You see it everywhere in magazine articles and advertisements, but what exactly is a core competence? At its simplest, a core competence is a unique capability that affords some type of competitive advantage. It corresponds to a business process, and involves underlying skills, functions, systems and knowledge. To determine if something is of core competence, one must ask, “Does this ‘thing’ give the company a unique advantage over its competitors and help make the company profitable”? Capabilities, on the other hand, refer to a firm s skill at effectively coordinating its resources. In other words, resources are the source of a firm’s capability; and capabilities refer to a firm s ability to bring these resources together and to deploy them advantageously.
Every organization possesses many capabilities that enable it to perform the activities necessary to provide its products or services. Some of these activities may simply be performed adequately, while others may actually be performed rather poorly. However, successful organizations conceivably possess certain capabilities allowing them to perform key activities exceptionally well. Moreover, these are the distinctive capabilities that support a market position that is valuable and difficult to imitate.
At Wal-Mart, its major competitive core competence is its superior logistics system. Wal-Mart is one of the biggest global retailers in the world, operating in several different countries around the world, with multiple formats, all tied together by a state-of-the-art retail distribution system known as a Retail Link. No other mass retailer or trading community – domestic, foreign, or global – has developed a system even close to Wal-Mart’s capabilities in supply chain and distribution management and optimization. However, the possibility of competitors having allocated significant resources to developing state-of-the-art data warehouses that, like Wal-Mart’s, goes beyond collecting point-of-sale data to drive replenishment, exist. In looking at Wal-Mart more closely one realizes that since Wal-Mart is a traditional company its core competence is its supply chain. Wal-Mart maintains a win-win situation with its suppliers since they order large quantities and they represent one of the largest customers for their suppliers.
Wal-Mart has an excellent warehouse and inventory management system on hand, a segment of the value chain system, and hence they are able to stay ahead of their competitors. Their IT focuses on data warehousing and improving their inbound and outbound logistics. Also their shipping and order processing to each of their different store locations is done by applying ‘Just in Time’ inventory. Promotions are a big deal for Wal-Mart. Their heavy reliance on advertisement to boost their sales and increase their number of customers has lead them to their current position in the market. Their IT helps them determine which products are the most popular to the customers, and thus they are able to offer the lowest prices on the most needed products. Advertising these sale items attracts more customers to their stores. Customer relations are very important at Wal-Mart since their customer retention rate must be high in order to maintain their level of growth. Due to better inventory management, and higher quality of service they are able to offer customers a lower price on most products and thus increase the customer’s willingness to pay.
Some of Wal-Mart’s sustainable sources of competitive advantage lie largely in their goal to providing their customers with the “Everyday Low Prices.” This assurance along with the fact that they are willing to match or beat any of their competitors prices leads their customers to place more faith in Wal-Mart. Wal-Mart’s aim to always serve their customers with a smile as well as always be of assistance is another reason they are able to stay ahead of their competition. Sticking steadfastly to the two rules of thumb on customer satisfaction and low price guarantee has lead Wal-Mart to become the leader in their competitive industry.
Some of Wal-Mart’s weaknesses lie in their recent entrance into the Asian markets. Since their European competitors have already made their foothold there, Wal-Mart is at a slight disadvantage at gaining customers there. Also the value chain system applied to the American markets needs to be altered for their Asian markets because the tastes of the Asian consumers vary greatly from their American counterparts. Wal-Mart is also reaching the saturation point in the American markets. Their long time presence has lead to use every trick in the book to gain customer satisfaction the old school way, but now with the use of IT they can further increase their customer market by analyzing the market trends of their various locations. Their new IT will give them further insight on what the customers really want and they will be able to focus and selling and advertising the demanded products at the lowest market prices to beat out their competitors.
According to the competitive forces model, analyzing Wal-Mart’s stance in the Asian markets reveals that the threat of new entrants into the industry is quite possible, since they are trying to sell foreign products to consumers who would prefer the local products. The threat of competitors is quite strong as they have to compete with the European stores who have established themselves well before Wal-Mart’s arrival. However, the new IT will give them the ability to determine which products are in most demand in which locations and then switch the order levels with suppliers accordingly, thus avoiding any losses and in fact guaranteeing a profit.
How a business achieves and sustains a competitive advantage has long been the central focus of strategic management. Although the identification and development of the requisite capabilities is important, management’s primary focus is on achieving a defensible low-cost or differentiation position, and on keeping rivals off balance through strategic investments, and pricing strategies. Wal-Mart has the same resources (e.g., retail space, skilled employees, equipment, etc.) as many other discount chains. However, what distinguishes Wal-Mart is its unique capability to manage its resources in a highly productive way. Wal-Mart’s sophisticated supply system provides the mass-merchandiser with significant advantages by improving its ability to minimize shipping and handling costs. Underlying it all is a set of core competencies and/or capabilities that are hard to imitate. These core competencies, and a continuous strategic investment in them, govern the long term strength of the company.