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Wal-Mart: An American Original

- Agenda

1. A Retrospective on its Growth

2. Innovative Business Model
 How Did Sam Walton Get These Ideas?
3. Wal-Mart Today: The Challenges
 Retreat from Germany in 2006
 Sluggish Growth in the US Market
 Clamour at Home: The Price of Becoming Big
4. Wal-Mart’s Response
 Global Ambitions
 Re-thinking “One-Size-Fits-All” Approach
 Flexible Workforce

Dr. Lakshmi Mohan 1

How Wal-Mart Got There
- A Retrospective on Its Growth

 The Numbers: How “Big” is Big?

 IT: The Driver of the EDLP strategy
 Management Process
… Partnership with Suppliers
… Partnership with Employees
… Obsessive Focus on Costs

Dr. Lakshmi Mohan 2

Wal-Mart: A Behemoth …

 1962 : Sam Walton launched his first store

 Location : Bentonville, a backwater in Arkansas,
“a state where chickens outnumber people”
 Today : World’s Largest Retailer
 Four times as big as #2 Retailer, Carrefour
 5,482 stores in 14 countries as of Oct 31, 2005
 Revenues: 285B vs GE: $152B
 Second-largest Company after ExxonMobil ($298B)
 Workforce: 1.3 M
Biggest private sector employer in the world
Dr. Lakshmi Mohan 3
Walton’s Business Model was Different…

 Located stores in small towns since big retailers such

as Kmart and Sears dominated large towns
 Kept overhead low
 Offered incentives - Profit-sharing for staff
 Partnerships for suppliers
 Large investment in IT … To keep inventory low
 Customers got friendly service
AND, “Everyday Low Price”

Dr. Lakshmi Mohan 4

Wal-Mart after 40 years …….
Lord of the Things

• Annual 2001 sales: $220 billion – Pre-text Profits: $9.3 Million

….. 60% of U. S. Retail Sales
• #1 Food Retailer in the U.S.: $56 billion in 2001
….. Opened since 1985 over 1000 massive dept./grocery supercenters,
at 200,000 sq. ft., bigger than 4 football fields
• # of employees worldwide: 1.28 million
….. More than the US Postal service ; # in China : 4,000
• # of Suppliers : 30,000 ….. In every continent but Antarctica
• Value of 100 shares bought in 1970 @ $16.50 per share: $11.5 million
• Wal-Mart’s % of P&G's $40 billion in annual sales : 15%
P&G has a 150-strong Bentonville office & Senior EVP dedicated to Wal-Mart
• Typical starting hourly wage: $6.50
Source: Business 2.0, March 2002
Dr. Lakshmi Mohan 5
A Simple But Powerful Idea:
Minimize the “Bad I” - Inventory
Walton figured out that most of the costs gets added
after the product leaves the factory and moves through
the supply chain:
Mfg.  Wholesaler  Retailer
• 20% - 30% of retail price spent on keeping inventory in
3 warehouses
• Walton eliminated the wholesaler
• He instituted JIT inventory practices using “real-time”
flow of information from a store’s sales floors to the
supplier’s plants that dictated:
What to produce? When to ship? To which stores?
Dr. Lakshmi Mohan 6
IT is Critical for Wal-Mart’s
“Everyday Low Price” Strategy
Invested in most of the waves of retail IT systems earlier and
more aggressively than its competitors
- Set industry standards in IT
1969 : Used computers to track store inventory
1980 : Adopted bar codes
1985 : Electronic Data Interchange (EDI) with suppliers
Late 80’s : Wireless scanning guns
2003 : Mandated its 100 largest suppliers to place RFID (Radio Frequency
Identification) tags on the boxes and pallets shipped to Wal-mart
stores by January 2005
Focus of IT Investments:
Applications that directly enhanced its core value proposition – EDLP
– and increase sales through micromerchandising
Dr. Lakshmi Mohan 7
IT: Only Area Where Wal-Mart Outspent Competitors

Walton recognized early on that timely information is the key to

maximizing sales and minimizing costs. The better your information
about what’s selling and what’s not, store by store, the better you
can avoid the twin perils of retailing
 too little inventory or too much
 Very Secretive About Its Information Systems
 Custom-designed systems built by employees kept competitors
off the trail
 Hardware and software vendors bound by non-disclosure
 In 2001, Wal-Mart summarily announced that it would no longer
share sales data with market research vendors like Information
Resources Inc and AC Nielsen, since the reports of the vendors
are available to all retailers who subscribe to that service.
Dr. Lakshmi Mohan 8
Wal-Mart’s Fetishness About Secrecy
- Sued Amazon for “Stealing Its Computer Secrets”
 1997: Amazon Forced to Set Up Distribution Network
 Because Bertelsmann, the German media giant, went into a joint venture
with Barnes & Noble, one of the two largest book store chains in the US,
and launched an online book store to compete with Amazon
Bertelsmann bought the largest book distributor in the US, who was
Amazon’s Supplier
 Amazon Lacked Core Competence in Distribution
 Recruited 15 current employees of Wal-Mart and its vendors who had
intimate knowledge of Wal-Mart’s computer systems behind the super-
efficient distribution system.
 Amazon’s Stand
 “We’re not interested in other people’s trade secrets. We’re interested in
hiring the brightest, hardest working, and most talented people wherever
they might be.”
 Wal-Mart’s Response
 “There’s a lot of computer talent out there in the Valley. If you’re coming to
Bentonville, you’re looking for something special.”
Dr. Lakshmi Mohan 9
Sharing Sales Data With Suppliers
- Key to Low-Price Leadership

 Treat Suppliers as Partners, NOT Adversaries

 Implemented a Collaborative Planning, Forecasting and
Replenishment (CPFR) Program
 JIT Inventory Program Reduced Carrying Costs
- for Both Wal-Mart AND Its Suppliers
 Wal-Mart’s Cost of Goods : 5% - 10% Less Than Competitors

“CPFR has blurred the lines between Wal-Mart and the Supplier:
You’re both working to the same end: To sell as much product as
possible without either of us having too much inventory”.

Source: Computerworld, Sept. 30, 2002

Dr. Lakshmi Mohan 10
Wal-Mart’s Data Warehouse

Current Level of Storage Capacity : 570 Terabytes *

– Second only to the U.S. Government’s
– More than all of the Internet’s fixed pages
Information is shared with its own Buyers AND

* Wall Street Journal, Dec 3-4, 2005

Dr. Lakshmi Mohan 11

Value of the Data Warehouse
- Wal-Mart’s Buyers

 Helps to time merchandise deliveries -

Its shelves stay stocked, but NOT overstocked
“Predict what is going to happen,
instead of waiting for it to happen”
 Example : Analysis of purchases during Hurricane Charley
indicated products to be stocked in Florida’s Wal-Mart
ahead of Hurricane Frances that hit a few weeks later
“Not just the usual flash-lights, but, for example, strawberry
Pop-Tarts whose sales rates was 7 times the normal rate.
The Pre-Hurricane top-selling item was beer! ”
Source: New York Times, Nov 14, 2004
Dr. Lakshmi Mohan 12
Value of the Data Warehouse
- Suppliers
Wal-Mart opened its data vault in January 1999 to its
suppliers – cements Wal-Mart’s power over them
 Extranet built by Wal-Mart, Retail Link, allows suppliers to
see how their products are selling in different stores and
which ones need to be replenished.
 Vast and detailed data on sales and inventory exceeds
what many manufacturers know about their own

“They are very strict with their suppliers, but they

give them the data they need.”
Dr. Lakshmi Mohan 13
All That Data Is Mined!
- Doing it since 1990

Analysis of its 90 million shopping cart transactions per week

- To see how the purchases of the different items are related.
- Company can then better identify items to market together.
Obvious examples:
- Charcoal and tongs go alongside the barbecue grills
- Tiny baggies next to the pretzel boxes so Mom can pack snacks
for the kids
A not so obvious example!
- Customers who buy Barbie dolls (it sells one every 20 seconds)
have a 60% likelihood of buying one of three types of candy bars

Source: Forbes, Sep 5, 1997

Dr. Lakshmi Mohan 14
Micromerchandising Pays Off

Sales per square foot


Dollars ($)


2000 2001 2002

Dr. Lakshmi Mohan 15

Wal-Mart Stays Ahead of Competition!

Competitors began to adopt many of Wal-Mart’s IT innovations

including EDI and wireless bar code scanning in earnest in the mid-
1990s. Target’s vice-chairman acknowledges that his company is
“the world’s premier student of Wal-Mart”.
Still Wal-Mart’s productivity, measured by real sales per employee,
is higher than competitors.
Sales per employee, $ thousand
1995 1999

Wal-Mart 148 Wal-Mart 181

Kmart 109 Kmart 133

Sears 87 Sears 118

Dr. Lakshmi Mohan 16

The Wal-Mart Effect on Retail
- Wal-Mart’s Market Share: 9%
- But 40% more productive than its competitors

- Wal-Mart’s Market Share: 27%
- Productivity advantage widened to 48%

- Competitors reacted by adopting Wal-Mart’s innovations
- Managed to increase their productivity by 28%
- Wal-Mart raised the bar further by increasing its own efficiency
by another 20%
Source: “Retail: The Wal-Mart Effect”, The McKinsey Quarterly, 2002, No. 1
Dr. Lakshmi Mohan 17
Wal-Mart Changed Retailing Economics

Company Selling, General & Admin.

(Latest 12 months in 1994-95) Costs As a % of Sales
Wal-Mart 15.8%
(19.4% in 1984)
Circuit City 19.0%
K-Mart* 22.2%
Caldor* 24.4%
Bradlees* 29.4%
Federated Dept. Stores 33.3%
*Now in Chapter 11 bankruptcy proceedings
Source: Business Week, Nov 27, 1995
Dr. Lakshmi Mohan 18
IT Innovation Is NOT Enough…

… At least half of Wal-Mart’s productivity edge stems from

managerial innovations that improve the efficiency of stores and
have nothing to do with IT.

For Example:
 Cross-training of employees allows them to function
effectively in more than one department at a time.
 Better training of cashiers and monitoring of utilization
can increase productivity rates at checkout counters by
10% to 20%.

Dr. Lakshmi Mohan 19

Wal-Mart’s Management Process
Key Features
1. Low Wages… But “Golden Cuffs”
… Started a Profit-Sharing Plan in 1971 for ALL Employees
“ Based on profit growth, we contribute a % of the employee’s wages to
his/her plan. The employee can take it in cash or Wal-Mart stock when
they leave the company.”
“After nearly 25 years at the company, Shirley Cox, a cashier, still earned
barely $7.00 an hour. But she retired in her 40s on $250,000 of company
stock…. the stock is a prevailing theme for everyone at Wal-Mart… if you
hang around long enough, you can make a fortune on the stock.”
2. No class system, thus fending off all attempts at unionization
… ALL employees are called “associates” drumming home the notion that
managers and workers are partners
3. Promote from within
… In 1996, 5,900 workers moved up to management jobs
… 60% of the 30,000 managers are former hourly workers
Dr. Lakshmi Mohan 20
Wal-Mart’s Management Process
Key Features

4. Empowering of Front-Lines
… Wal-Mart gives them information at their finger-tips and the freedom to act.
“If someone asks me how we manage a $100 billion company, I tell them a store
at a time, and we constantly challenge that unit to make it the best.”
5. Keeping Track of Competitors’ Prices
“Later that afternoon, she leaves the store for an hour to compare prices at
nearby Kmart and Target stores. She is reimbursed mileage. If a competitor’s
prices are the same or lower than Wal-Mart’s, she consults with her supervisor
about cutting her own prices up to 5 %.”
6. Management will not tolerate “shrinkage”
Loss, theft and damage of inventory is capped at around 1%
Other retailers settle for 3% - 5%

Dr. Lakshmi Mohan 21

Wal-Mart’s Management Process
Key Features
7. Work Ethic, Disdain for Extravagance
and Customer-Centric
 Lead by Example: Walton was a model of frugality and modesty
who continually warned against complacency and sloth. He drove
around in an aged Ford pickup truck and wore inexpensive clothes.
 Wal-Mart’s corporate offices are cramped, dingy and cheaply
furnished. Walton believed that executives should spend more time
on the selling floor than behind desks.
 To make sure they did, Walton, an avid pilot, assembled a small air-
force that whisked them around the country, visiting Wal-Mart’s
Monday through Friday. On the road, they stayed in budget hotels,
and ate at family restaurants.
 Every Saturday, at a meeting in corporate headquarters in
Bentonville, they discussed their findings.
Dr. Lakshmi Mohan 22
“A Model of Frugality”
- In Practice

 No signs of opulence or ego at the company’s headquarters.

 Lee Scott, the current CEO, drives a VW beetle and shares a
hotel room. John Menzer, head of Wal-Mart International,
sits in a tiny office on the same floor as his staff.
 Executives take out their own rubbish, pay for their coffee
and are told to bring back pens from conferences !
 Another penny-saving practice: call vendors collect !
 Expenses on a buying trip should not exceed 1% of the cost
of the items purchased.

Dr. Lakshmi Mohan 23

In the Founder’s Words …

There’s no two ways about it: I’m cheap. Wal-Mart never

bought a jet until we hit $40B in sales and expanded as far
away as California and Maine, and even then they had to
practically tie me up and hold me down to do it.
A lot of what goes on these days with high-flying companies
and these overpaid CEOs, who’re really just looting from the
top and aren’t watching out for anybody but themselves,
really upsets me …
Why should we stay so cheap when we’re a $50+B company:
Because we believe in the value of the dollar. We exist to
provide value to our customers, which means that, in addition
to quality and service, we have to save them money. Every
time Wal-Mart spends one dollar foolishly, it comes right out
of our customers’ pockets.
Dr. Lakshmi Mohan 24
“The Bigger Wal-Mart Gets,
The More Essential It Is We Think Small”
Walton’s Management Principles (circa 1990, 1528 stores)
 For several decades now we’ve worked hard at building a company
that’s simple and streamlined and takes its directions from the
grassroots. It’s a pretty tall order for an outfit that is spreading out all
over the country as fast as we can.
 At our size today, there’s all sorts of pressure to regiment and
standardize and operate as a centrally driven chain.
 I’d hate to work at a place like that and I worry every single day about
Wal-Mart becoming that way.
 Nothing at all profound about any of our principles – in fact, they’re all
common sense. Most of them can be found in any number of books or
articles on management theory.
 But I think the way we have applied them at Wal-Mart has been
just a little bit different.
Dr. Lakshmi Mohan 25
Most Important,
Think One Store At a Time

That sounds easy enough, but its something we’ve constantly

had to stay on top of. Because our sales and earnings keep going
up doesn’t mean that we’re smarter than everyone else, or that we
can make it happen because we’re so big. What it means is that
our customers are supporting us. We know what we have to do:
keep lowering our prices, keep improving our service, and keep
making things better for the folks who shop in our stores.

That is not something we can simply do in some general way.

It isn’t something we can command from the executive offices
because we want it to happen.
We have to do it store by store, department by department,
customer by customer, associate by associate.
Dr. Lakshmi Mohan 26
Store Within A Store:
“Push Responsibility – And Authority – Down”
… “Toward that department head who’s stocking the shelves and
talking to the customer.”
What sets us apart is that we train our department heads to be managers of
their own businesses. In some cases, these businesses are bigger in annual
sales than a lot of our first Wal-Mart stores.
This works only because we decided a long time ago to share so much
information about the company with our associates, rather than keep
everything secretive.
We let them see all the numbers so they know exactly how they are
doing within the store and within the company. They know their
costs, their markup, their overhead and profit margins. It’s a big
responsibility and a big opportunity.
And, we give them incentives to want to win.
Dr. Lakshmi Mohan 27
Sales Review Meetings at Corporate
- One Store At A Time
 When we sit down at our Saturday morning meetings to talk about our business,
we like to spend time focusing on a single store, and how that store is doing
against a single competitor in that particular market. We talk about what that
store is doing right and what it’s doing wrong.
 Focus on a Single Store
 Enables us to improve that store
 Learn a particular way in which, say, the Panama City Beach Wal-Mart is
outsmarting the competition on beach towels.
 Get that information out to all our other beach stores around the country.
“I don’t know any other large retail company – Kmart, Sears, Penney’s – that
discusses their sales at the end of the week in any smaller breakdown than by
region. We talk about individual stores - if we’re talking about the store in
Harrisburg, Illinois, everybody here is expected to know something about that
store – how to measure its performance, whether a 20% increase is good or bad,
what the payroll is doing, who the competitors are, and how we’re doing.”
Dr. Lakshmi Mohan 28
Keep Your Ear To The Ground
 A computer is not – and will never be – a substitute for getting out in
your stores and learning what’s going on.
It can tell you down to the dime what you’ve sold. But it can never tell
you how much you could have sold.
 That’s why we at Wal-Mart are fanatics about our managers and buyers getting
off their chairs here in Bentonville, and getting out into those stores. We have
12 airplanes – only one of them is a jet, I’m proud to say – in our hangars out at
the Rogers, Arkansas, airport, and that’s why they are there.
We stay in the air to keep our ear to the ground.
 Our whole travel system is really an outgrowth of the way I managed those 9
stores back in 1960. I would get in my old Tri-Pacer and fly to those stores
once a week to find out what was selling what wasn’t, what the competition
was up to, what kind of job our managers were doing, what the stores were
looking like, what the customers had on their minds. Of course, I have
continued to visit stores almost constantly ever since, but with almost 2,000
stores today, a lot of other folks have to get in on the act.
Dr. Lakshmi Mohan 29
The Real “Hands-On, Get-Down-In-The-Store
Stuff” …
 Our district managers are doing the job that I did back in 1960.
But we also have 18 Regional Managers based here in
Bentonville. Every Monday morning, they pile into those airplanes
and head across the country to the stores in their region.
 It’s a condition of their employment. They stay out 3 to 4 days, usually
coming back in on Thursday. We’ve drummed into their heads that they
should come back with atleast one idea that will pay for the trip.
 Then they gather with the senior management of the company – all of
whom should also have been visiting stores earlier in the week if they
expect to ask any intelligent questions or know the first thing about
what’s going on – for our Friday morning merchandising meeting.
 In addition to the field work, we have computer printouts at the
meetings which tell us what’s selling and what’s not.
But the really valuable intelligence that surfaces in these
sessions is what everybody has brought from the stores.
Dr. Lakshmi Mohan 30
Bentonville, Arkansas, Does Not Come to the World
- The World Comes to Bentonville!

It Buys the Most

Company % of its total sales to Wal-Mart
Tandy Brands Accessories 39%
Clorox 23%
Revlon 20%
PJR Tobacco 20%
Procter & Gamble 17%

It Sells the Most Products

Company Wal-Mart’s U.S. market share
Dog Food 36%
Disposable diapers 32%
Photographic film 30%
Toothpaste 26%
Pain remedies 21%
Source: “One Nation Under Wal-Mart; Fortune, Feb. 18, 2003
Dr. Lakshmi Mohan 31
As the Company Grew,
It Exercised Its Muscle on Suppliers
 Wal-Mart meets with each Supplier to establish sales goals for
the coming year after review of sales results for past weeks and
 Keeps a Supplier Scorecard
 Punctuality of deliveries
 Data-documented problems about meeting orders or returns of
defective products by customers
 Suppliers not meeting sales targets would face tougher
negotiations in the future from the steely Wal-Mart buyers.
 RFID Mandate to Top 100 Suppliers in 2003
 In the Horizon: Scan-based Trading
 “Suppliers own each product until it is sold. Wal-Mart will never
take those orders onto its books. Think of the impact of shedding
$50B of inventory. The impact will probably be felt by suppliers,
but none are likely to complain.” … Meta Group Retail Analyst
Dr. Lakshmi Mohan 32
Wal-Mart Lives in a World of Supply & Command,
Instead of a World of Supply & Demand

 An Example: Cross-Docking
 Pre-assembled orders for individual stores from a
supplier’s truck go seamlessly from an unloading dock at
Wal-Mart’s Distribution Center directly into a truck bound
for stores …
Get goods into stores without even unpacking them
– let alone allowing them to sit in storage !
“Until we reached a billion dollars, a lot of suppliers just
ignored us way out here in the Arkansas Outback.
Now, of course, we’re too big too ignore.”
Dr. Lakshmi Mohan 33
Vendor-Financed Inventory !

 How Cross-Docking Works

 At Wal-Mart’s new distribution centers, P&G’s trucks are
unloaded directly to trucks that will head for Wal-Mart Stores.
The toothpaste is never even put on warehouse shelves. Once
a truck is full, it heads to the stores.
 Products are put on the shelf within 4 hours, and are usually
sold within 24 hours.
 Despite this tight delivery schedule, Wal-Mart has 10 days to
pay P&G.
 Benefit of Cross-Docking: Vendor-Financed Inventory
 “Sell the goods before we have to pay.”
Dr. Lakshmi Mohan 34
How Wal-Mart Drives a Tough Bargain

 Suppliers are shown to “the row”, a long corridor of drab,

windowless cubicles at the Bentonville headquarters, each
adorned with a notice that Wal-Mart’s buyers do not accept
 It’s like a scene from a bazaar: sweaters spill out of suitcases
and haggling over prices continues all day.
… “We were grapes, but now we are raisins. They suck you dry.”
 “There’s a difference between being tough and being
obnoxious. Every buyer has to be tough, That’s the job.”

Dr. Lakshmi Mohan 35

How Wal-Mart Drives a Tough Bargain

 Buyers are told: “You’re not negotiating for Wal-Mart. You are
negotiating for your customer. And your customer deserves the
best price you can get. Don’t ever feel sorry for a vendor. He knows
what he can sell for, and we want his bottom price.”
 Vendors are told to quote the best price:
“If they told me it’s a dollar, I would say, ‘Fine, I’ll consider it, but
I’m going to go to your competitor, and if he says 90 cents, he’s
going to get the business. So make sure a dollar is your best price.’
If that’s being hard-nosed then we ought to be as hard-nosed as we
can be. You have to be fair and upfront and honest, but you have to
drive your bargain because you’re dealing for millions and millions
of customers who expect the best price they can get. If you buy that
thing for $1.25, you’ve just bought somebody else’s inefficiency.”
Dr. Lakshmi Mohan 36
A Telling Example of Wal-Mart’s Growth
- Went Past Toys “R” Us by 1998

Toys “R” Us: Largest Toy Retailer in the U.S.

--- Value Proposition: Choice, Quality, Reasonable Price
--- Displaced Dept. Stores and small specialist toy retailers
--- 25% share of the market – Before Wal-Mart!
Wal-Mart: Largest Toy Retailer: 25% market share
--- Toys “R” Us Share: 15% (2003 Sales: $11B)
--- Value Proposition: One better than Toys “R” Us: Rock-Bottom PRICES
--- Super-efficient supply chain
--- Mass retailer, with a broad diverse array of products
--- Can afford to use toys as a loss-leader (lose money on toy sales) to lure in
customers who then purchase higher-margin goods
- Toys “R” Us just doesn’t have that luxury
Source: Wall Street Journal, August 31, 2004
Dr. Lakshmi Mohan 37
41 Years of Nonstop Growth

Dr. Lakshmi Mohan 38

“Sense & Respond” Management Process of
Wal-Mart : Why They are Unbeatable

Disappointing sales on Friday, Nov 26, 2004

(the day after Thanksgiving),

Traditionally the biggest shopping day of the year

- Wal-Mart knows it literally at the end of the day

Because of their state-of-the-art information system

Dr. Lakshmi Mohan 39

How did Wal-Mart Management respond to it?

1. Within a couple of hours, Michael Duke, the president of

Wal-Mart, had gotten messages on his Blackberry that
sales were off at stores around the country.

2. He brainstormed with execs and store managers about

which products to mark down.

3. A team met over the weekend to finalize the list and

contact suppliers.

4. On Tuesday, stores nationwide offered the new prices.

Source: www.fastcompany.com

Dr. Lakshmi Mohan 40

How did Wal-Mart Management respond to it?

5. On Thursday, Wal-Mart broadcast a video for its stores

suggesting new displays.

6. The next day, the displays were up, and a new ad

campaign was underway.

7. On Saturday, the company conducted a meeting with

500 employees asking for more ideas -- and acted on 21
of their recommendations.
The result? The retailer expects December
sales to be up three percent. Alth ugh it's not
the holiday season it had initially hoped for, it
represents a heck of a comeback.
Source: www.fastcompany.com
Dr. Lakshmi Mohan 41
Wal-Mart’s Exception Management
– Driven by IT
“At Wal-Mart, problems are referred to as
“exceptions”. We keep watching everything
that just happened. We are pretty near real-
time. We can tell people that they need to go
do something, and we are within hours,
depending on the event.”
“The event may be a truck’s failure to drop off or
pick up something. It could be the absence of
an important product in the store’s backroom
or in the distribution centre that serves the
store. Or, it could be an act of nature like the
hurricanes that descended, one after another,
on Florida in 2004”
Source: New York Times, Nov. 14, 2004
Dr. Lakshmi Mohan 42
Reflecting on the Wal-Mart Business Model
- What Is It Grounded On?

1. Use of IT
2. Cost Control
3. Partnership with Suppliers
4. Partnership with Employees
How did a Small-town Merchant get these Innovative Ideas?

Walton tells it all in his folksy, conversational style in his

autobiography; “Sam Walton: Made in America – My Story”,
Bantam Paperback, June 1993
He died in April 1992, after fighting a two-year battle against a
form of bone cancer.
Dr. Lakshmi Mohan 43
How did Walton Get IT?

 1966 – Store #5 was under construction

 I knew we had to get better organized than we were.
 We had lists of items we were supposed to carry, and we
were dependent on the people in the stores to keep
records of everything manually – this was at a time when
quite a few people were beginning to go into

Dr. Lakshmi Mohan 44

How did Walton Get IT?

 I had read a lot about that, and I was curious. I made

up my mind I was going to learn something about IBM
 So I enrolled in an IBM school for retailers in
Poughkeepsie, New York. One of the speakers was from
the National Mass Retailers’ Institute  Abe Marks, Head of
a Discount Retailer in Connecticut.
 I visited with Abe a number of times at his New York office,
and he was a very open guy. He shared with me how he
used computers to control your merchandise.
Dr. Lakshmi Mohan 45
“Best Utilizer of Information
To Control Absentee Ownerships”
“Sam knew that you are putting your stores where you, as management, aren’t.
If he wanted to grow, he had to learn to control it.”

Need Timely “I” to Service the Stores
- How much merchandise is in the store?
- What is selling? What is not?
- What is to be ordered? Marked down?

Key Metric: Inventory Turnover

 Ratio of Sales to Inventory
 Higher Inventory Turnover  Less Working Capital

“The man is a genius. He realized – even at the rudimentary level he was on in 1966,
operating those few stores that he had – that he couldn’t expand beyond that horizon
unless he had the capability to capture this information on paper so that he could
control his operations, no matter where they might be … Gave him the ability to open
many stores, and run them well, and be profitable.”
Dr. Lakshmi Mohan 46
Growth of Wal-Mart Stores
Year # of Stores Sales (million $)
1962 1
1966 5
1968 13
1970* 32 31
1972 51 78
1974 78 168
1976 125 340
1978 195 678
1980 276 1,200
1990 1,528 26,000
* Went public on Oct 1, 1970
100 shares in 1970 @ $16.50
 Nine Two-For-One Stock Splits
 51,200 shares in 1990 @ $62.50
 Initial Investment of $1,650 in 1970 worth $3M in 1990
Dr. Lakshmi Mohan 47
How Did Walton Manage IT?

 I knew I’d never be any whizbang computer guy myself, so I

had another reason for going to that school. I was looking to
have a good, bright systems person, and I figured I might find
one there.
 That’s where I first met Ron Mayer, then the smart young CFO
at Duckwall Stores in Abilene, Kansas. I targeted him as the
guy we needed at Wal-Mart, and started wooing him right there.
 Like so many of them, he wasn’t interested just then in moving
to Bentonville, Arkansas, to work for somebody he knew next
to nothing about. Later on, we changed his mind … He joined
Wal-Mart in 1968 as VP for finance and distribution.

Dr. Lakshmi Mohan 48

How Did Walton Manage IT?

 From Ron Mayer’s arrival on, we as a company have been

ahead of most other retailers in investing in sophisticated
equipment and technology.
 The funny thing is: everybody at Wal-Mart knows that I have
fought all these technology expenditures as hard as I could.
The truth is: I did want it. I knew we needed it, but I just couldn’t
bring myself to say, OK, sure, spend what you need.
 I always questioned everything. It was important to me to
make them think that may be the technology wasn’t as good
as they thought it was, or may be it wasn’t the end-all they
promised it would be.
Dr. Lakshmi Mohan 49
Growth of IT in Wal-Mart

 1978: Bar Coding & SKU Inventory System

When Jack Shewmaker became our COO in 1978, he worked really hard at
getting me to invest in more and better computer systems, so that we could
track sales and inventories across the company, especially in-store
 1983: Satellite Communication System
Once we had those scanners in the stores, we had all this data pouring into
Bentonvile over phone lines. Those lines have a limited capacity, so as we
added more and more stores, we had a real logjam of stuff coming in from the
field. I like my numbers as quickly as I can get them. The quicker we get that
information, the quicker we can act on it.
“The technology did not really exist to do this for a retailer in the early Eighties.
But we got together with Macom & Hughes Corporation and worked out a
contract … Committed $24 M to build it … It was not an immediate success.
But we got it working. Now, everybody has one” - Jack Shewmaker
Dr. Lakshmi Mohan 50
Value of IT in Wal-Mart
- According to Walton
A few years ago, we built this huge building right next to our offices
– around 135,000 sq. ft. – just to house the computers, and everyone
at the time told me how much room we’d have to grow. I mean it was
really empty in there just 2 or 3 years ago. Well, already it’s
completely full of computer equipment. And, when I look back, it’s
no wonder …
We’ve spent almost $700 M building up the computer and
satellite systems we have …
I’m told it’s the largest Civilian database in the world
– even bigger than AT&T’s.
None of that matters to me. What I like about it is the kind
of information we can pull out of it on a moment’s notice.
Dr. Lakshmi Mohan 51
Value of IT in Wal-Mart
- According to Walton

We keep a 65-week rolling history of every single item we stock.

I can pick anything, say a little combination TV/VCR like I use
here in my office, and tell you exactly how many of them we’ve
bought over the last year and a quarter and exactly how many of
them we’ve sold. Not only overall, but in every region, every
district, every store.
It makes it tough for a vendor to know more about how his
product is doing in our stores than we do.

We’ve always known that information gives you a certain

power, but the degree to which we can retrieve it in our
computer does give us the competitive advantage.

Dr. Lakshmi Mohan 52

Partnership with Suppliers
- Started with P&G
One day my close friend, George Billingslay, asked me to join him
on a canoe trip down the Spring River. He said he was bringing
along an old friend named Lou Pritchett, who was a V.P. with P&G
at the time, and who wanted to meet me and talk about some
things relating to our two companies. So I went along, and it turned
out to be the most productive float trip I ever took with George.
During that time on the river, we both decided that the entire
relationship between vendor and retailer was at issue. Both
focused on the end-user – the customer – but each did it
independently of the other. No sharing of information, no planning
together, no systems coordination.
We were simply two giant entities going our separate ways,
oblivious to the excess costs created by this obsolete system.
Dr. Lakshmi Mohan 53
Sharing of Information
- Key for “Win-Win” Partnership
We assembled the top ten officers of both the companies in
Bentonville for two days of soul-searching and thinking.
Within three months, we had created a P&G / Wal-Mart team to
build a whole new kind of vendor relationship.
We formed a partnership to conduct our business, with one of
the most important outcomes being that we started sharing
information by computer.
P&G could monitor Wal-Mart’s sales and inventory data,
and then use that information to make its own production
and shipping plans more efficiently.
We broke new ground by using IT to manage our business
together, instead of just to audit it.
Dr. Lakshmi Mohan 54
Employees: Key to Customer Loyalty

The way management treats the associates is exactly how the

associates will then treat the customers.
And if the associates treat the customers well, the customers will
retain again …
Satisfied, loyal, repeat customer are at the heart of Wal-Mart’s
spectacular profit margins, and those customers are loyal to us
because our associates treat them better than salespeople in
other stores do.
Our relationships with the associates is a partnership in the truest
sense. It’s the only reason our company has been consistently able
to outperform the competition – and even our own expectations.
Dr. Lakshmi Mohan 55
Sam Walton’s Confession …

Now I would love to tell you that this partnership was all part of my
master plan from the beginning, that as a young man I had same
sort of vision of a great retailer company in which all the
employees would be awarded a stake in the business That I saw
them having the opportunity to participate in many of the
decisions that would determine the profitability of that business.
… I would love to tell you all that, but unfortunately none of it
would be true!
In the beginning, I was so chintzy I really didn’t pay my employees
well. The managers were fine, but we really didn’t do much for the
clerks except pay them an hourly wage, and I guess that wage was
as little as we could get by with at the time.

Dr. Lakshmi Mohan 56

Then, Eureka !
- Walton Saw the Light …
In the very early days of the business, I was so doggoned competitive,
and so determined to do well, that I was blinded to the most basic truth,
really the principle that became the foundation of Wal-Mart’s success …
Back then, I was so obsessed with turning in a profit margin of 6% or
higher; and, no matter how you slice it in the retail business, payroll is
one of the most important parts of overhead. Overhead is one of the
most crucial things you have to fight to maintain your profit margin
That was true then, and it’s still true today …
The larger truth that I failed to see turned out to be another of these
paradoxes – like the discounters’ principle of the less you charge, the
more you will earn …
AND, HERE IT IS: The more you share profits with your
associates, whether it’s in salaries or incentives or bonuses or
stock discounts – the more profit will accrue to the company.
Dr. Lakshmi Mohan 57
“The Idea for Sharing Profits & Benefits
… NOT From Me, But From Helen”
“We were on a trip, and we were talking about the high salary that Sam was
earning, and about all the money and benefits that he was paying the officers of
the company in order to keep his top people. He explained that the people in the
store didn’t get any of those benefits ….
I think it was the first time I realized how little the company was doing for
them. I suggested to him that, unless those people were on board, the
top people might not last long either ….
I remember it because he didn’t really appreciate my point of view then. Later
on, I knew he was thinking about it, and when he bought it, he really bought it.”
“We didn’t include our associates in the initial, managers-only profit sharing
plan when we took the company public in 1970. There was nobody around
preaching that philosophy in those days…
In 1971, we corrected my big error of the year before, and started a profit-
sharing plan for all the associates …
Profit-sharing has been the carrot that’s kept Wal-Mart headed forward.”
Dr. Lakshmi Mohan 58
“One of the Most Successful Bonuses
- Our Shrink Incentive Plan”

 Unaccounted-for inventory loss – theft – is one of the

biggest enemies of profitability in the retail business.
 So, in 1980, we decided the best way to control the
problem was to share with the associates any
profitability the company gained by reducing shrinkage.
 If a store holds shrinkage below the company’s goal,
every associate in that store gets a bonus that could be
as much as $200.
 Our shrinkage % is about half the industry average.

Dr. Lakshmi Mohan 59

Employees Monitor Shrinkage !

 Most associates don’t want to think that they’re working

alongside anyone who does enjoy stealing.
 So, under a plan like this, where you are directly
rewarded for honesty, there’s a real incentive to not
ignore any customers who might want to walk off with
something, or, worse, to allow any of your fellow
associates to fall into that trap.
 Everybody in that store becomes a partner in trying to
stop shrinkage, and when they succeed, they, along with
the company in which they already hold stock, share in
the reward.

Dr. Lakshmi Mohan 60

Empowering Front-Line Employees
- Sharing Rather Than Hoarding, Information
 The only way they can possibly do their jobs to the best of their
 Obviously, some of that information flows to the street. But I just believe
the value of sharing it with our associates is much greater than any
downside there may be to sharing it with folks on the outside. It doesn’t
seem to have hurt us much so far.
 Nowadays, I see management articles about information sharing as a
new source of power in corporations. We’ve been doing this from the
days when we only had a handful of stores. We’ve kept doing it as we
have grown.
 That’s why we’ve spent hundreds of millions of dollars on computers and
satellites – to spread all the little details around the company as fast as
possible. But they were worth the cost. It’s only because of IT that our
store managers have a really clear sense of how they’re doing most of
the time. They get all kinds of information transmitted to them over the
satellite on an amazingly timely basis like, for example, up-to the-minute
sales date that tells them what’s selling in their own store.
Dr. Lakshmi Mohan 61
Obsessive Focus on Costs
- “Control Your Expenses Better Than Your Competition”

“Every time Wal-Mart spends one dollar foolishly, it

comes out of our customers’ pockets. Every time we
save them a dollar, that puts us one more step
ahead of the competition, which is where we always
plan to be.” – Sam Walton
Fifteen years after his death, frugality is still
ingrained in Wal-Mart’s culture.

Dr. Lakshmi Mohan 62

Walton Led By Example
 Frugality came naturally to Walton, who was a country boy. He
drove an old pick-up truck, and flew economy class.
 “I’m not saying every company should necessarily be as chintzy as
Wal-Mart. Everybody’s not in the discount business, consumed by
trying to save every possible dollar for their customers … I feel it’s
upto me as a leader to set an example. It’s not fair for me to ride
one way and ask everybody else to ride another way, The minute
you do that, you start building resentment and your whole team
idea begins to strain at the seams.”
 “If American management is going to say to their workers that
we’re all in this together, they’re going to have to stop this
foolishness of paying themselves $3M and $4M bonuses every
year and riding around everywhere in limos and corporate jets
like they’re so much better than everybody else.”
Dr. Lakshmi Mohan 63
The “2 Percent Formula”
- For Corporate Overhead Expenses
 “When we had about 5 stores, I tried to operate on a 2%
general office expense structure. I just pulled it out of the air.
Most companies then charged 5% of their sales to run their
offices. But we have always operated lean. We have had our
people do more than in their companies. It has been our
heritage, our obsession, that we would be more productive
and more efficient than our competition.”
 We have not changed that basic formula from 5 stores to
2,000 stores. In fact, we are actually operating at a far lower
% today in office overhead than we did 30 years ago. And,
that includes tremendous expenses for computer support
and distribution center support – everything that we supply
centrally in the way of support for the stores.
Dr. Lakshmi Mohan 64
Stay Lean, Fight Bureaucracy

 A lot of first-time visitors are shocked by our executive

offices. Most people say my office and those of the other
Wal-Mart executives look like something you’d find in a
truck terminal … We sure as heck won’t win any interior
decorating awards, but they’re all we need, and they must
be working fine. Just ask our shareholders.
 A lot of bureaucracy is really the product of some empire
builder’s ego. Some folks have a tendency to build up big
staffs around them to emphasize their own importance.
We don’t need any of that at Wal-Mart.
 If you’re not serving the customer, or supporting the
folks who do, we don’t need you.
Dr. Lakshmi Mohan 65
Wal-Mart Retreats from Germany in July 2006
 Entered Germany in 1997
 Bought two struggling German retail chains
 95 stores in 1999
 Persisted for 8 years before admitting defeat
 Too afraid to tarnish its image …
by pulling out of the world’s third largest economy
 Fiscal 2006 Sales: $ 2.5 B; Losses: $ 127.5 M
 Total International Sales: $ 63 B; Global Sales: $ 312 B
 Struggled from the outset against stiff local competition
 Closed 10 of the initial 95 stores
 “Tried German managers, US managers, and a combination of the two”.
 Sold its 85 stores to Germany’s largest retailer, Metro
 Pre-tax Loss: $ 1 B on the Deal
Source: Financial Times, July 29-30, 2006
Dr. Lakshmi Mohan 66
Germany’s Discount Retail Market
- A Tough One to Crack
 German shoppers are frugal …
“People in this country only ever look out for one thing –
 This trait should have been a boon for Wal-Mart
- the guardian of EDLP
 But Germany already had a number of homegrown
 Regulations restrict store hours and other retailing basics
 Carrefour, Wal-Mart’s biggest global competitor, operates in
29 countries … But has steered clear of Germany

“It is clearly a very challenging market for us that we

have not figured out.” – Wal-Mart CEO, April 2006

Dr. Lakshmi Mohan 67

German Discounters
- Proved to be A Real Match for Wal-Mart
 Power of Privately-held Discounters – Aldi & Lidl
 Grown their market share to 40% vs. < 2% for Wal-Mart
 Had discovered the efficiency of drab out-of-town store sites
and economies of scale that made their suppliers sweat
 Kept costs AND prices low
 Underpriced Wal-Mart
 Sell a limited selection in each store … 850 to 1,000 items
vs. 100,000 at Wal-Mart
 Stock mainly their own brands
 80% of German consumers are 20 minutes from an Aldi
Aldi has invaded Wal-Mart’s home turf
– opened more than 700 stores in the U.S.
Source: Asian Wall Street Journal, July 31, 2006
Dr. Lakshmi Mohan 68
BIG Mistake Made by Wal-Mart
- Exported Its Culture Wholesale
… Did NOT Adapt to the German Market
 Little feel for German shoppers
 They care more about price than having their bags packed.
 “The German consumer does not like extra service as he’s
worried that he’ll have to pay for it.”
 Bag-packers were reassigned !
 Little feel for German staff as well
 “They hid in the toilets to escape the morning Wal-Mart
“We screwed up in Germany. Our biggest mistake was putting
our name up before we had the service and low prices”
- Head of Wal-Mart International, The Economist, Dec 6, 2001

Dr. Lakshmi Mohan 69

Germany Was Not The Only Failure …

 Before Germany, South Korea

 Sold its 16 stores in May 2006
 Another Problem Child: Japan
 Took a stake in the Seiyu store chain – over 400 stores in 2002
 Faced Problems Similar to Germany
 Sluggish domestic consumer market
 Challenge of adapting its global strengths to the different
cultural expectations of its Japanese customers

Dr. Lakshmi Mohan 70

The Japan Expansion
- Seiyu Store Chain Still Hangs Heavily
 Took Full Management Control of Seiyu
 Invested an additional $565M in Dec 2005
 Became the majority owner of Seiyu
 Ended the uneasy effort to cooperate with the previous
Japanese-led management
 Dispatched former COO of Wal-Mart International to take
command of the Seiyu operation
 Challenges in Japan
 Low-cost format is not established in the market
 Will Japanese consumers respond to its efforts to turn
Seiyu, a conventional Japanese department store, into
something closer to its discount store model?
Source: The Financial Times, July 29-30, 2006
Dr. Lakshmi Mohan 71
Maturing US Business
- Impacting Wal-Mart Share Price

 Sales Growth at Existing Stores Sliding Since the Late 1990s

 FY06: 3% same-store sales gains vs. 9% in 1999; > 6% for Target
 Q2 Profit in FY07 likely to fall 23% despite 14% rise in sales …
First time in 10 years
 Stock Price Down 35% from Peak in Dec 1999
 Despite $11B Earnings on $312B Revenue for FY06
… 10% rise from previous year
 US Division: 78% of Total Sales
 BIG Challenge in the US Market
 Can’t rely solely on building hundreds of new stores each year
to perpetuate growth
 Must find ways to generate more sales at existing US stores
Source: Wall Street Journal, Sept 7, 2006 & Economic Times, Aug 15, 2006

Dr. Lakshmi Mohan 72

The Price of Becoming a Behemoth
- A Rash of Lawsuits & Negative Publicity
 Its Giant Stores: Symbols of “Big Retail”
 Blamed for the destruction of entire communities
 “Eliminates jobs when it moves into a new community”
 “Drives down retail wages in that community since Wal-Mart’s
low price forces other businesses to lower their prices and
hence their wages.
 Company’s Pursuit of Low Prices
 Crushes Kmarts and mom-and-pops alike
 Decline in U.S. manufacturing jobs as both Wal-Mart & its
Vendors turn to cheaper overseas sources
 Class Action Suit for Sex-Discrimination
 6 women filed a suit in 2001 alleging that Wal-Mart doesn’t fairly
pay & promote women
 Federal judge ruled in 2004 that the suit could proceed as a
class action covering 1.6M current and former female employees
Dr. Lakshmi Mohan 73
Is There Such a Thing as
“Too Much Information”?

 Wal-Mart’s Unusually Detail-Rich Human-Resources

 Contains data on …
… Performance reviews
… Seniority & Time Spent with the Company
… Which Store ?
 Judge Has Allowed Use of the Database
 To compare whether men and women working in the same
store were paid differently
 Whether women were fairly promoted compared to men

Dr. Lakshmi Mohan 74

Wal-Mart CEO Rebuts Critics …
 “ We used to believe you could run the company out of Bentonville, and if you
took care of your business, employees and customers, everyone would leave
us alone.”
 “What we’re trying to do now is reach out. Where we’re wrong, we change, so
our detractors don’t have a foothold in attacking us. Where we’re right, we will
fight and take each issue to the wall.”

 Impact of Lawsuits
“Sam Walton believed that there were only two types of employees he wouldn’t
give a second chance to – those who abused people and those who stole” …
… We have 1.5 million employees, including every kind of person known to
man – racists, sexists, etc. If someone made a negative racial comment in the
past, instead of dealing with it severely, we might have transferred him.
… In today’s world, he has to go.
… “The number of people not doing the right thing is a small %. But it is unfair
when that number is seen as representative of a wider institutional pattern.”
Source: Wall Street Journal, Oct 6, 2004
Dr. Lakshmi Mohan 75
Response to Charges of Discrimination

 Started companywide computer postings of management

 Hired a Director of Diversity
 Executive managers’ bonuses based on diversity targets
 CEO personally stands to forfeit $600K of his bonus if the
company falls short of company goals
 CEO is also getting out more, meeting with investors,
community groups and the media
… Playing the role of the Company’s public defender and explainer
… To avoid future growth being constrained by political barriers,
Wal-Mart will have to raise its head from Bentonville,
and worry more about how it is perceived

Dr. Lakshmi Mohan 76

Response to Charges of “Low Wages”

 The United Food & Commercial Workers union has been

successful in creating in people’s minds the perception that we
pay inadequate wages & benefits.
 I like the free-enterprise system in this country …
… Two-thirds of our managers are promoted from the ranks of
hourly employees.
… Over 75% of our workers are full-time.
… We paid $2B last year in health benefits.
… We pay more than our Competitors.
… We opened a store in Phoenix recently and 5,000 people
applied for 500 openings.

Dr. Lakshmi Mohan 77

“Driving Out Competitors”

I get irritated as sin when I read that we historically sell our

toys at a loss…
… We have a phenomenal toy business,
and our profits are exceptionally good.
… It’s one of the highest margin businesses.
… We say we sell for less, which means, if a competitor’s
prices are lower, we will drop our prices, even if it means
below our cost.

Dr. Lakshmi Mohan 78

Unpopularity is Hard for
Wal-Mart’s Executives to Understand …
… After all, EDLP has been good for consumers
 Criticism Leveled Against Wal-Mart:
 “To benefit your customers, you drive down prices as low as possible.
But doesn’t that encourage manufacturers to move jobs overseas,
which puts some of your customers out of work, so they can’t afford to
buy as much at Wal-Mart. Isn’t that a vicious circle and does that really
benefit America ?”
 CEO’s Response:
 “We have a history of working with companies like P&G, Kellogg,
PepsiCo to drive out unnecessary costs – inventory buildup, packaging
expenses – from the business and pass the savings onto the customer.”
 “Say we do business with a certain manufacturer and give them all the
shelf space for their products. And other retailers are sourcing a similar
item overseas and offering greater value. Ultimately, the customer will
make the decision. Manufacturers are putting themselves at risk.”
Dr. Lakshmi Mohan 79
Wal-Mart’s Global Ambitions

 International Revenues: 20% of Total Sales in FY06

… Fastest-growing business segment
 Focused on Asia & Latin America
… Bought a stake in Central America’s largest retailer in late 2005
– gained a majority stake in March 2006
… 60 retail outlets & 30,000 employees in China
… “We have plans to open 20 new stores in China this year.”
 Exit from South Korea & Germany in 2006
… Put it farther from its target of getting a third of its sales and profit growth
… Fallen behind Carrefour in expanding globally
– will operate in 11 countries outside the U.S., vs. 29 Carrefor
 Deepened its India Focus in 2006
… Set up a liaism office in Bangalore to undertake its Indian market research
… “The Indian market is much less competitive than Germany and Korea, and its
middle class is hungry for modern retailing prices and products sold by
Western retailers like Wal-Mart”
Dr. Lakshmi Mohan
Source: Economic Times, August 14, 2006
Wal-Mart Opens Doors to Unions
- In China: August 2006

 After years of fighting unionization efforts at its stores in the U.S., Wal-
Mart decided to allow unions in China after years of pressure from the
All China Federation of Trade Unions
 Unionization is required under Chinese law.
 “Wal-Mart Supports China’s Efforts to Build a Harmonious Society.”
– Company Announcement
 Will collaborate with the All China Federation because the two groups had the
“mutual aim” to establish grassroots unions
 Unions in China do not have the history of bargaining power that unions in
Europe and the U.S. have
 “The function of Chinese unions is to urge workers to participate in the work,
care about their welfare, and to organize recreational activities for them.”
 Statement from the All China Federation:
 “If Wal-Mart union members are subjected to unfair treatment at work, unions
at the national, provincial, city and district level will strive all out to protect
employees’ legitimate rights.”
Dr. Lakshmi Mohan 81
To Boost Sales, Wal-Mart Drops
One-Size-Fits-All Approach

 Break Its 3,400 U.S. Stores into 6 Different Models

 Affluent Shoppers, African-Americans, Empty-Nesters, Hispanics,
Suburbanite & Rural Residents
 “Wal-Mart is all things to all people.
By offering customers all the same things, you end up under-serving everyone
because you don’t have an offering that is specific to that customer segment.”
– CEO of U.S. stores and architect of the new approach.
– Huge shift for a Company that grew on the strength of standardization
 Test Run of Localization Theory in Mexico
– Six Different formats with different merchandise mix
to better target different income levels
… The Bodega stores catered to low-income customers with basic breads,
while the Superama stores lured the affluent with rich deserts and
fancier display cases
… Sales per sq.ft rose by 10%
Dr. Lakshmi Mohan 82
“Address Specific Customer Segments With a
Precison That Better Meets Their Needs & Wants”

 Segmentation of U.S. Market based on ethnicity and lifestyle in

addition to income
 New Store in Plano, Texas: Affluent Shoppers
– 3,000 different items targeting the well-heeled
… About 3% of the approx. 100,000 items in an average Wal-Mart
– Twice the number of organic products
– Expanded the wine section with 1,000 bottles,
at prices ranging from $4 to $500
– Removed the Gun Department
– Expanded the Home-Fitness Equipment area

Dr. Lakshmi Mohan 83

Hears the Customer’s Voice !

– Interviewed 50 women in North Dallas

… Complained how cluttered Wal-Mart store seems
– Made changes, large and small
… “Welcome” instead of “Entrance” over the front stores
… Aisles are at least a foot wider than at the typical Wal-Mart
… Special displays of products that normally mark Wal-Mart’s main aisles
have been removed
… Research showed that after about 8 ft., shoppers’ eyes glaze over and
they stop noticing what is on a shelf
… Designed shelves that jut out with a rounded edge where special items
are displayed.

Dr. Lakshmi Mohan 84

Another Example: New Store
In Largely White Suburb of Chicago

 Determined that Shoppers would be Predominantly African-

American from nearby Chicago
 Study of the area showed it had a high number of premature births
 Store stocked up on clothes and baby-bottle nipples geared for
preemies … Both have been strong sellers
 Doubled the amount of cosmetics for African-American women
 Increased the gospel, rhythm and blues, and hip-hop music section
to 92 ft., almost 4 times the size at an average Wal-mart

“This Wal-Mart has stuff for all your needs

- the right music, make up, baby things.”
… A 19-year-old African-American shopper,
who is holding a friend’s baby.
Source: Wall Street Journal, Sept 7, 2006
Dr. Lakshmi Mohan 85
Localization Strategy Entailed
Shaking Up the Management Structure

 Beefed up its Marketing Dept., adding Ph.D.s in areas such

as ethnology, food science, and research and evaluation
… Segmented its shoppers using census data and customer
feedback, among other things, into demographic groups.
 Moved 27 Regional GMs from Bentonville to the Regions
… “By reading the newspapers, watching the TV stations and
being part of the community, I have a better flavour for
what’s going on.” Regional GM for 132 stores in Illinois,
who moved to a Chicago suburb.
 Gave Local Store Managers More Say in What Products to
… Added new field staff responsible for following trends in
fashion, food and consumer electronics
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First Venture Into Interactive Consumer-Generated Advertising
- To Reach Out to Fashion-Conscious Youth Consumers

Back-to-school Season Marketing Campaign in July 2006

– “The Hub-School My Way”, jointly sponsored by Sony and put
together by a unit of Omnicon, the world’s biggest marketing agency.
An online competition inviting high school students
– “To check out what styles are on the horizon”,
and to “express your style”
– “Create your own web pages and videos”
– Winners to be used in a Wal-Mart cable television commercial,
possibly also for cinema release.
“We are just scratching the surface. Instead of a small number of ad
agency executives creating the best ads, millions of people will be
contributing to creating the best ads – a huge change that will really
enhance brand advertising.”
– Chief Executive of ViTrue, which provides marketers with the technology
to create interactive advertising.
Source: The Financial Times, July 21, 2006
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Back to Basics for Wal-Mart
- A Flexible Workforce
 A New Plan for Manning Stores:
Employees’ Work Schedule Tailored to the Demands of Customer
Shopping Habits
– To improve the bottom-line
… Despite the risk of more bad PR on worker issues
… Something to cheer its loudest critics now, the investors
 Invested in Software-Generated Workforce Optimization
– Meet heavy shopping hours with more help
– Scale down during slower periods, generally weekday afternoons
– Shorter lines at the register mean more happy customers who are
more likely to return
– More important to the business than a cashier, unhappy about
spreading her work week over 4 days instead of 3, who quits and
does not return
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Will It Work ?

 Piloted in 39 Stores – Roll-out to All U.S. Locations by end-2007

– “Our surveys indicate that customers had a better shopping
– Affects 1M workers
 Already Drawing Union Wrath
– But, of course, that is nothing new.
– The United Food & Commercial Workers already devote 10 pages of
their Web site to Wal-Mart bashing, so what’s one more
– Two other major chains, Target & Lowes, have already rolled out
such a plan in the U.S.
But, when you’re the biggest player on the block, everything
you do will draw reaction.
Source: Times of India, Jan 9, 2007
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At the End of the Day …

… Few doubt that Wal-Mart has both the patience and the
resources to stay on top.

“Never underestimate them. They foster an image as country

hicks. It makes the kill more of a surprise.” – A Retail Analyst
Certainly, Wal-Mart has made mistakes, but it has also got
more things right than its rivals, who mistake its small-town
simplicity for naivety at their peril.
“Just because we are simple doesn’t mean we are
unintelligent.” – Wal-Mart CEO

Source: The Economist, Dec 6, 2001

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