Wal-Mart’s IT Infrastructure: Enabling Technology

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Introduction

In the 1960s Sam Walton incorporated his enterprise as Wal-Mart Stores and a few decades later, it became a global retailing juggernaut with a revenue of up to $400 billion in the fiscal year 2009 (Thompson, Strickland, & Gamble, p. 374.). The success of Wal-Mart is anchored to its business motto: “Everyday low prices” and since it is the undisputed leader in the retail industry its rivals are very much interested to know its major business strategies especially when it comes to its utilization of cutting-edge technology. An overview of Wal-Mart’s major business decisions will reveal that it is the fusion of IT technology as well as astute management is the reason why Sam Walton and his leaders were able to create an IT infrastructure that is both an enabling technology as well as a tool that create real strategic advantages.

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Competitive Forces

It would have been easy if entrepreneurs can start up a business and expect no competition. Businessmen can spend all their time selling or manufacturing products that consumers will buy. They will become very profitable because they are the only business establishment selling an in-demand product and therefore they have cornered the market. But in the real world, there would be many competing forces; different stores and different corporations are selling the same type of product or service. For instance, there are different companies selling tennis racquets. There are also different companies selling men’s underwear. The proliferation of companies and business establishments within a particular industry will create competitive forces.

When there is competition corporations will be forced to reduce prices or spend money in improving their product to ensure customer loyalty. In other words, it would be more difficult to earn a profit because there are so many players trying to get a slice of the pie. According to Porter’s Five Forces – a framework for understanding competitive forces in business – one way to hold on to a healthy profit margin is to increase barriers for entry. Thus, new entrants will find it difficult to join the game. This can be achieved by high initial investment costs, control of distribution channels, etc. In the case of Wal-Mart, the barrier for entry was the everyday low prices that they promise to their customers. This means that a new player must lower their prices to join the competition.

Wal-Mart was able to stay on top for all these years because their prices can always be considered as the lowest in the industry. It is very difficult for the competition to sell as low as Wal-Mart and naturally, customers flock to Wal-Mart’s multiple store formats such as supercenters; discount stores; Sam’s Club (members-only warehouse); and Neighbourhood Market (Thompson, Strickland, & Gamble, p. 377). It must be pointed out that for Wal-Mart to maintain rock bottom prices the company needed an IT infrastructure that enhances communication, information sharing, and monitoring of their business operations from the factory, to the distribution centers, and finally to the check-out counters.

Using another analysis model, the Five Generic Competitive Strategies, one can see how computer technology can be used to increase productivity and help the organization to break away from the competition. In the said model, one way to achieve competitive advantage is to use the Overall Low-Cost Leadership Strategy. This simply means that the company must make it their top priority to sell at the lowest possible price.

A company can attack this problem in many different ways but in the 21st century, it would be impossible to do so without the use of computer technology. For instance, lowering prices can be achieved by a more streamlined operation. When the company can reduce expenses then it can afford to lower prices. Computer software programs that can track inventory levels, as well as the movement of products from suppliers to distribution centers, can help keep costs down.

The second major strategy under this model of analysis is the Focused Differentiation Strategy. Under this strategy, the company must focus on niche markets. In the case of the retail industry, this can be achieved by offering a wide assortment of products to satisfy the most discriminating customer. For example, there is a growing demand for organic farm products. A supermarket chain should provide this type of consumer product and failure to do so would mean losing this segment of the market. To achieve differentiation – especially in superstores like Wal-Mart – there is a need to use technology that allows managers to mix and match products to a specific store in a particular geographic area. This kind of decision process can be a nightmare for those who do not possess the appropriate tools for information sharing and information dissemination.

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Technology

Since the beginning of recorded history, technology has played a major part in man’s struggle to survive in a hostile environment. Men and women of ancient times learned to contend with natural phenomena such as hurricanes, flash floods, drought, etc. with the use of technology. They learned farm techniques; they learned how to build sturdier homes, and they learned how to transport people and materials to a much better and safer place. Technology was also used to win wars and to build civilizations. Technology leapfrogged from the simple tools and contraptions of the Medieval Period to the more sophisticated assembly lines and engines of the 18th and 19th centuries. The Age of Industrialisation paved the way for the Information Age of the 20th century.

When computer software technology was perfected after World War II, there was no turning back. Businessmen were quick to realize that if they will not adhere to modern technology they will not be able to sustain their competitive advantage. In the case of computer hardware and computer software, the most important application is in the area of accounting, tracking inventory levels, human resource management, and the ability to store information that can be later analyzed to improve efficiency.

Computers made it easy to study trends in marketing. Every single purchase and every single item that came out of the factory can be meticulously recorded and stored in a more compact device that requires less space and relatively easy maintenance as compared to the bulkier ledgers and paper and ink processes of long ago. A CEO or an accountant can demand information at the push of a button or a few clicks of the mouse. There is no need to spend countless hours going and back forth to the bookkeeper’s records and manually creating a pie chart for analysis. A computer can access volumes of data and create a graphical representation of sales and profitability in a shorter period.

In the case of Wal-Mart, the company went beyond the conservative use of computer technology to keep records updated. They went beyond expectations by merging computer hardware, computer software, and telecommunications device are to increase their efficiency, especially when it comes to information dissemination as well as information sharing. They were not only adept at doing these things; Wal-Mart was also the leader of the pack when it comes to the clever use of technology.

Thus, they were able to remain at the top of their game. According to one report, “Wal-Mart’s approach to technology was to be on the offense – probing, testing, and then deploying the newest equipment, retailing techniques, computer software programs, and related technological advances to increase productivity and drive costs down” (Thompson, Strickland, & Gamble, p. 384). The general assumption that many companies are unable to fully utilize their information systems does not apply to Wal-Mart.

The company began using computers in 1974 and a few years later they began using point-of-sale scanners and bar codes in 1983 (Thompson, Strickland, & Gamble, p. 384). This means a more efficient way to check out items and a more pleasant experience for employees and customers alike. The ability to shorten this process can result in the overall reduction in operating costs which gives the company the ability to make more money and in the long run, will enable Wal-Mart to reduce its prices. But this is simply the beginning; Wal-Mart was always ready to take the lead when it comes to using cutting-edge technology. At a time when many companies were still grappling with the implications of using computer software, Wal-Mart was always moving forward and always ready to change for the better.

In 1984, Wal-Mart decided to use a computer-assisted merchandising system that allowed for a much more efficient product mix in every single store. The system enabled the company to design a product mix that would fit market circumstances and sales patterns for each store (Thompson, Strickland, & Gamble, p. 384). In 1986, Wal-Mart installed America’s largest private satellite communication network allowing two-way voice and data transmission between headquarters, the distribution centers, and the stores (Thompson, Strickland, & Gamble, p. 384). The system allowed them to save a significant amount of money compared to what they were spending when using the traditional telephone network.

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In 1989, Wal-Mart went one step further by establishing direct satellite links to about 1,700 vendors that supplied close to 80 percent of the goods sold by the company (Thompson, Strickland, & Gamble, p. 384). This allowed Wal-Mart to use electronic purchase orders and instant data exchanges. Using this system the company was able to speed up its credit card authorization procedure. In the early 1990s, Wal-Mart started using the automated reordering system that notified suppliers every time their products moved through the checkout lanes.

Thus, information sharing was not only accomplished within the company but the same was also allowed to transpire between Wal-Mart and their suppliers. For suppliers like Procter & Gamble, this is not only an excellent way to understand sales patterns of their products they are also given enough time to prepare the production of the next batch of items ready to be shipped out to Wal-Mart. It is easy to understand the synergy achieved by both companies.

Wal-Mart is not resting on its laurels so to speak and the company continues to develop and use new as well as old technology to streamline operations. In another recent display of management wizardry, Wal-Mart issued orders to all of its suppliers that starting 2003 they must adhere to a new protocol, the use of the electronic product code (EPC) technology (Thompson, Strickland, & Gamble, p. 385).

This technology is based on radio frequency identification systems (RFID) and this is not new. According to one commentator RFID technology, “…is so old it’s almost laughable … in World War II, the British used it to make sure incoming planes were theirs, not Germany’s” (Booth-Thomas et al., par. 2). Since Wal-Mart did not shrink back from using new as well as old technologies the company was able to develop a better method that will help in speeding up inventory as well as payment systems (Booth-Thomas et al., par. 2). This will boost the morale of employees and can increase the satisfaction of customers.

In the traditional method of scanners and bar codes, the checkout personnel must point the scanner into every individual product, making sure that the scanner head was able to read each bar code correctly. This can easily consume time and at the same time reduce the movement of items at a snail’s pace when customers began lining up behind the counters. The use of RFID technology will allow for the development of new scanners that require minimal human intervention. These new scanners can detect the presence of EPC tags in all the items loaded into supermarket cart and even before the cashier can say hello the scanner was able to process the merchandise and ready with the total amount that has to be paid. All of that in the twinkling of an eye and the customer is ready to move out of the store and attend to other duties and responsibilities.

Efficiency and Strategic Advantage

The preceding discussion was able to show how Wal-Mart was able to achieve cost-efficiency that drives down cost as well as improve employee morale. Wal-Mart was able to build an information system that allows for easy tracking of merchandise as well as the establishment of a reordering system that can easily minimize future problems. The company can give enough lead time for suppliers to manufacture items that are selling briskly while informing them also of products that are not doing so well. The use of technology allowed Wal-Mart to make decisions that further increases the company’s efficiency.

The use of the satellite link that enhances communication as well as data transfers is one good example of how the company was able to reduce expenses. The use of traditional telephone systems was a financial burden that Wal-Mart is more than happy to eliminate from its operations. The use of computer software that allows them to create a unique product mix for every single store will allow the company to minimize waste because it can be assured that what they are selling in every store are products that the local population will surely need.

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But the success of Wal-Mart is not simply about using cutting-edge technology because in the case of EPC and the radio frequency technology embedded in the system was not new. In other words, Wal-Mart was able to use what is already old technology and reinvent it so that it can serve them well. On the other hand, it can be argued that the success of Wal-Mart is not just the proper use of technology but the fusion of technology and astute management practices.

According to one study, “The technology that went into what Wal-Mart did was not brand new and not especially at the technological frontiers, but when it was combined with the firm’s managerial and organizational innovations, the impact was huge” (Schrage, par. 4). At the onset, Wal-Mart decided to work closely with its suppliers and when the company became the retail juggernaut that it is known today, it can make demands that suppliers could not afford to ignore.

Thus, whatever technology Wal-Mart adopts into its arsenal the effect is magnified severalfold because suppliers are forced to adapt to these changes. In the use of EPC tags, the effect would have been different if Wal-Mart has to negotiate and plead with suppliers to experiment with this innovation. But since Wal-Mart can demand that suppliers use EPC tags they can reach a new level of innovation without having to spend a great deal of money doing the tagging themselves. In other words, they can demand that suppliers do the dirty work and they better obey, or else they lose their lucrative contracts with the global retailer.

Conclusion

The general assumption that many organizations seem ill-equipped to use their information systems to build and maintain a competitive advantage does not apply to Wal-Mart. Since its inception, Sam Walton and his dedicated team of innovators were always on the offensive when it comes to technology. As a result, they were able to achieve cost-efficiency that in turn allow them to reduce their prices. Using the principles found in Porter’s Five Forces as well as the equally popular Five Generic Competitive Strategies one can ascertain that by reducing prices Wal-Mart increases the barriers for entry as well as separates itself from the rest of the competition. It would be foolish to shop anywhere else if Wal-Mart is the only store that can guarantee low prices or best-cost products.

On the other hand, it is not accurate to simply base the success of Wal-Mart on the adoption of IT technologies as well as other related technologies. It must be pointed out that it is the combination of technology as well as clever management practices that created strategic advantages for the company. Therefore, Wal-Mart’s IT infrastructure is not only an enabling technology but also a strategic weapon that allows Wal-Mart to break away from the pack and provide low prices that are difficult to match by other industry players.

Works Cited

Irwin. R. “Five Generic Competitive Strategies”. 2009. Web.

Schrage, M. “Wal-Mart Trumps Moore’s Law.” Technology Review. 2009. Web.

Thompson, A. Jr., A. Strickland III, & J. Gamble. Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases. New York: McGrawhill, 2008.

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