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Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. Business model innovation, strategic leadership and smart economic policies are her professional passions. A former Madison, WI resident, Kay now resides in San Diego, CA. The views on her blog are not those of her employer, IBM.

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February 9th, 2011

Three business model lessons that Walmart forgot

Avoid unconsciously veering away from a winning value promise.

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 #1 retailer. They dramatically improved distribution productivity – in fact, supply chain as a revered specialty arrived with Walmart, as did a measurable bump-up in US productivity due to Walmart’s efficiency. They then leveraged growing power over its suppliers to fulfill Walmart’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 Walmart Stores, Inc.’s weak post-recession performance?  Walmart stores open at least one year lost .75% revenue each quarter over the past year while Target, Costco and Family Dollar saw same-store revenue climb. Walmart’s decline is about more than post-recession consumers shopping-up. The American consumer is still highly price-sensitive, but looking outside Walmart 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.

Walmart 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 Walmart 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 Walmart’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.

Walmart’s problems started when they tried to recapture market share lost to Target, now about one-sixth Walmart’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, Walmart 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 Walmart customers. Unable to find what they wanted at Walmart, they turned elsewhere.

Walmart 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 Walmart 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 Walmart 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 Walmart 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.

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

And if you are the Walmart of your industry, never forget it.


8 comments to Three business model lessons that Walmart forgot

  • 1. Love your posts — always give me something to ponder
    2. I think you have a small mistake re: gas prices. You have $2/gal — do you mean $3/gal?
    3. The five questions are great — simple enough to remember, powerful enough to amke sure you don;t forget.
    Cheers, Bill

  • Thanks Bill. The earlier the better, hence my $2/gallon. But at $3/gallon it was a no-brainer as an old boss used to say. A reader at WTN network said that Walmart looks more and more like GM in their practices. Interesting…. Take care.

  • Doug Quam

    Articulating a value promise can sometimes be challenging, so the thought of straying from a promise that’s differentiated and compelling is SO counterproductive. Thanks for the reminder of the importance of staying true to your value promise.

  • That’s a good point. Not only is it challenging to articulate it, actually aligning to deliver on it as Walmart did so well is hugely challenging. So the veering off is indeed a mistake. I hope your work at 3M continues to go well. Amazing company….

  • Mike Lachapelle

    Your comment earlier on the Toyota post was right here as well. There is a strong element of Walmart compromising its authenticity with its customers on the bait-and-switch of the pricing promise.

    But there is another element at play here related to business model innovation. Walmart’s success and dominance was based on their innovations in the key activities (capabilities). They revolutionized logistics and distribution giving them a competitive advantage and better profits. But here, much like Nokia who are currently all over the news about their problems, Walmart has gotten complacent with their advantage and tried to find ways to increase profits without further innovation.

    Meanwhile their competitors have learned the lessons from Walmart’s logistics innovations and moved to further their own business model innovations. Target, as you deftly point out, changed the value proposition so their customers trust them to chose best products, and changed the revenue streams adding the financial incentive. Dollar changed the channels structure by being more ‘local’ and community accessible and lowered costs by smaller stores. BB&B improved the customer in-store experience and added a unique channel with the pre-order.

    More than forgetting their value promise to their customers, Walmart is guilty of complacency in business model innovation. In today’s hugely competitive markets and increasing shorter life-span of business models, that is a death-knell.

    Mike

  • Mike, adding complacency is a good add. I hint at that with the comment might Walmart be like Sears ignoring the competition? That is complacency. I guess the lesson from all of this is that even business models commoditize.My colleague Bill Welter and I always say, “The most important question facing leaders is not “Do I change my business model?” but rather, “How much change is needed?”
    Kay Plantes´s last [type] ..Three business model lessons that Walmart forgot

  • The second point is very common with the growing competition nowadays. People at top levels are becoming too aggressive and end up over promising. They never succeed in giving what was promised and hence suffer later. To kill the competition, one needs to be unique and try to capitalize on self strengths rather than copy what others are doing.
    Jessica´s last [type] ..Advanced African Mango Detox

  • When Walmart forged on with its “Low Prices . . . Always” promise in its inital phases, it attracted price-sensitive consumers and advanced into the power it is today. Now they become the victims of their own success in developing a streak of hard-headedness (in creating what became marketing ploys such as their “Low Prices on Everything” promise which has becoming anything but hollow) and not following complaint boards like my3cents.com which contains more than 50 complaints on Walmart Stores alone. They could adjust their business by reading those comments, take note and act on them, so could they act on their promises and make adjustments accordingly. As this blog article points out, they need to change direction or else . . . they will be washed up like tidal waves coming on the edge of a beach and then receding in constant otion.

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