Founded in 1962 by Sam Walton, Wal-Mart followed an amazing pattern of success and growth,

eclipsing all other U.S. department store retailers by the early 1990�s.� In early spring 2001, Wal-Mart
enjoyed a huge market capitalization of over $230B, which was down from highs of nearly $300B in
early 2000.� Over the last year, however, Wal-Mart had suffered a number of failures in its Internet-
based operations, as it tried feverishly, along with many other traditionally �bricks-and-mortar�
companies, to make a transition to the Internet.� As much of the commotion in the markets relative to
the Internet subsided due to a slowing economy and a number of high-profile �dot-com� failures, Wal-
Mart continued to experiment with it�s Internet presence and corporate strategy.� In this paper, we
discuss Wal-Mart and its technical transition to the Internet.� First, we examine the company from a
value chain and core competency perspective, to gain insight on what value the company brings to the
table, both in its traditional and Internet operations. We give a synopsis of Wal-Mart�s recent and
current online philosophies, and then turn to Wal-Mart�s strategy as it relates to the transition.� Finally,
we provide an analysis of Wal-Mart�s prospects and recommendations for the future.
 
Sources of Value��������
 
Wal-Mart had always invested heavily in infrastructure.� They were among the first to use point-of-sale
Uniform Product Codes (UPC) scanning, and intra-store radio frequency (RF) transmission of product
UPC and pricing information between central store inventory systems and personnel with scanners on the
store shelves.� However, their most valuable infrastructure investments were made at a significantly
higher level.� A satellite system connecting all stores was initially installed in 1983, and grew into a
complex communication network that included all stores, headquarters, and distribution centers, as well
suppliers.� This system facilitated a modified just-in-time process of inventory control, a feat virtually
unheard of in general merchandise retailing.� Put simply, as each store sells an item, a message is
automatically sent to the supplier of that item, who then knows to include a replacement in the next
shipment (usually that day) to the nearest distribution hub. This degree of connectivity allows rapid
response to inventory needs, and reduces dramatically the amount of inventory required.�
 
A second area of major investment was in distribution technology.� Wal-Mart established a network of
innovative hubs which used �cross-docking� to minimize distribution center inventory and to facilitate
the need-based inventory delivery system enabled by the satellite network.� In this model, as shipments
arrive at the warehouse, merchandise is moved directly to the trucks carrying the outbound shipments to
specific stores.� In many cases, the same trucks can even be used for inbound and outbound shipments,
including those carrying new merchandise to stores and those carrying returned, outdated, or unneeded
merchandise from stores, thus minimizing round-trip shipping costs.
 
Wal-Mart operates as an aggregator, distributor, and retailer of consumer goods.� Due in part to its size,
to the connectivity involved in its operations, and to the zest with which it has traditionally negotiated
supplier contracts, Wal-Mart has established itself in a key position in the value chain of its suppliers.� It
is consumer goods giant Procter & Gamble�s largest customer, and holds a significant power position
relative to other smaller suppliers.�This position has enabled Wal-Mart to obtain superior price breaks
relative to the competition on the products it carries.� It�s size has obviated the need for separate
distributors or wholesalers in the value chain.� Coupled with the efficiency of its distribution network
and store model, Wal-Mart has achieved a well-entrenched position in the value chain of its customers as
well� � that of the lowest cost consumer goods retailer.�� Hence, the value that Wal-Mart provides is
two-fold.� First, it provides value to its suppliers by operating as a large, relatively stable, nearly
omnipresent channel for sales of goods, which provides rapid feedback on unit sales and localized
demand.� Secondly, and arguably more importantly, Wal-Mart provides value to customers by offering
aggregation of a wide variety of consumer goods in a single location, and selling those goods at the
lowest prices.�
 
With respect to traditional operations, Wal-Mart continues to enjoy success.� Despite the emergence of
other bricks-and-mortar competitors such as Target, Wal-Mart�s cost position and relationships with
suppliers still differentiate it from the competition.� It�s value proposition continues to be successful,
and it remains a darling of Wall Street analysts.� Finally, as the fervor over business-destroying dot-com
ventures wanes, Wal-Mart continues to show a high level of durability potential in it�s traditional
operations.� Selected financial information for Wal-Mart is provide in Exhibits 1-3.
 
 
Competencies
 
With an eye toward the online environment, it is useful to examine the competencies that Wal-Mart
possesses in its current operations.� It has been theorized that companies deliver superior customer value
by performing exceptionally well in one or more of three areas, Operational Excellence, Customer
Intimacy, and Product Leadership[1]. Based on the above discussion, it is relatively easy to theorize that
Wal-Mart�s primary strengths lie in the area of Operational Excellence.� Specifically, Wal-Mart�s
ability to coordinate a complex information management and distribution network, and to efficiently
manage supplier relationships are the cornerstones of its success.� What isn�t as obvious is how Wal-
Mart�s competencies translate to an online environment.� Clearly this is highly dependent on the type
of online strategy Wal-Mart pursues.� We will discuss Wal-Mart�s online strategy in detail later in this
paper.� However, it is useful to examine some common areas in which Wal-Mart might excel or face
challenges.
 
For many companies, the thrust of an online presence is perceived to lie in the business to consumer
(B2C) arena.� As shown in the operations of pure play online retailers such as Amazon.com, or clicks-n-
mortar companies like Toys �R Us, one of the keys to success in the realm of B2C online retailing is the
ability to efficiently fulfill large quantities of small orders.� A highly efficient back-end fulfillment
system is therefore a key competency that large scale online retailers must master.� On the surface, it
would seem that Wal-Mart, with its heavy investment in back-end infrastructure, would excel in this
area.� However, we note that a key difference in Wal-Mart�s systems is that they are currently
designed to optimize large shipments of varied products to relatively few locations through relatively
proprietary transportation networks, not small shipments to a large number of public locations.� Could
Wal-Mart�s systems be expanded or adapted to handle such shipments efficiently?� Perhaps.� But,
we see it as potentially being a significant challenge.
 
A second broad area of expertise linked to success in the B2C arena is a the customer interface: the
degree of customer intimacy, community building, and one-to-one marketing.� While it can be argued
that Wal-Mart has successfully created a �community feel� within its bricks-and-mortar stores, and by
virtue of their omnipresence and comprehensive information management systems have garnered superior
knowledge of consumer purchasing habits, it would be a stretch to state that Wal-Mart excels at customer
intimacy.� It is therefore uncertain as to what degree Wal-Mart�s rather macroscopic knowledge of
relationships with customers is transferable to an online B2C environment.�
 
It should be noted that there is one aspect of B2C retailing advantage which Wal-Mart clearly exemplifies
in its traditional operations: that of beating competitors on price.� Wal-Mart�s efficiency and
relationships with suppliers represent a competency that could potential transfer very well to online
operations.� The degree to which Wal-Mart�s cost, and hence price, advantage can be leveraged on the
internet will depend heavily on how parallel the online cost structure turns out to be, with key areas of
concern likely to be distribution and shipping costs.
 
With respect to the business-to-business (B2B) online environment, many companies are using the
Internet as an inexpensive medium over which to efficiently link entities in their respective value
chains.� Suppliers, distributors, wholesalers can relatively easily be connected.� Exchanges can be
created for the buying and selling of commodities, supplies, and other goods or services.� The list of
applications goes on.� Wal-Mart clearly has a competency in the management of information and
communication among all upstream parties in its value chain.� Currently, this expertise is played out in a
set of interwoven proprietary systems and networks.� It is possible that value could be garnered by Wal-
Mart in the B2B environment should the Internet be used as a logical migration destination for current
systems, or via the generation of enhanced systems which improve upon their proprietary
predecessors.� However, the entrenchment of current systems could prove as much a hindrance to Wal-
Mart in a transition to the Internet as it is a competency in their current operations.� Again, the degree to
which this competency is transferable is highly dependent on the strategy Wal-Mart elects to pursue
 
Thus far, we have attempted to outline Wal-Mart�s position and value proposition, as well as the set of
competencies that have made it successful.� We have noted the opportunities and challenges those
competencies present relative to a transition to the Internet.� We now look at Wal-Mart�s motivation
and strategy for moving to the Internet and then we examine Wal-Mart�s real actions and Internet
operations to date.� Finally we close with a summary of key issues Wal-Mart must considered going
forward.
 
 
The Strategy for Walmart.com
 
Wal-Mart looked to venture on-line as a means to continue delivering on its promise to customers,� �a
wide assortment of good quality merchandise; the lowest possible prices; guaranteed satisfaction with
what you buy; friendly, knowledgeable service; convenient hours; free parking; a pleasant shopping
experience.�� While the Internet can be used to achieve many of these objectives, initially Wal-Mart
hastily overlooked two key things: the value of the Internet as it relates to Wal-Mart�s traditional
business and the ability of the Internet to leverage Wal-Mart�s core strengths.� These factors have
become increasingly evident over the past three years.
 
Wal-Mart�s traditional business was based on bringing �contemporary retail shopping advantages to
small-town America.�� Since the beginning of Wal-Mart.com, people have asked how Wal-Mart
would successfully transition its customer base to e-commerce.� The paradox being that many present
customers may not use the Internet while savvy Internet users may not be Wal-Mart shoppers.� In line
with its mantra, Wal-Mart sought to bridge the digital divide by extending reasonably priced Internet
access to rural communities.� Consequently, Wal-Mart forged a deal with America Online to distribute
AOL CD ROM�s and disks in the Wal-Mart stores.�This would enable the majority of current
customers to get on-line and ultimately shop at Wal-Mart.com.� Unfortunately, AOL and Wal-Mart
have not been able to roll-this program out in the targeted timeframe. Further, while this effort serves to
extend Internet access to a broader population it does not help those individuals/families who do not own
computers.
 
As mentioned in the first section,� Wal-Mart has enjoyed technological leadership as one of its core
strengths and sources of competitive advantage.� In 1996, it seemed logical for Wal-Mart to establish an
early presence on the Web, the next new technological advancement.�� With that, Wal-Mart also
developed the most secure technology for managing on-line payments and forged a partnership
with MasterCard to offer digital certificates to cardholders.�� Unfortunately, as mentioned earlier, the
web site was poorly designed, difficult to use, and did not take advantage of the information-value of the
Internet and the ability to have a one-to-one customer relationship.
 
Likewise, Wal-Mart saw the Internet as a means to conveniently deliver a wide assortment of goods at
low prices.� The complexity arose when Wal-Mart recognized the difficulty of translating assortment,
convenience, and low prices to the Internet.� On-line shoppers perceive convenience as the ease and
speed with which one can find what they are looking for.� Assortment is only valuable to on-line
shoppers if it is easily navigable and accessible.� To-date the Wal-Mart.com web site has been neither.
 
 
Moving to the Internet
 
Wal-Mart began its love-hate relationship with the Internet in July of 1996 when it launched a bare bones
site targeted at the online B2C retail market.� At that time, the company did little with the site, as they
waited for more of their customers to get on-line.� The site operations were conducted from the
corporate headquarters in Bentonville, Arkansas.� Competitive pressures to beef-up the site didn�t
arise until 1999, when they began reworking the site to prepare for the holiday season.� However, when
the holiday season arrived, the company had trouble delivering items on time.� As early as December
10th, Wal-Mart couldn�t guarantee that purchases from the web site would be delivered by
Christmas.� Thus, in January of 2000, Wal-Mart announced yet another makeover of their site.� The
new site would include everyday household items as well as special features such as a travel center,
which offered airline tickets and hotel reservations.�� Reviews of Wal-Mart�s new site were lack-
luster, siting difficult navigation and search capabilities.� In September of 2000, the site was ranked
fourth among department stores in the number of unique visitors, behind J.C. Penny, Sears and Target.[2]
 
It appears Wal-Mart knew all along that the website was filled with problems which is why Wal-Mart
and Accel announced the break-out of Wal-Mart.com just days after the site re-launched for the third time
in early 2000.�This division would operate as a co-owned independent company located in Silicon
Valley, isolated from Wal-Mart�s headquarters in Arkansas.� This entity would have a separate board
and management team, which would be hired in the following months.� Additionally, two outside
fulfillment centers would handle shipping.� While full details of the financing and ownership
arrangement haven�t been disclosed, it is known that Wal-Mart owns at least an 80% stake, with Accel
making up the remainder.
 
Fortunately Wal-Mart�s pockets have been deep enough to afford experimentation with the right mix of
bricks-and-clicks.� The company failed to achieve success with a fully integrated structure, and
therefore made the decision to separate operations. Reports indicated that Wal-Mart had been
contemplating a partnership for some time before deciding to partner with Accel.� Wal-Mart had
strategically waited to find a partner that could bring key relationships to help them thrive in the Internet
community, and lend expertise in how to operate and recruit in a talent-drained industry.� Accel also
demonstrated a history of longer-term business relationships, which was attractive to Wal-Mart.
 
The benefit to earlier failed attempts at the Internet was the acknowledgement of the need to have a
separate culture in order to get business done in the warp-speed of Silicon Valley.� In anticipation of a
culture-clash, Accel addressed key points, like going public and offering employees stock options, well in
advance of the deal being announced. The ability to attract high-quality management was essential to
Wal-Mart.� Wal-Mart�s �good-old-boy� executives understood the importance of luring talent with
oodles of stock options and found that by separating the companies an incentive structure could be
formed that included stock options, with the intent to take the company public at some point.�
 
Another overlooked reason for spinning off Internet operations into a separate company was the
avoidance of sales tax�a key factor for price-sensitive on-line shoppers.� Because Wal-Mart had
physical presence in all 50 states, all Internet customers would have to pay sales tax.� By spinning off
the Internet operations, Wal-Mart.com could avoid sales tax in states in the 47 states where the dot-com
doesn�t operate.
 
In the spring of 2000, Jeanne Jackson joined Wal-Mart.com as the CEO.� Jackson came from the Gap,
where she transformed Banana Republic in to a chic, urbane shopping destination,� increasing sales
from $750 million to $1.5 billion in four years.� Jackson was chosen for the position because of her
strong background in traditional retailing and her leadership of the Gap�s Direct division, which
included managing its Internet sites.� Because Wal-Mart did not have direct sales expertise, launching a
Web store required creating a new direct-marketing infrastructure and developing a new set of
management skills.� Jackson provided this link.�
 
Since arriving at Wal-Mart.com, Jackson has slimmed down product offerings and re-vamped the site,
which re-launched in early November of 2000, just in time for the holiday season.� Under Jackson�s
leadership, Wal-Mart.com has purchased the assets of several smaller e-tailers and formed partnerships
with Time Warner and RealNetworks to offer proprietary music events via the web.� Jackson�s stated
strategy for the site is to start with a reliable, easy-to-use web site which both get back to Wal-Mart�s
traditional strengths.� In addition to stripping away the bells and whistles from the site, Jackson also
stripped away products that made no sense on the web (i.e. $0.25 plastic cups) and expanded categories
that complemented store offerings, such as patio furniture.�
 
Ultimately, Jackson would like to have shipping and customer-service in-house, and to fully-integrate the
stores and the web.� This last item will be essential in achieving the right mix of bricks-and-clicks to
fully service the Wal-Mart customer.� Currently Wal-Mart.com is working on the ability to offer online
listings of real-time inventories in individual stores.� This would allow customers to decide whether to
head to the store, or to buy the item on-line.� This type of seamless integration could determine the
success of Wal-Mart�s on-line presence by leveraging the strengths of physical and on-line stores to
offer a full-service capability to customers.� As discussed earlier, the Wal-Mart customer may not have
been the ideal Internet shopper three years prior.� However, as the digital divide narrows, Wal-Mart may
find many customer service benefits to the web, which would bolster their already strong customer
service reputation.
 
In analysis of Wal-Mart�s decision to take Internet operations out-of-house, we refer to the article
entitled �Get the Right Mix of Bricks & Clicks.�� Components of the seamless strategy and joint
venture strategy make sense for Wal-Mart.� In support of their early decision to integrate operations,
Wal-Mart�s brand and customers lend well to an integrated platform.� Wal-Mart�s brand needed no
introductions, and they could advertise the web site throughout their numerous stores
nationwide.� Additionally, the brand is known for everyday low-prices, which fits well with Internet
shoppers� priorities.� Opposition to the seamless strategy lies in Wal-Mart�s lack of direct sales
experience and fulfillment capabilities.� Additionally, the importance of benefits derived from seamless
customer service may have been mitigated for Wal-Mart at the time, as many felt the Wal-Mart customer
profile was not web-savvy.
 
 
Real Results
 
Perhaps the transition difficulty in the early years rested in the area of Wal-Mart�s technical
prowess.� As discussed previously, one of Wal-Mart�s core competencies is its operational ability to
streamline the supply chain through cross-docking inventory systems and efficient means of
communication through technology. While Wal-Mart has achieved technology efficiency in its supply
chain, shipping to a store is a much different game than shipping direct to a customer.� In this case, the
web presented much more than just a technological advancement.� Perhaps the secret to the web relied
more on the ability to use the channel to reach customers to develop an efficient relationship.� Wal-Mart
had an expertise in operations, not in one-to-one customer relationships.
 
Finally, the definition of �low price� is more tied to value on the Internet. Value includes the
information available to an on-line shopper, convenience and ease of purchasing items, and actually
obtaining those goods as a result.� In reality, leading web sites like Amazon.com do not offer the lowest
price. Instead, they offer the best value.� They make �the right product available at the right time in the
right place.�� Customers are willing to pay a small premium for that convenience.� Additionally, low-
priced goods on-line typically net out to be of equal or higher price once shipping is included.� Wal-
Mart may not be able to successfully offer the lowest on-line price as it incurs added costs through direct
marketing and delivery to customers.�
 
Another asset has driven Wal-Mart�s growth: a friendly shopping environment.� It is important to
assess whether this strategic advantage easily translates to an Internet environment.�� While an easy-
to-use site makes a shopping experience more pleasant, it doesn�t necessarily equate to a smiling
salesperson helping you shop.� Wal-Mart also forgot to capitalize on one of its greatest strengths in the
traditional, physical world. Wal-Mart�s wide aisles with a multitude of shelf facings have enabled Wal-
Mart to increase sales per store visit simply by suggesting products to shoppers.� Wal-Mart has taken
advantage of the tendency to impulse shop.� Wal-Mart has yet to translate this ability into the virtual
world.�
 
 
What�s Next
 
Although Wal-Mart appears on the right track with its partnership with Accel and the creation of Wal-
Mart.com, its responsibility to manage the technical transition has only begun.� Wal-Mart and Wal-
Mart.com must create a plan to both monitor internal operations and technological advances.�� For
Wal-Mart, it appears that a separate company is the right option based on the aforementioned analysis,
however, this may not always be true.� Most analysts agree that the role of the Internet is in its nascent
stages, and will continue to develop over the next few years.� With this in mind, Wal-Mart must monitor
the progress of its company and determine if there is an advantage, whether from a financial, managerial
or even marketing standpoint, that would favor integration.
 
Similarly, with the rapid change in technology effecting customer relationships, Wal-Mart and Wal-
Mart.com must institutionalize their monitoring of developments.� Rather than jumping on the Internet
bandwagon, Wal-Mart must learn from its mistakes in this case and keep an eye out for future disruptive
technologies.� As many cases show, a company�s strength can quickly become a competency
trap.� In order to help prevent this, Wal-Mart and Wal-Mart.com must create incentives for managers at
both organizations to follow technological developments.� Managers should focus on more than simple
NPV and DCF analysis and factor in some benefit of being a part of the technology.� The introduction
of real options could potentially solve this problem.� Although it may be difficult to implement at
present, keeping it in mind in going through project decision analysis will benefit Wal-Mart.
 
There are three unique ways for Wal-Mart to access disruptive industry changes:� partnerships with
third parties (like the Accel deal), the acquisition of companies with complementary technologies, or
through internal development.� Wal-Mart.com can become a breeding ground for technological and
managerial innovation.� Since Wal-Mart is a well-established firm, it requires large scale projects with
high ROI�s.� This characteristic may prevent adaptation and adoption.� In contrast, Wal-Mart.com
will be smaller in scope and potential projects, making it easier to experiment with new means of serving
the customer.� Regardless, a system of knowledge management must be created to allow the two
companies to share innovations and great ideas.�� Whether these systems are institutionalized (ex �
group of Wal-Mart and Wal-Mart.com people who meet semi-regularly) or informal (ex � Wal-Mart
encourages people to meet cross-company for events or discussions), the management of both sides must
explicitly support the sharing of information.� Clearly this integration is where the true efficiencies can
be realized.� As evidenced by the lack of profitability in the pure-play e-tailing sector, Wal-Mart�s best
bet for return on Wal-Mart.com is to leverage efficiencies between the two organizations.�
 
With the establishment of a well-functioning Internet operation, Wal-Mart can also begin to examine its
customer base more intimately.� Based on new abilities to tailor offerings under Customer Relationship
Management (CRM) theory, Wal-Mart can start differentiating its customers and customizing its
offerings to them.� For example, there may be some customers who want to shop exclusively through
the web and others who will use a combination of web and store shopping.� For each of these customers
there is unique value that Wal-Mart brings.� Wal-Mart must gather its information about its customers
and then interact with them further to deliver an end product that provides the most value.
 
In conclusion, Wal-Mart appears to be in the position to finally manage the technical transitions
related to the Internet.� Through its partnership with Accel and its creation of a separate entity
it is on track to begin to exploit the Internet to its benefit.� Wal-Mart must learn from its
mistakes during this period and create systems to manage future technical
transitions.� Fortunately, the size of Wal-Mart�s pockets allow for these mistakes. �In fact,
the capital support could even facilitate more flexibility with experimentation, which could
greatly increase its competitive position.� Wal-Mart.com can still enjoy the benefits of
purchasing leverage available to the parent company, as well as the brand recognition and
advertising opportunities.� Wal-Mart must find the right set of incentives and dialogue between
the two companies to provide the customers with an integrated full-service offering.� Once this
equilibrium is reached, hopefully Wal-Mart will begin to fully appreciate the synergies of the
Internet.