Module 5: Competitive advantage

Grant - The Sources and Dimensions of Competitive Advantage

In the previous three chapters we’ve looked at some of the key components of competitive advantage-
Chapters 3 and 4 looked at the external sources of competitive advantage, in particular, the role and
the nature of key success factors. Chapter 5 looked at the resources and capabilities within the firm
upon which competitive advantage is based.

In this chapter, we bring together these aspects of competitive advantage in order to look at two main
themes. The first of these is to look at the processes through which competitive advantage emerges, is
eroded, and can be sustained. Here, we are putting particular emphasis on the role of strategic
innovation in creating new sources of competitive advantage. Second, we will be looking at the two
major dimensions of competitive advantage - cost advantage and differentiation advantage - and
providing a systematic framework with which we can look at the potential for a firm to establish cost
advantage and differentiation advantage.

Chapter 7 - The Sources and Dimensions of Competitive Advantage

- If you don’t have a competitive advantage - don’t compete. - CEO General Electric
- In this chapter, we integrate and develop the elements of competitive advantage that we have analyzed
in previous chapters.
- Chapter 1 noted that a firm can earn superior profitability either by locating in an attractive industry or
by establishing a competitive advantage over its rivals. Of these two, competitive advantage is the
most important.
- Very few industry environments can guarantee secure returns; hence, the primary goal of a strategy is
to build competitive advantage for the firm.
- Chapter 3 analyzed the external sources of competitive advantage: the determinants of the key success
factors within a market.
- Chapter 5 analyzed the internal sources of competitive advantage: the potential for the firm’s
resources and capabilities to establish and sustain competitive advantage.

How is competitive advantage established?

- Competitive advantage refers to a firm’s ability to outperform its rivals.
- Competitive advantage can be defined broadly in terms of a firm’s superiority in creating value for its
stakeholders, or more narrowly in terms of profitability.
- Taking the simple approach, competitive advantage can be defined as: a firm’s potential to earn a
higher rate of profit than its direct competitors. Emphasis on the potential - a firm may forgo current
profit in favor of investing in market share, technology, customer loyalty, or executive perks.
- In 1998-2007 Amazon earned a net loss despite its obvious competitive advantage. They had forgone
profit in favor of sales growth.
- Competitive advantage is a disequilibrium phenomenon: it is created by change and, once established,
it sets in motion the competitive process that leads to its destruction.
- The changes that generate competitive advantage can be either internal or external.
- External changes create competitive advantage when they have differential effects on companies
because of their different resources and capabilities or strategic positioning.
- For example, reducing subsidies for renewable energy will enhance the competitive advantage of
power producers that use fossil fuels over the wind and solar power producers.
- The greater the magnitude of the external change and the greater the difference in the strategic
positioning of firms, the greater the propensity for external change to generate competitive
advantage.
- The world’s beer brewing industry has a relatively stable external environment and the leading firms
pursue similar strategies with similar resources and capabilities: differences in profitability among
these groups tend to be small and stable.
- The major toy companies on the other hand, comprise a heterogeneous group that experience
unpredictable shifts in consumer preferences, resulting in wide and variable profitability differences.
- The emergence of competitive advantage:

- The competitive advantage that

arises from external change also depends on firms’ ability to respond to change.
- Entrepreneurial responsiveness involves one of two key capabilities:
● Anticipation. IBM has demonstrated a remarkable ability to renew its competitive advantage
through anticipating, and then taking advantage of, many of the major shifts in the IT sector.
● Agility. As markets become more turbulent and unpredictable, quick-response capability has
become increasingly important as a source of competitive advantage. Quick responses require
information and “early-warning systems” can be through contact with customers, suppliers, and
competitors, to compress their cycle times so that information can be acted upon speedily.
- Zara has built a vertically integrated supply chain that cuts the time between a garment’s design and
retail delivery to under three weeks (against an industry norm of three to six months).
- The Boston Consulting Group termed this concept time-based competition.
- Competitive advantage may also be generated internally through innovation which creates
competitive advantage for the innovator while undermining previously established competitive
advantages—the essence of Schumpeter’s “creative destruction.”
- Business model innovation
- Strategic innovation has long been recognized as an important source of competitive advantage.
- McKinsey made the distinction between “same game” strategies (“playing by the traditional rules”)
and “new game” strategies (“rewriting them completely”).
- More recently, the term business model innovation has been used to describe the introduction of novel
approaches to creating and/or capturing value within an industry.
- Most new companies entering the Fortune 500 between 1997 and 2007 owed their success to
innovative business models.
- These innovative business models are a variation on a theme or the transfer of an existing business
model from a different sector.
- Business model innovations can be classified in different ways with three generic types:
- New industry models - reconfiguration of the conventional industry value chain such as Zara’s
vertically integrated fast-fashion strategy.
 - New revenue models - changing the value proposition, the target audience or pricing strategy such

as Rolls Royce’s “Power by the hour”.

- New enterprise models - involve reconfiguring enterprise boundaries and partner relationships.
- Conceiving of business model innovations is much easier than implementing them.
- Implementing business model innovations comes up against the resistance created by commitment to
the prevailing business model.
- Established companies may be reluctant to experiment with new business models because of their
adherence to current asset allocations or to senior executives ‘perceptions of the “dominant logic” of
their business.
- Business models offer a narrative that can be used, not only to simplify cognition, but also as a
communication device creating a sense of legitimacy around the initiative.
- Moreover, adopting new business models does not necessarily involve abandoning existing models—
increasingly companies are getting used to operating multiple models.
Examples of Business model innovations
Business model innovations are typically associated with e-commerce businesses such as Google,
eBay, Facebook, Amazon, and Spotify. Yet, many of these business models are variants on
business models established much earlier. Significant business model innovations include the
following:
- Free content supported by paid advertising
- Platform business models
- Shared-ownership model
- Franchising
- Consumer cooperatives
- Microfinance (small loans to low-income business owners)
- Tied products (razor-and-blades) model
- Mail order

- Blue ocean strategy

- An alternative approach to identifying the potential for strategic innovation is the blue ocean strategy
involving a quest for “uncontested market space”.
- Creating untapped market space doesn’t necessarily require finding new market opportunities, blue
oceans can also be created within existing markets.
- The challenge is “to create new rules of the game by breaking the existing value/cost trade-off.
- Common to many blue ocean strategies is offering superior customer value through reconciling low
price with differentiation.
Creators of the Blue ocean strategy argue that the best value-creating opportunities for business lie
not in existing industries following conventional approaches to competing, but seeking
uncontested market space. These “blue oceans” may be entirely new industries created by
technological innovation but are more likely to be the creation of new market space within
existing industries using existing technologies. This may involve:
- New customer segments for existing products
- Reconceptualization of existing products
- Novel recombinations of product attributes and reconfigurations of established value
chains that establish new positions of competitive advantage.

The strategy canvas is a framework for developing blue ocean strategies. The horizontal axis
shows the different product characteristics, the vertical axis shows the amount of each
characteristic a firm offers its customer. The challenge is to identify a strategy that can provide a
 novel combination of attributes. This involves four types of choice:
◆ Raise: What factors should be raised well above the industry’s standard?
◆ Eliminate: Which factors that the industry has long competed on should be eliminated?
◆ Reduce: Which factors should be reduced well below the industry’s standard?
◆Create: Which factors should be created that the industry has never offered?

The strategy canvas: Value lines for Cirque du Soleil and the traditional circus

How is competitive advantage sustained?

- Once established, competitive advantage is eroded by competition. The speed with which competitive
advantage is undermined depends on the ability of competitors to challenge either by imitation or
innovation.
- Imitation is the most direct form of competition; hence, for competitive advantage to be sustained
over time, barriers to imitation must exist.
- The term isolating mechanisms are used to describe the barriers that prevent the erosion of a
business’s superior profitability. Isolating mechanisms can be very effective!
- For one firm to successfully imitate the strategy of another, it must meet four conditions:
1. It must identify the competitive advantage
of a rival
2. It must have an incentive to imitate
3. It must be able to diagnose the sources of
the rival’s competitive advantage
4. It must be able to acquire the resources and
capabilities necessary for imitation.
- At each stage, the incumbent can create isolating
mechanisms to impede the would-be imitator.
- Obscuring superior performance
- A simple barrier to imitation is to obscure the firm’s superior profitability.
- “One way to throw competitors off balance is to mask high performance so rivals fail to see your
success until it’s too late.”
- For example, one of the attractions of private company status is avoiding disclosure of financial
performance.
- In order to discourage new competitors, companies may forgo maximizing their short-term profits.
- The theory of limit pricing, in its simplest form, postulates that a firm in a strong market position sets
prices at a level that just fails to attract entrants.
- Deterrence and preemption
- A firm may avoid competition by persuading potential rivals that imitation will be unprofitable.
- Deterrence involves making threats. For deterrence to work, the threats must be clearly signaled,
backed by commitment, and credible.
- A firm can also deter imitation by preemption—occupying existing and potential strategic niches to
reduce the range of investment opportunities open to the challenger. Preemption may include:
* Proliferation of product varieties by market leaders leaving few niches for new entrants and
smaller rivals to occupy.
* Investing in underutilized production capacity.
* Patent proliferation can limit competitors' innovation opportunities.
- Causal ambiguity and uncertain imitability
- If a firm is to imitate the competitive advantage of another, it must understand the basis of its rival’s
success. For example, Walmart does many things differently, but which of these differences are the
critical determinants of superior profitability?
- The term causal ambiguity refers to when a firm’s competitive advantage is multidimensional and is
based on complex bundles of resources and capabilities, it is then difficult for rivals to diagnose the
success of the leading firm.
- The outcome of causal ambiguity is uncertain imitability and hence successful imitation is uncertain.
- The problems of strategy imitation may run even deeper.
- capabilities are the outcome of complex combinations of resources and that multiple capabilities
interact to confer competitive advantage and interactions extend across the whole range of
management practices.
- Where activities are tightly linked within a particular competitive environment, a number of fitness
peaks will appear, each associated with a unique combination of strategic variables.
- To locate on the same fitness peak as another firm not only requires recreating a complex
configuration of strategy, structure, management systems, leadership, and business processes, but
also means that getting it just a little bit wrong may result in the imitator missing the fitness peak
and finding itself in an adjacent valley.
- One of the challenges for the would-be imitator is deciding which management practices are generic
best practices and which are contextual—they only work in combination with other management
practices.
- Acquiring resources and capabilities
- Having diagnosed the sources of an incumbent’s competitive advantage, the imitator’s next challenge
is to assemble the necessary resources and capabilities for imitation.
- A firm can acquire resources and capabilities either by buying them or by building them.
- The imitation barriers here are limits to the transferability and replicability of resources and
capabilities.
Competitive advantage in different market settings
Competitive advantage arises where there are imperfections in the competitive process, which in
turn result from the conditions under which essential resources and capabilities are available. We
distinguish between two types of value-creating activity: trading and production.

In trading markets, the limiting case is efficient markets, which correspond closely to perfectly
 competitive markets. If prices reflect all available information and adjust instantaneously to new
information, no market trader can expect to earn more than any other. In other words, competitive
advantage is absent. This reflects the conditions of resource availability. Both of the resources
needed to compete—finance and information—are equally available to all traders.

Competitive advantage in trading markets requires imperfections in the competitive process:

◆ Where there is an imperfect availability of information, competitive advantage results from
superior access to information—hence the criminal penalties for insider trading in most
advanced economies.
◆ Where transaction costs are present, competitive advantage accrues to the traders with the
lowest transaction costs.
◆ If markets are subject to systematic behavioral trends competitive advantage accrues to traders
with superior knowledge of market psychology or of systematic price patterns.

In production markets, the potential for competitive advantage is much greater because of the
complex combinations of the resources and capabilities required, the highly differentiated nature
of these resources and capabilities, and the imperfections in their supply.

Cost advantage
- A firm can achieve a higher rate of profit over a rival in one of two ways:
1. supply an identical product or service at a lower cost (cost advantage)
2. supply a product or service that is differentiated in such a way that the customer is willing to pay
a
price premium that exceeds the additional cost of the differentiation (differentiation advantage).
- In pursuing cost advantage, the goal of the firm is to become the cost leader in its industry/segment.
- Cost leadership requires the firm to “find and exploit all sources of cost advantage [and] sell a
standard, no-frills product.”
- Differentiation by a firm from its competitors is achieved “when it provides something unique that is
valuable to buyers beyond simply offering a low price.”
- By combining the two types of competitive advantage with the firm’s choice of scope—broad market
versus narrow segment—Michael Porter has defined three generic strategies: cost leadership,
differentiation, and focus.
- Historically, strategic management has emphasized cost advantage which reflects the traditional
emphasis by economists on price as the principal medium of competition and the quest to to exploit
economies of scale and scope through investments in mass production and mass distribution.
- This preoccupation with cost advantage was reinforced during the 1970s and 1980s when the
experience curve became a widely-used tool of strategy analysis
- Since then, increasing low-cost competition from emerging market countries has resulted in Western
firms adopting a number of new approaches to cost reduction, including outsourcing, offshoring,
process re-engineering, lean production, and organizational delayering.
- Sources of competitive advantage: Porter’s generic strategies:

-
 BCG and the experience curve
-The experience curve has its basis in the systematic reduction in the time taken to build airplanes
and Liberty ships during World War II.
-BCG observed a remarkable regularity in the reductions in unit costs with increased cumulative
output.
-Its law of experience states: the unit cost of value added to a standard product declines by a
constant percentage (typically between 15% and 30%) each time cumulative output doubles.
-The experience curve has important implications for strategy. If a firm can expand its output faster
than its competitors can, it can move down the experience curve more rapidly and open up a
widening cost differential.
-BCG recommended that a firm’s primary strategic goal should be driving volume growth through
increasing its market share.
-The weaknesses of the experience curve as a strategy tool are, first, it fails to distinguish several
sources of cost reduction (learning, scale, process innovation); second, it presumes that cost
reductions from experience are automatic—in reality they must be managed.
- There are seven principal determinants of a firm’s unit costs (cost per unit of output) which are
referred to as cost drivers.
- The relative importance of these different cost drivers varies across industries, between firms within
an industry, and across the different activities within a firm.
- By examining each of these different cost drivers in relation to a particular firm, we can analyze a
firm’s cost position relative to its competitors’, diagnose the sources of inefficiency, and make
recommendations as to how a firm can improve its cost efficiency.
- Economies of scale
- The predominance of large corporations in most manufacturing and service industries is a
consequence of economies of scale.
- The point at which most scale economies are exploited is the minimum efficient plant size (MEPS).
- The drivers of cost advantage

- Scale economies arise from three principal sources:

1. Technical input-output relationships
2. Indivisibilities: Many resources and activities are “lumpy”—they are unavailable in small sizes.
Hence, they offer economies of scale as firms are able to spread the costs of these items over larger
volumes of output. In R&D, NPD, and advertising, market leaders tend to have much lower costs as
a percentage of sales than their smaller rivals.
3. Specialization: Increased scale permits greater task specialization. Specialized workers using
 specialized equipment and division and labour are especially important in knowledge-intensive
industries.
- Scale economies are a key determinant of an industry’s level of concentration. In many consumer
goods industries, scale economies in marketing have driven industry consolidation.
- In other industries - especially aerospace, automobiles, software - economies of scale arise from the
huge costs of new product development.
- In industries where scale economies are important, small- and medium-sized companies can avoid
disadvantages of small scale by outsourcing activities where scale is critical.
- Economies of learning
- The experience curve has its basis in learning-by-doing. Repetition develops both individual skills and
organizational routines.
- Learning occurs both at the individual level through improvements in dexterity and problem solving
and at the group level through the development and refinement of organizational routines.
- Process technology and process design
- Superior processes can be a source of huge cost economies.
- Ford’s moving assembly line reduced the time taken to assemble a Model T from 106 hours in 1012
to 6 hours in 1914.
- When process innovation is embodied in new capital equipment, diffusion is likely to be rapid.
However, the full benefits of new process technologies typically require system-wide changes.
- Toyota’s system of lean production, which GM sought to imitate, relies less on advanced automation
than on work practices such as just-in-time scheduling, total quality management, continuous
improvement (kaizen), teamwork, job flexibility, and supplier partnerships.
- Business process re-engineering (BPR) is an approach to redesigning operational processes
- BPR recognizes that processes can evolve haphazardly, hence, BPR begins with the question: “If we
were starting afresh, how would we design this process?”
- BPR can lead to major gains in efficiency, quality, and speed.
- In recent years, BPR has been partly superseded by business process management, where the
emphasis has shifted from workflow management to the broader application of information tech-
nology to the redesign and enhancement of organizational processes.
- Product design
- Design-for-manufacture—designing products for ease of production rather than simply for
functionality and esthetics—can offer substantial cost savings.
- Service offerings, too, can be designed for ease and efficiency of production.
- However, efficiency in service design is compromised by the tendency of customers to request
deviations from standard offerings.
- Capacity utilization
- Over the short and medium terms, plant capacity is more or less fixed and variations in output causes
capacity utilization to rise or fall. Underutilization raises unit costs.
- Pushing output beyond normal full capacity also creates inefficiencies.
- Input costs
- There are several reasons why a firm may pay less for an input than its competitors:
- Locational differences in input prices
- Ownership of low-cost sources of supply
- Non-union labor (labor unions result in higher levels of pay and benefits and work rules that can
lower productivity)
- Bargaining power (the ability to negotiate preferential prices and discounts
- Residual efficiency
- Even after taking account of the basic cost drivers—scale, technology, product and process design,
input costs, and capacity utilization—unexplained cost differences between firms typically remain.
- These residual efficiencies depend on the firm’s ability to eliminate “organizational slack” or “X-
inefficiency”.
- Eliminating these excess costs often requires a threat to a company’s survival.

Using the value chain to analyze costs

- Each activity tends to be subject to a different set of cost drivers, which give it a distinct cost
structure. A value chain analysis of a firm’s costs seeks to identify:
● the relative importance of each activity with respect to total cost;
● the cost drivers for each activity and the efficiency for the performance of each activity;
● how costs in one activity influence costs in another;
● which activities should be undertaken within the firm and which activities should be outsourced.
- A value chain analysis of a firm’s cost position comprises the following stages:
1. Disaggregate the firm into separate activities: Which activities are separate from one another,
which are the most important in terms of cost…
2. Estimate the cost that each activity contributes to total cost.
3. Identify cost drivers: For each activity, what factors determine the level of unit cost relative to
other firms? For activities with large fixed costs, the principal cost driver is likely to be the ability to
amortize costs over a large volume of sales. For labor-intensive activities, key cost-drivers tend to be
wage rates, process design, and defect rates.
4. Identify linkages: The cost of one activity may be determined, in part, by the way in which other
activities are performed.
5. Identify opportunities for reducing costs

Differentiation advantage
- A firm differentiates itself from its competitors “when it provides something unique that is valuable to
buyers beyond simply offering a lower price.”
- Differentiation advantage occurs when the price premium that the firm earns from differentiation
exceeds the cost of providing the differentiation.
- Cement, wheat, and memory chips are all classified as commodities because they lack physical
differentiation.
- However, “Anything can be turned into a value-added product or service”. For example:
* Cement is the ultimate commodity product, yet Cemex has become a leading worldwide supplier
of cement and ready-mix concrete through emphasizing “building solutions”—one aspect of which
is ensuring that 98% of its deliveries are on time (compared to 34% for the industry as a whole).
* Online bookselling is inherently a commodity business. Yet, Amazon has exploited the
information generated by its business to offer a range of value-adding services: best-seller lists,
reviews,a dn customized recommendations.
- The lesson is this: differentiation is not simply about offering different product features; it is about
identifying and understanding every possible interaction between the firm and its customers and
asking how these interactions can be enhanced or changed to deliver additional value. This requires
looking at both the firm (the supply side) and its customers (the demand side).
- While supply-side analysis identifies the firm’s potential to create uniqueness, the critical issue is
whether such differentiation creates value for customers and whether the value created exceeds the
cost of the differentiation.
- Differentiation is about understanding customers and how to best meet their needs.
- The fundamental issues of differentiation are also the fundamental issues of business strategy: Who
are our customers? How do we create value for them? And how do we do it more effectively and
efficiently than anyone else?
- Since differentiation is about uniqueness, establishing a differentiation advantage requires creativity.
- There are two requirements for creating profitable differentiation. On the supply side, the firm must
be aware of the resources and capabilities through which it can create uniqueness (and do it better
than competitors).
- On the demand side, the key is insight into customers and their needs and preferences.
- Using the value chain in cost analysis:

-
- The potential for differentiating a product or service is partly determined by physical characteristics.
- For products that are technically simple, satisfy uncomplicated needs, or must meet rigorous technical
standards, differentiation opportunities are constrained by technical and market factors.
- Products that are technically complex, that satisfy complex needs, or that do not need to conform to
particular technical standards fofer much greater scope for differentiation.
- Beyond these constraints, the potential in any product or service for differentiation is limited only by
the boundaries of the human imagination.
- Starbucks’ ability to charge up to $5 for a cup of coffee (compared to $1 at Burger King) reflects, not
just the characteristics of the coffee, but also the overall “Starbucks Experience”.
- Differentiation includes both tangible and intangible dimensions.
- Tangible differentiation is concerned with the observable characteristics of a product or service that
are relevant to customers’ preferences and choice processes: for example, size, shape, color, weight,
design, material, and performance attributes.
- Tangible differentiation also extends to products and services that complement the product.
- Opportunities for intangible differentiation arise because the value that customers perceive in a
product is seldom determined solely by observable product features or objective performance
criteria.
- For consumer goods and services, the desire for status, exclusivity, individuality, security, and
community are powerful motivational forces.
- Image is especially important for those products and services whose qualities and performance are
difficult to ascertain at the time of purchase (so-called experience goods).
- Differentiation is concerned with how a firm competes—the ways in which it can offer uniqueness to
customers. Such uniqueness might relate to consistency (McDonald’s), reliability (Federal Express),
status (American Express), quality (BMW), and innovation (Apple).
- Segmentation is concerned with where a firm competes in terms of customer groups, localities, and
product types.
- Whereas segmentation is a feature of market structure, differentiation is a strategic choice made by a
firm. Differentiation may lead to focusing upon particular market segments, but not necessarily.
- Differentiation offers a more secure basis for competitive advantage than low cost does.
- A position of cost advantage is vulnerable to adverse movements in exchange rates and to new
competitors taking advantage of low input costs and new technologies.
- Analyzing differentiation: The demand side
- Analyzing customer demand enables us to determine which product characteristics have the potential
to create value for customers, customers’ willingness to pay for differentiation, and a company’s
optimal competitive positioning in terms of differentiation variables.
- The key to successful differentiation is to understand customers. This requires the analysis of
customer preferences in relation to product attributes. Techniques include:
- Multidimensional scaling (MDS) compares competing products in terms of key product attributes.
- Conjoint analysis measures the strength of customer preferences for different products which then

allows consumer preference for a hypothetical new product to be predicted.

- Hedonic price analysis views products as bundles of underlying attributes. For example, price
differences between models of computers reflect differences in processor speed, memory, and
capacity. This analysis can be used to decide what levels of each attribute to include within a new
product and the price for each product.
- Analyzing product differentiation in terms of measurable performance attributes fails to take account
of customers’ underlying motivations. Most buying is influenced by social and psychological
motivations.
- It is important to ask the right questions when formulating strategy. It is vital to establish a
competitive advantage, but concentrating upon what competitors are doing can lock a company into
conventional ways of thinking.
- Rather than a futile attempt to match Sony and Microsoft on computing power, graphics, or virtual
reality, Nintendo has concentrated on enhancing users’ gaming experiences. This has allowed it to
discover differentiation opportunities that don’t depend upon advanced micro-electronics.
- For most goods, brand equity has more to do with higher-level needs such as status and identity than
with tangible product performance.
- The disastrous introduction of “New Coke” in 1985 was the result of Coca-Cola giving precedence to
tangible differentiation (taste preferences) over intangible differentiation (authenticity).
- Harley-Davidson is in the business of selling lifestyle, not transportation.
- The implications for differentiation are that we must analyze not only the product and its
characteristics but also customers, their lifestyles and aspirations.
- Market research that focuses upon traditional demographic and socioeconomic factors may be less
useful than a deep understanding of consumers’ relationship with a product.
- Companies are drawn to corporate social responsibility as a means of protecting and augmenting the
value of their brands.
 - Analyzing differentiation: The supply side
- Creating a differentiation advantage also depends on a firm’s ability to offer differentiation.
- The Drivers of Uniqueness:
- Differentiation is concerned with providing customers with uniqueness and opportunities for
providing uniqueness can arise in virtually everything that the firm does, including:
● product features and product performance;
● complementary services (such as credit, delivery, repair);
● intensity of marketing activities (such as rate of advertising spending);
● technology embodied in design and manufacture;
● quality of purchased inputs;
● procedures that influence the customer experience (such as the rigor of quality control);
● skill and experience of employees;
● location (e.g., proximity to the customer);
● degree of vertical integration
- Differentiation can also occur through bundling—combining complementary products and services in
a single offering.
- Electronic commerce has reinforced unbundling: consumers increasingly create their own customized
vacations in preference to purchasing an all-inclusive vacation package.
- However, rebundling of products and services has become especially important in business-to-
business transactions through “providing customer solutions”. This involves a radical rethink of the
business models in many companies.
- Product Integrity:
- Differentiation decisions cannot be made on a piecemeal basis. Establishing a coherent and effective
differentiation position requires the firm to assemble a complementary package of differentiation
attributes.
- Product integrity refers to the consistency of a firm’s differentiation.
- Internal integrity refers to consistency between the function and structure of the product. External
integrity is a measure of how well a product’s function, structure, and semantics fit the customer’s
objectives, values, production system, lifestyle, use pattern, and self-identity.
- Simultaneously achieving internal and external integrity is a complex organizational challenge: it
requires close cross-functional collaboration and intimate customer contact.
- Integration of internal and external product integrity is especially important for providers of
“lifestyle” products where differentiation is based on customers’ social and psychological needs.
- Here, the credibility of the image depends critically on the consistency of the image presented. One
element of this integration is a common identity between customers and company employees.
- Harley-Davidson’s image is supported by a top management that dons biking leathers and participates
in owners’ group rides.
- Signaling and reputation:
- Differentiation is only effective if it is communicated to customers.
- Literature distinguishes between search goods, whose qualities and characteristics can be ascertained
by inspection, and experience goods, whose qualities and characteristics are only recognized after
consumption.
In the terminology of game theory, the market for experience goods corresponds to a prisoners’
dilemma. A firm can offer a high-quality or a low-quality product. The customer can pay either a
high or a low price. If quality cannot be detected, then equilibrium is established, with the
customer offering a low price and the supplier offering a low-quality product, even though both
would be better off with a high-quality product sold at a high price.
 The resolution of this dilemma is for producers to find some credible means of signaling quality to
the customer. The most effective signals are those that change the payoffs in the prisoners’
dilemma. Thus, an extended warranty is effective because it would be more expensive for a low-
quality producer than a high-quality producer.

Brand names, warranties, expensive packaging, money-back guarantees, sponsorship of sports and
cultural events, and a carefully designed retail environment for the product are all signals of
quality. Their effectiveness stems from the fact that they represent significant investments by the
manufacturer that will be devalued if the product proves unsatis- factory to customers.
- A perfume can be sampled prior to purchase and its fragrance assessed, but its ability to augment the
identity of the wearer and attract attention remains uncertain.
- Financial service companies rely upon symbols of security and stability.
- Brands:
- Brands fulfill multiple roles. They provide an implicit guarantee of quality simply by identifying the
producer.
- The brand represents an investment that provides an incentive to maintain quality and customer
satisfaction.
- A brand acts as a guarantee to the customer that reduces uncertainty and search costs. The more
difficult it is to discern quality on inspection, and the greater the cost to the customer of purchasing a
defective product, the greater the value of a brand.
- However, the value conferred by consumer brands such as Red Bull, Tesla, Mercedes-Benz, Gucci,
and American Express is more about conferring identity than guaranteeing reliability and quality.
- Traditional mass-market advertising is taking a back seat to word-of-mouth promotional initiatives
using social and the other digital marketing tools of viral marketing.
- The costs of differentiation:
- Differentiation adds cos. If differentiation narrows a breadth of appeal, it also limits the potential for
exploiting scale economies.
- One means of reconciling differentiation with cost efficiency is to postpone differentiation to later
stages of the firm’s value chain. Modular design with common components permits scale economies
while permitting product variety.
- Bringing it all together: the value chain in differentiation analysis
- The key to successful differentiation is matching the firm’s capacity for creating differentiation to the
attributes that customers value most. For this, the value chain provides a particularly useful
framework.
- Using the value chain to identify opportunities for differentiation involves three principal stages:
1. Construct a value chain for the firm and its customers. It might be useful to also consider firms
further downstream in the value chain. If the firm supplies different types of customers, it’s useful to
draw separate value chains for each major category of customer.
2. Identify the drivers of uniqueness in each activity of the firm’s value chain.
3. Locate linkages between the value chain of the firm and that of the buyer. What can the firm do
with its own value chain activities that can reduce the cost or enhance the differentiation potential of
the customer’s value chain activities?
- Value chain analysis of differentiation opportunities can also be applied to consumer goods.
- Consumers engage in a chain of activities that involve search, acquisition, and use of the product.
- Such complex consumer value chains offer many potential linkages with the manufacturer’s value
chain, with rich opportunities for innovative differentiation.

Can firms pursue both cost and differentiation advantage?

- The two primary sources of competitive advantage require fundamentally different approaches to
business strategy.
- Porter views cost leadership and differentiation as mutually exclusive strategies. A firm that attempts
to pursue both is “stuck in the middle”:
- “The firm stuck in the middle is almost guaranteed low profitability… The firm that is stuck in the
middle also probably suffers from a blurred corporate culture and a conflicting set of organizational
arrangements and motivation system.”
- In practice, few firms are faced with such stark alternatives.
- Differentiation is not simply an issue of “to differentiate or not to differentiate”. All firms must make
decisions as to which customer requirements to focus on.
- A cost leadership strategy typically implies limited-feature, standardized offerings, but this does not
necessarily imply that the product or service is an undifferentiated commodity.
- In most industries, market leadership is held by a firm that maximizes customer appeal by reconciling
effective differentiation with low cost—Toyota in cars, McDonald’s in fast food, Nike in athletic
shoes.
- The huge global success of Japanese suppliers of cars, motorcycles, consumer electronics, and
musical instruments during the 1980s and 1990s was the result of simultaneously pursuing cost
efficiency, quality, innovation, and brand building.
- The Japanese management techniques reconciled cost efficiency with differentiation and has been
facilitated by new management techniques: total quality management repudiated the conventional
trade-off between quality and cost; flexible manufacturing systems have reconciled scale economies
with variety.
- In many industries, the cost leader is not the market leader but a smaller competitor with minimal
overheads, nonunion labor and cheaply acquired assets.
Generic Key strategy elements Organizational requirements
strategy

Cost Scale-efficient plants Access to capital

leadership Maximizing labor productivity Division of labor with incentives linked
Design for manufacture to quantitative performance targets
Control overheads Product design coordinated with
Process innovation manufacture
Outsourcing Tight cost controls
Avoid marginal customering Process engineering skills
accounts Benchmarking
Measuring profit per customer

Differentiation Emphasis on branding, advertising, Marketing abilities

design, customer service, quality Product engineering skills
and new product development Cross functional coordination
Creativity
Research capability
Incentives linked to qualitative
performance targets.

Summary
- Making money in business requires establishing and sustaining competitive advantage.
- The isolating mechanisms that sustain competitive advantage are dependent primarily upon the ability
of rivals to access the resources and capabilities needed for imitation.
- Competitive advantage has two primary dimensions: cost advantage and differentiation advantage.
- Cost advantage is the outcome of seven primary cost drivers.
- By applying these cost drivers and by disaggregating the firm into a value chain of linked activities,
we can appraise a firm’s cost position relative to competitors and identify opportunities for cost
reduction.
- You need to look behind cost accounting data and beyond simplistic approaches to cost efficiency,
and to analyze the factors that drive relative unit costs in each of the firm’s activities in a systematic
and comprehensive manner.
- The appeal of differentiation is that it offers multiple opportunities for competitive advantage with a
greater potential for sustainability than does cost advantage.
- Achieving a differentiation advantage requires the firm to match its own capacity for creating
uniqueness to the requirements and preferences of customers.
- The value chain offers firms a useful framework for identifying how they can create value for their
customers by combining demand-side and supply-side sources of differentiation.
- Finally, the basis of a firm’s competitive advantage has important implications not just for the design
of its strategy but for the design of its organizational structure and systems.
- Typically, companies that are focused on cost leadership design their organizations differently from
those that pursue differentiation.
- For most firms, cost efficiency and differentiation are not mutually exclusive—in today’s intensely
competitive markets, firms have little choice but to pursue both.

Case - Walmart, Inc. in 2018: The World’s Biggest Retailer Faces

New Challenges
- In 2018, Walmart was not only the world’s biggest retailer, it was also the world’s biggest company
in terms of revenue.
- Between 1972 and 2009, its average annual sales growth was 22% and its return on equity had not
fallen below 20%.
- Yet, sustaining Walmart’s phenomenal record of growth and profitability was proving to be an ever
more daunting challenge. As Walmart continued to expand its range of goods and services it was
forced to compete on a broader front.
- While Walmart could seldom be beaten on price, it faced competitors that were more stylish
(T.J.Maxx), more quality-focused (Whole Foods), more service-oriented (Lowe’s, Best Buy), and
more focused in terms of product range.
- However, all these competitive threats were trivial compared to that posed by online retailing and
Amazon who shocked the retail world with its acquisition of Whole Food Markets.
- Walmart’s success had rested heavily upon its ability to combine huge scale with speed and
responsiveness. Walmart’s increasing size and complexity—including its presence in 29 countries of
the world—threatened this agility.

History of Walmart
- Discount stores—large retail outlets offering a broad range of products—began appearing in the
United States after World War II.
- Conventional wisdom held that cities with at least 100,000 inhabitants were needed to support a
discount store. Sam Walton believed that, with low enough prices, discount stores could be viable in
smaller communities.
- Distribution was a problem for Walmart: “Our only alternative was to build our own distribution
centers so that we could buy in volume at attractive prices and store the merchandise.”
- Walmart’s expansion strategy involved entering new areas by building a few stores that were served
initially from a nearby distribution center. Once a critical mass of stores had been established,
Walmart would build a new distribution center.
- Sam Walton experimented continually with alternative retail formats:
- Sam’s warehouse clubs were wholesale outlets that offered products in multipacks and minimal
customer service.
- Supercenters were large-format stores. They combined a discount store with a grocery market,
plus other specialty units such as an eyeglass store, hair salon, dry cleaners, and photo lab. They
were open 24/7.
- Neighborhood markets were supermarkets with an average floor space of 42,000 square feet.
- Walmart express convenience stores.
- Online business. A key feature of Walmart’s online strategy was its integration of web-based
transactions with its physical store network. In 2016-17, Walmart acquired additional e-commerce

companies (Jet.com, Hayneedle.com, Shoes.com, Moosejaw, ModCloth, and Bonobos)

- Walmart’s international expansion began in 1991 with a joint venture with Mexico’s largest retailer.
- Walmart’s overseas expansion followed no standard pattern: it might enter through greenfield entry,
through joint venture, or by acquisition.
- Walmart adapted its strategy to each country's consumer habits, infrastructure, competitive situation,
and regulatory environment. Its overseas operations have met with varying degrees of success.
- China represents Walmart’s greatest international success outside of North America.
- Walmart’s strategy and management style was inseparable from the philosophy and values of its
founder. For Walton, thrift and value for money were a religion. Undercutting competitors’ prices
was an obsession that drove his unending quest for cost economies.
- Walton established a culture in which every item of expenditure was questioned.
- He set an example: he walked rather than took taxis, shared rooms at budget motels while on business
trips, and avoided any corporate trappings or manifestations of opulence or success.
- “I don’t think that big mansions and flashy cars is what the Walmart culture is supposed to be about”
- His passion for detail extended to competitors’ stores: he visited their stores and counted cars in their
parking lots.
- Central to his leadership role was his relationship with his employees, the Walmart associates.
- The “10-foot attitude” pledge embodied Sam Walton’s request to an employee that: “I want you to
promise that whenever you come within 10 feet of a customer, you will look him in the eye, greet
him and ask if you can help him.”
- The “Sundown Rule”- that every request, no matter how big or small, gets same-day service - became
the basis for Walmart’s fast-response management system.
- “Three Basic Beliefs” formed the foundation for Walmart’s corporate culture:
* Service to customers
* Respect for the individual
* Striving for excellence

Walmart in 2018
- “Walmart Inc helps people around the world save money and live better - anytime and anywhere - in
retail stores and through e-commerce and mobile capabilities. Through innovation, we are striving to
create a customer-centric experience that seamlessly integrates our e-commerce and retail stores in
an omni-channel offering that saves time for our customers.”
- Our strategy is to lead on price, invest to differentiate on access, be competitive on assortment and
deliver a great experience.
- Everyday low prices (“EDLP”). EDLP is our pricing philosophy under which we price items at a low
price every day so our customers trust that our prices will not change under frequent promotional
activity. Price leadership is core to who we are.
- Our omni-channel presence provides customers access to our broad assortment anytime and
anywhere. We strive to give our customers and members a great digital and physical shopping
experience.
- Walmart divides its sales into three product groups: grocery (56%), health and wellness (11%), and
general merchandise (33%).

Walmart’s Operations and Activities

- The size of Walmart’s purchases and its negotiating ability made it both desired and feared by
suppliers. As a Walmart vendor, a manufacturer gained unparalleled access to the US retail market.
- At the same time, Walmart’s buying power and cost-cutting fervor means razor-thin margins for most
suppliers.
- Would-be suppliers were escorted to one of the spartan cubicles on “Vendor Row” where they
prepared themselves for an intimidating and grueling encounter.
- To avoid dependence on individual suppliers, Walmart limited the total purchases it obtained from
any one supplier. The result was an asymmetry of bargaining power:
- Walmart’s biggest supplier, P&G, accounted for about 3% of Walmart's sales, but this represented
18% of P&G’s revenues.
- However, Walmart’s relationships with its suppliers are anything but arm’s-length. Collaboration
involves a constant quest for efficiencies through enhanced cooperation—though Walmart receives
a disproportionate share of the resulting cost savings.
- Collaboration allows suppliers and manufacturers within the supply chain to synchronize their
demand projections under a collaborative planning, forecasting, and replenishment scheme, resulting
in Walmart achieving faster replenishment, lower inventory, and a product mix more closely tuned
to local customer needs.
- From January 2018, suppliers were obliged to deliver full orders within a specified one- or two-day
window 85% of the time or be fined 3% of the cost of the delayed goods.
- While most discount retailers relied heavily on their suppliers and third-party distributors for
distribution to their individual stores, about 85% of Walmart’s purchases are shipped to Walmart’s
own distribution centers, then distributed to Walmart stores in Walmart trucks.
- Walmart’s hub-and-spoke configuration, where each distribution center serves between 75 and 110
stores within a 200-mile radius, permits control over the scheduling of deliveries, larger drop sizes,
fuller utilization of trucks, and greater flexibility.
- Walmart continuously adapts its logistics system to increase speed and efficiency:
- Cross-docking allows goods arriving on inbound trucks to be unloaded and reloaded on outbound
trucks without entering warehouse inventory.
- Remix adds an additional tier to Walmart’s distribution system: third-party logistic companies
made small frequent pick-ups from suppliers allowing Walmart a five-day rather than a four-day
week ordering cycle from suppliers.
- The international extension of Walmart’s procurement system involves direct purchases from
overseas suppliers, rather than through importers, giving Walmart direct control of import
logistics.
- Walmart pioneered the use of radio frequency identification (RFID) for logistics management and

inventory control.
- In 2008, Walmart introduced a new system of packing trucks with better use of capacity.
- Walmart’s management of its retail stores is based upon satisfying customers by combining low
prices, a wide range of quality products carefully tailored to customer needs, and a pleasing
shopping experience.
- Walmart’s store management was distinguished by the following characteristics:
- Merchandising: Walmart offers a wide range of nationally-branded products. After 2008,
Walmart
greatly increased its range of private-label products.
- Decentralization of store management: Individual store managers are given greater
decision-making authority in relation to merchandise, product positioning, and pricing.
- Customer service: Most Walmart stores in the US are either 24 hours or 6 am to midnight.
Walmart seeks to engage with its customers at a personal level. Within stores, employees are
expected to look customers in the eye, smile at them, and offer a verbal greeting.
- At the core of Walmart’s strategy is Sam Walton’s credo that “There is only one boss: the customer”
and the belief that value for customers equates to low prices.
- Unlike other discount chains, Walmart does not engage in promotional price-cutting.
- “Everyday Low Prices” also permitted Walmart to spend less on advertising and other forms of
promotion than its main rivals.
- Nevertheless, Walmart's advertising budget of $3 billion exceeded that of any other retailer.
- The image that Walmart communicates is grounded in traditional American virtues of hard work,
thrift, individualism, opportunity, and community. This identification with core American values is
reinforced by a strong emphasis on patriotism and national causes.
- However, as Walmart became a target for pressure from politicians, NGOs, and labor unions, it was
increasingly forced to adapt its image and its business practices.
- Commitment to social and environmental responsibility forms part of a wider corporate makeover to
upgrade Walmart’s image and broaden its consumer appeal.
Walmart’s approach to human resource management reflects Sam Walton’s beliefs about relations
between the company and its employees and between employees and customers.
- Walmart is under continuous pressure to increase rates of pay—particularly from labor unions that
have long sought to recruit Walmart employees.
- Walmart has resisted unionization in the belief that union membership creates a barrier between the
management and the employees in furthering the success of the company and its members.
- However, at several of its overseas subsidiaries Walmart works closely with local unions.
- Opportunity for advancement provides a key incentive: 75% of Walmart managers (including CEO
Doug McMillon) had started as hourly employees.
- Employees are encouraged to show initiative and flexibility, especially in relation to serving
customers and identifying opportunities for cost saving.
- Walmart’s human resource practices are an ongoing paradox. Its dedication to training, internal
promotion, and employee involvement.
- Yet, the intense pressure for cost reduction and sales growth frequently results in cases of employee
abuse.
- Walmart has long been a pioneer in applying information and communications technology to support
decision making and promote efficiency and customer responsiveness.
- Analyzing purchasing patterns also led to continual adjustments in store layout (e.g., creating “baby
aisles that include infant clothes and children’s medicine alongside dia- pers, baby food and formula.
- As Walmart increased its commitment to building an online presence, so too did its investments in
information technology and e-commerce.
- They included a number of acquisitions of hi-tech companies. The most important being Jet.com.
bought in 2016.
- In order to compete with Amazon, walmart.com is imitating some elements of Ama- zon’s approach,
for example, it now offers free two-day shipping on orders greater than $35.
- Walmart was also testing “associate delivery” using employees to deliver packages for extra pay on
their way home from work in their personal cars.
- Walmart customers can link their Walmart and Google accounts providing Walmart with additional
data to forecast customer demand.
- Walmart also established a Silicon-Valley-based incubator— Store No. 8—to develop and launch
innovative retailing startups.
- In May 2018, Walmart opened a new front in its rivalry with Amazon: it acquired a controlling
interest in Flipkart, Amazon’s leading online retailing competitor in India.
- Walmart’s management structure and management style reflects Sam Walton’s princi- ples and values
—especially his belief that all managers, including the CEO, needed to be closely in touch with
customers and store operations.
- The key to Walmart’s fast-response management system was the close linkages in this system which
ensured speed of communication and decision making between the corporate headquarters and the
individual stores and warehouses.
- Most large retailers had regional offices; Walmart’s regional VPs had no offices. Their time was spent
visiting stores and warehouses in their regions Monday to Thursday, then returning to Bentonville
on Thursday night for Friday and Saturday meetings.
- “By noon on Saturday we had all our corrections in place. Our competitors, for the most part, got their
sales results on Monday for the week prior. Now, they’re already ten days behind.”

1. How well is Walmart performing? To what extent is its performance attributable to

industry attractiveness and to what extent to competitive advantage?
- It is not a very attractive industry. Hence, most of its performance can be attributed to them
taking advantage of their competitive position.
- Our strategy is to lead on price, invest to differentiate on access, be competitive on
assortment and deliver a great experience.
- Walmart divides its sales into three product groups: grocery (56%), health and well- ness
(11%), and general merchandise (33%)

2. In which of Walmart’s principal functions and activities (namely: purchasing, distribution

and warehousing, instore operations, marketing, IT, HRM, and organization and
management systems/style) do its main competitive advantages lie? Identify the distinctive
resources and capabilities in each of these functions and activities.
- Purchasing:
The size of Walmart’s purchases and its negotiating ability made it both desired and feared
by suppliers. As a Walmart vendor, a manufacturer gained unparalleled access to the US
retail market. At the same time, Walmart’s buying power and cost-cutting fervor means
razor-thin margins for most suppliers.
To avoid dependence on individual suppliers, Walmart limited the total purchases it
obtained from any one supplier. The result was an asymmetry of bargaining power:
Walmart’s biggest supplier, P&G, accounted for about 3% of Walmart's sales, but this
represented 18% of P&G’s revenues.
However, Walmart’s relationships with its suppliers are anything but arm’s-length.
Collaboration involves a constant quest for efficiencies through enhanced cooperation—
though Walmart receives a disproportionate share of the resulting cost savings.
- Distribution:
Distribution was a problem for Walmart: “Our only alternative was to build our own
distribution centers so that we could buy in volume at attractive prices and store the
merchandise.”
 Walmart’s expansion strategy involved entering new areas by building a few stores that
were served initially from a nearby distribution center. Once a critical mass of stores had
been established, Walmart would build a new distribution center.
Seamlessly integrates our e-commerce and retail stores in an omni-channel offering that
saves time for our customers.
Our omni-channel presence provides customers access to our broad assortment anytime and
anywhere.
While most discount retailers relied heavily on their suppliers and third-party distributors
for distribution to their individual stores, about 85% of Walmart’s purchases are shipped to
Walmart’s own distribution centers, then distributed to Walmart stores in Walmart trucks.
This allows control over the scheduling of deliveries, larger drop sizes, fuller utilization of
trucks, and greater flexibility.
- Warehousing:
Walmart continuously adapts its logistics system to increase speed and efficiency:
- Cross-docking
- Remix
- International extensions involving direct purchases from overseas suppliers rather than
through importers.
- Walmart pioneered the use of radio frequency identification (RFID)
- New way of packing trucks with better use of capacity was introduced in 2008.
- In Store operations:
They experimented continually with alternative retail formats (warehouse clubs,
supercenters, neighbourhood markets, express convenience stores, online business)
Walmart’s management of its retail stores is based upon satisfying customers by combining
low prices, a wide range of quality products carefully tailored to customer needs, and a
pleasing shopping experience.
Marketing:
everyday low prices (“EDLP”). EDLP is our pricing philosophy under which we price
items at a low price every day so our customers trust that our prices will not change under
frequent promotional activity. Price leadership is core to who we are.
Unlike other discount chains, Walmart does not engage in promotional price-cutting.
“Everyday Low Prices” also permitted Walmart to spend less on advertising and other
forms of promotion than its main rivals.
Nevertheless, Walmart's advertising budget of $3 billion exceeded that of any other retailer.
Walmart’s store management was distinguished by merchandising, decentralization of store
management, and customer service.
The image that Walmart communicates is grounded in traditional American virtues of hard
work, thrift, individualism, opportunity, and community. This identification with core
American values is reinforced by a strong emphasis on patriotism and national causes.
Commitment to social and environmental responsibility forms part of a wider corpo- rate
makeover to upgrade Walmart’s image and broaden its consumer appeal
- IT:
A key feature of Walmart’s online strategy was its integration of web-based transactions
with its physical store network.
Walmart has long been a pioneer in applying information and communications technology
to support decision making and promote efficiency and customer responsiveness.
As Walmart increased its commitment to building an online presence, so too did its
investments in information technology and e-commerce.
They included a number of acquisitions of hi-tech companies. The most important being
Jet.com. bought in 2016
In order to compete with Amazon, walmart.com is imitating some elements of Amazon’s
approach, for example, it now offers free two-day shipping on orders greater than $35.
- HRM:
Walmart’s approach to human resource management reflects Sam Walton’s beliefs about
 relations between the company and its employees and between employees and customers.
Walmart is under continuous pressure to increase rates of pay—particularly from labor
unions that have long sought to recruit Walmart employees.
Walmart’s human resource practices are an ongoing paradox. Its dedication to training,
internal promotion, and employee involvement.
- Organization and management:
Walmart’s strategy and management style was inseparable from the philosophy and values
of its founder. Thrift and value for money were a religion. Undercutting competitors’ prices
was an obsession that drove his unending quest for cost economies.
The 10-foot attitude, the Sundown rule, and the three basic beliefs.
Walmart’s management structure and management style reflects Sam Walton’s princi- ples
and values—especially his belief that all managers, including the CEO, needed to be
closely in touch with customers and store operations.
The key to Walmart’s fast-response management system was the close linkages in this
system which ensured speed of communication and decision making between the corporate
headquarters and the individual stores and warehouses.
Most large retailers had regional offices; Walmart’s regional VPs had no offices. Their time
was spent visiting stores and warehouses in their regions Monday to Thursday, then
returning to Bentonville on Thursday night for Friday and Saturday meetings.
“By noon on Saturday we had all our corrections in place. Our competitors, for the most
part, got their sales results on Monday for the week prior. Now, they’re already ten days
behind.”

2. A great part of Walmart’s competitive advantage lies in the way they handle their purchasing.
The size of their purchases as well as it being a way for the supplier to enter the US market makes it
attractive for suppliers to work with Walmart. At the same time, however, their huge bargaining
power results in poor margins for the suppliers. As a precautionary measure, Walmart uses multiple
suppliers which further increases their advantages when it comes to bargaining. Simultaneously,
while the collaboration between Walmart and its suppliers is good, a disproportionate share of the
gained profits goes to Walmart.

Initially, distribution was a problem for Walmart which gave them no choice but to build their own
distribution centres. Through the development of omni-channels, Walmart is today able to supply
customers faster and to a greater extent. Not being as reliant on third-party distributors as the
conventional retailers further gives Walmart an extended control and greater flexibility and
distribution can therefore be seen as yet another area of competitive advantage that Walmart
exploits. Turning to warehousing, Walmart has applied cross-docking, RFID, and other adaptations
of their logistics system to constantly increase speed and efficiency. As the company increased in
size, however, the flexibility has been somewhat reduced as is commonly viewed with larger
corporations and compared to smaller actors this might not be an equally strong competitive
advantage for Walmart.

As for in store operations, one of the most prominent for Walmart’s service offering is their low
prices and wide assortment of products. In their strive to satisfy customers the company has
experimented with different retail formats such as warehouse clubs, supercenters, neighbourhood
markets, online business, and express convenience stores out of which only the last concept has
been forced to shut down. An advantage of being a large company is the ability to experiment in
this way with different service concepts. On the other hand, being a low price actor, there is likely
to be a difference in how profitable the different concepts are, and constantly striving for
minimizing costs, Walmart might not be able to offer the customers a shopping experience which
can compete with more high end stores. As an attempt to improve the shopping experience without
it implying extra costs is by training their employees in customer service and approach.

Price leadership is tightly connected to Walmart and their “Everyday Low Prices” has permitted
them to spend less on marketing and advertising which is a competitive advantage compared to
their competitors. Further, the Walmart brand is tightly connected to traditional American values
such as hard work and patriotism which might work in their favor as an advantage in marketing.

Historically, Walmart has been early in adopting and applying IT and communication technology in
its business, a competitive advantage which one might argue is a central piece to staying
competitive in the increasingly technological world we’re living in. In 2016 Walmart acquired
several hi-tech companies as a part of their IT strategy to expand their offering into this share of the
market, something which might supply them future possibilities of staying ahead in the
technological area. Amazon is one of Walmart’s greatest competitors in online retail and would
probably be considered superior to Walmart within this area as of the present. However, Walmart
can be seen to have adapted some of the elements of Amazon's approach.

HRM is not one of the areas in which Walmart demonstrates a competitive advantage. They are
under constant pressure to increase the standards for employees and their wages. The organization
and management on the other hand consists of many elements tightly connected to the spirit and
values of the company creating a consistency with their business idea and providing guidance for
managers.

3. To what extent is Walmart’s competitive advantage sustainable? Why have other retailers
had limited success in imitating Walmart’s strategy and duplicating its competitive
advantage?
- Sustaining Walmart’s phenomenal record of growth and profitability was proving to be an
ever more daunting challenge. As Walmart continued to expand its range of goods and
services it was forced to compete on a broader front.
- While Walmart could seldom be beaten on price, it faced competitors that were more
stylish (T.J.Maxx), more quality-focused (Whole Foods), more service-oriented (Lowe’s,
Best Buy), and more focused in terms of product range.
- Walmart adapted its strategy to each country's consumer habits, infrastructure, competitive
situation, and regulatory environment. Its overseas operations have met with varying
degrees of success.
- Our strategy is to lead on price, invest to differentiate on access, be competitive on
assortment and deliver a great experience.
- Walmart divides its sales into three product groups: grocery (56%), health and wellness
(11%), and general merchandise (33%).
- By 2017, Walmart held 26% of the US grocery market— Kroger, America’s biggest
supermarket chain, had 10%.

4. What challenges does Walmart currently face? What measures does it need to take to
sustain its recent performance and defend against competitive (and other) threats?
- Sustaining Walmart’s phenomenal record of growth and profitability was proving to be an
ever more daunting challenge. As Walmart continued to expand its range of goods and
services it was forced to compete on a broader front.
- While Walmart could seldom be beaten on price, it faced competitors that were more
stylish (T.J.Maxx), more quality-focused (Whole Foods), more service-oriented (Lowe’s,
Best Buy), and more focused in terms of product range.
- However, all these competitive threats were trivial compared to that posed by online
retailing and Amazon who shocked the retail world with its acquisition of Whole Food
Markets.
- Walmart’s success had rested heavily upon its ability to combine huge scale with speed and
responsiveness. Walmart’s increasing size and complexity—including its presence in 29
countries of the world—threatened this agility.