There is no better place to see the perfect alignment between business model and operating model than in a Fortune 1 company, Walmart.
Walmart was founded by Sam Walton in 1962 with a business model of keeping prices as low as possible. In order to achieve this, Sam Walton had to create an operating model that allowed him to keep the lowest prices in his stores. By operating on a large scale and by minimizing costs, Sam could have a successful business even if his margins were slimmer than competitors. Because Walmart provided a huge market for suppliers’ goods, Sam could negotiate better deals and offer his customers even lower prices. With such slim margins, Walmart has an incredible competitive advantage difficult for others to replicate.
Modernizing Business Model
After over 50 years of business, Walmart has kept the same business model of “everyday low prices.” It has kept this model in sync with its operational model by concentrating on four key areas: volume of sales, leveraging its bargaining power with suppliers, minimization of overhead and operational costs, and innovation in supply chain management. First for volume, Walmart sells everything and is everywhere. With four different types of stores, discount stores, supercenters, Sam’s Clubs, and neighborhood markets, Walmart can capture a wide customer demographic. It has over 11,500 retail stores and it is estimated that roughly 90% of Americans live within 15 minutes of a Walmart. The sheer volume of its customer base is staggering; each week more than 260 million customers visit Walmart’s retail stores and e-commerce websites. With this breath of a customer base, Walmart is able to churn out sales in 2014 over $482 billion.
Leveraging Bargaining Power and Driving Down Costs
Walmart’s enormous size and purchasing power enables it to drive supplier behavior, driving down costs. Many general merchandise producers rely on Walmart for up to 70% of their sales. Without having Walmart as a partner, these businesses would not be able to operate. This gives Walmart unlimited power in establishing its price and delivery terms.
Walmart is also able to drive down costs by managing its on trucking fleet and by innovating its transportation method. Walmart has adopted a warehouse practice called cross-docking. This method moves inventory directly from an arriving truck to a departing truck. This enables products to be transferred quickly and without need for lengthy and expensive warehouse, storage time. As a result of the lower costs for products and a more efficient inventory management process, Walmart can pass along savings in the form of lower prices to consumers.
Supply Chain Management
Walmart has modernized its supply chain management process and strives to further minimize overhead and operation costs. Walmart was one of the first companies to deal directly with manufacturers, in effect making it the supplier’s responsibility to manage Walmart’s inventory. With this “vendor managed inventory” (VMI), irregularities in the flow of inventory can be smoothed, preventing oversupply and stockouts.
Walmart was also one of the first businesses to invest in technology that used a computer system for inventory control. In this system, information such as in-store point of sale data, warehouse inventory, and real time sales was funneled into centralized databases. This information was shared with suppliers so they knew when to ship more goods. By continuously innovating and harmonizing every step in its supply chain, Walmart can further drive down costs.
Walmart Moving Forward
The one area where Walmart remains vulnerable is in the online realm. With less and less people shopping at brick and mortar stores, Walmart needs to revolutionize itself. Customer preference is no longer defined solely by price but also on convenience. Consequently, Walmart must invest in its e-commerce platform to ensure speedy delivery in a convenient, online experience. As Walmart begins to compete with companies like Amazon, it will be interesting to see if it can maintain an alignment between its business and operating models. Walmart will need to modify its existing distribution network and distribution centers to better incorporate online commerce. If Walmart hopes to stay a Fortune 1 company, it needs to either adjust its business and operating models, or it needs to leverage its existing models to bring value to customers in an increasingly digital world.
- Hill, Charles W. L., Gareth R. Jones, and Melissa A. Schilling. “Chapter 9: Corporate Level Strategy.” Strategic Management Theory. 11th ed. Stamford: Cengage Learning, 2015. 292.