31 Aug Read Walmart article and,Discuss the business strategy and functional strategies of Walmart, and for each strategy state the following: objectives- desired ends- tactics-steps and de
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709-423 Wal-Mart Stores in 2003 (Abridged Version)
Sam Walton was born in Oklahoma in 1918. His energy and drive were evident early on in his athletic attainments, student leadership, and entrepreneurial ventures.6 After college, Walton became a management trainee with J. C. Penney, a department store. He would eventually imitate some Penney policies, including calling employees “associates” to foster a sense of partnership, letting store managers buy small stakes in the stores that they ran, and supplementing store-level management with extensive visits from headquarters.
In 1945, Walton opened his first store, a small variety format franchised from the Ben Franklin chain.7 Prodded by a manufacturer’s representative, Walton developed a low-price/high-volume orientation. He lowered his costs of goods sold by ordering more merchandise directly from manufacturers or their agents, since Ben Franklin charged a 25% markup. By the early 1960s, Walton’s chain of 15 stores had become the largest Ben Franklin franchisee, but the absolute scale of operations remained modest. Looking for a bigger opportunity, Walton learned about the development of discount retailers in the Northeast U.S. According to Walton:
I started running all over the country, studying the concept. . . . Then closer to home, Herb Gibson started his stores with a simple philosophy: “Buy it low, stack it high, sell it cheap.” He sold it cheaper than anybody ever had before, and he sold more of it. [When] he branched out to the square in Fayetteville and started competing with our variety stores . . . we had to act. He was the only one discounting out this way, and, because I had made all those trips back East, I was probably one of the few out here who understood what he was up to.8
In 1962, Sam and his brother Bud opened the first Wal-Mart Discount City store, in Rogers, Arkansas, an attempt to make the discount format work in a much smaller town than suggested by conventional wisdom. The number of Wal-Mart stores increased to 18 by 1970. Walton then took the company public, raising $3.3 million for its first warehouse and to accelerate store expansion.
Walton supplemented internal talent by hiring senior managers externally, some from outside retailing and many with skills in “nontraditional” areas. These managers pushed for massive investments in information technology (IT) aimed at tracking every item in the Wal-Mart system at all times via automated distribution centers linked by computers to both stores and suppliers. Wal- Mart became a leader in an IT-driven transformation of retailing, which shrank inventory-taking lags from months in the 1950s to close to real time by the 1990s. In 2003, Wal-Mart was estimated to spend 1.0% of sales on IT while its competitors spent an estimated 1.76% of sales on IT.9
In addition to innovation, Walton placed a premium on imitation and adaptation. He cruised his and competitors’ stores, tape measure and recorder in hand.1 He openly admitted to “borrowing” ideas: self-service (from a Ben Franklin franchisee), company cheers (from a Korean tennis ball manufacturer), greeters (from a Louisiana Wal-Mart store), and SAM’s Club (inspired by the Price Club).
Walton’s emphasis on learning was wedded to an obsession with frugality and a plain-folks manner. He emphasized caring for employees, tightly controlled compensation at all levels, and connections with employees. Any employee was supposed to be able to call him at his publicly listed home phone number. Walton communicated pride, and fun, in the Wal-Mart way of doing things. He even danced the hula on Wall Street in a grass skirt after losing a bet to his CFO David Glass. Until cancer forced him to cut back, Walton worked at least six days a week, often starting as early as 4 a.m.—except on Saturdays, when it might be as early as 2 or 3 a.m. to get a head start on preparing 1 He had crashed into at least one vehicle while counting the cars in a competitor’s parking lot.
Wal-Mart Stores in 2003 (Abridged Version) 709-423
for the meeting scheduled to start at 7:30 a.m. Walton passed away in 1992, weeks after receiving the Presidential Medal of Freedom, the highest civilian honor in the United States.
David Glass took over as CEO from 1988 to 2000. During his tenure, Wal-Mart’s revenues grew from $20 billion to nearly $200 billion by looking beyond the core domestic discount retailing format. CEO Lee Scott, who took over from Glass, played a key role in developing Wal-Mart’s distribution network before holding top-level positions in merchandising and store operations. Scott reflected:
I think Wal-Mart is a story of evolution, not revolution. So much of what we have done have been things that we actually saw other people doing and integrated into what we were doing. All of those things have just kind of incrementally, month by month, year by year, come together to create something that is interwoven and meaningful. Individual decisions, at the time those decisions were made, were not in strategy sessions that laid out, 12 years from now—here’s what we’ll look like and we’ll put these individual pieces together along this schedule to achieve this goal.10
The Discount Store format required a potential customer base of 150,000 people.11 The average size of these stores had increased from 42,000 square feet in 1975 to 91,000 by 1995. The number of Discount Stores declined with their conversion to Supercenters.
Introduced in 1988, the larger Supercenter added a full-line grocery store and specialty departments to a Discount Store. The food was meant to drive traffic to general merchandise departments, but Wal-Mart’s operational efficiencies made its food business profitable by itself. Its Supercenters were typically more focused on food (35% of sales) and had more ancillary services than competitors. By 2003, 42% of the U.S. (118 million people) had access to a Wal-Mart Supercenter,12 which needed a potential customer base of 76,000 people. In 2001, 7% of Supercenters’ sales growth came from new shoppers and 21% from existing shoppers who increased their purchase volume. The remaining 72% was diverted from other channels, including one-third from competing grocery stores and 22% from Wal-Mart’s other formats.13 In 2003 Supercenter operating margins were estimated to average 6.6%, but margins were unlikely to rise to the levels reached by Discount Stores given the narrow margins on food in general and Wal-Mart’s especially aggressive pricing (see Exhibit 5).
Neighborhood Markets let Wal-Mart enter space-constrained suburban areas and pack more stores into a domestic market of relatively fixed size. Introduced in 1998, these “SmallMarts” focused on groceries and limited lines of general merchandise, drugstore items, and photo processing.
SAM’s Clubs, begun in 1983, were warehouse clubs and a separate division. The format used high-volume, low-cost merchandising, bulk buying, and rapidly changing assortments of relatively few SKUs in cavernous warehouses at discounts deeper than traditional discounters; gross margins averaged 10%, versus 25%–35% for traditional discounters. SAM’s had led in the club segment, but had been surpassed by Costco in terms of sales and customer spending per visit. One observer said that SAM’s did not “develop the consumer side as effectively as Costco did, particularly in the perishables area, which is where Costco gets a lot of fairly high-margin sales that SAM’s does not. And consumers are proud to tell people they bought something at Costco, whereas shopping at SAM’s is not something they brag about.”14 SAM’s president explained the plan for 2003: “Our focus will not be on becoming the dominant club but on being profitable at a lower-volume rate.”15
Walmart.com was founded in 2000 as a wholly owned subsidiary. It generated $100 million in 2003, and improved Wal-Mart’s access to consumers earning $75,000 or more.16 The site helped drive store traffic—for example, digital photos ordered online could be picked up in the stores.
709-423 Wal-Mart Stores in 2003 (Abridged Version)
In Wal-Mart’s early days, procurement meant buying trips. Walton, ever frugal, decreed that trip expenses not exceed 1% of the value of purchases. This often meant sharing hotel rooms and walking instead of taking taxis.17 Wal-Mart even called its suppliers collect. In the 1990s, it began to bypass manufacturers’ representatives, saving 3%–4% on goods formerly sourced through them. As its private label business expanded, Wal-Mart increasingly dealt with unbranded suppliers and opened offices worldwide to oversee factories. In 2002, Wal-Mart terminated its relationship with its longtime procurement agent and hired hundreds of that firm’s employees instead.18
By 2003, Wal-Mart spent $107 billion on U.S. suppliers. Suppliers who visited Wal-Mart headquarters in Bentonville, Arkansas were not allowed to entertain buyers or visit in their offices. Instead, they were shown into small interview rooms equipped with only a table and four chairs. The negotiations focused on a single price on the invoice, which was to include return management fees, cooperative advertising, and promotional spending. According to one observer, “It’s not even negotiated anymore. No one would dare come in with a half-a**ed price.”19
Although Wal-Mart bargained hard, it built partnerships with suppliers by sharing information electronically. Wal-Mart used electronic data interchange (EDI) to communicate with suppliers about forecasting, planning, replenishing, and shipping. Its Retail Link private exchange provided suppliers with access to point-of-sale data, two-year sales trends, and inventories of their products on a store- by-store basis. Retail Link reportedly cost Wal-Mart $4 billion to develop and perfect; suppliers had to make substantial investments to implement the new system, including hardware and the costs of hiring, training, and employing Retail Link analysts.20 By 2002, all of Wal-Mart’s suppliers were required to use Retail Link. Wal-Mart’s competitors banded together to create public exchanges to reduce transaction costs through auctions and reverse auctions.21 However, as of late 2002, Wal-Mart remained the only source of (close to) real-time retail data for a large community of suppliers.22
By 2002, it took under 10 minutes for information captured by store point-of-sale scanners to move into the data warehouse, which was reported to be the second-largest private database in the world.23 While the information in the database was proprietary, the skills that went into developing and using it and other systems proved harder to protect. By July 1998, over a dozen of Wal-Mart’s key information systems personnel left to work for Amazon.com and its affiliate, Drugstore.com.
In the retail industry, an estimated 8% of the items that customers came to buy were out of stock, and one-third of all goods were sold at marked-down prices.24 Up-to-the-minute information about supply and demand helped Wal-Mart reduce both stock-outs and overstocking. Wal-Mart’s suppliers also benefited from being able to schedule manufacturing more efficiently and from economies associated with increased throughput. Wal-Mart mined the data to rapidly restock and optimize its merchandising mix. One example of Wal-Mart’s rapid response was Target’s difficulty in finding American flags on September 12, 2001; Wal-Mart had begun buying every flag it could the previous day.
Wal-Mart encouraged its top-75 suppliers to include it in three-year strategic discussions that involved decisions such as factory size and location. While suppliers holding small shares of their respective markets tended to have poorer financial performance when Wal-Mart was a primary customer, large-share suppliers performed better financially with Wal-Mart as a primary customer.25 Procter & Gamble (P&G), one of the first manufacturers to invest in EDI with Wal-Mart, employed over 70 people in Bentonville by the early 1990s. By 2003, Wal-Mart was P&G’s largest customer, by far, accounting for 17% of its total revenue; P&G’s share of Wal-Mart’s revenue was under 3%.
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Wal-Mart was the largest U.S. importer from China by the mid-1990s. If Wal-Mart had been an independent country, it would have been China’s eighth-largest trading partner, ahead of Russia and Britain.26 According to one executive, global procurement could reduce the cost of general merchandise goods by 10%–20%.27 By 2001, global procurement for SAM’s Club was integrated with that for Wal-Mart’s other U.S. stores, and there was some coordination between SAM’s and non-U.S. stores.
Wal-Mart required suppliers to comply with its standards concerning child labor, workplace safety, and local laws.28 However, audits in 2001 revealed that over 50% of international suppliers’ factories violated Wal-Mart’s standards; 30% were in “serious violation.”29 Wal-Mart engaged with suppliers to fix the problems. Company data indicated subsequent compliance by suppliers. Wal- Mart was still voted “Sweatshop Retailer of the Year” in a 2003 activist group’s online poll, despite procurement practices that were arguably no worse than its competitors’.
Sam Walton once described why Wal-Mart built its first warehouse: “Here we were in the boondocks, so we didn’t have distributors falling over themselves to serve us like competitors in larger towns. Our only alternative was to build our own warehouse so we could buy in volume at attractive prices and store the merchandise.”30 Warehousing was capital- and scale-sensitive. Wal- Mart leveraged its investment by building stores within a day’s drive of the distribution center. As Glass explained, “We are always pushing from the inside out. We never jump and then backfill.”31
In 2003, Wal-Mart had 84 Wal-Mart and 19 SAM’s Club distribution centers in the U.S. and 43 distribution centers internationally. Distribution centers were the hubs in a hub-and-spoke network: Trucks picked up merchandise from (and returned merchandise to) suppliers and brought it to distribution centers, where it was sorted and then delivered to stores, usually within 48 hours of being ordered.32 Wal-Mart’s Corporate Traffic Department provided coordination; trucking capacity was supplied by both common carriers and Wal-Mart’s private fleet, the largest in the U.S. A typical Wal-Mart distribution center was one million square feet, highly automated, and required an average investment of $70 million.33 It was operated 24 hours a day by 700 associates paid $12–$18 per hour. Each center received hundreds of truckloads of merchandise daily and served about 150 stores within an average radius of 150 miles.34 In 2003, 83% of the merchandise for domestic Division One Stores, 63% for domestic SAM’s Clubs, and 76% for the International Division flowed through Wal-Mart’s distribution centers; direct-store delivery (DSD) by suppliers accounted for the remainder. These percentages were generally higher than for leading competitors.
Wal-Mart increased inventory turns from 3.2 in 1973 to 7.6 by 2003 (versus 6.1 at Target and 5.4 at Kmart).35 Expansion of Supercenters meant sales of fast-moving food items, but policy also contributed to increased inventory turns. Back rooms of stores served as staging areas rather than storage areas, freeing up more space for selling.36 Wal-Mart also had a “Scan ‘N Pay” model where suppliers maintained ownership of their items until they were sold at a Wal-Mart store; only then would accounts payable terms begin.37 Wal-Mart’s long-term goal was to double inventory turns to levels comparable to those of Amazon.com, which achieved 14.5 turns by the end of 2002.38 Each additional turn increased Wal-Mart’s payables-to-inventory ratio by an estimated 10% and freed up $2 billion in working capital.
In 2003, distribution costs were an estimated 2%–3% of revenues for Wal-Mart, versus 4%–5% for other retailers.39 Wal-Mart had mastered “cross-docking” to transfer merchandise directly from inbound trucks to store-bound trucks without ever storing the goods in its distribution centers. The latest distribution center prototype had increased throughput by 18%.40 Wal-Mart also automated
709-423 Wal-Mart Stores in 2003 (Abridged Version)
distribution through radio frequency identification (RFID) tags on product cases at the point of manufacture. This reduced “shrinkage” (pilferage) and the need for unloading to check products, with estimated cost savings to Wal-Mart of 6%.41 At 15¢ each, the RFID tags were still too expensive to be used on individual items to reduce checkout labor in stores, but their cost would fall over time.
In 2003 Wal-Mart remained committed to the basic merchandising principles that Walton used to build the company: achieving very high sales per square foot by offering a broad assortment of merchandise at consistently low prices in cheap but cheerful stores.
Wal-Mart commanded 30% of the U.S. market in household staples such as disposable diapers and shampoo. Wal-Mart historically placed more emphasis than other discount retailers on hard goods (hardware, housewares, automobile supplies, and small appliances) than on soft goods (apparel, linens, and fabrics). Hard goods generated more sales per square foot than soft goods, built up more traffic, and required fewer markdowns, but at lower gross margins. Recently, consumables’ (food, candy, and tobacco) share of total revenues had surged with the growth of Supercenters. Hard goods, soft goods, and consumables accounted for roughly 60% of Wal-Mart’s total revenues.
National brands dominated Wal-Mart’s product mix, but private labels were growing, accounting for $33 billion (20%) of Division One Stores’ sales in 1999, up from $13 billion (15%) in 1995, but still lower than the estimated 50% private-label share of Target’s sales.42 In 2001, Wal-Mart launched Sam’s American Choice detergent at half the price of Procter & Gamble’s Tide. The move “in no way strains our relationship,” a P&G spokeswoman said. Tide still commanded four times the shelf space of Sam’s Choice, but the latter now rated more highly in Consumer Reports.
Wal-Mart offered more variety than competitors and reduced stock-outs by managing product assortment by store rather than by region (Target’s approach) and by using sales data and other criteria. A “Volume Producing Item” contest had top managers champion high-potential-revenue items. The “Store of the Community” program tailored product assortments to local demographics and hosted community fundraising events. Further, Wal-Mart used the Modular Category Assortment Planning System (MCAPS) combined with Retail Link to involve suppliers in creating store-specific “modulars”—planned layouts of products—based on historical selling data, store traits, and 10 different consumer segments. Some suppliers had developed 1,000 different modulars for Wal-Mart.43 MCAPS enabled Wal-Mart to vary the size and merchandise mix of many items from one season or month to the next. Management saw the potential for doing even better: 10% of the visitors to U.S. stores (excluding SAM’s Clubs) left without a purchase, representing $9 billion in “lost” sales for the company.44
As an EDLP (everyday low prices) retailer, Wal-Mart’s slogan had long been “Always the Lowest Price. Always.” In the 1990s, competitors had forced a change, to “Always Low Prices. Always.” Wal- Mart also began to sell more items on promotion: $10 billion worth in 2002. For example, under the “Rollback” program, three to four key items per category were discounted by at least 10% for an average of 75 days. In some cases, the reductions were permanent. Suppliers absorbed the cost of a Rollback, but benefited from volume increases of up to several hundred percent and future preferences from Wal-Mart (e.g., desirable display locations).45
Except for locally sourced items, Wal-Mart set the prices for general merchandise nationally and food prices by zones corresponding to food distribution centers. Broad pricing discussions were held
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only once or twice per year, but store managers were allowed to match or beat the lowest competing price on an item in their trading area by as much as 5%. Wal-Mart conducted price checks in 99.8% of Kmart stores and 98.7% of Target stores every week.46 Some studies showed a pricing differential of at least 2%–4% between Wal-Mart and its best competitors in most markets,47 while others went up to 10% or more, particularly versus supermarkets.48 Kmart had gone bankrupt trying to match Wal- Mart’s prices, while Target emphasized a more upscale assortment and extensive advertising. As a Target executive put it, “If we’re in the business of selling the same stuff that the guy down the street [Wal-Mart] has, we’re not going to be able to sell it for more.”49
Wal-Mart promoted its EDLP image by advertising, sponsoring community events, and creating in-store excitement. In 2002, Wal-Mart’s advertising-to-sales ratio was 0.3%, compared with 2.2% at Target and 2.0% at Kmart. District merchandise managers often coordinated local radio or cable TV advertising, and store managers often struck deals with selected suppliers for market-level promotions. Wal-Mart distributed flyers less intensively than Target and Kmart. Contributions to local charities, funding of scholarships, and in-store charity-sponsored events helped Wal-Mart counter its portrayal as a retailing giant that destroyed the fabric of communities by displacing local stores. In 2003, Wal-Mart was experimenting with in-store television, since over half of consumers’ purchase decisions were supposed to be made in-store.50
Wal-Mart stores were relatively concentrated in small towns and rural areas where Wal-Mart was more likely to be the only “big box” (see Exhibit 6). Wal-Mart leased most of its stores, and its rental costs were an estimated 0.45% of sales versus 0.42% at Target and 1.6% at Kmart.51
Wal-Mart’s U.S. expansion from 1975 to 1996 revealed several patterns among competitors:
• Competitors deriving 90%+ of revenues from discount retailing stagnated in terms of number of stores, even if they did not exit after Wal-Mart entered their local markets.52
• Competitors that had diversified into other retailing formats and who tended to achieve higher sales per square foot were quicker to either exit or to stay in and fight; in the latter case, they increased their number of stores significantly.
• More profitable, less-leveraged retailers reacted more aggressively to Wal-Mart’s entry, typically by adding stores.53
Most of Wal-Mart’s U.S. discount stores were open 24 hours Monday through Saturday and for a limited time on Sunday, while Supercenters operated continuously. A “People Greeter” welcomed customers entering a store and kept watch for shoplifters. Wal-Mart installed electronic UPC scanners years ahead of competitors, greatly improving checkout efficiency. Credit cards were historically problematic for discount retailers because a bank authorization took several minutes. By the late 1980s, use of Wal-Mart’s satellite network cut authorization times to under three seconds, enabling customers to use most major credit cards; the change also reduced fraud and improved customer service.
Wal-Mart’s sales per square foot, a key measure of retail performance, doubled in real terms from 1983 to 2003, reaching $440 versus $249 for Target and $221 for Kmart. EDLP reduced labor
709-423 Wal-Mart Stores in 2003 (Abridged Version)
requirements, since displays and prices changed less frequently, and allowed for steadier operation. Shrinkage was under 1% of Wal-Mart’s discount sales in 2002 versus 2%–3% for direct competitors. Wal-Mart achieved better in-store execution—in receiving, processing, and shelving products—than competitors with similar prices. Store managers had strong incentives to perform and some autonomy in deciding whether to source locally or to run particular promotions. The goal of autonomy was efficiency rather than decentralization for its own sake. For example, to manage energy, Wal-Mart controlled the lights, heat, and air conditioning of all U.S. stores from Bentonville.54
For Walton, a key to Wal-Mart’s success was how it treated “associates.” Many of his people policies endured to the present day: sharing performance information with associates, soliciting their ideas, offering profit sharing, and maintaining an open-door policy. Initiatives were driven by the need to keep tight control over payroll expenses, which accounted for roughly half of operating expenses.
Wal-Mart’s sales per employee increased 25% since 1990 to average $176,000 in 2003, vs. $151,000 for Target and $145,000 for Kmart. IT generated much of the labor productivity improvement, but non-IT innovations such as cross-training and better utilization made a bigger contribution.55
Wal-Mart typically paid $7 per hour for U.S. entry-level ret
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