Arab Academy for Science, Technology & Maritime Transport

Advanced Management Institute (AMI)

Comprehensive Exam

Spring 2003

Wall-Mart Stores

Case Study

Presented by

Najlaa Ahmed Kallousa

June 2003

Wal-Mart Stores

Background

Sam Walton started his retail career in 1940 as a management trainee with J.C.Penney Co. in Des Moines, Iowa. He was impressed with the Penney method of doing business and later modeled the Wal-Mart chain on "The Penney Idea". The Penney Company found strength in calling employees "associates" rather than clerks.

Following service in the U.S Army during the Second World War, Sam Walton acquired a Ben Franklin variety store franchise in Newport, Arkansas. He operated this store successfully with his brother, James L. "Bud" Walton (1921-1995), until losing the lease in 1950. When Wal-Mart was incorporated in 1962, the firm was operating a chain of 15 stores. Bud Walton become a Senior Vice President of the firm and concentrated on finding suitable store locations, acquiring real estate, and directing store construction.

The early retail stores owned by Sam Walton in Newport and Bentonville, Arkansas, and later in other small towns in adjoining southern states, were variety store operations. They were relatively small operations of 6,000 square feet, were located on "main streets" and displayed merchandise on plain wooden tables and counters. Operated under the Ben Franklin name and supplied by Butler Brothers of Chicago and St. Louis, they were characterized a limited price line, low gross margins, high merchandize turnover, and concentration on return on investment. The firm, operating under the Walton 5 & 10 name, was the largest Ben Franklin franchisee in the country in 1962. The variety stores were phased out by 1976 to allow the company to concentrate on the growth of Wal-Mart discount department stores.

At the beginning of 1991, the firm had 1,573 Wall-Mart Stores in 35 states with expansion planned for adjacent states. In 2000, Wal-Mart Stores operated mass merchandising retail stores under a variety of names and retail formats including: Wal-Mart discount department stores, SAM's Wholesale Clubs, wholesale/retail membership warehouses, and Wal-Mart Super centers, large combination grocery and general merchandise stores in all 50 states. In the International Division, it operated stores in Canada, Mexico, Argentina, Brazil, Germany, South Korea, United Kingdom, and Puerto Rico, and stores through Joint ventures in China. It was not only the nation's largest discount department store chain, but it had also surpassed the retail division of Sears, Roebuck, and Co. in sales volume as the largest retail firm in the United States, and it was also considered the largest retailer in the world.

1. Current Situation

Current Performance

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The company recorded an improvement in all of profitability and return on investment and it witnessed a rapid increase in sales consequently in market share.

Strategic Posture

1. Mission

There is no agreed stated mission statement for the chain. In some stores they raise logos such as "everyday low prices" and in other ones they raise "provide the customer with a clean, pleasant, and friendly shopping experience". This can be kind of weaknesses for the firm. The absence of agreed mission statement provide unclear picture for employees and customers to know the firm current situation.

2. Objectives

The corporate and marketing strategies that emerged at Wal-Mart were based upon a set of 2 main objectives that had guided the firm through its growth years

In the first objective, the customer was featured "customer would be provided what they want, when they want it, all at a value".

In the second objective, the team spirit was emphasized "treating each other as we would hope to be treated, acknowledging our total dependency on our Associate-partners to sustain our success".

The approach included: aggressive plans for new store openings, expansion to additional states, upgrading, relocation, refurbishing and remodeling of existing stores, and opening new distribution centers.

3. Strategies

The company followed a variety of strategies as follow:

1. Growth strategy where the firm developed an aggressive expansion strategy. New stores were located primarily in communities of 5,000 to 25,000 in population. The store size ranged from 30,000 to 60,000 square feet with 45,000 being the average. The firm also expanded by locating stores in contiguous geographic areas. When its discount operations came to dominate a market area, it moved to an adjoining area. While other retailers built warehouses to serve existing outlets, Wal-Mart built the distribution center first and then spotted stores all around it. And the acquisition of McLane Company, Inc., in 1991.

2. Horizontal growth, since the firm expanded its business in 50 states and invaded around 9 foreign countries.

3. Cooperative Strategy, where the company launched several programs such as the "Buy American" Program was a Wal-Mart retail programs

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initiated in 1985, which resulted in cooperation with Gitano Group, Inc. for fashion.

4. Cost leadership strategy, the firm aimed to offer low price products and it raised a logo of "everyday low prices"

5. Differentiated strategy, the firm aimed to offer as many products as it can for various uses.

4. Policies

There are no stated policies, but it can be implicitly understood that the company implement the Total Quality Management. That the company applied the three common TQM principles:

1. Customer Focus.

2. Continuous Improvement.

3. Employees Empowerment.

2. Corporate Governance Board of Directors

Exhibit 2 in the paper mentioned 15 members of Wal-Mart's Board of Directors.

Top Management

Exhibit 2 mentioned a list of a number of officers.

3. External Environment: Opportunities and Threats (SWOT) Societal Environment

1. Political - Legal Factors

The rapid spread of programs that encouraging of the American products.

2. Economic Factors

By 1998 the country had return to prosperity, and witnessed an improvement in the economic indicators. Unemployment was low, total income was relatively high, and interest rates were stable, Combined with a low inflation rate. At the beginning of the year 2000, the United States had experienced 1 of the longest period of economic expansion in its history.

3. Sociocultural Factors

The American society has witnessed a big increase in the buying power and consumers were generally willing to buy

4. Technological Factors

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The United States is considered to be number 1 in the world in the technological development. So the firm has a great opportunity to benefit from it.

Task Environment (Industry)

Porter’s Approach

Michael Porter contends that a corporation is most concerned with the intensity of competition within its industry. The level of this intensity is determined by basic competitive forces. “The collective strength of these forces,” he contends, “determines the ultimate profit potential in the industry, where profit potential is measured in terms of long-run return on invested capital.” In carefully scanning its industry, the corporation must assess the importance to its success of each of the 6 forces: threat of new entrants, rivalry among existing firms, threat of substitute products or services, bargaining power of buyers, bargaining power of suppliers, and relative power of other stakeholders.

Threat of New Entrants

The potential of new entrants in this industry is low for many reasons, yet the number of the existing retailers is considered to be low or medium, however most of the existing firms have well brand name. In which make it's rather

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Threat of New

Entrance

Industry Competitors

Rivalry among existing Firms

Relative power of Unions,

Governments, etc.

Buyers

Potential Entrants

Bargaining power of Suppliers

Bargaining power of Buyers

Threat of substitute product or

service

Substitutes

Suppliers

Other Stakeholders

difficult to enter this era and it stipulates high capital requirements to be able to compete the existing firms. The market is relatively saturated. And the firm is considered to be the market leader.

Rivalry among Existing Firms

The rivalry is considered to be medium in this industry for many reasons:

Several formerly successful firms had declared bankruptcy, and as a result either liquidated or reorganized, which reduce the degree of the competition. There is still a place for the remaining companies to offer promotions or differentiated services.

Threat of Substitute Products or Services

The threat of substitute is considered to be low. That in the worst case the people can't give up the essentials products.

Bargaining Power of Buyers

The bargaining power of buyers is considered to be at its high level, that the retailing industry is highly affected by changing the economic indicators and increased competitive pressures.

Bargaining Power of Suppliers

Yet the case didn't mention anything about the suppliers, the bargaining power of suppliers in this industry based on the number of suppliers and oh the nature of the relationship between them and the company. But I don't think there is a supplier refuses to deal with the market leader. So the bargaining power is considered to be low.

Relative Power of Other Stakeholders

The threat of other stakeholders is low to medium, government regulations, and the increasing role of human rights organizations and health care associations.

External Factor Analysis Summary EFAS

External Factors Weight RatingWeighted

ScoreComments

ThreatsDollar exchange rate 0.1 4 0.4 Concerning the international marketsGATT 0.25 5 1.25 The risk of importing far east products

OpportunitiesEconomic Indicators 0.35 4 1.4 Benefits from the economic prosperityEncouraging the domestic products 0.25 5 1.25 Benefits from low costGovernment regulations 0.05 2 0.1 To adapt efficiently

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Total Scores 1   4.4  Above Average4. Internal Environment: Strength and Weaknesses (SWOT)

Corporate Structure

There is no information mentioned on the type of the corporate structure, but it implicitly appeared that the firm's structure is flat or cross-function structure other than traditional hierarchical structure. But the firm provide more authority for its employees and it called them associates and empower them to participate along the process.

Corporate Culture

The company enjoys a beautiful culture within the company, where the firm puts emphasis on human resources management. And the company gives its employees deep authority and as we mentioned above called them associates instead of clerks. And it uses us instead of me pronoun.

Corporate Resources1. Marketing

The firm adopted "The Penney Idea" who developed many techniques to achieve customer satisfaction. The firm has launched its discount department store chain, the store designed to offer 1 stop shopping in 36 departments that included family apparent, health and beauty aids, households needs, electronics, toys, fabric and crafts, automotive supplies, lawn and patio, jewelry, and shoes. In addition at certain store locations, a pharmacy, automotive supply and service center, garden center, or snack bar were also operated (diversifications). The firm also operates its stores with "everyday low prices". In addition it offers excellent services for the customers through warm greetings and with its fantastic design and unified outlets design.

The firm offers a "satisfaction guaranteed" refund and exchange policy to attract customers to be confident of Wal-Mart's merchandise and quality.

In other words the firm has developed an excellent marketing mix.

2. Finance

The objective of the company is to increase its sales and consequently its profit. As a result of aggressive expansion plan the firm followed, the fixed assets has sharply increased from 1999 to 2000.

Yet the sales increase with an average of 20.8% within the last decade the financial ratios has recorded deterioration. The current ratio declined from 1.7 in 1990 to reach 1.5 in 1995 and fall sharply to reach 0.9 in 2000, which means there is a big problem in the liquidity.

Return on assets recorded deterioration from 1990 to 1997 to improve after that period. But it considered a bad ratio.

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Also the ROE has witnessed deterioration in the beginning of the decade and then it begun to improve.

The firm recorded a sharp increase in long term debt which led to increase the financial risk.

Finally as a result of the aggressive expansion the financial ratios witnessed deterioration. So I recommended following one of the stability strategy.

3. Research and Development

There is nothing mentioned regarding this department, yet it's implicitly understood that the firm spend a lot on developing new techniques and services and it has strong team specialized in developing the position of the firm in the market.

4. Operations and Logistics

The firm built the distribution center first and then spotted stores all around it, as opposed to the rest of retailers who built warehouses to serve the existing outlets. In Wal-Mart, most stores were less than a 6-hours drive from 1 of the company's warehouses. The first major distribution center, 390,000 square-foot facility opened in Searcy, Arkansas, outside Bentonville in 1978.

5. Human Resources

The firm puts more emphasize on human resource management, employees of Wal-Mart became "associates," a name borrowed from Sam Walton's early association with J.C.Penney Co. input was encourage at meetings at the store and corporate level. The firm hired employees locally, provided trainings programs, and through a "Letter to the President" program, management encouraged employees to ask questions, and made words like "we", "us" and "our" a part of the corporate language. A number of special award programs recognize individual, department, and division achievement. Stock ownership and profit-sharing programs were introduced as part of a "partnership concept".

Briefly the company has applied the recent philosophies and techniques in managing its human resources.

6. Information Systems

Technological advancements such as scanner cash registers, handheld computers for ordering of merchandise, and computer linkage of stores with the general office and distribution centers improved communications and merchandise replenishment. Each store was encouraged to initiate

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programs that would make it an integral part of the community in which it operates.

It seems that the company has strong information system.

External Factor Analysis Summary EFAS

External Factors Weight RatingWeighted

ScoreComments

WeaknessesNo clear mission statement 0.1 4 0.4 Urgent for employees and customersLack of international orientations 0.05 2 0.1 Loss international opportunitiesFinancial performance 0.15 4 0.6 May lead to great losses

StrengthsStrong distribution channels 0.2 4 0.8 Competitive advantageProducts diversification 0.2 4 0.8 More attractiveInformation system 0.1 4 0.4 Strong communicationsStrong brand name 0.1 4 0.4 LoyaltyHuman resource management 0.1 5 0.5 Successful servicesTotal Scores 1   4  Above Average

5. Analysis of Strategic Factors (SWOT) Situation Analysis

From the EFAS and IFAS the company is considered well-positioned (pioneer) in the market. But the company is suffering from some financial problems so the company has to deal with it.

The company has competitive advantage in all of distribution channels, products diversification, and strong HR management.

Review of Mission and Objectives

As mentioned before the company managed to achieve its stated objectives.

6. Strategic Alternative and Recommended Strategy Strategic Alternative

I think the company managed its strategies effectively and efficiently. It used a mix of various strategies. But I think the company has to follow one of the stability or retrenchment strategies during the coming period. That the growth or the expanding strategies it follows has bleed its financial resources.

Recommended Strategy

As above mentioned the company has to implement one of the stability or retrenchment strategies during the coming periods to stop bleeding its resources.

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7. Implementation

As mentioned before the company has implemented several principles of total quality management philosophy, such as:

1. Management commitment: creating committed management to the process of continuous improvement, a dedication to empowering people to change, and to periodically raise the goals for improvement. Adoption and communication of TQM: using tools like mission statement and slogans.

2. Employee empowerment: giving workers the responsibility for improvements and the authority to make changes to accomplish them.

3. Reward System: is the missing link that motivates managers and employees to "walk the talk" and use TQM to the fullest and it's divided into two groups, monetary and non-monetary rewards.

4. Integrating training: includes different aspects of TQM elements, team skills and problem-solving techniques.

5. Process improvement: process of reducing waste and cycle times in all areas through cross-departmental process analysis.

6. Quality at source: the philosophy of making each worker responsible for the quality of his/her work.

8. Evaluation and Control

I think the company outperformed the market during the last decade so it deserves to be called the market leader or the largest retailer in the world. But I think the company should take care during the coming period that any recession in the American economy might lead to great losses that it increased its debt in a way that led to increase its financial risk. In addition, retailing industry is more sensitive to any change in the economic indicators, so the firm should follow one of the stability strategies or retrench one of its activity.

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