Wal-Mart

"Businesses that need to operate uniformly wherever ever they are-McDonald's or Wal-Mart, for example-must ple-must be shaped by relatively few people. In such a business, centralized decision making is a very sensible approach. Businesses that serve diverse markets, on the other hand-or that experience very different conditions in different locations, or that rely more on high levels of innovation and flexibility than on uniformity-are best shaped by a wider array of people.... That is, by the people closest to where the work actually gets done. Those businesses must tell people on the front lines to "trust your instincts." And businesses that tell their people to "trust your instincts" generally should be decentralized. A decentralized structure pushes the power to set strategy, spend money, make decisions, and create policies out toward the marketplace. It promotes motes local autonomy. Managers within companies can look at the operations ations for which they are accountable in much the same way. In your department or work group, what's more important, uniformity or innovation? Consistency tency or flexibility? If your success depends heavily on uniformity and consistency, centralized decision making may be justified. If your success relies more on innovation and flexibility, you should make a conscious scious effort to push decision-making power down."

"To serve customers in the home decorating and crafting area, you simply have to have a wide selection. A few years back, Sam Walton opened five craft stores called Helen’s (named after his wife). Before long, he found it so different, so opposite to the Wal-Mart model, he got out of the field. A craft store is in “the parts business.” If a woman wants to do a project that requires ten parts, and Hobby Lobby has only eight of them, she’s going to give up in frustration. We have to carry all ten parts."

"Sam Walton’s reputation for hard bargaining with vendors highlights a second leveler that aspiring billionaires must defeat. Society runs not only according to laws, but also according to certain conventions of behavior. Individuals who unfailingly abide by these informal rules are unlikely to amass billion-dollar fortunes. In Walton’s case, the key to obtaining lower costs was a willingness to violate the retailing industry norm of cordial re¬ lations with vendors. Wal-Mart deviated even further from convention when it tried to go around manufacturers’ representatives to deal directly with manufacturers."

"In 1977, Walton bought a 16store discount chain operating in Missouri and Illinois, Mohr Super Value, and converted the outlets to Wal-Marts. He added the 104-store Big-K chain in 1981, making an attractive purchase after the 71-year-old retailer overextended itself through an acquisition and construction of an expen¬ sive corporate headquarters. After entering the warehouse club segment, Wal-Mart acquired the Midwest-based, 27-store Wholesale Club chain. When the time came to begin entering larger cities, Walton bought the 21 D. H. Holmes department stores to gain a foothold in New Orleans. In short, Sam Walton’s success had a touch of the industry consolidation magic for which Wayne Huizenga became famous."

"Walton’s compulsion to keep opening stores reflected an unwilling¬ ness to rest on his laurels. He repeatedly reinvented his business, switch¬ ing from variety stores to discounting, then branching out into warehouse clubs. Still later, he combined his discounting format with food retailing to create Wal-Mart Supercenters. Inevitably, Walton’s boldness generated some mistakes. For example, the successful Wal-Mart Supercenters were scaleddown versions of hypermarkets, a format that the company abandoned af¬ ter opening four stores. The massive (200,000 square feet) hypermarkets combined supermarket items and general merchandise under a single roof. Unfortunately, customers were fatigued by having to cover large dis¬ tances to find items. Additionally, shoppers found the hypermarkets’ selec¬ tion too limited in categories such as electronics. They also balked at buying groceries in the large-quantity packages that the stores featured. Other retailing concepts that proved failures for Wal-Mart included Save-Co Home Improvement Centers, Helen’s Arts and Crafts, and dot Discount Drugs. Another abortive scheme involved selling new cars through Sam’s Club stores at just $100 over dealer’s invoice. The venture collapsed, after selling just 10 cars, when the Arkansas Motor Vehicle Commission ruled that Sam’s Club was illegally acting as a broker."

"Aside from the question of the size of the targeted marketing area, almost everything about Wal-Mart was borrowed. Walton selected the chain’s name, which was suggested by the manager of his original Bentonville variety store, because of its similarity to “Fed-Mart.” Speaking of that outfit’s founder, Sol Price, Walton said, “I guess I’ve stolen—I actu¬ ally prefer the word ‘borrowed’—as many ideas from Sol Price as from anybody in the business.”70 Two decades after the founding of Wal-Mart, Walton copied Price yet again by launching Sam’s Club stores to compete in the warehouse club category. Price had introduced this deep-discount format, selling everything from food to appliances under one roof, through the Price Club chain in 1976."

"As an additional cost-saving measure, Wal-Mart maintained no re¬ gional offices. Instead, the company based all of its regional vice presi¬ dents in Bentonville, flying them out to their regional territories every Monday morning. This strategy saved the company as much as 2 percent of sales, relative to competitors Kmart and Target.90 To economize on the cost of maintaining a fleet of planes, Walton opened a facility at a spare hangar to serve other airplane owners with fuel, storage, and mainte¬ nance. By thus demonstrating that he was in the general aviation busi¬ ness, he qualified to buy parts and fuel on wholesale terms.91"

"Even after Wal-Mart was up and running, Walton capitalized on the fact that few discounters regarded his small, regional outfit as a competitor. By his estimate, he vis¬ ited more headquarters of discounting chains than anyone else in history. Out of curiosity, if nothing else, the managers frequently let him in and freely shared information about their methods."

"Aside from wringing maximum performance from its people, per¬ haps the most important element inWal-Mart’s overtaking of its competi¬ tors during the 1980s was its willingness to embrace new technologies. By computerizing its inventory management and being early to adopt the Universal Product Code (or bar code) scanning system, the company was able to maintain its frenetic growth without spinning out of control. Even in the area of technology, though, Wal-Mart’s edge derived from the posi¬ tive corporate culture created by its founder. If the environment had been less open to challenging senior management, Walton’s personal reluctance to spend on new systems would have prevented Wal-Mart from embrac¬ ing state-of-the-art techniques. Instead of squelching ideas through a hi¬ erarchical structure, however, Walton encouraged the internal debate that eventually won him over."

"“What sets us apart,” Walton said in explainingWal-Mart’s success, “is that we train people to be merchants. We let them see all the numbers so they know exactly how they’re doing within the store and within the company; they know their cost, their markup, their overhead, and their profit.”73 Deeply involving workers at all levels in the store’s success was indeed a distinctive feature of the Wal-Mart operation. In the late 1970s, the com¬ pany agreed to share with the associates the benefits of efforts to reduce shrinkage, the disappearance of inventory through damage, shoplifting, in¬ ternal theft, or faulty records. By 1984, Wal-Mart had reduced shrinkage to 1.4 percent of sales, well below the industry average of 2.2 percent.74"

"The growing number of stores and expansion of Wal-Mart’s market area eventually induced Walton to take a huge risk on technology. Telephone lines, with their capacity limitations, were beginning to pose a constraint in collecting the vast amounts of data required to keep tabs on operations. In 1983, Wal-Mart’s computer chief proposed a solution: a private satellite sys¬ tem, capable of transmitting not only voice and data, but also video broad¬ casts of Walton leading the company cheer. The technology was not really proven and the cost was huge for a company of Wal-Mart’s size at the time. Nevertheless, Walton gave the project the green light. Predictably, construc¬ tion costs ran significantly over budget. When the system was finally com¬ pleted, it broke down frequently until technicians worked out the bugs. In the end, however, the gamble paid off in spades. With the largest privately owned satellite communications network in the United States, Wal-Mart reaped tremendous benefits in such varied uses as tracking delivery trucks, transmitting training videos, and speeding up the processing of credit card transactions. Savings realized through detection of credit card fraud were more than enough to pay for the system.78"

"Walton also showed his independence by rejecting the retailing in¬ dustry norm of cordial relations between buyers and vendors. He insisted on hard-nosed bargaining and forbade his buyers to accept meals or gifts from sales representatives. Wal-Mart’s buyers were “as folksy and downto-earth as home-grown tomatoes,” according to one executive who did business with them. “But when you start dealing with them—when you get past that ‘down home in Bentonville’ business, they’re as hard as nails and every bit as sharp.”97 An official of another company characterized Wal-Mart more bluntly, calling it “the rudest account in America.”98"

"The Moon Pie gimmick began in 1985 when Wal-Mart’s assistant manager in Oneonta, Alabama, accidentally ordered five times as many of the cookie-and-marshmallow delicacies as he had intended. To clear out the excess inventory, he staged an event that soon became a tradition. By 1990, when a contestant billing himself as “the Godzilla of Gluttony” set a record by wolfing down 16 of the three-and-a-half-inch-diameter con¬ fections in 10 minutes, the annual competition was attracting media cov¬ erage from all over the world."

"Wal-Mart softened its stance toward suppliers after the manufactur¬ ers’ representatives organized and launched a publicity campaign de¬ nouncing the company’s policies. Walton’s more accommodative approach did not entirely represent a backing down in the face of criti¬ cism. In part, he was responding to technological advances that made it more economical to cooperate with vendors through information-sharing agreements than to maintain an adversarial relationship."

"Walton conceded that his toughness toward vendors partly reflected lingering resentment of his treatment at their hands in Wal-Mart’s early years. “I don’t mind saying we were the victims of a good bit of arrogance from a lot of vendors in those days,” he recalled. “They didn’t need us, and they acted that way.”100 As a result, he said, “We have always resented paying anyone just for the pleasure of doing business with him.”101"

"In the Netflix example we see a feature of Scale Economies that recurs in many technology firms: a single fixed cost which declines per unit as it is prorated over higher and higher volumes. Beyond fixed costs, Scale Economies emerge from other sources as well. To name a few: Volume/area relationships. These occur when production costs are closely tied to area, while their utility is tied to volume, resulting in lower per-volume costs with increasing scale. Bulk milk tanks and warehouses would serve as examples. Distribution network density. As the density of a distribution network increases to accommodate more customers per area, delivery costs decline as more economical route structures can be accommodated. A new entrant competitor to UPS would face this difficulty. Learning economies. If learning leads to a benefit (reduced cost or improved deliverables) and is positively correlated with production levels, then a scale advantage accrues to the leader. Purchasing economies. A larger scale buyer can often elicit better pricing for inputs. For example, this has helped Wal-Mart."

"Sam Walton, who founded Wal-Mart, the largest company in the world at the time, explained his secret to success like this: "I always set pretty high standards for myself: I set extremely high goals for myself personally.""

"In recent decades, the fashion and design revolution has expanded into realms far beyond apparel. As consumer choice expanded, and as retailers and manufacturers aimed to build and serve new tastes and markets, design became an important consideration, not just for the growing of mass luxury products, but for all products. Consider a wastebasket, an everyday item you can purchase in any number of retail venues. You’re looking for a certain size or shape, or perhaps you want it to be waterproof, and you might want it to have a lid. For a few bucks, you can buy a terrific plastic waste¬ basket (in an array of colors) at Wal-Mart to satisfy all these func¬ tional criteria. For a few extra dollars, it can even be a brand-name wastebasket, like Rubbermaid, sure to last for years without any trouble. But for most consumers, utility is not the only consider¬ ation—even when buying a wastebasket. In a den, library, or bed¬ room, plastic will not do. The choices now extend to wicker, brass, leather, wood. Given the decor in the room, maybe a hand-painted wastebasket purchased during a vacation at the seashore would be perfect. Such a wastebasket will command a higher price than the Rubbermaid alternative. You have a story to tell your friends about the purchase, and you expect something so different, perhaps even unique, to cost more. The wonderful world beyond utility is the world of fashion. Here, design makes the difference, and the cus¬ tomer will pay for this added value. In fact, the closer an item comes"