Wal-Mart – What Makes Them America’s Number One Company?
America, land of “free-enterprise” has millions of companies in its market. The metropolitan statistical area of Houston, Texas in fact has over 600,000 businesses, most employing from 2 to 10 employees. As companies grow in the number of people they employ, fewer and fewer companies surround them. Most companies never grow beyond the smallest group size for many reasons. Some companies grow to become the target of the competition or the “model” on which the smarter more savvy managers base their practices to achieve “best of class” status in their industry or market. Wal*Mart has certainly earned its position at the pinnacle of American business and global retail dominance.
Founded by a retailer named Sam Walton with his brother in 1962, Wal*Mart has become that company to watch and emulate in the twenty first century. Walton, a “Ben Franklin” franchisee between 1945 and 1962 collaborated with his brother Bud Walton to found the first Wal*Mart in 1962 in rural Arkansas. Their strategy was simple. They opened discount-merchandising stores in rural America where big business and big retailers typically ignored “fly over” territory. The strategy of mass buying power and passing on the savings to customers took flight as the company grew steadily into the seventies and eighties.
As Walton situated stores in small towns with populations between 5,000 and 25,000 he implemented his plan “To put good-sized stores into little one-horse towns which everybody else was ignoring.” He thought that if they offered, “Prices as good or better than stores in cities that were four hours away by car…people would shop at home.” David Glass, CEO, explained, “We are always pushing from the inside out. We never jump and then back fill.”
Walton successfully instilled a small town friendly caring atmosphere in America’s number one company by indoctrinating “associates” in the idea that Wal*Mart “Has its own way of doing things.” He habitually shopped the competitors like K-Mart and Target. He would count the number of vehicles in their parking lots and “measure their shelf space.”
Sam Walton believed the number one key to the company’s success lay in the way the company treated their “associates.” He felt that if he wanted his associates to care for the customers then the associates must know that the company was taking care of them. Do to his foresight in people management the company many associates became wealthy as the stock price continued to climb the value turned everyday individuals in to wealthy people. Walton discouraged such shows of wealth claiming that such behavior did not promote the company’s reason for existence, to take care of the customer.
Walton described his management style as “Management by walking around.” Walton said about managing people that, “You’ve got to give folks responsibility, you’ve got to trust them, and you’ve got to check up on them.” This philosophy required sharing information and the numbers. The target was to empower associates, maintain technological superiority, and build loyalty within associates, customers and suppliers.
Free flow of information to associates gave associates a true and actual sense of ownership of the organization and allowed them to exercise authority to continually improve their processes especially their main institutional profit driver, supply chain management and process improvement. One of their key tools to managing an element of their chain, inventory, is called “traiting.”
Traiting in the Wal*Mart sense is described by Bradley and Ghemawat in their article as “A process which indexed product movements in the store to over a thousand store and market traits. The local store manager, using inventory and sales data, chose which products to display based on customer preferences, and allocated shelf space for a product category according to the demand at his or her store. Pairing inventory to exact store market demand eliminated or at least mitigated the need for advertised sales or “fire sales” allowing the company to brand it as the customers’ preferred venue for “everyday-low-prices.” Walton and later Glass insisted on lower than market average expenditures for advertising complimented with a “satisfaction guaranteed” policy to instill customer-buying loyalty.
Cost containment caused customer loyalty. In store operations, Wal*Mart, in 1993 incurred rental space of an average of 30 basis points lower than competitors. Its new store erection costs were substantially lower than competitors K-Mart and Target. Wal*Mart dedicated 15% less inventory space than the industry average thus allowing for more dedicated square footage for sales inventory. Square footage sales ranked around $300 per foot compared to $209 and $147 for Target and K-Mart respectively. Stores tended to stay open more flexibly than competitors, which also contributed to higher per square footage sales numbers.
The company organized each store into 36 departments and a department manager as a store within a store ran each department. The company had outpaced K-Mart by installing uniform product codes (UPC) electronic scanning equipment in 1988. Labor expense for individually labeling inventory was eliminated by installing shelf tags instead. The company spent $700 million dollars to connect the stores with headquarters in Bentonville, Arkansas via satellite. Collecting and sharing such sales and inventory information allowed managers to pinpoint slow moving inventory and manage the supply chain by reducing purchased avoiding pileups and deep discounting.
The company manages the distribution chain. They instituted “cross-docking” to reduce and minimize inventory sitting in a warehouse. When an in-bound truck arrives at the warehouse, an out-bound truck is parked right next to it or close and shipments are offloaded from the inbound truck and moved directly to the out-bound truck thereby eliminating the need to sit in inventory. This method of moving it out as it arrived contributed to Wal*Mart’s almost one percentage point of sales less cost than the competition for like costs.
Wal*Mart treated its distribution chain as a profit center as well by strategically locating a warehouse or distribution point geographically where it could serve 150 stores and each truck leaving the warehouse can serve or deliver on the same route to four neighboring stores. Distribution gave store managers various delivery options as well as nighttime deliveries.
Wal*Mart manages its vendor relationships in a well-known “no-nonsense” manner. Unlike other retailers especially department stores, Wal*Mart buyers are not greeted and seated in a buyers’ office. Sam would not have preferred that haughty presentation and image. They are simply placed in a bare room with table and chairs. The company was sued administratively in 1992 when manufacturers’ representatives initiated unsuccessfully proceedings with the Federal Trade Commission. The company has not permitted a single vendor to account for greater than 3% of purchases further enhancing the leverage it exercises over companies.
Wal*Mart is a pioneer in information sharing and partnering with vendors. In its relationship with companies like GE and Proctor and Gamble, they interlinked computers to show real-time sales and inventory product specific data so that such firms could manage their own supply chain delivery. “They expanded their electronic data interchange to include forecasting, planning, and shipping applications.”
In 1992, Fortune magazine listed Wal*Mart as “one of the 100 best companies to work for in America.” David Glass, CEO, claims “There are no superstars at Wal*Mart” which could embellish the team environment. He said, “We’re a company of ordinary people overachieving.” The largest company in the United States is non-union. Associates are trusted and treated like owners and information is shared and entrusted to them. Vendors comment on the loyalty and dedication of their associates.
Associates are encouraged and rewarded for bright ideas, which in many other companies would go, unrecognized or stolen by owners or managers whom would steal credit. Stealing such credit and voiding the proper party to the credit only works to beat down associates and instill a feeling of worthlessness. Wal*Mart does just the opposite. Everyone is rewarded for profitability through contributions to the associates profit sharing account. In 1993 Sam instituted his “Yes we can Sam” program for ideas and then a “Shrink incentive plan” to reduce theft and inventory loss. The program allowed Wal*Mart to remain at least 3 tenths of a percent lower than the industry average in slippage.
Sam and David were smart enough to realize that they could not be in hundreds of stores all the time if at all so they decided to properly compensate each of the store managers who can earn in excess of a hundred thousand dollars annually. The company offers incentive pay on top for reaching and exceeding profitability and forecasting targets. The company offered health benefits to employee who work more than 28 hours weekly and also gives productivity and profitability bonuses to such hourly workers.
Tight fisted management names Sam Walton’s successors, David Glass and company. He instituted weekly Friday morning meetings where they shout and yell about individual items sold but before the meeting is adjourned, issues are resolved. Glass promotes the idea that “There is no hierarchy at Wal*Mart and that everyone’s ideas count and that no accomplishment is too small.”
The company began diversifying its store mixes in the early eighties by acquisition of other chains and opening Sam’s Clubs. The idea included offering only a limited number of stock-keeping units (SKUs). They financed inventory through accounts payable and generated net income principally by charging “members” for the annual privilege of entering and shopping at the “Club.”
Inventory costs at Sam’s Clubs was further reduced since only 30% of inventory was ever shipped from a Wal*Mart warehouse. 70% was sent directly from vendor. Since inventory was turned so frequently during the year, Sam’s Clubs really never paid for inventory until it was sold or even after.
Now, Glass has been quoted as telling managers “That if they didn’t think internationally, they were working for the wrong company,” Discount Store News, (June 1994). Furthermore, Glass mentioned to Business Week in 1992 that “You can’t replace Sam Walton, but he has prepared the company to run well whether he’s here or not.”
Essentially, Wal*Mart was founded by a man who was smart enough to realize that since he could not be everywhere to serve customers that he need to create and maintain an atmosphere where the people who worked for him wanted to make money and serve customers. As he grew the company he and his management staff continually assessed the supply chain and thought of and enacted pioneering ways many times considered unorthodox that created better and better customer value and lowered the cost of giving the customer what he wanted which was the purpose of the company to begin with not to mention why the company got paid. By encouraging idea cultivation from the grass roots of the organization, Wal*Mart has become the premier retailer at the bottom of the price pole.
This author recommends that Wal*Mart management look to diversify within the store by adding more of what it already does well, maximizing the life experience on the cheap within the store. Other ancillary services could be added to any unprofitable square footage like barber shop, dentists, etc…