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” - Inventory
Walton 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?
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
Jessi Janis 6 as the
most admired company in America.
 History of Wal-Mart
• In 1945 Sam Walton 1st IPO in 1970.
opened the first Ben Then 100 shares were
Franklin franchise in worth $1,650 dollars and
Newport Arkansas and now the same 100 shares
operated them with his are worth more than $6
wife, Helen and brother, million dollars.
Bud. In 1999 named #1 stock on
• These were small chains the Dow.
that were very successful.
• In November of 1962
Wal-Mart was opened.
• Wasn’t until mid 1970’s
that Wal-Mart began to
grow.
 History
• 1987 In 1992 Sam Walton Died
– 2 new concept and in 1996 Bud Walton
implemented died.
• Hypermarkets, which In 1995 Wal-Mart’s Annual
sell everything including Report was dedicated to
food Bud.
• Supercenters which are
New president and CEO H.
scaled down
supermarkets Lee Scott states that
• Also David Glass named new “While our history is rich
CEO of Wal-Mart 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 Process
Key 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 Process
Key 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 Process
Key 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 Force
How Wal-Mart’s First Mover Advantage Pays Off

Wal-Mart is first to locate discount stores in cities with

1 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%
2 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
3 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

4 costs, wages, and rents by locating
in small town markets.
 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.
Sales per employee, $ thousand
1995 1999

Wal-Mart 148 Wal-Mart 181

Kmart 109 Kmart 133

Sears 87 Sears 118

W hy Wal-Mar t’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 coded
2. Weaknesses
• Self cannibalism
• Pilferage and shoplifting
3.Opportunities
• Online marketing and sale
4. Threats
• Intense competition
BCG
 Value chain to value grid
• VERTICAL
1. 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

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