walmart economy of scale

In the 1980s, companies discovered time as a new source of competitive advantage. In the 1990s, they will learn that time is just one piece of a more far-reaching transformation in the logic of competition. Companies that compete effectively on time—speeding new products to market, manufacturing just in time, or responding promptly to customer complaints—tend to be good at other things as well: for instance, the consistency of their product quality, the acuity of their insight into evolving customer needs, the ability to exploit emerging markets, enter new businesses, or generate new ideas and incorporate them in innovations. But all these qualities are mere reflections of a more fundamental characteristic: a new conception of corporate strategy that we call “capabilities-based competition.” For a glimpse of the new world of capabilities-based competition, consider the astonishing reversal of fortunes represented by Kmart and Wal-Mart. In 1979, Kmart was king of the discount retailing industry, an industry it had virtually created. With 1,891 stores and average revenues per store of $7.25 million, Kmart enjoyed enormous size advantages. This allowed economies of scale in purchasing, distribution, and marketing that, according to just about any management textbook, are crucial to competitive success in a mature and low-growth industry. By contrast, Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues about half of those of Kmart stores—hardly a serious competitor. And yet, only ten years later, Wal-Mart had transformed itself and the discount retailing industry. Growing nearly 25% a year, the company achieved the highest sales per square foot, inventory turns, and operating profit of any discount retailer. Its 1989 pretax return on sales was 8%, nearly double that of Kmart. Today Wal-Mart is the largest and highest profit retailer in the world—a performance that has translated into a 32% return on equity and a market valuation more than ten times book value. What’s more, Wal-Mart’s growth has been concentrated in half the United States, leaving ample room for further expansion. If Wal-Mart continues to gain market share at just one-half its historical rate, by 1995 the company will have eliminated all competitors from discount retailing with the exception of Kmart and Target. The Secret of Wal-Mart’s Success What accounts for Wal-Mart’s remarkable success? Most explanations focus on a few familiar and highly visible factors: the genius of founder Sam Walton, who inspires his employees and has molded a culture of service excellence; the “greeters” who welcome customers at the door; the motivational power of allowing employees to own part of the business; the strategy of “everyday low prices” that offers the customer a better deal and saves on merchandising and advertising costs. Economists also point to Wal-Mart’s big stores, which offer economies of scale and a wider choice of merchandise.

Competing on Capabilities: The New Rules of Corporate Strategy

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Competing on Capabilities: The New Rules of Corporate Strategy - Harvard Business Review