Abstract Sam Walton, a leader with an innovative vision, started his own companyand made it into the leader in discount retailing that it is today. Through hissavvy, and sometimes unusual, business practices, he and his associates led thecompany forward for thirty years. Today, four years after his death, the companyis still growing steadily.
Wal-Mart executives continue to rely on many of thetraditional goals and philosophies that Sam’s legacy left behind, whilesimultaneously keeping one step ahead of the ever-changing technology andmethods of today’s fast-paced business environment. The organization has faced,and is still facing, a significant amount of controversy over several differentissues; however, none of these have done much more than scrape the exterior ofthis gigantic operation. The future also looks bright for Wal-Mart, especiallyif it is able to strike a comfortable balance between increasing its profits andrecognizing its social and ethical responsibilities. Why is Wal-Mart soSuccessful? Is it Good Strategy or Good Strategy Implementation? — In 1962,when Sam Walton opened the first Wal-Mart store in Rogers, Arkansas, no onecould have ever predicted the enormous success this small-town merchant wouldhave. Sam Walton’s talent for discount retailing not only made Wal-Mart theworld’s largest retailer, but also the world’s number one retailer in sales. Indeed, Wal-Mart was named “Retailer of the Decade” by Discount StoreNews in 1989, and on several occasions has been included in Fortune’s list ofthe “10 most admired corporations.Order now
” Even with Walton’s death (after atwo-year battle with bone cancer) in 1992, Wal-Mart’s sales continue to growsignificantly. The Wal-Mart Philosophy — Wal-Mart is successful not onlybecause it makes sound strategic management decisions, but also for itsinnovative implementation of those strategic decisions. Regarded by many as theentrepreneur of the century, Walton had a reputation for caring about hiscustomers, his employees (or “associates” as he referred to them), andthe community. In order to maintain its market position in the discount retailbusiness, Wal-Mart executives continue to adhere to the management guidelinesSam developed. Walton was a man of simple tastes and took a keen interest inpeople. He believed in three guiding principles: 1.
Customer value and service;2. Partnership with its associates; 3. Community involvement (The Story ofWal-Mart, 1995). The Customer — The word “always” can be seen invirtually all of Wal-Mart’s literature. One of Walton’s deepest beliefs was thatthe customer is always right, and his stores are still driven by thisphilosophy.
When questioned about Wal-Mart’s secrets of success, Walton has beenquoted 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 toemployees and challenging them to come up with ideas and suggestions to make thecompany better. At each of the Wal-Mart stores, signs are displayed which read,”Our People Make the Difference. ” Associates regularly makesuggestions for cutting costs through their “Yes We Can Sam” program.
The sum of the savings generated by the associates actually paid for theconstruction of a new store in Texas (The story of Wal-Mart, 1995). One ofWal-Mart’s goals was to provide its employees with the appropriate tools to dotheir jobs efficiently. The technology was not used as a means of replacingexisting employees, but to provide them with a means to succeed in the retailmarket (Thompson & Strickland, 1995). The Community — Wal-Mart’s popularitycan be linked to its hometown identity. Walton believed that every customershould be greeted upon entering a store, and that each store should be areflection of the values of its customers and its community. Wal-Mart isinvolved in many community outreach programs and has launched several nationalefforts through industrial development grants.
What are the Key Features ofWal-Mart’s Approach to Implementing the Strategy Put Together by Sam Walton –The key features of Wal-Mart’s approach to implementing the strategy puttogether by Sam Walton emphasizes building solid working relationships with bothsuppliers and employees, being aware and taking notice of the most intricatedetails in store layouts and merchandising techniques, capitalizing on everycost saving opportunity, and creating a high performance spirit. This strategicformula is used to provide customers access to quality goods, to make thesegoods available when and where customers want them, to develop a cost structurethat enables competitive pricing, and to build and maintain a reputation forabsolute trustworthiness (Stalk, Evan, & Shulman, 1992). Wal-Mart storesoperate according to their “Everyday Low Price” philosophy. Wal-Marthas emerged as the industry leader because it has been better at containing itscosts which has allowed it to pass on the savings to its customers. Wal-Mart hasbecome a capabilities competitor.
It continues to improve upon its key businessprocesses, managing them centrally and investing in them heavily for the longterm payback. Wal-Mart has been regarded as an industry leader in “testing,adapting, and applying a wide range of cutting-edge merchandisingapproaches” (Thompson & Strickland, 1995, p. 860). Walton proved to bea visionary leader and was known for his ability to quickly learn from hiscompetitors’ successes and failures. In fact, the founder of Kmart once claimedthat Walton “not only copied our concepts, he strengthened them. Sam justtook 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 reducesits costs of sales. With this system, goods are continuously delivered to storeswithin 48 hours and often without having to inventory them.
Lower prices alsoeliminate the expense of frequent sales promotions and sales are morepredictable. Cross docking gives the individual managers more control at thestore level. A company owned transportation system also assists Wal-Mart inshipping goods from warehouse to store in less than 48 hours. This allowsWal-Mart to replenish the shelves 4 times faster than its competition.
Wal-Martowns the largest and most sophisticated computer system in the private sector. It uses a MPP (massively parallel processor) computer system to track stock andmovement which keeps it abreast of fast changes in the market (Daugherty, 1993). Information related to sales and inventory is disseminated via its advancedsatellite communications system. Wal-Mart has leveraged its volume buying powerwith its suppliers. It negotiates the best prices from its vendors and expectscommitments of quality merchandise (Thompson & Strickland, 1995). Thepurchasing agents of Wal-Mart are very focused people.
“Their highestpriority is making sure everybody at all times in all cases knows who’s incharge, and it’s Wal-Mart” (Vance & Scott, 1995, p. 32). “Eventhough Wal-Mart was tough in negotiating for absolute rock-bottom prices, thecompany worked closely with suppliers to develop mutual respect and to forgelong-term partnerships that benefited both parties” (Thompson &Strickland, 1995, p. 866).
Wal-Mart built an automated reordering system linkingcomputers between Procter & Gamble (“P&G”) and its stores anddistribution centers. The computer system sends a signal from a store to P&Gidentifying 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-Martdistribution center or directly to the store. This interaction between Wal-Martand P&G is a win-win proposition because with better coordination, P&Gcan lower its costs and pass some of the savings on to Wal-Mart. Sam Waltonreceived national attention through his “Buy America” policy.
Throughthis plan, Wal-Mart encourages its buyers and merchandise managers to stockstores with American-made products. In a 1993 annual report management statedthe “program demonstrates a long-standing Wal-Mart commitment to ourcustomers that we will buy American-made products whenever we can if thoseproducts deliver the same quality and affordability as their foreign-madecounterparts” (Thompson & Strickland, 1995, p. 868). Environmentalconcerns are important to Wal-Mart.
A prototype store was opened in Lawrence,Kansas, which was designed to be environmentally friendly. The store containsenvironmental education and recycling centers (Slezak, 1993). Wal-Mart has alsoadopted the low cost theme for its facilities. All offices, including thecorporate headquarters, are built economically and furnished simply. To conserveenergy, temperature controls are connected via computer to headquarters.
Throughthese programs, Wal-Mart shows its concern for the community. Wal-Mart has beenled from the top but run from the bottom, a strategy developed by Sam Walton andcarried 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, seniorexecutives strive to maintain its unique culture. This culture, described as”one part Southern Baptist evangelism, one part University of ArkansasRazorback teamwork, and one part IBM hardware” has worked to Wal-Mart’sadvantage (Saporito, 1994, p. 62). Just how Successful is Wal-Mart? — Aforecast (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, and52. 3% in Interest Debt (a level which is below Wal-Mart’s historicallycompounded growth rate of 55. 6%) indicates that the company should continue toreport gains each year until 2000. Growth on Sales — According to most analystsand company projections, sales should approximate $115 billion by 1996,representing an increase of 30. 6% as compared to 1995.
If the company continuesat this pace, sales should reach $334 billion by the year 2000. The growth onsales that Wal-Mart reported during the 1980s and the beginning of the 1990swill be difficult to repeat, especially considering the ever-changingmarketplace in which it competes. In an interview, Bill Fields, President of theStores Division, said “Wal-Mart is now seeing price pressure from companiesthat once assiduously avoided taking it on. These include specialty retailerssuch as Limited, category killers like Home Depot and Circuit City, and catalogcompanies like Spiegel. I think everybody prices off of Wal-Mart.
You’ve gotLimited reaching levels we’d thought they’d never get to. The result is thateveryday low prices are getting lower” (Saporito, 1994, p. 66). Inaddition, the baby-boomers are reaching their peak earnings years, whenfinancial and personal priorities change. Thus, savings, not spending, willlikely take precedence because most baby-boomers are approaching retirement.
Debt Position — Based on Wal-Mart’s position in 1994, which was considered ayear 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 propertyplants and equipment forced the company to increase long term debt by 4. 6 timesduring the period 1991-1995. Long term debt for 1995 is $7.
9 billion. IfWal-Mart continues its expansion plans based on more debt acquisition at 1994levels, the company may not attain forecasted gains by as early as 1998. Operating Expenses — Operating expenses will be a key strategic issue forWal-Mart in order to maintain its position in the market. The challenge is howto run more stores with less operating expenses. According to Bill Fields,”.
. . the goal is to increase sales per square foot and drive operatingcosts down yet another notch” (Saporito, 1994, p. 66). Trends indicate thatoperating expenses have been growing at a rate of 27.
7% in recent years. However, Wal-Mart should reap the benefits of its investments in hightechnology, and be able to operate more stores without increasing its expenses. Cost of Sales — Cost of sales historically has been equal to the level ofsales. If the company continues to take advantage of its buying power, Wal-Martcan expect to lower its cost of sales. Wal-Mart’s future will depend on how wellthe company manages its expansion plans.
For the coming years, the company willneed to justify its expansion plans with consistent growth in sales, in order tooffset the increases in debt interest and operating expenses. What Problems areAhead for Wal-Mart? What Risks? — Throughout the 1980s, Wal-Mart’s strategicintent was to unseat industry leaders Sears and Kmart, and become the largestretailer in the U. S. Wal-Mart accomplished this goal in 1991.
But Wal-Mart’scurrent strong competitive position and its past rapid growth performance can’tguarantee that the company will remain as the industry leader or maintain itsstrong business position in the future. Carol Farmer, a retail consultant, toldthe Wall Street Journal that, “One little bad thing can wipe out lots ofgood things” (Trimble, 1990, p. 267). Every move in its business operationought to be well thought-out and executed. Wal-Mart needs to address two majorareas in order to maintain or to capture an even stronger long term businessposition: 1) Single-business strategy — Wal-Mart’s success is mainly based onits concentration of a single-business strategy. This strategy has achievedenviable success over the last three decades without relying upondiversification to sustain its growth and competitive advantages.
Given itscurrent position in the industry, Wal-Mart may want to continue itssingle-business strategy and to push hard to maintain and increase market share. However, there is risk in this strategy, because concentration on asingle-business strategy is similar to “putting all of a firm’s eggs in oneindustry basket” (Thompson & Strickland, 1995, p. 187). In other words,if the retail industry stagnates due to an economic downturn, Wal-Mart mighthave difficulty achieving past profit performance. Also, if Wal-Mart continuesto follow Sam Walton’s vision of expansion, Wal-Mart will reach its peak in thevery near future.
When it does, its growth will start to slow down and thecompany will need to turn its strategic attention to diversification for futuregrowth. 2) Social responsibility — Retail stores can compete on several bases:service, price, exclusivity, quality, and fashion. Wal-Mart has been extremelysuccessful in competing in the retail industry by combining service, price, andquality. However, other merchants may object to Wal-Mart’s entry into theircommunity.
Because of its ability to out-price smaller competitors, Wal-Mart’sstores threaten smaller neighborhood stores which can only survive if they offermerchandise or services unavailable anywhere else. This makes it very hard forsmall businesses, such as “mom-and-pop” enterprises, to survive. They,therefore, fight to keep Wal-Mart from entering their locales. Numerous studiesconducted in different states both support and criticize Wal-Mart (Verdisco,1994). Nevertheless, Wal-Mart did drive local merchants out of business when itopened up stores in the same neighborhood.
As a result, more and more ruralcommunities are waging war against Wal-Mart’s entrance into their market. Besides protesting and signing petitions to attempt to stop Wal-Mart’s entryinto their community, the opposition’s efforts can even be found on TheInternet. Gig Harbor, a small town in Washington, recently started a World WideWeb page entitled “Us Against the Wal. ” The town’s neighborhoodassociation promised that they “will fight them tooth andnail” (PNA/Island Aerie Internet Productions, 1995/1996). The increasingopposition indicates that the road ahead for Wal-Mart may not be as smooth asWal-Mart’s annual report would entail.
This requires Wal-Mart to rethink itsexpansion strategy since it would not be profitable to operate in an unfriendlycommunity. 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 2000Wal-Mart should be able to double the number of stores to about 3,000 and toreach sales of $125 billion annually. Walton predicted that the four biggestsources of growth potential would be the following: 1. expanding into stateswhere it had no stores; 2. continuing to saturate its current markets with newstores; 3. perfecting the Supercenter format to expand Wal-Mart’s retailingreach into the grocery and supermarket arena — a market with annual sales ofabout $375 billion; 4.
moving into international markets (Thompson &Strickland, 1995). Wal-Mart Supercenters represent leveraging on customerloyalty and procurement muscle in order to create a new domestic growth vehiclefor the company. With few locations left in the U. S.
to put a new Sam’s Club ortraditional Wal-Mart, the Supercenter division has emerged as the domesticvehicle for taking Wal-Mart to $100 billion in sales. Before the Supercenter,Walton experimented with a massive “Hypermart”, encompassing more than230,000 square feet in size. The idea failed. Customers complained that theproduce was not fresh or well-presented and that it was difficult to find thingsin a store so big that inventory clerks had to wear roller skates. One ofWalton’s philosophies was that traveling on the road to success required failingat times. As a result of the unsuccessful experiment, Walton launched a revisedconcept: the Supercenter, a combination discount and grocery store that wassmaller than the Hypermart.
The Supercenter was intended to give Wal-Martimproved drawing power in its existing markets by providing a one-stop shoppingdestination. Supercenters would have the full array of general merchandise foundin traditional Wal-Mart stores, as well as a full-scale supermarket,delicatessen, fresh bakery, and other specialty shops like hair salons, portraitstudios, dry cleaners, and optical wear departments. Supercenters would measure125,000 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 ontarget. The Supercenter division more than doubled in size during 1993, thendoubled again in 1994. Supercenters, once thought of as risky because of slimprofit margins on the food side, will most likely make Wal-Mart the nation’slargest grocery retailer within the next five to seven years (Longo, 1994).
Expanding overseas, Wal-Mart moved into the international market in 1991 througha 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, PuertoRico, Argentina, and Brazil. The Wal-Mart International Division was officiallyformed in 1994 to manage the company’s international growth. By the year 2000,analysts expect Wal-Mart to be a huge international retailer, with numerouslocations in South America, Europe, and Asia. Conclusion — The ever-changingmarket 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 shoppingexperiences, but no one operation can capture them all. Therefore, it isincumbent upon management to define their target market and direct theirenergies toward solving that specific market’s problems. Technology,demographics, consumer attitudes, and the advent of a global economy are allconspiring to rewrite the rules for success. Success in the next decade willdepend upon the level of understanding retailers have about the new values,expectations, and needs of the customer. If Wal-Mart continues itscustomer-driven culture, it should remain a retail industry leader well into thenext century.
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