Essay, Research Paper: Wal-Mart

Economics

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Abstract Sam Walton, a leader with an innovative vision, started his own company
and made it into the leader in discount retailing that it is today. Through his
savvy, and sometimes unusual, business practices, he and his associates led the
company forward for thirty years. Today, four years after his death, the company
is still growing steadily. Wal-Mart executives continue to rely on many of the
traditional goals and philosophies that Sam's legacy left behind, while
simultaneously keeping one step ahead of the ever-changing technology and
methods of today's fast-paced business environment. The organization has faced,
and is still facing, a significant amount of controversy over several different
issues; however, none of these have done much more than scrape the exterior of
this gigantic operation. The future also looks bright for Wal-Mart, especially
if it is able to strike a comfortable balance between increasing its profits and
recognizing its social and ethical responsibilities. Why is Wal-Mart so
Successful? Is it Good Strategy or Good Strategy Implementation? -- In 1962,
when Sam Walton opened the first Wal-Mart store in Rogers, Arkansas, no one
could have ever predicted the enormous success this small-town merchant would
have. Sam Walton's talent for discount retailing not only made Wal-Mart the
world's largest retailer, but also the world's number one retailer in sales.
Indeed, Wal-Mart was named "Retailer of the Decade" by Discount Store
News in 1989, and on several occasions has been included in Fortune's list of
the "10 most admired corporations." Even with Walton's death (after a
two-year battle with bone cancer) in 1992, Wal-Mart's sales continue to grow
significantly. The Wal-Mart Philosophy -- Wal-Mart is successful not only
because it makes sound strategic management decisions, but also for its
innovative implementation of those strategic decisions. Regarded by many as the
entrepreneur of the century, Walton had a reputation for caring about his
customers, his employees (or "associates" as he referred to them), and
the community. In order to maintain its market position in the discount retail
business, Wal-Mart executives continue to adhere to the management guidelines
Sam developed. Walton was a man of simple tastes and took a keen interest in
people. He believed in three guiding principles: 1. Customer value and service;
2. Partnership with its associates; 3. Community involvement (The Story of
Wal-Mart, 1995). The Customer -- The word "always" can be seen in
virtually all of Wal-Mart's literature. One of Walton's deepest beliefs was that
the customer is always right, and his stores are still driven by this
philosophy. When questioned about Wal-Mart's secrets of success, Walton has been
quoted as saying, "It has to do with our desire to exceed our customers'
expectations every hour of every day" (Wal-Mart Annual Report, 1994, p. 5).
The Associates -- Walton's greatest accomplishment was his ability to empower,
enrich, and train his employees (Longo, 1994). He believed in listening to
employees and challenging them to come up with ideas and suggestions to make the
company better. At each of the Wal-Mart stores, signs are displayed which read,
"Our People Make the Difference." Associates regularly make
suggestions for cutting costs through their "Yes We Can Sam" program.
The sum of the savings generated by the associates actually paid for the
construction of a new store in Texas (The story of Wal-Mart, 1995). One of
Wal-Mart's goals was to provide its employees with the appropriate tools to do
their jobs efficiently. The technology was not used as a means of replacing
existing employees, but to provide them with a means to succeed in the retail
market (Thompson & Strickland, 1995). The Community -- Wal-Mart's popularity
can be linked to its hometown identity. Walton believed that every customer
should be greeted upon entering a store, and that each store should be a
reflection of the values of its customers and its community. Wal-Mart is
involved in many community outreach programs and has launched several national
efforts through industrial development grants. What are the Key Features of
Wal-Mart's Approach to Implementing the Strategy Put Together by Sam Walton --
The key features of Wal-Mart's approach to implementing the strategy put
together by Sam Walton emphasizes building solid working relationships with both
suppliers and employees, being aware and taking notice of the most intricate
details in store layouts and merchandising techniques, capitalizing on every
cost saving opportunity, and creating a high performance spirit. This strategic
formula is used to provide customers access to quality goods, to make these
goods available when and where customers want them, to develop a cost structure
that enables competitive pricing, and to build and maintain a reputation for
absolute trustworthiness (Stalk, Evan, & Shulman, 1992). Wal-Mart stores
operate according to their "Everyday Low Price" philosophy. Wal-Mart
has emerged as the industry leader because it has been better at containing its
costs which has allowed it to pass on the savings to its customers. Wal-Mart has
become a capabilities competitor. It continues to improve upon its key business
processes, managing them centrally and investing in them heavily for the long
term payback. Wal-Mart has been regarded as an industry leader in "testing,
adapting, and applying a wide range of cutting-edge merchandising
approaches" (Thompson & Strickland, 1995, p. 860). Walton proved to be
a visionary leader and was known for his ability to quickly learn from his
competitors' successes and failures. In fact, the founder of Kmart once claimed
that Walton "not only copied our concepts, he strengthened them. Sam just
took the ball and ran with it" (Thompson & Strickland, 1995, p. 859).
Wal-Mart has invested heavily in its unique cross-docking inventory system.
Cross docking has enabled Wal-Mart to achieve economies of scale which reduces
its costs of sales. With this system, goods are continuously delivered to stores
within 48 hours and often without having to inventory them. Lower prices also
eliminate the expense of frequent sales promotions and sales are more
predictable. Cross docking gives the individual managers more control at the
store level. A company owned transportation system also assists Wal-Mart in
shipping goods from warehouse to store in less than 48 hours. This allows
Wal-Mart to replenish the shelves 4 times faster than its competition. Wal-Mart
owns the largest and most sophisticated computer system in the private sector.
It uses a MPP (massively parallel processor) computer system to track stock and
movement which keeps it abreast of fast changes in the market (Daugherty, 1993).
Information related to sales and inventory is disseminated via its advanced
satellite communications system. Wal-Mart has leveraged its volume buying power
with its suppliers. It negotiates the best prices from its vendors and expects
commitments of quality merchandise (Thompson & Strickland, 1995). The
purchasing agents of Wal-Mart are very focused people. "Their highest
priority is making sure everybody at all times in all cases knows who's in
charge, and it's Wal-Mart" (Vance & Scott, 1995, p. 32). "Even
though Wal-Mart was tough in negotiating for absolute rock-bottom prices, the
company worked closely with suppliers to develop mutual respect and to forge
long-term partnerships that benefited both parties" (Thompson &
Strickland, 1995, p. 866). Wal-Mart built an automated reordering system linking
computers between Procter & Gamble ("P&G") and its stores and
distribution centers. The computer system sends a signal from a store to P&G
identifying an item low in stock. It then sends a resupply order, via satellite,
to the nearest P&G factory, which then ships the item to a Wal-Mart
distribution center or directly to the store. This interaction between Wal-Mart
and P&G is a win-win proposition because with better coordination, P&G
can lower its costs and pass some of the savings on to Wal-Mart. Sam Walton
received national attention through his "Buy America" policy. Through
this plan, Wal-Mart encourages its buyers and merchandise managers to stock
stores with American-made products. In a 1993 annual report management stated
the "program demonstrates a long-standing Wal-Mart commitment to our
customers that we will buy American-made products whenever we can if those
products deliver the same quality and affordability as their foreign-made
counterparts" (Thompson & Strickland, 1995, p. 868). Environmental
concerns are important to Wal-Mart. A prototype store was opened in Lawrence,
Kansas, which was designed to be environmentally friendly. The store contains
environmental education and recycling centers (Slezak, 1993). Wal-Mart has also
adopted the low cost theme for its facilities. All offices, including the
corporate headquarters, are built economically and furnished simply. To conserve
energy, temperature controls are connected via computer to headquarters. Through
these programs, Wal-Mart shows its concern for the community. Wal-Mart has been
led from the top but run from the bottom, a strategy developed by Sam Walton and
carried on by a small group of senior executives led by CEO David Glass.
Although recent growth has led Wal-Mart to add more management layers, senior
executives strive to maintain its unique culture. This culture, described as
"one part Southern Baptist evangelism, one part University of Arkansas
Razorback teamwork, and one part IBM hardware" has worked to Wal-Mart's
advantage (Saporito, 1994, p. 62). Just how Successful is Wal-Mart? -- A
forecast (see Appendix A) of Wal-Mart's income for the period 1995-2000,
considering increases of 30.6% in Net Sales, 27.7% in Operating Expenses, and
52.3% in Interest Debt (a level which is below Wal-Mart's historically
compounded growth rate of 55.6%) indicates that the company should continue to
report gains each year until 2000. Growth on Sales -- According to most analysts
and company projections, sales should approximate $115 billion by 1996,
representing an increase of 30.6% as compared to 1995. If the company continues
at this pace, sales should reach $334 billion by the year 2000. The growth on
sales that Wal-Mart reported during the 1980s and the beginning of the 1990s
will be difficult to repeat, especially considering the ever-changing
marketplace in which it competes. In an interview, Bill Fields, President of the
Stores Division, said "Wal-Mart is now seeing price pressure from companies
that once assiduously avoided taking it on. These include specialty retailers
such as Limited, category killers like Home Depot and Circuit City, and catalog
companies like Spiegel. I think everybody prices off of Wal-Mart. You've got
Limited reaching levels we'd thought they'd never get to. The result is that
everyday low prices are getting lower" (Saporito, 1994, p. 66). In
addition, the baby-boomers are reaching their peak earnings years, when
financial and personal priorities change. Thus, savings, not spending, will
likely take precedence because most baby-boomers are approaching retirement.
Debt Position -- Based on Wal-Mart's position in 1994, which was considered a
year of expansion for the company, (Wal-Mart added 103 new discount stores, 38
"Supercenters", 163 warehouse clubs, and 94,000 new associates)
interest debt increased 52.3%. The cost paid by Wal-Mart to finance property
plants and equipment forced the company to increase long term debt by 4.6 times
during the period 1991-1995. Long term debt for 1995 is $7.9 billion. If
Wal-Mart continues its expansion plans based on more debt acquisition at 1994
levels, the company may not attain forecasted gains by as early as 1998.
Operating Expenses -- Operating expenses will be a key strategic issue for
Wal-Mart in order to maintain its position in the market. The challenge is how
to run more stores with less operating expenses. According to Bill Fields,
". . . the goal is to increase sales per square foot and drive operating
costs down yet another notch" (Saporito, 1994, p. 66). Trends indicate that
operating expenses have been growing at a rate of 27.7% in recent years.
However, Wal-Mart should reap the benefits of its investments in high
technology, and be able to operate more stores without increasing its expenses.
Cost of Sales -- Cost of sales historically has been equal to the level of
sales. If the company continues to take advantage of its buying power, Wal-Mart
can expect to lower its cost of sales. Wal-Mart's future will depend on how well
the company manages its expansion plans. For the coming years, the company will
need to justify its expansion plans with consistent growth in sales, in order to
offset the increases in debt interest and operating expenses. What Problems are
Ahead for Wal-Mart? What Risks? -- Throughout the 1980s, Wal-Mart's strategic
intent was to unseat industry leaders Sears and Kmart, and become the largest
retailer in the U.S. Wal-Mart accomplished this goal in 1991. But Wal-Mart's
current strong competitive position and its past rapid growth performance can't
guarantee that the company will remain as the industry leader or maintain its
strong business position in the future. Carol Farmer, a retail consultant, told
the Wall Street Journal that, "One little bad thing can wipe out lots of
good things" (Trimble, 1990, p. 267). Every move in its business operation
ought to be well thought-out and executed. Wal-Mart needs to address two major
areas in order to maintain or to capture an even stronger long term business
position: 1) Single-business strategy -- Wal-Mart's success is mainly based on
its concentration of a single-business strategy. This strategy has achieved
enviable success over the last three decades without relying upon
diversification to sustain its growth and competitive advantages. Given its
current position in the industry, Wal-Mart may want to continue its
single-business strategy and to push hard to maintain and increase market share.
However, there is risk in this strategy, because concentration on a
single-business strategy is similar to "putting all of a firm's eggs in one
industry basket" (Thompson & Strickland, 1995, p. 187). In other words,
if the retail industry stagnates due to an economic downturn, Wal-Mart might
have difficulty achieving past profit performance. Also, if Wal-Mart continues
to follow Sam Walton's vision of expansion, Wal-Mart will reach its peak in the
very near future. When it does, its growth will start to slow down and the
company will need to turn its strategic attention to diversification for future
growth. 2) Social responsibility -- Retail stores can compete on several bases:
service, price, exclusivity, quality, and fashion. Wal-Mart has been extremely
successful in competing in the retail industry by combining service, price, and
quality. However, other merchants may object to Wal-Mart's entry into their
community. Because of its ability to out-price smaller competitors, Wal-Mart's
stores threaten smaller neighborhood stores which can only survive if they offer
merchandise or services unavailable anywhere else. This makes it very hard for
small businesses, such as "mom-and-pop" enterprises, to survive. They,
therefore, fight to keep Wal-Mart from entering their locales. Numerous studies
conducted in different states both support and criticize Wal-Mart (Verdisco,
1994). Nevertheless, Wal-Mart did drive local merchants out of business when it
opened up stores in the same neighborhood. As a result, more and more rural
communities are waging war against Wal-Mart's entrance into their market.
Besides protesting and signing petitions to attempt to stop Wal-Mart's entry
into their community, the opposition's efforts can even be found on The
Internet. Gig Harbor, a small town in Washington, recently started a World Wide
Web page entitled "Us Against the Wal." The town's neighborhood
association promised that they "will fight them [Wal-Mart] tooth and
nail" (PNA/Island Aerie Internet Productions, 1995/1996). The increasing
opposition indicates that the road ahead for Wal-Mart may not be as smooth as
Wal-Mart's annual report would entail. This requires Wal-Mart to rethink its
expansion strategy since it would not be profitable to operate in an unfriendly
community. How Big Will Wal-Mart be in Five Years if all Continues to go Well?
-- Before he died, Sam Walton expressed his belief that by the year 2000
Wal-Mart should be able to double the number of stores to about 3,000 and to
reach sales of $125 billion annually. Walton predicted that the four biggest
sources of growth potential would be the following: 1. expanding into states
where it had no stores; 2. continuing to saturate its current markets with new
stores; 3. perfecting the Supercenter format to expand Wal-Mart's retailing
reach into the grocery and supermarket arena -- a market with annual sales of
about $375 billion; 4. moving into international markets (Thompson &
Strickland, 1995). Wal-Mart Supercenters represent leveraging on customer
loyalty and procurement muscle in order to create a new domestic growth vehicle
for the company. With few locations left in the U.S. to put a new Sam's Club or
traditional Wal-Mart, the Supercenter division has emerged as the domestic
vehicle for taking Wal-Mart to $100 billion in sales. Before the Supercenter,
Walton experimented with a massive "Hypermart", encompassing more than
230,000 square feet in size. The idea failed. Customers complained that the
produce was not fresh or well-presented and that it was difficult to find things
in a store so big that inventory clerks had to wear roller skates. One of
Walton's philosophies was that traveling on the road to success required failing
at times. As a result of the unsuccessful experiment, Walton launched a revised
concept: the Supercenter, a combination discount and grocery store that was
smaller than the Hypermart. The Supercenter was intended to give Wal-Mart
improved drawing power in its existing markets by providing a one-stop shopping
destination. Supercenters would have the full array of general merchandise found
in traditional Wal-Mart stores, as well as a full-scale supermarket,
delicatessen, fresh bakery, and other specialty shops like hair salons, portrait
studios, dry cleaners, and optical wear departments. Supercenters would measure
125,000 to 150,000 square feet, and target locations where sales per store of
$30 to $50 million annually were feasible. Walton's prediction was right on
target. The Supercenter division more than doubled in size during 1993, then
doubled again in 1994. Supercenters, once thought of as risky because of slim
profit margins on the food side, will most likely make Wal-Mart the nation's
largest grocery retailer within the next five to seven years (Longo, 1994).
Expanding overseas, Wal-Mart moved into the international market in 1991 through
a joint-venture partnership with CIFRA S.A. de C.V., Mexico's leading retailer.
Since then the company has entered Canada, Hong Kong, mainland China, Puerto
Rico, Argentina, and Brazil. The Wal-Mart International Division was officially
formed in 1994 to manage the company's international growth. By the year 2000,
analysts expect Wal-Mart to be a huge international retailer, with numerous
locations in South America, Europe, and Asia. Conclusion -- The ever-changing
market presents continuing challenges to retailers. First and foremost,
retailers must recognize the strong implications of a "buyers' market"
(Lewison, 1994). Customers are being offered a wide choice of shopping
experiences, but no one operation can capture them all. Therefore, it is
incumbent upon management to define their target market and direct their
energies toward solving that specific market's problems. Technology,
demographics, consumer attitudes, and the advent of a global economy are all
conspiring to rewrite the rules for success. Success in the next decade will
depend upon the level of understanding retailers have about the new values,
expectations, and needs of the customer. If Wal-Mart continues its
customer-driven culture, it should remain a retail industry leader well into the
next century.
Bibliography
Daugherty, R. (1993). New approach to retail signals strong future for point
of purchase displays. Paperboard Packaging, pp. 24-27. Lewison, M. D. (1991).
Retailing. New York: Macmillan. Longo, D. (1994). New generation of exec's leads
Wal-Mart into the next century. Discount Store News, pp. 45-47. PNA/Island Aerie
Internet Productions (1995/1996). Us against the Wal. Gig Harbor, Washington:
Peninsula Neighborhood Association. [Online] Available: http://www.harbornet.com/pna/.
Saporito, B. (1994, May). And the winner is still . . . Wal-Mart. Fortune, pp.
62-68. Slezak, M. (1993). Seeds of "environmental store" planted in
1989. Discount Stores Inc., pp. 25-27. Stalk, G., Evans, P., Shulman, L. (1992,
March-April). Competing on capabilities: the new rules of corporate strategy.
Harvard Business Review, pp. 55-70. Thompson, A. A., Jr. & Strickland, A.J.
III. (1995). Strategic management concepts and cases (8th ed.). Chicago: Irwin.
Trimble, V. H. (1990). Sam Walton: The inside story of America's richest man.
New York: Dutton. Vance, S., & Scott, S. (1994). Wal-Mart: a history of Sam
Walton's retail phenomenon. New York: Twayne. Verdisco, R. J. (1994, October).
Superstores and Smallness. Discount Merchandiser, p. 8. Wal-Mart Stores, Inc.
(1995). The story of Wal-Mart. Bentonville, Arkansas: Corporate Offices of Wal-
Mart Stores, Inc. Wal-Mart Annual Report, 1994 Wal-Mart Annual Report, 1995.

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