Wal-mart Economics Wal-mart Economics 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 discounts 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. 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 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). 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). 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 capability 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. 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 L …