The company has been focused on the strategic management of costs from the very early days when its founder, Sam Walton, began his career as a discount retailer.
One of Walton's own rules for building a business, in fact, encapsulates the dual-pronged philosophy of Wal-Mart's strategic cost management. His ninth rule specifically advocates that one should "control your expenses better than your competitors. This is where you can always find the competitive advantage" (Ghemawat, et al. 2004: 49). The scope of this paper will be to examine the key strategic elements underpinning Wal-Mart's cost controls and industry leadership. The company engages in aggressive cost reduction through the strategic management of procurement, inventory, distribution, and internal operational efficiencies. Further, it maintains its cost leadership within the industry by being willing to duplicate the successful strategies of its competition, its use of the principle of evolution over revolution, deep discounting strategies, and key strategic partnerships with other companies.
Based upon the information in the case study and the research evidence found which supports the strategic management practices used by Wal-Mart-not to mention the obvious success enjoyed by the company-it would be fair to say that Wal-Mart is indeed successfully managing its costs and placing itself at the head of the line within the American discount retail market.
Strategic Management of Cost Reduction
In business, it is one thing for a company to say that it is going to control its costs; but it is quite something else to effectively do it. Wal-Mart has developed several key elements or points of control that have allowed it to manage its costs with startling efficiency.
Procurement. It isn't any great revelation that if a company is in the retail business, it's viability depends on obtaining goods for as low a cost as possible and then selling them as expensively as the market will allow. Accordingly, any strategic management of costs is going to necessarily begin on the side of procurement where the resale goods are obtained. In fact, there was a survey conducted in the year 2000 where "50 per cent of finance directors surveyed by Byline Research said that cost reduction was their most important factor in procurement issues..." (Chatel & Hunt 2003: 216). For Sam Walton and his managers, "buying trips" had to have expenses of less than 1% of the value of any purchases, which meant there were often times of sharing hotel rooms, walking instead of taking a taxi, or even calling suppliers collect (Ghemawat, et al. 2004: 28). Given Walton's obsession with keeping costs low, it wouldn't be unexpected to discover that one of his key strategies would become to bypass distributors and manufacturer's representatives entirely and purchase his products directly from the manufacturers. Because merchandise procurement is a fundamental activity for a retail firm, and cost-effective purchasing impacts the cost of good sold, "successful negotiations with vendors may enable the retail buyer to obtain financial assistance from the supplier" (Fairhurst, Lennon, & Yu 1996: 14). For Sam Walton during his early years, the fact that his chain