Walmart Case Study: Strategy, Ethics & Corporate Structure

Introduction and Case Issues

Case Issues

CI#1 — Consumer Safety: Walmart Stores has been severely criticized for its intense drive to offer customers the cheapest products on the market. In pursuit of that goal, the company has at times neglected the quality and safety of its merchandise.

CI#2 — Impact on Local Communities: Communities generally object to the opening of a Walmart store in their region. Citizens fear the impact the store will have on their lives and the environment, while local entrepreneurs worry about being driven out of business.

CI#3 — Employee Turnover: A large majority of Walmart employees are dissatisfied with their wages, benefits (including healthcare), and working conditions. This dissatisfaction generates significant personnel fluctuation.

Current Situation

Walmart embodies the ultimate model of retail business success. The company is the largest retailer in the United States, with a market share of approximately 20%. It operates a total of 2,701 stores spread across all American states and 13 additional countries. Fiscal year 2006 produced strong financial results, including net sales of $312.4 billion and net income of $11.2 billion (Walmart Annual Report for 2006).

Current Performance

The end of fiscal year 2006 was marked by a 44.9% increase in free cash flow, which reached $4,498 million compared to $3,105 million in 2005. Walmart also recorded a 9.5% increase in net sales and a 9.4% increase in net income (Parmelee, 2007).

In the preceding year, Walmart continued its territorial expansion by adding five more countries to its portfolio. The company increased expenditures — primarily employee wages — and conducted intensive marketing research to identify and satisfy customer needs.

Strategic Posture

1. Strengthen and maintain its leading position in the United States and become a leader in the international market.
2. Continue territorial expansion to additional countries and further increase revenues.
3. Use and promote environmentally friendly procedures and support community development (CI#2).
4. Respect all employees (CI#3).
5. Satisfy all customers (CI#1).

Mission

The Walmart mission encompasses several commitments drawn from company statements:

• "Provide sustainable, healthy and value-oriented products to meet customers' needs." (CI#1) (Walmart Annual Report for 2006)
• "Give ordinary folk the chance to buy the same thing as rich people." (Center for Business Planning, 1994–2007)
• "Save people money so they can live better." (Walmart Stores Website, 2007)
• "As a company committed to environmental responsibility, Walmart desires to be a leader in building and operating retail facilities that minimize the usage of energy and natural resources." (CI#2) (Walmart Stores Website, 2007)
• "Our mission is to enhance and integrate our supplier diversity programs into all of our procurement practices and to be an advocate for minority- and women-owned businesses." (Walmart Stores Website, 2007)
• "The mission of the Global Ethics Office is to promote and facilitate an effective global ethics program. Global ethical principles are designed to assist our associates and suppliers in making the right decision and doing the right thing." (Walmart Stores Website, 2007)
• "Focusing on the environment is the key to our mission to improve the quality of life for people around the world." (CI#2, CI#1) (Walmart Stores Website, 2007)

Objectives

• Increase the number of Walmart stores across the globe.
• Increase customer satisfaction and safety (CI#1).
• Reduce employee turnover and the associated costs of replacing personnel (CI#3).
• Support community development by creating additional jobs, offering locals a wide selection of low-cost products, and participating in charitable events (CI#2).

Strategies

1. Offer customers cheap, high-quality products:

• Improve the quality of products sold (CI#1).
• Improve logistics processes.
• Import products from countries with comparative cost advantages and resell them in the U.S. and foreign markets.

2. Territorial expansion:

• Open at least 305 new stores, relocate others to more commercial areas, and expand already-successful stores in welcoming communities.
• Open at least 30 new Sam's Clubs — a strategy that supports both Walmart's expansion and the development of small local businesses that can now obtain supplies at lower prices (CI#2).

3. Support community development (CI#2):

• Create new job opportunities.
• Pay increased taxes to local budgets.
• Participate in charitable events and adopt environmentally friendly procedures.

4. Human resources (CI#3):

• Walmart is primarily focused on reducing personnel costs.
• The company generally employs part-time workers who do not receive full benefits.
• Overtime is discouraged.
• Stores offer specialized training programs to all employees.

Policies

Pricing policies:

• Everyday Low Price
• Rollback: further reduces the Everyday Low Price
• Special Buy

Return policy: Essentially all purchased items can be exchanged or refunded within 90 days of purchase, provided the customer retains the receipt. Exceptions include computer components and accessories (45 days), camcorders and digital cameras (30 days), and computers and postpaid mobile phones (15 days) (Return Policy, Walmart Stores Website).

Diversity policies: Walmart values the diversity of its employees and associates. The corporation engaged with a number of leadership groups, including:

• African-American groups
• Asian and Pacific Islander groups
• Women's organizations
• Hispanic organizations
• Native American markets
• Seniors' organizations
• Gay, Lesbian, Bisexual, and Transgender groups
• Groups for people with disabilities
• Supplier diversity organizations

Corporate Governance

Board of Directors

Walmart's Board of Directors is composed of fifteen members, as listed on the Walmart Stores website:

1. Aida M. Alvarez (since 2006) — Former member of the Clinton Cabinet and former administrator of the U.S. Small Business Administration; Founding Director of the Office of Federal Housing Enterprise; Chair of the Latino Community Foundation; director of UnionBanCal; member of Deloitte & Touche LLP.
2. James W. Breyer (since 2001) — Managing partner of Accel Partners; director of RealNetworks Inc. and Marvel Entertainment Inc.
3. M. Michele Burns (since 2003) — Chairman and CEO of Mercer LLC; director of Cisco Systems Inc.
4. James Cash Jr. (since 2006) — Ph.D.; retired professor of Business Administration at Harvard; director of the Chubb Corporation, General Electric Company, Phase Forward Inc., ITM Software Corp, and Microsoft Corporation.
5. Roger C. Corbett (since 2006) — Director of the Reserve Bank of Australia and Fairfax Limited; retired CEO and Group Managing Director of Woolworths Limited.
6. Douglas N. Daft (since 2005) — Director of the McGraw-Hill Companies Inc.; retired Chairman and CEO of the Coca-Cola Company.
7. David D. Glass (since 1997) — Former President and CEO of Walmart Stores Inc.
8. Roland A. Hernandez (since 1998) — Director of Lehman Brothers Holdings Inc., MGM Mirage, the Ryland Group Inc., and Vail Resorts Inc.
9. Allen I. Questrom (since June 2007) — Member of the Board of Directors of Burt's Bees Inc. and Sotheby's Holdings Inc.; retired Chairman and CEO of J.C. Penney Company.
10. H. Lee Scott Jr. (since 1999) — President and CEO of Walmart Stores Inc.
11. Jack C. Shewmaker (since 1997) — President of J-COM; retired Vice Chairman of Walmart Stores Inc.
12. Jim C. Walton (since 2005) — Chairman of the Board and CEO of Arvest Bank Group Inc.; Chairman of the Board of Community Publishers Inc.
13. S. Robson Walton (since 1978) — Current Chairman of the Board at Walmart Stores.
14. Christopher J. Williams (since 2004) — Director of Harrah's Entertainment Inc.; Chairman and CEO of the Williams Capital Group L.P. and Williams Capital Management L.L.C.
15. Linda S. Wolf (since 2005) — Former Chairman of the Board and CEO of Leo Burnett Worldwide, Inc., a division of Publicis Groupe S.A.

Top Management

Walmart's senior executive team, as presented on the Walmart website, includes:

• Eduardo Castro-Wright — Executive Vice President and CEO, Walmart Stores Division
• M. Susan Chambers — Executive Vice President, People Division
• Patricia A. Curran — Executive Vice President, People, Walmart Stores Division
• Leslie A. Dach — Executive Vice President, Corporate Affairs and Government Relations
• Linda M. Dillman — Executive Vice President, Risk Management, Benefits, and Sustainability
• Michael T. Duke — Vice Chairman, International Division
• Johnnie C. Dobbs — Executive Vice President, Logistics and Supply Chain
• John E. Fleming — Executive Vice President and Chief Merchandising Officer, Walmart Stores Division
• Rollin L. Ford — Executive Vice President and Chief Information Officer
• Craig R. Herkert — Executive Vice President and CEO, The Americas, International Division
• Charles M. Holley Jr. — Executive Vice President, Finance and Treasurer
• Thomas D. Hyde — Executive Vice President and Corporate Secretary
• Gregory L. Johnston — Executive Vice President, Club Operations, Sam's Club
• Thomas A. Mars — Executive Vice President and General Counsel
• C. Douglas McMillon — Executive Vice President and CEO, Sam's Club
• John B. Menzer — Vice Chairman and Chief Administrative Officer
• Stephen Quinn — Executive Vice President and Chief Marketing Officer
• Thomas M. Schoewe — Executive Vice President and Chief Financial Officer
• H. Lee Scott Jr. — President and Chief Executive Officer
• William S. Simon — Executive Vice President and Chief Operating Officer, Walmart Stores Division
• Gregory E. Spragg — Executive Vice President, Merchandising and Replenishment, Sam's Club
• S. Robson Walton — Chairman of the Board of Directors
• Stephen P. Whaley — Senior Vice President and Controller
• Eric S. Zorn — Executive Vice President and President, Walmart Realty

Internal Environment: Strengths and Weaknesses

Corporate Structure

Walmart's retail division consists of four major subsidiaries: Walmart Discount Stores, Walmart Supercenters, Walmart Neighborhood Markets, and Sam's Clubs (Walmart Facts, 2007).

• Walmart Discount Stores: More than 1,000 in the U.S. alone; average store surface of 107,000 square feet; approximately 225 associates; 120,000 items sold.
• Walmart Supercenters: Generally open 24 hours a day; sell a wide array of products including grocery, clothing, and general merchandise; more than 2,300 stores internationally; average surface of 187,000 square feet; 350 or more associates; approximately 42,000 different products.
• Walmart Neighborhood Markets: Sell grocery, pharmaceuticals, and general merchandise; more than 120 locations, generally co-located with supercenters; average surface of 42,000 square feet; 95 employees; approximately 29,000 items sold.
• Sam's Clubs: Offer general merchandise in large quantities at value prices; primarily targeted at small businesses; average of 160–170 associates; approximately 5,500 different items.

Walmart operates subsidiaries in all 50 American states and in 13 additional foreign countries: Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, and the United Kingdom.

Corporate Culture

The corporate culture of Walmart is one of the biggest contributing factors to its status as one of the world's most admired companies. As the company states: "From the three basic beliefs to the sundown rule, we respect our customers, associates and suppliers and strive to treat them as we ourselves want to be treated. In building and nurturing these relationships, as well as serving the communities where we live, we've helped build a better business — one committed to excellence." (Walmart Stores Website, 2007)

Key cultural principles include:

1. High standards of ethics, morality, and integrity.
2. A commitment to environmentally friendly procedures and packaging.
3. Treating all employees, partners, and customers with the utmost respect.
4. Valuing diversity and encouraging innovation.

Corporate Resources

1. Marketing

Product: Walmart offers a wide array of products, from grocery and apparel to general merchandise, including both organic and non-organic items.

Promotion: Strong advertisements and promotions are developed by the Walmart marketing department with the aid of specialized firms. Advertisements run across all media channels — television, radio, internet, street banners, flyers, and print media — with a consistent focus on low prices.

Price: Low retail prices result primarily from cheap imports. These low prices, however, pose a significant threat to local businesses (CI#2).

Place: Walmart maintains international coverage across all American states and 13 countries, and is also available for online purchases at walmart.com.

2. Research and Development

Because Walmart is primarily a retailer, the company does not perceive a strong need for product innovation or improvement, and R&D budgets remain relatively limited.

3. Operations and Logistics

Operations principally involve the import of low-cost products, transport, storage, inventory management, and selling. The corporation employs strict procedures that ensure smooth ongoing operations. Its highly efficient logistics system enables the conglomerate to collect and transport products to numerous destinations — a capability that is central to maintaining low retail prices.

4. Human Resource Management

Walmart employed approximately 2 million people in 2007. Employees work an average of 34 hours per week; overtime is discouraged and training programs are provided. The most common position is sales associate. Employees are generally dissatisfied with wages — which are lower than at comparable companies — and with the limited benefits package, both of which contribute to elevated turnover (CI#3).

5. Information Systems

Skilled and qualified technicians maintain and update the information systems and databases that support both online purchases and customer assistance. The Information Systems Division is guided by three beliefs — "Respect for the Individual; Service to Our Customers; and Strive for Excellence" — and five commitments: "Know the Business; Build it Right; Show the Value; Count on Us; and Teach Up" (Information Systems Division, Walmart Stores Website).

6. Financial Data and Analysis

Key financial highlights for fiscal years 2004–2006 (in millions of dollars, from the Walmart Annual Report for 2006):

• Net Sales: $312,427 (2006) / $285,222 (2005) / $256,329 (2004)
• Cost of Sales: $240,391 (2006) / $219,793 (2005) / $198,747 (2004)
• Net Income: $11,231 (2006) / $10,267 (2005)
• Long-Term Debt: $26,429 (2006) / $20,087 (2005) / $17,102 (2004)

7. Financial Ratios (Fiscal Year 2006)

Data for the following ratios were retrieved from the Reuters website in November 2007:

Valuation Ratios: These ratios allow comparison of a company's stock price relative to other stocks in the market.

• Price-to-Earnings (P/E) Ratio = Price per Share / Earnings per Share. Walmart's P/E ratio was slightly above the industry average (14.71 vs. 14.55), indicating that investors were paying more per unit of income and expecting higher growth relative to industry peers (Investopedia, 2007).
• Price-to-Sales Ratio = Share Price / Revenue per Share. Walmart's price-to-sales ratio was nearly identical to the industry average, suggesting that WMT stock was well balanced with other traded companies in the sector.
• Price-to-Book Ratio = Stock Price / (Total Assets − Intangible Assets and Liabilities). Walmart's ratio was slightly above the industry's (2.93 vs. 2.66), which may indicate a slight overvaluation of WMT stock.

Dividend Yield: Dividend Yield = Annual Dividends per Share / Price per Share. The 1.93% dividend yield indicates that investors received $0.0193 for each dollar invested in Walmart. This figure exceeds the industry average of 1.79%, indicating that Walmart was a relatively profitable investment.

Profitability Ratios: All five profitability ratios — gross margin, operating margin, pre-tax margin, net profit margin, and effective tax rate — were below the industry average, suggesting that Walmart earned lower profits than its sector peers on a relative basis.

Management Effectiveness Ratios: According to O'Reilly (2007), these ratios "compare financial measures from company financial statements to evaluate management performance." Walmart's ROI, ROA, and ROE all exceeded industry averages, indicating that the company possesses a capable and skilled management team.

Efficiency Ratios: These ratios measure how well a company manages its resources and assets while maximizing profits. All three metrics — receivable turnover, inventory turnover, and asset turnover — exceeded the industry average.