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    Is Walmart Defying Economic Gravity?
    05 Dec 2013What Do You Think?

    Is Walmart Defying Economic Gravity?

    by James Heskett
    Summing Up Can Walmart sustain its half-a-trillion-dollar enterprise much longer? Jim Heskett's readers see a conflict between the company's immense size and its business model.
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    Summing Up


    When Does Friction Trump Scale in the Corporate Life Cycle?

    This month's column raised the issue of size limits on an organization's ability to compete In today's global economy. The specific case in point was Walmart and whether it had become just too big to pursue its business model. Given the nature of some unusually thoughtful responses, there was no consensus on the question of whether Walmart has reached its full potential. Comments raised even more interesting questions surrounding the dynamic of relationships between the benefits of scale and the problems of friction in very large organizations.

    Several respondents commented on dangers to the Walmart business model. Benn Manning commented that "The real dangers for Walmart aren't competitors or new business models but are instead itself and how it delivers on its value proposition, potential regulation from federal and state governments, and negative publicity driven by special interest groups." Shadreck Saili added, "Is a company this large manageable?…'Yes' for as long as its policies align with policies of the environments it operates in … 'No' if complacency levels begin to rise to unprecedented levels."

    Others cited evidence that Walmart's model has some practical limitations. Evidence of possible friction was presented by Clark Phippen, who cited symptoms that suggest that Walmart is becoming "arthritic."(1) Employees, he wrote, consider themselves ''just a minimum wage earner happy to have the job …; and (2) wastage … (that) seems to abound in the cavernous stores…." Cheri Thomas cited saturation of its markets, especially in the United States, as a concern, adding that "Walmart's fixation on low prices has led it to prey upon other stakeholders.'' She added, ''How long can this be sustained without effective push-back?"

    Others noted the benefits of scale in fostering success for the foreseeable future. Robert Duque suggested that the organization will learn from its subsidiaries, such as Sam's Club, which is developing "a more information-driven model by gaining a better understanding of product and customer relationships." Dean Vella cited Walmart's innovation in supply chain management and sustainability as ways in which it is reducing the friction associated with size. Ajit noted the benefits of scale: "Their low costs are a core strength and therefore their commensurate risks (are) lower." And Steve Fotenberry said that "As much as some people like to complain about Walmart … The 'family' atmosphere for the workers continues to exist, and the value to customers has not changed."

    These comments suggest that the tradeoff between scale and friction is complex. For example, what effect does a company's origins, its beliefs, and how these are reflected in management behaviors (reflected in Walmart's emphasis on "family") reduce friction? How does scale bind an organization to a low-price, low-cost strategy, eliminating management choice going forward? And do such strategies have much longer lives than those associated with other forms of differentiation among offerings to customers? When does friction trump scale in the corporate life cycle? Under what conditions? What do you think?

    Original Article

    There is a body of research that seeks to relate economics to human biology. It's usually associated with the notion that the life cycles of businesses parallel stages of biological life: birth, rapid growth, maturity, and death. Companies are categorized as growth or value investments. Managers think of businesses in their portfolios as question marks (too early to tell), stars, cash cows, and dogs. Entrepreneurs "harvest" the spoils of startups once the rapid growth period is nearing its end. This work has presented evidence that there is a surprising amount of turnover among the largest business firms, characterized in the United States by the fact that only one company, General Electric, has survived in the Dow Jones Industrials index since its beginning.

    We are reminded of the matter as Wal-Mart Stores, Inc. names a new CEO, Doug McMillon, who faces a number of very large challenges, including that of how to grow a nearly half-trillion-dollar organization charged with everything from bribery in its Mexican operation to discrimination in its labor policies, and blamed for low wages and reliance on indirect societal subsidies for its labor policies. Is it possible that Walmart is just too big to pursue its business model in the longer-term future?

    This is not a trivial question. Walmart, as the world's largest private organization, has a bigger population than several United Nations member countries. Its revenue base is larger than many of the world's economies. And its borders extend far beyond the US.

    Everyone has an opinion about Walmart. Mine is influenced by my only visit to Bentonville, Arkansas 20 years ago. Even then it was a big company. The Saturday morning management meeting I witnessed was attended by a thousand members of the Walmart "family"—employees, their families, and guests like me. Every effort was made to recognize individual effort. New products were introduced. Decisions under consideration were even discussed from the stage. The biggest display in the room was an electronic counter on the wall that every two seconds added up the savings delivered to Walmart's customers over the company's lifetime.

    How you feel about Walmart's future may depend on how you feel about its policies and business model. Clearly, leadership has chosen to distribute the profits from its remarkable productivity increases to customers and, at least in the early years, owners and investors that largely included managers. More recently, the benefits have gone primarily to customers. Walmart's managers are not among the most highly paid, especially in light of the dedication, travel, and on-the-ground involvement expected of them. Investors do not regard the stock as a "growth" stock.

    And what about employees? They are thought by many to be left out of the distribution of the spoils almost entirely. Overlooked is the fact that the company has created 2.2 million jobs, albeit many part-time, but with very few layoffs. Employees with whom I have spoken directly are generally positive about their company and their work. They see senior managers frequently and know and work with many of them in the stores. They seem to feel that they are part of a community, one that quite naturally would take up contributions to put food, including Thanksgiving turkeys, on the tables of their less-fortunate coworkers, regardless of what a cynical outside world might think. The annual employee turnover rate is 70 percent, not especially high for a retail organization.

    But we're left with a question that has been posed for many years: How much longer will Walmart's business model be sustainable? Will it be endangered by its size, increases in the minimum wage laws, or other business and social trends that have plagued nearly every other large company in history? Is a company this large manageable? Is Walmart defying economic gravity? What do you think?

    Comments
      • Benn Manning
      • Director of Global Sourcing, Walmart
      Now in my sixth year of working at Walmart I recognize three dangers to Walmart that could prohibit it from existing in a meaningful way 50 years from now.

      First, is the danger of Walmart losing its culture of focusing on customers. Walmart's business model revolves around the value proposition of everyday low prices for its customers. In order to provide low prices to customers it must retain an operating model of everyday low costs. If Walmart becomes lax in expense control, it will not be able to offer low costs to its customers.

      Second, is the danger of Walmart being regulated out of its business model. Recently Washington DC tried to impose a discriminatory minimum wage for big-box retailers. If this had passed, Walmart claimed it would not continue building new stores in the area. Many people speculated that this was just political jockeying on Walmart's part. However, people fail to recognize it's unlikely Walmart could make its model work with the minimum wages that were being proposed. This is just one example. With the current aversion towards big business from many politicians there are many other regulatory issues that could force Walmart out of its business model i.e. healthcare, tax law, environmental, etc.

      Which leads to the third danger of Walmart losing favor with the general public and its core customer base through negative publicity. There are several union-backed organizations that have made it their mission to unionize Walmart or at least give it a black eye trying. These efforts could also lead to the disruptive regulation mentioned above.

      I haven't mentioned lower-cost retailers like Aldi, Winco, or Costco. I also haven't mentioned disruptive business models (e-commerce), overall company size, or changing consumer behavior as dangers. Walmart, for its size, is extremely agile and adept at evolving with its customer base. While these things affect Walmart in the short-term I do not believe any of them will keep Walmart from being around in a meaningful way in 50 years.

      The real dangers for Walmart aren't competitors or new business models but are instead itself and how it delivers on its value proposition, potential regulation from federal and state governments, and negative publicity driven by special interest groups.
      • Robert Duque
      • VP | GM - Fair Isaac Advisors, FICO
      When looking at Wal-Mart, they are the poster child for a Margin-Driven Retail business model. However, they shouldn't be pigeon-holed into this model: Sam's Club for example has done a nice job developing a more information-driven model by gaining a better understanding of product and customer relationships. McMillon came from Sam's where he spearheaded those efforts; could it help Wal-Mart build upon their current model and sustain leadership by evolving just like Tesco has? That's where I'd put my money.
      • Dean Vella
      • Content Manager - usanfranonline.com, University of San Francisco Online & Bisk Education
      I think when you look at the economics of the company and the contributions it has made to the communities it serves, Walmart deserves better treatment from the press who tends to demonize them. They are innovators especially in the supply chain management area and they are making good progress on energy efficiencies towards sustainability. I wrote an article on their supply chain and is our most popular article on the site if you care to visit it can be found here: http://www.usanfranonline.com/wal-mart-successful-supply-chain-management/
      • Steve Fotenberry
      • Aviation Safety Inspector- Manager, FAA
      I have several family members who work for Walmart, and lived near and shopped at one of the first Walmarts in Harrison, Arkansas (near Bentonville) back in the 70's. I believe the company will continue to grow and be viable for the forseeable future. The "family" atmosphere for the workers continues to exist, and the value to costomers has not changed. As much as some people like to complain about Walmart, it is still THE place to go if you're looking for something quick and/or cheap. Not my personal favorite store, but a good value and I don't see a change.
      • kent mollohan
      • Mr.
      Yes, I say, defying gravity and society's increasing understanding of who's paying the "low prices." They certainly succeeded in growing a company, but now it's come clear how much society pays for their success and how little reward society obtains for this support. The "drive to the bottom" in jobs, low wage jobs, cheap jobs, all dependent postures ignores the development and fostering of opportunities: a new spirit is needed now.
      • Clark Phippen
      • Director, EnerTech Capital
      Two Wal-Mart characteristics strike me as "arthritic" (to prolong the human relationship in business cycles): (1) employees I have met do not consider themselves part of a family - just a minimum wage earner happy to have the job and barely speaking English; and (2) wastage now seems to abound in the cavernous stores - sacks of fertilizers leaking product, porch furniture cast aside because it's damaged, cloth goods stained and being thrown away - and this is just to the casual observer over the past few weeks. This cannot continue to happen. As a member of a public employer pension fund investment committee, I do note that our managers, either value or growth oriented, are not maintaining much if any Wal-Mart position these days. So maybe you do have a point.
      • Cheri Thomas
      • Director, Center for Executive and Professional Development, Martin Methodist College
      Walmart's fixation on low prices has led it to prey upon other stakeholders: community (social welfare subsidies to employees, loss of manufacturing jobs to China); employees (low wages, poor benefits, poor track record for equal opportunity and advancement); suppliers (brutal price competition and continuity uncertainty); and customers (poor quality, misleading claims for example about local produce). How long can this be sustained without effective push-back? Additionally, with its current model, it seems to have reached saturation, at least in the US. Once that occurs, how do you grow? Population growth is low. Income growth in their demographic is low (due in part to themselves!). Remember, Henry Ford said he paid people enough to afford to buy his product. Meanwhile, Walmart is having to have food drives and give their employees food stamp applications so their employees can eat at Christmas.
      • Bob
      • Wilmes, Commenting as a Private Individual
      Walmart's governance and business model will face a magnified threat to their operations by the globalization of information through mobile devices. Although Walmart has invested in developing their online website, we have only really begun to see the way consumers use smartphones and mobile advertising to upend price competition. Will customers trust Walmart with more digital information and their social network connections ? Retailers have just begun to integrate mobile ads into consumer behavior and communities of interest. New metrics of digital trust will be developed that will make it harder to offer "everyday low prices" if other retailers can effectively tap the power of association and loyalty. With a 90% smartphone peneration rate in the United States, customer behavior will be driven by intelligent interaction with consumers. Imagine a Walmart competitor creating a mobile application that alerts a customer everytime th
      e app senses the GPS location of an approaching Walmart parking lot. Suddenly the competitor can run a 30 minute "special" just in time for that customer to drive down the road or hit the order online button.
      • Rosemary Yaecker
      • Retired, Intl. PR, Lucent Technology
      I think that the poorer classes in the US. have even less money than before, and they are loathe to spend any of it. That's why Walmart is suffering. It would help to have the company pay each employee more!
      • Shadreck Saili
      Some complacency seem to have emerged in walmart overtime, typical of attributes of being in existence for a long while. In its international operations, walmart's low wage policy must certainly be above the existing laws of various nation it operates in, for warmart to avoid gaining negative perception about how it manages employee welfare.

      Is a company this large managable? The answer is yes and No. 'Yes ' for as long as its policies allign with policies of the environments it operates in. Warmart has faced some challenges to penetrate some african states account of this.

      The answer is 'No' if complacency levels begin to rise to unprecedented levels
      • Kapil Kumar Sopory
      • Company Secretary, SMEC(India) private Limited
      Business expansion has to have limits for any Company to survive. Walmart has expanded fast but without adhering to the important norms of ethics, as it has come for criticism in some countries. It pays minimum wages to staff which cannot keep them always satisfied.Hence, the high turnover.
      Walmart's worry to sell cheap has something to do with quality standards which, if maintained, dent profits. Otherwise the quality has to be compromised. Once discovered, this can tarnish the image.
      Management has to be focused on all likely negatives in order to eliminate these as far as possible.
      • David Physick
      • Consultant, Glowinkowski International
      It is interesting that this article sits alongside one in which Harvard professors remember Nelson Mandela. How would Wal-Mart be if Mandela had been CEO? How would his approach to truth and reconciliation be managed between Wal-Mart and the "mom 'n' pop" stores that have disappeared from US Main Street. I make that comment in light of a tour my wife and I made NE USA in November to celebrate our 30th wedding anniversary. In a circular loop from Boston up through Maine, across to Niagara Falls and down through Philadelphia to New York we passed through a great many small communities. So many seemed to be down on their heels and the Main Street was occupied by thrift shops, cafes and little else. People looked down-at-heart. There were many moth-balled, redundant industrial sites. We'd hit pockets of affluence, e.g. Stowe in Vermont and around Lake George in upper New York state.

      Every so often, we'd hit a larger community in which the edge-of-town strip mall was anchored by a Wal-Mart. We popped into a couple of them - my wife likes Wal-Mart and we used to shop at Asda, Wal-Mart's UK business until we moved - and we're warmly welcomed and very courteously served at the check-outs. How much of the stores' stock was really needed by the local population I'd question but, considering my earlier comments about the socio-economic state of affairs in the other townships we'd passed through, it did seem the shops were delivering what the customer wanted. Each was busy. In New York City we were informed Wal-Mart has not been allowed to open, which looking at the retail frenzy surrounding Black Friday seemed somewhat of a paradoxical anacronism. And the news in both US and UK highlighted the scuffles and more serious altercations that occurred in Wal-Mart / Asda stores as customers fought for the bargains.

      If, as Professor Heskett is saying, Wal-Mart has been distributing its financial success down through its value-chain to its customer that seems laudable. But what about the small, family businesses that have not been able to stand up to the Wal-Mart behemoth? Which "benefit" is most valuable and merits praise and recognition? It is an enormously emotive issue.

      Perhaps Professor Heskett's question masks something much deeper and more profound, which concerns the degree to which consumerism and immediate gratification has enveloped our behaviour. We have to have the 50" TV, now. We have to upgrade our mobile phone, now. We have to have a copy of the dress or coat some celebrity has been seen wearing, now. Why? What point does this serve? In the US, life's immediate fulfilment seems a long way removed from the Iroquois confederacy's rule to make decisions looking out seven generations. We can't look out beyond seven minutes.

      I was saddened by what I saw during my journey through the NE states. It struck me that the American dream has vaporised. Is Wal-Mart the problem or the solution? I think it could become more the latter than the former with some deft Mandela-like leadership.
      • Will Wilkin
      • Co-Owner-Operator, Made In USA Solar LLC
      The 2.2 million jobs created by Walmart are among the lowest paid in the legal economy. The overwhelming prevalence of part-time and low wage jobs in this "world's largest private organization" is a prime example of how bad the American economy has become for ordinary Americans. Considering how fraudulent are the official unemployment statistics, which if calculated as they were until 1994 would show about 23% unemployment in America today, it is not so surprising that the "employees with whom [the author has] spoken directly are generally positive about their company and their work." This just shows how very tough it has got out there, and how much the expectations of American workers have been beaten down.

      And what is the root of these deteriorating wages and expectations and employment levels? The Free Trade policies that incentivize the globalized corporations to offshore and outsource so much American manufacturing.

      On September 20, 2011, Manufacturing and Technology News reported that during the previous ten years, the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. This export of our tax base and manufacturing engines of wealth creation continues apace, and it is the fundamental reason for the fiscal crises at the federal, state and local levels. It is also dismantling our industrial ecosystem, uprooting our skills and productive capacities in essential technologies. And of course it explains the stagnation of wages and employment opportunities that lead to these low-wage part-time Walmart jobs being appreciated as better than nothing.

      Truly a sign that it is not just Walmart that is defying gravity so much as it is the entire American economy doing so. We can only print so many trillion $100 bills to trade for imports before the world finds a new reserve currency backed by real economic production. And then the low, low prices of the imports lining Walmart's shelves will also evaporate.
      • Adam Hartung
      • Managing Partner, Spark Partners
      Wal-Mart is excellent at fulfilling the success formula Sam Walton created so many years ago.

      Unfortunately, the world has shifted. Significant changes in consumer behavior, including on-line shopping, have changed how they view the now decades-old value proposition.

      Additionally, changes in views regarding minimum wage (and living wage) and the nature of work impact how the population (society) view hiring an enormous workforce that does not make very much money.

      But Wal-Mart has not adapted well to these shifts. Thus, a gap has been created between the Wal-Mart success formula and expectations. This lack of adaptation to market shifts by other companies has historically led to lower sales growth, lower returns and eventual decline.

      Unless Wal-Mart moves from being so focused on executing its outdated success formula toward much greater adaptation it is likely to go the way of S.S. Kresge, Woolworth, Montgomery Wards, Kmart and Sears.
      • Vipan Seth
      • Director of Mktg & Sales, Comcast
      As a consumer and marketer, I believe Walmart's real challenge in competing with online retailers and drop shippers. Customer is a lot closer to suppliers and manufacturers than ever before. The value proposition may get diluted over time. Internet tools and apps where shoppers can compare prices and order with the click of a button may threaten the business model and erode the low value positioning.
      • ajit
      • None, None
      The question implies that Walmart is an unchanging entity. I think they can morph successfully just as GE did. From my experience in retail, their low costs are a core strength and therefore their commensurate risks lower. I think they need to overcome their image of a low labor rate payer, possibly by raising pay a bit and prices a bit. Also by changing the product mix to include high value products (like Costcos upscale liquor brands) and services. Another possibility might be to compete with Amazon by offering net buying with alternatives. In summary I think they still have some steam left.
      • Ken Black
      • VP Sales, Orwellian Tomorrow Corporation
      Walmart is racing quickly towards over-saturation and over-capacity in the marketplace. If economic trouble develops from mismanagement, similar to GM's situation, Walmart could be crawling to DC for a bailout. The question is, does Walmart have enough unionization for Congress to decide Walmart would be worthy of a bailout? Or would there be a major reorganization involving the shedding of a myriad of stores prior to being absorbed by another major retailer (ie. like Kmart taken over by Sears) ? I believe Walmart's tentacles are reaching into all levels of government around the world to insulate them from whatever economic calamity is on the horizon.
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    James L. Heskett
    James L. Heskett
    UPS Foundation Professor of Business Logistics, Emeritus
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