Monday, November 19, 2007

Outline and Thesis

  1. Introduction

  2. Strategy for Managing Cost

    • Budgeting payroll cost

      Saving on business travel cost

      Investing in technology: energy system, new equipped store, and RFID

      Eliminating unnecessary costs

  3. Strategy for Managing Growth

    • Location


  4. Strategy for Managing People Resources

    • Motivating employee

      Internal promotion

      External recruitment

  5. Conclusion
  6. References


Wal-Mart story started from a man with a dream named Sam Walton. Sam first owned a variety store in Newport, Arkansas. After losing his rent, Sam found a new location to restart his business which was in Bentonville, Arkansas. By working very hard to satisfy his customers with possible low price, Sam had increased sale and grew profit rapidly. Until 1962, Sam and his brother, Bud, had expanded their business as a large regional chain of 15 stores. After the business grew, Sam wanted to build larger store in the town. Though, without any support from his main supplier, Sam and his family worked together to build out the larger store called Wal-Mart discount store.

The Wal-Mart store was very successful. In 1983, Walton’s family expanded their business into larger metropolitan area and started the first wholesale club called Sam’s club in Oklahoma City. As business keeps growing, Wal-Mart has expanded its division into many countries around the world. Based on the Wal-Mart growth table, in 1970 Wal-Mart had only $30.8 million revenue, 32 stores, and 900 associates. Wal-Mart had dramatically increased its revenue in 2004 up to $256.3 billion, 4906 stores in eleven countries, and 1.5 million associates worldwide. Ranging in the 36th largest discount chain in the country in 1971, which below many other well-known retailers such as Sears with sales of $9.3 billion, JC Penny-$4.2 billion, and K-Mart- $2.6 billion, now Wal-Mart is the largest retailer in the world with hundreds of billions in sales (Soderquist, 2005).

Wal-Mart now has many different divisions around the globe which include discount stores, supercenters, neighborhood markets, and Sam’s clubs and the only reason for these divisions is to provide customers with needed products and services at an affordable prices and conveniences. From managerial perspective, the most three important strategies for Wal-Mart’s operational model are cost management, people management, and growth management.

Strategy for Managing Cost

Since cost is the most important tool that drives businesses to success, the strategy for managing cost is also important for business to succeed especially for giant retailer like Wal-Mart. Business’s performance can be defined by the success of minimizing cost due to retailer already have to compete in lower prices to attract customers. Cost is categorized into two types which are fixed cost and variable cost. For Wal-Mart, fixed cost includes rent, property tax, payroll, utilities, inventory, and administration cost which do not change by the sale level of the store. As business grows bigger, some fixed costs such as bureaucracy has increased and difficult to avoid or reduce. By regularly review periodical financial reports, Wal-Mart’s leaders and associates always work their best to find new alternatives, approaches, or chances to reduce some costs and increase sales. At Wal-Mart managing cost include many approaches such as budgeting payroll, saving on business travel, eliminating unnecessary cost, and investing in technology.

One of the most important approaches that Wal-Mart used to manage cost is to budget payroll. Budgeting payroll is useful for store managers to keep trace the payroll cost, review cost by department, and compare the actual cost to the plan. This budget will allow store managers to balance between hiring employees and the available fund. The successful managers must keep the payroll cost below the budget; however, if the cost is exceeding the budget they have to immediately find solutions to reduce the cost. A good example of this approach was the case in of Larry English who was the store manager #18 in Newport, Arkansas in 1970. With only 8% to the sales of payroll budget for his store, Larry had exceeded the budget by 0.1% and the problem was pointed out by his district manager, Don Whitaker. As a solution, Don had ordered the transfer of his store’s new assistant to another store in Poplar Bluff, Missouri due to the lack of Larry’s capability to manage his money. That financial punishment was a new lesson for Larry that had helped him succeeded in controlling his people with the money he had. As the result he had successfully opened many new stores in a giant size such as store #278 in Shrevepot in the size of 80,000 square foot and the store #512 in El Paso with the size of 110,000 square foot (Fishman, 2006). Besides transferring employees, the zero-dollar-overtime budget is also another solution to control payroll cost. After working on regular hours, people are already exhausted and less alertness; thus, it does not worth for Wal-Mart to pay extra one-and-a-half for exhausted workers to get regular job done.

Not only budgeting payroll cost, Wal-Mart also control on business travel cost. Not like the other company, Wal-Mart always finds the best possible way of saving even on business travel. Instead of booking first-class flight, Sam and all executive managers’ flight is always coach class on a commercial airline. Moreover, those who are on business travel will have their meal reimbursed only in regular restaurants not a high-class restaurant. Besides flight and meal, Wal-Mart also saves on the hotel room. With one of the most impressive policies at Wal-Mart is called two-to-a-room which requires all associates who travel on business to share the hotel room and usually one manager and one associate have to stay in the room (Bergdahl, 2006).

Another approach to control cost is called elimination approach which will eliminate all unnecessary costs. Unnecessary cost is unnoticeable cost that already occurred but customers are not willing to pay for it such as box in/out cost, moving cost, or recycling cost. Fortunately, Wal-Mart have noticed on these costs and in the early 1990s and it had started to eliminate these costs by corporate with the manufacturers of these products. For example, the revolution of elimination box from powder fresh and unscented products. Mathematically, this little change helps customers save millions of dollars each year. Supposed that only one nickel saving per container of deodorant, multiply by two hundreds millions of adult citizen in the US, the answer will be ten millions of dollars saving (Fishman, 2006).

Lastly, technology investment is also a great approach that Wal-Mart used to minimize cost. According to Wal-Mart’s history, the first technology investment was for computer system which was Sam’s idea. It seemed that this investment worth too much but the returns of the investment was greatness. The computers’ capabilities have great effect on business management such as provide on-time information for all levels of managers. With technology, the company had fasten the data processing time, improved customer services, reduced cost for gathering data from all divisions. Besides invested in information system, Wal-Mart also invested in electric power supplies which greatly save on utilities cost; for example, solar power investment. Wal-Mart has conducted many experiments on different types of new energy provider such as wind power, and solar power by building the first experimental store in Colorado. The result from that experiment proved that Wal-Mart had reduced the energy expense by %. From that experiment, Wal-Mart had decided to sign a ten-year contract to three large-scale solar power providers which are BP Solar, SunEdison, and PoweLight. The solar power energy will be installed on 22 sites of Wal-Mart in California and Hawaii (Wal-Mart Launches, 2007). Besides using new energy source to reduce the utilities cost, Wal-Mart also installed the new lighting system called GE instead of fluorescent lighting, which will save up to 66% on utilities cost. Moreover, Wal-Mart also equipped the stores with new technology devices such as sawtooth roof, radiant-heat snow-melt, evaporative cooling, and light-powered infrared sink. Each device has its own special function and characteristic which will greatly reduce the utilities cost. The new sawtooth roof will help the company saving on lighting cost because the new roof will allow more natural light into the shopping areas which will reduce the use of electricity. The radiant-heat snow-melt, which is a built-in heater pipe under the concrete across the sidewalks, will help company save on melting snow cost. The new cooling system will use less energy than the standard refrigerated air-conditioning system to keep the store in a comfortable temperature during the hottest days of the summer. The new sink will use less water than a traditional sink and function without electric power because the system relies on the restroom lighting which charges to a battery system (Wal-Mart Continues Green Initiative, 2005). Additionally, Wal-Mart also invested in technology to reduce inventory cost. For example, the Radio Frequency Identification-RFID will benefit both suppliers and retailers in order to control the flow of products from shipping to in-store displaying (Soderquist, 2005).
All in all, with these great approaches such as budgeting payroll, saving on business travel, eliminating unnecessary costs, and investing in various aspects of technology will help Wal-Mart to succeed its goal of minimizing cost with an efficiency of business operation.

Strategy for Managing Growth

Strategy for business expansion is one of the most important strategies for driving Wal-Mart to be the biggest company in the world. Since 1962, Wal-Mart has geographically expanded in North America, Europe, and Asia. With positive vision of Sam Walton how the business can grow, Wal-Mart had dramatically expanded from a single store to thousands of store, clubs, and supercenters around the world. Annually, Wal-Mart always has many growing plans which include regional and international expansion plans. From the managerial standpoint, these plans can succeed based on two basic components which are location and acquisition.

Location is one of the basic components for expansion plan. Location is very important for a retailer like Wal-Mart. When Wal-Mart has to plan on opening new store, it always looks for the best site for the store. The best location for each store vary by geography and involve with many outsource factors such as distant and cost. One characteristic of a best location for Wal-Mart store is positioning close to the distribution center. By choosing the nearest location to the distribution centre will reduce the shipping time and gas expense for the truck. Moreover, the best location also must be around the community not in a rural area. By placing the store around town will be convenience for customers to shop by saving their time of driving. Beside these characteristics, parking lot is also an important characteristic of a good location because it is one of the most considerable factors that can bring customers back to the store. If a customer goes to Wal-Mart but he has to drive around about five minutes just to find a space to park his car and he has to walk about four minutes from the car into the store, how much is the possibility that he would return to that store? The answer will be one out of 100. Therefore, a convenience parking lot is very important for each store.

Another basic component of expansion strategy is acquisition. Acquisition is a term referred to company that will corporate with Wal-Mart in order to serve people. This component is very important for Wal-Mart to grow. Wal-Mart is very selective on its acquisition and it had turned down many opportunities by most companies so far. In order to corporate with Wal-Mart, a good acquisition must built-in by quality people with experience and high commitment especially they must get along with Wal-Mart culture. One of the great benefits of operating with a well-known acquisition is that company will gain returns on the investment in a shorter period. Because the acquisitions are already well-known in the regional, by only apply Wal-Mart’s operational model to those stores and operate the stores by almost the same people, at the same place, and with the same merchandise, those stores will increase its sales and eventually businesses will rise to the top rank. For example, Woolco is the number four discounter in Canada. After three years of joining operation with Wal-Mart, now it has doubled the sales and become the number one retailer in Canada. Another benefit of joint-operation with international acquisition is fewer competitors in the tough market such as UK. Due to the market in UK is owned largely by two biggest companies which are ASDA and AA. ASDA was the second biggest supermarket chain in the UK with many criticisms such as misleading advertisement, breaking law and regulation, and polluting environment. However, Wal-Mart has found many opportunities in the UK market by acquiring ASDA and operating with its low cost strategy. After five years under Wal-Mart’s operational model, ASDA had increased grocery sales from 13% to 16% within the same store. Beside grocery, ASDA had expanded into many divisions by converting stockroom space into non-food sales such as merchandise, pharmacy, vision, and vacation services such as hotel and car rental. Moreover, ASDA also is the first company in the UK that initiated environmental program such as reduces greenhouse gas emission from stores acidifying gas emission from transportation, and improves waste management. After all, ASDA/Wal-Mart had received many awards such as the best workplace in 2004 by Fortune magazine and named as the British’s Best Value Retailer for eight consecutive years.

As a result, successfully identify a great location will help Wal-Mart reduce shipping time and cost as well as increase in sales. With the right acquisition, Wal-Mart will reduce risky time, gain the returns of investment faster than usual, and also fewer the competitors. Therefore, these two basic components will succeed the growth plans of Wal-Mart.

Strategy for Managing People Resources

Finally, the strategy for managing people is one of the three important strategies that lead Wal-Mart to be the biggest company in the world with the highest amount of employee. Human resource is defined by economists as a scarce resource to all businesses. Many businesses and organization have different strategies in managing this special resource. These strategies vary by the type, size and location of the businesses. Managing human resources at financial company will be different from government institution as well as managing human resource in mid-size firms will completely different and less complicated than managing human resource at the retailer businesses. In turn, effective human resource management will create a high perspective teamwork, fair competition, and respective employees. For the world biggest retailer like Wal-Mart, the success of managing this department is acquired through three basic activities which are motivation, internal promotion, and external recruitment.

One of the basic activities that lead Wal-Mart to successfully manage its people is motivation. Motivating employees into the same culture is one of Sam’s goals. Wal-Mart takes all of its effort to make employees feel like they are part of the company because they are sources of new idea for Wal-Mart to develop (Soderquist, 2005). Motivation is alive through all levels of positions at Wal-Mart. This company motivates employees in many different ways in order to prove that the company is not only care about profit they can gain from employees but also employees’ crises. One of the facts proved about this motivation is the used of term “association” instead of “employee”. Wal-Mart had agreed with J.C Penny by referring the employees as associates because it can make them feel more engagement with the company. After that, Sam had suggested a new way of treating his associates by calling all levels of them by their first name and displaying only the first name on the ID badge. Sooner, from hourly associations to top managers or even the founder of the company is calling each other by their first name only. Everyone in the company is getting more involves by calling the other’s first name because it can create a family-oriented business instead of boss-oriented one. Because of Sam’s belief that the company was built by the people, Wal-Mart had renamed its human resource department as a “people department.” Though, the word sound simple but it touches people’s heart deeply. Moreover, people at Wal-Mart are full with respect regardless of their position. Soderquist had told from his experience of visiting the Wal-Mart store in Bartless, Tennessee. He was unbelievable to see all associations and department managers had stood up with ovation to Gracie, who was a cleaner lady of the store for many years (Soderquist, 2005). Beside the way of treating people, Wal-Mart also encourage people through health care benefit and financial benefit. All associations at Wal-Mart and their immediate family can get a health insurance at a very low price which includes primary doctor, pharmacies, vision, and dental. For financial benefit, Wal-Mart started to share profit to its people in 1971. After that, Wal-Mart has enabled all associations an access to own company’s shares by selling stock to them at a discounted price and without brokerage fee. Wal-Mart also had implemented a cash incentive plan for employees to get additional income depend on company’s performance. Addition to these benefit plans, Wal-Mart also tries to get involve with associations’ crisis directly and indirectly. The program called door open which provides a direct access for all associations to express their problems to the store manager and if the manager cannot find the solution the next level of management such as supervisors, CEO, board of directors or even Sam will be in charged. Wal-Mart also helps the associations’ crisis by hiring a special psychologist team to counsel on their problems. As a result from all of these motivations, Wal-Mart has created an exciting environment workplace with respect, prospective, and value. Beside emotional motivation, Wal-Mart also provides educational motivation via many training programs such as technology, leadership, and management to all of it associates.

Another basic activity beside motivation employees is internal promotion that brings Wal-Mart to succeed in managing its human resource. Because Wal-Mart aimed at people’s involvement for all levels of association, it had developed many learning program to prepare them to be a leader. Reported by Soderquist, about more than three-quarters of the stores managers had started as an hourly association (Soderquist, 2005). As in the case of Larry English who started at one of Wal-Mart stores in Harrison as a stock boy, then became an assistant manager at Wal-Mart #1 in Rogers, Arkansas. In 1970, he had become a manager of the store 18 in Newport, Arkansas. After a financial management lesson given by his district manager, Larry became a field manager operating many giant stores after thirty-five years with the company (Fishman, 2006). Another case of Kevin Turner is also similar to Larry’s case. Kevin had started as a temporary cashier at one of Wal-Mart store in Ada, Oklahoma in 1986 (Soderquist, 2005). After he graduated from the East Central University, he decided to work full-time in the company as an auditor. Later on he was transferred to the technology department at the entry-level position. After gradually promotions, Kevin had become a senior vice president and the CIO of this company in 1999. Later on, Kevin was promoted to president and CEO of Sam’s clubs, a $30 billion division of Wal-Mart. Theresa Barrera also has the same story like Kevin. Started from a part-time cashier in Sam’s club in Texas, Theresa was granted a Wal-Mart scholarship in 1986 which let her finished her college degree. After five-year working in the home office of the company, she was transferred back to the Wal-Mart store division and was promoted to divisional merchandise manager in 1999. Until 2001, she is now a vice president of the company whom responsible for more than $5 billion of purchasing merchandise for the stores (Soderquist, 2005).

Beside bottom-up internal promotion, Wal-Mart also excels at external recruitment for both new associates and high-level managers. From Wal-Mart’s history, company had hired many small business owners when it first started. Those business owners were very important to the company because they possessed the entrepreneurial characteristics such as penny saving and risky. Moreover, Wal-Mart also hires external people who have experience in business management or expertise in a specific division to back up the business; for example, Wal-Mart’s pharmacy division. The pharmacy division was started by Clarence Archer, a pharmacist expertise. Based on Archer’s background, he was the ideal candidate for pharmacy division of Wal-Mart because not only he was a pharmacist but he also had experience in running pharmacies for drugstore chain like Kroger and Zales. Archer started his drugstore at Wal-Mart in 1981 in his forties when Paul Carter was the executive vice president. Pharmacy business at Wal-Mart at that time is very challenging. It moved very slow year for the first year because there are many well-known drugstores such as Kroger and SuperX. However, financially supported by Sam Walton, Archer had started up with some philosophy strategies such as hiring the best pharmacists in town to attract customers, giving out dollars coupons to increase sales, and always having important medicine in stock. Due to Archer’s competitive nature, now Wal-Mart has 3,535 pharmacies and is the fourth of pharmacy business (Fishman, 2006).


All in all, by implementing these three important strategies successfully, Wal-Mart has become from a single store to the biggest retailer in the US and to the biggest company in the world. The cost management strategy of Wal-Mart wills create an operational model with the lowest cost which will increase the margin of profit on the financial statements. Moreover, the growth management strategy had dragged Wal-Mart into the right direction of investment and expanded radically around the distribution center. Lastly, the people management strategy inspires all associates to work more efficiency and creates a great workplace environment which full of self-improvement, competition, and respects. It also provides an opportunity for people to build-up experience from the low-rank position to the high-rank position. Therefore, strong management in these three strategies had transformed Wal-Mart into the biggest company in the world with the highest number of employees worldwide and had also provided benefits to millions of people around the world by transferring unnecessary cost into low-cost products.