Walmart: America’s Low-Cost Leader or America’s Outdated Business Model?
University of Alaska Fairbanks
MBA 617 Organization Theory
I. Case Development
a. Background and Overview
Walmart is a multinational mass merchandiser that provides consumers with low-cost options on many products; mainly groceries and consumables. In 1962, Sam Walton opened the first Walmart in Rogers, Arkansas (Walmart Corporate, n.d). The store was based on the success of his previous store called “Walton’s 5&10” (or Walton’s Nickel and Dime store). The business model was a low-cost high-sales model that, while won’t offer high individual profit margin, will offer high sales volume and cumulative high profit margin. Walmart’s success grew tremendously over the next 53 years. By 1967, Walmart had 24 stores and annual sales of $12.7 million (Walmart Corporate, n.d.). In 1970, Walmart went public at an opening stock price of $16.50 (Walmart Corporate, n.d.). 30 years after the opening of his first Walmart, Sam Walton passed away, but not before the company reached new heights. At the time of his death, Walmart employed over 371,000 employees at 1,928 stores and clubs (Walmart Corporate, n.d.). Today, with annual sales of $485 billion, 11,500 stores in 27 countries, Walmart is currently the largest private employer in the world with 2.2 million employees (1.4 million in the U.S.) (Corporate Walmart, n.d.).
Walmart officially competes for sales in the $25 trillion a year retail industry ($4 trillion in the U.S. alone), although with their mixture of sales in groceries and other consumables, they unofficially compete in the consumer goods sector. Walmart generates 4x more revenue ($482 billion) than the next closest competitor (Costco at $114.5 billion) and more than the next 4 competitors combined (Costco, Kroger, Carrefour, Tesco) (Soni, 2015). Walmart is able to generate enormous amounts of revenue by offering products at a lower price than their competitors and offer price match guarantee in the rare cases that they aren’t. This enables Walmart to capture a market share of approx. 11% of the Retail Industry in the U.S. (Soni, 2015).
b. Organizational Structure and Culture
As a low-cost leadership strategist, Walmart’s structure allows them to operate according to the local environment, thus ensuring that the local culture is taken into account and increasing the chances of success (Daft, 2010). Walmart continues to scan the external environment to determine what organizational structure changes need to be made. Currently Walmart’s organizational structure is a strict divisional organizational structure; which is designed for maximum efficiency. This structure enables each operational unit (i.e. Walmart U.S., Walmart International, etc..) to operate with complete autonomy and achieve Walmart’s mission statement is “We save people money so they can live better.”
Walmart’s Board of Director’s is a 15 panel member group that includes: Tom Horton (Former Chairman and CEO of American Airlines), Samuel Robson Walton (son of Sam Walton), and Kevin Systrom (CEO and Founder of Instagram) (Corporate Walmart, n.d.). Doug McMillon is the organization’s CEO with Greg Foran (President and CEO, Walmart U.S.), David Cheesewright (President and CEO, Walmart International), Rosalind Brewer (President and CEO, Sam’s Club), and Neil M. Ashe (President and CEO, Global eCommerce and Technology) making up the top level executive leaders of the organization (Corporate Walmart, n.d.).
Walmart offers employment at various positions such as store manager, cashier, accountant, and many other positions that are common in a corporate, retail, and industrial settings. Walmart uses a very rigid pay scale that is designed for efficiency and objectivity however, it offers very little in wage increases for lowered tiered workers and creates an uneven pay distribution between hourly employees and salaried management (Hines & Wilkie, 2012). Walmart offers many advancement opportunities, as nearly 75% of their store management staff started out as hourly employees (Corporate Walmart, n.d.). The benefits offered by Walmart however, are less than the industry standard. Walmart offers a medical, dental, and vision plan that covers less than what their competitors offer however, more than half of Walmart employees do not have access to these benefits due to the practice of keeping employees hours less than full-time (Hines & Wilkie, 2012). This is considered even more jarring when it is noted that many Walmart stores offer access to Pharmacists, but employees do not receive a discount on prescriptions.
c. Changes and Challenges
As a leader in the retail industry, they have effectively stayed ahead of their peers by being able to analyze their environment and introduce innovation into their organization. Their supply chain management system is one of the best in the world because of the high-tech informational systems it has implemented. Their sheer size and technological advances in logistics have allowed them to operate efficiently and effectively.
Walmart faces 2 major challenges: their negative image and Amazon. Walmart’s biggest challenge is their negative image. According to Jerry Bowman “Walmart is reviled for…poor treatment of workers, anti-competitive practices…and gender discrimination.” (Here’s Wal-Mart’s biggest threat – The Motley Fool, n.d.). Walmart has countered this by creating a large public relations department to counter these claims.
Walmart may be the retail revenue leader, but they are facing a serious challenge from Amazon. Amazon is in a different industry, but are gradually taking potential customers away from Walmart. Walmart’s online revenues were ¼ of Amazon’s for fy15. While Amazon’s impact on Walmart’s sales may be minute and the real damage may not be felt for years (or possibly a decade) it is something that must be addressed soon or Walmart could find themselves in the same category as Blockbuster.
Despite the considerable challenge from Amazon and the negative public relations from different entities, Walmart has a bright future because of their technological innovations with their supply system and their sheer size and influence. Walmart had a 1.9% increase in revenue from fy14 to fy15 ($476 billion to $485 billion) (Corporate Walmart, n.d.). If Walmart is able to continue this trend, then their future demise could be greatly exaggerated.
II. Critical Evaluation
a. Issues with Organization
As organizations grow, they can experience new challenges. Some of these challenges are a direct result of the external environment (i.e. legal challenges) or they could be a result of internal strife (i.e. a merger causing layoffs). As stated earlier, Walmart has 2 key issues, an external event and an internal event, that could hinder their growth and development: negative public relations and Amazon.
Walmart’s negative public relations image is two-fold. It is a result of their size; large companies are often easy targets for criticism. They are often labeled as job-killers by the media because smaller businesses often decline once they enter a market. The mayor of New York, Bill de Blasio, released a report that detailed the economic impact Walmart has in a market once it moves in. The report states that “for every 2 jobs Walmart creates, Walmart kills 3 jobs. Also, for every $100 spent, Walmart recirculates only $43 back into the local economy; while the local businesses that it replaced recirculated $68 back into the local economy.” (De Blasio, 2013).
The other reason they have a negative public relations image is because they have horrible pay and benefits practices. Walmart offers wages and benefits that are sub-par for its size and its industry resulting in high employee turnover. There have been many critics of their willingness to keep their front-line employees’ wages and benefits low while increasing the wages and benefits of their upper level management. Most of Walmart’s employees are hourly and make less than $10 an hour. A retired Walmart manager was recently quoted as saying “70 percent of the workers at his outlet were part-time, meaning they worked no more than 32 hours a week… as a means of saving costs on benefits such as medical insurance.” (Hines & Wilkie, 2012).
The biggest physical threat to Walmart is Amazon. The domination of the online retail market by Amazon is starting to encroach on Walmart’s brick and mortar store sales. Walmart’s overall sales revenues has increase, but the margin of deficit between Amazon and Walmart in online sales is increasing as well. In 2014, Amazon had $89 billion in online sales compared to $12.2 billion for Walmart (Peterson, 2015). While this doesn’t put a damper into Walmart’s overall sales, it does show a cause for concern. Black Friday 2015 marked the first time ever that there were more online sales (103 million) than in store sales; continuing the steady uptick in online sales on the busiest shopping day of the year (Wahba, 2015).
- Increase Public Relations through positive measures
To increase their public relations image, Walmart must continue to fight fire with fire and go on the offensive. They have taken steps to do this by promising that every employee will make a minimum of $10 per hour (Jamieson, 2016). Walmart should also increase the number of full-time employees so that they can have access to the medical and dental benefits offered to employees. Walmart must change the benefits that are offered to their employees. They should offer different tiers of benefits to part-time and full-time employees; and decrease the out-of-pocket expenses for both tiers. They can continue the aforementioned positive steps by promising to hire workers that are displaced by their arrival into their new market, increase the funds that are donated to local charities. These additional measures will provide additional tax relief, an increase of expenditures in the local economy, and an increase in positive public relations.
- Enhance utilization of supply system
Walmart has a top notch supply chain system however (Robinson, 2015); they are not utilizing it effectively when it comes to online sales. Walmart sales the same items as Amazon, but Amazon uses their space more effectively. Walmart could use the same approach as Amazon by introducing a consignment approach to online sales. They would advertise the product online, but the suppliers would manage the storage and shipping of the item to the consumer. They could also introduce the “preferred” supplier (just like Amazon) and offer guarantees through these suppliers or free shipping to home. The ship to home service is another opportunity that they could improve. Walmart offers free shipping to their stores however, in the increasingly internet driven society, most people like the comfort of having their product delivered directly to their door steps. Walmart charges for any and all deliveries to homes.
- Diversify portfolio offerings
Lastly, Walmart could improve its future outlook by diversifying its portfolio. All of Walmart’s current ventures are related to their retail stores, which isn’t bad however, there is an excellent opportunity that exist for Walmart to enter the digital movie industry. Amazon offers access to free digital movies as part of their membership. They could offer memberships with perks, similar to Amazon. Walmart could partner with Hulu, Netflix, or Vudu and offer their services as part of the membership perks.
c. Management Implications
The management implications of the suggested recommendations will be profound. Management will have to take a more active role in communicating with hourly employees and their concerns. From my research, the only concern of management has been the financial aspect of the organization. The measure of success will no longer be based on purely on financial returns, but management will have to take a more balanced scorecard approach to results.
Collaboration will also be key to implementing the recommendations. Walmart can no longer use its size to bully suppliers, but must forge partnerships to remain viable in the next decade. Managers must be able to effectively communicate across the aisle and express their wishes instead of making demands, as they currently are able to do. Managers will also have to manage conflict that arise through collaborations. Because of the different hierarchal reporting requirements between the different organizations, managers will have to work with their counterparts to de-conflict issues that arise from resource management, scheduling concerns, and product support.
Walmart is in a simple, unstable environment (Daft, 2010). This means that there are relatively few elements to contend with however, consumer demand changes very rapidly. Walmart is a lot more stable than other retailers in this environment because of their size, large customer base, and ability to dictate lower prices from suppliers. Although Walmart’s environment isn’t complex, they have had to adapt to an onslaught of negative public relations, causing damage to their image (Hines & Wilkie, 2012). This is unusual for the environment that they are in however, as the biggest bullies on the block and their low wage and benefits practice, they are an easy target.
Walmart is currently one of the best in the business at operating efficiently and effectively due to its ability to demand lower rates from its suppliers, their integrated supply system, and the ability to charge less than nearly every brick and mortar store however, with the increased competition by online retailers that are able to charge similar prices, and in some cases less, they must find new and improved ways of increasing their efficiency and effectiveness to remain profitable and not received the same fate as so many of their past competitors.
Daft, R. L. (2010). Organization theory and design (10th ed.). Mason, OH: South-Western Cengage Learning.
De Blasio, B. (2013, August 14). New Report: Wal-Mart Destroys Local Economy. Retrieved March 06, 2016, from https://www.popularresistance.org/new-report-wal-mart-destroys-local-economy/
Here’s Wal-Mart’s Biggest Threat — The Motley Fool. (n.d.). Retrieved February 03, 2016, from http://www.fool.com/investing/general/2014/12/02/this-1-thing-is-wal-marts-biggest-threat.aspx
Hines, A. & Wilkie, C. (2012, November 26). Walmart’s Internal Compensation Documents Reveal Systematic Limit On Advancement. Retrieved February 22, 2016, from http://www.huffingtonpost.com/2012/11/16/walmarts-internal-compensation-plan_n_2145086.html
Jamieson, D. (2016, January 20). Walmart To Hike Its Minimum Wage To $10, Raise Pay For 1.2 Million Employees. Retrieved March 05, 2016, from http://www.huffingtonpost.com/entry/walmart-10-raise_us_56a01acde4b0404eb8f03b26
Peterson, H. (2015, November 09). There’s one thing that everyone is getting wrong about the war between Walmart and Amazon. Retrieved March 06, 2016, from http://www.businessinsider.com/walmart-vs-amazon-online-sales-2015-11
Robinson, A. (2015, May 13). Walmart: Keys to Successful Supply Chain Management. Retrieved March 06, 2016, from http://cerasis.com/2015/05/13/supply-chain-management/
Soni, P. (2015, February 18). Welcome to Market Realist. Retrieved February 07, 2016, from http://marketrealist.com/2015/02/analyzing-walmart-worlds-largest-retailer/
Wahba, P. (2015, December 22). In 2015, Amazon Ate Even More of Walmart’s Lunch. Retrieved March 06, 2016, from http://fortune.com/2015/12/22/retail-ecommerce-2015-amazon-walmart/
Walmart Corporate – We save people money so they can live better. (n.d.). Retrieved February 07, 2016, from http://corporate.walmart.com/
Executive-Level Organizational Structure
Lower-Level Organizational Structure