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Competitive strategy and the Wal-Mart threat: positioning for survival and success.
Retail industry (Reports)
Parnell, John A.
Lester, Donald L.
Pub Date:
Name: SAM Advanced Management Journal Publisher: Society for the Advancement of Management Audience: Trade Format: Magazine/Journal Subject: Business; Business, general Copyright: COPYRIGHT 2008 Society for the Advancement of Management ISSN: 0036-0805
Date: Spring, 2008 Source Volume: 73 Source Issue: 2
Event Code: 200 Management dynamics; 740 Commodity & service prices Computer Subject: Company business management; Company pricing policy
Product Code: 5200000 Retail Trade

Accession Number:
Full Text:
The popular image is that Wal-Mart comes to town and locally-owned retailers shrivel up and die. This may happen, but it doesn't have to. Retailers who carefully analyze their own strengths and weaknesses vis a vis Wal-Mart's may survive and prosper. Retail owners should consider three strategies: a focus on low costs, a focus on differentiation, and a value orientation. Sometimes these can be mixed-and-matched among a retailer's product lines. "There's no substitute for knowing one's customers, markets, and resources as a foundation for ... a successful strategy," according to the authors.



No class of retailer has influenced the business landscape in recent years more than the big box, and no big boxer is more prominent than Wal-Mart. Big boxers like Wal-Mart not only apply pressure to suppliers and alter the mix of shopping alternatives for consumers, but they also greatly influence the competitive behavior of traditional retailers. The academic and business press has chronicled the wide-ranging effects of the mega-retailer over the past two decades (McCune, 1994; McGee and Peterson, 2000; Stone, 1993). Although there is growing evidence that Wal-Mart's hold on retail may be slipping, it remains a competitive nightmare for many of its competitors, particularly small rivals in local markets (McWilliams, 2007a, 2007b).

A number of authors (e.g., McGee and Peterson, 2000; Edid, 2005; Spector, 2005) have suggested or inferred competitive responses for smaller retailers when a big box like Wal-Mart comes to town. This paper builds on such work by providing a more comprehensive and theory-based analysis of strategic alternatives available to retailers specifically facing a threat from Wal-Mart. Toward that end, the remainder of the paper begins with an overview of the big box phenomenon and a framework for understanding how the big box influences the strategic landscape. Three theory-based potential strategic responses are evaluated, followed by conclusions and opportunities for further research.

Wal-Mart and the Big Box Phenomenon

The emergence of big box retailers in the United States has changed the retailing landscape considerably. The term "big box" typically refers to discount retailers whose stores exceed 50,000 square feet, with many as large as 200,000 square feet. Big boxers usually implement a limited number of store designs across markets and seek profits through high volume via low markups. Their facades are standardized with large windowless single-story buildings. Ample parking is usually available, although customers may be required to walk a considerable distance to enter the store.

Store traffic patterns spell the success of big boxers, particularly in the United States. During the last 15 years, the number of consumer trips to the shopping mall has been cut in half, a trend that has not always held true for malls anchored by a big box like Wal-Mart or Target (Chittum, 2005). In addition, a growing percentage of American teenagers have access to a credit card. Teens are making more and more purchase decisions and are frequenting shopping malls less and shopping more at big boxers, entertainment-oriented retailers, and online retailers (Barta, Martin, Frye, and Woods, 1999; Etter, 2005; Raymond, 1999; Spector, 2005).

A big box store that operates primarily in a specialized market may also be referred to as a "category killer." Toys "R" Us is widely referenced as the first category killer; others in the U.S. include Best Buy, Circuit City, Lowe's, Blockbuster, and Home Depot. From a strategic perspective, general merchandise big boxers and category killers are similar in a number of ways, with the primary distinction being the breadth of the product line (Spector, 2005). Wal-Mart, for example, sells office supplies like Office Depot, electronics like Best Buy, and hardware like Home Depot, but does not offer as wide a selection as their specialized counterparts.

Wal-Mart is the perennial general merchandise big-box retailer in the United States, although rivals Costco and Target are also prominent examples. Wal-Mart boasts 23 miles of retail selling space in the U.S., where 70% of its approximately 5,500 stores are located. Annual revenues for 2004 were slightly over $288 billion (Revell, 2005), making it number one on the Fortune 500 ranking. By 2005, Wal-Mart had slipped to second place on the Fortune 500 (McGirt, 2006) with revenues of $315 billion, just behind Exxon Mobil. However, in 2006 it regained the top spot as revenues exceeded $350 billion (Useem, 2007), with its headcount nearing two million.

Because of its prominence and ability to trim costs, Wal-Mart is often the brunt of criticism from politicians, activists, union leaders, and others. Detractors, for example, contend that Wal-Mart's aggressive negotiating tactics ultimately annihilate U.S. manufacturing firms and send American jobs overseas. Some charge that the mega-retailer seeks to render obsolete small businesses in the communities in which it operates (Edid, 2005; Quinn, 2000). Others cite positive influences, however, noting such factors as job creation and the benefits of low prices (Etter, 2005; York, 2005). When Albertson's--the second largest grocer in the U.S. with 2,500 stores--searched for a buyer in 2005, it was another reminder that Wal-Mart can destroy smaller competitors and have a staggering effect on the success of large retailers as well (Berman, Adamy and Sender, 2005). Besides Albertson's, a host of formerly successful discount chain stores were bankrupt by the late 1990s, including Heck's, Arlans, Federals, Ames, E.J. Korvette, Atlantic Mills, and W.T. Grant (Camerius, 2006).

Wal-Mart critic Arindrajit Dube suggests that Wal-Mart's relatively low wages result in an annual wage loss in the retail sector of almost $5 billion. Hollywood producer Robert Greenwald even produced a movie about the giant retailer, "WAL-MART: The High Cost of Low Price," chronicling the plight of an Ohio-based hardware store when Wal-Mart moved to town (York, 2005). Indeed, the liberal segment of the U.S. has adopted Wal-Mart as its cause de jour with such a vengeance that one writer has labeled their obsession WMDS--Wal-Mart derangement syndrome (Goldberg, 2006). Senator John Kerry (D. Mass.) has been quoted as saying that Wal-Mart is "disgraceful" and a symbol of "what's wrong with America" (Will, 2006b). He is basing his remarks on Will's (2006b) claim that Wal-Mart costs about 50 retail jobs for every 100 jobs that it creates.

Critics are aghast at Wal-Mart's wages and lack of health care coverage, siding with unions in their efforts to organize Wal-Mart workers. They argue that Wal-Mart takes advantage of American blue-collar workers who, due to downsizing and outsourcing, cannot find viable employment elsewhere. They also suggest that much of the outsourcing can be blamed on Wal-Mart's coercive tactics in dealing with suppliers and costs. Through laws and ordinances, the union push has even led several states and cities to try to force Wal-Mart and other big-box retailers to spend at least 8% of its payroll on health care or pay a minimum of $13 an hour to hourly employees (Novak, 2006; Will, 2006a). When Wal-Mart announced its intention to move into inner city areas of Los Angeles, for example, voters rejected its effort (Kaplan, 2006), choosing instead to rely on small morn and pop merchants that some suggest have historically overcharged local residents who lack basic transportation.

Not all press has been negative, however. As Jason Furman of New York University notes, Wal-Mart's economic benefits cannot be ignored as the retailer saves its customers an estimated $200 billion or more on food and other items every year (Mallaby, 2005). As for health insurance, Wal-Mart offers 18 different plans to its employees, with one having monthly premiums as low as $11 (Will, 2006a). All together, over 86% of Wal-Mart employees have some form of health insurance, with about half being insured through the company. With over 1.3 million workers in the U.S., Wal-Mart accounted for 13% of the country's productivity gains in the scond half of the 1990s.

The competitive issue for the future is how constrained Wal-Mart's domestic growth will become due to this class war being fostered by the more liberal segment of U.S. society. If legislation takes hold on a widespread basis to limit Wal-Mart's penetration of untapped U.S. markets, will that create opportunities for other firms to expand their operations to take up the slack?

The Big Box and the Strategic Landscape

Traditional economic theory suggests that the rules governing firm success and failure tend to evolve over time as a result of the collective activities of numerous competitors in an industry. This economic ideal is marked by free and open competition and assumes that no single firm is able to rise head and shoulders above the crowded field and dominate the industry. The problem, however, is that all firms in an industry are neither equally competitive nor equally lucky. In many cases, this results in one or more rising to prominence. Such is the case with big boxers.

Industrial organization (IO) economics emphasizes the influence of the industry environment on firms. The central tenet of industrial organization theory is the notion that a firm must adapt to influences in its industry to survive and prosper; thus, its financial performance is primarily determined by the success of the industry in which it competes. Industries with favorable structures offer the greatest opportunity for firm profitability (Bain, 1968). Recent research has supported the notion that industry factors tend to play a dominant role in the performance of most competitors, except for those that are the notable industry leaders or losers (Hawawini, Subramanian, and Verdin, 2003).

The IO perspective assumes that a firm's performance and ultimate survival depend on its ability to adapt to industry forces over which it has little or no control. According to IO, strategic managers should seek to understand the nature of the industry and formulate strategies that feed off the industry's characteristics. Because IO focuses on industry forces, other factors including strategies, resources, and competencies are assumed to be fairly similar among competitors within a given industry.

If one firm deviates from the industry norm and implements a new, successful strategy, other firms will attempt to rapidly mimic the higher-performing firm by purchasing the resources, competencies, or management talent that have made the leading firm so profitable. Hence, although the IO perspective emphasizes the industry's influence on individual firms, it is also possible for firms to influence the strategy of rivals, and in some cases even modify the structure of the industry, albeit in a limited fashion (Barney, 1986; Seth and Thomas, 1994).

Perhaps the opposite of IO, the resource-based view (RBV) considers performance to be a function of a firm's ability to utilize its resources (Barney, 1986). Although environmental opportunities and threats are important, a firm's unique resources compose the key variables that allow it to develop a distinctive competence (Lado, Boyd, and Wright, 1992) and enable it to distinguish itself from rivals and create competitive advantage. A firm's resources include all of its tangible and intangible assets, such as capital, equipment, employees, knowledge, and information. An organization's resources are directly linked to its capabilities, which can create value and ultimately lead to profitability for the firm. Hence, resource-based theory focuses primarily on individual firms rather than on the competitive environment.

The increasing speed of business activity and the notion of ephemeral competitive advantage have prompted researchers to emphasize dynamic strategy positioning models. This approach does not refute the tenets of IO and the RBV per se, but challenges their static assumptions in favor of strategies that are more flexible and adaptive to changing market conditions. This is especially true in industries where success depends on a constant flow of new offerings (Barnett, 2006; Fiegenbaum and Thomas, 2004; Selsky, Goes, and Baburoglu, 2007).

The IO, resource-based, and dynamic strategic positioning perspectives can be useful tools for understanding competitive behavior in industries where big boxers thrive. Contrary to I0 assumptions concerning the limited power of any single firm, however, big boxers set--or at least influence significantly--the competitive rules in their industries. For example, big boxers shift the power relationship between retailer and producer in favor of the retailer, a move that can effectively reduce the level of differentiation among producers. When a retailer becomes a dominant player in its industry, it begins to control a large percentage of the output of many of its suppliers. As a result, the retailer can sometimes exercise more influence on a products position and image than the manufacturer. IO and strategic group models acknowledge only minimal influence on the part of a single competitor. Industry factors dictate critical success factors, and even large firms must adapt to them. In contrast, big boxers leverage their size and scope in such a way that rivals, suppliers, and buyers must reorient their competitive strategies accordingly. As Hannaford (2005) relates, firms with market dominance in the past would have charged above-market prices, earning above-average returns for their oligopolistic position. Wal-Mart, however, charges below-market prices, forcing suppliers who wish to take advantage of their vast market to keep their costs and prices low.

Consider the case of Wal-Mart and Vlasic pickles. In 2003 Wal-Mart priced a gallon of Vlasic pickles at $2.97, thereby selling a gallon of the nation's top-selling brand for less than most other retailers charged for a quart. The move was a good one for Wal-Mart as it strengthened the retailer's image as a deliverer of value. Unfortunately, the move undermined efforts Vlasic had made for years to establish its position as a producer synonymous with the pickle itself. If Vlasic had chosen not to sell to Wal-Mart, the producer would have paid a great price in terms of market share. Ultimately, Vlasic had little choice but to allow Wal-Mart to sell its pickles in whatever way the retailer saw fit (Fishman, 2003).

Consider another case involving Wal-Mart and Levi Strauss. In 2002, Levi and Wal-Mart announced that the retailer would begin selling Levis in its stores. Levi had experienced declining market share in the decades prior, closing 58 manufacturing plants in the U.S. and outsourcing 25% of its sewing between 1980 and 1991. After rebuilding and posting a record $7.1 billion in sales in 1996, Levi experienced six years of decline. The Wal-Mart deal was designed to revive the brand. The problem was that half the jeans sold in the U.S. in 2002 cost less than $20 a pair, a year in which Levi sold none for less than $30. Clearly Wal-Mart, the country's leading clothing retailer, would not be interested in selling premium jeans at a premium price. Levi had to develop a fresh line of less expensive jeans for Wal-Mart, the Levi Strauss Signature brand. As expected, Levi sales increased shortly after its new line of jeans were introduced in Wal-Mart (Fishman, 2003). At least some of the Wal-Mart sales cannibalized those of Levi's more profitable premium brands in other outlets, however. In addition, the sale of Levis at Wal-Mart tarnished the image of the century-and-a-half old American icon.

Big boxers adopt a resource-based perspective to a great extent, seeking to develop resources and competencies that cannot be readily duplicated by rivals. Although competitive strategies can vary among big boxers, the general approach is based on four pillars:

Build economies of scale. Big boxers lower costs by purchasing larger quantities. They distribute these products efficiently to a large number of stores strategically located to minimize transportation and related costs. Sheer size represents the single greatest resource advantage possessed by the big boxer.

Offer everyday low prices on most items. Leveraging scale economies, big boxers typically offer prices that simply cannot be matched by rivals. As a result, most competitors find it difficult to compete with the big boxers solely on price.

Sell a wide variety of products. Selling lots of products increases store traffic. A customer may visit the big box to purchase one or two products, but will likely leave with more. Product lines for general merchandise big boxers like Wal-Mart are not as deep as they are at their specialized rivals. Only products that sell considerable volume are carried, fueling even greater economies of scale.

Offer a consistent, predictable shopping experience across time and locations. Economies of scale and low prices are achieved when all stores sell the same products. Predictability enables customers to plan their shopping trips accordingly.

The four-pronged strategy employed by the typical big box like Wal-Mart can be lethal to competitors, but the approach is not without its shortcomings and can be attacked effectively by smaller retailers. Specific plans for addressing the Wal-Mart threat are outlined in the following section.

Strategies for Confronting the Wal-Mart Threat

Big boxers reduce the relative size of otherwise "large" retailers. To effectively confront the big box threat, smaller, often sizable and established rivals must account for the influence of the big boxer on the industry and formulate their strategies accordingly. Specifically, the first step in confronting Wal-Mart is to understand the threats it creates, as well as the opportunities it affords traditional retailers. While the competitive threat posed by the entry of a Wal-Mart store into a locale previously dominated by traditional and specialty retailers is substantial, it does not necessarily create a hopeless situation for smaller rivals. Competitive strategy is about choices, some of which are mutually exclusive. By its very nature, a big box like Wal-Mart possesses key competitive strengths and weaknesses that should be understood before crafting a response.

Wal-Mart's strengths are forthright and widely acknowledged. With its size and access to capital, Wal-Mart can sustain even a low-performing store for the long term when moving into a region, a luxury not afforded many small, family-based businesses. Distribution and supply chain efficiencies enable the retailer to offer exceptionally low prices that are difficult for rivals to match. Its wide product assortment--especially in superstores where both groceries and general merchandise are offered--generates store traffic and supports a one-stop shopping experience for the consumer. And, its cost-control-oriented corporate culture, which includes a reliance on low-cost, part-time labor, keeps costs down.

Wal-Mart's business model has its shortcomings, however. Of the five primary dimensions to retailing--quality, service, convenience, selection, and price--and Wal-Mart wins only on price and selection (Rigby and Haas, 2004). Since Wal-Mart typically captures about 30% of a local market, 70% remains for its rivals, including local retailers, other big boxers, and smaller-store chains. While Wal-Mart is often referenced as the "500-pound gorilla," maintaining such a stature is not easy. As a big box seeking to secure maximum market share from a broad audience, Wal-Mart simply lacks the focus and resolve to battle competitors along the periphery, thereby creating opportunities for retailers that can compete on quality, service, and convenience. The success enjoyed by family-owned businesses such as Berlin Myers, Jr., owner of a lumber company in Summerville, South Carolina, bearing the family name, suggests that superstores and other retailers can coexist, often with the smaller outlets supplementing what the large ones carry. The big boxers typically do not compete directly with smaller retailers unless they are attacked first (McCune, 1994).

Because of its reliance on distribution and supply chain efficiencies, Wal-Mart retailers are challenged to alter product assortments and tailor offerings to the specific needs of a region. In addition, Wal-Mart's approach assumes that price is the primary factor consumers evaluate when choosing a retailer. While Wal-Mart is able to offer high-demand products at low prices, its sheer size makes it difficult for associates to deliver exceptional customer service on a consistent basis, a key component in the consumer shopping experience. Wal-Mart's image as Goliath in a David versus Goliath battle can be a liability if consumers become sensitive to the plight of family-owned businesses defending themselves against the onslaught of a retail invasion.

In general, Wal-Mart's competitive responses target large general merchandise retailers or grocers (e.g., Home Depot, Best Buy, and Kroger), not small niche-oriented specialty retailers. As category killers fight more among themselves, their success is less connected with an ability to dwarf smaller retailers, than with an ability to attack and defeat other category killers (Barta, Martin, et al, 1999). The sale of Toys-R-Us in 2005 demonstrates the rise of one category killer and its subsequent fall at the hands of other big boxers.

The process of formulating a competitive response to Wal-Mart can be a challenge to small retailers if their managers do not understand local demographics or how customers make shopping decisions. The Wal-Mart threat is greatest for a retailer whose survival has been historically based on a lack of competition, not on proficiency in meeting the needs of certain customers. Clearly, such businesses are not in a position to evaluate alternative strategic responses to Wal-Mart until they develop a clear understanding of their own resource advantages and vulnerabilities.

Patience can be a virtue when battling a category killer like Wal-Mart. It is not unusual for the new category killer to offer steep discounts and an abundance of helpful employees at the outset, only to ease prices higher and eliminate some of the extra help after some of the smaller competitors will have been eliminated from the scene (Grantz and Mintz, 1998). Existing retailers often suffer the most during this initial time period, but not always.

Wal-Mart's effects on other retailers are not universally negative. When a large general merchandiser like Wal-Mart comes to town it often increases the "pull factor," resulting in an overall increase in sales revenue for the community as a whole. Total general merchandise sales for the town may increase by as much as 50% or more during the first year or two, but usually begin to decline after five years. Revenues from some stores, like those specializing in home furnishings, typically benefit from Wal-Mart's presence. The effect on other outlets such as clothing stores is not as evident. Nonetheless, tax revenues from sales in the "Wal-Mart town" generally outpace those in communities without a Wal-Mart, which is why efforts to convince politicians to block entry into a community are generally ineffective (Stone, 1993).

Big boxers affect retailers within close proximity, with two important caveats. First, not all retailers are affected equally. Retailers with similar product lines may be affected more directly than those with alternative or complementary product lines. Restaurants, for example, typically benefit from a big box locating nearby because of the increased traffic in the immediate area.

Second, retailers located miles away may be adversely affected when a new big box opens. Traffic patterns may shift as consumers located closer to a traditional retailer decide to drive a longer distance to shop at the big box. This effect is exacerbated when other retailers "cluster" around the big box, drawing even more potential store traffic away from retailers in other locales.

Given Wal-Mart's array of resource strengths and shortcomings, three strategic approaches may be utilized vis-a-vis Wal-Mart. Porter's (1980) strategy typology serves as a useful framework for illustrating the first two of these alternatives, as elaborated below.

* Strategy 1: Focus--Low Costs

"We can beat Wal-Mart at its own game as long as we fight on our own turf."

According to the focus--low cost strategy, the retailer should compete on the basis of costs, but not target the mass market. Online auction facilitator eBay is replete with microbusinesses selling a few products at rock-bottom prices. In many cases these sellers undercut the big boxers by marketing only a limited number of products to a highly defined end user. By minimizing overhead, targeting specific buyers, and offering convenience--no trip to the store is required--these microbusinesses beat the big boxers at their own game, but only on a very small piece of turf. This approach mimics what Porter (1980) termed a focus--low cost strategy. Empirical research supports the effectiveness of this approach among select small retailers, especially those that operate in hostile and intensely competitive environments (McGee and Rubach, 1996/1997).

It is difficult for rivals to match the superstores on price because they typically lack the volume to negotiate better deals from their suppliers. In some cases, however, a smaller retailer can emphasize a limited number of products and achieve a substantial volume. Alternatively, a small retailer can join with those in other communities to strengthen its bargaining power. Trade associations may be able to direct small retailers to "co-ops" that are already engaged in this process. Co-ops typically welcome newcomers in an effort to drive volumes even higher.

Interestingly, Wal-Mart prices are not always the lowest. One study reports that prices at the big box are actually higher for approximately one-third of their products compared with other major competitors in key U.S. markets (Crawford and Mathews, 2001). Astute competitors may be able to compete with Wal-Mart on price within the boundaries of specific product lines and customer groups.

Aldi provides an example of a not-so-big box that competes effectively by employing a focus--low cost strategy. Aldi is an international retailer that offers a limited assortment of groceries and related items at the lowest possible prices. Functional operations are all focused on minimizing costs, and efforts are targeted to consumers with low-to-moderate incomes.

Aldi minimizes costs a number of ways. Most products are private label, allowing Aldi to negotiate rock-bottom prices from its suppliers. Stores are modest in size, much smaller than those of a typical chain grocer. Aldi only stocks common food and related products, maximizing inventory turnover. The grocer does not accept credit cards, eliminating the 2-4% fee typically charged by banks to process the transaction. Customers bag their own groceries and must either bring their own bags or purchase them from Aldi for a nominal charge. Aldi also takes an innovate approach to the use of its shopping carts in its U.S. stores. As in many Canadian stores, customers insert a quarter to unlock a cart from the interlocked row of carts located outside the store entrance. The quarter is returned when the cart is locked back into the group. As a result, no employee time is required to collect stray carts unless a customer is willing to forego the quarter by not returning the cart.

Like Aldi, rival chain Save-A-Lot has found a way to compete successfully against Wal-Mart. The grocery store pursues locations in urban areas rejected by Wal-Mart and offers prices competitive with the big box. Save-A-Lot generates profits by opening small, cheap stores catering to households earning less than $35,000 a year. Save-A-Lot stocks mostly its own brand of high-turnover goods to minimize costs and eschews pharmacies, bakeries, and baggers (Adamy, 2005).

Dollar General is an example of a general merchandiser that has adopted a focus--low cost strategy, coupled with an emphasis on customer access. Prices are kept to a minimum, although they may not be as low as those at Wal-Mart for common items. Dollar General also offers deeply discounted store-branded products. The key, however, is that unlike Wal-Mart, Dollar General positions its stores for easy access. Customers can easily park, enter the store, and make their purchases (Crawford and Mathews, 2001).

* Strategy 2: Focus--Differentiation

"Wal-Mart simply cannot meet the needs of our customers."

One approach for successfully competing against a big box requires a recognition that costs must be kept under control, but that low costs--and low prices--cannot serve as an effective basis for that competition. Retailers adopting a focus--differentiation strategy eschew price competition and compete on the basis of other factors such as quality, selection, convenience, and service. There is mounting evidence that a number of Wal-Mart's smaller rivals are employing this approach effectively against the big box (McWilliams, 2007a).

Michael Porter's low cost-differentiation dichotomy illustrates the conundrum faced by most businesses. Simply stated, differentiating products or services requires resources, thereby raising one's cost position relative to others in an industry. On the other hand, a strong emphasis on minimizing costs may limit the use of advertising, product development, and the like, all of which enable a firm to differentiate its output. In the end, there is a tendency for low costs and differentiation to work against each other. A business attempting both strategies simultaneously can end up "stuck in the middle" (Porter, 1980) because implementing the combination strategy is generally more difficult than implementing either the low-cost or the differentiation strategy alone.

In many cases, however, it is not necessary to abandon cost containment to pursue differentiation. The key point is this: Consumers may be willing to pay a somewhat higher price for a product similar to one offered by the big box if they believe that other factors--quality, convenience, location, service, favorable terms, etc.--compensate for the higher price. At some point, however, the perceived worth of the nonprice factors may not be substantial enough to warrant the higher price, or the price difference will be too great for potential customers to afford. As Toby Kaye, owner of two computer stores in Baltimore put it, the smaller retailer does not need to match prices, but they need to be "within striking distance" (McCune, 1994). The problem is that many small retailers do not consider what the market will bear when pricing their merchandise. They may simply add a set percentage to their costs instead of viewing pricing strategies as a competitive weapon. One proven approach in the convenience store market segment is to price commonly-purchased goods such as milk and bread at competitive prices but make it necessary for customers to walk past dozens of other products that are priced at a premium to get to those goods, hoping impulse buying will occur.

Specialization can also be an excellent approach to combating the big box. Stores like Wal-Mart are masters of breadth, not depth. Due to the smaller margins, big box stores are usually able to carry only high-demand products. Smaller retailers can carve out a niche by carrying related items or product lines that the big boxers do not. Examples can be found throughout America's small towns in areas such as hardware, auto parts, and sporting goods.

Small retailers are also better equipped to tailor their product and service lines to local tastes. Limited product line variations are common among big boxers and are necessary to achieve economies of scale. In many lines of business, however, local tastes may differ substantially from the generic approach, providing opportunities to rivals to fulfill these needs. Empirical research supports the effectiveness of this type of "focus" approach among select small retailers, especially those that operate in hostile and intensely competitive environments (McGee and Rubach, 1996/1997). Smaller retailers may even succeed by cooperating with their big box rivals, not competing with them.

As the world's largest retailer, Wal-Mart is a lightning rod for attention, negative publicity, and legal confrontations, resulting in almost 5,000 lawsuit defenses in 2004 alone (Willing, 2001). Simply stated, the volume of business transacted at a big box such as Wal-Mart can readily take a toll on customer service. Hence, providing consistent service is always a challenge, particularly at the big boxers where employees may lack expertise in their respective departments. Today's consumer is strapped for time and more selective than in the past. Women are spending less time shopping, and many consumers are shopping more on the Internet (Barta, Martin, Frye, and Woods, 1999; Spector, 2005).

Rigby and Haas (2004) suggest that competing with Wal-Mart requires some retailers to segment their customer bases and 'wow' the ones that matter. This can be done through expanding signature categories, customizing local assortments, focusing on personal attention, and raising loyalty benefits to customers. Consider the case of Dick's, a small grocery chain in the Midwest. Dick's culls names of newcomers and birth and wedding announcements from local newspapers. New arrivals and newlyweds receive letters of congratulations and coupons from the nearest store. Follow-up letters are sent to lure customers into stores on a consistent basis (Kawasaki, 1995).

The emphasis on service among grocers has extended to the implementation of loyalty cards. A number of grocers have implemented loyalty programs to track purchase behavior and reward repeat customers. Given Wal-Mart's emphasis on efficiency and low prices, the big box is not in a position to get to know individual customers and local buying patterns like other retailers may be. Such programs have met with mixed results, however.

Department store Nordstrom's emphasizes exceptional service. The typical Nordstrom's department store carries 150,000 pairs of shoes of virtually every size and width, with an on-line inventory of over 20 million pairs. The retailer also provides shoe shines, spas for women, and even a concierge service (Spector, 2001).

Although Wal-Mart's wages are competitive, they are not as high as many of their competitors. Competitors may be able to recruit innovative employees with above-market wages, providing them with opportunities to be more creative in their work. Developing and emphasizing distinctive competencies is critical, and human resources can be a key means of doing so (McGee and Peterson, 2000).

* Strategy 3: Value Orientation

"Wal-Mart might offer a better price, but we offer a better value."

Rather than focus solely on costs and prices or means of differentiation, a distinct approach seeks to blend the two into a superior value proposition for the retailer. Such rivals compete on the basis of value by controlling costs vigorously whenever such costs do not directly and significantly enhance the attractiveness of products or services. Value can be viewed as a form of differentiation, but it is distinguished by its co-emphasis on cost leadership.

Value can be expressed as the ratio of perceived worth to price and can rise when the product or service's perceived worth increases or its price decreases. In essence, Wal-Mart has taken the simplest approach to create value, minimizing prices. Other formulas for creating value exist, however, although they require a detailed understanding of consumer tastes and preferences as they relate to a given retailer's line of business.

Wal-Mart's one-size-fits-all approach precludes it from exploring some of these alternatives in an efficient manner, especially at the local level. One way to improve one's value proposition relative to that of Wal-Mart is to add relatively inexpensive features or services when they increase the perceived value of the offering considerably, especially when Wal-Mart is not in a position to integrate a similar approach. Delivery--whether free or for a nominal charge--is a common example of a means of enhancing perceived value, as are expertise and repair, real services after a sale.

The value orientation strategy begins with an organizational commitment to quality products or services, thereby differentiating a firm from its competitors. Because customers may be drawn to high quality, demand may rise, resulting in a larger market share, providing economies of scale that permit lower per-unit costs in purchasing, manufacturing, financing, research and development, and marketing. In this regard, a firm can seek to provide maximum value by differentiating products and services only to the extent that any associated cost hikes can be justified by increases in overall value and by pursing cost reductions that result in minimal, if any, reductions in value.

Conceptually, this strategic approach may be viewed as a hybrid of the other two, although it is qualitatively different. Value-oriented retailers do not merely seek a middle position between the low-cost and differentiation strategies, an approach Porter (1985) suggested can leave competitors stuck in the middle. Alternatively, such retailers consciously seek cost and price positions that may be nominally higher than those of big boxers like Wal-Mart, but also enhance their offerings so that additional value is created. Store managers can be trained to recognize pricing opportunities or vulnerabilities in their individual markets. In addition, supply chains must be examined, labor deployment managed, and overhead wastes eliminated if this value orientation is to be viable (Rigby and Haas, 2004).

In a study of independent drugstores, McGee and Peterson (2000) found that competitive advantage could be achieved through an image of high-quality service. This perception of high quality by the customer is driven by an ability to act decisively, control retail programs related to price, and overwhelm customers with service, particularly the handling of complaints. They reported that these drugstores were successful through the implementation of three competency-based constructs and only one performance-based construct.

Arkansas-based grocer Harp's, for example, has grown to about 50 stores by maintaining competitive prices, but also emphasizing service and freshness. By maintaining price levels close to those at Wal-Mart, Harp's is able to lure customers who are willing to pay a little more for enhanced services and produce freshness. Harp's has discovered how to balance price and other competitive factors to produce value for its customer base.


The Wal-Mart footprint has created numerous challenges for competitors, particularly small retailers whose managers are not well prepared when the big boxer opens a store nearby. In 2006, Wal-Mart began to implement a low-cost/ differentiation strategy, focusing at first on six demographic groups in the U.S. (Zimmerman, 2006). The decades-old layaway plan was discontinued and a celebrity line of home decor from Colin Cowie was added (Kabel, 2006). Store upgrades include specialists in the area of electronics for consumers interested in those big ticket items, products targeting Hispanic shoppers, more upscale merchandise for affluent consumers such as those who shop at the Plano, Texas, Wal-Mart, and a better variety of products that appeal directly to the African-American community (Zimmerman, 2006). Early indications of this attempt to attract upscale consumers to the supercenters are negative as it appears the strategy is not taking hold (McWilliams, 2007b).

As if this wasn't daunting enough, Wal-Mart has embarked on a "green" strategy of environmental conservation and protection that not only includes its stores but also the suppliers of its product lines (Gunther, 2006). Early goals include 25% increased vehicle efficiency, 30% reduction in energy consumed by stores, and a 25% reduction in solid waste. Eventually, CEO Lee Scott wants to get rid of chemicals in the air around production facilities, smog in cities, and anything bad that is now going into a river (Gunther, 2006). The concept of going green originated with Sam Walton's son, Rob, but was propelled to fruition by two things: Wal-Mart has been fending off criticism for its environmental unfriendliness for years, costing it approximately 8% of its former customers, and the "green" strategy might just save the firm money in the long run.

These challenges can be addressed successfully, however, when retailers understand how their resource strengths and weaknesses compare with those of the big boxer. Under certain situations, a retailer may be successful by focusing on a market niche in conjunction with either low costs or differentiation, or by incorporating a value orientation. Dynamic strategic positioning models can also be utilized to augment these approaches. By emphasizing flexibility and adaptability, a dynamic strategy approach can enable a small, nimble firm to respond to industry and environmental changes more rapidly than big boxers like Wal-Mart.

Although a number of published studies have identified various examples of retailers that have competed effectively with big boxers like Wal-Mart, no panacea has emerged. This paper provides a number of examples as well, but integrates them with three strategic approaches built on existing theory. A focus--differentiation strategy may be the most intuitively appealing for many retailers. Indeed, this basic approach seems to be the strategy of choice for many researchers investigating the big box phenomenon, although it is not optimal for all retailers. When a retailer combines this approach with a flexible, dynamic competitiveness perspective, such as the development of a network of suppliers that provide enough variety to rotate several product-supported themes through the store during the year, providing a different look every few months, it can devise a strategy that a big boxer cannot duplicate. However, Wal-Mart's recent interest in smaller and higher-end stores--if executed--might create a strategic response problem for smaller, higher-end competitors (McWilliams, 2007b).

The most appropriate strategic approach depends on the firm and its unique situation. Indeed, each strategy has its own strengths and vulnerabilities, as summarized in Table 1. A focus--low cost strategy can be attractive because it limits the areas in which a retailer must compete with Wal-Mart on price, but it is highly vulnerable to a competitive response because it relies on the very strategic dimension that is core to the big boxer's success, low price. On the other hand, a focus--differentiation strategy can be attractive to many retailers because it avoids direct competition with Wal-Mart, thereby eliminating the low-price vulnerability. A value-orientation strategy can be attractive because it enables a retailer to blend price competitiveness with other resource strengths in its competitive positioning. Its vulnerability is moderate, however, as Wal-Mart also excels in a form of value orientation based primarily on low price.

Purely as an aside, there is one other option that isn't normally discussed regarding Wal-Mart's strategic vulnerability. With the recent interest of Tesco PLC food markets and Japan-based FamilyMart convenience stores in California, foreign-based retailers are expanding their U.S. presence (McWilliams, 2007a). Is it possible for some firm, foreign or domestic, to take its core business, such as groceries for Kroger or Tesco, and expand its dry goods offerings to eventually rival Wal-Mart? Perhaps a foothold in regional markets where Wal-Mart has not fared well, such as California or New York, could provide a base for a gradual expansion across the U.S. and beyond. It seems somewhat unlikely that a competitive threat of global proportions could occur to Wal-Mart, but there are precedents for such a result. Clearly Circuit City, a pioneer in the supercenter concept for electronics and sophisticated point-of-scale systems, has been outpaced by Best Buy for several years, as Best Buy has taken Circuit City's model and updated it, improved it, and made it more hip for younger consumers.

There is no substitute for knowing one's customers, markets, and resources as a foundation for formulating a successful strategy. Such knowledge becomes the input for crafting and refining a retailer's competitive strategy regardless of the strategic option chosen. As such, there is more than one way a retailer can implement each of the three strategic options.

Future research on retailer survival vis-a-vis Wal-Mart should focus on models for assessing resource strengths and weaknesses so that an optimal strategic response can be incorporated. Regardless of the option chosen, a successful strategy can only be developed when a retailer has the appropriate knowledge and tools required to make the best choice and tailor it specifically to the firm's unique array of strategic resources.


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John A. Parnell, University of North Carolina-Pembroke

Donald L. Lester, Middle Tennessee State University

Dr. Parnell has published over 200 basic and applied research articles, presentations, and cases in strategic management and related areas. Dr. Lester has published works in numerous journals in the fields of strategic management, entrepreneurship, and organizational theory.
Table 1. Strategic Response Alternatives for Confronting Wal-Mart

Strategy             Attractiveness            Vulnerability

Focus--Low Cost:     A moderate size           HIGH: Competing with
                     retailer may complete     Wal-Mart on the basis
"We can beat Wal-    effectively with          of costs--even with a
Mart at its own      Wal-Mart on price when    focus orientation--can
game as long as we   proper product-line       make a retailer
fight on our own     decisions are made.       vulnerable to price
turf."               This strategy can be      competition.
                     effective when a
                     retailer has experience
                     serving a distinct
                     customer market and
                     the ability to amass
                     sufficient volume to
                     be price competitive.

Focus--              A smaller retailer may    LOW: If Wal-Mart lacks
Differentiation:     compete effectively       the expertise or
                     with Wal-Mart in market   interest necessary to
"Wal-Mart simply     segments where the        fulfill the needs of a
cannot meet the      giant retailer is         particular market
needs of our         unwilling or unable to    niche, it is possible
customers."          fulfill customer needs.   to avoid direct
                     Product advice and        competition.
                     service, for example,
                     may be substandard in
                     many product areas at

Value Orientation:   Factors such as           MODERATE: If Wal-Mart
                     service, expertise,       can offer lower
"Wal-Mart might      and delivery are very     prices and the
offer a better       important in some         convenience of one-stop
price, but we        product lines. If         shopping, offering a
offer a better       Wal-Mart lacks the        better value will be
value."              infrastructure to         difficult.
                     address these factors,
                     a small retailer with
                     a moderate level of
                     volume may be able to
                     be somewhat price
                     competitive while
                     excelling in other
                     areas important to

Strategy             Examples

Focus--Low Cost:     Grocers Aldi and Save-A-
                     Lot generate substantial
"We can beat Wal-    volume by offering a limited
Mart at its own      product line of no-frills
game as long as we   products targeted to low-income
fight on our own     consumers.

Focus--              A bicycle shop offers high-
Differentiation:     quality bicycles,
                     accessories, and expertise,
"Wal-Mart simply     or a paint store offers expert
cannot meet the      advice and interior design
needs of our         advice not available at Wal-Mart.

Value Orientation:   AutoZone's prices are
                     typically a little higher than
"Wal-Mart might      those at Wal-Mart, but its
offer a better       product line is much more
price, but we        extensive and its sales
offer a better       personnel can provide the
value."              expertise and advice
                     necessary to help customers
                     repair their vehicles.
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