam opened his first variety store, he knew every person there personally. He became an essential member of the community. His friendliness and empathetic nature helped him build long-term relationships with vendors and associates. He criticized ideas, not persons. He gave honest, sincere appreciation and built trust. His ‘friendliness’ was one of the main reasons behind Walmart’s successful ‘Customer-Friendly’ policy.

GRIT -David Glass, one of the close associates 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”.

CONCLUSION

All of Walmart’s activities like Supply-Chain Management, Integrated Network, Information System, Customer Friendliness, etc., fit and reinforce each other, forming a formidable integrated design. Given the sheer volume and size of Walmart’s operations, it would be impractical, if not impossible for any competitor to imitate it; and imitating only part of it would not make much business sense.

Note: The above content is part of the following book.

How Brands Built Its Sustainable Competitive Advantage? by Shah Mohammed M On Amazon.com.

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.

Written by

Secular Humanist, Business Growth Consultant, Design Thinker, India. Reach me at mmshah8@gmail.com. or https://www.shahmohammed.com

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