The biggest employer in the world uses technology in a superior way and offers everything from eye examinations to pharmacy and auto service to banking. It was instrumental in the closing or bankruptcy of 27 supermarket chains and has a “perpetual-profit” generating machine that could be a threat to your business.

Powering Wal-Mart’s growth is a self-perpetuating productivity loop that starts by reducing its cost in order to invest the savings in lower prices. Lower prices then increase sales which generate higher profits to reduce costs further.

William H. Marquard author of Wal-Smart gives an example using a bottle of shampoo that is selling for 99 cents and costs Wal-Mart 75 cents generating a gross profit of 24 cents. Assuming each store sells 1,000 bottles of shampoo per week, the company makes $240 of total gross profit per store.

By negotiating a lower price from the vendor the self-perpetuating productivity loop reduces the cost by 2 cents to 73 cents. It then lowers the price in the store to 94 cents, draws attention to this bargain and increases shampoo sales to 1,400 a week. Even though it makes 3 cents less per bottle its gross profit rises to $294.

Then Wal-Mart invests some of the increased profits in technology to better manage its truck fleet creating transportation efficiencies that drop shampoo costs another 2 cents per bottle to 71 cents. Cutting another 6 cents off the price to 88 cents, customers respond, and weekly sales jump to 2,000 per store. Total gross profit has climbed from $240 to $340.

With just this one product, according to Marquard, Wal-Mart multiplies the profit by 6,600 stores over 52 weeks and increases its profit by $34 million annually. This self-perpetuating productivity loop of reducing costs, reducing prices, increasing sales and increasing profits has created a business model that will crush anyone who tries to compete directly. Where will it go next and how can you compete with Wal-Mart and other giants?

The key to competing successfully is don’t compete against them! Learn from them, emulate them and make choices like they do. In order to focus and dominate their category, all dominant players willingly give a large segment of the market to competitors.

Kohl’s and Target are successful because they saw and captured the customers who wanted a discount but better quality, service and more fashion selection than Wal-Mart offers. The same is true for higher-end home fashions exploited by Pottery Barn and Bed, Bath & Beyond.

All companies have strengths and weaknesses, including dominant players. Wal-Mart’s focus on low-cost and efficient product delivery leaves plenty of room to create customer service advantages.

Dominant players in any size market are successful because they have highly targeted strategies and customer value propositions. To be focused, they have to say “no” to some products, services, and markets, which create opportunities for other companies.

To dominant your market, ask: How will you differentiate? What do customers want that they are not getting now? What are your unique strengths and how can you use them to serve a customer better than anyone else?

Like Wal-Mart you can be successful but must create a focused strategy that genuinely addresses an underserved or unanswered need. There must be enough people that want your products or services and are willing to pay what you’re asking. You must be able to deliver in a way superior to any competitors.

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