Information Systems: A Management Perspective

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Wal-Mart: attaining competitive advantage from information technology

Wal-Mart is the world's largest and most profitable retailer, with $44 billion in 1992 sales and 380,000 employees. Its growth from a single store in Rogers, Arkansas to almost 2,000 bright, attractive stores in 43 states is legendary in American business. Sam Walton was central to the legend. He built his empire on a belief in providing value for the customer and empowering employees, who are called associates. The Wal-Mart culture is built on obtaining the most current information about what customers want, getting the best ideas from employees about how to run the stores well, and sharing some of the profits with employees. The way Wal-Mart operates has been a model for General Electric's quest to increase speed and productivity. Jack Welch, CEO of General Electric said "Many of our management teams spent time there observing the speed, the bias for action, the utter customer fixation that drives Wal-Mart."

The use of information technology has been an essential part of Wal-Mart's growth. A decade ago Wal-Mart trailed K-Mart, which could negotiate lower wholesale prices due to its size. Part of Wal-Mart's strategy for catching up was a point-of-sale system, a computerized system that identifies each item sold, finds its price in a computerized database, creates an accurate sales receipt for the customer, and stores this item-by-item sales information for use in analyzing sales and reordering inventory. Aside from handling information efficiently, effective use of this information helps Wal-Mart avoid overstocking by learning what merchandise is selling slowly. Wal-Mart's inventory and distribution system is a world leader. Over one 5 year period, Wal-Mart invested over $600 million in information systems.

Wal-Mart use telecommunications to link directly from its stores to its central computer system and from that system to its supplier's computers. This allows automatic reordering and better coordination. Knowing exactly what is selling well and coordinating closely with suppliers permits Wal-Mart to tie up less money in inventory than many of their competitors. At its computerized warehouses, many goods arrive and leave without ever sitting on a shelf. Only 10% of the floor space in Wal-Mart stores is used as an inventory area, compared to the 25% average for the industry.

With better coordination, the suppliers can have more consistent manufacturing runs, lower their costs, and pass some of the savings on to Wal-Mart and eventually the consumer. Some 3,800 vendors now get daily sales data directly from Wal-Mart stores. And 1,500 have the same decision and analysis software that Wal-Mart's own buyers use to check how a product performs in various markets.

Aside from computers and telecommunications equipment, the technical basis of the point-of-sale system is the bar code scanner. Bar code scanners make it possible to record the sale of each item and make that information available immediately for both reordering and sales analysis. The first use of bar code scanners occurred in the 1970s. After two decades of experience, accurate inventory tracking using bar code scanners is a competitive necessity for large grocery stores and retailers.

Consistent with the adoption of any information technology, development and acceptance of bar codes required agreements on standards. The idea of bar code scanning required that industry develop a universal product code (UPC) system, a standard method for identifying products with numbers and coding those numbers as the type of bar code shown in the photo. The UPC codes that we see routinely today were chosen from a number of alternatives developed by different companies.

As happens with other uses of technology, the use of bar codes has brought a range of problems along with the benefits Wal-Mart and other retailers have realized. The use of bar code scanners made it unnecessary to stamp the price on every item (except in states that still require this for consumer protection). This reduced costs but also eliminated jobs of some of the clerks who formerly did the stamping. Other problems (not necessarily related to Wal-Mart) were uncovered when a UCLA study of 1,200 purchases at three retail chains in California found mischarges on 5% to 12% of the purchases. For example, a researcher was charged a scanner price of $21.99 for a pair of jeans that were marked on sale for $15.44. The ratio of overcharges to undercharges at one chain was as high as 5-to-1. In other words, the majority of the mistakes were overcharges, not undercharges. The Riverside, California district attorney who prosecuted three retailers for scanner overcharges said, "I don't believe scanners have helped the consumer at all." On the one hand, the productivity of modern retailing depends on bar code scanners; on the other, the system of updating the prices is imperfect and may even be an opportunity for dishonesty.

Stepping away from the technology and back to Wal-Mart, even its tremendous success has brought some problems. The huge Wal-Mart stores on the outskirts of small towns have overwhelmed many merchants on Main Street. Wal-Mart is so large that it can sell products profitably at prices less than many small-town merchants' cost. Some feel that Wal-Marts have killed the traditional business districts of some small towns. If this is true, consumers in these towns receive the benefits of the best selection and pricing, but lose some of the benefits of living in a small town.

Questions:

  1. Explain how advances in information technology played a major role in Wal-Mart's success.

  2. Explain how the case reveals some of the negative impacts that sometimes result from technology usage.
Sources: Koselka, Rita. "Distribution revolution," Forbes, May 25, 1992, pp. 54-61.; Bartholomew, Doug. "The Price is Wrong," Information Week, Sept. 14, 1992, pp. 26-36.; Sidey, Hugh. "The Two Sides of the Sam Walton Legacy," Time, Apr. 20, 1992, pp. 50-51.

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