One of the foremost advantages of Wal-Mart is due to its management’s keen understanding of substitutes. In a market that has quick changing needs, Wal-Mart has constantly been threatened by the collective substitutes such as grocers, drug stores and other retail stores. The presence of these other substitutes creates a small yet viable threat to the business of Wal-Mart; a threat that Wal-Mart is all too familiar with due to the fact that it too was a small substitute that has taken advantage of its pricing, location and diversification to turn into an economic force.
Using the “Buy it Low, Stack it High and Sell it Cheap” idea, Wal-Mart has not only been able to offer lowest prices but it this lower price has allowed it to maintain more SKUs than any other competitor thus providing low prices and several items to choose from. This is one key concept that has remained in the consciousness of most major businesses today. While there are certain sectors that try to seek quality, the diversity that Wal-Mart offers has allowed Sam Walton to find a niche with over 90% of the purchasing public. Wal-Mart used discount pricing to establish its stores as the alternative
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It was able to offer similar products sold at other stores at lower prices by maintaining a low-cost structure by keeping its operating cost low, maximizing store space, rationalizing areas of expenditure, aligning supply with demand, and other practices. Wal-Mart’s mutual partnership with suppliers, product manufacturers, and logistics firms also supported its low-cost structure. (Bradley & Ghemawat, 2002) By maintaining low prices, Wal-Mart was able to fend off strong substitutes to its store and store products and kept customers coming back.
The second key to Wal-Mart’s success was the way that it targeted the usually ignored small towns as the location for its stores (Bradley & Ghemawat, 2002). By establishing stores in small communities, the company’s discount prices captured the entire community as a market. Wal-Mart gets the first mover advantage and fends of the entry of substitute stores in the small towns. In addition, Wal-Mart stores are also clustered to allow warehousing in key locations and logistics arrangements to save on cost.
This mobility and access to new markets for expansion kept Wal-Mart well ahead of the competition. By cornering select markets, it prevents new competition from entering and thus maintaining its advantage in the market. After substitutes such as K-Mart followed the low price format, Wal-Mart maintained its discount pricing while developing differentiation strategies such as offering its own brands and establishing various store formats to provide accurate product and service needs to a particular market or area (Bradley & Ghemawat, 2002).
Wal-Mart continues to develop differentiating factors as a means of suppressing the threat of substitutes by making itself difficult to substitute. Every single commodity manufacturer who is interested in surviving must be able to gain the good graces of Wal-Mart. The impact of Wal-Mart is such that it “has life-or-death decision over [almost] all the consumer goods industries that exist in the United States (Gereffi 2006). ”
Bradley, S. P., & Ghemawat, P. (2002). Wal-Mart Stores, Inc. HBS #9-794-024. Boston, MA: Harvard Business School. Gereffi, Stephen (2006). Consumer Benefits from Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart. Economic Research Service, U. S. Department of Agriculture. Hicks,M. (2005) “The Impact of Wal-Mart on Local Fiscal Health: Evidence from a Panel of Ohio Counties. ” Econ WPA Economics Working Papers. (Urban/Regional Archive No. 0511016)