During the last two decades, Wal-Mart has been able to take advantage of the rise of information technology and the explosion of the global economy to change the balance of power in the business world. Here, Edna Bonacich, professor of sociology; Jon Lehman, a former Wal-Mart store manager; Nelson Lichtenstein, professor of history; Ray Bracy, Wal-Mart's vice president for federal and international public affairs; Gary Gereffi, professor of sociology; and Alan Tonelson of the U.S. Business and Industry Council offer details on how Wal-Mart exploited these to forces to become the world's largest company.
Professor of Sociology, University of California, Riverside
… What are the secrets of Wal-Mart's success?
There are many secrets, but let me just focus on one issue; that is, their control of logistics. So their leadership, particularly their post-[Sam] Walton leadership ... had the wisdom to hire logistics people who are very, very competent. And basically, they gained control over the supply chain. That was their goal, and they put in information technology that enabled them to collect it and disperse this information. They have the largest commercial satellite system in the world. They have satellites that are collecting information and beaming it down to their vendors. ...
So the idea is to master the process of production, movement of the goods, warehousing of the goods, making sure that it arrives at the right place at the right time. That's what Wal-Mart is so good at. And they're very good at squeezing the price out of that. So they insist that it be done cheaply, it be done accurately, it be done quickly.
And they determine what it is they want and when they want it?
Yes, I believe they do. ...
What is it that enables Wal-Mart to know what it wants, when it wants [it] and where it wants it?
The bar-coding revolution… That little bar code that you see [has] everything [on it]: which company it is and exactly what product [it] is; a shirt of a certain size, a certain color, short sleeves, with pockets, every little detail -- a precise description of the product.
When they scan that in when you buy it, that information is immediately collected. So they know where you bought it; they know the brand name and so forth. All of that is put into the information system. And then, if you have a good partnership with your vendor, that [information] is beamed down to them, and they know [what] has sold. They know, "We need to reproduce this." …
Why does it give Wal-Mart power, if it's dealing with the shirt makers, or with Procter & Gamble making hairspray or soap or whatever? You talk about a revolution and changing relationships. …
Part of Wal-Mart's power lies in its sheer size. There's a kind of building effect that occurs. ... They form a monopsony: in other words, a single buyer for a number of major products. So they are the major buyers. They don't control 100 percent of the market, but they may control 38 percent of the market for [several] goods. They are the largest toy seller. They are the largest grocer. So there are large products that they control. And then the manufacturers are basically stuck having to sell to them. If they don't sell to [Wal-Mart], then they're in deep trouble. So there's a big volume effect. ...
Wal-Mart's big, but is that really the only source of its power? I mean, what gives Wal-Mart the incredible leverage it has in the marketplace?
Wal-Mart's leverage lies in the fact that they are at the end of the supply chain: in other words, that they front with the consumer, and the transaction of selling the goods is under their control. Therefore, they know what is being sold, and they're able to use that information to tell the producers what needs to be made, when, where. They also know what prices are popular, so they are able to say: "We want to sell this at a certain price. You make it at a certain price, or we're not going to work with you."
So the manufacturers are dependent on Wal-Mart for knowledge of the market?
That's right. And the manufacturers are dependent on Wal-Mart for being able to sell their goods at all. … And the shelf space is absolutely critical to their power. In other words, there are some industries that don't depend on large retailers, like the automobile industry, which still controls its dealers. The dealers are small and don't have power, and it's General Motors and Ford that control them.
But in these mass consumer-merchandise [industries], the retailers are the ones that have grown in power and have become enormous and incredibly wealthy. And you can see that shift in the way that the Fortune 500 has changed. In other words, it used to be General Motors and Exxon that dominated the Fortune 500 for years. Now Wal-Mart is number one. It shifted in 2002, I believe, and they now are the largest corporation in terms of sales in the world, let alone in the United States, and they're growing at something like a 15 percent clip. So there's no hope of anybody catching them up, unless they have a large consolidation of some kind.
Former Wal-Mart store manager
... What do you get from a bar code when you're running Wal-Mart or a Wal-Mart store?
Well, the amount of merchandise now that you can get through the computer systems and bar codes, universal product codes, is -- believe it or not, you can track sales on specific items, specific weeks, specific days, specific hours of the day, when you sell merchandise the most. You can find out what size of toothpaste is your best seller, what times of the year you sell that toothpaste. You can track sales spikes during the year, during certain seasonal periods and --
Sizes of clothes.
Clothes, sizes, colors, flavors -- all of those things. It's really incredible.
So what does that mean? ... Step back and describe how this thing operates. ... What happens when a sale is made?
OK. Well, let's talk about [cat food]. Let's say you have a cat, and your cat likes tuna-flavored 9 Lives or something. So you go to the counter, and you pick up some tuna 9 Lives. And maybe you pick up some chicken- and some beef-flavored as well, and you take all that to the cashier. ...
Well, as soon as that cashier picks up the cans of cat food and scans it, then the cat food is recorded by the computer. The sale's recorded, and then an order is generated. An order is automatically generated that evening at midnight, when the home office pulls that information through their data ports. Then that order goes to the distribution facilities throughout the company, and that distribution facility, the warehouse, fills that order, and it's sitting back on the shelf the next night or the following night. ...
So the efficiency is enormous.
Oh, yeah. And it has to be. And it keeps getting more and more, faster and faster. ...
Professor of History, University of California, Santa Barbara
What is it that transforms Wal-Mart from a really good-sized regional merchandiser into a national and then a global economic power?
Wal-Mart is successful in the '80s and '90s in really becoming a mega-corporation, a template firm; that is, a kind of firm that sets the standard for many other firms. ...
On the one hand, technology has exploded, and it adopts this new, very efficient infrastructure which means that China, Arkansas, New York -- there's no difference in terms of real time and communications and ordering things. That's one thing.
Second, it takes advantage of the move to the Sunbelt and the population dispersal. And third -- and Sam Walton always said this -- he said: "I pay low wages. I can take advantage of that. We're going to be successful, but the basis is a very low-wage, low-benefit model of employment." And well, their competitors -- whether they're the Sears or even Woolworth's or even Kmarts of this world, and Costco certainly -- those firms ... had a sense that they couldn't really get away with a minimum-wage workforce, which had a 50 or 75 percent turnover. That was thought to be inefficient.
But Wal-Mart, I think, showed that they could do that. And partly you can have a workforce which rapidly turns over if you have the technology there, which means you can just slot one person into the job with no training and no sort of background. And that's what's happened. Wal-Mart has to hire something on the order of half a million workers every year just to maintain its current workforce. And they understood that. And that's been true, not just at Wal-Mart, of course, [but in] the whole fast-food world, the whole world of contingent workers. I mean, this is sort of a new American model for labor, for workforce, and Wal-Mart has been right there at the forefront of that, partly forging the way, partly being a vanguard firm, but partly just taking advantage of that. …
Wal-Mart Vice President for Federal and International Corporate Affairs
Well, if you study Wal-Mart -- and we all do -- and as you join this company, one of the things that you learn is how we became successful. It might seem counterintuitive, but Sam Walton started the process of saying you don't become successful by creating a process to have larger margins. What you do is you work on supply-chain efficiencies in many ways. You pass those savings on to the customer; you don't put them in your pocket. You pass them on to customers. That volume makes up for the item-by-item lower margin, if you will, and that volume allows you to grow and succeed and prosper.
It creates also customer loyalty, knowing they can come to us every time and find the lowest price. And I'll tell you, though Sam is not with us anymore, that this is something we talk about all the time.
And so our global sourcing is not to create higher margins. That's not what it's there to achieve. It's there to achieve having low-priced goods so we can pass those low-priced goods on to our consumers. ...
Historically, when does [global sourcing start to] happen in the company? How does it begin? How does it develop?
Sure. Well, it's been going on probably since the inception of the company. ... Back in the '70s and '80s, Sam Walton would travel overseas, and he would travel overseas looking for goods that would sell in our stores. ... So we've been doing it for a long time, again, in order to compete when we were regional players with some of the more national players.
We heard Kmart and Sears and JCPenney were well ahead of Wal-Mart particularly in terms of going to Asia to do some sourcing. ... But we understand also from people who studied this a lot more than we have that Wal-Mart was the most effective in integrating overseas sources, outsourcers, into its supply chain. How did that come about? When did that come about? When do we see that movement begin to gather momentum? ...
First of all, I think that part of the answer lies in the fact that we work with suppliers even in -- especially in -- the United States to make them part of our supply chain in a way that allows them to be better while we are better.
What does that mean? That means sharing data. It means having them understand what is selling, where, when, how, so they can do their management of the factories or wherever it is that they're bringing the goods in from so that there is some transparency about our relationship. We have done the same from the beginning with suppliers outside. There are people that have access to Retail Link [the software used by Wal-Mart and its vendors] around the world, so if they make [a] product that we sell around the world, they can look at where it's selling. We are transparent with that data, allowing them to be more successful.
The other thing we've done a good job [with] is helping these factories understand the power of quality assurance and quality management. We have had them understand the value of having loyal associates. It's something we don't talk about very often, but there are factories now that are trying to understand that by having associates work for them, that want to work for them, feel good about that, they're going to be more productive. And we talked about that with them. We share that kind of information with them in much the way that American manufacturers try to do with their associates so that they want to come back to work for them and the factories are more productive. So it's an across-the-board kind of sharing to try and help them be more efficient.
I think finally, the last point that we would tell you is that if there's a middleman in our process, even if it's a Wal-Mart middleman, we try and eliminate those. We try and make the relationship face-to-face, factory-to-buyer, factory-to-global sourcing, so that there is no mix-up and no [mis]understanding and also no expense in the process of and the buying of goods and the delivery of goods. ...
Professor of Sociology, Duke University
I think one of the secrets of Wal-Mart's success was that they took their technological sophistication from the U.S. market in terms of information technology and logistics and distribution-center management and took it global. And in particular, when they went to China, they had managed to marry the high-technology system in terms of transportation of goods and delivery of goods with low-cost production in Chinese factories. So Wal-Mart has married high tech and low tech in the U.S. retail revolution.
And even though others went to China before them, like Sears, like JCPenney, like Kmart, they were the first to take a highly technical, globalized supply chain to China. Is that it?
Other U.S. retailers have been doing business in Asia and China for a long time. I don't think any other retailer has been as good as Wal-Mart in making that China sourcing a high-tech business venture. ...
Fellow, U.S. Business and Industry Council
China is a godsend for companies like Wal-Mart because low Chinese production costs let it widen profit margins. Wal-Mart can't really widen profit margins by raising its own prices very much, but it can widen profit margins by lowering costs, and going to China is a great solution for lowering the costs. ...
So what you're saying is Wal-Mart is not only supplying consumers with lower-priced goods from China, it's boosting its own profits by using stuff that comes from China?
Wal-Mart is clearly boosting its profits by encouraging its own suppliers to move to China. Wal-Mart is a very well-managed firm. It's got the art and science of retailing down, and it makes a lot of money doing that, but getting more and more goods from China is a big driver of Wal-Mart's rising profits.