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Wal-Mart Stores, Inc (WMT)

Lee Scott ignored his fear of public speaking as he prepared to step in front of 20,000 people at the Bud Walton Arena in Fayetteville, Arkansas, on June 1, 2007. For his seventh year as WalMart CEO, Scott addressed his company's shareholders at its annual meeting. Outside the building, the local Against the Wal" protesters were back for the fourth year in a row clutching a list of seven demands: "living wage", affordable health care, "end discrimination", zero tolerance on child labor, "respect communities, "respect the environment, and "stop union busting." Inside the arena, shareholders had their own concerns, with declining share prices and 11 shareholder proposals-all opposed by the company. Since Scott became CEO in 2000, Wal-Mart's stock price has dipped about 27 percent, from $64.50 to the $47 range. In the same timeframe, competitor Costco's stock price has appreciated roughly 20 percent, and Target's has climbed more than 70 percents (see Exhibit 1). Analysts are saying Wal-Mart's glory days are over" and its stock is dead money. Some observers are speculating that Scott's days as CEO may be numbered if he is unable to get the company back on track soon. It is a big company to change. From its humble origins 45 years ago as a single shop in the Ozarks, Wal-Mart has grown to 1.8 million employees supporting more than 6,700 stores in 14 countries, serving 175 million customers per week and pulling in an average of $6.6 billion in weekly sales. Over the past decade Wal-Mart doubled its store count, tripled its revenue, and nearly quadrupled its net income (see Exhibits 2 and 3). Wal-Mart earned more in its first quarter of fiscal 2007 ($78.8 billion) than Target made all year ($59 billion). Wal-Mart's revenue gave it the No. 1 spot on Fortune's April 2007 list of America's largest corporations. By contrast, its profit as a percentage of revenue came in at 3.2 percent, and its total return to investors was 0.1 percent, earning Wal-Mart sub-par ranks by those measures (no. 354 and no. 355, respectively).

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Over the past several years, Wal-Mart has stumbled upon a variety of compounding difficulties. Opposition has been mounting against not only Wal-Mart's practices, but also its very presence, due to multiple relationship issues with employees, communities, and governments. It is increasingly challenging for the company to expand at its current rate, both in the United States and abroad. Meanwhile, key competitors have been "growing two to five times faster than WalMart" in same-store sales. As a result, the company has gradually been losing some of its luster, even in the eyes of its former admirers. In 2004, Wal-Mart had been number one on Fortune magazines list of America's Most Admired Companies" for the second year running, notwithstanding "a year of bad press and lagging stock price." In 2007, by contrast, Wal-Mart was tied for number 19, behind Costco (no. 18) and Target (no. 13). What had worked in the past was no longer sustainable in the current competitive environment. Scott wondered whether the change efforts he had started over the past few years would begin to have a positive effect or whether he should somehow adjust Wal-Mart's course.

Company History Origins

Before founding Wal-Mart, Sam Walton accumulated experience in variety store retailing as a JC Penney management trainee and a franchisee of Ben Franklin stores. Anticipating discount market growth, Walton opened his first Wal-Mart store in Rogers, Arkansas, in 1962, the same year Kmart and Target were founded. Wal-Mart opened 24 more stores by I967. This start was slow compared with Kmart, which had already opened 162 stores by I966. Wal-Mart went public in 1970, giving it access to the financial resources needed to begin a decades-long expansion campaign that led to the opening of 3,800 stores by 2005. Wal-Mart opened its first Sam's Club warehouse in 1983 and its first international store in 1991, and the company's national and international multiplatform expansion continues.

Recent History
Wal-Mart's growth soared in recent years, with the company adding nearly one new store every day (since 2006). The company's rapid expansion brought its total retail store presence to 6,782 units worldwide as of February 8, 2007. Wal-Mart spread with a missionary zeal, to "save people money so they can live better". As Wal-Mart presence continued to grow, so did its sales, to a record $345 billion in the fiscal year ended January 31, 2007 (hereafter referred to as 2007). The company's massive growth brought with it massive controversies, however. WalMart faced multiple accusations, charges, and lawsuits, many resulting in fines, including environmental violations, child labor law violations, use of illegal immigrants by subcontractors, and allegedly poor working conditions for associates. Side effects of these issues include communities rejecting expansion of Wal-Mart stores into their neighborhoods. Anti-Wal-Mart press is also on the rise, with books such as How Wal-Mart Is Destroying America and the World: And What You Can Do About lt by Bill Quinn, and Robert Greenwald's film, Wal-Mart: The High Cost of Low Price. By one estimate, Wal-Mart's reputation issues have cost it $16 billion in market capitalization and an unknown amount of lost business in each store category or business segment. Case Analysis Strategic Management BMGMT3202

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Business Segment
Wal-Mart's three business segments are Wal-Mart Stores, Sam's Club, and Wal-Mart International. The Wal-Mart Stores segment includes walmart.com and three retail store formats in all 50 of the United States, including 2,257 Supercenters, 1074 Discount Stores, and 112 Neighborhood Markets. The Neighborhood Markets have the smallest format, with an average size of 42,000 square feet, and a primary focus on grocery products. Wal-Mart's Discount Stores offer a wide assortment of general merchandise and a limited variety of food products" within 107,000 square feet of selling space. Supercenters average 187,000 square feet and add a full line of food products to Discount Stores' typical selection. Wal-Mart converted 147 Discount Stores into Supercenters in 2007. Overall, Wal-Mart Stores opened 303 new units in 2007 (276 Supercenters, 15 Discount Stores, and 12 Neighborhood Markets). Membership-based Sam's Club operates in a retail warehouse format, as well as online at samsclub.com. The segment's 579 clubs average 132,000 square feet, and provide "exceptional value on brand-name merchandise at members only' prices for both business and personal use. Sam's Club opened 15 new units in 2007. Wal-Mart International added 576 (net) new stores in 2006-on its way to doubling its total retail unit count over the past few year. Wal-Mart now operates 2,760 stores outside the United States in various formats, under diverse brand names, in 13 foreign countries and territories. Wal-Mart International includes "wholly owned operations in Argentina, Brazil, Canada, Puerto Rico, and the United Kingdom; the operation of joint ventures in China; and the operations of majority-owned subsidiaries in Central America, Japan, and Mexico. In 2006, Wal-Mart divested its operations in Germany and Korea. Mike Duke, vice chairperson of Wal-Mart Stores and head of the International Division, commented that it had "'become increasingly clear that in Germany's [and South Koreas] business environment it would be difficult to obtain the scale and results we desire. Wal-Mart seeks markets where it feels that there is potential for it to become a top three retailer, an opportunity that did not exist for it in Germany [or South Korea]. WalMart Internationals U.K.-based Asda subsidiary b rings in the largest share of the company's international revenue, at 37.4 percent. Wal-Mart de Mexico provides the next largest share at 23.6 percent of Wal-Mart International sales (see Exhibit 5). One of the challenges for each of Wal-Mart's segments is determining the appropriate product offerings for each location.

Product/Service Diversification
Wal-Mart continues to build on the discount general store concept that reflects founder Sam Walton's ideals: "a wide assortment of good quality merchandise; the lowest possible prices; guaranteed satisfaction with what you buy; friendly, knowledgeable service; convenient hours; free parking; [and] a pleasant shopping experience. The company's Neighborhood Market locations provide an average of 29,000 items per store; its Discount Stores offer 120,000 items in each store; and its Supercenters stock more than 142,000 different items. Wal-Mart com. offers customers 1 million SKUs (stock keeping units or items in stock), multiple times the number offered in Wal-Mart's retail stores. Sam's Club features appliances, electronics, furniture, jewelry, and office products, plus healthcare, business, personal and financial services. Interestingly, Wal-Mart caters heavily to customers with little or no access to banking services, often described as the unbanked. This category fits 20 percent of Wal-Mart customer base and, as such, Wal-Mart provides substantial financial services for this customer segment by providing services such as check cashing. It has 170 money centers in its approximately 4,000 U.S. stores. Case Analysis Strategic Management BMGMT3202

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Product and service offerings are just one of the many complex decisions that WalMart's strategic leaders have to make.

Strategic Leaders
Ultimate leadership control has remained in the Walton family, with chairmanship changing hands only once, from father to son. Successors to the highest executive positions at Wal-Mart have always come from within the company. After eight years as CFO and executive vice president, David Glass succeeded Sam Walton as president and later as CEO. Lee Scott joined Wal-Mart in 1979 and was named CEO by David Glass in 20004 (see Exhibit 6).

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Decision Makers
Twenty-five senior Wal-Mart officers meet via weekly videoconferences "to review the Company's ongoing performance, focus on initiatives to drive sales and customer service, and address broader issues. Eight of these senior officers currently have the most critical roles. The most powerful among them is S. Robson (Rob) Walton, first son of Sam Walton and chair of the board of directors since l992.Rob Walton was initiated into the fledgling family business one night in the early 1960s after he earned his driver's license when Sam recruited him to truck goods from a garage in Bentonville to a Wal-Mart store. Rob officially joined the company in 1969, shortly after graduating from law school, worked his way up to the vice chair position, and became board chair in 1992 after his father died."We lead when we embrace my dad's vision according to Rob, "to improve the lives of everyday people by making everyday things more affordable". Rob now lives in Colorado, where he races bicycles and sports cars in his spare time, and flies the company jet to his Bentonville office. He continues to serve as the primary conduit for Walton family input related to company proceedings. CEO Lee Scott "rose through the ranks by excelling at the mechanical aspects of retailing, playing an indispensable part in Wal-Mart's technology-induced rebound in the latter half of the 1990s". The son of a gas station owner and a music teacher in small-town Kansas, Scott worked factory night shifts to pay for college, while he, his wife, and their baby lived in a mobile home. He put his business degree to use in logistics, first as a dispatcher for Yellow Freight, then as a "headstrong, "aggressive, even abrasive Wal-Mart transportation manager. His skill in reducing costs helped him ascend to senior logistics jobs, then into the top merchandising post, where he cut billions in excess inventory in the late 1990s. Next Scott ran the 2,300-unit Wal-Mart Stores Division for a year before becoming Wal-Mart's chief operating officer and vice chairperson in 1999. He became CEO in January 2000. Mike Duke, an industrial engineer who had 23 years of experience with Federated and May Department Stores, followed Scott's path, climbing the distribution and logistics ladder to the leadership of Wal-Mart Stores Division. Now he oversees international operations as vice chairperson. John Menzer, who joined Wal-Mart in 1995 after 10 years with Ben Franklin Retail Stores, served as Wal-Mart's chief financial officer before becoming CEO of Wal-Mart International in 1999.He led the acquisitions of Seiyu (a majority-owned subsidiary in Japan) and Asda. Now as vice chairperson, Menzer is responsible for Wal-Mart Stores and various corporate functions, including strategic planning. Case Analysis Strategic Management BMGMT3202

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A native of Ecuador, Eduardo Castro-Wright leads the Wal-Mart Stores Division in the United States after leading Wal-Mart de Mexico from 2001 to 2005, following a distinguished career with Nabisco in the Latin America and Asia-Pacific regions. Doug McMillon became president and CEO of Sam's Club after a 15-year career with Wal-Mart, first as a buyer, then as a merchandising manager and leader. Nineteen-year Target veteran John Fleming ascended through Walmart.com in the early 2000sto become Wal-Mart Stores' chief marketing officer, prior to his January 2007 induction as chief merchandising officer for Wal-Mart Stores. After 13 years in marketing roles with PepsiCo Stephen Quinn joined Wal-Mart as senior vice president of marketing in 2005, and then in January 2007 took over Fleming's former position as chief marketing officer for Wal-Mart Stores. These eight leaders are supported and monitored by the board of directors.

Board of Directors
Wal-Mart has an active, high-caliber, 14-member board of directors that may soon get even more powerful. "The Board has been instrumental in encouraging the company to more quickly address critical issues, and I am extremely pleased that they are not reticent about sharing their opinions. Rob Walton recently wrote, adding: "Today's Board is the furthest thing from a rubber stamp. Two out of three board members have held CEO positions and or chaired the boards of various companies. Retail turnaround guru Allen Questrom, who overhauled JCPenney, joined the board in June 2007. Questrom recently told Women's Wear Daily: "[Wal-Mart is] never going to be a leader in fashion apparel. That's not their calling. But can they improve on that, sure they can. The most famous former board member is New York Senator and Democratic presidential candidate Hillary Rodham Clinton, who served on the Wal-Mart board from 1986 to 1992 as a "loyalist reformer". Several board members are among the largest share-holders in the company.

Shareholders
Of the 4.1 billion Wal-Mart shares outstanding, insiders and beneficial owners hold 42 percent, while institutional investors and mutual funds hold 37 percent. The Walton family owns almost 1.7 billion shares through its holding company, Walton Enterprises, LLC, whose directors were five of America's ten wealthiest individuals in 2005: Sam's three sons, Rob Walton, director Jim C. Walton, and John T. Walton (d. 2005); daughter Alice L. Walton; and widow Helen R. Walton (d.2007). Top non-Walton inside shareholders include CEO Lee Scott (1.2 million shares), director David D. Glass (1.2 million shares), director Jack C. Shewmaker (557,674 shares), Mike Duke (413,213 shares), and John Menzer (401,883 shares). Some 1,127 institutions own Wal-Mart stock. Nearly 536 million Wal-Mart shares are owned by 785 mutual funds. In total, as many as 312,423 shareholders held common stock in Wal-Mart on March 16, 2007, when the company finalized its annual report for fiscal 2007.

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Financial Results Fiscal 2007 and Recent Years

Over the past 10 years, Wal-Mart's net income has nearly quadrupled, from $3 billion in 1997 to $11.7 billion in 2007. Revenues have more than tripled, from $100 billion to $345 billion. Meanwhile, operating, selling, and general administration expenses have quadrupled, outstripping the increase in revenue and net income, averaging 14.6 percent to sales. Despite the increase in expenses steadily higher gross margins have boosted operating income (refer to Exhibit 3). Wal-Mart had assets totaling $151 billion in 2007 up from $39 billion in 1997. Concurrent with the increase in assets liabilities have grown 319 percent over the same period, from $21.4 billion to $89.6 billion. Shareholder return on equity measured 22 percent in 2007, close to its l0-year average. Total shareholder equity rose from $17.2 billion in 1997 to $61.8 billion in 2007 (see Exhibit 9). Wal-Mart has improved its profitability over the last several years. Compared with an average operating profit margin of 5.1 percent in the prior three-year period, Wal-Mart has averaged 6.0 percent in the past three years. In 1997, Wal-Mart's operating profit margin was 4.3 percent. From a debt perspective, Wal-Mart has fluctuated up and down, with a debt ratio between 55.1 percent and 61.5 percent over the last 10 years. As of 2007, it measured 59.3 percent, 150 basis points over its l0-year median (see Exhibit 10).

Comparative Revenue
Sales by Region. Of nearly $345 billion in total sales in 2007 (not including Sam's Club fees), domestic U.S. revenues totaled nearly $268 billion, or 77.6 percent of sales, while international revenues were $77 billion, or 22.4 percent of sales. International operations are becoming increasingly important to the company. Driving Wal-Mart's overall growth, international sales growth has averaged 33.6 percent over the past 10 years, whereas domestic sales have grown an average of only 11.0 percent in the same period. In the last three years, domestic sales growth has averaged8 .7 percent versus average international growth of 17.8 percent (refer to Exhibit 2). Wal-Mart has experienced varying rates of growth in international markets. Nonetheless, international revenue has been a constant source of sales growth for Wal-Mart, outpacing the revenue contribution from the Sam's Club segment since 2001. Sales by Segment. Wal-Mart Stores brought in 65.6 percent of all sales in 2007, down from 75.1 percent of sales in 1997. Wal-Mart International was responsible for 22.4 percent of sales, up from 5.0 percent a decade earlier, while Sam's Club accounted for 12.1 percent of sales in 2007, down from 19.9 percent in 1997 (refer to Exhibit 2). Sam's Club has suffered against rival Costco for years, losing the battle for comparablestore sales in"64 of the past 73 months," according to one researcher, as well as the battle for membership renewals. Average annual sales per warehouse were $73 million for Sams Club versus $135 million for Costco in fiscal 2006. Wal-Mart's online business has not been a significant source of revenue, bringing in an estimated $135 million in sales in 2002, the same year JCPenney.com had sales of $324 million and Amazon.com reached sales greater than $3 billion. Wal-Mart Supercenters drove 56.1 percent of the company's sales, reflecting the company's competitive strength in traditional non membership discount formats. Case Analysis Strategic Management BMGMT3202

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Results relative to competitors

Market Leadership. Wal-Mart is the number one retailer in 77 of the 100 largest general merchandise markets in America, squaring up against Target or Costco in all but 11 of these markets. Either Wal-Mart, Costco, or Target holds the top position in 91 of the top 100 largest general merchandise markets in the United States. Geographically, Wal-Mart is the dominant retailer in the South and throughout midsized and small-town markets, while Costco is the leader in California and Washington. According to ACNielsen, (the world's leading marketing information company), in the United States, Wal-Mart controls 20 percent of dry grocery, 2 percent of non-food grocery, 30 percent of health and beauty aids, and 45 percent of general merchandise sales". It also controls 45 percent of the retail toy segment. However, Target, Kroger, and Family Dollar Stores are all growing revenue faster than Wal-Mart, threatening its dominance (see Exhibit 11). Financial Ratios. From a competitive profitability perspective, Wal-Mart's 5.87 percent operating margin and 3.23 percent net margin put it in the middle of the pack relative to its key competitors (refer to Exhibit 11). Target enjoys higher margins, closer to those of JCPenney, while Costco has lower margins, closer to those of Dollar General and Kroger. Wal-Mart's margins are nearest those of Family Dollar Stores and Sears Holdings (Kmart and Sears). WalMart's profit margin may be held down somewhat by its presence in the lower margin grocery business, especially in its Neighborhood Markets format. In Supercenters, groceries serve a larger role of driving store traffic and drawing customers toward higher margin products. From a management effectiveness standpoint, Wal-Mart is creating a return on equity that is higher than Target's and much higher than Costco's and a return on assets that is nearly identical to Target's and higher than Costco's. Case Analysis Strategic Management BMGMT3202

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First Quarter, Fiscal 2008, (Quarter Ending April 30, 2007)

Wal-Mart had a difficult first quarter. Revenue and earnings "were not where we would have expected [them] to be, nor where we believe they should be according to CEO Scott. Quite honestly, we are not satisfied with our overall performance. Wal-Mart increased company sales (not including Sam's Club fees) by 8.3 percent in the first quarter to $85.3 billion. Overall operating income Increased 7.9 percent year-over-year with nearly 53.1 percent of the change coming from Wal-Mart's international operations (see Exhibit 12). Closing out the first quarter on a down note, Wal-Mart's April same-store sales decrease was the worst ever recorded in 28 years of tracking: an overall U.S. comparable-store sales slide of 3.5 percent for the month, with a 4.6 percent drop at Wal-Mart Stores offset by a 2.5 percent increase at Sam's Clubs. Much of the April decline was blamed on the apparel business, which constitutes 10 percent of Wal-Mart's sales. Recent failed forays into fashion appear to have dragged down overall same-stores sales. Wal-Mart wasn't the only retailer to have a bad April. The International Council of Shopping Centers reported an average 2.3 percent drop in same-store sales across 51 chains. Against the trend, Costco posted a 6 percent same-store sales gain in April (see Exhibit 13). The financial situation might be better considered with an understanding of the competitive situation in Wal-Mart's industry.

Competitive Situation
We face strong sales competition from other discount, department, drug, variety and specialty stores and supermarkets, many of which are national, regional or international chain, as well as internet-based retailers and catalog businesses. Additionally, we compete with a number of companies or prime retail site locations, as well as in attracting and retaining quality employees ("associates)". We, along with other retail companies, are influenced by a number of factors . . . cost of goods, consumer debt levels and buying patterns, economic conditions, interest rates, customer preferences, unemployment, labor costs, inflation, currency exchange fluctuations, Case Analysis Strategic Management BMGMT3202

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fuel prices, weather patterns, catastrophic events, competitive pressures and insurance costs .Our Sam's Club segment faces strong sales competition from other wholesale club operators , catalogs businesses, internet-based and other retailers." -2007 Wal-Mart Annual Report, 28-29

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Competitors
Target. Target Corporation operates 1,318 general merchandise stores and 182 Super Target stores in 47 states, in addition to its online business, target.com. Target describes itself as "an upscale discounter that provides high quality, on-trend merchandise at attractive prices in clean, spacious and guest-friendly stores. Target has grown revenue from $33 billion in 2001 to more than $59 billion in 2006, a compound annual growth rate of 12.5 percent. Profits have risen as well, as earnings from continuing operations averaged an annual growth rate of 20.4 percent over the same period (see Exhibit 14). Costco. Costco Wholesale Corporation runs 510 warehouses, averaging 140,000 square feet, in 38 states, six foreign countries (Canada, Mexico, the United Kingdom, Taiwan, Korea, and Japan), and Puerto Rico. Costco offers three kinds of membership and roughly 4,000 products, 10 to 15 times fewer than many competitors, according to the company. Costco benefits from a limited number of products sold in high volumes, high inventory turnover, low costs via purchasing discounts and a no-frills approach, and favorable real estate locations. Gross margins have averaged about 10.6 percent over the past five years, and operating income has increased an average of 10.5 percent over the same period (see Exhibit 15).

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Kroger. The Kroger Co. is one of the nation's largest retailers, operating 2,468 supermarkets and multidepartment stores under two dozen banners including Kroger, Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smith's, Fry's, Fryt Marketplace, Dillons, QFC, and City Market."Kroger's operating income fell 13.1 percent between 2002 and 2006, from $2.8 billion to $2.2 billion, despite an increase in revenue of 27.7 percent. Operating margins have averaged 24.8 percent over the last three years, up from I5.7 percent in the three years prior (see Exhibit 16).

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Other General Discount Competitors. Sears Holdings (Kmart and Sears) offer some additional U.S. competition in general merchandise, while Tesco of Britain and Carrefour of France compete with Wal-Mart internationally. Carrefour is the second-largest retailer in the world (after Wal-Mart) and is probably its closest international competitor from a strategy perspective, as it focuses on hypermarkets (similar to Supercenters), in addition to a variety of other formats. Tesco emphasizes convenience and competes primarily in groceries, but also in general merchandise against Wal-Mart's U.K. subsidiary Asda. Tesco is looking to expand to the West Coast of the United States in 2007. Amazon.com adds another level of global competition for Wal-Mart due to its high number of SKUs and its convenience. Niche Competitors. Other retailers compete with Wal-Mart at the department level, including Safeway, Best Buy, Circuit City, Home Depot, Ace Hardware, Lowe's, Kohl's, Mervyns California, Barnes & Noble, and Borders, among others. In order to provide lower prices than its competitors, Wal-Mart has developed a unique relationship with its suppliers.

Suppliers
Wal-Mart's 1,600-member Global Procurement Services team, based in 23 countries, buys merchandise from suppliers in more than 70 countries, including 61,000 suppliers in the United States.lla Leveraging its size, "Wal-Mart not only dictates delivery schedules and inventory levels but also heavily influences product specifications. In the end, many suppliers have to choose between designing goods their way or the Wal-Mart way''. In return, companies with a streamlined product and supply chain can benefit greatly. "If you are good with data, are sophisticated, and have scale, Wal-Mart should be one of your most profitable customer, says a retired consumer products executive. Wal-Mart controls a large and rapidly increasing share of the business done by most every major U.S. consumer products company about 28 percent of the total sales of Dial and almost a quarter of the sales of Del Monte Foods, Clorox, and Revlon.

Customers
Wal-Mart attracts 175 million people to its stores each week. According to ACNielsen (the world's leading marketing information company), the typical Wal-Mart shopper has an annual household income of $10,000 to $50,000. These shoppers account for 54 percent of Wal-Mart's sales. Wal-Mart also attracts an affluent segment (with household incomes of at least $75,000) that accounts for 26 percent of its customer base. The affluent segment cross-shops the most with Costco (27 percent) and Target (28 percent). These upscale shoppers likely have lower price elasticity, a relatively lower switching cost, but a higher sensitivity to brand reputation. Even though Wal-Mart recently hired some well-known public relations experts and ended its relationship with its Ad Agency of 32 years in hopes of creating a more positive image, according to a 2004 study, "2 to 8 percent of Wal-Mart consumers surveyed have ceased shopping at the chain because of 'negative press. Shoppers interviewed by the authors of this case have strong opinions about Wal-Mart (see Exhibit 18). Wal-Mart's recent struggles with bad press and lawsuits have created urgency to find a way to protect its market share from potential entrants or substitutes.

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Other Sources of Competition

Customers have many alternatives for each of the products and services that Wal-Mart provides, but few alternatives exist for the large-scale discount superstore or warehouse shopping experience. The same products can be purchased at different types of retailers, but it is difficult to replicate the convenience, price, and diversity of merchandise found at a Wal-Mart. Also, new potential market entrants with similar scale would have difficulty competing in any substantial volume on price across a wide array of merchandise. Other large incumbents such as Target and Costco have also built economies of scale that would be difficult for a start-up to replicate. Supply chains must be extensive and very efficient. Product differentiation is usually minor in discount store merchandise. However, switching retailers would be easy for customers in well-served areas. Beyond these retail industry forces, more general external trends also influence Wal-Mart's competitive situation.

External Trends
Government. Wal-Mart has become a "poster company" on political issues related to trade, health care, the environment, discrimination, worker pay, and general anti-corporate sentiment. Many activists even contend that Wal-Mart is breaking antitrust laws by using its "power to micromanage the market, carefully coordinating the actions of thousands of firms from a position above the market." Concerns about Wal-Mart's handling of hazardous waste have prompted local, state, and federal officials in the southwestern United States to initiate official actions. In addition to activists and union groups, U.S. political figures are lashing out against Wal-Mart. Democratic presidential candidates are "denouncing Wal-Mart for what they say are substandard wages and health care benefits". Wal-Mart's political action committee's contributions to candidates (even to a former board member) are being returned as a sign of protest. This sentiment is not only surfacing nationally, but locally as well. Governments in Inglewood, California, Cedar Mill, Oregon, and Vancouver Canada, have rejected Wal-Mart expansion plan. Legal. Class-action lawsuits against Wal-Mart have become commonplace. In Savaglio v. WaIMart Stores, Inc., the "plaintiffs allege that they were not provided meal and rest breaks in accordance with California law, and seek monetary damages and injunctive relief". A jury ruled in favor of those plaintiffs and awarded them a total of $198 million. In Dukes v. Wal-Mart Stores, Inc., currently pending on behalf of all present and past female employees in all of WalMart's retail stores and warehouse clubs, Wal-Mart is alleged to have" engaged in a pattern and practice of discriminating against women in promotions, pay, training, and job assignments". These lawsuits are providing ample fodder for Wal-Mart opponents to inflict ongoing reputation damage. Global. The globalization trend that began in the 1990s persists. As trade barriers continue to come down around the world and as technology enables greater access to information, the world is becoming one mega-market of labor, capital, goods, and services. Bilateral and multilateral free trade agreements are continuing to shape markets. Technology. The development of radio frequency identification (RFID) is expected to play a major part in the next evolution of supply chain management in the retail industry. This technology may better enable retailers to track inventory locations, store shelving status, packages en-route to and from suppliers, warehouses, shelves, and even shoplifting. Recent developments in the technology include a movement toward common standards and practices Case Analysis Strategic Management BMGMT3202

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that could make RFID as ubiquitous as bar codes and a push to lower the cost per RFID tag from the current l0-cent mark to the Wal-Mart target of 5-cents. RFID chips are increasingly "able to hold much more information and fit into different shapes and sizes-woven inside clothing, slipped into a paper-thin tag or molded inside a key chain." Another technology development impacting the retail industry is the unabated growth of electronic commerce, and the increasing pervasiveness of broadband Internet access in most developed countries. As consumers at various socioeconomic levels come to rely more on the Web for information, entertainment, and shopping, retailers are discovering the need to use their online presence not just to spur online sales, but to drive traditional format sales as well. Demographics. Americans, like those in many developed nations, are getting older. The Census Bureau estimates the number of those aged 65 and up will rise from approximately 35 million in 2000 to 86.7 million by 2050. The age 65 and up cohort made up I2.4 percent of the total U.S. population in 2000; by 2050, it will make up 20.7 percent of a projected population of nearly 420 million. The country is also becoming more diverse. Ethnic and gender diversity in the U.S. workforce is on the rise. In 1995, whites/non-Hispanics made up 76 percent of the workforce, but this is projected to decrease to 68 percent in 2020. According to the U.S. Department of Labor, women comprised 46 percent of the labor force in 2006. The percentage of women over the age of 16 in the labor force has risen 23 percent in 44 years to 59 percent in 2004. The distance in America between the "haves" and the "have-nots" is growing. Increasing returns to education have created a bifurcation in income distribution. The bottom quintile has seen its mean income increase 34.5 percent in real terms from 1967 to 2005, whereas the top income quintile had an increase in mean income of 80.8 percent over the same time period. Average income growth for the bottom three quintiles was only 30.4 percent. The typical Wal-Mart customer is in the middle income quintiles. As Wal-Mart's competitive landscape continues to evolve, the company is taking its strategic cues from Sam Walton's words of wisdom: "Everything around you is always changing. To succeed, stay out in front of that change."

Current Strategies
To manage its competitive environment, Wal-Mart is currently deploying a variety of strategies, most of which stem from its relentless core generic strategy of cost leadership, but some of which represent beyond cost approaches. "Our everyday low price position is the basis for our business wrote Rob Walton in Wal-Mart's 2006 annual report. He added, "While this core principle is critical to our growth and business strategy, by itself it is not enough anymore." According to Scott in this year's shareholder letter, Wal-Mart is confronting "a period of perhaps the most rapid and profound change in our Company's history. With our transformation plan, we are committed to staying 'Out in Front' of the changes around us. The corporate plan, encompassing previous change initiatives as well as newer ones, rests on "five pillars": "broadening our appeal to our customers, making Wal-Mart an even better place to work, improving operations and efficiencies, driving global growth, and contributing to our communities.

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Strategies to Deal with External and Reputational Challenges. Wal-Mart is pursuing two key strategies that will help them overcome external issues affecting the company, including environmental and community-impact issues, among others. These strategies include sustainability efforts and localized charitable giving to help portray it as being a responsible corporate citizen and a good neighbor. Wal-Mart launched its global environmental sustainability initiative in 2004 and has since taken action toward several sustainability goals: sell 100 million compact fluorescent bulbs by 2008; reduce packaging by five percent by 2013; buy fish from certified fisheries; sell "more organic and environmentally friendly products"; and make company facilities and trucks more energy-efficient. The Wal-Mart Foundation in 2006 gave "more than $415 million in cash and in-kind merchandise to 100,000 organizations worldwide," making it the "largest corporate cash contributor in America. The Foundation "gave most of the money at the local level where [it] can have the greatest impact. Wal-Mart has beefed up pro-community, pro-sustainability, pro-health care information on its Web site, on its television ads, and in its annual report. The company recently launched In Front with Wal-Mart, a 30-minute television show airing on the Lifetime and USA networks that "gives [Wal-Mart] a chance to showcase [its] incredible associates and the variety of ways they give back to their communities, bettering the lives of America's working families" and "sheds light . . . on some of [Wal-Mart's] eco-friendly practices." Wal-Mart created an interactive Web site on sustainability, dedicated a page of its 2007 annual report to sustainability, and will soon publish a separate Sustainability Report. In its public outreach, Wal-Mart also stresses its benefits to suppliers and communities, as well as its commitment to providing affordable health care and competitive wages for its associates. These efforts tie into its supply-chain innovation and people strategies.

Supply Chain Innovation and People Strategies

As previously mentioned, Wal-Mart creates value for customers with a highly efficient and innovative supply chain management operation. This operation combines tough, low-cost procurement tactics, leading-edge information systems and "rocket-science" logistics. There's not much negotiation at all. The manufacturer walks into the room. I've been in these little cubicles, I've seen it happen. The buyer says, "Look, we want you to sell it to us for 5 percent on a dollar-at cost-lower this year than you did last year." They know every fact and figure that these manufacturers have. They know their books. They know their costs. They know their business practices-everything, you know? So what's a manufacturer left to do? They sit naked in front of Wal-Mart. You know, Wal-Mart calls the shots. "If you want to do business with us, if you want to stay in business, then you're going to do it our way. And it's all about driving down the cost of goods. -Former Wal-Mart Store manager John Lehman on Frontline 2004 All Wal-Mart suppliers must participate in Retail Link, a computerized system in which they "plan, execute, and analyze their businesses."Along with electronic data interchange, suppliers receive purchase order information and supply invoices electronically, thereby lowering expenses and increasing productivity. Suppliers must meet Wal-Mart's strict lead-time and shipping requirements by using the technology and complying with operating procedures. The Wal-Mart logistics team uses an Internet-based Transportation Link system that complements a Backhaul Betty telephone voice-response system to help them move goods. In one year, WalMart estimated nearly I million loads of general merchandise moved to Distribution Centers throughout the country. Store-bound shipments travel by the company's 7,000 trucks, one of the Case Analysis Strategic Management BMGMT3202

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largest fleets in the world. The company relentlessly strives to develop its supply-chain process. For example, "[t]o ensure greater supply chain visibility, satellite-based tracking technology is being installed in the Company's entire fleet of over-the-road trailers. The data generated . . . increases productivity, reduces costs and enhances security." In the stores, Wal-Mart's legendary inventory management capability is driven by its advanced Texlon barcode system. In addition to tracking the sales price, inventory levels of each product, and a history of quantities sold, Texlon can record trends and predict future needs. Quantities sold can be traced to specific weeks, days, or even hours of each day. Seasonal projections can be documented, and shopping habits are noted. Information is sent daily at midnight to the warehouses, so depleted products are restocked the following night. Reliance on this kind of technology to drive the supply chain enables Wal-Mart's suppliers to use "pull production' instead of "push production. The barcode system will eventually be replaced by an RFID-based system, technology Wal-Mart is driving. Wal-Mart's technological supply- chain sophistication is intended to provide "value for customers, associates, and shareholdersl'1sT7h e system depends on Wal-Mart's 1.8 million associates to provide the final link in the value chain to customers. Wal-Mart's people strategy involves "[g]living our associates the tools and opportunities they need to be as productive as possible, which has enabled "workforce productivity gains in every quarter of the last two years". Associates who feel overworked may create a weak link in the value chain. I would say that some customers are happy, but most are not. . . . [M]any workers feel they are being overworked due to mainly understaffing issues, which causes workers to treat the customers worse, then causing customers to become upset. Many customers have at one time been [Wal-Mart] associates and understand how things are handled at each store level and can relate. Personally, [I] believe that overall morale a few years ago was much higher with workers, and that attitude was passed along to the customers. Today many customers feel that [Wal-Mart] only wants them for [their] money, and does not care about them." - Anonymous Wal-Mart Manager (2007, e-mail interview, May 21) Reassuring its "valued long-term associates" that the company "is listening to them Wal-Mart "again increased [its] average full-time hourly wage in the United States". The company is against unionization of its associates. Wal-Mart's operational effectiveness goals of improving return on investment, comparable-store sales, and working capital productivity are setting the agenda for its businesssegment strategies.

Wal-Mart Stores Segment Strategies

The Wal-Mart Stores segment is in its second year of a three-year strategic plan to improve ROI, people development, and customer relevancy. Customers have become the prime focus since January 2007, when Wal-Mart Stores elevated its new marketing and merchandising chiefs and completed its management reshuffle. In 2006, Wal-Mart Stores rolled out a $4 generic prescription program, a clear openingprice-point approach. Merchandising has been characterized by the product-focused opening price point" strategy, which relied on attractive low prices on entry-level items in every category to set the stage for higher-margin prices on more desirable items. This single strategy has served to focus each of the two dozen departments at a typical Wal-Mart Supercenter (see Exhibit 19). Wal-Mart stores often offer retail space to other vendors that provide services, such as nail salons, hair salons, Case Analysis Strategic Management BMGMT3202

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coffee shops, food and beverage vendors (e.g., McDonald's and Subway), full-service banks, and even employment agencies in some locations. Recently, Wal-Mart Stores" realigned [its] merchandising. . . around five key power categories entertainment, grocery, health and wellness, apparel, and home". Global Procurement meanwhile is "establishing groups of technical experts-specialists that focus on the many important dynamics of a particular category purchase.

The Wal-Mart Stores customer segmentation and merchandising strategies have been in flux over the past few years, with three different strategies in play to move Wal-Mart Stores toward a more customer-focused position. The first customer-focused strategy-mimicking Target's upscale, fashion-forward appealflopped. "In working to broaden our appeal to our customers, we moved too quickly in the rollout of some of our fashion forward apparel in the United States, according to Scott. Wal-Mart Stores has at least partially retreated from this strategy. The second customer-focused strategy - localizing selections based on storeneighborhood demographics - continues to drive various store changes, though it may be waning. In 2006, Wal-Mart "launched six different types of customized stores to attract different demographics, from inner-city residents, to affluent suburbanites, to rural shoppers". With these stores, Wal-Mart attempted to target African-Americans, Hispanics, empty-nesters, suburbanites, rural residents, and the affluent. Wal-Mart expanded and empowered regional marketing teams, moving many executives away from headquarters into regions to better understand Wal-Mart's wide customer base. These changes were inspired by localized merchandizing selection in Wal-Mart de Mexico stores aimed at different mixes of inventory for different income levels. For example, the localization strategy expanded the mix of hip-hop, gospel, and R&B music in a store outside Chicago and led to plans for larger pharmacy sections and fewer children's clothes at a store geared toward empty-nesters. In his March letter to shareholders, Scott wrote, "We continue to strive to make sure every Wal-Mart store is a 'Store of the Community'-one that reflects the individual needs of each neighborhood we serve. The third customer-focused strategy-appealing to the three universal types of low-priceseeking customers who currently shop at Wal-Mart-now guides merchandising and marketing decisions. According to Fleming and Quinn, the three types are "'brand aspirationals' (people with low incomes who are obsessed with names like Kitchen Aid),'price-sensitive affluents' Case Analysis Strategic Management BMGMT3202

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(wealthier shoppers who love deals), and 'value-price shoppers' (who like low prices and cannot afford much more). For these types, the Wal-Mart Stores segment is concentrating on developing unique, innovative products and providing distinguished brands (such as the recently added Dell desktop computers) to better appeal to its core customers as the low-price leader on well-known brands. This is a much better strategy for Wal-Mart than the store segmentation strategy path. . . they were going down before. . . because it aligns with their basic brand proposition (EDLP) and basic consumer rather than trying to attract a new consumer by adding high-end fashion and complicated assortments. For the same reason, it aligns better with Wal-Mart\ supply chain strength. It's far easier to roll out a national brand in stores nationally than it is to ship different assortments to different stores within a region without disrupting the cost efficient supply chain that is Wal-Mart's core competitive advantage. I'm not sure what took them so long but it looks like Wal-Mart is back to a strategy that is sustainable and executable for them. -Forrester Research Senior Analyst Lisa Bradner

Sams Club Segment Strategies

Sam's Club, meanwhile, is focused on three areas: "reinvigorating the brand" by broadening products and services; improving inventory management and other performance measures; and optimizing the "in-club experience. Sam's Club stores offer members products such as frozen and dry food goods in bulk, electronics, computer equipment, clothing, books, electronic entertainment, and general merchandise. Sam's Club recently restructured its management layers to give stores additional flexibility and to boost service. Rumors have circulated that Sam's Club may spin off from Wal-Mart, in part to set its own direction in attracting and retaining members and associates, two key groups who are generally less loyal to Sam's Club than to its rival Costco.

Wal-Mart International Segment Strategies

Wal-Mart International's strategy is to prioritize "where the greatest growth and greatest returns exist what the segment calls "majoring in the majors". The majors appear to include the Americas primarily, followed by the United Kingdom and Japan, as well as China and India over the long term. Wal-Mart International is labeling this strategy "focused portfolio execution. Its second strategy is global leverage, or "taking full advantage of our worldwide assets, including formats, information systems, purchasing organizations, category expertise, and shared best practices". In the past year, it has concentrated on turning around Asda in the United Kingdom through "improved execution in all phases of customer service, differentiation with competitors, and development of new channels and formats". To better compete against U.K. leader Tesco, second-largest Asda reportedly may be considering acquiring the third-largest U.K. retailer, the J. Sainsbury chain of grocery and convenience stores. Wal-Mart's international stores are varied in their mix of products and services, and they stick to the motto of "offering working families the things they need at the prices they can afford. Just as the business segments are looking to focus on the right challenges for their short- and long-term success in the marketplace, the company must ensure it is applying its greatest resources against its greatest strategic challenges across the enterprise.

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Strategic Challenges
The challenges Wal-Mart faces today are actually not much different from what they have been for the past several years. These following quotes come from an article in April 2003: "Even though it is the nation's largest apparel retailer with more than 12 percent of the market, WalMart could be doing better in this category"; "It would like to be a fashion retailer and take on Target with good quality at a low price-point, but it hasnt convinced the American consumer it should be a destination for casual fashion'; "Wal-Mart is . . . looking abroad for future sales growth; "Wal-Mart will need to struggle against the urge to centralize operations and eliminate decision making from the frontlines where managers have face-to-face contact with customers"; and "The only area in which Wal-Mart has not been able to pummel its competition is against Costco. One of the company's challenges may be to stop proliferating nearly identical sets of challenges each year. Like the stock price, the challenges appear to be stuck in a holding pattern. One key new challenge is the sluggishness of same store sales relative to Wal-Mart's competitors. According to BusinessWeek, Wal-Mart faces "the diciest conundrum in retailing today. . . can it seduce . . . middle-income shoppers into stepping up their purchases in a major way without alienating its low-income legions in the process? Another growing challenge is the difficulty of expanding in the domestic market, whether because of community opposition or geographic saturation (see Exhibits 20 and 21). These and other strategic challenges are weighing on the minds of Wal-Mart's shareholders, especially on the two with the most responsibility for the company's fate.

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Questions Wal-Mart Leaders Must Address

CEO Lee Scott and Chairman Rob Walton are grappling with some vexing questions as they head into the 2007 Wal-Mart Annual Shareholders Meeting: How can Wal-Mart Stores and Sam's Club increase same-store sales? How should the company capture share of middle and upper-income wallets? Should Wal-Mart Stores fully retreat from fashion forward merchandising and marketing? Will its neighborhood-store-localization strategy increase sales enough to offset the associated costs? What should it do to make its new three-types-of-customers segmentation strategy work? Should the company spin off Sam's Club? If not, what should it do to compete more effectively against Costco? Is Wal-Mart expanding the right kind of new stores at the right pace and in the right places? How and where should the company continue to grow internationally? Should Asda buy J. Sainsbury? What will it take to restore the company's reputation in America? Should Lee Scott change Wal-Mart's course? If so, how? Should Rob Walton replace Lee Scott? If so, when and with whom? Source: Michael A. Hitt, Duane R. Ireland, and Robert E. Hoskisson (2008), Management of Strategy -Concept and Cases, Thomson South Western.

Case Analysis Strategic Management BMGMT3202