A lesson to be learned for Wal-Mart

Love Wal-Mart Stores, Inc. or hate it, you have to admire the consistent business model strategy its leaders followed to emerge as the world’s No. 1 retailer. They dramatically improved distribution productivity – in fact, supply chain as a revered specialty arrived with Wal-Mart, as did a measurable bump-up in U.S. productivity due to Wal-Mart’s efficiency.

They then leveraged growing power over its suppliers to fulfill Wal-Mart’s compelling value promise – “everyday lowest price.” It took decades for competitors to figure out how to stop the Fortune 500 company’s march.

Did leadership hubris then lead to Wal-Mart Stores Inc.’s weak post-recession performance? Wal-Mart stores open at least one year lost .75 percent revenue each quarter over the past year while Target, Costco and Family Dollar saw same-store revenue climb. Wal-Mart’s decline is about more than post-recession consumers shopping-up. The American consumer is still highly price-sensitive, but looking outside Wal-Mart for better deals or better products.

Wal-Mart leaders have a game plan to recover, according to a recent Associated Press article. But could they have avoided their current troubles? CEO Mike Duke should post these three lessons on humongous billboards heading into his Arkansas corporate headquarters.

#1 Align everything to our value promise.

Wal-Mart promises lowest everyday prices on everything. A new pricing strategy, according to the AP story, in which low prices were used to lure people into the store only to sell them market-priced products was not just greedy, but stupid. Whatever Wal-Mart gained in near-term margin they lost in customer goodwill and profits going forward.

The most important element of your business model is your value promise – the unique benefits (or lowest costs, in Wal-Mart’s case) that lead customers and prospects to select you over their alternative options. Every element of your business – from strategy to pricing tactics to culture – should be aligned against that value promise.

#2 In addressing competitive threats, don’t forget our value promise.

Wal-Mart’s problems started when they tried to recapture market share lost to Target, now about one-sixth Wal-Mart’s size. Attempts at “design-look” clothing failed. Next tactic: reduce brands and SKUs to widen aisles and improve the in-store experience.

In the process, Wal-Mart forgot why their customers shop with them: for everyday low prices on everything they want to buy. Target customers trust Target to pick out the best merchandise, which enables Target to also offer a higher-end, less cluttered store experience.  Not so with Wal-Mart customers. Unable to find what they wanted at Wal-Mart, they turned elsewhere.

Wal-Mart should have improved its customer shopping experience in other ways (e.g., alphabetic ordering of brands within the category’s shelves or pre-ordering as Bed, Bath & Beyond so successfully accomplishes). Target was much savvier in beating Wal-Mart at its game without leaders forgetting Target’s value-promise. By offering 5%-off the bill with Target credit card usage, Target’s competitive tactic will generate a financial services revenue stream for the corporation.

#3 Don’t let anyone capture our value promise.

When the price of gas shot up over $2/gallon all Wal-Mart stores should have gone on red-alert. The overall time and money cost of a trip to “dollar stores” (Family Dollar, Dollar Tree, Dollar General) versus Wal-Mart improved because of dollar stores’ more convenient locations and smaller footprints. Family Dollar leaders moved the way a Green Bay Packer or Pittsburgh Steeler runs right past his opponent’s line towards the end-zone when a hole appears in the line.

Wal-Mart’s “smaller store ­– closer in” strategy is too late in arriving.  Furthermore, there were alternative strategies to deal with the higher price of gas before changing the real estate: more aggressive online ordering incentives (like Amazon’s Prime) and gas cards for loyal customers.

Could it be that Wal-Mart Stores’ leaders were acting like Sears, ignoring the competition?

Overall lesson

Ultimately, your business model boils down to answers to the five most important strategy questions facing any leadership team:

  • Who are we for?
  • What business are we in?
  • What’s our value promise?
  • Why will this promise be hard for competitors to copy?
  • Why will we be profitable?

Look at Lessons #1, #2 and #3 and you’ll see success is all about the value promise. The answers to your five interdependent business strategy questions should result in a hard-to-copy value promise that appeals to a large enough target market willing to pay a high enough premium over your costs to make you wildly profitable.  Be in whatever business lets you do just that with your current and potential skills, knowledge and resources.

If you can’t be the Wal-Mart of your industry, avoid becoming its Sears with a totally confusing value promise. Carve out a niche that your industry’s Wal-Mart can’t easily copy, as Target, Costco and Family Dollar have done facing the #1 retailer in the world.

And if you are the Wal-Mart of your industry, never forget it.

 

Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. She served as chief economist for former Wisconsin Republican Gov. Lee Dreyfus. Plantes provides expertise in business model innovation, strategic leadership and smart economic policies. She resides in Madison.

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