A Different Analysis of Wal-Mart Part 1

I bought a self-learning record to learn Spanish. I turned it on and went to sleep; the record got stuck. The next day I could only stutter in Spanish.                 — Steven Wright

A Different Professor’s Analysis of the Wal-Mart Case Study  (Part 1)

Try to jot down answers to the professor’s discussion. Part two of his lecture will be posted tomorrow.

A Professor Discusses Wal-Mart with his MBA class. The purpose of this analysis is to give you another approach of analyzing a case. Do you find Greenwald’s approach “better” or more thorough, precise and analytical or this professor’s approach? Can you answer his question at the end of this post?

The Professor: Much of my work with MBA students and companies involves helping them uncover the hidden power in situations. As part of this process often teach a case about Wal-Mart’s founding and rise, ending in 1986 with Sam Walton as the richest person in the US. In a subsequent session I will follow-upby discussing the modern Wal-Mart, pushing into urban areas, stretching out to Europe, and becoming the largest corporation on the planet in terms of revenue. But the older case portrays a simpler, leaner Wal-Mart—a youthful challenger rather than the behemoth it has become. Hard as it is to believe today, Wal-Mart was once David, not Goliath.

I write this on the Black-Board: CONVENTIONAL WISDOM: A Full-line discount store needs a population base of at least 100,000. The question for the group is simple: Why has Wal-Mart been so successful? To start, I call on Bill, who had some experience in sales during the earlier part of his career. He begins with the ritual invocation of founder Sam Walton’s leadership. Neither agreeing nor disagreeing, I write “Sam Walton” on the board and press him further. “What did Walton do that made a difference?”

Bill looks at my labeled box on the board and says, “Walton broke the conventional wisdom. He put big stores in small towns. Wal-Mart had everyday low prices. Wal-Mart ran a computerized warehousing and trucking system to manage the movement of stock into stores. It was non-union. It had low administrative expenses.” It takes about thirty minutes for six other participants to flesh out this list. They are willing to throw anything into the bin, and I don’t stop them. I prod for detail and context, asking, “How big were the stores?” “How small were the towns?” “How did the computerized logistics system work?” And “What did Wal-Mart do to keep its administrative expenses so low?”

As the responses flood in, three diagrams take shape on the white-board. A circle appears, representing a small town of ten thousand persons. A large box drawn in the circle represents a forty-five thousand square foot store. A second diagram of the logistical system emerges. A square box represents a regional distribution center. From the box, a line marks the path of a truck, swooping out to pass by some of the 150 stores served by the distribution center. On the return path, the line passes vendors, picking up pallets of goods. The line plunges back to the square, where an “X” denotes cross-docking to an outgoing truck. Lines of a different color depict the data flows, from the store to a central computer, and then out to vendors and the distribution center.

Finally, as we discuss the management system, I draw the path of the regional managers as they follow a weekly circuit: Fly out from Bentonville, Ark., on Monday, visit stores, pick up and distribute information, and return to Bentonville on Thursday for group meeting on Friday and Saturday. The last two diagrams are eerily similar—both revealing the hub structure of efficient distribution.

The discussion slows. We have gotten most of the facts out; I look around the room, trying to include them all, and say, “If the policies you have listed are the reasons for Wal-Mart’s success, and if this case was published—let’s see—in 1986, then why was the company able to run rampant over Kmart for the next decade? Wasn’t the formula obvious? Where was the competition?”

Silence….This question breaks the pleasant five-and take of reciting case facts. The case actually says almost nothing about competition, referring broadly to the discounting industry. But surely executives and MBA students would have thought about this in preparing for this discussion. Yet it is totally predictable that they will not. Because the case does not focus on competition, neither do they. I know it will turn out this way—it always does.

Half of what alert participants learn in a strategy exercise is to consider the competition even when no one tells you to do it in advance. Looking just at the actions of a winning firm, you see only part of the picture. Whenever an organization succeeds greatly, there is also at the same time, either blocked or failed competition. Sometimes competition is blocked because an innovator holds a patent or some other legal claim to a temporary monopoly. But there may also be a natural reason imitation is difficult or very costly. Wal-Mart’s advantage must stem from something that competitors cannot easily copy, or do not comply because of inertia and incompetence.

In the case of Wal-Mart, the principal competitive failure was Kmart. Originally named the S.S. Kresge Corporation, Kmart was once the leader in low-cost variety retailing It spent much of the 1970s and 1980s expanding internationally ignoring Wal-Mart’s innovations in logistics and its growing dominance of small—tow2n discount. It filed for bankruptcy in 2002. After some moments I ask a more pointed question: Both Wal-Mart and Kmart began to install bar-code scanners at cash registers in the early 1980s. Why did Wal-Mart seem to benefit from this more than Kmart?

3 responses to “A Different Analysis of Wal-Mart Part 1

  1. In answer tot he question:Why did Wal-Mart seem to benefit from this more than Kmart?

    Wal-mart benefited from the bar-code scanners more than K-Mart because the scanners were just what Wal-Mart needed to gain an advantage in logistics. Wal-Mart received much more benefit from immediate/accurate reporting of inventory since their truck fleet wouldn’t suffer from backhauls. They were able load up the trucks with appropriate inventory at all times and significantly improving margins.

    This was not the case for K-Mart since they were more spread apart geographically and even if they had a truck fleet (I’m not sure if they did at all) the trucks would have much more backhaul removing some of the advantage of bar codes.

    • This was my guess, with the addition of saying that if they could more accurately judge their customer’s buying habits, they could bargain even better with suppliers. WMT has a reputation for being ruthless with suppliers in negotiating bulk buy discounts. You can make those volume buys with more confidence when you have more information about how likely your customer’s are to buy it from you.

    • Good observation. Technology reinforced WMT’s local economies of scale due to the density of their stores compared to Kmart

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