Competitive Strategy and the Wal-Mart

Threat: Positioning for Survival and Success

John A. Parnell, University of North Carolina-Pembroke
Donald L. Lester, Middle Tennessee State University

No class of retailer has influenced the business and seek profits through high volume via low
landscape in recent years more than the big box, markups. Their facades are standardized with
and no big boxer is more prominent than Wal- lai"ge windowiess single-story buildings. Ample
Mart. Big boxers like Wal-Mart not only apply parking is usually available, although customers
pressure to suppliers and alter the mix of shop- may be required to walk a considerabie distance
ping alternatives for consumers, but they also to enter the store.
greatly influence the competitive behavior of Store traffic patterns spell the success of big
traditional retailers. The academic and business boxers, particularly in the United States. During
press has chronicled the wide-ranging effects of the la.st 15 years, the number of consumer trips
the mega-retailer over the past two decades to the shopping mall has been cut in half, a trend
(McCune, 1994; McGee and Peterson, 2000; that has not always held true for malls anchored
Stone, 1993). Although there is growing evi- by a big box like Wal-Mart or Target (Chittum,
dence that Wal-Mart's hold on retail may be 2005), In addition, a growing percentage of
slipping, it remains a competitive nightmare for American teenagers have access to a credit card.
many of its competitors, particularly small rivals Teens are making more and more purchase
in local markets (McWiltiams, 2()07a. 2007b). decisions and are frequenting shopping malls
A number of authors (e.g.. McGee and less and shopping more at big boxers, entertain-
Peterson, 2000; Edid, 2005; Spector, 2005) have ment-oriented retailers, and online retailers
suggested or inferred competitive responses for (Barta. Martin, Frye, and Woods. 1999; Etter,
smaller retailers when a big box like Wal-Mart 2005; Raymond, 1999; Spector. 2005).
comes to town. This paper builds on such work A big box store that operates primarily in a
by providing a more comprehensive and theory- specialized market may also be referred to as a
based analysis of strategic alternatives available "category killer." Toys "R" Us is widely refer-
to retailers specifically facing a threat from Wal- enced as the first category killer; others in the
Mart. Toward that end, the remainder of the U.S, include Best Buy, Circuit City. Lowe's,
paper begins with an overview of the big box Blockbuster, and Home Depot. From a strategic
phenomenon and a framework for understanding perspective, general merchandise big boxers and
how the big box influences the strategic land- category killers are similar in a number of ways,
scape. Three theory-based potential strategic with the primary distinction being the breadth of
responses are evaluated, followed by conclu- the product line (Spector, 2005). Wai-Mart, for
sions and opportunities for further research. example, sells office supplies like Office Depot,
electronics like Best Buy, and hardware like
Wal-Mart and the Big Box Phenomenon Home Depot, but does not offer as wide a selec-
The emergence of big box retailers in the United tion as their specialized counterparts.
States has changed the retailing landscape con- Wal-Mart is the perennial general merchan-
siderably. The term "big box" typically refers to dise big-box retailer in the United States, al-
discount retailers whose stores exceed 50.000 though rivals Costco and Target are also
square feet, with many as large as 200,000 prominent examples. Wal-Mart boasts 23 miles
square feet. Big boxers usually implement a of retail selling space in the U.S., where 70%
limited number of store designs across markets of its approximately 5,500 stores are located.

14 SAM ADVANCED MANAGEMENT JOURNAL

Annual revenues for 2004 were slightly over They argue that Wal-Mart takes advantage of
$288 billion (Revell. 2005). making it number American blue-collar workers who, due to
one on the Fortune 500 ranking. By 2005, Wal- downsizing and outsourcing, cannot find viable
Mart had slipped to second place on the Fortune employment elsewhere. They also suggest that
500 (McGirt, 2006) with revenues of $315 much of the outsourcing can be blamed on Wal-
billion, just behind Exxon Mobil. However, in Mart's coercive tactics in dealing with suppliers
2006 it regained the top spot as revenues ex- and costs. Through laws and ordinances, the
ceeded $350 billion (Useem. 2007), with its union push has even led several states and cities
headcount nearing two million. to try to force Wal-Mart and other big-box
Because of its prominence and ability to trim retailers to spend at least 8% of its payroll on
costs, Wal-Mart is often the brunt of criticism health care or pay a minimum of $ 13 an hour to
from politicians, activists, union leaders, and hourly employees (Novak, 2(X)6: Will. 2006a).
others. Detractors, for example, contend that When Wal-Mart announced its intention to move
Wal-Mart's aggressive negotiating tactics ulti- into inner city areas of Los Angeles, for ex-
mately annihilate U.S. manufacturing firms and ample, voters rejected its effort (Kaplan. 2006),
send American jobs overseas. Some charge that choosing instead to rely on small mom and pop
the mega-retailer seeks to render obsolete small merchants that some suggest have historically
businesses in the communities in which it oper- overcharged local residents who lack basic
ates (Edid, 2005: Quinn, 2000). Others cite transportation.
positive influences, however, noting such factors Not all press has been negative, however. As
as job creation and the benefits of low prices Jason Furman of New York University notes,
(Etter, 2005; York, 2005). When Albertson's — Wal-Mart's economic benefits cannot be ignored
the second largest grocer in the U.S. with 2,500 as the retailer saves its customers an estimated
stores — searched for a buyer in 2005, it was $200 billion or more on food and other items
another reminder that Wal-Mart can destroy every year (Mallaby, 2005). As for health insur-
smaller competitors and have a staggering effect ance, Wal-Mart offers 18 different plans lo its
on the success of large retailers as well (Berman, employees, with one having monthly premiums
Adamy and Sender. 2005). Besides Albertson's, as low as $11 (Will, 2()()6a). All togethei; over
a host of formerly successful discount chain 86% of Wal-Mart employees have some form of
stores were bankrupt by the late 1990s, includ- health insurance, witb about half being insured
ing Heck's. Arlans, Federals, Ames, E.J. Kor- through the company. With over 1.3 million
vette, Atlantic Mills, iind W.T. Grant (Camerius, workers in the U.S., Wal-Mart accounted for
2006). 13% of the country's productivity gains in the
Wal-Mart critic Arindrajit Dube suggests that scondhalfofthe 1990s.
Wal-Mart's relatively low wages resuit in an The competitive issue for the future is how
annual wage loss in the retail sector of almost $5 constrained Wal-Mart's domestic growth will
billion. Hollywood producer Robert Greenwald become due to this class war being fostered by
even produced a movie about the giant retailer, the more liberal segment of U.S. society. If
"WAL-MART: The High Cost of Low Price," legislation takes hold on a widespread basis to
chronicling the plight of an Ohio-based hard- limit Wal-Mart's penetration of untapped U.S.
ware store when Wal-Mart moved to town (York. markets, will that create opportunities for other
2005). Indeed, the liberal segment of the U.S. firms to expand their operations to take up the
has adopted Wal-Mart as its cause de jour with slack?
such a vengeance that one writer has labeled
their obsession WMDS — Wal-Mart derange- The Big Box and the Strategic
ment syndrome (Goldberg. 2006). Senator John Landscape
Kerry (D. Mass.) has been quoted as saying that Traditional economic theory suggests that the
Wal-Mart is "disgraceful" and a symbol of rules governing firm success and failure tend to
"what's wrong with America" (Will, 2006b). He evolve over time as a result of the collective
is basing his remarks on Will's (2006b) claim activities of numerous competitors in an indus-
that Wal-Mart costs about 50 retail jobs for try. This economic ideal is marked by free and
every 100 jobs that it creates. open competition and assumes that no single
Critics are aghast at Wal-Mart's wages and finn is able to rise head and shoulders above tbe
lack of health care coverage, siding with unions crowded field and dominate the industry. The
in their efforts to organize Wal-Mart workers. problem, bowever, is that all firms in an industry

SPRING 2008 15
are neither equally competifive nor equally linked to its capabilities, which can create value
lucky. In many cases, this results in one or more and ultimately lead to profitability for the fimi.
rising to prominence. Such is the case with big Hence, re source-based theory focuses primarily
boxers. on individual firms rather than on the competi-
Industrial organization (10) economics em- tive environment.
phasizes the influence ofthe industry environ- The increasing speed of business activity and
ment on firms. The central tenet of industrial the notion of ephemeral competitive advantage
organization Iheory is che notion that a firm must have prompted researchers to emphasize dy-
adapt to influences in its industry to survive and namic strategy positioning models. This ap-
prosper; thus, its financial pertbrmance is prima- proach does not refute the tenets of IO and the
rily detennined by the success of the industry in RBV per se, but challenges their static assump-
which it competes. Industries with favorable tions in favor of strategies that are more flexible
structures offer the greatest opportunity for firm and adaptive to changing market conditions.
profitability (Bain. 1968). Recent research has This is especially true in industries where suc-
supported the notion that industry factors tend to cess depends on a constant flow of new offerings
play a dominant role in the performance of most (Bamett. 2006; Fiegenbaum and Thomas. 2004;
competitors, except for those that are the notable Selsky, Goes, and Baburoglu. 2007).
industry leaders or losers (Hawawini,
Subramanian, and Verdin. 2003). The IO, resource-based, and dynamic strategic
positioning perspectives can be useful tools for
The IO perspective assumes that a firm's understanding competitive behavior in industries
perfonnance and ultimate survival depend on its where big boxers thrive. Contrary to 10 assump-
ability to adapt to industry forces over which it tions concerninfi the limited power of any sinfile
has little or no control. According to 10, strate- firm, however, hig boxers set — or at least influ-
gic managers should seek to understand the ence significantly — the competitive rules in
nature of the industry and formulate strategies their industries. For example, big boxers shift
that feed off the industry's characteristics. Be- the power relationship between retailer and
cause 10 focuses on industry forces, other producer in favor of the retailer, a move that can
factors including strategies, resources, and effectively reduce the level of differentiation
competencies are assumed to be fairly similar among producers. When a retailer becomes a
among competitors within a given industry. dominant player in ils industry, it begins to
If one firm deviates from the industry norm control a large percentage of the output of many
and implements a new, successful strategy, other of its suppliers. As a result, the retailer can
firms will attempt to rapidly mimic the higher- sometimes exercise more influence on a prod-
performing firm by purchasing the resources, ucts position and image than the manufacturer.
competencies, or management talent that have 10 and strategic group models acknowledge only
made the leading firm so profitable. Hence, minimal influence on the part of a single com-
although the 10 perspective emphasizes the petitor. Industry factors dictate critical success
industry's influence on individual firms, it is also factors, and even large flrms must adapt to them.
possible for firms to influence the strategy of In contrast, big boxers leverage their size and
rivals, and in some cases even modify the struc- scope in such a way that rivals, suppliers, and
ture ofthe industry, albeit in a limited fashion buyers must reorient their competitive strategies
(Barney. 1986; Seth and Thomas. 1994). accordingly. As Hannaford (2005) relates, firms
with market dominance in the past would have
Perhaps the opposite of IO, the resource-based charged above-market prices, earning above-
view (RBV) considers performance to be a average returns for their oligopolistic position.
function of a firm's ability to utilize its resources Wal-Mart, however, charges below-market
(Barney. 1986). Although environmental oppor- prices, forcing suppliers who wish to take advan-
tunities and threats are important, a firm's tage of their vast market to keep their costs and
unique resources compo.se the key variables that prices low.
allow it to develop a distinctive competence
(Lado. Boyd. and Wright, 1992) and enable il to Consider the case of Wai-Man and Vlasic
distinguish itself from rivals and create competi- pickles. In 2003 Wai-Man priced a gallon of
tive advantage. A firm's resources include all of Vlasic pickles at $2.97, thereby selling a
its tangible and intangible assets, such as capital, gallon ofthe nation's top-.selling brand for less
equipment, employees, knowledge, and informa- than most other retailers charged for a quan.
tion. An organization's resources are directly The move was a good one for Wai-Man as it

16 SAM ADVANCED MANAGEMENT JOURNAL

strengthened the retailer's image as a deliverer Sell a wide variety of products. Selling lots of
of value. Unfortunatety, the move undermined products increases store traffic. A customer may
efforts Vlasic had made for years to establish its visit the big box to purchase one or two prod-
position as a producer synonymous with the ucts, but will likely leave with more. Product
pickle itself. If Vlasic had chosen not to sell to lines for general merchandise big boxers like
Wal-Mart, the producer would have paid a great Wal-Mart are not as deep as they are at their
price in terms of market share. Ultimately, specialized rivals. Only products that sell consid-
Vlasic had little choice but to allow Wal-Mart to erable volume are carried, fueling even greater
sell its pickles in whatever way the retailer saw economies of scale.
fit (Fishman, 2003). Offer a consi.stent, predictable shopping
Consider another case involving Wal-Mart experience across time and locations. Econo-
and Levi Strauss. In 2002, Levi and Wal-Mart mies of scale and low prices are achieved when
announced that the retailer would begin selling all stores sell the same products. Predictability
Levis in its stores. Levi had experienced declin- enables customers to plan their shopping trips
ing market share in the decades prior, closing accordingly.
58 manufacturing plants in the U.S. and out- The four-pronged strategy employed by the
sourcing 25% of its sewing between 1980 and typical big box like Wal-Mart can be lethal to
1991. After rebuilding and posting a record $7.1 competitors, but the approach is not without its
billion in sales in 1996, Levi experienced six shortcomings and can be attacked effectively by
years of decline. The Wal-Mart deal was de- smaller retailers. Specific plans for addressing
signed to revive the brand. The problem was the Wal-Mart threat are outlined in the following
that half the jeans sold in the U.S. in 2002 cost section.
less than $20 a pair, a year in which Levi sold
none for less than $30. Clearly Wal-Mart, the Strategies for Confronting the Wal-Mart
country's leading clothing retailer, would not be Threat
interested in selling premium jeans at a premium Big boxers reduce the relative size of otherwise
price. Levi had to develop a fresh line of less "large" retailers. To effectively confront the big
expensive jeans for Wal-Mart, the Levi Strauss box threat, smaller, often sizable and established
Signature brand. As expected, Levi sales in- rivals must account for the influence of the big
creased shortly after its new line of jeans were boxer on the industry and formulate their strate-
introduced in Wal-Mart (Fishman, 2003). At gies accordingly. Specifically, the first step in
least some of the Wal-Mart sales cannibalized confronting Wal-Mart is to understand the
those of Levi's more profitable premium brands threats it creates, as well as the opportunities it
in other outlets, however. In addition, the sale of affords traditional retailers. While the competi-
Levis at Wal-Maii tarnished the image of the tive threat posed by the entry of a Wal-Mart
century-and-a-half old American icon. store into a locale previously dominated by
Big boxers adopt a resource-based perspective traditional and specialty retailers is substantial, it
to a great extent, seeking to develop resources does not necessarily create a hopeless situation
and competencies that cannot be readily dupli- for smaller rivals. Competitive strategy is about
cated by rivals. Although competitive strategies choices, some of which are mutually exclusive.
can vary among big boxers, the general approach By its very nature, a big box like Wal-Mart
is based on four pillars: possesses key competitive strengths and weak-
Build economies of scale. Big boxers lower nesses that should be understood before crafting
costs by purchasing larger quantities. They a response.
distribute these products efficiently to a large Wal-Mart's strengths are forthright and
number of stores strategically located to mini- widely acknowledged. With its size and access
mize transportation and related costs. Sheer size to capital, Wal-Mart can sustain even a low-
represents the single greatest resource advantage performing store for the long term when moving
possessed by the big boxer. into a region, a luxury not afforded many small,
Offer everyday low prices on most items. family-based businesses. Distribution and
Leveraging scale economies, big boxers typi- supply chain efficiencies enable the retailer to
cally offer prices that simply cannot be tnatched offer exceptionally low prices that are difficult
by rivals. As a result, most competitors find it for rivals to match. Its wide product assortment
difficuh to compete with the big boxers solely — especially in superstores where both grocer-
on price. ies and general merchandise are offered —

SPRING 2008 17
generates store traffic and suppons a one-stop ability to attack and defeat other category killers
shopping experience for the consumer. And. its (Barta. Manin. et al, 1999). The sale of Toys-R-
cost-control-oriented corporate culture, which Us in 2OO.'i demonstrates the rise ofone category
includes a reliance on low-cost, pan-time labor, killer and its subsequent fall at the hands of
keeps costs down. other big boxers.
Wa!-Man's business mode! has its shoncom- The process of formulating a competitive
ings, however. Ofthe five primai-y dimensions to response to Wal-Mart can be a challenge to
retailing — quality, service, convenience, selec- small retailers if their managers do not under-
tion, and price — and Wai-Man wins only on stand local demographics or how customers
price and selection (Rigby and Haas. 2004). make shopping decisions. The Wal-Mart threat
Since Wai-Man typically captures about 30% of is greatest for a retailer whose survival has been
a Iocal market, 70% remains for its rivals, in- historically based on a lack of competition, not
cluding local retailers, other big boxers, and on proflciency in meeting the needs of certain
smaller-store chains. While Wai-Man is often customers. Clearly, such businesses are not in
referenced as the "500-pound gorilla," maintain- a position to evaluate altemative strategic re-
ing such a stature is not easy. As a big box sponses to Wai-Man until they develop a clear
seeking to secure maximum market share from a understanding of their own resource advantages
broad audience. Wal-Mart simply lacks the focus and vulnerabilities.
and resolve to battle competitors along the
periphery, thereby creating opportunities for Patience can be a vinue when battling a cat-
retailers that can compete on quality, service, egory killer like Wal-Miul. It is not unusual for
and convenience. The success enjoyed by fiim- the new category killer to offer steep discounts
ily-owned businesses such as Berlin Myers, Ji., and an abundance of helpful employees at the
owner of a lumber company in Summerville. outset, only to ease prices higher and eliminate
South Carolina, bearing the family name, sug- some of the extra help after some of the smaller
gests that superstores and other retailers can competitors will have been eliminated from the
coexist, often with the smaller outlets supple- scene (Grantz and Mintz, 1998). Existing retail-
menting what the large ones carry. The big ers often suffer the most during this initial time
boxers typically do not compete directly with period, but not always.
smaller retailers unless they are attacked first Wal-Mart's effects on other retailers are not
(McCune, 1994). universally negative. When a large general
merchandiser like Wai-Man comes to town it
Because of its reliance on distribution and often increases the "pull factor," resulting in an
supply chain efficiencies. Wal-Mart retailers are overall increase in sales revenue for the commu-
challenged to alter product assonments and nity as a whole. Total general merchandise sales
tailor offerings to the specific needs of a region. for the town may increase by as much as 50% or
In addition. Wai-Man's approach assumes that more during the first year or two. but usually
price is the primary factor consumers evaluate begin to decline after five years. Revenues from
when choosing a retailer. While Wal-Mart is able some stores, like those specializing in home
to offer high-demand products at low prices, its fumishings. typically benefit from Wal-Mart's
sheer size makes it difficult for associates to presence. The effect on other outlets such as
deliver exceptional customer service on a consis- clothing stores is not as evident. Nonetheless,
tent basis, a key component in the consumer tax revenues from sales in the "Wai-Man town"
shopping experience. Wai-Man's image as generally outpace those in communities without
Goliath in a David versus Goliath battle can be a a Wai-Man, which is why effons to convince
liability if consumers become sensitive to the politicians to block entry into a community are
plight of family-owned businesses defending generally ineffective (Stone, 1993).
themselves against the onslaught of a retail Big boxers affect retailers within close prox-
invasion. imity, with two imponant caveats. First, not all
In general, Wai-Man's competitive responses retailers are affected equally. Retailers with
target large general merchandise retailers or similar product lines may be affected more
grocers (e.g.. Home Depot, Best Buy, and directly than those with altemative or comple-
Kroger), not small niche-oriented specialty mentary product lines. Restaurants, for example,
retailers. As category killers fight more among typically benefit from a big box locating nearby
themselves, their success is less connected with because ofthe increased traffic in the immediate
an ability to dwarf smaller retailers, than with an area.

18 SAM ADVANCED MANAGEMENT JOURNAL

 Second, retailers Iocated miles away may be one-third of their products compared with other
adversely affected when a new big box opens. major competitors in key U.S. markets (Craw-
Traffic patterns tnay shift as consumers located ford and Mathews. 2001). Astute competitors
closer to a traditional retailer decide to drive a may be able to compete with WaKMart on price
longer distance to shop at the big box. This within the boundaries of specific product lines
effect is exacerbated when other retailers "clus- and customer groups.
ter" around the big box, drawing even more Aldi provides an example of a not-so-big box
potential store traffic away from retailers in that competes effectively by employing a focus-
other locales. low cost strategy. Aldi is an intemationai retailer
Given Wal-Mart's array of resource strengths that offers a limited assortment of groceries and
and shortcomings, three strategic approaches related items at the lowest possible prices. Func-
may be utilized vis-a-vis Wal-Mart. Porter's tional operations are all focused on minimizing
(1980) strategy typology serves as a useful costs, and efforts are targeted to consumers with
framework for illustrating the first two of these low-to-moderate incomes.
alternatives, as elaix)rated below. Aldi minimizes costs a number of ways. Most
products are private label, allowing Aldi to
• Strategy 1: Focus-Low Costs negotiate rock-bottom prices from its suppliers.
Stores are modest in size, much smaller than
"We can beat Wc/Z-Mart at its own game as long those of a typical chain grocer. Aldi only stocks
as we fight on our own turf." common food and reiated products, maximizing
According to the focus-low cost strategy, the inventory turnover. The grocer does not accept
retailer should compete on the basis of costs, credit cards, eliminating the 2-4% fee typically
hut not target the mass market. Online auction charged by banks to process the transaction.
facilitator eBay is replete with microbusinesses Customers bag their own groceries and must
selling a few products at rock-bottom prices. In either bring their own bags or purchase them
many cases these sellers undercut the big boxers from Aldi for a nominal charge. Aldi also takes
by marketing only a iimited number of products an innovate approach to the use of its shopping
to a highly defined end user. By minimizing carts in its U.S. stores. As in many Canadian
overhead, targeting specific buyers, and offering stores, customers insert a quarter to unlock a
convenience — no trip to the store is required — cart from the interlocked row of carts located
these microbusinesses beat the big boxers at outside the store entrance. The quarter is re-
their own game, but only on a very small piece turned when the cart is locked back into the
of turf. This approach mimics what Porter group. As a result, no employee time is required
(1980) termed a focus-low cost strategy. Em- to collect stray carts unless a customer is willing
pirical research supports the effectiveness ofthis to forego the quarter by not returning the cart.
approach among select small retailers, especially Like Aldi. rival chain Save-A-Lot has found a
those that operate in hostile and intensely com- way to compete successfully against Wal-Mart.
petitive environments (McGee and Rubach, The grocery store pursues locations in urban
1996/1997). areas rejected by Wal-Mart and offers prices
It is difficult for rivals to match the competitive with the big box. Save-A-Lot gener-
superstores on price because they typically lack ates profits by opening small, cheap stores
the volume to negotiate better deals from their catering to households earning less than $35,000
suppliers. In some cases, however, a smaller a year. Save-A-Lot stocks mostly its own brand
retailer can emphasize a limited number of" of high-turnover goods to minimize costs and
products and achieve a substantial volume. eschews pharmacies, bakeries, and baggers
Alternatively, a small retailer can join with those (Adamy, 2005).
in other communities to strengthen its bargain- Dollar General is an example of a general
ing power. Trade associations may be abie to merchandiser that has adopted a focus—low cost
direct small retailers to "co-ops" that are already strategy, coupled with an emphasis on customer
engaged in this process. Co-ops typically wel- access. Prices are kept to a minimum, although
come newcomers in an effort to drive volumes they may not be as low as those at Wal-Mart for
even higher. common items. Dollar General also offers
Interestingly, Wal-Mart prices are not always deeply discounted store-branded products. The
the lowest. One study reports that prices at the key, however, is that unlike Wal-Mart, Dollar
big box are actually higher for approximately General positions its stores for easy access.

SPRING 2008 19
Customers can easily park, enter the store, and dise. They may simply add a set percentage to
make their purchases (Crawford and Mathews, their costs instead of viewing pricing strategies
2001). as a competitive weapon. One proven approach
in the convenience store market segment is to
• Strategy 2: Focus-Differentiation price commonly-purchased goods such as milk
and bread at competitive prices but make it
"Wal-Mart simply cannot meet the needs of our necessary for customers to walk past dozens of
customers." other products that are priced at a premium to
One approach for successfully competing get to those goods, hoping impulse buying will
against a big box requires a recognition that occur.
costs must be kept under control, but that low Specialization can also be an excellent ap-
costs — and low prices — cannot serve as an proach to combating the big box. Stores like
effective basis for that competition. Retailers Wal-Mart are masters of breadth, not depth.
adopting a focus-differentiation strategy eschew Due to the smaller margins, big box stores are
price competition and compete on the basis of usually able to carry only high-demand products.
other factors such as quality, selection, conve- Smaller retailers can carve out a niche by carry-
nience, and service. There is mounting evidence ing related items or product lines that the big
thai a number of Wal-Mart's smaller rivals are boxers do not. Examples can be found through-
employing this approach effectively against the out America's small towns in areas such as
big box (McWilliams, 2007a). hardware, auto parts, and sporting goods.
Michael Porter's low cost-differentiation Small retailers are also better equipped to
dichotomy illustrates the conundrum faced by tailor their product and service lines to local
most businesses. Simply stated, differentiating tastes. Limited product line variations are com-
products or services requires resources, thereby mon among big boxers and are necessary to
raising one's cost position relative to others in achieve economies of scale. In many lines of
an industry. On the other hand, a strong empha- business, however, local tastes may differ sub-
sis on minimizing costs may limit the use of stantially from the generic approach, providing
advertising, product development, and the like, opportunities to rivals to fulfill these needs.
all of which enable a firm to differentiate its Empirical research supports the effectiveness of
output. In the end, there is a tendency for low this type of "focus" approach among select small
costs and differentiation to work against each retailers, especially those that operate in hostile
other. A business attempting both strategies and intensely competitive environments (McGee
simultaneously can end up "stuck in the middle" and Rubach, 1996/1997). Smaller retailers may
(Porter, 1980) because implementing the combi- even succeed by cooperating with their big box
nation strategy is generally more difficult than rivals, not competing with them.
implementing either the low-cost or the differen- As the world's largest retailer, Wal-Mart is a
tiation strategy alone. lightning rod for attention, negative publicity,
In many cases, however, it is not necessary to and legal confrontations, resulting in almost
abandon cost containment to pursue differentia- 5,000 lawsuit defenses in 2004 alone (Willing,
tion. The key point is this: Consumers may be 2001). Simply stated, the volume of business
willing to pay a somewhat higher price for a transacted at a big box such as Wal-Mart can
product similar to one offered by the hig box if readily take a toll on customer service. Hence,
they believe that other factors — quality, conve- providing consistent service is always a chal-
nience, location, service, favorable terms, etc. — lenge, particularly at the big boxers where em-
compensate for the higher price. At some point, ployees may lack expertise in their respective
however, the perceived worth ofthe nonprice departments. Today's consumer is strapped for
factors may not be substantial enough to warrant time and more selective than in the past. Women
the higher price, or the price difference will be are spending less time shopping, and many
too great for potential customers to afford. As consumers are shopping more on the Intemet
Toby Kaye, owner of two computer stores in (Barta, Martin, Frye, and Woods, 1999; Spector,
Baltimore put it, the smaller retailer does not 2005).
need to match prices, but they need to be "within Rigby and Haas (2004) suggest that com-
striking distance" (McCune. 1994). The problem peting with Wai-Man requires some retailers
is that many small retailers do not consider what to segment their customer bases and "wow'
the market will bear when pricing their merchan- the ones that matter. This can be done through

20 SAM ADVANCED MANAGEMENT JOURNAL

expanding signature categories, customizing its price decreases. In essence, Wal-Mart has
local assortments, focusing on personal atten- taken the simplest approach to create value,
tion, and raising loyalty benefits to customers. minimizing prices. Other formulas for creating
Consider the case of Dick's, a small grocery value exist, however, aithough they require a
chain in the Midwest. Dick's culls names of detailed understanding of consumer tastes and
newcomers and birth and wedding announce- preferences as they relate to a given retailer's
ments from local newspapers. New arrivals and line of business.
newlyweds receive letters of congratulations and Wal-Mart's one-size-fits-all approach pre-
coupons from Ihc nearest store. Follow-up letters cludes it from exploring some of these alterna-
are sent to lure customers into stores on a consis- tives in an efficient manner, especially at the
tent basis (Kawasaki, 1995). local level. One way to improve one's value
The emphasis on service among grocers has proposition reiative to that of Wal-Mart is to
extended to the implementation of loyalty cards. add relatively inexpensive features or services
A number of grocers have implemented loyalty when they increase the perceived value of the
programs to track purchase behavior and reward offering considerably, especially when Wal-
repeat customers. Given Wal-Mart's emphasis Mart is not in a position to integrate a similar
on efficiency and low prices, the big box is not approach. Delivery — whether free or for a
in a position to get to know individual customers nominal charge — is a common example of a
and local buying patterns like other retailers may means of enhancing perceived value, as are
be. Such programs have met with mixed results, expertise ;md repair, real services after a sale.
however. The value orientation strategy begins with an
Department store Nordstrom's emphasizes organizational commitment lo quality products
exceptional service. The typical Nordstrom's or services, thereby differentiating a firm from
department store carries 150,0(X) pairs of shoes its competitors. Because customers may be
of virtually every size and width, with an on-line drawn to high quality, demand may rise, result-
inventory of over 20 million pairs. The retailer ing in a larger market share, providing econo-
also provides shoe shines, spas for women, and mies of scale that permit lower per-unit costs in
even a concierge service (Spector, 2001). purchasing, manuf'acturing, fmancing. research
Although Wal-Mart's wages are competitive, and development, and marketing. In this regard,
they are not as high as many of their competi- a firm can seek to provide maximum value by
tors. Competitors may be able to recruit innova- differentiating products and services only to the
tive employees with above-market wages, extent that any associated cost hikes can be
providing them with opportunities to be more justified by increases in overall value and by
creative in their work. Developing and empha- pursing cost reductions that result in minimal. If
sizing distinctive competencies is critical, and any, reductions in value.
human resources can be a key means of doing so Conceptually, this strategic approach may be
(McGee and Peterson, 2000). viewed as a hybrid of the other two. although it
is qualitatively different. Value-oriented retailers
• Strategy 3: Value Orientation do not merely seek a middle position between
the low-cost and differentiation strategies, an
"Wal-Mart might offer a htXX&v price, but we approach Porter (1985) suggested can leave
offer a better value." competitors stuck in the middle. Alternatively,
Rather than focus solely on costs and prices or such retailers consciously seek cost and price
means of differentiation, a distinct approach positions that may be nominally higher than
seeks to blend the two into a superior value those of big boxers like Wai-Mart, but also
proposition for the retailer. Such rivals compete enhance their offerings so that additional value is
on the basis of value by controlling costs vigor- created. Store managers can be trained to recog-
ously whenever such costs do not directly and nize pricing opportunities or vulnerabilities in
significantly enhance the attractiveness ofptod- their individual markets. In addition, supply
ucts or .services. Value can be viewed as a form chains must be examined, labor deployment
of differentiation, but it is distinguished by its managed, and overhead wastes eliminated if this
co-emphasis on cost leadership. value orientation is to be viable (Rigby and
Value can be expressed as the ratio of per- Haas, 2004).
ceived worth to price and can rise when the In a study of independent drugstores, McGee
product or service's perceived worth increases or and Peterson (2000) found that competitive

SPRING 2008 21
advantage could be achieved through ati image originated with Sam Walton's son, Rob, but was
of high-quality service. This perception of high propelled to fruition by two things: Wal-Mart
quality by the customer is driven by an ability to has been fending off criticism for its environ-
act decisively, control retail programs related to mental unfriendliness for years, costing it ap-
price, and overwhelm customers with service, proximately 8% of its former customers, and the
particularly the handling of complaints. They "green" strategy might just save the firm money
reported thai these drugstores were successful in the long run.
tlirough the implementation of three compe- These challenges can be addressed success-
tency-based constructs and only one perfor- fully, however, when retailers understand how
mance-based construct. their resource strengths and weaknesses compare
Arkansas-based grocer Harp's, for example, with those of the big boxer. Under certain situa-
has grown to about 50 stores by maintaining tions, a retailer may be successful by focusing
competitive prices, but also emphasizing service on a market niche in conjunction with either low
and freshness. By maintaining price levels close costs or differentiation, or by incorporating a
to those at Wal-Mart, Harp's is able to lure value orientation. Dynamic strategic positioning
customers who are willing to pay a little more models can also be utilized to augment these
for enhanced services and produce freshness. approaches. By emphasizing flexibility and
Harp's has discovered how to balance price and adaptability, a dynamic strategy approach can
other competitive factors to produce value for its enable a small, nimble firm to respond to indus-
customer base. try and environmental changes more rapidly than
big boxers like Wal-Mart.
Conclusions Although a number of published studies have
The Wal-Mart footprint has created numerous identified various examples of retailers that have
challenges for competitors, particularly small competed effectively with big boxers like Wal-
retailers whose managers are not well prepared Mart, no panacea has emerged. This paper
when the big boxer opens a store nearby. In provides a number of examples as well, but
2006, Wal-Mart began to implement a low-cost/ integrates them with three strategic approaches
differentiation strategy, focusing at first on six built on existing theory. A focus—differentiation
demographic groups in the U.S. (Zimtnerman, strategy may be the most intuitively appealing
2006). The decades-old layaway plan was dis- for many retailers. Indeed, this basic approach
continued and a celebrity line of home decor seems to be the strategy of choice for many
from Colin Cowie was added (Kabel, 2006). researchers investigating the big box phenom-
Store upgrades include specialists in the area of enon, although it is not optimal for all retailers.
electronics for consumers interested in those big When a retailer combines this approach with a
ticket items, products targeting Hispanic shop- flexible, dynamic competitiveness perspective,
pers, more upscale merchandise for affluent such as the development of a network of suppli-
consumers such as those who shop at the Piano. ers that provide enough variety to rotate several
Texas. Wal-Mart, and a better variety of products product-supported themes through the store
that appeal directly to the African-American during the year, providing a different look every
community {Zimmemian, 2006). Early indica- few months, it can devise a strategy that a big
tions of this attempt to attract upscale consumers boxer cannot duplicate. However, Wal-Mart's
to the supercenters are negative as It appears the recent interest in smaller iind higher-end stores
strategy is not taking hold (McWilliams. 2007b). — if executed — might create a strategic re-
As if this wasn't daunting enough. Wal-Mart sponse problem for smaller, higher-end competi-
has embarked on a "green" strategy of environ- tors {McWilliams, 2007b).
mental conservation and protection that not only The most appropriate strategic approach
includes its stores but also the suppliers of its depends on the firm and its unique situation.
product lines (Gunther, 2006). Early goals in- Indeed, each strategy has its own strengths and
clude 25% increased vehicle efficiency, 30% vulnerabilities, as summarized in Table 1. A
reduction in energy consumed by stores, and a focus—low cost strategy can be attractive be-
25% reduction in solid waste. Eventually, CEO cause it limits the areas in which a retailer must
Lee Scott wants to get rid of chemicals in the air compete with Wal-Mart on price, but it is highly
around production facilities, smog in cities, and vulnerable to a competitive response because it
anything bad that is now going into a river relies on the very strategic dimension that is core
(Gunther, 2006). The concept of going green to the big boxer's success, low price. On the

22 SAM ADVANCED MANAGEMENT JOURNAL

 Table 1. Strategic Response Alternatives for Confronting Wal-Mart
Strategy Attractiveness Vulnerability Examples

Focus-Low Cost: A moderate size retailer may complete HIGH: Competing with Grocers Aldi and Save-A-
effectively with Wal-Mart on price Wal-Mart on the basis of Lot generate substantial
"We can heat Wal- volume by offering a limited
when proper product-line decisions costs—even with a focus
Mart at its own are made. Tliis strategy can be product line of no-trills
orientation—can make a
game as long as we effective when a retailer has products targeted to low-
retailer vulnerable to price
fight on our own experience serving a distinct customer income consumers.
competition.
turf." market and the ability to amass
sufficient volume to be price
competitive.

Focus- A smaller retailer may compete LOW: If Wal-Mart lacks A bicycle shop oOers high-
Differentiation: efTectively with Wal-Mart in market the expertise or interest quality bicycles,
segments where the giant retailer Is necessary to fulfill the accessories, and expertise,
"Wai-Marl simply unwilling or unable to fulfill customer needs of a particular or a paint store offers expert
cannot meet the market niche, it is advice and interior design
needs. Prt>ducl advice and service, for
needs of our
example, maybe substandard in many possible to avoid direct advice not available at Wal-
customers."
product areas at Wal-Mart. competition. Mart.

Value Oricntatiou: Factors such as service, expertise, and MODERATE: If Wal- AutoZone's prices are
delivery are very Important in some Mart can offer lower typically a little higher than
""Wal-Mart might product lines. If Wal-Mart lacks the prices and the those at Wal-Mart, but its
offer a better price, infrastructure to address these factors, convenience of one-stop product line is much more
iyui we offer a better a small retailer with a moderate level shopping, offering a better extensive and its sales
value." of volume may be able to be value will be ditficult. personnel can provide the
somewhat price competiiive while expertise and advice
excelling in other areas important to necessary to help customers
customers. repair their vehicles.

Other hand, a focus—differentiation strategy can could occur to Wal-Mart, but there are prece-
be attractive to many retailers because it avoids dents for such a result. Clearly Circuit City, a
direct competition with Wal-Mart, thereby pioneer in the supercenter concept for electron-
eliminating the low-price vulnerability. A value- ics and sophisticated point-of-scale systems, has
orientation strategy can be attractive because it been outpaced by Best Buy for several years, as
enables a retailer to blend price competitiveness Best Buy has taken Circuit City's model and
with other resource strengths in its competitive updated it, improved it. and made it more hip for
positioning. Its vulnerability is moderate, how- younger consumers.
ever, as Wai-Mart also excels in a form of value There is no substitute for knowing one's
orientation based primarily on low price. customers, markets, and resources as a founda-
Purely as an aside, there is one other option tion for formulating a successful strategy. Such
that isn't nonnally discussed regarding Wal- knowledge becomes the input for crafting and
Mart's strategic vulnerability. With the recent refinitig a retailer's competitive strategy regard-
interest of Tesco PLC food markets and Japan- less of the strategic option chosen. As such,
based FamilyMart convenience stores in Califor- there is more than one way a retailer can imple-
nia, foreign-based retailers are expanding their ment each of the three strategic options.
U.S. presence (MeWilliams. 2007a). Is it pos- Future research on retailer survival vis-a-vis
sible for some firm, foreign or domestic, to take Wal-Mart should focus on models for assessing
its core business, such as groceries for Kroger or resource strengths and weaknesses so that an
Tesco, and expand its dry goods offerings to optimal strategic response can be incorporated.
eventually rival Wal-Mart? Perhaps a foothold in Regardless of the option chosen, a successfui
regional markets where Wal-Mart has not fared strategy can only be developed when a retailer
well, such as California or New York, could has the appropriate knowledge and tools re-
provide a base for a gradual expansion across the quired to make the best choice and tailor it
U.S. and beyond. It seems somewhat unlikely specifically to the firm's unique array of strate-
that a competitive threat of global proportions gic resources.'

SPRING 2008 23
Dr. Parnell has published over 200 basic and Kawasaki. G. (1995). How to drive yotir competition crazy.
New York: Wesley Publishing.
applied reseaich articles, presentations, and
Lado. A., Boyd, N., :ind Wright, P. (1992). A competency-
cases in strategic management and related based model of sustainable competitive advantage: Toward
areas. Dr. Lester has published works in numer- a conceptual integration. Journal of Management, IH( \),
ous journals in the fields of strategic manage- 77-91.
ment, entrepreneurship. and organizational Mallaby, S. (2005. November 29). Wal-Mart: A progressive
theory. dream company, really. Fayetteville Ohsen>er, p. 11 A.
McCune. J. C. (1994). Inthe shadow of Wal-Mart. Manaj?f-
REFERENCES ment Review. S3{\2), 10-16.
Adamy, J. (2005, August 30). To fmd growth, no-frills grocer McGee, J. E. and Peterson, M. (2000). Toward the develop-
goes where other chains won't. Wall Street Journal, pp, ment of measures of distinctive competencies among small
A1.A8. independent retailers. Journal of Small Business Manage-
Bain, J.S. (1968). Industrial Organization. New York. Wiley. ment. Ml). 19-33.
Barnett, M.L. (2006). Finding a working balance between McGee. J,E.. and Rubach, MJ. (1996/1997). Responding to
competitive and communal strategies. Journal of Manage- increased environmental hostility: A study of the com-
ment Studies. 4.i. 1753-1773. petitive behavior or small retailers. Journal of Applied
Bamey, J.B. (1986). Strategic factor markets: Expectations, Bu.siness Research. IS{ 1). 83-94.
luck, and business strategy. Management Science. 42. McGirt. E. (2006). A banner year. f>»-mHc. }53{1), 192-195.
1231-1241. McWilliams. G. (2007a. October 3). Wal-Mart era wanes amid
Barta. S.. Martin, J, Frye. J., and Woods, M.D. (1999). Trends shifts in retail. Wall Street Journal. AL
in retail trade. Stillwater. Oklahoma: Cooperative Exten- McWilliams, G. (2()O7b. August 17). Wal-Mart eyes smaller
sion Service. and higher-end stores. Wall Street Journal, BI.
Berman. D.. Adamy. J.. and Sender. H. (2tX)5. March 16). Novak, R. (2006, September 18). Chicago mayor shows la-
Cerberus nears deal for Albertson 's. Wall Street Journal. bor lagging in Wal-Mart vote. Daily News Journal, B2.
A3, A15. Porter. M.E. (1980). Competitive .strategy. New York: Free
Camerius. J. (2006). Wal-Mart stores. Inc.: On becoming the Press.
world's largest company. In T, Wheelen, and J.D. Hunger, Quinn, B. (2000). How Wal-Mart is destroying America. Ber-
Cases in Strategic Management and Business Policy. Up- keley. CA..Ten Speed Press.
per Saddle River, NJ: Pearson Prentice Hall. p. 18-1-18- Raymond. J. (1999. January). The millennial mind-set. Ameri-
21. can Demographics, 60-65.
Chittum.R. (2005, March 1). Anchors away! Wall Street Jour- Revell, J. (2005). Up, up. and away. Fortune, /5/(8), 232-
nal On-Line Edition. 236.
Crawford. F. and Mathews. R. (2001). The myth of excel- Rigby. D., and Haas, D. (2004). Outsmarting Wal-Mart.
lence. New York: Crown Business. Harvard Business Review, S2( 12). 22-26.
Edid. M. (2005). The Good, the bad. and Wal-Mart. Ithaca. Selsky, J.W., Goes, J., and Baburoglu. O.N. (2007). Contrast-
NY: Cornell University Institute of Workplace Studies. ing perspectives of strategy making: Applications in
Etter, L. (2005. December). Gauging the Wal-Mart effect. Wall 'hyper'envimnments. Organization Studies. 28. 71-94,
Street Journal. 3—4, p. A9. Seth, A., and Thomas, H. (1994). Theories of the finn: Impli-
Fiegenbaum. A., and Thomas, H. (2004). Strategic risk and cations for strategy Tsaearch. Journal of Management Stud-
competitive advantage: An integrative perspective. Euro- ies. 31. 165-191.
pean Management Review. 1(1). 84-95. Spector, R. (2001). Lessons from the Nordstrom way. New
Fishman, C. (2003). The Wal-Mart you don't know. Fast York: Wiley and Sons.
Company, 77.68. Spector. R. (2005), Category killers. Boston, Harvard Busi-
Grantz. R.B., and Mintz. N. (1998). Cities backfrom the edge. ness School Press.
New York. Preservation Press. Stone. K.E. (1993). Impact of the Wal-Mart phenomenon on
Goldberg. J. (2006. August 25). Dems have bad case of rural communities. Increasing Understiuiding of Public
WMDS. The Commercial Appeal. AlO. Problems and Policies, Chicago.
Gunther, M. (2006). The green machine. Fortune, 154(3). 42- Useem. J, (2007). The big get bigger. Fortune, /55(8), 81 -84.
57. Will. G. (2006a. January 19). Union's touch is felt in Wal-
Hannaford, S. (2005). Both sides now. Harvard Business Mart legislation. Daily News Journal. B2.
W*T/CM,83(3). 17. Will. G. (2006b, September 15). Liberals can't handle deals
Hawawini. G.. Subramanian, V., and Verdin. P. (2003). Is at Wal-Mart. Daily News Journal. B2.
performance driven by industry — or firm-specific fac- Willing. W. (2001, August 13). Lawsuits a volume business
tors? A new look at the evidence. Strategic Management at Wal-Mart. USAToday.com.
Journal. 24. 1-16. York, B. (2(K)5. November 23). Panic in a small town. Na-
Kabel. M. (2006, September 15). Wal-Mart ends layaway plan, tional Review (on-line).
adds celebrity decor line. USA Today, 9A.
Kaplan. E. A. (2006. August 25). Wal-Mart mouthpiece gags
on his foot. The Commercial Appeal, AlO.

24 SAM ADVANCED MANAGEMENT JOURNAL