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,
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
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,
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,
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
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
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
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
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
* 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;
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,
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
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,
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,
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
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
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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
excelling in other
areas important to
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.