Corporate culture provides Wal-Mart competitive advantage

With 3,200 stores in the US and more than $200 billion in annual sales, Wal-Mart sits firmly atop the Fortune 500, because it is a relentlessly profit-driven company, Jan Mauldin, formerly director of marketing and community programs for Wal-Mart, told the 111th annual convention of the International Association of Refrigerated Warehouses. The meeting was held in San Antonio, Texas, April 13 to 18, 2002. Mauldin currently is a consultant in private practice.

While profit is the goal, service is the process, Mauldin said. The folksy appearance of Wal-Mart is not makeup on a hard, hidden corporate face; it is the company at its core. That corporate culture drives profit by making Wal-Mart stores the retailer of choice for a large percentage of consumers, she said.

The Wal-Mart empire is built around four retail concepts. The basis of the company remains its discount stores, which have followed the same pattern since the company's founding in Rogers, Arkansas, Mauldin said. The second concept is the Wal-Mart supercenter that combines a discount store with groceries and perishables in a total inventory of almost 100,000 items. The newest of the four concepts is the Wal-Mart neighborhood market that provides the services of a traditional grocery store in a building format that is small by Wal-Mart standards. The fourth retail concept is the Sam's Wholesale Club, which is basically a membership warehouse store that carries a constantly changing inventory of about 4,000 items.

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According to a 2001 count, the company operated 1,651 Wal-Mart discount stores, 1,026 Wal-Mart supercenters, and 486 Sam's Clubs. Neighborhood markets were just getting started, so Wal-Mart had only 26 in operation in mid-2001, Mauldin said. In addition, the company operated 1,118 stores in countries other than the US.

International holdings include wholly owned supermarket subsidiaries in the United Kingdom and in Germany. In early 2001, international operations accounted for $32 billion in sales and an operating profit of $1.1 billion, Mauldin said.

Starting with that one store in Rogers, Arkansas, that opened on July 2, 1962, Wal-Mart set about a steady growth pattern that has accelerated as the company culture took root, Mauldin said. The company has had competitors from the beginning. In the same year, S S Kresge launched its Kmart chain, F W Woolworth started Woolco, and Dayton Hudson opened the first stores in its Target chain. In the first five years of operation, Kmart built 250 stores and generated $800 million in sales annually. By contrast, Wal-Mart had 19 stores and sales of $9 million at the end of its first five years. It took until 1979 for Wal-Mart to reach $1 billion in sales, but today it tops the market and the Fortune 500 at $220 billion, she said.

Wal-Mart needs 1.2 million employees, known internally as associates, to operate its system. For its last reporting year, the company generated $220 billion in sales. Perhaps the most important data that can be extracted from Wal-Mart's sales figures is total sales per square foot of store space, Mauldin said. Based on published figures, Wal-Mart generates $413 for every sq ft of space. It nearest competitor, Kmart, sells only $222 per sq ft.

To maintain these sales levels, Wal-Mart operates 62 distribution centers, each with an average of 1.2 million sq ft of storage space, Mauldin said. System-wide, these distribution centers ship more than 7 million cases a day for an annual total of more than 2 billion cases a year. More than 85% of all merchandise sold by Wal-Mart is handled by its distribution centers. They use highly automated handling systems and carefully coordinated cross-docking to move goods through the system with a minimum of inventory and operate 24 hours a day. The distribution network is based on the hub-and-spoke concept with warehouses in the center of a trade area where no store is more than one day's drive from its distribution center.

Serving this distribution network is one of the largest private fleets in the country with more than 3,000 tractors and 12,000 trailers, Mauldin said. Owning the fleet is an important part of Wal-Mart's culture, because it gives the company control of its operations in ways that would not be possible if distribution were a contract situation, she said. “The fleet has an on-time delivery record well in excess of 99.5%, and the opinion within the company is that it is not good enough,” Mauldin said. “The only acceptable delivery record is 100% on-time, and if they could get better than 100%, someone at Wal-Mart would want it that way.”

Wal-Mart tracks sales system-wide with its own satellite communication and information system. Each store has a satellite dish to link data into the largest single sales database in the world through two earth station transmitters at corporate headquarters. Keeping track of sales and inventory results in a total of 75 million point-of-sale transactions each week, Mauldin said.

Building a culture that could support such a structure has been a crusade at Wal-Mart from the beginning. It is a culture based on profit derived, not from the pricing end, but from the cost end of every transaction, Mauldin said. The plan, always, has been to drive costs out of the system in the stores, from the manufacturers' profit margins, and from merchandise brokers and other middlemen, all in the service of driving down prices at the retail level.

Driving out costs has evolved into seven basic rules of operation. The first of these is to form partnerships with vendors, Mauldin said. More than once Sam Walton, the company founder, demanded lower costs from vendors only to be told that goods were already selling essentially at the manufacturing cost. Walton would insist that manufacturing processes be analyzed in a search for lower costs. “He didn't tell his vendors how to do things, but he insisted that they look for a better way,” she said. “Often the result was increased efficiency in manufacturing and a lower price for Wal-Mart. With that lower price, Wal-Mart could sell more, increasing the amount of business with the vendor.”

Wal-Mart insists that its vendors maintain balance in their operations. For instance, the company refuses to allow any supplier to concentrate more than 40% of its business on Wal-Mart, Mauldin said.

Partnership with vendors allows Wal-Mart to follow its second rule, which is keeping expenses low, Mauldin said. Healthy suppliers can provide timely deliveries at low prices. Efficient internal operation maintains the reality of low pricing from vendors. From the beginning Wal-Mart has operated on the principle that saving is important as pricing. Saving a penny in operation is as important as generating a penny from sales, she said. This leads directly to proper selection of store locations, the third operating principle. In the beginning, Wal-Mart limited its store locations to rural communities with a maximum population of 10,000, Mauldin said. The idea was to hold down real estate costs and to insulate the company from heavy competition in metropolitan areas

Company ownership of the distribution fleet is the fourth operating rule, Mauldin said. Wal-Mart refused to give up control of the vital distribution function. The Wal-Mart fleet had to be able to reach every store in one day. If that was not possible, the store was not built.

The fifth rule is knowing the numbers. When Wal-Mart talks about numbers, it is talking about details, not just the big picture, Mauldin said. The company wants to know detailed sales figures by department and by individual store associate. Not only must managers know the numbers, but the associates must know them as well. The drill at Wal-Mart is to know the numbers and constantly to look for ways to improve results. Without knowing the details, associates do not have the information necessary for improvement, she said.

In addition to knowing its own business, Wal-Mart says that knowing its competition is the sixth operating rule. Managers are required to know competitors' pricing as well as they know the pricing at Wal-Mart, Mauldin said. The drive is to have the lowest prices in the market as a tool for driving up sales and generating profit. Most importantly, Wal-Mart does not believe that its way is the only way. Corporate culture expects the company to adopt ideas from competitors if those ideas seem to work better than Wal-Mart's.

The last rule on the Wal-Mart list is to take care of the customer. Unless the situation is completely unreasonable, a customer must never be allowed to leave a Wal-Mart store unsatisfied, Mauldin said. Taking care of customers is possible, because the company has an unwritten deal with its associates. “Sam Walton believed that if he was good to people and fair with them and demanding of them, they would eventually decide that he was on their side,” she said. “The focus of that deal is that cost-cutting can co-exist with a moral center, which operates on the principle that Wal-Mart can be the cheapest place to shop and the best place to work at the same time.”

The company still reflects the personality and characteristics of its founder. Sam Walton was a passionate promoter of his ideas and his company, Mauldin said. He was a maverick who was willing to take chances and who knew that people would do a better job if they were having fun. He was frugal, because he understood that frugality could lead to increased profit, and he was a motivator who was able to lead the company, in part, because he believed in communicating the gospel of Wal-Mart to anyone who would stand still long enough to listen, she said.

Walton always said that Wal-Mart operated according to 10 rules, Mauldin said. If asked, he would enumerate them as

• 1. Commit to the business;

• 2. Share the profits with all associates;

• 3. Motivate your partners, vendors, and suppliers;

• 4. Communicate everything about the business to everyone in the company;

• 5. Appreciate the associates and let them know they are appreciated;

• 6. Celebrate success;

• 7. Listen to everyone;

• 8. Exceed expectations;

• 9. Control expenses; and

• 10. Swim upstream; make waves.

And if pressed, he would add the final Wal-Mart rule, which is break all the rules, she said.

To some, the culture at Wal-Mart is a paradox. The company stands for main street rural community values operating with the efficiencies of a huge corporation, Mauldin said. The stores have a real homegrown hokeyness supported by intense volumes of real-time sales data. The company and its people can mix the informality of fried chicken at the Walton's with the demands of stockholders on Wall Street. Paradox or not, Wal-Mart's culture — every corporate culture, in fact — is the value system that directs the thoughts, words, and deeds of everyone in the company, she said.