Wal-mart Economics Essay, Research Paper

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 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.

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 “Super-centers”, 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 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 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.

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 Super-center 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 Super-centers 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 Super-center division

has emerged as the domestic vehicle for taking Wal-Mart to $100 billion

in sales. Before the Super-center, Walton experimented with a massive “Hyper-mart”,

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 Super-center, a combination discount

and grocery store that was smaller than the Hyper-mart. The Super-center

was intended to give Wal-Mart improved drawing power in its existing markets

by providing a one-stop shopping destination. Super-centers 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. Super-centers 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 Super-center division more than doubled in size during 1993, then doubled

again in 1994. Super-centers, 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.

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.

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