The Economic Strategies Of Wal Essay, Research Paper

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.

Wal-Mart is successful not only because it makes sound economic and 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, 1998).

Walton’s greatest accomplishment was his ability to empower, enrich, and train his employees (Longo, 1999). 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, 1998). 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, 1999).

The key features of Wal-Mart’s approach to implementing the economic 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, 1999).

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, 1999, p. 860). Walton proved to be a visionary leader and entrepreneur 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, 1999, 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, 2000). 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, 1999). 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, 1999, 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.

Environmental concerns are important to Wal-Mart. The first prototype store was opened in Lawrence, Kansas, which was designed to be environmentally friendly. The store contains environmental education and recycling centers (Slezak, 1999). Now almost every Wal-Mart has these facilities to help the community. 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.

A forecast (see Appendix A) of Wal-Mart’s income for the period 1998-2000, considering increases of 20.2% in Net Sales, 27.7% in Operating Expenses, and 47.3% in Interest Debt (a level which is below Wal-Mart’s historically compounded growth rate of 51.6%) indicates that the company should continue to report gains each year until 2003.

According to most analysts and company projections, sales should approximate $165 billion by 2001, representing an increase of 20.6% as compared to 1999. If the company continues at this pace, sales should reach $235 billion by the year 2005. 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, 1999, 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.

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, 1999, p. 66). Trends indicate that operating expenses have been growing at a rate of 27.7% in recent years. Wal-Mart has also benefited greatly from the prospering economy along with many other businesses. However, Wal-Mart should reap the benefits of its investments in high technology, and be able to operate more stores without increasing its expenses.

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.

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, 1999, p. 187). In other words, if the retail industry stagnates due to an economic downturn, Wal-Mart might have difficulty achieving past profit performance.

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, 2000). 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, 1999/2000).

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, 1999).

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 2003, 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 and economy” (Lewison, 1998). 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 and beyond.