Sam Walton, the visionary leader, founded his own company which has since become the foremost provider of discount retailing.
Through his unconventional and astute business practices, along with his associates, he led the company forward for three decades. Currently, four years after his death, the company continues to experience steady growth. The executives at Wal-Mart still rely on the traditional goals and philosophies that Sam’s legacy left behind while also staying ahead of rapidly evolving technology and methods in today’s fast-paced business environment. Despite encountering significant controversy on various issues and continuing to face them, these challenges have only had a superficial impact on this enormous operation. The future holds promise for Wal-Mart, especially if it can find a comfortable balance between increasing profits and recognizing its social and ethical responsibilities.
What factors contribute to Wal-Mart’s success? Is it attributed to a well-devised strategy or effective implementation of that strategy? In 1962, when Sam Walton opened the first Wal-Mart store in Rogers, Arkansas, no one could have predicted the immense success this merchant from a small town would achieve.
Sam Walton transformed the retail industry through his expertise in discount retailing, resulting in Wal-Mart becoming the leading global retailer in terms of sales. In 1989, Discount Store News recognized Wal-Mart’s excellence in retail and honored it as the “Retailer of the Decade.” Fortune has also acknowledged Wal-Mart multiple times on its prestigious list of the “10 most admired corporations.” Despite Sam Walton’s unfortunate death from bone cancer in 1992, Wal-Mart’s sales have continued to flourish due to astute strategic management decisions and innovative implementation. Walton, known as the entrepreneur of the century, was renowned for genuinely caring about customers, employees (referred to as “associates”), and the community. To maintain its dominance in discount retailing, Wal-Mart executives still uphold Sam’s established management principles.
Walton, a man of simple preferences, had a strong curiosity about individuals. He embraced three essential principles: 1. Prioritizing customer value and service; 2. Nurturing partnerships with associates; 3.
Community involvement has always been a key focus for Wal-Mart (The Story of Wal-Mart, 1995). The concept of “always” is evident throughout their literature. Walton firmly believed that the customer is always right and this belief still drives the functioning of his stores. In response to inquiries about Wal-Mart’s secrets of success, Walton emphasized their commitment to surpassing customers’ expectations consistently (Wal-Mart Annual Report, 1994, p. 5).
Walton’s most notable achievement was his skill in empowering, enriching, and training his employees (Longo, 1994). He valued the input of his employees and encouraged them to contribute ideas and suggestions to improve the company. Displayed in every Wal-Mart store are signs that emphasize the importance of the employees: “Our People Make the Difference.” Through their “Yes We Can Sam” program, employees regularly propose ways to cut costs. In fact, the savings generated by these associates funded the construction of a new store in Texas (The story of Wal-Mart, 1995).
According to Thompson & Strickland (1995), Wal-Mart’s objective was to equip its employees with the necessary resources for effective job performance. Rather than utilizing technology as a means of replacing workers, the company sought to empower them and facilitate their success in the retail industry. The close relationship between Wal-Mart and its hometown is acknowledged as a key factor contributing to its accomplishment. Walton placed emphasis on personally greeting every customer and ensuring that each store embodied the values of both customers and the community. Additionally, Wal-Mart actively engages in community outreach programs and has initiated numerous national endeavors through industrial development grants.
Wal-Mart’s strategy, developed by Sam Walton, is characterized by several key elements. These include establishing strong relationships with suppliers and employees, paying close attention to store layouts and merchandising techniques, seizing cost-saving opportunities, and fostering a high-performance culture. The primary goal of this strategic formula is to provide customers with access to quality goods that are available when and where they desire. Additionally, Wal-Mart aims to create a cost structure that enables competitive pricing and establish a reputation for trustworthiness (Stalk, Evan & Shulman, 1992). The philosophy embraced by Wal-Mart stores centers around offering “Everyday Low Prices.” By effectively managing expenses, Wal-Mart has become the industry leader and has been able to pass on the resulting savings to its customers. Through continuous improvement of core business processes, central management, and significant long-term investments, Wal-Mart has positioned itself as a formidable competitor.
Thompson & Strickland (1995, p. 860) acknowledge Wal-Mart as a trailblazer in experimenting with and applying innovative merchandising tactics. The renowned leader, Walton, exhibited extraordinary leadership abilities and possessed a talent for quickly grasping lessons from both competitors’ successes and failures. Interestingly, the founder of Kmart claimed that Walton not only copied their ideas but also improved upon them.
According to Thompson & Strickland (1995, p. 859), Sam simply took the ball and ran with it. Wal-Mart has made significant investments in its distinctive cross-docking inventory system. This system has allowed Wal-Mart to attain economies of scale, resulting in decreased sales costs. Through this system, products are regularly delivered to stores within 48 hours and often without the need for inventory.
Lower prices lead to the elimination of regular sales promotions and increased predictability in sales. Cross docking at the store level gives individual managers more control. Wal-Mart’s company-owned transportation system helps ship goods from warehouses to stores within 48 hours, enabling faster replenishment of shelves compared to competitors. Moreover, Wal-Mart has the largest and most advanced computer system in the private sector called a MPP (massively parallel processor) computer system, which tracks stock and movement and keeps the company informed about rapid market changes (Daugherty, 1993).
Wal-Mart uses its advanced satellite communications system to disseminate information related to sales and inventory. The company takes advantage of its buying power and negotiates the best prices with suppliers. It also expects suppliers to provide quality merchandise. The purchasing agents at Wal-Mart are highly focused individuals whose main priority is ensuring that everyone knows that Wal-Mart is in charge at all times and in all cases (Thompson & Strickland, 1995; Vance & Scott, 1995, p. 32).
According to Thompson & Strickland (1995, p. 866), despite Wal-Mart’s tough negotiations for lowest prices, the company formed close relationships with suppliers in order to develop mutual respect and long-term partnerships that were beneficial for both parties. Wal-Mart implemented an automated reordering system connecting computers between its stores and distribution centers with Procter & Gamble (“P&G”). This computer system enables a store to send a signal to P&G, identifying any low-in-stock items.
Wal-Mart uses satellite technology to send a resupply order to the nearest P&G factory, which then ships the requested item either to a Wal-Mart distribution center or directly to the store. This collaboration benefits both companies as it reduces costs for P&G and enables them to offer discounts to Wal-Mart. The founder of Wal-Mart, Sam Walton, implemented a “Buy America” policy that gives priority to American-made products in stores. In their 1993 annual report, Wal-Mart management expressed their commitment to purchasing domestic products as long as they are equal in quality and affordability compared to foreign-made products (Thompson & Strickland, 1995, p. 868).
Wal-Mart places great importance on environmental issues, as evidenced by the opening of a prototype store in Lawrence, Kansas. This store was specifically designed to be environmentally friendly and includes features such as environmental education and recycling centers (Slezak, 1993). In addition, Wal-Mart has widely embraced the low-cost concept in its facilities.
Wal-Mart demonstrates its concern for the community by building and furnishing all offices, including the corporate headquarters, in an economical and simple manner. The temperature controls in these offices are computer-connected to headquarters to conserve energy. This strategy of being led from the top but run from the bottom was initially developed by Sam Walton and is now upheld by a small group of senior executives led by CEO David Glass. Despite adding more management layers due to recent growth, senior executives continue to strive for maintaining Wal-Mart’s unique culture. This culture is a blend of Southern Baptist evangelism, University of Arkansas Razorback teamwork, and IBM hardware, which has proven advantageous for Wal-Mart (Saporito, 1994, p.).
According to Appendix A, Wal-Mart’s projected income for the period 1995-2000 includes a 30.6% increase in Net Sales, a 27.7% rise in Operating Expenses, and a 52.3% surge in Interest Debt. Despite the forecasted interest debt growth rate being lower than the historical compounded growth rate of 55.6%, it is expected that the company will continue to report annual gains until 2000.
Analysts and company projections suggest that sales will reach approximately $115 billion by 1996, a 30.6% increase from 1995. If this pace continues, sales are estimated to reach $334 billion by 2000.
However, replicating Wal-Mart’s past decades’ sales growth could be challenging due to the constantly changing marketplace and increased competition. In an interview, Bill Fields, President of the Stores Division admitted that Wal-Mart now faces price pressure from companies that previously avoided competing with it.
Specialty retailers such as Limited, category killers like Home Depot and Circuit City, and catalog companies like Spiegel are all affected by Wal-Mart’s pricing strategy (Saporito, 1994, p. 66). Moreover, as the baby-boomers enter their peak earnings years, their financial and personal priorities shift.
Due to the upcoming retirement of most baby-boomers, savings will likely be prioritized over spending. In 1994, Wal-Mart experienced significant growth by adding 103 new discount stores, 38 “Super-centers”, and 163 warehouse clubs. Additionally, they hired 94,000 new associates. However, this growth also resulted in a 52.3% increase in interest debt. The financing of property plants and equipment led to a 4.6 times increase in long term debt from 1991 to 1995, with Wal-Mart’s long term debt reaching $7.9 billion in 1995. If Wal-Mart continues expanding using the same level of debt acquisition as in 1994, it may not achieve projected gains until as late as 1998.
Wal-Mart’s market position relies on successful management of operating expenses. The obstacle is to expand the number of stores while cutting costs, as mentioned by Bill Fields.
According to Saporito (1994, p. 66), the objective is to enhance sales per square foot and decrease operating costs even further. Recent trends show a growth rate of 27.7% in operating expenses. Nevertheless, Wal-Mart’s investments in advanced technology should enable them to operate more stores without increasing expenses. The company has historically had a cost of sales equal to its level of sales. By continuing to leverage its buying power, Wal-Mart can anticipate a reduction in its cost of sales.
Wal-Mart’s future hinges on the effective management of its expansion plans, requiring consistent sales growth to justify the expansion and offset increasing debt interest and operating expenses. Despite their formidable competitive position and previous rapid growth, there are potential hurdles and risks that could jeopardize Wal-Mart’s industry leadership and overall business standing in the times ahead.
Carol Farmer, a retail consultant, emphasizes the significant impact that even a minor negative event can have when compared to numerous positive aspects. Hence, it is vital for Wal-Mart to meticulously strategize and carry out all facets of its business operations. To enhance or sustain its long-term market position, Wal-Mart needs to prioritize two critical areas: 1) Adopting a single-business strategy since the company’s prosperity greatly relies on this approach.
Despite not relying on diversification for growth and competitiveness, Wal-Mart has achieved remarkable success in the past thirty years. With its current position, the company may choose to continue with its single-business strategy to preserve and expand its market share. However, this approach carries a risk as it involves concentrating all of a company’s resources in one industry, similar to putting all of a firm’s eggs in one basket (Thompson & Strickland, 1995, p. 187).
If the retail industry experiences a decline, Wal-Mart may encounter challenges in maintaining its previous levels of profitability. Nevertheless, if it persists in expanding as per Sam Walton’s vision, it will soon reach its pinnacle. Consequently, the company will have to redirect its strategic focus towards diversification to ensure sustainable future growth. Wal-Mart has effectively accomplished this by amalgamating service, price, and quality as a formidable contender within the retail industry.
Wal-Mart’s entry into a community may face opposition from other merchants. Smaller neighborhood stores, in particular, feel threatened by Wal-Mart’s ability to offer lower prices, as it poses a challenge to their survival unless they provide unique merchandise or services. This situation is especially tough for small businesses like “mom-and-pop” enterprises. As a result, these businesses actively resist the presence of Wal-Mart in their localities. Various studies conducted in different states have both supported and criticized Wal-Mart (Verdisco, 1994).
Despite this, Wal-Mart caused local merchants to go out of business in the same area where they opened stores. Consequently, numerous rural communities are now actively opposing Wal-Mart’s entry into their market. The opposition employs various tactics such as protests, petition signing, and even utilizing the internet. A small town called Gig Harbor in Washington, for instance, established a webpage named “Us against the Wal.” The local neighborhood association pledged to fiercely resist Wal-Mart’s presence. As a result, it appears that Wal-Mart may encounter obstacles and challenges ahead, contrary to what their annual report suggests.
Wal-Mart should reconsider its expansion strategy to avoid operating in an unfriendly community. Before his death, Sam Walton believed that by the year 2000, Wal-Mart could double its number of stores to around 3,000 and achieve annual sales of $125 billion. Walton identified four main sources for growth potential:
- Expanding into states without existing stores
- Saturating current markets with new stores
- Enhancing the Super-center format to enter the grocery and supermarket market with $375 billion in annual sales
Moving into international markets (Thompson & Strickland, 1995), Wal-Mart Super-centers represent the utilization of customer loyalty and procurement power to establish a new domestic growth avenue for the company. As there are limited locations available in the U.S. to open new Sam’s Club or traditional Wal-Mart stores, the Super-center division has become the primary means for Wal-Mart to achieve $100 billion in sales. Previously, Walton attempted to introduce a large “Hyper-mart” spanning over 230,000 square feet, but the concept was unsuccessful.
Customers were unhappy with the quality and presentation of the produce and found it difficult to navigate the large store where inventory clerks had to wear roller skates. Walton believed that failure was necessary for success and responded by introducing a revised concept: the Super-center. This smaller version of the Hyper-mart aimed to improve Wal-Mart’s appeal in existing markets by offering a one-stop shopping experience. Super-centers included general merchandise, supermarkets, delis, bakeries, and specialty shops like hair salons, portrait studios, dry cleaners, and optical wear departments.
Walton’s prediction of establishing Super-centers with sizes ranging from 125,000 to 150,000 square feet in locations where each store could achieve annual sales of $30 to $50 million was proven right. The Super-center division experienced significant growth, doubling in size first in 1993 and again in 1994. Despite initial concerns about lower profit margins on the food side, these Super-centers are highly likely to make Wal-Mart the largest grocery retailer in the nation within five to seven years (Longo, 1994). In terms of global expansion, Wal-Mart entered the international market in 1991 through a joint-venture partnership with CIFRA S.A. de C.V., Mexico’s leading retailer.
The Wal-Mart International Division has grown since its establishment in 1994, expanding to countries including Canada, Hong Kong, Mainland China, Puerto Rico, Argentina, and Brazil. The division’s goal is to maintain global expansion and analysts predict that by 2000, Wal-Mart will become a prominent retailer with a significant presence in South America, Europe, and Asia. However, retailers encounter ongoing challenges due to the constantly changing market conditions. One crucial factor for retailers to consider is the significant influence of a “buyers’ market” (Lewison, 1994).
Identifying the target market and addressing its specific issues is crucial for management, as no single operation can cater to all customers. The retail industry’s definition of success is being shaped by technology, demographics, consumer attitudes, and the global economy. Retailers’ comprehension of their customers’ evolving values, expectations, and demands will determine their success in the future. If Wal-Mart continues its customer-centric approach, it will likely remain a leader in the retail industry for years to come.
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Bentonville, Arkansas is where the corporate offices of Wal-Mart Stores, Inc. are situated. The company released its annual reports for 1994 and 1995 under the titles “Wal-Mart Annual Report, 1994” and “Wal-Mart Annual Report, 1995”.
