Walmart Case

Executive SummaryWalmart has thrived in a very competitive industry by building on its founding principles and developing arguably the industries best supply chain. It has integrated its sales to its suppliers, streamlined order fulfillment and driven down its costs, which is one of its key founding principles, “Our purpose is helping our customers save money so they can live better” (Grant text, 5 walmart core 5 values). Walmart has had great success in North America, but its cultural values have not translated well in other parts of the world. Great sales growth has not translated into significant margins. Walmart has incurred losses on its international operations.

Carrefour (founded in France) and Walmart both retreated from Germany. Some of the key issues facing Walmart include adapting their founding 5 core principles to vastly different cultures; the drive to cut costs clashes with treating the employees as part of family (which part of the family has more value? Is treated with integrity?); the drive to cut costs has been driven far down the supply chain to a myriad of suppliers, sub-suppliers and sub-sub-sub suppliers….how can Walmart audit or control these suppliers…standards imposed by Walmart?

Current SituationBrief HistoryWalmart has grown over the past 50 years from a local ‘general merchandiser’ with 15 stores in Arkansas to become the largest in the world with over 10,000 stores world-wide. Wal-Mart’s six market segments are: groceries; fashion clothes; pharmacy; health clinics; financial services; and music downloads. Its main North American competitors are Target, Dollar General and Costco. Walmart has four formats plus on-line that it has adapted to its international expansion. These formats have not always been successful, especially in their foreign expansion with retreats in Germany, South Korea and losses in Japan. The formats are: The smallest are neighbourhood formats averaging 42,000 square feet Traditional Discount store averaging 102,000 square feet

Sam’s Clubs averaging 127,000 square feetSuper Centers averaging 187,000 square feet”No matter who we are or where we come from, our values pull us together and keep us together. They constantly push us forward to become a better and stronger company.”  — Mike Duke, Walmart President & CEO

Sam Walton drove this growth founded on five(5) core principles with its roots in small town US family values: Integrity: Be Trustworthy and honest in all your business activities (Sam valued Honor) Opportunity: If, you work hard and do a good job, you will be promoted (approx.. 75% of store managers started as associates) Family and Community: Your customers, suppliers and associates are your neighbours. Work with a purpose: Deliver them the lowest costs (EDLP) and their lives will be improved. Responsibility: Make the world a better place

These became Wal-Mart Stores 3 core values: The Value Statement: Service to the customer, Respect for the individual and Striving for excellence. From the website: Delivering a seamless shopping experience; Talent is key to success; Benefiting our communities. The Mission Statement: Save Money/Live Better (from the website). There is consistency in Sam’s values and Walmart’s stated values today. Walmart built its US operations using a hub and spoke system. The hub (distribution center) supports the spokes (stores). Each wheel was the launch board to the next hub and spoke as a hub could support growth of sufficient stores to build a new hub.

Today Walmart has expanded overseas primarily through joint ventures or acquisitions and then built wheels to support the new regions. Additional distribution models such as Remix and the integration of IT systems have been built to streamline ordering, deliveries and drive costs further down the supply chain. Expansion overseas and growth have impacted margins, at least in the international operations, and affected the ability to centrally control the operations and keep the personal relationships between head office and the individual store managers.

Porters 5 forces & the resource based approach (C.K.Prahad & Core Competencies) to firm analysis The External EnvironmentPorters 5 forces can be termed the outside-in approach to industry and firm analysis. The general merchandising industry is very competitive with few to no barriers to entry, buyers can easily switch among many substitute products with cost becoming the primary factor of choice for buyers. The only strength for a merchandiser is the choice among many suppliers. Barriers to new entrants (Low)

Few to noneLocation and min financingPower of Suppliers (HIGH)Little power; many substitutesPower of Buyers (HIGH)Many alternatives; can price compare; customer service is of minimal concern Substitutes (Low)Most products have many substitutesIndustry CompetitorsIntense rivalry; no obvious barriers to entry; suppliers have little power; the only avenue for uniqueness is internal competencies Based on the porters 5 forces analysis, we found the general merchandise industry is not attractive. We need to use a different model to assess Wal-Marts’s competitive advantage The real competitive advantage for any firm is how it uses its resources, but more importantly its capabilities to create competitive advantages over its rivals. The resource based view as “popularized by C.K. Prahad….’The Core Competence of the Corporation” will be used to evaluate Wal-Marts core competencies and its ability to leverage these competencies to create a sustained competitive advantage.

Walmart’s Resources and capabilities (The internal environment) Tangible resources:

22-24% debt to total assets has remained stable; ability to borrow Their working capital has remained steady at 0.9 to 1; pay bills as they come due Major investment in fixed assets at 56-58%; stores and fixtures to support sales growth US Super centres: 3022; 629 US discount stores (declining numbers); 611 US Sam’sclubs; 196 US Neibourhood Markets; 5651 International units…lots of stores 23% ROE will allow Wal-Mart to easily raise funds in the equity markets Walmart’s financial strength allows it to finance growth without increasing its leverage. Its debt to equity and working capital has remained stable over the past 10 years with little impact from the financial crisis.

This, in combination with the industry’s highest return on equity, means Wal-Mart can borrow at a very low weighted (WACC) average cost of capital (interest costs have averaged less than 5% of long-term debt) or raise capital in the stock market at favorable prices. Its major investments are in inventory and fixed assets. The fixed assets are supported by 93% long-term debt and equity financing meaning part of working capital is supported by long-term financing. This is a conservative approach and explains why Wal-Mart was not greatly impacted by the credit crunch brought about by the financial crisis.

Intangible resourcesFounding 5 core principles: small town values; EDLP; community; responsibility; opportunity Proprietary distribution sw systems- satellite RDFI for logistics mgmtand inventory control Links all stores, to system all the way to suppliers; tracks items Own their own satellite; use EDI with suppliers; POS to suppliers for inventory reorders Store layout

Growth through Hub and spoke (distribution) systemCross-docking system: minimal warehousing; goods go immediately from dist pts to stores; minimizes costs Customer satisfaction guarantee program; use of greetersEDLPDecentralized store management: layout,pricing, sales strat by dept mgrs., product mix within store Use of IT to integrate entire value chain Communication and supervision structure keeps stores close to HO Reg VP10-15 Dist Mgrs  8-12 stores; VP visit stores/no offices; data accum M-th; data anal Fri-sat; decision made Sat; Dist mgrs.

Contacted sat for following week Wal-Mart’s founding principles as enshrined in its mission and vision give’s every associate right up to the management team a focus and an understanding of where each component of the value chain. fits in this picture and where each of their jobs and duties lie. There is no doubt, nor is there any drift. Each job has a purpose within Sam’s greater vision. Greeting the customer or stocking what is in demand is all part of the “Customer Satisfaction Guarantee”.

The distribution (RDFI), purchasing (EDI) and sales (POS) systems have been integrated in order to control costs at all parts of the value chain. In effect driving costs back to the suppliers. This singular focus on cost has allowed Wal-Mart to pass this savings to its customers. This has been facilitated by minimizing bottle-necks using cross-docking and REMIX and growth with the hub and spoke strategy including regional mega distribution centers such as Shanghai China to support global growth. Decision making at the customer level has been decentralized to the store level allowing store managers and department managers control over layout, input on pricing and products on the shelf.

This allows for EDLP (everyday low pricing) to be competitive at the local level in all regions. The weekly meeting is a hallmark of Wal-Mart. It has been changed to monthly, but the weekly gathering of information to facilitate decisions from the corporate to store level remains. The VPs meet with their district managers who visit all their assigned store managers (stores) gathering the intelligence needed to drive the strategy and the tactics. This information is culled to develop ongoing strategies from supplier acquisition or termination to individual store strategies all to facilitate “Save more, Live better”. Human Resources

Empowered sales associates94% of employees have health benefitsWith one year or more of service employees are covered by a pension Pay scale is higher than competitorsAll store managers from around the world participate in a monthly meeting via satellite (formerly the famous Wal-Mart weekly meetings) Wal-Mart’s employees (or associates) are family. They are your neighbours. Associates are empowered and when deserved, promoted . They are given better than average health benefits and wages. All associates are covered by a pension plan. Associates will someday become the VP’s, district managers and managers. They are Sam’s community to be treated with honour and respect, just the same as the clients.


Corporate FunctionsMulti-district mgr/VP coordination worldwide to Benton HOCentralized purchasing from Benton HOManagement InfoComplete integration of sales, inventory and supplier information through sophisticated IT systems to facilitate managerial decision making Eg. The VP/Dist mgr/Store mgr meetings and data gathering

OperationsOperational efficiencyCentralized and proprietary supply chain system allows Walmart to drive down costs at all stages of the supply chain more efficiently than their competitors Walmart is able to use the capabilities of its EDI, POS and other data systems and combine this with the VP’s weekly info gathering exercise to make weekly managerial decisions. This is more sophisticated and faster than the competitions Store design; layout of aisles; and stocking of shelves benefits from the information capabilities REMIX Program: uses 3rd distribution

Flexibility and speed of response:marketing and pricing can be done at the individual store and even at the department level; decisions on what items to stock

MarketingEDLP is Wal-Marts brand with quality productsCustomer is the only boss (5 core values, esp community)O.55% ratio of adv$ to sales$ is lower than competitorsPeople know something is always on sale and EDLP

Sales and distributionEDLPIT systems: RDFI, EDI, POS and their integration to support decision making Hub & spoke system to dist inventory to storesIntegrate electronic and mgr info to make fast decisionsCustomer ServiceSatisfaction Guaranteed programLow cost/Customer benefits (core value ofcommunity)Ranking of Walmarts Capabilities or competitive advantage1. Supply chain managementa. Logistics:a.i. Distribution and warehousing (Hub and spoke)a.ii. Cross-dockinga.iii. Have their own truck fleet (use 3rd party for frequent/local PU & deliveries) b. IT Systems to integrate POS, EDI and RDFI to minimize inventory costs, inventory turnover times, minimize stock-outs and adjust to local demand c. REMIX: 3rd Party logistics company: PU, consolidate and delivery to dist centers 2. Relationship management style

a. VPDist Mgr store meeting systema.i. Every store is connected on a personal level to Benton, HO a.ii. Weekly decision making processa.ii.1. Movement of product; competitors, problems faced, performance analysis b. Diversified store management: Decisions made at store/dept level b.i.1. Pricingb.i.2. Stockingb.i.3. Positioning of productb.i.4. Store layout3. Wal-marts Founding Principles or the Wal-Mart branda. Gave a consistent message and focus to their valuesb. Stable and centralized leadership style

Walmarts Sustainable competitive advantage (failure of the competition)

Wlamart has developed unique set of core competentcies. The leadership of SamWalmart and 5 founding principles allowed Walmart to stay focused and ahead of its competition. (see figure 1.1 in text for assistance)

Failure of competitionThe competition have not had the long-term view or consistent core values that guided Walmart. Reliance on 3rd party logictics systems has meant less control over the supply chain thus less control of costs. Walmart’s economies of scale dwarf its nearest competition, which means Walmart can almost always get a better deal. Recommendations for Wal-Mart to maintain its competitive advantage Walmart must continue to improve on its industry leading supply chain. This has allowed them to gain a significant advantage in bargaining with suppliers because of their economies of scale and the ability to control costs all through the supply chain.

In effect, they have driven the costs down to the supplier level. They must be true to their core founding principles. This means returning to the weekly meetings. The Benton, HO must find a way to adapt the “Small town values” to the cultural traditions of each region. We suggest weekly meetings done on a regional basis such as North America, China or Asia and Europe.

They should continue the monthly meetings of the global management team. The marketing, customer service and even the store layout can be customized and localized to show the true appreciation of these families and neighbours with different cultures and customs. The corporate management team needs to adopt a diversity strategy to become more reflective of the diverse customer and associate base outside of the US. The customer (and the supporting cast of associates) relationship along with their low cost strategy is one of the key success factors for Wal-Mart.

Sources and citations: (Wal-Mart Stores financial Statement accessed Sept 16 2013) “Contemporary Strategy Analysis”, Grant, Robert M, 8th Edition, John Wiley & Sons, 2013 (ch 3 & 5) Http://…Core Competencies (Prahad & Hamel), Organizational Learning