Starting with one store in Rogers, Arkansas, that opened on July 2, 1962,
Wal-Mart set about a steady growth pattern that has accelerated as the
company’s culture of being “relentlessly profit-driven” took root. While profit is
their goal, service is the process. The Wal-Mart Empire is built around four retail
concepts. The basis of the company remains its discount stores, which has
followed the same pattern as the very first store. The second concept is the WalMart Super center that combines a discount store with groceries and perishables
in a total inventory of almost 100,000 items. The newest of the four concepts is
the Wal-Mart neighborhood market that provides the services of a traditional
grocery store in a building format that is small by Wal-Mart standards. The fourth
retail concept is the Sam’s Wholesale Club, which is basically a membership
warehouse store that carries a constantly changing inventory of about 4,000
items. Wal-Mart currently has 1.3 million workers.
The Wal-Mart Stores was founded on principles developed by the cofounder, Sam Walton. Three basic beliefs are carried out everyday at these
stores. The first being respect for the individual, every associate’s opinion is
respected. Managers are considered “servant leaders” who help associates
realize their potential through training, praise and construct feedback. An “open
door” management philosophy encourages associates to raise questions and
concerns about operations. The second belief is service to the customer. The
customer is the boss. Everything possible is done to make shopping at Wal-Mart
and Sam’s Club a friendly, pleasant experience. The “Ten-Foot Rule” means that
associates are to greet and ask assistance to every person that they come into
contact with within 10 feet of them. The “Satisfaction Guaranteed” refund and
exchange policy allows customers to be fully confident of Wal-Mart and Sam’s
Club merchandise and quality. The last belief is to strive for excellence. This
allows associates to share exceptional to commitment to customer satisfaction.
At the start of each day, store associates gather for the Wal-Mart cheer and
review of the previous day, as well as discuss their daily goals. “The Sundown
Rule” requires a continued sense of urgency, with questions asked in the
morning answered before the end of the day.
Building a culture that could support its large structure has been a
crusade at Wal-Mart from the beginning. It is a culture based on profit derived,
not from the pricing end, but from the cost end of every transaction. The plan
always has been to drive cost out of the system in the stores, from the
manufacturers’ profit margins, and from merchandise brokers and other
middlemen, all in the service of driving down prices at the retail level. More than
once Sam Walton demanded lower costs from the vendors only to be told that
the goods were already selling essentially at the manufacturing cost. Walton
would insist that manufacturing processes be analyzed in a search for lower cost.
The company still reflects the personality and characteristics of its founder. In a
March Businessweek article published in 2000 it was said that Wal-Mart calls
their suppliers collect.
Wal-Mart perfected a business model, which worked well in the United
States. In the late 90’s expectations from the capital markets, remained high,
and Wal-Mart was consistently pressured to show increased profits and sales.
International markets provided them with their best option to achieve this
growth. The macro-economic scenario was favoring globalization. The domestic
market was becoming saturated, and trade barriers were coming down. The new
transition economies had large populations with increasing levels of disposable
incomes.
Wal-Mart, courtesy of its existing stores in the US, had huge buying power
with companies like Kellogg, Nestle, 3M, Proctor & Gamble and Coke. This gave
Wal-Mart the opportunity to source stocks cheaply for its international outlets.
Wal-Mart had gained expertise (see Figure A) in store management and logistics,
and leveraged these competencies every time it entered into a new international
market.
Wal-Mart did not use one single strategy to enter different countries (see
Figure B). The choice was based on the specifics of the business, competitive
and economic environments. After choosing the country, and understanding the
environment, the management at Wal-Mart would decide on the best entry
strategy. The options varied form starting new stores form scratch, to
acquisitions, joint ventures, and alliances. Wal-Mart established its presence in
local markets by first understanding the uniqueness of each market, and then
adapting its business model to suit that market.
In its current 10-Q quarterly report filed on June 4, 2004 Wal-Mart stated
that its Board of Directors authorized a new $7 billion share repurchase program.
It also noted that in March it announced an increase in the annual dividend on
common stock by 44% to $0.52 per share. Generally companies won’t increase
dividends unless their foreseeable long-term growth rates increase. The reason
for this being that if down the road a company can no longer keep paying the
current dividend and they have to decrease these payment then the stock is
usually hammered. The key for increasing the dividend payout should come
from operating cash flow. This isn’t the case for Wal-Mart, as states in this 10-Q
report, “If our operating cash flows are not sufficient to pay the increased
dividend and fund our capital expenditures, we anticipate funding any shortfall in
these expenditures with a combination of commercial paper and long-term debt.”
I think that this is a major mistake in financial policy going forward. Looking at
the top five executives pay and how its highly based on performance, it wouldn’t
surprise me if the performance is based on its stock price. This would explain the
outrageous financial strategy going forward.
Anther problem going forward is that Wal-Mart should address on its own,
rather wait for a court order is the class-action lawsuit that it faces. On June 22,
2004, a federal judge ruled that a lawsuit could proceed as a class action
representing 1.6 million former and current female Wal-Mart employees. Only
34% of Wal-Mart managers are female versus the industry average of 56%. In
almost ever category women are underpaid at Wal-Mart. I’d like to see the CEO
and other top executives step up and put together an initiative together to help
end the disparities between men and women. Wal-Mart should just settle out of
court and save legal, court and bad publicity by this because it’s clearly a losing
battle.
One final thought on Wal-Mart: It should really think about the social
impact that it will play on the communities that it hires within. When Henry Ford
started building cars he realized that there was no middle class at that time and
he could have paid his workers less but he took the social impact into
consideration and he created a middle class. Wal-Mart aren’t paying their
workers enough and they should really look beyond short-term profits and think
more about the long-term effect that it will have on America.
Figure A
Figure B.
Country
Mode of Entry
Strategy
Germany
Acquiring a Dominant
Player
-Acquired company is the
Mexico
50-50 JV with leading
player Cifra
Brazil
60-40 JV with local
retailer –
Attacks Competition
Argentina
Greenfield Operations
China
Greenfield Operations
Local Adaptation
largest player in the local
market
-Adopted similar
business and human
resource models
-Met EU guidelines for
zoning
-Leveraged local market
knowledge
-Understood and
overcame cultural
barriers
-Leveraged experience
from the Mexican
markets, which were
similar
-Emphasized on
Customer service (which
competitors lacked)
-Developed economies of
Scale
Utilized Discount tactics
-Gained experience from
similar markets in Mexico
and Brazil
-Sourcing with
economies of scale
Adopted merchandising
and store designs that
best suit consumer needs
-Sourced stocks from
international suppliers
who manufacture in
China
-Sourced from local
manufacturers who
understand local tastes
-Met government trade
and business guidelines
Canada
Acquiring a weak player
-Acquired Woolco in a
saturated market
-Operated in areas that
have high brand
recognition
-Required minimum
cultural adaptation
-Emphasized on
customer service and
store design
References:
All information obtained by Wal-Mart SEC filings from 1998-2004 and course case
packet study information.