Wal-Mart Stores’ Discount operations

Submitted by

Ajal.A.J

How Wal-Mart Got There- A Retrospective on Its

Growth

The Numbers: How “Big” is Big? IT: The Driver of the EDLP strategy Management Process

… Partnership with Suppliers… Partnership with Employees… Obsessive Focus on Costs

Walton’s Business Model was Different…

Located stores in small towns since big retailers such as Kmart and Sears dominated large towns

Kept overhead low Offered incentives - Profit-sharing for staff Partnerships for suppliers Large investment in IT … To keep inventory low Customers got friendly service

AND, “Everyday Low Price”

A Simple But Powerful Idea: Minimize the “Bad I” - InventoryWalton figured out that most of the costs gets added after the product leaves the factory and moves through the supply chain:

Mfg. Wholesaler Retailer

• 20% - 30% of retail price spent on keeping inventory in 3 warehouses

• Walton eliminated the wholesaler

• He instituted JIT inventory practices using “real-time” flow of information from a store’s sales floors to the

supplier’s plants that dictated:

What to produce? When to ship? To which stores?

Jessi Janis 6

History – some important dates• 1962: Company founded with opening of first Wal-Mart in

Rogers, Ark. • 1967: Wal-Mart's 24 stores total $12.6 million in sales.• 1970: Wal-Mart opens first distribution center and home

office in Bentonville, Ark.• 1977: Wal-Mart makes first acquisition, 16 Mohr-Value

stores in Michigan and Illinois.• 1978: Hutcheson Shoe Company acquired• 1981: Wal-Mart makes its next acquisition with 92 Kuhn's

Big K stores.• 1983: U.S. Woolco Stores acquired.• 1990: Wal-Mart becomes nation's No. 1

retailer.1990McLane Company of Temple, Texas acquired.• 1997: Wal-Mart replaces Woolworth on the Dow Jones

Industrial Average.• 2003: Wal-Mart named by FORTUNE magazine as the

most admired company in America.

History of Wal-Mart

• In 1945 Sam Walton opened the first Ben Franklin franchise in Newport Arkansas and operated them with his wife, Helen and brother, Bud.

• These were small chains that were very successful.

• In November of 1962 Wal-Mart was opened.

• Wasn’t until mid 1970’s that Wal-Mart began to grow.

1st IPO in 1970. Then 100 shares were

worth $1,650 dollars and now the same 100 shares are worth more than $6 million dollars.

In 1999 named #1 stock on the Dow.

History

• 1987 – 2 new concept

implemented• Hypermarkets, which

sell everything including food

• Supercenters which are scaled down supermarkets

• Also David Glass named new CEO of Wal-Mart

In 1992 Sam Walton Died and in 1996 Bud Walton died. In 1995 Wal-Mart’s Annual

Report was dedicated to Bud.

New president and CEO H. Lee Scott states that “While our history is rich with success, there’s no question that our best years are yet to come.”

Important People

• Co-founders, Sam and James “Bud” Walton started 1st Wal-Mart in Rogers, Arkansas, 1962

• David Glass was named president 1984, in 1988 he became chief executive officer

• S. Robson Walton named chairman of the board in 1992• President and CEO in 2000- H.Lee Scott• Vice President- Laura Philips

Mission Statement

Wal-Mart’s Management ProcessKey Features

1. Low Wages… But “Golden Cuffs”… Started a Profit-Sharing Plan in 1971 for ALL Employees

“ Based on profit growth, we contribute a % of the employee’s wages to his/her plan. The employee can take it in cash or Wal-Mart stock when they leave the company.”

“After nearly 25 years at the company, Shirley Cox, a cashier, still earned barely $7.00 an hour. But she retired in her 40s on $250,000 of company stock…. the stock is a prevailing theme for everyone at Wal-Mart… if you hang around long enough, you can make a fortune on the stock.”

2. No class system, thus fending off all attempts at unionization… ALL employees are called “associates” drumming home the notion that

managers and workers are partners

3. Promote from within… In 1996, 5,900 workers moved up to management jobs… 60% of the 30,000 managers are former hourly workers

Wal-Mart’s Management ProcessKey Features

4. Empowering of Front-Lines … Wal-Mart gives them information at their finger-tips and the freedom to act. “If someone asks me how we manage a $100 billion company, I tell them a store at a time, and we constantly challenge that unit to make it the best.”

5. Keeping Track of Competitors’ Prices “Later that afternoon, she leaves the store for an hour to compare prices at

nearby Kmart and Target stores. She is reimbursed mileage. If a competitor’s prices are the same or lower than Wal-Mart’s, she consults with her supervisor about cutting her own prices up to 5 %.”

6. Management will not tolerate “shrinkage” Loss, theft and damage of inventory is capped at around 1% Other retailers settle for 3% - 5%

Wal-Mart’s Management ProcessKey Features

1. Work Ethic, Disdain for Extravagance and Customer-Centric

Lead by Example: Walton was a model of frugality and modesty who continually warned against complacency and sloth. He drove around in an aged Ford pickup truck and wore inexpensive clothes.

Wal-Mart’s corporate offices are cramped, dingy and cheaply furnished. Walton believed that executives should spend more time on the selling floor than behind desks.

To make sure they did, Walton, an avid pilot, assembled a small air-force that whisked them around the country, visiting Wal-Mart’s Monday through Friday. On the road, they stayed in budget hotels, and ate at family restaurants.

Every Saturday, at a meeting in corporate headquarters in Bentonville, they discussed their findings.

Wal-Mart the Corporate ForceWal-Mart the Corporate Force

How Wal-Mart’s First Mover Advantage Pays Off

Wal-Mart is first to locate discount stores in cities with less than 50,000 population. Wal-Mart targets greater than 25 percent of all retail purchases in those cities.

In 1987, 33% of Wal-Mart’s stores are in “single store” towns with no direct competitors compared to 12% for the industry. In 1993, W-Mart has 22% of stores without competition from either K-Mart or Target; K-Mart & Target do not compete with W-Mart in only 18% and 15% of markets, respectively.

Wal-Mart’s store prices are 6 percent higher in “no competition” markets than in markets with direct competitors (for every 10

percent more stores without competition, W-M makes .06% higher overall profits, or .10 x .06) In 1987, 1.3% of W-Mart’s higher

profits [.21x.06] are due to no competition.

Wal-Mart incurs lower advertising costs, wages, and rents by locating in small town markets.

1

2

3

4

Wal-Mart Stays Ahead of Competition!

Competitors began to adopt many of Wal-Mart’s IT innovations including EDI and wireless bar code scanning in earnest in the mid-1990s. Target’s vice-chairman acknowledges that his company is “the world’s premier student of Wal-Mart”. Still Wal-Mart’s productivity, measured by real sales per employee, is higher than competitors.

118

133

181

Sears

Kmart

Wal-Mart

87

109

148

Sears

Kmart

Wal-Mart

1995 1999 Sales per employee, $ thousand

Why Wal-Mart’s Advantage is Sustainable

Competitors rationally refuse to enter Wal-Mart towns because:• Wal-Mart is first in the small town with a minimum

efficient scale (MES) store• There is no feasible way to increase local demand

(relatively fixed demand)• If the second mover builds a store (makes a MES

investment, which is necessary to compete successfully) it will create substantial overcapacity; neither firm will make money.

Wal-Mart’s advantage is sustainable due to a natural geographic monopoly. This has more to do with strategy and positioning than operational efficiency.

Five forces analysis

1. Competition- Very High

2. Barriers to entry-Low. (But survival is not easy)

3. Supplier’s power- Less

4. Customer’s power- Less

5. Substitutes- Major substitutes are department stores. Moderate

SWOT Analysis

1. Strengths• Brand name• Cost effective supply chain and inventory management• Good employees• IT advantage- all stores UPC coded2. Weaknesses• Self cannibalism• Pilferage and shoplifting3.Opportunities• Online marketing and sale4. Threats• Intense competition

BCG

Value chain to value grid

• VERTICAL1. Exploring Parallel value chains-new ways to

influence demand• Discount stores in small towns• Marketing theme “We sell for Less”• Strategy- “Every day low prices”• 13 promotions per year• Main computer linked with 3000 vendors.• No vendor supplied more than 2.8% of total

purchases

Value chain to value grid( contd..)

2. Managing Risk

- Divesrification

- 3 new ventures –dot Discount Drug, Helen’s Arts and Crafts and Sam’s Wholesale Clubs

Value chain to value grid (Contd..)

• HORIZONTAL

1. Seizing Value

- Areas previously considered saturated are being explored by Wal-Mart

- Stores 30000 sq ft opened at small towns of population 1000 to 5000

Value chain to value grid (Contd..)

• DIAGONAL

1.Value chains across tiers

- More than one vendor

- No vendor supplied more than 2.8 % of company’s total purchases

- One truck used to supply to two or more stores at a time, and used to collect shipments and returns on the way back

Employees: Key to Customer Loyalty

Our relationships with the associates is a partnership in the truest sense. It’s the only reason our company has been consistently able to outperform the competition – and even our own expectations.

Q1: Is the industry attractive? What was the competitive advantage of

Wal Mart?• The industry is attractive- Right timing

- Better informed customers- supermarkets and TV

- Government standards

• Competitive advantages of Wal-Mart- Low price

- Number of stores- in small as well as large towns- proximity to the customer home(an expansion plan of “ Pushing from Inside Out”)

- Well-treated employees

- Wide variety of goods( hardware, clothes,food)

- Good relationship with vendors

- Good communication network

Q2: Should Sam Walton move into Sam's club? Can he extend the competitive

advantage in Sam's club?• No.- Club members given more premium- it is against their mission- late mover disadvantage• No.

Thank you for shopping at WAL-MART

Questions?