Strategic Management: Wal-Mart - Essay Example

Strategic Management of Cost: Wal-Mart YOUR FULL YOUR INSTITUION OR SCHOOL Strategic Management of Cost: Wal-Mart Within the spectrum of American retailers, Wal-Mart is certainly notable as an industry leader and major player in the discount retail market. As the case study indicates, by the end of 2003 Wal-Mart had become both the world's largest company and the world's largest private employer (Ghemawat, Mark, & Bradley 2004: 23). Upon review of the information in the study, it is clear that the company has a focused strategy regarding cost management. In fact, Wal-Mart specifically seeks innovative and aggressive ways to control costs within its own operating systems, as well as aspiring to be the market leader in low-cost product offerings to the public. The company has been focused on the strategic management of costs from the very early days when its founder, Sam Walton, began his career as a discount retailer. One of Walton's own rules for building a business, in fact, encapsulates the dual-pronged philosophy of Wal-Mart's strategic cost management. His ninth rule specifically advocates that one should "control your expenses better than your competitors. This is where you can always find the competitive advantage" (Ghemawat, et al. 2004: 49). The scope of this paper will be to examine the key strategic elements underpinning Wal-Mart's cost controls and industry leadership. The company engages in aggressive cost reduction through the strategic management of procurement, inventory, distribution, and internal operational efficiencies. Further, it maintains its cost leadership within the industry by being willing to duplicate the successful strategies of its competition, its use of the principle of evolution over revolution, deep discounting strategies, and key strategic partnerships with other companies. Based upon the information in the case study and the research evidence found which supports the strategic management practices used by Wal-Mart-not to mention the obvious success enjoyed by the company-it would be fair to say that Wal-Mart is indeed successfully managing its costs and placing itself at the head of the line within the American discount retail market. Strategic Management of Cost Reduction In business, it is one thing for a company to say that it is going to control its costs; but it is quite something else to effectively do it. Wal-Mart has developed several key elements or points of control that have allowed it to manage its costs with startling efficiency. Procurement. It isn't any great revelation that if a company is in the retail business, it's viability depends on obtaining goods for as low a cost as possible and then selling them as expensively as the market will allow. Accordingly, any strategic management of costs is going to necessarily begin on the side of procurement where the resale goods are obtained. In fact, there was a survey conducted in the year 2000 where "50 per cent of finance directors surveyed by Byline Research said that cost reduction was their most important factor in procurement issues..." (Chatel & Hunt 2003: 216). For Sam Walton and his managers, "buying trips" had to have expenses of less than 1% of the value of any purchases, which meant there were often times of sharing hotel rooms, walking instead of taking a taxi, or even calling suppliers collect (Ghemawat, et al. 2004: 28). Given Walton's obsession with keeping costs low, it wouldn't be unexpected to discover that one of his key strategies would become to bypass distributors and manufacturer's representatives entirely and purchase his products directly from the manufacturers. Because merchandise procurement is a fundamental activity for a retail firm, and cost-effective purchasing impacts the cost of good sold, "successful negotiations with vendors may enable the retail buyer to obtain financial assistance from the supplier" (Fairhurst, Lennon, & Yu 1996: 14). For Sam Walton during his early years, the fact that his chain (Ben Franklin) took a 25% markup taught him that it would be best to deal with manufacturers directly (Ghemawat, et al. 2004: 25), and thus the successful negotiation with a vendor would be characterized by going around them to the supplier. In the later years, after Wal-Mart was well established, the only negotiation with suppliers became a single price on the invoice with no consideration for suppliers' costs of marketing or promotion (Ghemawat, et al. 2004: 28). The bottom line was to obtain the merchandise as cost-effectively as possible. Inventory. Once the merchandise has been secured, it becomes inventory until it is sold. Inventory management is a key factor in cost control because the longer items are held, the more expensive they become in terms of holding costs and the likelihood of discounted sales. In fact, Wal-Mart uses inventory turns as a "key measure of the overall performance of the supply chain" (Ghemawat, et al. 2004: 30). The reason for this is quite straightforward; the company cannot successfully control its costs if it suffers from either over-stock or under-stock. Inventory has to be handled just so, and retailers such as Wal-Mart must "collapse the time needed to complete the merchandise cycle...improve inventory turns...[resulting in] less inventory and fewer clearance markdowns...The result will be improved profitability" (Peterson 1992: 108). As the timing of the merchandise cycle is reduced, so also are the costs associated with it. Distribution. Another key element in Wal-Mart's ability to control its costs is the way that it goes about distribution; and the company is beating its competitors rather smartly in this particular area. In fact, as the case study demonstrates, Wal-Mart's distribution costs accounted for approximately 2%-3% of revenues, where its competition pays at least a full percentage point higher (Ghemawat, et al. 2004: 31). One of the reasons the company is able to keep its costs low is that it has gone to a hub-and-spoke method. In this type of distribution system, merchandise is delivered to a centrally-located distribution centre, where it is "sorted and then delivered to stores, usually within 48 hours of being ordered" (Ghemawat, et al. 2004: 30). This methodology is part of the larger process of supply chain management, which makes a hugely significant impact on the final cost of goods sold. "Supply chain management is intended to accelerate the flow of goods...along the chain's entire length, and to help companies monitor that flow. Indeed, programs to improve supply chains might raise margins by 1 to 2 percent of sales and improve customer service dramatically (Agrawal & Pak 2001: 22). Certainly, Wal-Mart has borne this principle out by focusing much of its strategic management on controlling these costs and distancing itself from the competition. Internal Efficiency. A final notable area of focus for Wal-Mart's cost management is its own internal operational efficiencies. For example, a significant investment in information technology in the mid-1970's allowed the company to automate much of its distribution, control its product information and, ultimately, make its inventory data management reporting close to real-time (Ghemawat, et al. 2004: 26). This type of focus on operations gave management the ability to strategize regarding many different aspects of the company. Another example of this effort was the decision made about the retail format of the stores themselves. The standard "Discount Store" format had the largest representation in the system, but in 1988 the company introduced the "Supercenter" concept (Ghemawat, et al. 2004: 27). The original idea was to add a grocery component to the product offering, with the hope that the traffic would increase in the general merchandise section as a result. Given the company's focus on cost control and internal efficiencies, however, the grocery section turned profitable in and of its own right. Even though earlier efforts at a European-style "Hypermart" had proven unworkable, by continuing to increase its internal operational efficiency through a various set of retail formats, the company again found a way to make its institutional frugality work. Overall, the company's focus on aggressive cost reduction management is paying good dividends. Through focused procurement, careful inventory management, a modernized distribution system, and increased internal efficiencies, Wal-Mart's reputation is well-deserved. The second aspect of this analysis, that of the strategic management of cost leadership, shows that Wal-Mart does equally well in distinguishing itself from the competition Strategic Management of Cost Leadership Managing those costs under the direct control of the company is necessary and, with proper expense management, generally likely. Less assured is the ability to exert that same managerial success on the marketplace and lead the industry in cost savings and low price sales. Wal-Mart uses four distinct principles to accomplish this goal. Imitation and Imprinting. Sam Walton, and thus the corporate culture at Wal-Mart, had no compunction at seeing what the competition might be doing and then incorporating those ideas into the company. Walton was once known for going to competitor's stores and measuring their displays, counting the number of cars in the lot, and even "borrowing" specific ideas from others and converting them into strategies employed by Wal-Mart (Ghemawat, et al. 2004: 26). It has been said that imitation is the sincerest form of flattery, but for Walton and Wal-Mart, it has been good for business as well. The idea of imitation-or at least being willing to consider the fact that your competitors might have some good ideas-shows the imprint of Sam Walton's own personality upon the company: ...the specific life history of an enterprise [can] exhibit the imprint of particular values, as frequently happens in entrepreneurial businesses founded by a person or group strongly committed to a particular way of doing business. Wal-Mart's founder, Sam Walton, was well known for a devotion to customer service, low-cost pricing, and a no-frills, no-nonsense "value for money" operation. These practical, experience-based principles became the values on which he built an enterprise of surpassing commercial success. (Frederick 1995: 22) Thus imitation and imprinting has brought sufficient innovation into the company to allow it to be an industry cost leader over competitors such as Target and K-Mart. Evolution. Another contributor to Wal-Mart's success is the way in which it has incorporated innovations into the company. As articulated by the current CEO, the organization is "a story of evolution not revolution" (Ghemawat, et al. 2004: 26). What this means is that management has taken its lead from the personality of Sam Walton, added ideas and concepts from competitors and other companies, and integrated it all together a little bit at a time. Rather than engaging in specific planning goals that would be executed over a series of years, Wal-Mart has managed its changes gradually, but with a shorter visionary timeframe. Over the course of this incremental assimilation of ideas, the company has evolved into its innovation and cost leadership position with a more stable managerial and operational system. Deep Discounting. No discussion of the strategic cost management of Wal-Mart would be complete without consideration of its pricing and discount policies. Initially, the organization claimed to always have the lowest prices, and gave local managers the authority to match competitors' prices. Over the decades of the company's growth and evolution, however, there was a gradual change to simply promising low prices at all times. The company's success at keeping its own costs low allowed it to lead the marketplace in discount pricing; to the point that some attribute the bankruptcy of K-Mart directly to Wal-Mart and its associated outlets. Target is known to generally run 10%-15% higher in price, though it does attempt to keep up through special discounts and close-out sales. Generally in America, however, Wal-Mart is the first company that comes to mind if the subject is discount prices. Strategic Partnerships. In spite of the fact that Wal-Mart violated the traditional pricing system of the day and dealt directly with manufacturers, it has found several ways to work closely with other companies. One of the first forms of this cooperation was the sharing of data with the suppliers. Although expensive to develop, Wal-Mart's "Retail Link" point-of-sale data system could provide its alliance partners with two-year sales trends and the inventories of their products on a store-by-store basis (Ghemawat, et al. 2004: 28). Such cooperation was not initially considered, given the fact that Sam Walton was willing to cross certain boundaries to get the lowest price on his merchandise. It was found, however, that there could be a "downward-spiraling price-orientated battle between suppliers and retailers, all vying for an increased share of diminishing profit margins" and that the idea of retailers and suppliers working together on mutually beneficial cost-cutting practices would work to the benefit of all (Gillooley & Varley 2001: 42). This is exactly what Wal-Mart began to do in order to strategically manage its cost leadership in the industry. One noteworthy example would be the strategic relationship with Proctor and Gamble. As a result of P&G's investment in the data exchange system with Wal-Mart, it had employees in the Bentonville headquarters of the company managing its products, and Wal-Mart became its largest customer; responsible for 17% of its total revenue (Ghemawat, et al. 2004: 29). This type of partnership demonstrates why Wal-Mart is the cost leader in the industry; they are willing to work together with large suppliers and partner in discount retail sales. Through the combination of its willingness to innovate by imitating other organizations, the use of evolutionary principles to bring about stable change, the deep discounting strategies, and its key strategic partnerships with suppliers and manufacturers, Wal-Mart has obtained and maintained its position of cost leadership in the industry. Conclusion Wal-Mart is very successful at utilizing strategic management practices to keep its own costs low and to be the cost leader for the industry. The key principles have been outlined as a set of internal cost controls and external industry factors. By managing its procurement systems and costs, the company sets a foundation for lower expenses. Its inventory and distribution management is always keen on operating at the highest possible efficiencies. Its own internal systems are optimized so that the organization can meet the market demands as cost-effectively as possible. Through its use of imitation and innovation, Wal-Mart has developed a culture that sustains its industry position. Allowing management to be evolutionary instead of revolutionary has provided a consistent environment for the organization to position itself within the market. The use of deep discount pricing-made possible by the successful management of costs on the front end-combined with the strategic partnerships the company has formed, positions Wal-Mart as not only a cost reducer, but a cost leader. Wal-Mart's commercial success is well-deserved and obvious to any observer. As an organization, it clearly demonstrates the effectiveness of strategic management of costs. References Agrawal, M.K. & Pak, M.H. (2001) "Getting Smart about Supply Chain Management." The McKinsey Quarterly, 22-23 Chatel, F. & Hunt, R. (2003) Reatilisation: The Here, There and Everywhere of Retail. London: Europa Fairhurst, A.E., Lennon, S.J., & Yu, H. (1996) "Small Retail Store buyers' Response to Apparel Markets: Perceptions and Choices." Journal of Small Business Management, 34, (4) 14-21 Frederick, W.C. (1995) Values, Nature and culture in the American Corporation. New York: Oxford University Press Ghemawat, P., Mark, K.A., & Bradley, S.P. (2004)"Wal-Mart Stores in 2003." Harvard Business Review, 704-430, 23-54 Gillooley, D. & Varley, R. (2001) Retail Product Management: Buying and Merchandising. London: Routledge Peterson, R.A. (1992) The Future of U.S. Retailing: An Agenda for the 21st Century. 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