Save Money….Live Better?


Wal-Mart

In the 1950’s, Sam Walton collected the capital to purchase several franchises for the Ben Franklin 5 and Dime chain. These stores flourished under the entrepreneur’s new management practices, which carried out a strategy of purchasing directly from manufacturers, selling at discounted prices, and increasing inventory volume (Fredericks 1995).  This strategy became the foundation for Sam Walton’s business that we know today as Wal-Mart. Walton opened his first Wal-Mart in Arkansas in 1962; 50 years later, over 90% of US consumers have shopped at a Wal-Mart at least once (Fredericks 1995). The small discount retailer has grown into a multibillion-dollar corporation bent on providing the lowest prices everyday to the millions of customers that shop at Wal-Mart. Walton’s low price strategy followed this simple logic:

“Say I bought an item for 80 cents. I found that by pricing it at $1.00, I could sell three times more of it than by pricing it at $1.20. I might make only half the profit per item, but because I was selling three times as many, the overall profit was much greater. Simple enough.” (WalmartChina.com)

 

Providing low prices is just one side of Walton’s low-cost, high-profit strategy, utilizing technology and scale, Wal-Mart cuts costs in operations, logistics, and upstream and internal supply chain components wherever possible. The company’s business strategy came to focus on around four main goals: continue adding stores, maintain discount prices, and cut costs in inventory and operations. Over the next two decades, Wal-Mart methodically acquired or partnered with discount stores and manufacturers to secure the lowest costs for their products.

Today, Wal-Mart is the #1 retailer in the world, employing a sales force of more than 2.2 million individuals, and generating more than $476 billion dollars in sales for the last fiscal year. The second largest US retailer is Target, who earned only $76 billion in the same fiscal year. Wal-Mart has the highest profit margin in the industry: 3.36%, an impressive increase from Target’s modest 2.07%, especially considering Wal-Mart’s sales volume. For the purposes of this paper, I will concentrate on American Wal-Marts, but acknowledge the hugely successful growth of the international business. In America there are 4,625 Wal-Mart stores, and over 10 thousand worldwide (“Wal-Mart Company Overview”). Wal-Mart strives to provide name brand products at discounted prices, for all of its stores, and has partnered with labels such as Faded Glory, Clorox, Kellogg’s, Disney, and Danskin Now (Basker 2007). They have become an industry leader in the warehouse clubs and superstore industry and is the most profitable company in the world, earning the #1 spot on the Fortune 500 list for the last two years as a specialty retailer.

Low cost leadership has propelled Wal-Mart to its spot at the top, using technology to improve supply chain management, creating a culture of driven and committed employees, and continuous expansion and growth. Wal-Mart is the largest grocery retailer in North America. Competing against grocery stores, retailers, mass merchandisers, pharmacies, and more, Wal-Mart penetrates almost every industry. This has had an interesting effect on the number of products supplied in a store: competition from Wal-Mart has driven the average amount of products from 14,000 in 1980 to over 30,000 by 2004 (Courtemanche and Carden 2014). This places Wal-Mart in a powerful position as a retailer; the company controls a significant portion of product output from each of its major suppliers.

In 2006, Wal-Mart mandated that its top 100 suppliers must use RFID tags on their products.  For inventory management and better stock-out control, this mandate changed the way Wal-Mart did inventory management. Hoping to increase their control and tracking ability from distribution centers to stores, players in the upstream supply chain felt forced into investing capital into the tags, citing their only ROI a better relationship with Wal-Mart (Balocco et all 2011). Wal-Mart possesses so much power as a large-scale distributor that producers are willing to conform to the company’s iron-fisted mandates. Wal-Mart does not solicit vendors; vendors solicit Wal-Mart. This is true despite low profit margins because of an effort by Wal-Mart to purchase products for the lowest cost of goods sold possible.  Aggressively scrutinizing their supply chain ultimately leads to better inventory control and shrinkage reduction strategies. Employees are trained to find ways to create efficiencies and shave pennies from supply chain costs by utilizing technology. The drive to cut costs through technology effectively utilizes their economies of scale and hard bargaining practices with suppliers.

However without the right corporate culture to utilize the technology, Wal-Mart would be half the company it is today. Performance goals and outcomes are strongly linked to implementing company wide strategy. Wal-Mart recognizes the need to measure learning and growth as part of employee evaluation, and provides education and training on the relationship between people, technology, and corporate strategy to facilitate employee learning (Crain 2009). Because of the connection between strategy and employee performance, employees have an incentive to understand Wal-Mart’s corporate strategy and learn how their actions further the company mission.  Sam Walton recognized the value of information sharing and maintaining excellent employee relationships, building these values into Wal-Mart’s 10 Commandments (see Figure 1).

Implementing a low-cost supply chain and cultivating a committed corporate culture laid the groundwork for controlled growth. While demand made discount stores in small towns successful, Walton faced challenges in coordinating a supply chain to deliver the products. The chain began to open distribution centers that were positioned as a hub for a series of stores in an area, saving money in distribution costs. After the products were delivered to the centers, Wal-Mart internally managed distribution of goods to its stores. This solution became the foundation for the controlled sprawl of Wal-Mart stores, creating a network of shared resources and low cost distribution. Situating the stores near distribution centers could save as much as $220,000 (in 2005) by opening a store relatively close to the distribution center. Today, the median distance to a Wal-Mart in the United States is 14.3 miles (Fettig 2006). Figure 2 illustrates the high-density growth strategy Wal-Mart implemented. Choosing new store locations requires careful consideration of economic factors such as population size and density, income and distribution. Wal-Mart stores are not placed anywhere by accident. Initially, Walton targeted rural areas, capitalizing on the need of underserved populations to have access to a multidimensional discount store.  Over time, rural America got smaller and smaller, and the appeal of locating stores in suburban and urban communities grew.

This, coupled with similar population makeup in the same geographic region, caused multiple Wal-Marts to open relatively close to one another. This new strategy was known as economies of density (Fettig 2006). This was a both a terrible and brilliant business strategy. Wal-Marts began to lose money from their relative proximity to one another- a process Basker calls “self-cannibalization”.  However, cutting costs by capitalizing on economies of scale was the hallmark of Wal-Mart growth. Knowledge, local and internal to the company, could be shared easily across stores by way of moving managers and employees around. While some stores had to close, the result of overpopulating the area with Wal-Mart led to the decline of local small businesses.  Effectively being strangled by the giant company’s capitalization of technology and economies of scale, Wal-Mart literally drove out any competition by employing their ever constant every day low prices (EDLP) strategy (Basker 2007). Rather than reacting to market pressures, business competitors were forced to reorient their strategy to defend against the huge drain on sales.

Wal-Mart’s influence on the longevity of small and medium sized businesses has been a source of contention for years.  It is hard to deny the facts: Wal-Mart supercenters cause incumbent grocery stores to reduce their prices, studies in Iowa have shown that “some small towns lose up to 47 percent of their retail trade after 10 years of Wal-Mart stores nearby” (Courtemanche 2014, Stone 1997). The economy of density growth strategy strangles small businesses by giving every consumer in a region multiple opportunities to go to a Wal-Mart rather than anywhere else. Is it unfair of Wal-Mart to capitalize on their scale and influence when it’s effectiveness forewarns the collapse of the small business market?  In recent years, Wal-Mart has taken steps to green its business practices. However, true sustainability is the intersection of environmental, economic, and social justice practices.  A green supply chain isn’t particularly useful if the other components of sustainability aren’t equally weighed and acted on. Wal-Mart takes its many stakeholders into consideration, however their commitment to everyday low prices clearly signals the priority of one stakeholder above the rest: the customer. This has interesting implications for a stakeholder group that is the least informed and lacks collective bargaining power.  Ferrell argues that more powerful stakeholder groups will influence ethical decisions to a greater extent “and perhaps in a manner not in the overall best interests of consumers.”  A consideration of the ethics of sustainability and justice as fairness may help illuminate the power and control of Wal-Mart enacted in the name of the number one stakeholder: the customer.

Rawls’ Justice as Fairness explores the relationship between two major concepts: liberty and equality, where liberty is prioritized over equality. The liberty principle suggests that all individuals should have an equal opportunity to access basic liberties: agency, personal integrity, political freedom and liberties provided by the law all should be protected under this ethic. Furthermore, free individuals should have the access to two main tenants to the equality principle: Fair Equality of Opportunity and the Difference Principle. Rawls believes that everyone of the same natural abilities should have an equal opportunity to hold a position or office. If there are differences between people, because of natural ability or social inequalities, it should be to favor the disadvantaged.

This theory of ethics can be applied in two very different perspectives to Wal-Mart: the internal and external stakeholder. If we consider this theory from the point of view of the CEO Douglas Mcmillon, our picture of the ethical composition of this company contrasts with the point of view of the external stakeholder, specifically the small business owner. If we consider Wal-Mart to be a micro-society, wherein the corporate rules are akin to law and the CEO and board are like the government, then it is correct to say that each employee has an equal right to basic liberties. Within the Wal-Mart system, all are paid according to their job and ability, and have personal agency relative to the confines of their job. However, with a workforce of 2.2million, there are bound to be some managerial issues. According to Indeed.com, former employee reviews of the company suggested that below the corporate level, management can be dispassionate, disorganized, and unreliable. However, overall, Wal-Mart’s organizational structure supports and values individuals. Employees are promoted to management positions, rather than hiring outside managers. In this way the fair equality of opportunity is the equal ability of all Wal-Mart employees to be promoted to management and higher-level responsibilities. Sam Walton once said, “If you take care of your people, your people will take care of your customers, and your business will take care of itself.” Wal-Mart recognizes the value of the employee as a central figure to their operations.

Because of this mantra, the difference principle may not be supported in this organization. Wal-Mart culture promotes low cost leadership.   The difference principle looses traction for a fiercely competitive company: when cutting down prices are the number one priority, employees who can’t meet company expectations will not be supported. There are 2.2 million Wal-Mart employees, and no shortage of people willing to work for the company. If an employee isn’t responding to training or meeting expectations, Wal-Mart does not provide programs that support the disadvantaged. This stems from the connection between performance measures and strategy. As long as employees meet their performance goals, they will be welcomed and supported. However, low cost is the bottom line for Wal-Mart. Employees that are not contributing to the success of the company do not stay with the company for very long.

Justice as fairness considers what is deserved for basic human happiness. Justice is the standard for assessing morally complex issues. Fairness is a kind of justice that emphasizes liberty and equality. However this theory of ethics is a framework that depends on the perspective of the analysis. In this case, Wal-Mart’s treatment of internal stakeholders is relatively just- so long as their actions do not compromise their EDLP strategy. However, if this same company is considered from the perspective of external stakeholders, a very different interpretation of this ethical framework comes out

Small businesses are just one of many external stakeholders affected by the presence of Wal-Marts. Liberty and equality, as they contribute to the external stakeholder’s ability to thrive, are ultimately controlled by Wal-Mart’s ownership of the consumer market. Small businesses do meet the liberty principle: they have agency and are able to act and retaliate to the presence of Wal-Marts. However, small businesses are not equally able to access the consumer market. The sheer size of the Wal-Mart corporation prevents the fair equality of opportunity. Opportunity for small businesses implies the ability to grow their profits and participate equally in the markets. External stakeholders can attain the first principle of justice as fairness, however cannot achieve the second until Wal-Mart recognizes their competitive advantage of size and scale.

Perspective matters. Wal-Mart, in a vacuum, won’t be faulted for the relatively successful management of 2.2 million employees and striving to be the most profitable company in the world. What is startling about Wal-Mart is their willingness to push the boundaries on what is externally acceptable. Low prices, from a supply chain management view, means outsourcing production and increasing imports, capitalizing on lax labor laws and lower manufacturing costs abroad. There is nothing equal about using capital to secure a competitive advantage. The very notion of a competitive advantage is inherently unequal, and capitalism as the framework in which Wal-Mart operates is flawed from an ethical perspective. But if we assume that capitalism is normative, the problem specific to Wal-Mart is their stakeholder priority.

Throughout the company, the Customer is the sole focus, using the proxy of EDLP to justify the means. In a capitalist system, serving your customers means generating greater sales: although the combined effect of quantity and profit margin conveniently lines pockets for Wal-Mart executives, the company focuses on providing the greatest value to the customer. Appropriate treatment of employees is simply good business practice. Cooperative employees that understand and actively seek to further the company mission and goals are valuable assets. In the name of the customer, employees are encouraged to have strong ambition. Customers have been manipulated to assume that Wal-Mart is acting in their best interest by offering the lowest price. However, Wal-Mart’s customer-oriented strategy can be construed as consequentialist ideology where the end justifies the means.

Stone found that within 10 years of a Wal-Mart opening, 47% percent of retail from preexisting businesses is lost to Wal-Mart. Part of a stakeholder orientation for a company requires interaction with external groups that are affected by the organization. Small businesses succeed in creating value in customer service and genuine human interaction, and offer alternative options that are necessary for a healthy economy. If small businesses are closing as a result of Wal-Mart opening new stores in the community, is it Wal-Mart’s responsibility to assist them? Small businesses are a tribute to the success of the American dream, and in some ways is a nostalgic nod to the market post WWII. Wal-Mart exists in a capitalist system where profits equal success, and has shown that scale and technological innovation are critical. From a capitalist framework, it follows that unsuccessful small business inevitably will close because they cannot generate sufficient profits. Wal-Mart is perfectly aware their actions have directly and indirectly lead to the closure of retail establishments each time a new store opens.

If justice as fairness attempts to equalize natural talents and social inequalities, then small businesses are socially unequal compared to the corporate giant and therefore should be subject to the difference principle. However, there is not substantial evidence that Wal-Mart is enacting the difference principle to offset the huge advantage they have over the local small business. If Wal-Mart seeks to become an ethically just company as well as a financially profitable one, then they need to take into account the affects of their actions on stakeholders. The difference principle is the solution to creating a sustainable company in a capitalist market. Sam Walton was once the owner of a fledging business. Wal-Mart took off to become a hugely successful company, but its foundation as a small business connects the corporation even more to the local business community. A stakeholder oriented company that holds the needs of all stakeholders-not just the customer- recognizes the importance of success beyond the success-is-profits mentality dominant in the business world today.

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5 thoughts on “Save Money….Live Better?”

  1. Where is figure 1? It is a little creepy or ironic (?) that such a religious man (I think, no?) would use the ten commandments for something as profane as a store.

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  2. I agree that the interesting aspect of WalMart is how its efforts on behalf of the customer trump most (or all) other stakeholder considerations. One overlooked aspect of this is that the same customers who like or need the low prices may ALSO value less gender discrimination (or none), a greener supply chain, or local economic diversity. So, in a way, WalMart acts on behalf of what it “thinks” is the customer stakeholder which is a overly-simplified of the real, complicated human stakeholders out there.

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  3. I am not sure I agree with the premise of using Rawls to consider the difference principle WITHIN a firm or organization. Is this your application? Or did you see others arguing this way. Did Rawls indicate he imagine it could be used to describe the way an organization performs or operates?

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  4. TO me, if we take the difference principle as the basis for just inequalities, then it is a good analysis to look at small and/or local retail.

    One perspective is if Wal-Mart then raises prices after local retail looses out, then it is using its unequal access to market share to make things worse. Does it do this?

    Also, you put the focus on creating more justice on WalMart. I tend to think of Rawls arguing for social systems outside of organizational level decision-makers. In essence, seems to me that he is then imagining government or legal solutions such that inequalities exist so as to better all.

    However, maybe one reading of Rawls and the difference principle is that the mere lowering of retail prices is itself helping all.

    But, to go back to my reading, the actor who needs to take Wal Mart’s unequal access to market share is the government, not Wal Mart.

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  5. Also, it seems to me your analysis of WalMart suggest another application of the difference principle is for WalMArt to use the savings it achieves in its supply chain management to share wealth with employees and suppliers.

    For example, I believe it has one of the highest turn over rates of employees. SO, yes it hires internally. It also is not a career-building employer for the vast majority of its employees. (I am not even touching the fact that its low wages force many employees to get government subsides for housing, health, and food, essentially getting a taxpayer subsidy for its wage practices). Is there a way Rawls’ approach would mean that WalMart should share the wealth created with employees?

    Do suppliers/venders seek WalMart out to improve their sales, or to survive? I feel like I have seen people arguing that some loose money when they sell to WalMart. Again, who is benefitting?

    In both of these, I am struggling to identify the inequality that triggers the difference principle.

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