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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.
References 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.
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