Wall-Mart Stores, Inc.

Background Company
Founded by Sam Walton, the first Wal-Mart store opened in Rogers, Arkansas, in
1962. Seventeen years later, annual sales topped $1 billion. By the end of January 2005,
Wal-Mart Stores, Inc. (Wal-Mart) was the world’s largest retailer, with $288 billion in sales.
In 1995, Wal-Mart sold no grocery; by 2005, the company was the market leader among
supermarkets in the U.S. Wal-Mart was the largest private sector employer in the world. The
information technology that powered Wal-Mart’s supply chain and logistics was the most
powerful, next only to the computer capability of the Pentagon. The company owner over
20 aircrafts which were used by managers to travel to its stores in far-flung locations. The
number of miles flown by Wal-Mart managers in the company-owned aircrafts would place
Wal-Mart on par with medium-sized commercial airline. Wal-Mart had the largest privately-
owned satellite communication network in the U.S. and broadcasted more television than
any network TV.
Wal-Mart’s winning strategy in the U.S. was based on selling branded products at
low cost. Each week, about 138 million customers visited a Wal-Mart store somewhere in
the world. The company employed more than 1.6 million associates (Wal-Mart’s term for
employees) worldwide through more than 3,700 stores in the US and more than 1,600 units
in Mexico, Puerto Rico, Canada, Argentina, Brazil, China, Korea, Germany, and the United
Kingdom. (The first international store opened in Mexico City in 1991.) Wal-Mart also
obtained a 38% controlling share in the Japanese retail chain Seiyu in order to capture a
slice of the world’s second largest market estimated at $1.3 trillion.
In 2002, Wal-Mart was presented with the Ron Brown Award for Corporate
Leadership, a presidential award that recognizes companies for outstanding achievement in
employee and community relations. In 2004, Fortune magazine placed Wal-Mart in the top
spot on tis “Most Admired Companies” list for the second year in a row.
By 2005, Wal-Mart held an 8,9% retail store market share in the United States. Put
simply, of every $100 that Americans spent in retail stores, $8.9 was spent in Wal-Mart.
Procter & Gamble, Clorox, and Johnson & Johnson were among its nearly 3,000 suppliers.
Though Wal-Mart may have been the top customer for consumer product manufacturers, it
deliberately ensured it did not become too dependent on any one supplier; no single vendor
constituted more than 4 percent of its overall purchase volume. In order to drive up supply
chain efficiencies, Wal-Mart had also persuaded its suppliers to have electronic “hook-ups:
with its stores and adapt to the latest supply chain technologies like RFID which could
increase monitoring and management of the inventory.
Wal-Mart used a “saturation” strategy for store expansion. The standard was to able
to drive from a distribution center to a store within a day. A distribution center was
strategically placed so that it could eventually serve 150-200 Wal-Mart stores within a day.
Stores were built as far away as possible but still within a day’s drive of the distribution
center; the area then was filled black (or saturated back) to the distribution center. Each
distribution center operated 24 hours a day using laser-guided conveyer belts and cross
docking techniques that received goods on one side wile simultaneously filling orders on the
other. Wal-Mart’s distribution system was so efficient that they incurred only 1.3% of sales
as distribution costs compared to 3.5% for their nearest competitor.
The company owned a fleet of more than 6,100 trailer trucks and employed over
7,600 truck drivers making it one of the largest trucking companies in the United States.
(Most competitors outsourced trucking.) Wal-Mart had implemented a satellite network
system that allowed information to be shared between the company’s wide network stores,
distribution centers, and the suppliers. The system consolidated orders for goods, enabling
the company to buy full truckload quantities without incurring the inventory costs.
In its early years. Wal-Mart’s strategy was to build large discount stores in small rural
towns. By contrast, competitors such as Kmart focused on large towns with populations
greater than 50,000. Wal-Mart’s marketing strategy was to guarantee “everyday low prices”
as a way to pull in customers. Traditional discount retailers relied on advertised “sales.”

Wal-Mart’s Management Systems

Each store constituted an investment center and was evaluated on its profits relative
to its inventory investments. Data from over 5,300 individual stores on items such as sales,
expenses, and profit and loss were collected, analysed, and transmitted electronically on a
real-time basis, rapidly revealing how a particular region, district, store, department within a
store, or item within a department was performing. The information enabled the company
to reduce the likelihood of stock-outs and the need for markdowns on slow moving stock,
and to maximize inventory turnover. The data from “outstanding” performers among 5,300
stores were used to improve operations in “problem” stores.
One of the significant cost for retailers was shoplifting, or pilferage. Wal-Mart addressed this
issue by instituting a policy that shared 50 percent of the savings from decreases in a store’s
pilferage in a particular store, as compared to the industry standard, among that store’s employees
through store incentive plans.

Early in Wal-Mart’s history, Sam Walton implemented a process requiring store managers to
fill out “Best Yesterday” ledgers. These relatively straightforward forms tracked daily sales
performance against the numbers from one year prior. Recalled Walton, “We were really trying to
the very best operators—the most professional managers—that we could. I have always had the
soul of an operator, someone who wants to make things work well, then better, then the best they
possibly can.” His organization was really a “store within a store,” encouraging department
managers to be accountable and giving them an incentive to be creative. Successful experiments
were recognized and applied to other stores. One example was the “people greeter,” an associate
who a personal service, their presence served to reduce pilferage. The “10-Foot Attitude” was
another customer service approach Walton encouraged. When the founder visited his stores, he
asked associates to make a pledge, telling them, “I want you to promise that whenever you come
within 10 feet of a customer, you will look him in the eye, greet him, and ask him if you can help
him.”
 In return for employees’ loyalty and dedication, Walton began offering profit sharing in
1971. “Every associate that had been with us for atleast one year, and who worked atleast 1,000
hours a year, was eligible for it,” he explained. “Using formula based on profit growth, we contribute
a percentage of every eligible associate’s wages to his or her plan, which the associate can take
when they leave the company, either in cash or in Wal-Mart stock.” In fiscal 2005, Wal-Mart’s annual
company contribution totalled $756 million.

Wal-Mart also instituted several other policies and programs for its associates: incentive
bonuses, a discount stock purchase plan, promotion from within, pay raises based on performance
not seniority, and an open-door policy.

Sam Walton, the founder of Wal-Mart, believed in being frugal. He drove and old beat-up
truck and flew economy class, despite being a billionaire. He instilled frugality as part of Wal-Mart’s
DNA.

Discussion

1. What is Wal-Mart’s strategy? What is the basis on which Wal-Mart builds its competitive
advantage?
● Wal-Mart’s winning strategy in the U.S. was based on selling branded products at low
cost. Each week, about 138 million customers visited a Wal-Mart store somewhere in
the world.
● The basis is Wal-Mart ensured it did not become too dependent on any one supplier; no
single vendor constituted more than 4 percent of its overall purchase volume.
● Wal-Mart used a “saturation” strategy for store expansion. The standard was to able to
drive from a distribution center to a store within a day. A distribution center was
strategically placed so that it could eventually serve 150-200 Wal-Mart stores within a
day.
● Wal-Mart’s strategy was to build large discount stores in small rural towns. By
contrast, competitors such as Kmart focused on large towns with populations
greater than 50,000. Wal-Mart’s marketing strategy was to guarantee “everyday
low prices” as a way to pull in customers.
2. How do Wal-Mart’s control systems help execute the firm’s strategy?
● Each store constituted an investment center and was evaluated on its profits relative to
its inventory investments. Data from over 5,300 individual stores on items such as sales,
expenses, and profit and loss were collected, analysed, and transmitted electronically on
a real-time basis, rapidly revealing how a particular region, district, store, department
within a store, or item within a department was performing. The information enabled
the company to reduce the likelihood of stock-outs and the need for markdowns on slow
moving stock, and to maximize inventory turnover. The data from “outstanding”
performers among 5,300 stores were used to improve operations in “problem” stores.
● Wal-Mart also instituted several other policies and programs for its associates: incentive
bonuses, a discount stock purchase plan, promotion from within, pay raises based on
performance not seniority, and an open-door policy.
● Wal-Mart had implemented a satellite network system that allowed information
to be shared between the company’s wide network stores, distribution centers,
and the suppliers. The system consolidated orders for goods, enabling the
company to buy full truckload quantities without incurring the inventory costs.