WAL-MART.COM:
A Case Study
in Managing Technical Transitions
Managing Technical Transitions
Prof. Michael Lawless
February 24, 2001
Prepared by:
Andrew Bender
Ann Howell
Amy Lavin
David Torgerson
Founded
in 1962 by Sam Walton, Wal-Mart followed an amazing pattern of success and growth,
eclipsing all other U.S. department store retailers by the early 1990’s. In early spring 2001, Wal-Mart enjoyed a
huge market capitalization of over $230B, which was down from highs of nearly
$300B in early 2000. Over the last
year, however, Wal-Mart had suffered a number of failures in its Internet-based
operations, as it tried feverishly, along with many other traditionally
“bricks-and-mortar” companies, to make a transition to the Internet. As much of the commotion in the markets
relative to the Internet subsided due to a slowing economy and a number of
high-profile “dot-com” failures, Wal-Mart continued to experiment with it’s
Internet presence and corporate strategy.
In this paper, we discuss Wal-Mart and its technical transition to the
Internet. First, we examine the company
from a value chain and core competency perspective, to gain insight on what
value the company brings to the table, both in its traditional and Internet
operations. We give a synopsis of Wal-Mart’s recent and current online
philosophies, and then turn to Wal-Mart’s strategy as it relates to the
transition. Finally, we provide an
analysis of Wal-Mart’s prospects and recommendations for the future.
Sources of Value
Wal-Mart
had always invested heavily in infrastructure.
They were among the first to use point-of-sale Uniform Product Codes
(UPC) scanning, and intra-store radio frequency (RF) transmission of product
UPC and pricing information between central store inventory systems and
personnel with scanners on the store shelves.
However, their most valuable infrastructure investments were made at a
significantly higher level. A satellite
system connecting all stores was initially installed in 1983, and grew into a
complex communication network that included all stores, headquarters, and
distribution centers, as well suppliers.
This system facilitated a modified just-in-time process of inventory
control, a feat virtually unheard of in general merchandise retailing. Put simply, as each store sells an item, a
message is automatically sent to the supplier of that item, who then knows to
include a replacement in the next shipment (usually that day) to the nearest
distribution hub. This degree of connectivity allows rapid response to
inventory needs, and reduces dramatically the amount of inventory
required.
A
second area of major investment was in distribution technology. Wal-Mart established a network of innovative
hubs which used “cross-docking” to minimize distribution center inventory and
to facilitate the need-based inventory delivery system enabled by the satellite
network. In this model, as shipments
arrive at the warehouse, merchandise is moved directly to the trucks carrying
the outbound shipments to specific stores.
In many cases, the same trucks can even be used for inbound and outbound
shipments, including those carrying new merchandise to stores and those
carrying returned, outdated, or unneeded merchandise from stores, thus
minimizing round-trip shipping costs.
Wal-Mart
operates as an aggregator, distributor, and retailer of consumer goods. Due in part to its size, to the connectivity
involved in its operations, and to the zest with which it has traditionally
negotiated supplier contracts, Wal-Mart has established itself in a key
position in the value chain of its suppliers.
It is consumer goods giant Procter &
Gamble’s largest customer, and holds a significant power position relative
to other smaller suppliers. This
position has enabled Wal-Mart to obtain superior price breaks relative to the
competition on the products it carries.
It’s size has obviated the need for separate distributors or wholesalers
in the value chain. Coupled with the efficiency
of its distribution network and store model, Wal-Mart has achieved a well-entrenched
position in the value chain of its customers as well – that of the lowest cost consumer goods retailer. Hence, the value that Wal-Mart provides is
two-fold. First, it provides value to
its suppliers by operating as a large, relatively stable, nearly omnipresent
channel for sales of goods, which provides rapid feedback on unit sales and
localized demand. Secondly, and
arguably more importantly, Wal-Mart provides value to customers by offering
aggregation of a wide variety of consumer goods in a single location, and
selling those goods at the lowest prices.
With
respect to traditional operations, Wal-Mart continues to enjoy success. Despite the emergence of other
bricks-and-mortar competitors such as Target,
Wal-Mart’s cost position and relationships with suppliers still differentiate
it from the competition. It’s value
proposition continues to be successful, and it remains a darling of Wall Street
analysts. Finally, as the fervor over
business-destroying dot-com ventures wanes, Wal-Mart continues to show a high
level of durability potential in it’s traditional operations. Selected financial information for Wal-Mart
is provide in Exhibits 1-3.
Competencies
With
an eye toward the online environment, it is useful to examine the competencies
that Wal-Mart possesses in its current operations. It has been theorized that companies deliver superior customer
value by performing exceptionally well in one or more of three areas,
Operational Excellence, Customer Intimacy, and Product Leadership[1].
Based on the above discussion, it is relatively easy to theorize that
Wal-Mart’s primary strengths lie in the area of Operational Excellence. Specifically, Wal-Mart’s ability to coordinate
a complex information management and distribution network, and to efficiently
manage supplier relationships are the cornerstones of its success. What isn’t as obvious is how Wal-Mart’s
competencies translate to an online environment. Clearly this is highly dependent on the type of online strategy
Wal-Mart pursues. We will discuss
Wal-Mart’s online strategy in detail later in this paper. However, it is useful to examine some common
areas in which Wal-Mart might excel or face challenges.
For many companies, the thrust of an online presence is perceived to lie in the business to consumer (B2C) arena. As shown in the operations of pure play online retailers such as Amazon.com, or clicks-n-mortar companies like Toys ‘R Us, one of the keys to success in the realm of B2C online retailing is the ability to efficiently fulfill large quantities of small orders. A highly efficient back-end fulfillment system is therefore a key competency that large scale online retailers must master. On the surface, it would seem that Wal-Mart, with its heavy investment in back-end infrastructure, would excel in this area. However, we note that a key difference in Wal-Mart’s systems is that they are currently designed to optimize large shipments of varied products to relatively few locations through relatively proprietary transportation networks, not small shipments to a large number of public locations. Could Wal-Mart’s systems be expanded or adapted to handle such shipments efficiently? Perhaps. But, we see it as potentially being a significant challenge.
A second broad area of expertise linked to success in the B2C arena is a the customer interface: the degree of customer intimacy, community building, and one-to-one marketing. While it can be argued that Wal-Mart has successfully created a “community feel” within its bricks-and-mortar stores, and by virtue of their omnipresence and comprehensive information management systems have garnered superior knowledge of consumer purchasing habits, it would be a stretch to state that Wal-Mart excels at customer intimacy. It is therefore uncertain as to what degree Wal-Mart’s rather macroscopic knowledge of relationships with customers is transferable to an online B2C environment.
It should be noted that there is one aspect of B2C retailing advantage which Wal-Mart clearly exemplifies in its traditional operations: that of beating competitors on price. Wal-Mart’s efficiency and relationships with suppliers represent a competency that could potential transfer very well to online operations. The degree to which Wal-Mart’s cost, and hence price, advantage can be leveraged on the internet will depend heavily on how parallel the online cost structure turns out to be, with key areas of concern likely to be distribution and shipping costs.
With respect to the business-to-business (B2B) online environment, many companies are using the Internet as an inexpensive medium over which to efficiently link entities in their respective value chains. Suppliers, distributors, wholesalers can relatively easily be connected. Exchanges can be created for the buying and selling of commodities, supplies, and other goods or services. The list of applications goes on. Wal-Mart clearly has a competency in the management of information and communication among all upstream parties in its value chain. Currently, this expertise is played out in a set of interwoven proprietary systems and networks. It is possible that value could be garnered by Wal-Mart in the B2B environment should the Internet be used as a logical migration destination for current systems, or via the generation of enhanced systems which improve upon their proprietary predecessors. However, the entrenchment of current systems could prove as much a hindrance to Wal-Mart in a transition to the Internet as it is a competency in their current operations. Again, the degree to which this competency is transferable is highly dependent on the strategy Wal-Mart elects to pursue
Thus far, we have attempted to outline Wal-Mart’s position and value proposition, as well as the set of competencies that have made it successful. We have noted the opportunities and challenges those competencies present relative to a transition to the Internet. We now look at Wal-Mart’s motivation and strategy for moving to the Internet and then we examine Wal-Mart’s real actions and Internet operations to date. Finally we close with a summary of key issues Wal-Mart must considered going forward.
The Strategy for Walmart.com
Wal-Mart looked to venture
on-line as a means to continue delivering on its promise to customers, “a wide assortment of good quality
merchandise; the lowest possible prices; guaranteed satisfaction with what you
buy; friendly, knowledgeable service; convenient hours; free parking; a
pleasant shopping experience.” While
the Internet can be used to achieve many of these objectives, initially Wal-Mart
hastily overlooked two key things: the value of the Internet as it relates to
Wal-Mart’s traditional business and the ability of the Internet to leverage
Wal-Mart’s core strengths. These
factors have become increasingly evident over the past three years.
Wal-Mart’s
traditional business was based on bringing “contemporary retail shopping
advantages to small-town America.”
Since the beginning of Wal-Mart.com, people have asked how Wal-Mart
would successfully transition its customer base to e-commerce. The paradox being that many present
customers may not use the Internet while savvy Internet users may not be
Wal-Mart shoppers. In line with its
mantra, Wal-Mart sought to bridge the digital divide by extending reasonably
priced Internet access to rural communities.
Consequently, Wal-Mart forged a deal with America
Online to distribute AOL CD ROM’s and disks in the Wal-Mart stores. This would enable the majority of current
customers to get on-line and ultimately shop at Wal-Mart.com. Unfortunately, AOL and Wal-Mart have not
been able to roll-this program out in the targeted timeframe. Further, while
this effort serves to extend Internet access to a broader population it does
not help those individuals/families who do not own computers.
As
mentioned in the first section,
Wal-Mart has enjoyed technological leadership as one of its core
strengths and sources of competitive advantage. In 1996, it seemed logical for Wal-Mart to establish an early
presence on the Web, the next new technological advancement. With that, Wal-Mart also developed the most
secure technology for managing on-line payments and forged a partnership with MasterCard to offer digital certificates
to cardholders. Unfortunately, as
mentioned earlier, the web site was poorly designed, difficult to use, and did
not take advantage of the information-value of the Internet and the ability to
have a one-to-one customer relationship.
Likewise,
Wal-Mart saw the Internet as a means to conveniently deliver a wide assortment
of goods at low prices. The complexity
arose when Wal-Mart recognized the difficulty of translating assortment,
convenience, and low prices to the Internet.
On-line shoppers perceive convenience as the ease and speed with which
one can find what they are looking for.
Assortment is only valuable to on-line shoppers if it is easily
navigable and accessible. To-date the
Wal-Mart.com web site has been neither.
Moving to the Internet
Wal-Mart began its
love-hate relationship with the Internet in July of 1996 when it launched a
bare bones site targeted at the online B2C retail market. At that time, the company did little with
the site, as they waited for more of their customers to get on-line. The site operations were conducted from the
corporate headquarters in Bentonville, Arkansas. Competitive pressures to beef-up the site didn’t arise until
1999, when they began reworking the site to prepare for the holiday season. However, when the holiday season arrived,
the company had trouble delivering items on time. As early as December 10th, Wal-Mart couldn’t guarantee that
purchases from the web site would be delivered by Christmas. Thus, in January of 2000, Wal-Mart announced
yet another makeover of their site. The
new site would include everyday household items as well as special features
such as a travel center, which offered airline tickets and hotel
reservations. Reviews of Wal-Mart’s
new site were lack-luster, siting difficult navigation and search
capabilities. In September of 2000, the
site was ranked fourth among department stores in the number of unique
visitors, behind J.C. Penny, Sears and Target.[2]
It appears
Wal-Mart knew all along that the website was filled with problems which is why
Wal-Mart and Accel announced the break-out
of Wal-Mart.com just days after the site
re-launched for the third time in early 2000.
This division would operate as a co-owned independent company located in
Silicon Valley, isolated from Wal-Mart’s headquarters in Arkansas. This entity would have a separate board and
management team, which would be hired in the following months. Additionally, two outside fulfillment
centers would handle shipping. While
full details of the financing and ownership arrangement haven’t been disclosed,
it is known that Wal-Mart owns at least an 80% stake, with Accel making up the
remainder.
Fortunately
Wal-Mart’s pockets have been deep enough to afford experimentation with the
right mix of bricks-and-clicks. The
company failed to achieve success with a fully integrated structure, and therefore
made the decision to separate operations. Reports indicated that Wal-Mart had
been contemplating a partnership for some time before deciding to partner with
Accel. Wal-Mart had strategically
waited to find a partner that could bring key relationships to help them thrive
in the Internet community, and lend expertise in how to operate and recruit in
a talent-drained industry. Accel also
demonstrated a history of longer-term business relationships, which was
attractive to Wal-Mart.
The
benefit to earlier failed attempts at the Internet was the acknowledgement of
the need to have a separate culture in order to get business done in the
warp-speed of Silicon Valley. In
anticipation of a culture-clash, Accel addressed key points, like going public
and offering employees stock options, well in advance of the deal being
announced. The ability to attract high-quality management was essential to
Wal-Mart. Wal-Mart’s “good-old-boy”
executives understood the importance of luring talent with oodles of stock options
and found that by separating the companies an incentive structure could be
formed that included stock options, with the intent to take the company public
at some point.
Another
overlooked reason for spinning off Internet operations into a separate company
was the avoidance of sales tax—a key factor for price-sensitive on-line
shoppers. Because Wal-Mart had physical
presence in all 50 states, all Internet customers would have to pay sales tax. By spinning off the Internet operations,
Wal-Mart.com could avoid sales tax in states in the 47 states where the dot-com
doesn’t operate.
In
the spring of 2000, Jeanne Jackson joined Wal-Mart.com as the CEO. Jackson came from the Gap, where she transformed Banana Republic in to a chic, urbane
shopping destination, increasing sales
from $750 million to $1.5 billion in four years. Jackson was chosen for the position because of her strong background
in traditional retailing and her leadership of the Gap’s Direct division, which
included managing its Internet sites.
Because Wal-Mart did not have direct sales expertise, launching a Web
store required creating a new direct-marketing infrastructure and developing a
new set of management skills. Jackson
provided this link.
Since
arriving at Wal-Mart.com, Jackson has slimmed down product offerings and
re-vamped the site, which re-launched in early November of 2000, just in time
for the holiday season. Under Jackson’s
leadership, Wal-Mart.com has purchased the assets of several smaller e-tailers
and formed partnerships with Time Warner
and RealNetworks to offer
proprietary music events via the web.
Jackson’s stated strategy for the site is to start with a reliable,
easy-to-use web site which both get back to Wal-Mart’s traditional
strengths. In addition to stripping
away the bells and whistles from the site, Jackson also stripped away products
that made no sense on the web (i.e. $0.25 plastic cups) and expanded categories
that complemented store offerings, such as patio furniture.
Ultimately,
Jackson would like to have shipping and customer-service in-house, and to
fully-integrate the stores and the web.
This last item will be essential in achieving the right mix of
bricks-and-clicks to fully service the Wal-Mart customer. Currently Wal-Mart.com is working on the
ability to offer online listings of real-time inventories in individual stores. This would allow customers to decide whether
to head to the store, or to buy the item on-line. This type of seamless integration could determine the success of
Wal-Mart’s on-line presence by leveraging the strengths of physical and on-line
stores to offer a full-service capability to customers. As discussed earlier, the Wal-Mart customer
may not have been the ideal Internet shopper three years prior. However, as the digital divide narrows,
Wal-Mart may find many customer service benefits to the web, which would
bolster their already strong customer service reputation.
In
analysis of Wal-Mart’s decision to take Internet operations out-of-house, we
refer to the article entitled “Get the Right Mix of Bricks & Clicks.” Components of the seamless strategy and
joint venture strategy make sense for Wal-Mart. In support of their early decision to integrate operations,
Wal-Mart’s brand and customers lend well to an integrated platform. Wal-Mart’s brand needed no introductions,
and they could advertise the web site throughout their numerous stores
nationwide. Additionally, the brand is
known for everyday low-prices, which fits well with Internet shoppers’
priorities. Opposition to the seamless
strategy lies in Wal-Mart’s lack of direct sales experience and fulfillment
capabilities. Additionally, the
importance of benefits derived from seamless customer service may have been
mitigated for Wal-Mart at the time, as many felt the Wal-Mart customer profile
was not web-savvy.
Real Results
Perhaps
the transition difficulty in the early years rested in the area of Wal-Mart’s
technical prowess. As discussed
previously, one of Wal-Mart’s core competencies is its operational ability to
streamline the supply chain through cross-docking inventory systems and
efficient means of communication through technology. While Wal-Mart has
achieved technology efficiency in its supply chain, shipping to a store is a
much different game than shipping direct to a customer. In this case, the web presented much more
than just a technological advancement.
Perhaps the secret to the web relied more on the ability to use the
channel to reach customers to develop an efficient relationship. Wal-Mart had an expertise in operations, not
in one-to-one customer relationships.
Finally,
the definition of “low price” is more tied to value on the Internet. Value
includes the information available to an on-line shopper, convenience and ease
of purchasing items, and actually obtaining those goods as a result. In reality, leading web sites like Amazon.com
do not offer the lowest price. Instead, they offer the best value. They make “the right product available at
the right time in the right place.”
Customers are willing to pay a small premium for that convenience. Additionally, low-priced goods on-line
typically net out to be of equal or higher price once shipping is
included. Wal-Mart may not be able to
successfully offer the lowest on-line price as it incurs added costs through
direct marketing and delivery to customers.
Another
asset has driven Wal-Mart’s growth: a friendly shopping environment. It is important to assess whether this
strategic advantage easily translates to an Internet environment. While an easy-to-use site makes a shopping
experience more pleasant, it doesn’t necessarily equate to a smiling
salesperson helping you shop. Wal-Mart
also forgot to capitalize on one of its greatest strengths in the traditional,
physical world. Wal-Mart’s wide aisles with a multitude of shelf facings have
enabled Wal-Mart to increase sales per store visit simply by suggesting
products to shoppers. Wal-Mart has
taken advantage of the tendency to impulse shop. Wal-Mart has yet to translate this ability into the virtual
world.
What’s Next
Although Wal-Mart appears on the right track with its partnership with Accel and the creation of Wal-Mart.com, its responsibility to manage the technical transition has only begun. Wal-Mart and Wal-Mart.com must create a plan to both monitor internal operations and technological advances. For Wal-Mart, it appears that a separate company is the right option based on the aforementioned analysis, however, this may not always be true. Most analysts agree that the role of the Internet is in its nascent stages, and will continue to develop over the next few years. With this in mind, Wal-Mart must monitor the progress of its company and determine if there is an advantage, whether from a financial, managerial or even marketing standpoint, that would favor integration.
Similarly,
with the rapid change in technology effecting customer relationships, Wal-Mart
and Wal-Mart.com must institutionalize their monitoring of developments. Rather than jumping on the Internet
bandwagon, Wal-Mart must learn from its mistakes in this case and keep an eye
out for future disruptive technologies.
As many cases show, a company’s strength can quickly become a competency
trap. In order to help prevent this,
Wal-Mart and Wal-Mart.com must create incentives for managers at both
organizations to follow technological developments. Managers should focus on more than simple NPV and DCF analysis
and factor in some benefit of being a part of the technology. The introduction of real options could
potentially solve this problem.
Although it may be difficult to implement at present, keeping it in mind
in going through project decision analysis will benefit Wal-Mart.
There
are three unique ways for Wal-Mart to access disruptive industry changes: partnerships with third parties (like the
Accel deal), the acquisition of companies with complementary technologies, or
through internal development.
Wal-Mart.com can become a breeding ground for technological and
managerial innovation. Since Wal-Mart
is a well-established firm, it requires large scale projects with high
ROI’s. This characteristic may prevent
adaptation and adoption. In contrast,
Wal-Mart.com will be smaller in scope and potential projects, making it easier
to experiment with new means of serving the customer. Regardless, a system of knowledge management must be created to
allow the two companies to share innovations and great ideas. Whether these systems are institutionalized
(ex – group of Wal-Mart and Wal-Mart.com people who meet semi-regularly) or informal
(ex – Wal-Mart encourages people to meet cross-company for events or
discussions), the management of both sides must explicitly support the sharing
of information. Clearly this
integration is where the true efficiencies can be realized. As evidenced by the lack of profitability in
the pure-play e-tailing sector, Wal-Mart’s best bet for return on Wal-Mart.com
is to leverage efficiencies between the two organizations.
With
the establishment of a well-functioning Internet operation, Wal-Mart can also
begin to examine its customer base more intimately. Based on new abilities to tailor offerings under Customer
Relationship Management (CRM) theory, Wal-Mart can start differentiating its
customers and customizing its offerings to them. For example, there may be some customers who want to shop
exclusively through the web and others who will use a combination of web and
store shopping. For each of these
customers there is unique value that Wal-Mart brings. Wal-Mart must gather its information about its customers and then
interact with them further to deliver an end product that provides the most
value.
In conclusion, Wal-Mart appears to be in the position to finally manage the technical transitions related to the Internet. Through its partnership with Accel and its creation of a separate entity it is on track to begin to exploit the Internet to its benefit. Wal-Mart must learn from its mistakes during this period and create systems to manage future technical transitions. Fortunately, the size of Wal-Mart’s pockets allow for these mistakes. In fact, the capital support could even facilitate more flexibility with experimentation, which could greatly increase its competitive position. Wal-Mart.com can still enjoy the benefits of purchasing leverage available to the parent company, as well as the brand recognition and advertising opportunities. Wal-Mart must find the right set of incentives and dialogue between the two companies to provide the customers with an integrated full-service offering. Once this equilibrium is reached, hopefully Wal-Mart will begin to fully appreciate the synergies of the Internet.