INTRODUCTION
The purpose of this report is to analyse a competitive industry using Terry Porter’s five forces model. The analysis will then narrow the industry into segments and focus on how key players in the segment exhibit distinct advantages. A discussion will follow on how the leading company achieves competitive advantage by means of their distinct competencies and whether they can sustain it over time.

The chosen industry for this report is the retail industry, specifically the discount merchandiser segment. The key companies discussed in this paper will be Costco and Wal-Mart, two of the biggest discount merchandisers in the USA. While Costco and Wal-Mart operate under two very separate business models, they carry similar products and compete in similar geographical areas.

The life cycle stage of this industry is in the mature stage where the market is now saturated with notable players aside from the two mentioned. Growth in this market is demonstrated by expanding into different geographic and other markets to increase their overall market shares. Under the maturity life stage, minimizing cost and expansion into different segments can develop a competitive advantage over other big box retailer competitors.

Currently, Wal-Mart is the industrial and segment leader because of its ability to minimize their expenses and expand quickly in global and online markets.

Wal-Mart
Wal-Mart is a mass-market retailer operating in three segments: Wal-Mart USA, Wal-Mart International and their online stores. Their different business models including supercenters, warehouse clubs and smaller groceries stores cater to large and small communities as they are well recognized by their everyday low prices. Such low-priced items include groceries, clothing and home appliances.

For their 2012 fiscal year, Wal-Marts revenues grew to 469.16 billion from $446.95 billion last year (CNN, 2013). This 5% increase helped Wal-Mart rank top industry in the Fortune 500 rankings in which they maintained for the past twelve years (CNN, 2013). Despite strong numbers, 62% of its net sales are contributed by U.S Shoppers (as cited in CNN, 2013). In 2012, it posted return on assets and equity of 8.4% and 22.3%. These numbers represents that the company earned 8.4 and 22.3 cents of profit when investing $1 into its assets and equity.

Costco
Costco engages in the business of membership warehousing in which consumers pay a membership fee to shop in Costco’s warehouses. Their business model consists of selling a wide array of goods in bulk forms. This allows them to require less space on the sales floor and requires fewer employees to replenish their items. Similar to other retail giants, they have a presence in the global and online markets.

For fiscal year 2012, revenues grew 11.5% from 2011 to $99.14 billion dollars (CNN, 2013). In 2012, their return on assets and equity were 6.3% and 13.8% respectively (CNN, 2013).

PORTERS FIVE FORCES MODEL ANALYSIS
The five forces model developed by Terry E. Porter helps managers in a given company to analyze the competitive forces in the industry and identify opportunities and potential threats (Hill & Jones, 2012). If the competitive forces are high in an industry then existing companies will have a difficult time earning profits, while low competitive forces allow companies to identify opportunities to raise profits and gain market shares (Hill & Jones, 2012)

Threats of New Entrants
Risk of new entry into the discount retailer industry is low due to the large capital requirements needed to operate distribution channels and real estate cost. Mom & Pop stores usually are not big enough to hold an array of products compared to the retail giants. Since many suppliers can rely on big retail giants such as Wal-Mart to increase their revenue, they are lenient in giving retail giants a discounted price than compared to smaller stores.

Many retail giants have inventory space to store products. This advantage allows them to buy most of their products in bulks to lower the cost. Most independent stores will not have the inventory space or space on their sales floor to store their items.

Brand loyalty also plays a role in raising barriers to entry for new firms. Wal-Mart advertises their everyday low cost slogan and compares savings against other retailers. In addition, most retail giants offer customers “a one stop shop” which allows customers to buy all their needs in one place. Nevertheless, the switching cost for customers will be high if new stores do not carry all the items a customer can buy at an established store. New entrants however can succeed by presenting other types of value towards customers.

Bargaining Power of Suppliers
The bargaining power of suppliers is low in this discount merchandise industry because most manufacturers depend on the shelf space of retail companies to sell their products. Costco can average $41,000 per SKU indicating why suppliers want their products to be on their shelves (Ashworth, 2012).With companies such as Wal-Mart and Costco purchasing huge volumes from their suppliers, not being able to agree on financial terms with the retail giants can reduce sales revenue of suppliers.

The suppliers’ demand for selling products at Costco and Wal-Mart is high due to Costco’s and Wal-Mart’s growing number of consumers and large e-retailing base. The opportunity to salvage a high profit is likely if a supplier’s product sells well. However, if suppliers cannot agree on financial terms with the retail giants, they can be replaced with other suppliers who can supply the same good and can be flexible in terms of quantity and price. According to Business Insiders, many well known companies depend on Wal-Mart for their revenue and have no choice but to agree on Wal-Marts prices (As cited in Wiederman, 2012). Moreover, if the suppliers cannot meet new low prices, they are ordered by Wal-Mart to cut costs in raw materials or labour, which then might be sourced overseas (Wiederman, 2012). Producers may also be asked to redesign their packaging in order to meet the need by retail giants. For example, Costco gets their suppliers to redesign product packagers in order to fit more items onto a pallet (Mcgregor, 2008). By having more on a pallet, Costco can generate more revenue per square foot than their competitors can.

In addition, discount merchandisers can further decrease the bargaining power of suppliers by shelving their own private label brands. Wal-Mart’s and Costco’s private label brand, ‘Great value and Kirkland’ are usually cheaper and hold the same quality as the generic brands thereby increasing the choices consumers can make and ultimately reducing the powers of other producers.

Threats of Substitution
Substitutions for shopping in big box stores are shopping online on websites such as Amazon. Since online websites do not have overhead cost, they can offer prices lower of any other retail store. The threat of consumers changing their shopping experience from walking into stores to online shopping is reasonable. While most goods are cheaper online compared to big box retailer, the trade off is that the consumers will not be able to receive the item until a later time. However, big box retailers provide a one-stop shop experience in which the consumers can purchases all their products in one go. Including in these one stop shop are perishable items such as fruits and vegetables which consumers have the ability to examine the items before buying. While most consumers do both online shop and shop at big box stores, online shopping can become a threat of substitute in the future because of the convenience factor of not leaving home.

Bargaining Power of Consumers
Bargaining power of consumers is low in this industry because no one individual can influence prices on a certain brand. Most retail giants will carry similar brands and consumers will likely pick the products available to them. However, consumers always have the choice to buy their products elsewhere. In doing so though, they may give up more time and money, which ultimately raises their switching cost.

Rivalry among Key Players
Rivalry in this industry is fierce with many retail giants competing for market shares. Since most retail giants offer similar products for almost identical prices, those who can minimize cost and expand aggressively into other geographic will attain greater market shares.

To conclude the five forces model, it is well known that this industry is fiercely competitive with notable retail giants. Key players such as Costco and Wal-Mart have developed their brand recognition for years and compete on low prices to raise the barrier to entry. In addition to the capital requirements for real estate, new entrants must have in place distribution channels in which products can be distributed quickly from producers to consumers. They must also buy products from suppliers in low cost, and have the savings transfer to the consumers. Without any form of low cost, consumers will not have any incentives to shop elsewhere. In addition, new entrants must also take into consideration the brand loyalty consumers may developed for a certain products or store. If new entrants cannot compete on prices, they must differentiate their product selection or somehow create an enjoyable shopping experience to remain competitive in the industry. Costco for instance, differentiate their products by offering different type of service centre in their store.

DISTINCTIVE COMPETENCIES LEADS TO COMPETITVE ADVANTAGE
Firm specific strengths allow companies to differentiate themselves from competitors. These strengths can lead companies to achieve competitive advantage. Discussed below are Wal-Marts and Costco distinctive competencies.

Efficiency through Supply Chain Management
Wal-Mart’s success in the industry is mainly derived from the management of their supply chains. Although the intense task of determining the operation and coordination of the supply chain can be challenging to many companies, having an efficient and effective supply chain can ultimately be beneficial to the company. Recognized as the bullwhip effect, ordering too much or too less can leave companies with either too much stock or out of stock as customer demands for goods cannot be forecasted ahead of time. However, Wal-Mart has perfected their supply chain and has become the company known for its distribution efficiency. Evidence for this statement shows that Wal-Mart last year sold $1.22 billion dollars worth of merchandise daily (Traub, 2012). Wal-Mart’s supply chain is based on synchronized demand projections. This means that, manufacturers and distribution centers in the supply chain receive sales data from the cash registers, and distribute the goods when the data shows a low quantity (Traub, 2012). As information is informally shared across the supply chain on all Wal-Mart systems in real-time, all stores can expect their shipment of orders to be fulfilled fast and efficiently 100% of the time (Traub, 2012).

Like Wal-Mart, part of Costco’s success in the industry has been part of their supply chain management. Costco has fared well with its supply chain management by sharing inventory and sales data with its suppliers (Little, 2013). Like Wal-Mart, the suppliers in turn are responsible for stocking the products onto Costco shelves (Little, 2013). Unlike Wal-Mart, Costco does not have a huge number of stock keeping units (SKUs) as Costco purchases bulk items at discounted prices and transfers the savings to the consumers. The concept of having limited SKUs enables Costco to change product assortment towards items that are selling well (as cited in Mcgregor, 2008). The low-SKU model also means that Costco will not carry key items if the purchase price is recognized as too expensive for customers (Mcgregor, 2008).

Costco also replenishes their sales floor more efficiently and frequently than compared to any other big box retailer. They can do this because of the invested capital they have in their employees. In addition, Costco pays on average 42% higher in wages to their employees in comparison to Wal-Mart (Greenhouse, 2005). As they display most of their products on pallets, fewer employees are needed to package and stock shelves. Thus, employees are paid more than the industry average as Costco has more money to spend on wages.

On the other hand, while Wal-Mart has success in transferring items efficiency into its stores, it faces the challenges of actually delivering it to the customers. Without enough workers to replenish the store however, products remains stacked on pallets in the backroom and not on the sales floor where they are available for customers (Ungar, 2013). This problem arises because of Wal-Marts frugal business strategy in terms of cutting labour expense over the years. According to a Bloomberg Industry analyst, adding five full-time employees will add half a percentage to selling and administration expense to Wal-Mart and this will ultimately would affect their profit margins (As cited in Dudley, 2013). However, this saving also affects sales revenue, because when services are not up to par, it can leave customers disappointed and dissatisfied with their visit. Harold Meyerson, a writer for the Washington post, suggests that when retailers put employees in crummy working conditions with low pay, this negatively affect the company’s overall image (Meyerson, 2013).

Customer Responsiveness
By identifying and satisfying customer complaints, customers will perceive high utility to a product or a brand. One problem of customer responsiveness in the retail industry is how long do customers wait in checkout lines line before they get their items scanned.

According to a survey conducted by Cisco, about 52% of global consumers prefer self service station for faster checkouts (Cisco, 2013). Wal-Mart has listened to the demand and has added 10,000 self-checkout lanes to its store (White, 2013). Implementation of this technology will allow Wal-Mart to further reduced their labour cost because multiple check-out lanes can be supervise by one individual (White, 2013). However, this comes as a cost to customer satisfaction and overall experience. According to the American Customer Satisfaction Index, Wal-mart has been tied or taken last place six years in a row (Dudley, 2013).

Costco on the other hand, is eliminating self-checkout registers in their stores. Costco’s’ CEO, Craig Jelinek, believes their employees can do a better job in terms of efficiency (Lutz, 2013). Self-checkouts in stores like Costco can increase the risk of theft due to the bulk packaging of their products. Having traditional cashiers scan the items for the customers acts as a counter measure to prevent people from stealing.

DURABILITY OF COMPETITIVE ADVANTAGE
In closing remarks, Wal-Mart will not sustain competitive advantage in the long run.
With Wal-Mart stores being more self-automated, they are decreasing the level of satisfaction customers may receive during their visits. A disorganized store and empty shelves are the reasons why customers are leaving Wal-Mart for other stores.

Costco on the other hand are seeing increases in numbers of new members. Over 1.6 million new members joined Costco worldwide in the first half of 2013 (Trefis, 2013). Despite raising membership fees from $50 - $55 dollars earlier this year, Costco also saw consistent renewal rates of 90% in North America (Trefis, 2013). Coupling with the fact that Costco has not expanded their international presence pass the U.K (Trefis, 2013), Costco has a lot of opportunities to overtake the throne of Wal-Mart in the long run.

Costco will attain competitive advantage not by expansion, but by including tailored services into the customers shopping experience. In 2012, Costco collaborated with First Choice Bank and 10 other lenders to implement a mortgage program for their members (Trefis, n.d). By launching into other segments, Costco will provide more utility to customers other than cheap prices.