Can anyone help me with the attached case study on Wal-Mart? Answering the following questions:Late in 2005, Wal-Mart announced a series of sweeping new strategic initiatives. Each student is to write a case analysis of Wal-Mart’s current strategy and challenges. The paper should be 10-12 typed pages, due June 28 2015, must address each of the 6 items listed below. Include at least three (3) sources in addition to the references provided.What threats and challenges is Wal-Mart currently facing?What priorities did Wal-Mart CEO Lee Scott set in his Wal-Mart: Twenty-First Century Leadership address (24 Oct 2005)?Wal-Marts Board discussed proposals to meet (some of) these challenges at a board retreat in 2005. Discuss these initiatives as outlined in the Supplemental Benefits Documentation: Board of Directors Retreat FY06″ See also Wal-Mart health cost strategy NYT 26Oct2005. Was additional damage done to Wal-Mart by the leaking to the public of the Board Benefits Strategy document?Comment on two recent Wal-Mart initiatives from the standpoints of: a) Strategy and b) PR.Discuss Wal-Marts strategic social challenges from the standpoint of Bonini, Sheila M. J.; Mendonca, Lenny T.; Oppenheim, Jeremy M. When social issues become strategic. McKinsey Quarterly. 2006 no. 2.Were all of the issues Wal-Mart now faces already evident in the 2003 case study Additional sources:Wal-Mart as Leviathan New York Review of Books. 16 Dec 2004Lee Scott on why Wal-Mart is playing nicer. Business Week. 03 Oct 2005. 94/5.Wal-Mart Experimental Stores: Environments of scale. By: Payton, Paula. European Retail Digest, Winter2005 Issue 48, p7-12, 6p.Wal-Mart and Carrefour as Home-Region Multinationals. By: Rugman, Alan M.; Dossett, Aaron. European Retail Digest, Winter2005 Issue 48, p61-65.9-704-430REV. JANUARY 30, 2004PANKAJ GHEMAWATSTEPHEN BRADLEYKEN MARKWal-Mart Stores in 2003For the fiscal year ending January 31, 2003, Wal-Mart Stores, a retailer, posted net income of $8billion on sales of $245 billion, up 21% and 12% respectively from the previous year. Wal-Mart hadbecome the worlds largest company and, with 1.4 million employees, the worlds largest privateemployer. Twenty million shoppers visited its stores each day and 82% of U.S. households had madeat least one purchase at Wal-Mart during the previous year.1 In March 2003, Fortune ranked itforthe first timeas Americas most admired as well as largest company. And people began to discusswhether Wal-Mart could rack up $1 trillion in sales within 10 years.Amidst all this fanfare, Wal-Marts CEO, H. Lee Scott, Jr., had recently rated his company at about6 on a 10-point scale.2 Asked whether the late Sam Walton, Wal-Marts legendary founder, would likethe company if he could see it in 2003, Scott had a measured response:In many ways he would be pleased. In other ways, I think he would not. . . . I think Samwould be disappointed to think that here we are much later, and we havent figured out a wayto judge whether our store managers are treating people appropriately. I think he would bedisappointed because he would probably think our expenses are too high and our competitorsare still better than we are in certain categories, and why arent we moving faster there. ButSam had a way of criticizing himself and the company that motivated you to get better.3Scott foresaw another 10 to 20 years of growth in the companys core businesses of discountinggeneral merchandise and food in the U.S. What were finding is that you can put a lot more storesinto a market than you ever dreamed you could.4 But Wal-Mart was also looking at new areas forgrowth. Geographic scope had been expanded by international operations, initiated in the early1990s, that already accounted for 17% of sales, 15% of earnings before interest and taxes (EBIT), and32% of total assets. And horizontal scope would be expanded by the plans, announced in January2003, to introduce basic financial services for U.S. customers.Discount Retailing in the United States5Discount retailing began in the mid-1950s in the United States, with operators selling generalmerchandise in sparsely furnished and staffed stores. Discounters challenged traditional departmentstores by offering lower prices. Wal-Mart, Kmart, and Targetthe three largest discount retailers inthe United States in 2003all started up in 1962. That year, discount retailing generated $4.25 billion________________________________________________________________________________________________________________Professor Pankaj Ghemawat prepared this case primarily from published sources with the assistance of Professor Stephen P. Bradley andResearch Associate Ken A. Mark. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve asendorsements, sources of primary data, or illustrations of effective or ineffective management.Copyright 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may bereproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical,photocopying, recording, or otherwisewithout the permission of Harvard Business School.This document is authorized for use only by Jania Evans ([email protected]). Copying or posting is an infringement of copyright. Please [email protected] or 800-988-0886 for additional copies.704-430Wal-Mart Stores in 2003in sales in the United States. By the end of the 1960s, format sales had grown to $28 billion,surpassing department stores $20 billion.Discount retailers sales stagnated in real terms during the 1970s, reflecting a generally difficulteconomic climate, and many large chains as well as small ones went bankrupt. But the ban on resaleprice maintenance in the United States in 1975, among other factors, set the stage for furtherpenetration, over the next decade, by large, no-frills retailers at the expense of smaller, more serviceoriented retailers. After decades of increases, the total number of retail establishments in the UnitedStates fell by 20% after the ban.6By 1981, discount retailing generated $66 billion in sales in the United States, or virtually the sameamount, in real terms, as in the late 1960s. Kmart had become the largest discount retailer and WalMart the second largest (up from about number 25 in the early 1970s). Growth resumed in the 1980s,but at a more modest rate than in the 1960s, and was driven to a significant extent by innovationssuch as denser displays, point-of-sale systems, and UPC scanning.The 1980s also saw the first experiments in the United States with hypermarkets, a giant Europeanformat that combined general merchandise and grocery items. While hypermarkets never took off inthe United States, experiments with them led Wal-Mart and others, including Kmart and Target, toevolve a somewhat smaller format, dubbed the supercenter, which was rolled out in the 1990s. (WalMart reportedly tried out 14 different variants on the concept.)Supercenters grew to account for more than $100 billion in sales by 2001 and blurred thetraditional boundaries between discount retailers and supermarkets. Sales of traditional discountstores, in contrast, grew in the first few years of the 1990s but then stagnated and amounted to $137billion in 2002 (see Exhibit 1).7 The number of discount retailers declined, with the casualtiesincluding Kmart in early 2002 in the biggest retail bankruptcy ever. Concentration in the supermarketcategory, which was roughly as large as the discount store and supercenter categories combined, hadheld steady for many years but also increased significantly in the late 1990s as a result of a wave ofmergers and acquisitions.8Wal-Mart Stores, Inc.Wal-Mart was headquartered in Bentonville, Arkansas, close to where that state met Oklahoma,Kansas, and Missouri (all in the west central United States). At the end of fiscal year 2003, Wal-Martoperated 4,688 stores with a total area of 561 million square feet. Approximately 73% of the stores and81% of the square footage were located in the United States. Wal-Mart commanded as much as 30%of the U.S. market in a number of household staples such as disposable diapers and shampoo. Forfiscal year 2004, it planned to spend $11 billion in capital, much of it to add 48 million square feet in465 new stores, 335 in the United States and 130 in other countries. Comparable store sales growthrates had recently averaged 5%6% for the key domestic formats.Exhibit 2 provides 10 years of financial and other data for Wal-Mart and Exhibit 3 tracks somesummary statistics over a 30-year period. Exhibit 4 maps Wal-Marts principal businesses on agrowth-profitability grid, and Exhibit 5 compares its economics with its largest direct competitors indiscount retailing in fiscal year 2003Target and Kmart. Target priced at a 10%15% premium toWal-Mart, while Kmarts bankruptcy was often attributed to its attempt to match Wal-Marts prices.The next subsection reviews Wal-Marts history, particularly the legacy of its founder, SamWalton, and the one after it describes Wal-Marts domestic store formats. The subsequent sectionsdiscuss the elements of Wal-Marts business system.2This document is authorized for use only by Jania Evans ([email protected]). Copying or posting is an infringement of copyright. Please [email protected] or 800-988-0886 for additional copies.Wal-Mart Stores in 2003704-430Founders LegacySam Walton, the founder of Wal-Mart, was born in Kingfisher, Oklahoma, in 1918 and raised inMissouri. His energy and drive were evident early on in his athletic attainments, student leadership,and entrepreneurial ventures.9 After college, Walton became a management trainee with J. C. Penney,a department store. At Penney, Walton was exposed to a number of policies that he would eventuallyimitate, including calling employees associates to foster a sense of partnership, letting store managersbuy small stakes in the stores that they ran, and supplementing store-level management withextensive visits from headquarters.In 1945, Walton opened his first storea small variety format franchised from the Ben Franklinchain.a It was as a Ben Franklin franchisee that Walton, prodded by a manufacturers representative,first developed his low price/high volume orientation. He also tried to lower his costs of goods soldby ordering more merchandise directly from manufacturers or their agents, since Ben Franklincharged a 25% markup. He continued, however, to focus on small towns close to home.By the beginning of the 1960s, Waltons chain had become the largest Ben Franklin franchisee andthe largest independent variety store operator in the United States but, with 15 stores, its absolutescale of operations remained modest. Walton began to look for a bigger opportunity and learnedabout the development of discount retailers in the U.S. Northeast. According to Walton,I started running all over the country, studying the concept. . . . Then closer to home, HerbGibson started his stores with a simple philosophy: Buy it low, stack it high, sell it cheap. Hesold it cheaper than anybody ever had before, and he sold more of it. [When] he branched outto the square in Fayetteville and started competing with our variety stores . . . we had to act.He was the only one discounting out this way, and, because I had made all those trips backEast, I was probably one of the few out here who understood what he was up to.10In 1962, Sam and his brother Bud opened the first Wal-Mart Discount City store, in Rogers,Arkansas. This marked an attempt to make the discount format work in a much smaller town thansuggested by conventional wisdomby offering prices that were virtually unheard of in suchlocations. But there were weaknesses. David Glass, a rising financial star whom Walton was trying tohire away from a drug retailer, recalled the opening of the second Wal-Mart store as follows:It was the worst retail store I had ever seen. Sam had a couple of trucks of watermelons inand stacked them on the sidewalk. He had a donkey ride out in the parking lot. It was about115 degrees, and the watermelons began to pop, and the donkey began to do what donkeys do,and it all mixed together and ran all over the parking lot. And when you went inside the store,the mess just continued, having been tracked in all over the floor. He was a nice fellow, but Iwrote him off. It was just terrible.11Glass suggested to Walton that he find something else to do.Walton overcame these early problems, and the number of Wal-Mart stores increased steadily inthe second half of the 1960s, to 18 by 1970. But the cost of goods sold remained high, partly becauseWal-Mart lacked its own warehouse. In order to finance one and to accelerate store expansion,Walton took the company public in 1970 and raised $3.3 million.Walton supplemented internal talent by hiring senior managers externally, some from outsideretailing, many with skills in nontraditional areas. David Glass, who finally joined as Executivea Walton phased out his Ben Franklin stores by 1976.3This document is authorized for use only by Jania Evans ([email protected]). Copying or posting is an infringement of copyright. Please [email protected] or 800-988-0886 for additional copies.704-430Wal-Mart Stores in 2003Vice President of Finance and Distribution in 1976, was an example. He and others pushed formassive investments in information technology (IT), broadly aimed at knowing where every itemwas at all times in the Wal-Mart system by building automated distribution centers and linking themby computers to both stores and suppliers. This made Wal-Mart one of the leaders in a general ITdriven transformation of retailing that, for example, shrank inventory-taking lags from months in the1950s to weeks by the 1970s and close to real time by the 1990s.One IT application that particularly appealed to Walton was the private satellite network installedin the early 1980s. With his and other top managers capacity to visit stores and distribution centersbecoming more and more limited, creating another channel of communication seemed veryattractive. But even for that investment, Walton needed to be persuaded. In addition to innovation,Walton placed a premium on imitation and adaptation as well. He cruised not only his own stores,but also competitors, tape measure and recorder in hand, and had crashed at least one vehicle whilecounting the number of others in a competitors parking lot. He also cheerfully admitted toborrowing specific ideas from all over the world: self-service (from another Ben Franklinfranchisee), company cheers (from a visit to a Korean tennis ball manufacturer), greeters (from a WalMart store in Louisiana), calling employees associates (a practice at J. C. Penney that he wasreminded of while vacationing in England), SAMs Club (the first significant new format for WalMart, inspired by the Price Club), and Hypermart USA (from a Carrefour that he visited in Brazil).Waltons emphasis on learning was wedded to an obsession with frugality and a plain-folksmanner. He simultaneously emphasized taking care of employees and tightly controlledcompensation at all levels. Walton also exploited his charisma to the hilt in forging connections withemployees. Any one of what became hundreds of thousands of people was supposed to be able tocall him at his home phone number, which was publicly listed. These and other efforts atcommunication, aimed to create a strong company culture in which there was pride in the idea thatWal-Mart had its own way of doing thingsand moments of shared fun. Thus, Walton even dancedthe hula on Wall Street in a grass skirt after losing a bet to David Glass.Perhaps the greatest common factor in these diverse facets of Waltons personality was a totalabsorption in the business. Until cancer finally forced him to cut back on his workload, he worked atleast six days a week, often starting as early as 4 a.m.except on Saturdays, when it might be as earlyas 2 or 3 a.m. so as to get a head start on preparing for the meeting scheduled to start at 7:30 a.m. SamWalton passed away in 1992, weeks after receiving the Presidential Medal of Freedom, the highestcivilian honor in the United States. His eldest son, S. Robson Walton, was then named chairman ofthe board of directors. However, no family members were actively involved in managing Wal-Mart,although the family continued to hold about 38% of the equity in the company.David Glass, who had taken over as CEO from Walton in 1988, continued in that position until2000. Under him, Wal-Marts revenues grew from $20 billion to nearly $200 billion, although thisrequired looking beyond the core domestic discount retailing format. The quest for growth continuedunder Lee Scott, who took over as CEO from Glass, and who had also played a key role in developingWal-Marts distribution network before holding top-level positions in merchandising and storeoperations. But, looking back, Scott painted an evolutionary picture of change at Wal-Mart:I think Wal-Mart is a story of evolution not revolution. So much of what we have done havebeen things that we actually saw other people doing and integrated into what we were doing.All of those things have just kind of incrementally, month by month, year by year, cometogether to create something that is interwoven and meaningful. Individual decisions at thetime those decisions were made were not in strategy sessions that laid out 12 years fromnowheres what well look like and well put these individual pieces together along thisschedule to achieve this goal.124This document is authorized for use only by Jania Evans ([email protected]). Copying or posting is an infringement of copyright. Please [email protected] or 800-988-0886 for additional copies.Wal-Mart Stores in 2003704-430Retailing FormatsIn the United States, Wal-Mart stores were grouped into Division One (comprising DiscountStores, Supercenters, and Neighborhood Markets) and SAMs Clubs (see Exhibit 6). Outside theUnited States, retail formats varied by country and were grouped under Wal-Marts InternationalDivision (see Appendix A and Exhibit 12).The Discount Store format continued to account for the largest number of Wal-Mart stores, buttotal domestic numbers and square footage had peaked in 1995 and then declined with theconversion of many such stores to Supercenters. The average size of these stores had increased from42,000 square feet in 1975 to 57,000 square feet in 1985 and 91,000 square feet by 1995. Such stores hadalso been kept current with the development of flexible space and an expansion of retail categories.Wal-Mart estimated that the average Discount Store required a potential customer base of at least150,000 people to be viable.13A Supercenter was a larger format that added a full-line grocery store and ancillary or specialtydepartments to a Discount Store. Wal-Mart introduced the Supercenter in 1988, with the intent ofdriving increased traffic to the general merchandise departments through the food offering.However, Wal-Marts operational efficiencies made its food business profitable in and of itself. WalMarts Supercenters were typically larger, more focused on food (35% of sales), and contained moreancillary businesses and services than direct competitors. By 2003, fully 42% of the total U.S.population, or 118 million people, had access to a Wal-Mart Supercenter.14In 2001, 7% of the Supercenters sales growth came from new shoppers and 21% from existingshoppers who increased their purchase volume. The remaining 72% was diverted from otherchannels, including one-third from competing grocery stores and 22% from Wal-Marts otherDivision One stores.15 It was estimated that a Supercenter needed a potential customer base of 76,000people to be viable. Supercenters operating margins were estimated to have averaged 6.6% recentlyand would improve as more of them matured, but were considered unlikely to rise to the levelsreached by Discount Stores (9%10%) given the narrow margins on food in general and Wal-Martsespecially aggressive pricing. Exhibit 7 summarizes pro forma estimates of the NPV (net presentvalue) of a new Supercenter versus a new Discount Store.Neighborhood Markets let Wal-Mart enter space-constrained suburban areas as part of its effort topack ever more stores into a domestic market of relatively fixed size. Introduced in 1998, thesesmaller stores, dubbed smallMarts, focused on groceries but also offered limited lines of generalmerchandise, drugstore items, and photo processing. Wal-Mart had used a relatively cautiousapproach in rolling out Neighborhood Markets. However, as CEO Lee Scott told analysts: Dontinterpret that to mean were disappointed in Neighborhood Markets.16SAMs Clubs, introduced in 1983, were warehouse clubs that constituted a separate organizationaldivision at Wal-Mart. Pioneered in the 1970s, the warehouse club format used high-volume, low-costmerchandising, bulk buying, and rapidly changing assortments of relatively few SKUs in cavernouswarehouses to discount even more deeply than the traditional discount formatgross marginsaveraged 10%, versus 25%35% for traditional discounters. This new format had inspired a rash ofentry, particularly in the early 1980s, but had not lived up to its early promiseat least for Wal-Mart.SAMs had once led in the club segment, but had been surpassed by Costco in terms of total sales andcustomer spending per visit. According to one observer, SAMs did not develop the consumer sideas effectively as Costco did, particularly in the perishables area, which is where Costco gets a lot offairly high-margin sales that SAMs does not. And consumers are proud to tell people they boughtsomething at Costco, whereas shopping at SAMs is not something they brag about.17 Kevin Turner,brought over from Supercenters to become the president and CEO of SAMs, explained its plans for5This document is authorized for use only by Jania Evans ([email protected]). Copying or posting is an infringement of copyright. Please [email protected] or 800-988-0886 for additional copies.704-430Wal-Mart Stores in 20032003: Our focus will not be on becoming the dominant club but on being profitable at a lowervolume rate.18In addition to its physical stores, Wal-Mart founded Walmart.com in 2000 as a wholly ownedsubsidiary that was intended to be its internet play. Walmart.com generated about $100 million in2003 and improved Wal-Marts access to higher-income consumers (earning $75,000 and above).19 Inaddition, it also helped to drive store traffic (for example, digital photos ordered online could bepicked up in the stores).ProcurementIn the early days, procurement essentially meant going on buying trips. Walton, ever frugal, haddecreed that expenses on such trips should not exceed 1% of the value of purchases. This often meantsharing hotel rooms and walking instead of taking taxis.20 Top managers at Wal-Mart still pinchedpennies in these and other ways. Wal-Mart even called its suppliers collect.By fiscal year 2003, Wal-Marts total cost of goods sold was $192 billion, a figure thatunlikethose for some other retailersdid not include the logistics costs of its extensive distributionnetwork. It also reported spending a total of $107 billion on U.S. suppliers during the year. Supplierswere now significantly more willing to come to Bentonville. And Wal-Mart itself had reached backfarther in the supply chain over time, toward dealing with the ultimate manufacturer. Thus, in theearly 1990s, it began to bypass manufacturers representatives, so as to save 3% to 4% on goodsformerly sourced through them. This disintermediation was challenged in the courts but upheld. Andas its private label business expanded, Wal-Mart increasingly dealt with unbranded suppliersi.e.,took more of the marketing function on itself, and opened offices around the world to overseefactories. In 2002, Wal-Mart terminated its relationship with its longtime procurement agent andhired hundreds of that firms employees instead.21When suppliers visited Bentonville, they were not allowed to entertain buyers or visit them intheir offices but instead, were shown into small, interview rooms equipped with only a table and fourchairs. There, the negotiation over terms was boiled down to a single price on the invoice. Accordingto one observer, Its not even negotiated anymore. No one would dare come in with a half-a**edprice.22 Most other retailers negotiated invoice prices that did not include additional costs tosuppliers such as return management fees, co-operative advertising, and promotional spending.Although Wal-Mart bargained hard, it had also tried to build partnerships with a widening circleof suppliers. One key initiative was the sharing of information electronically. Wal-Mart had usedelectronic data interchange (EDI) since the 1980s to communicate with suppliers. In the early 1990s,EDI was expanded to include forecasting, planning, replenishing, and shipping applications. Atroughly the same time, Wal-Marts Retail Link private exchange began to provide its thousands ofsuppliers computer access to point-of-sale data on the two-year sales trends and the inventories oftheir products on a store-by-store basis. Retail Link reportedly cost Wal-Mart $4 billion to developand perfect; suppliers had to make substantial investments to implement the new system, includinghardware purchases and the costs of hiring, training, and employing Retail Link analysts.23 By 2002,all of Wal-Marts suppliers were required to use Retail Link. This prompted Wal-Marts competitorsto band together to create public exchanges such as World Wide Retail Exchange and GNX, to reducetransaction costs through auctions and reverse auctions.24 However, as of late 2002, Wal-Martremained the only source of (close to) real-time retail data for a large community of suppliers.256This document is authorized for use only by Jania Evans ([email protected]). Copying or posting is an infringement of copyright. Please [email protected] or 800-988-0886 for additional copies.Wal-Mart Stores in 2003704-430Supply chain management of this sort…Late in 2005, Wal-Mart announced a series of sweeping new strategic initiatives. Each student is to write a case analysis of Wal-Mart’s current strategy and challenges. The paper should be 10-12 typed pages, due June 28 2015, must address each of the 6 items listed below. Include at least three (3) sources in addition to the references provided.Additional sources:Wal-Mart as Leviathan New York Review of Books. 16 Dec 2004Lee Scott on why Wal-Mart is playing nicer. Business Week. 03 Oct 2005. 94/5.Wal-Mart Experimental Stores: Environments of scale. By: Payton, Paula. European Retail Digest, Winter2005 Issue 48, p7-12, 6p.Wal-Mart and Carrefour as Home-Region Multinationals. By: Rugman, Alan M.; Dossett, Aaron. European Retail Digest, Winter2005 Issue 48, p61-65.9-704-430REV. JANUARY 30, 2004PANKAJ GHEMAWATSTEPHEN BRADLEYKEN MARKWal-Mart Stores in 2003For the fiscal year ending January 31, 2003, Wal-Mart Stores, a retailer, posted net income of $8billion on sales of $245 billion, up 21% and 12% respectively from the previous year. Wal-Mart hadbecome the worlds largest company and, with 1.4 million employees, the worlds largest privateemployer. Twenty million shoppers visited its stores each day and 82% of U.S. households had madeat least one purchase at Wal-Mart during the previous year.1 In March 2003, Fortune ranked itforthe first timeas Americas most admired as well as largest company. And people began to discusswhether Wal-Mart could rack up $1 trillion in sales within 10 years.Amidst all this fanfare, Wal-Marts CEO, H. Lee Scott, Jr., had recently rated his company at about6 on a 10-point scale.2 Asked whether the late Sam Walton, Wal-Marts legendary founder, would likethe company if he could see it in 2003, Scott had a measured response:In many ways he would be pleased. In other ways, I think he would not. . . . I think Samwould be disappointed to think that here we are much later, and we havent figured out a wayto judge whether our store managers are treating people appropriately. I think he would bedisappointed because he would probably think our expenses are too high and our competitorsare still better than we are in certain categories, and why arent we moving faster there. ButSam had a way of criticizing himself and the company that motivated you to get better.3Scott foresaw another 10 to 20 years of growth in the companys core businesses of discountinggeneral merchandise and food in the U.S. What were finding is that you can put a lot more storesinto a market than you ever dreamed you could.4 But Wal-Mart was also looking at new areas forgrowth. Geographic scope had been expanded by international operations, initiated in the early1990s, that already accounted for 17% of sales, 15% of earnings before interest and taxes (EBIT), and32% of total assets. And horizontal scope would be expanded by the plans, announced in January2003, to introduce basic financial services for U.S. customers.Discount Retailing in the United States5Discount retailing began in the mid-1950s in the United States, with operators selling generalmerchandise in sparsely furnished and staffed stores. Discounters challenged traditional departmentstores by offering lower prices. Wal-Mart, Kmart, and Targetthe three largest discount retailers inthe United States in 2003all started up in 1962. That year, discount retailing generated $4.25 billion________________________________________________________________________________________________________________Professor Pankaj Ghemawat prepared this case primarily from published sources with the assistance of Professor Stephen P. Bradley andResearch Associate Ken A. Mark. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve asendorsements, sources of primary data, or illustrations of effective or ineffective management.Copyright 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may bereproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical,photocopying, recording, or otherwisewithout the permission of Harvard Business School.This document is authorized for use only by Jania Evans ([email protected]). Copying or posting is an infringement of copyright. Please [email protected] or 800-988-0886 for additional copies.704-430Wal-Mart Stores in 2003in sales in the United States. By the end of the 1960s, format sales had grown to $28 billion,surpassing department stores $20 billion.Discount retailers sales stagnated in real terms during the 1970s, reflecting a generally difficulteconomic climate, and many large chains as well as small ones went bankrupt. But the ban on resaleprice maintenance in the United States in 1975, among other factors, set the stage for furtherpenetration, over the next decade, by large, no-frills retailers at the expense of smaller, more serviceoriented retailers. After decades of increases, the total number of retail establishments in the UnitedStates fell by 20% after the ban.6By 1981, discount retailing generated $66 billion in sales in the United States, or virtually the sameamount, in real terms, as in the late 1960s. Kmart had become the largest discount retailer and WalMart the second largest (up from about number 25 in the early 1970s). Growth resumed in the 1980s,but at a more modest rate than in the 1960s, and was driven to a significant extent by innovationssuch as denser displays, point-of-sale systems, and UPC scanning.The 1980s also saw the first experiments in the United States with hypermarkets, a giant Europeanformat that combined general merchandise and grocery items. While hypermarkets never took off inthe United States, experiments with them led Wal-Mart and others, including Kmart and Target, toevolve a somewhat smaller format, dubbed the supercenter, which was rolled out in the 1990s. (WalMart reportedly tried out 14 different variants on the concept.)Supercenters grew to account for more than $100 billion in sales by 2001 and blurred thetraditional boundaries between discount retailers and supermarkets. Sales of traditional discountstores, in contrast, grew in the first few years of the 1990s but then stagnated and amounted to $137billion in 2002 (see Exhibit 1).7 The number of discount retailers declined, with the casualtiesincluding Kmart in early 2002 in the biggest retail bankruptcy ever. Concentration in the supermarketcategory, which was roughly as large as the discount store and supercenter categories combined, hadheld steady for many years but also increased significantly in the late 1990s as a result of a wave ofmergers and acquisitions.8Wal-Mart Stores, Inc.Wal-Mart was headquartered in Bentonville, Arkansas, close to where that state met Oklahoma,Kansas, and Missouri (all in the west central United States). At the end of fiscal year 2003, Wal-Martoperated 4,688 stores with a total area of 561 million square feet. Approximately 73% of the stores and81% of the square footage were located in the United States. Wal-Mart commanded as much as 30%of the U.S. market in a number of household staples such as disposable diapers and shampoo. Forfiscal year 2004, it planned to spend $11 billion in capital, much of it to add 48 million square feet in465 new stores, 335 in the United States and 130 in other countries. Comparable store sales growthrates had recently averaged 5%6% for the key domestic formats.Exhibit 2 provides 10 years of financial and other data for Wal-Mart and Exhibit 3 tracks somesummary statistics over a 30-year period. Exhibit 4 maps Wal-Marts principal businesses on agrowth-profitability grid, and Exhibit 5 compares its economics with its largest direct competitors indiscount retailing in fiscal year 2003Target and Kmart. Target priced at a 10%15% premium toWal-Mart, while Kmarts bankruptcy was often attributed to its attempt to match Wal-Marts prices.The next subsection reviews Wal-Marts history, particularly the legacy of its founder, SamWalton, and the one after it describes Wal-Marts domestic store formats. The subsequent sectionsdiscuss the elements of Wal-Marts business system.2This document is authorized for use only by Jania Evans ([email protected]). Copying or posting is an infringement of copyright. Please [email protected] or 800-988-0886 for additional copies.Wal-Mart Stores in 2003704-430Founders LegacySam Walton, the founder of Wal-Mart, was born in Kingfisher, Oklahoma, in 1918 and raised inMissouri. His energy and drive were evident early on in his athletic attainments, student leadership,and entrepreneurial ventures.9 After college, Walton became a management trainee with J. C. Penney,a department store. At Penney, Walton was exposed to a number of policies that he would eventuallyimitate, including calling employees associates to foster a sense of partnership, letting store managersbuy small stakes in the stores that they ran, and supplementing store-level management withextensive visits from headquarters.In 1945, Walton opened his first storea small variety format franchised from the Ben Franklinchain.a It was as a Ben Franklin franchisee that Walton, prodded by a manufacturers representative,first developed his low price/high volume orientation. He also tried to lower his costs of goods soldby ordering more merchandise directly from manufacturers or their agents, since Ben Franklincharged a 25% markup. He continued, however, to focus on small towns close to home.By the beginning of the 1960s, Waltons chain had become the largest Ben Franklin franchisee andthe largest independent variety store operator in the United States but, with 15 stores, its absolutescale of operations remained modest. Walton began to look for a bigger opportunity and learnedabout the development of discount retailers in the U.S. Northeast. According to Walton,I started running all over the country, studying the concept. . . . Then closer to home, HerbGibson started his stores with a simple philosophy: Buy it low, stack it high, sell it cheap. Hesold it cheaper than anybody ever had before, and he sold more of it. [When] he branched outto the square in Fayetteville and started competing with our variety stores . . . we had to act.He was the only one discounting out this way, and, because I had made all those trips backEast, I was probably one of the few out here who understood what he was up to.10In 1962, Sam and his brother Bud opened the first Wal-Mart Discount City store, in Rogers,Arkansas. This marked an attempt to make the discount format work in a much smaller town thansuggested by conventional wisdomby offering prices that were virtually unheard of in suchlocations. But there were weaknesses. David Glass, a rising financial star whom Walton was trying tohire away from a drug retailer, recalled the opening of the second Wal-Mart store as follows:It was the worst retail store I had ever seen. Sam had a couple of trucks of watermelons inand stacked them on the sidewalk. He had a donkey ride out in the parking lot. It was about115 degrees, and the watermelons began to pop, and the donkey began to do what donkeys do,and it all mixed together and ran all over the parking lot. And when you went inside the store,the mess just continued, having been tracked in all over the floor. He was a nice fellow, but Iwrote him off. It was just terrible.11Glass suggested to Walton that he find something else to do.Walton overcame these early problems, and the number of Wal-Mart stores increased steadily inthe second half of the 1960s, to 18 by 1970. But the cost of goods sold remained high, partly becauseWal-Mart lacked its own warehouse. In order to finance one and to accelerate store expansion,Walton took the company public in 1970 and raised $3.3 million.Walton supplemented internal talent by hiring senior managers externally, some from outsideretailing, many with skills in nontraditional areas. David Glass, who finally joined as Executivea Walton phased out his Ben Franklin stores by 1976.3This document is authorized for use only by Jania Evans ([email protected]). Copying or posting is an infringement of copyright. Please [email protected] or 800-988-0886 for additional copies.704-430Wal-Mart Stores in 2003Vice President of Finance and Distribution in 1976, was an example. He and others pushed formassive investments in information technology (IT), broadly aimed at knowing where every itemwas at all times in the Wal-Mart system by building automated distribution centers and linking themby computers to both stores and suppliers. This made Wal-Mart one of the leaders in a general ITdriven transformation of retailing that, for example, shrank inventory-taking lags from months in the1950s to weeks by the 1970s and close to real time by the 1990s.One IT application that particularly appealed to Walton was the private satellite network installedin the early 1980s. With his and other top managers capacity to visit stores and distribution centersbecoming more and more limited, creating another channel of communication seemed veryattractive. But even for that investment, Walton needed to be persuaded. In addition to innovation,Walton placed a premium on imitation and adaptation as well. He cruised not only his own stores,but also competitors, tape measure and recorder in hand, and had crashed at least one vehicle whilecounting the number of others in a competitors parking lot. He also cheerfully admitted toborrowing specific ideas from all over the world: self-service (from another Ben Franklinfranchisee), company cheers (from a visit to a Korean tennis ball manufacturer), greeters (from a WalMart store in Louisiana), calling employees associates (a practice at J. C. Penney that he wasreminded of while vacationing in England), SAMs Club (the first significant new format for WalMart, inspired by the Price Club), and Hypermart USA (from a Carrefour that he visited in Brazil).Waltons emphasis on learning was wedded to an obsession with frugality and a plain-folksmanner. He simultaneously emphasized taking care of employees and tightly controlledcompensation at all levels. Walton also exploited his charisma to the hilt in forging connections withemployees. Any one of what became hundreds of thousands of people was supposed to be able tocall him at his home phone number, which was publicly listed. These and other efforts atcommunication, aimed to create a strong company culture in which there was pride in the idea thatWal-Mart had its own way of doing thingsand moments of shared fun. Thus, Walton even dancedthe hula on Wall Street in a grass skirt after losing a bet to David Glass.Perhaps the greatest common factor in these diverse facets of Waltons personality was a totalabsorption in the business. Until cancer finally forced him to cut back on his workload, he worked atleast six days a week, often starting as early as 4 a.m.except on Saturdays, when it might be as earlyas 2 or 3 a.m. so as to get a head start on preparing for the meeting scheduled to start at 7:30 a.m. SamWalton passed away in 1992, weeks after receiving the Presidential Medal of Freedom, the highestcivilian honor in the United States. His eldest son, S. Robson Walton, was then named chairman ofthe board of directors. However, no family members were actively involved in managing Wal-Mart,although the family continued to hold about 38% of the equity in the company.David Glass, who had taken over as CEO from Walton in 1988, continued in that position until2000. Under him, Wal-Marts revenues grew from $20 billion to nearly $200 billion, although thisrequired looking beyond the core domestic discount retailing format. The quest for growth continuedunder Lee Scott, who took over as CEO from Glass, and who had also played a key role in developingWal-Marts distribution network before holding top-level positions in merchandising and storeoperations. But, looking back, Scott painted an evolutionary picture of change at Wal-Mart:I think Wal-Mart is a story of evolution not revolution. So much of what we have done havebeen things that we actually saw other people doing and integrated into what we were doing.All of those things have just kind of incrementally, month by month, year by year, cometogether to create something that is interwoven and meaningful. Individual decisions at thetime those decisions were made were not in strategy sessions that laid out 12 years fromnowheres what well look like and well put these individual pieces together along thisschedule to achieve this goal.124This document is authorized for use only by Jania Evans ([email protected]). Copying or posting is an infringement of copyright. Please [email protected] or 800-988-0886 for additional copies.Wal-Mart Stores in 2003704-430Retailing FormatsIn the United States, Wal-Mart stores were grouped into Division One (comprising DiscountStores, Supercenters, and Neighborhood Markets) and SAMs Clubs (see Exhibit 6). Outside theUnited States, retail formats varied by country and were grouped under Wal-Marts InternationalDivision (see Appendix A and Exhibit 12).The Discount Store format continued to account for the largest number of Wal-Mart stores, buttotal domestic numbers and square footage had peaked in 1995 and then declined with theconversion of many such stores to Supercenters. The average size of these stores had increased from42,000 square feet in 1975 to 57,000 square feet in 1985 and 91,000 square feet by 1995. Such stores hadalso been kept current with the development of flexible space and an expansion of retail categories.Wal-Mart estimated that the average Discount Store required a potential customer base of at least150,000 people to be viable.13A Supercenter was a larger format that added a full-line grocery store and ancillary or specialtydepartments to a Discount Store. Wal-Mart introduced the Supercenter in 1988, with the intent ofdriving increased traffic to the general merchandise departments through the food offering.However, Wal-Marts operational efficiencies made its food business profitable in and of itself. WalMarts Supercenters were typically larger, more focused on food (35% of sales), and contained moreancillary businesses and services than direct competitors. By 2003, fully 42% of the total U.S.population, or 118 million people, had access to a Wal-Mart Supercenter.14In 2001, 7% of the Supercenters sales growth came from new shoppers and 21% from existingshoppers who increased their purchase volume. The remaining 72% was diverted from otherchannels, including one-third from competing grocery stores and 22% from Wal-Marts otherDivision One stores.15 It was estimated that a Supercenter needed a potential customer base of 76,000people to be viable. Supercenters operating margins were estimated to have averaged 6.6% recentlyand would improve as more of them matured, but were considered unlikely to rise to the levelsreached by Discount Stores (9%10%) given the narrow margins on food in general and Wal-Martsespecially aggressive pricing. Exhibit 7 summarizes pro forma estimates of the NPV (net presentvalue) of a new Supercenter versus a new Discount Store.Neighborhood Markets let Wal-Mart enter space-constrained suburban areas as part of its effort topack ever more stores into a domestic market of relatively fixed size. Introduced in 1998, thesesmaller stores, dubbed smallMarts, focused on groceries but also offered limited lines of generalmerchandise, drugstore items, and photo processing. Wal-Mart had used a relatively cautiousapproach in rolling out Neighborhood Markets. However, as CEO Lee Scott told analysts: Dontinterpret that to mean were disappointed in Neighborhood Markets.16SAMs Clubs, introduced in 1983, were warehouse clubs that constituted a separate organizationaldivision at Wal-Mart. Pioneered in the 1970s, the warehouse club format used high-volume, low-costmerchandising, bulk buying, and rapidly changing assortments of relatively few SKUs in cavernouswarehouses to discount even more deeply than the traditional discount formatgross marginsaveraged 10%, versus 25%35% for traditional discounters. This new format had inspired a rash ofentry, particularly in the early 1980s, but had not lived up to its early promiseat least for Wal-Mart.SAMs had once led in the club segment, but had been surpassed by Costco in terms of total sales andcustomer spending per visit. According to one observer, SAMs did not develop the consumer sideas effectively as Costco did, particularly in the perishables area, which is where Costco gets a lot offairly high-margin sales that SAMs does not. And consumers are proud to tell people they boughtsomething at Costco, whereas shopping at SAMs is not something they brag about.17 Kevin Turner,brought over from Supercenters to become the president and CEO of SAMs, explained its plans for5This document is authorized for use only by Jania Evans ([email protected]). Copying or posting is an infringement of copyright. Please [email protected] or 800-988-0886 for additional copies.704-430Wal-Mart Stores in 20032003: Our focus will not be on becoming the dominant club but on being profitable at a lowervolume rate.18In addition to its physical stores, Wal-Mart founded Walmart.com in 2000 as a wholly ownedsubsidiary that was intended to be its internet play. Walmart.com generated about $100 million in2003 and improved Wal-Marts access to higher-income consumers (earning $75,000 and above).19 Inaddition, it also helped to drive store traffic (for example, digital photos ordered online could bepicked up in the stores).ProcurementIn the early days, procurement essentially meant going on buying trips. Walton, ever frugal, haddecreed that expenses on such trips should not exceed 1% of the value of purchases. This often meantsharing hotel rooms and walking instead of taking taxis.20 Top managers at Wal-Mart still pinchedpennies in these and other ways. Wal-Mart even called its suppliers collect.By fiscal year 2003, Wal-Marts total cost of goods sold was $192 billion, a figure thatunlikethose for some other retailersdid not include the logistics costs of its extensive distributionnetwork. It also reported spending a total of $107 billion on U.S. suppliers during the year. Supplierswere now significantly more willing to come to Bentonville. And Wal-Mart itself had reached backfarther in the supply chain over time, toward dealing with the ultimate manufacturer. Thus, in theearly 1990s, it began to bypass manufacturers representatives, so as to save 3% to 4% on goodsformerly sourced through them. This disintermediation was challenged in the courts but upheld. Andas its private label business expanded, Wal-Mart increasingly dealt with unbranded suppliersi.e.,took more of the marketing function on itself, and opened offices around the world to overseefactories. In 2002, Wal-Mart terminated its relationship with its longtime procurement agent andhired hundreds of that firms employees instead.21When suppliers visited Bentonville, they were not allowed to entertain buyers or visit them intheir offices but instead, were shown into small, interview rooms equipped with only a table and fourchairs. There, the negotiation over terms was boiled down to a single price on the invoice. Accordingto one observer, Its not even negotiated anymore. No one would dare come in with a half-a**edprice.22 Most other retailers negotiated invoice prices that did not include additional costs tosuppliers such as return management fees, co-operative advertising, and promotional spending.Although Wal-Mart bargained hard, it had also tried to build partnerships with a widening circleof suppliers. One key initiative was the sharing of information electronically. Wal-Mart had usedelectronic data interchange (EDI) since the 1980s to communicate with suppliers. In the early 1990s,EDI was expanded to include forecasting, planning, replenishing, and shipping applications. Atroughly the same time, Wal-Marts Retail Link private exchange began to provide its thousands ofsuppliers computer access to point-of-sale data on the two-year sales trends and the inventories oftheir products on a store-by-store basis. Retail Link reportedly cost Wal-Mart $4 billion to developand perfect; suppliers had to make substantial investments to implement the new system, includinghardware purchases and the costs of hiring, training, and employing Retail Link analysts.23 By 2002,all of Wal-Marts suppliers were required to use Retail Link. This prompted Wal-Marts competitorsto band together to create public exchanges such as World Wide Retail Exchange and GNX, to reducetransaction costs through auctions and reverse auctions.24 However, as of late 2002, Wal-Martremained the only source of (close to) real-time retail data for a large community of suppliers.256This document is authorized for use only by Jania Evans ([email protected]). Copying or posting is an infringement of copyright. Please [email protected] or 800-988-0886 for additional copies.Wal-Mart Stores in 2003704-430Supply chain management of this sort…