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WAL-MART COST LEADERSHIP
Transcript of WAL-MART COST LEADERSHIP
From the 90s up to
How did Walmart achieve its competitive advantage's position?
Achieving cost leadership
“Commit to your business.
Believe in it more than anybody else.”
WAL-MART COST LEADERSHIP
Strict control on overhead costs
Little consideration on interiors
Scarce staff to support back-office operation
According to M. Porter the competitive advantage, which must be sustainable, is the result of a strategy that leads a firm
to obtain an advantageous position in the market.
This position gives the firm the opportunity to get permanently a higher profitability compared to the average of its competitors.
The cost leadership strategy
is the firm’s ability to offering a
similar product/service at a lower cost.
1. reducing prices
2. offering the same prices
Wal-Mart Stores, Inc., is an American operator of discount stores, one of the world’s biggest retailers. Wal-Mart’s success story is an example
of a company, which became successful by
rigorously pursuing its core philosophy of cost leadership.
Was founded by Sam Walton in 1962, and focused its early growth in rural areas, thereby avoiding direct competition with retailing giants.
In the 80's was able to foster its growth by making heavy investments in IT to manage its supply chain and by expanding business in bigger metropolitan cities. Efficiencies in its distribution networks (e.g., regional warehousing) helped Wal-Mart become the largest retailer in the United States in 1990.
It moved into international markets one year later with the opening of a store in Mexico, and growth continued, either through new stores or the acquisition of established retailers, in countries such as Canada, China, Germany, and the
among rivals is the driving force of this industry, in which
is the most critical factor.
Threat of New Entrants
New firm would be faced with the task of beating the price of WM immediately upon entry. Given the economy of scale, brand recognition, service and variety of product.
Bargaining Power of Suppliers
The Bargaining Power of Buyers
Currently, there are 3 main incumbent companies that exist in the same market: Sears, K Mart, and Target
Producing at a lower manufacturing costs level
compared to its rivals makes the firm able to control the competitive lever of price. The cost leader firm
can take advantage of its successful position in two different ways:
Wal-Mart’s cost leadership strategy
Every Day Low Prices
EDLP represents an application
of the value-based pricing, a
pricing strategy which sets prices
on the value perceived by
‘’Because you work hard for every dollar,
you deserve the lowest price we can offer every
time you make a purchase. You deserve our Every
Day Low Price. It’s not a sale; it’ s a great price you can count on every day to make your dollar go further at Walm-Mart’’
EDLP promises Wal-Mart’s customers a wide variety of high quality, branded and unbranded products at
the lowest possible price, offering better value for their money
How did Wal-Mart maintain low costs, the cost leadership and the competitive advantage over time?
1. Expending into bigger metropolitan cities
After being highly successful in the rural market of the US, Wal-Mart focused on expending into bigger metropolitan cities.
2. Diversifying in other areas of retailing with alternative retail formats.
In 1983 Wal-Mart ventured into the
membership club business, by establishing
"Sam's Club". They were
wholesale clubs, which
offered goods in bulk at
wholesale prices, exclusively to its
members, who comprised mainly
small business resellers, who paid
a nominal membership fee.
Economies of scale
◘The Hub & Spoke system
Automated distribution center
Company-owned truck fleet
- Mexico, Canada, UK,
- Similar approaches to
different national markets
- Inconsistent performance
- More than 11,000 retail units in 27 countries
- E-commerce websites in 10 countries
- 2.2 million associates employed around
- 1.3 million in the U.S. alone
- Revenues for 2013 were $276b and net profit
Wal-Mart is “both
Consumers can buy from small mom-and-pop stores or specialty stores, but these stores do not offer a wide range of products, nor do they offer competitive prices.
On-line purchase can be a substitute means for shopping; however, it may not be a good choice for goods that are consumed daily because shipping costs may lead to higher final prices, and shipping time can delay the need’s fulfillment.
- Switching costs of buyers is low
- Buyers are price-sensitive. They can be
easily lured to competitors to buy products
- The differentiation in the products and
brands among different discount retail
stores in this industry is low
- Since most of the products offered are
commodities, buyers usually choose the
store that is closest to their home or their
workplace for convenient shopping.
- Customer-focused strategy
- Wal-Mart products were usually priced
- Small towns (location)
"By cutting your prices, you can boost your sales
to a point where you earn far more at the cheaper retail price than you would have by selling the item at the higher price. In retailer
language, you can lower your markup but earn more because of the
increased volume". S. W.
attention to customers leads to a customer loyalty's increase, which is the source of Wal-Mart's success
- by leading retailers (K-Mart, Woolco) concentrated
more on big cities
- rural customers extremely attracted to EDLP
- customers bought in bulk --> more
volume and more profit
How to get the cost leadership?
According to Porter factors that lead to a low cost position are:
1. Heavy exploitation of economies of production (economies of scale,
2. Product/process innovation
3. Geographic reorganization --> manufactory plants' location near
procurment's sources and market
4. Rearrangement of the value chain in order to reach high levels of
efficiency (in terms of costs) -->
5. Reduction in costs
Wal-Mart's value chain
analytical tool that analyzes the activities performed by a firm in order to deliver a valuable product/service for the market
In 1987 Wal-Mart opened its first hypermarket in the US, a food and general merchandize retailing center, later called Supercenter, modeled on the European concept of hypermarket that had been pioneered by the French retailer Carrefour. A Supercenter combines a discount store with a grocery supermarkt: in addition it incorporates a number of specialty units (hair salon, eyeglass store, dry cleaner, photo lab, ect).
"The Supercenters are a result of our continuing interest in the experimentation with the understanding of what we believe to be significant new retailing vehicles"
3. Investing heavily in technology
In 1983, Wal-Mart installed the POS (point of sale) scanning system.
It's a computerized system that identifies each item sold, finds its price
in a computerized database, creates an accurate sales receipt for customers, and stores this
item-by-item sales information for use in analyzing sales and reordering inventory.
POS system helped Wal-Mart in:
- handling information efficiently
- planning store layout
- avoiding overstocking
- reordering goods easily
In 1987 Wal-Mart installed a SCS (satellite communication system).
The system helped in:
- establishing virtual communication links between all stores and distribution centers with the
headequarter, through two-way voice and data and one-way video communication
- linking its own system with those of its suppliers leading to a significant improvement in its
supply chain efficiency
involves a huge distribution center (hub) located
in the middle, which serves several stores (spokes) built all around the first.