Wal-Mart Case Study posted by Shawn Carlson 8/29/2004

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Update 8/27/2007: I have noticed a lot of people find my site by searching for these Case Studies (mostly Wal-Mart and jetBlue).  With school starting, I realize they will become more of a resource than ever.  To make it more of a resource, and to possibly receive critiques (time permitting) please send me what case studies you have.  I will add them to my site, creditting them to you, of course, and allow others to access them.  This way it can become much more of an academic resource.  Please, of course, include all references, noting that anything copied/stolen will not be posted.  Thanks for your help!  Just email them to me.

1. a. Corporate Strategy

            Before analyzing Wal-Mart’s corporate strategy, it is important to decide what business it is in.  For example, if Wal-Mart is in the business of selling consumer goods such as TV’s, sheets, clothes, etc then it is pursuing a concentric strategy by entering the food business.  However, this changes depending on how you analyze what business Wal-Mart is in.  Wal-Mart is in the business of selling everything customers need in their everyday lives.  This includes the consumer goods listed above as well as food-service items.  Even still, Wal-Mart pursues multiple strategies.  Concerning concentration, Wal-Mart continually finds more consumer goods to sell at its stores which can take money from competitors.  Additionally, when Wal-Mart entered into the food market, it quickly consolidated and held to good, saleable products.  Wal-Mart never forays too far into a market and only sells what will make it a profit.

            Recently, Wal-Mart has pursued a conglomerate strategy by starting to sell used cars at some of its stores in Buffalo, New York[1].  Selling cars is an entirely different industry than selling consumer goods.  Additionally, it requires a whole new set of expertise that does not come easily.  As far as future plans are concerned, Wal-Mart should abandon this strategy and stick to what they do best.

            Lastly, an argument can be made that Wal-Mart is also pursuing a vertical integration strategy.  Wal-Mart has developed its own name brand to sell products called Sam’s Choice.  This puts Wal-Mart into the business of making things like soda, cereal, and dog food.  While they still don’t grow their own crops or raise their own livestock, it is still a form of vertical integration.  Also, Wal-Mart works heavily with its suppliers.  This symbiotic relationship can be see as vertical integration due to the level at which Wal-Mart analyzes its suppliers and improves their manufacturing processes, etc.

            b. Business Strategy

            Wal-Mart definitely has the business strategy of Low Cost Leadership. They do nothing to really differentiate themselves from competitors and provide no-frills self-service stores that always provide the lowest prices.  Wal-Mart has built enough clout with suppliers that they can dictate the prices and go in and change suppliers manufacturing processes in order to wring out more and more savings for the consumer.  Everything that Wal-Mart does from calling suppliers collect to having execs double up in hotel rooms, is to save the customer money.  While they do try to provide good customer service on top of low prices, Wal-Mart’s strength is low-prices.  No one has such a supplier and distribution network like Wal-Mart that allows such low prices.

  1. Porter’s 5 forces:

One aspect of Wal-Mart that sets them apart from other corporations is how they manage their relationship with their suppliers.  We have determined that Wal-Mart is such a dominant force and has become such an important account for their suppliers that they have managed to eliminate Supplier Power.  By eliminating Supplier Power, Wal-Mart can pursue achieving their goals and concentrate purely on their Cost Leadership Strategy, which serves the consumer with “Everyday low prices.”  However, the fact that Wal-Mart is able to disregard Supplier Power begs the question of where exactly does Wal-Mart derive its power?  Additionally, if Wal-Mart has nearly eliminated Supplier Power, then what kind of relationship do they have with their suppliers?

            Wal-Mart’s power is derived from their size and the influence that comes with it.  A quick look at Wal-Mart’s numbers is the proof of Wal-Mart’s size and power.  Some of Wal-Mart’s numbers include 23% of Clorox’s sales and 20% of Revlon and RJR Tobacco’s sales.[2]  If these companies choose to walk away from their supplier relationship with Wal-Mart, then they would lose out on nearly a quarter of their revenue.  The fact of the matter is that this same concept extends to all of Wal-Mart’s other suppliers like Kraft, Proctor & Gamble, Gillette, Campbell’s Soup, and many more.[3]  The reality that these suppliers live in is one where they know that their Wal-Mart account is one that they cannot afford to lose.  In fact, suppliers are also faced to look at the predictions that, in an estimated five years, Wal-Mart will double in size, which mean Wal-Mart’s account with only continue to grow. 

            Since Wal-Mart has effectively eliminated Supplier Power, it is also important to consider the state of their relationship with suppliers.  In many ways, Wal-Mart has changed the dynamic of the supplier and buyer relationship.  Joe Galli,  Newell CEO, was quoted as saying, “The days of price increase are over.”[4]  Often times, Wal-Mart will tell their suppliers upfront what they will and will not pay for a good.[5]  However, despite the fact that Wal-Mart has removed the possibility for supplier price increase, their suppliers generally feel one of two ways about Wal-Mart.  The first supplier sentiment is serving a client like Wal-Mart forces a company to become more efficient.[6]  Many suppliers feel that doing business with Wal-Mart is the equivalent of entering a corporate basic training exercise.  Robin Prever, who was CEO of Saratoga Beverage Group, was quoted as saying that this relationship with Wal-Mart, “… wakes everybody up. And all our customers benefited. We changed our whole approach to doing business."[7]    The second sentiment of suppliers is that Wal-Mart is the big brother who likes to push them around.  In some instances when suppliers have attempted to raise prices, Wal-Mart has either denied their request or they also been known to pay the same previous amount to their supplier with no questions asked.[8]  An example of this situation is Wal-Mart’s relationship with Vlasic, who was “forced” by Wal-Mart to sell pickles in gallon containers for under $3.00 a jar.  Making only pennies a jar and watching their supply of pickles dwindle, Vlasic attempted to negotiate a price increase for their product with Wal-Mart and was denied causing a loss of millions of dollars for Vlasic.[9]

In this regard, if their suppliers feel cheated, does it really affect Wal-Mart in the end since suppliers cannot afford to lose their business?  The answer is yes because, “suppliers can affect manufacturing time, product quality, and inventory levels.”  All of these aspects of supply can shape Wal-Mart’s ability to effectively restock their shelves for their inventory turnover.[10]  In addition, if Wal-Mart pursued avenues that would seriously undercut their suppliers, then they face a variety of possible repercussions.  For instance, if suppliers became unable to take care of their workforces, then Wal-Mart could see significant drops in their product inventories.  Therefore, even though suppliers do not have power in regards to their relationship with Wal-Mart, it is still important for Wal-Mart to maintain relations with their 21,000 suppliers because suppliers are the key to Wal-Mart achieving its goals and strategy.

3.   McKinsey 7S model

            When analyzing the business of Wal-Mart, they actually employ all three of the “hard S’s” in their pursuit of their goals: Strategy, Systems, and Structure.  Their strength in all three of these S’s is probably a big reason why they have been so successful.

            As discussed with the business strategy, Wal-Mart’s overall strategy is to always provide the lowest prices.  Additionally, they aim to have a store which provides convenience by allowing consumers to find everything they need under one roof.  This strategy of convenience with low prices has driven Wal-Mart to be the business leader that it is.  Additionally, they plan to continue to expand into markets not yet penetrated by major chains, and some markets that are already saturated, such as New England and California.  This strategy has infiltrated the entire company so that in encompasses all the other S’s.  The other two hard S’s, systems and structure, support this strategy.  Also, low prices everyday has become the style and shared values of Wal-Mart.  Even the staff is completely committed to providing the lowest possible prices.  The skills of workers are also geared to finding inefficiencies and towards decreasing prices.  The low-cost strategy has driven Wal-Mart to do things such as call suppliers collect, do away with manufacturer representatives at sales meetings, do away with regional offices, etc.

            Wal-Mart has in place a set of systems that helps it achieve its strategy of low prices everyday.  The largest and most profitable of these systems is the Information Technology system.  Wal-Mart has employed computers, networking, and the internet to reduce inventories and waste, and speed deliveries.  Wal-Mart can connect to their suppliers and transmit them data so they know what Wal-Mart needs and when.  This is similar to the “just in time” production that Harley Davidson uses to hold down its inventories.  The lower inventories allow Wal-Mart to produce inventory turnover rates of around 70% which is really high.  Additionally, Wal-Mart has worked with suppliers in order to improve their efficiencies in production which they then pass to Wal-Mart and then to the consumer.  All this works to reduce cost.  Because of Wal-Mart’s strategy, these reduced costs due to systems allow Wal-Mart to reduce consumer’s prices.  Wal-Mart has streamlined the supply system so well that it would be very hard to find any inefficiencies and would be hard for any competitor to beat.  Additionally, Wal-Mart has a very efficient human resource system set-up that has both mostly kept employees happy, and resisted unionization.  Wal-Mart is the largest private employer and has developed systems to tie raises and bonuses to performance.  This encourages employees to think of the company and to always do their best.  System processes such as working with suppliers ties in with skills since being able to analyze supplier production processes is a skill that is learned and retained by Wal-Mart.

            Wal-Mart also employs a good structure that works with the systems to empower the low price strategy.  Wal-Mart has planned warehouses and integrated them with systems in order to achieve “cross-docking” so that supplies coming in never touch the warehouse floor before going out to stores, which greatly reduces inventory cost.  Additionally, they place their warehouses strategically so that one warehouse can serve many stores.  They have developed time schedules so that one truck can service many stores and that after a delivery the truck can take back returned goods to the warehouse.  The supercenter design itself is a structural advantage and strategy that Wal-Mart uses.  This design allows consumers to come to a single Wal-Mart store to find everything they need from groceries to gifts to clothes to toys.  Wal-Mart has designed an efficient management structure that allows it to eliminate the regional office.  Everything for Wal-Mart is planned and operated in their home of Bentonville, AR.  This structure alone has saved Wal-Mart millions of dollars a year.  When Wal-Mart places stores in strategic locations and drives traffic using convenience and then combines the sales with its systems and structure, you get a highly efficient and well-oiled corporation that can cut costs to a bare-minimum which are then passed along to the consumer, hence fulfilling the strategy.  If Wal-Mart continues to dominate these three S’s, it will continue to dominate the retail market.

4. HRM:

            Wal-Mart’s success in Human Resource Management is keeping their workforce of 1.3 million from unionizing, while adding to it and pursuing other HR activities to further Wal-Mart’s success.  Wal-Mart would not have been able to expand and have the same level of success without hiring and taking care of quality employees. Some of Wal-Mart’s human resource activities include employee advancement, employee recruitment on college universities, and employee training and development.  Additionally, while most firms have slowed down their hiring of new employees, Wal-Mart has sought out new ways to attract employees to compensate for their further expansion over the next five years.[11]

Looking at Wal-Mart’s Human Resource Management, one of the most important aspects is Wal-Mart’s employee advancement program.  Currently, 65% of the company’s managers began working hourly jobs, such as cashiers.[12]  Wal-Mart has taken great efforts to ensure that there are opportunities for their employees to rise up through the ranks so to speak.  This availability of opportunities to advance past low-paying hourly wage jobs undoubtedly is part of the reason that Wal-Mart was voted as one of Fortune magazine’s most admired companies and was distinguished as one of the best companies to work for in the U.S.[13]

In the realm of employee recruitment and employee training and development, Wal-Mart has targeted college students to add to their workforce.  Wal-Mart achieves this recruitment by fanning out over 80 college campuses.[14]  While they are at these colleges, they are also able to expand their demographics by looking at minority fraternities and sororities, which brings all types of people from different backgrounds, races, and genders together in the Wal-Mart family.  Having a wide variety demographic for a workforce, only serves to attract more people to seek employment with Wal-Mart because they are able to show that they have a very open hiring process.   Beyond this recruitment, Wal-Mart has taken an additional step with college students by offering management training for college students while they are still in school so they are more developed and prepared upon their graduation.[15]  This program serves the purpose of making college students consider careers with Wal-Mart, and over the last two years, the program has had immense success. 

            The results of these Human Resource activities speak for themselves.  Wal-Mart has achieved a very good retention rate for their employees, and the proof of this is their focus on adding to their workforce over the next five years by hiring 800,000 new employees bringing the total over two million.[16]  Despite the reports that Wal-Mart’s employees are underpaid and not given benefits, Wal-Mart has not wavered.  Employees, as much as 60%, have gone on record saying that they stay with Wal-Mart because the benefits allow them to take care of their families.[17]  If employees were unhappy and leaving at a considerable rate, then the focus would be on filling these open spaces rather than expanding their workforce.

5.  Wal-Mart’s future:

            As Wal-Mart continues to grow and expand, they should continue looking into new product markets. The next opportunity that Wal-Mart should seek to incorporate into their stores is the sale of musical instruments.  Specifically, Wal-Mart should look into the sale of guitars and other band equipment. This product market is a viable area for Wal-Mart to consider because  they have already involved themselves in the music industry. 

Wal-Mart is responsible for 14% of music sales worldwide, and they have also jumped on the online music bandwagon by selling MP3’s on their website for $.88 a song.[18]  They can bring a completely new aspect of music to their consumers by selling quality musical instruments, such as Fender electric and acoustic guitars, amplifiers, drum equipment, etc.  Fender is one of the biggest players in this industry being the largest supplier of solid body electric guitars.  Last year, Fender made an estimated $256 million dollars of sales with a workforce of 1,800 employees.[19]  The musical instrument industry is one that is growing because of increased consumer interest. Another company that has found a great deal of success is Yamaha, which is the nation’s largest maker of musical instruments.  Yamaha made an estimated $822 million of sales last year.[20]   These companies like Fender, Gibson, and Yamaha work mainly through dealers.  Whether through online sites, such as guitarplayer.com or through actual dealer stores like Sam Ash, these dealers specialize only in selling musical instruments. 

If Wal-Mart could come to an arrangement with a company like Yamaha or Fender, it would add a whole other level for musical instrument sales.  Wal-Mart could offer a variety of products with a variety or price ranges that will attract experienced musicians and beginners alike.  People that have never previously thought about buying a nice beginner guitar could now have the option to purchase a Fender or Yamaha guitar at a Wal-Mart everyday low price.  One question that might come to mind is why wouldn’t a customer seek out a dealer if they wanted to purchase a musical instrument?  One potential answer to this question is that often times dealers are not nearly as accessible as a Wal-Mart.  Also, dealers can raise prices and sell an overpriced product to an unsuspecting new musician.  Dealers have the luxury of overpricing their products because it is the only source of revenue and there is very little competition from other dealers in a single geographic area.  However, if a consumer were to see musical instruments and equipment for sale in a Wal-Mart, they could feel comfortable that those products meet Wal-Mart’s Cost-Leadership Strategy of “Everyday Low Prices.”  The bottom line for Wal-Mart is that there is definite potential in this product market, provided that they could find a way to enter the market effectively and stay true to their values while supplying their 3,000 plus stores with musical instruments.

            In addition to adding products to its stores like musical instruments, Wal-Mart needs to carefully plan further expansion.  While most of the US market is already saturated with regular and super Wal-Mart’s, there is still room to expand.  Wal-Mart still has a lot of room to grow in both New England and in California.  However, they need to be careful about doing this so as to not overextend themselves.  If they were to do so, it could send ripples throughout the company, causing them to raise prices and destroy what they have built.  Based on personal observations from having lived up there, New England is very sensitive about outsiders coming in, especially when it is a large chain.  Most of the restaurants and stores are either owned or operated locally, and are rather small.  Most convenience store “chains” only have one or two stores.  Additionally, people like feeling close and maintaining the “ambiance.”[21]  Therefore, Wal-Mart needs to expand slowly into New England so that people can get used to it, just like they have gotten used to large-chain Dunkin’ Donuts.  Also, they need to alter their store strategy and consider opening smaller stores that would fit into the ubiquitous small New England town.  When expanding into California, they again need to take it slow.  There have been a lot of complaints in California about zoning for Wal-Marts[22].  Wal-Mart needs to penetrate the market slowly and do more to help the community in order to prevent backlash.

            Finally, Wal-Mart needs to expand further into international markets.  Once again the key word is caution since not many countries operate like the United States and Wal-Mart will have a steep learning curve.  Wal-Mart should consider pairing up with existing companies when it is possible.  This is because they will receive built-in experience and an existing structure.  They can then take these companies and Wal-Mart-ize them like they did in Canada.  Additionally, they should build only a couple stores in a new country until their staff has learned enough about the idiosyncrasies of the country they’re in.  Once they learn about a new country, they’ll be able to leverage their strengths to deliver low prices everyday.

Extra Credit

            Luckily one of Jonathan’s best friends back home works for a Wal-Mart, as does his father.  His dad has been employed at Wal-Mart since my friend was born over 20 years ago.  While we didn’t actually travel to a Wal-Mart to talk to an associate, we feel that gained the knowledge necessary to make a recommendation based on the Job Design Model based on the conversation with Marc’s (Jonathan’s friend) dad, who is an assistant store manager.  We first asked Marc’s dad if he was happy working at Wal-Mart after all of these years.  He replied by saying that Wal-Mart has enabled him to seek out promotions over the years, but most importantly, it has given him a means to take care of his family.  The next question was after all these years if he still looks forward to going to work in the morning or if it has become a boring routine.  He said that it is hard not to get bored going to the same place and doing the same type of work but he said he likes the people that he works with so that eases the boredom of being at work.  Based on these couple answers, we think that his store should consider combining people into work teams because it would increase interaction and possibly ease some of the monotony of a normal workday.  Marc’s dad could pursue this on many levels of his store’s operations.  For instance, have a work team that rotates to different jobs during the day, sales people moving around to different departments (electronics moving over to athletic equipment). Teams of two or three people could work together, so that there is constant interaction between employees over the course of the day.  This could possibly help employees forget about doing the same type of job everyday because their colleagues are with them all day to take their mind off of it.


 

[1]  http://buffalo.bizjournals.com/buffalo/stories/2002/04/29/daily10.html

     [2] Jerry Useem, “One Nation Under Wal-Mart,” Fortune Magazine,  February 2003.

     [3] Ibid.

     [4] Ibid.

     [5] Charles Fishman, “The Wal-Mart You Don’t Know,” available from http://www.fastcompany.com/magazine/77/Wal-Mart.html, accessed 28 October 2004.

     [6] Ibid.

     [7] Ibid.

     [8] Useem.

     [9] Fishman.

     [10] Thomas Bateman and Scott Snell, Management: The New Competitive Landscape (New York: McGraw-Hill/Irwin, 2004), 52. 

     [11] Stephanie Armour, “While hiring at most firms chills, Wal-Mart’s heats up,” available from http://www.usatoday.com/money/industries/retail/2002-08-25-walmart-employment_x.htm, accessed 28 October 2004. 

     [12] Ibid.

     [13] Useem.

     [14] Armour.

    [15] Ibid.

     [16] Ibid.

     [17] Ibid.

     [18] “Wal-Mart to start download service this year, people say,” available from http://quote.bloomberg.com/apps/news?pid=10000103&sid=arsZlqzCq9ic, accessed 28 October 2004.

     [19] “Fender Musical Instruments Corporation Company Profile,” available from http://biz.yahoo.com/ic/51/51318.html, accessed 28 October 2004.

     [20] “Yamaha Corporation of America,” available from  http://www.hoovers.com/yamaha/--ID__43982--/free-co-factsheet.xhtml, accessed 28 October 2004.

[21] http://www.norfolk-county.com/users/claytons/walmart2.html

[22] http://www.businessweek.com/bwdaily/dnflash/jan2004/nf20040128_6990_PG2_db014.htm