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Wal-Mart Stores, Inc.— A New Set of Challenges

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1 Wal-Mart Stores, Inc.— A New Set of Challenges

2 1. What impresses you about this company
1. What impresses you about this company? What aspects of Wal-Mart do you find unimpressive? What accounts for Wal-Mart’s success? Is it a great strategy, superb strategy implementation and execution, or great leadership? Wall-Mart success relates to good strategy execution, sound leadership and good low cost broad cross section of buyers. The Wal-Mart strategy that stands out from what other discounters do (or could try to do) is the “backwards expansion” approach. This could have been copied by other discounters any time in the last 20 years (once Wal-Mart used it and proved it could work). Usually, all the items fall into one of these categories. Then you can ask which one most explains Wal-Mart’s success, which has been second most important, and which is third in importance. Hence, it is: 1. Good strategy execution 2. Good leadership 3. Good strategy

3 2. How would characterize Wal-Mart’s strategy
2. How would characterize Wal-Mart’s strategy? What are the chief components of its strategy? Backwards expansion from rural areas into metro areas Everyday low prices—often the lowest prices for a given item Name-brand merchandise (but with some house or private-label merchandise throw in) Wide selection—the trend at Wal-Mart is toward bigger Supercenter stores with a bigger variety of items to choose from and a full supermarket. Growing emphasis on the Supercenter store format, but Wal-Mart has multiple formats for its stores—Discount City stores, Supercenters, neighborhood markets, and Sam Clubs A customer-friendly store environment Innovative merchandising Use its enormous buying power to obtain goods from suppliers at the lowest possible prices. Wal-Mart relied less on advertising than most other discount chains. The company distributed only one or two circulars per month and ran occasional TV ads, relying primarily on word-of-mouth to communicate its marketing message. Wal-Mart’s advertising expenditures ran about 0.3 percent of sales revenues, versus 1.5 percent for Kmart and 2.3 percent for Target. Whether rivals can execute such a strategy as efficiently and effectively as Wal-Mart is quite another matter

4 3. What has Wal-Mart management done to implement and execute the stra­tegy? What policies, practices, support systems, and management approach­es underlie Wal-Mart’s strategy execution efforts? The efficiency and effectiveness of the distribution centers and the distribution system. The sales contests (increased sales productivity per square foot of floor space). Willingness to try new ideas and employee suggestions and to experiment with dif­ferent store formats. The company had a low threshold for change. Finding ways to “make customers number one” in the attitudes and actions of store employees. The company’s compensation and human resource management practices Wal-Mart executives have been expert practitioners by regularly spenting time talking to vendors, employees, and customers to get ideas for how Wal-Mart could improve and then they followed-up with actions to try the new ideas out. The company has kept its small-town flavor as it has grown and a merchandise mix that appeals to its small-town, budget-conscious customers. The emphasis on continuous improvement and the willingness to try out new ideas has lowered the barriers to doing things better and created a climate receptive to change, innovation, and experimentation.

5 A strong, strategy-supportive culture has been built—especially in Bentonville headquarters and in the distribution centers (less so in the stores because of rapid employee turnover and rapid expansion in the number of stores). The enormous attention to detail in the store environment and in its merchandising practices. In all stores, efforts were made to present merchandise in easy-to-shop shelving and displays. Retailing consultants considered Wal-Mart as being very adept at sending out an effective mix of vibes and signals concerning customer service, low prices, quality merchandise, and friendly shopping environment. Wal-Mart’s aggressive adoption and use of state-of-the-art retailing technology. Wal-Mart’s scale of operation allowed it to bargain hard with suppliers and get their bottom prices. Wal-Mart management worked at getting more mileage out of its capital expenditures for new stores, store renovations, and store fixtures. Ideas and suggestions were solicited from vendors regarding store layout, the design of fixtures, and space needed for effective displays. In keeping with the low-cost theme for facilities, Wal-Mart’s distribution centers and corporate offices were also built economically and furnished simply. Wal-Mart tried to put some organization muscle behind its pledge of “Satisfaction Guaranteed” and do things that would make customers’ shopping experience at Wal-Mart pleasant - “aggressive hospitality.” The strong bias for action that has become a standard product of the Friday merchandise and Saturday morning headquarters meetings in Bentonville.

6 4. What is your assessment of Wal-Mart’s culture
4. What is your assessment of Wal-Mart’s culture? What are its chief elements and characteristics? Why does the culture seem to be so much stronger in Bentonville than out in the stores? An emphasis on frugality, penny-pinching efficiency, and austerity—this is a company that thrives on driving costs out of the business. Dedication to customer satisfaction, meeting or exceeding customer expectations, and good customer service. Much emphasis was placed on going all out to exceed customers’ expectations and make sure that customers had a good time shopping at Wal-Mart. Every associate repeatedly heard “The customer is boss and the future depends on you.” The change-oriented work environment and entrepreneurial atmosphere-there’s a strong tradition of innovation and continuous improvement. Senior executives’ practice of spending much of their time in stores, listening and talking to customers and associates, soliciting suggestions and ideas, gathering infor­mation, and staying in touch with daily operations. The emphasis being placed on practicing Sam Walton’s 10 rules for building a business—Management had distilled much of Sam Walton’s business philosophy into 10 rules (see case Exhibit 4); these were reiterated to associates and used at meetings to guide decision-making and the crafting and executing of Wal-Mart’s strategy.

7 The Sundown Rule: Answer requests by sundown on the day they are received. Management believed this working principle had to be taken seriously in a busy world where people’s job performance depended on cooperation from others. The manner and extent to which Wal-Mart executives cultivate employee empower­ment and involvement and treat employees as partners/associates. The rah-rah spirit (the Wal-Mart cheer), the cheerleading by management, and the positive motivational practices. Sam Walton’s homespun values, beliefs, and business philosophy-most of which seem deeply ingrained in how the company conducts its Four of the central principles he preached were: - Treat employees as partners, - Build for the future, rather than just immediate gains, - Recognize that the road to success includes failing, which is part of the learning process - Involve associates at all levels in the total decision making process.

8 5. What does the financial information in case reveal about the company’s success and performance during the period? The financial information provided in case is revealing in several respects: Since 1993, Wal-Mart’s sales revenues have grown at an annual compound average growth rate (CAGR) of 14.9% and net income has increased at a CAGR of 14.7%. Since 2000, Wal-Mart’s revenues have grown at a slightly less robust CAGR of 11.6% (which is probably normal and expected for a company of this size) and net income has increased at a CAGR of 13.6%. Comparable store sales growth is slowing—from 11% in 1993 to 8% in 2000 to 5% in 2004. Operating costs and profit margins have trended thusly: Cost of sales as a % of net sales 77.5% 78.4% 78.9% 78.6% 78.6% 79.6% Operating, selling, general, and admin expenses as a % of net sales 17.5% 16.8% 16.6% 16.5% 16.4% 15.0% Net income as a % of net sales 3.5% 3.3% 3.1% 3.3% 3.3% 3.6%

9 The company’s return on assets and return on shareholders’ equity have also trended downward—these calculations are shown in the financial ratios section of case Exhibit 1. ROE is sliding, we think, because the company is relying heavily on retained earnings to help finance growth and because the company’s net profit margins are thin—net income is not growing as fast as shareholders equity is being boosted by the annual increases in retained earnings. Long-term debt and long-term obligations under capital leases are steadily rising—no doubt due to the financing needed to support opening so many new stores. While the company is doing well, there’s certainly no reason to get excited about the com­pany’s financial performance. Yet, there are no financial signs that the strategy or its execution are faltering. But the company is so big that it is beginning to find it hard to bring in $20-$30 billion in new revenues annually (which is, after all, a very sizable amount of new business).

10 Can the company continue to be successful
Can the company continue to be successful? What issues does management need to address? What needs to be on Lee Scott’s “worry list”? There are mounting concerns in some quarters about Wal-Mart’s size and influence. Is Wal-Mart growing too big and too powerful? Does it have too much influence over retailing? Some communities are hostile towards the entry of Wal-Mart stores because - Wal-Mart pays relatively low wages - The entry of Wal-Mart often is followed by store closings - Some people are opposed to the “big-box” stores and the traffic they produce on local thoroughfares. - Some people in local communities want to keep Wal-Mart out in order to provide the viability of their downtown stores— Unions are very anti-Wal-Mart and are gathering their forces to oppose Wal-Mart’s slightly above minimum-wage scales. Unionization of Wal-Mart’s work force would deal a major blow to the company’s low-cost structure.

11 The company has had to deal with a number of embarrassing incidents:
- The use of illegal immigrants to clean its stores - The violations of laws regarding gun sales in California and toy guns in New York state. - The charges that the company discriminates against women in pay, promotions, training, and job assignments. There are several issues that Wal-Mart management has to address: How to combat the hostility of local citizens towards the opening of new Wal-Mart stores How to deal with the protests of unions regarding the company’s relatively low levels of employee compensation How to strengthen the culture in Wal-Mart stores where turnover is frequently high and there is a large influx of new employees to indoctrinate Does the company need to review some of its policies and practices to see that it they are “squeaky clean” and above reproach?

12 7. What recommendations would you make to Wal-Mart management
7. What recommendations would you make to Wal-Mart management? Does Lee Scott personally need to take any particular actions internally or ex­ternally to combat any of the brushfires? The company needs to work harder at neutralizing the hostility of local citizens towards the opening of new Wal-Mart Supercenter stores. To combat the protests of unions and other local citizens concerned about the relatively low levels of employee compensation, Wal-Mart may need to consider upping its wage scale. More emphasis on culture is probably going to have to be included in employee training programs—especially management training and training for newly-hired store employees. We would suggest that the senior executives at headquarters go through each of Wal-Mart’s policies, procedures, and operating practices to be sure that they are each defensible and that there is nothing in them that is potentially embarrassing. If the company is discriminating against women in pay, promotions, training, and job assignments, thy it must quietly but forcefully cease such practices and begin to take clear and unequivocal steps to ensure that female employees receive equal pay for equal work and that more females are promoted to managerial positions. There are enough controversial issues swirling about Wal-Mart these days that lee Scott needs to be a bit more proactive in trying to keep Wal-Mart off the front pages when it comes to adverse publicity. Wal-Mart appears to have a number of “enemies” out there, and they should not be given any more ammunition that they can use against the company. Wal-Mart’s size and prominence makes it a lightening rod for attracting close scrutiny and for being a target of criticism by those who, rightly or wrongly, believe the company is doing things it should not be doing.


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