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Walmart Company’s Threats and Challenges Case Study

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Updated: Aug 5th, 2021

Abstract

Wal-Mart must value the importance of the social contract it has with stakeholders and various interest groups. The benefits strategy fiasco of 2005 was an eye-opener for the company. The errors committed during that period was a sobering reminder that the company cannot force its way into the hearts and minds of its critics. Wal-Mart executives must learn new skills, especially when it comes to understanding the sentiments and aspirations of various stakeholders.

Wal-Mart is a game-changer in the retail industry. The founder’s decision to sell commodities with very low prices was a critical step towards success. For several decades since its inception, none can compete with Wal-Mart in terms of the said strategy. Nevertheless, the relentless drive of Wal-Mart executives to drive down prices, combined with hundreds of billions of dollars in revenue attracted critics and detractors from different sectors of society. Aside from criticisms and protests from concerned citizens and various interest groups, Wal-Mart is also experiencing threats from competitors and declining sales. It is important to point out that declining sales can be a reflection of the company’s reputation. It is no longer enough to simply manage the physical aspect of the business. It is also important to look at sociopolitical issues that can negatively affect the perception of investors and customers regarding the company’s long-term growth.

Threats and Challenges

Wal-Mart’s declining sales are a significant source of threat to the company’s long-term growth (Cullen & Parboteeah, 2013). Another source of threat is Wal-Mart’s inability to dominate the global retailers market. For example, Mal-Wart’s attempt to establish supercenters in China started strong but sputtered a decade later. Wal-Mart currently has 364 stores in China; however, these stores are not the top draw in China, because stiff competition from Carrefour SA, Tesco, Auchan, and the Ruentex Group made it harder for Wal-Mart to get a bigger slice of the market (Rugman & Waters, 2005).

When it comes to challenges, Wal-Mart is dealing with multiple lawsuits about gender-based discrimination in the employment arena (Weiss, 2014). The company is also dealing with lawsuits concerning low wages and employment benefits. Wal-Mart has to answer accusations that it failed to provide health insurance for more than 60 percent of its employees (Ferrell & Fraedrich, 2013). One of the more controversial executive decisions of the company was the discovery of a memo sent by Susan Chambers – Wal-Mart’s executive vice-president for benefits (Ferrell & Fraedrich, 2013). In the said memo, Chambers told the board of directors that it is best to hire more part-time workers (Ferrell & Fraedrich, 2013). The bad publicity created by the memo reduced the value of Wal-Mart’s stock by 27 percent (Ferrell & Fraedrich, 2013). The company has to find a way to address these problems.

CEO Lee Scott’s Priorities

Faced with numerous challenges and threats to the company’s long-term profitability, Lee Scott rallied his troops and declared that the company has to focus on key priorities that are listed as follows: 1) Environment; 2) Healthcare; 3) Wages; 4) Communities, and 5) Diversity. By focusing on the environment and communities, the company expresses its desire to revitalize its image. By focusing on healthcare, wages, and diversity issues, the company manifests its willingness to address persistent problems and challenges that threaten to affect the company’s long-term sustainability.

The Environment

Lee Scott pointed out that the ultimate goal of the company is to use 100 percent renewable energy; create zero waste; and sell products that sustain the Earth’s resources (Scott, 2005). Wal-Mart’s CEO asserted that some of the environmental goals were feasible if the company focuses on improving fleet efficiency by 25 percent. He also pointed out that increasing the energy efficiency of Wal-Mart stores will help the environment. He also claimed that by improving recycling strategies, Wal-Mart will help reduce waste. Lee Scott challenged his employees to provide products that are safe and sustainable.

Healthcare

Lee Scott created an insurance plan that would enable all employees to get health insurance. He planned to encourage workers to pay $23 per month to acquire health insurance. He also said that this particular plan enables employees to have insurance coverage for their children if they are willing to pay another 50 cents per day.

The company’s healthcare program was only limited to healthcare plans. Lee Scott also promised to establish basic healthcare clinics in every store. The company even went further in its attempt to leverage its scale to offer affordable healthcare plans not only to employees but also to small business customers (Scott, 2005).

Supplemental Benefits Documentation: Health Cost Strategy

Lee Scott’s Twenty-First Century Leadership speech bore fruit. Susan Chambers spearheaded a team to look into the company’s benefits strategy. The team discovered that it is not practical to develop a benefits strategy aligned towards Scott’s initiative. In other words, it was not prudent to develop a better healthcare program for all employees. Through a confidential memo, Chambers expressed her unhappiness over the company’s benefits costs that grew at a rate of 15 percent per year (2005). From her point of view, it was not acceptable to use 12 percent of the company’s future profits to fund conventional healthcare programs (Chambers, 2005). She also expressed disdain over the fact that the least healthy, and the least productive workers are interested to sustain the status quo, and at the same time clamoring for longer careers with Wal-Mart.

Based on these statements, it can be argued that Chambers had two major objectives in mind. First, she wanted to develop a less expensive benefits strategy. Second, she wanted to get rid of the least productive employees, because their presence will magnify Wal-Mart’s problematic healthcare program. There are several implications if Chambers wanted to accomplish these twin goals. Wal-Mart had to move away from traditional health insurance plans and compel workers to build up savings using Health Savings Accounts. Wal-Mart had to acknowledge that older workers are not viewed as assets, but liabilities that continually drain the company’s resources.

Chambers acknowledged the importance of the company’s public reputation. Nevertheless, she decided that the company has to embrace a certain level of risk to reduce costs. As a result, she proposed a controversial strategy that will attract younger and healthier workers. This idea was not explicitly mentioned in the report; however, it was clear that Wal-Mart had to hire younger employees to reduce the company’s financial exposure when it comes to healthcare plans. Wal-Mart’s bias towards a younger workforce was made evident when the memo mentioned a benefits package that includes an education offering targeted at students (Chambers, 2005).

Leaked Internal Documents: Added Damage to the Company

Even before the confidential memo was leaked to the public, Susan Chambers acknowledged the explosive nature of the report (2005). She realized that even after the report has gone through revisions and made more palatable, certain aspects of the proposed plan can be used as added ammunition for the critics of the company (Chambers, 2005). Thus, one can expect the kind of negative publicity the memo created when it was leaked to the public in its raw form. The ideas and suggestions that were supposed to be under consideration were now made public. It was difficult for the company to deflect criticisms, especially with regards to the plan of easing out older members of the workforce. It was a public relations nightmare, especially in a country that places so much value on retirement plans. More importantly, it painted a negative image of the company, which is an organization that focuses only on profits. The leaked memo focuses the spotlight on the long-term goals of the company, and that is to reduce its commitment to veteran workers. By suggesting that it is better to hire students, the company demonstrated its willingness to consider short-term solutions to address present-day problems. For investors and other stakeholders, the company was in panic mode, as it attempts to answer mounting criticisms regarding its labor practices. It was therefore understandable when the company’s perceived value shrunk as much as 25 percent, during the height of the controversy (Ferrell & Fraedrich, 2013).

From a strategic standpoint, Susan Chamber’s decision to hire younger workers and to lower the company’s contribution to healthcare was brilliant if two conditions were true. First, the confidential memo was not made available to the press. Second, there should have been a clarificatory remark that the recommendations were short-term solutions. When the memo was leaked to the public, the company had no room to maneuver. In other words, it was a failure for strategic communication. If the memo was not leaked, and the company was able to hire younger workers without attracting attention to Wal-Mart’s “creative” attempt to reduce costs, the company could have enjoyed several years of significant growth. This assertion is supported by a New York Times report, wherein the author revealed the reaction of three top Wal-Mart officials when they received Chamber’s recommendations. The New York Times reporter said that the company’s chief financial officer, top human relations executive, and executive vice president received the recommendations with great enthusiasm (Greenhouse & Barbaro, 2005).

The enthusiastic reception of Chamber’s report meant that the company was in agreement with her decision to lower expenses. However, the confidential memo made one thing very clear. Wal-Mart was ready to adopt the recommendations as a long-term solution. If viewed from this context, a long-term commitment to hiring only younger workers will backfire in the long run. After a decade or more, these young workers are going to become the next group of less productive and less effective workers. In other words, the problem will recur. Moreover, it will cause internal problems for the company. It can be argued that older workers are less motivated to give their best for the company. Also, there would be a significant reduction in the number of workers willing to work long-term for Wal-Mart. The company will also attract workers that only consider Wal-Mart as a stepping stone for future careers. At best, the company will be viewed as the best employer when it comes to summer jobs and part-time employment opportunities. It is difficult to imagine the long-term growth of any company that cannot attract the cream of the crop. Lee Scott himself revealed in an interview with Robert Berner that Wal-Mart is in a different type of industry, wherein a worker without a High School degree can start as a cart pusher and end up being a regional vice-president (2005). However, this ideal scenario is only plausible if the company can attract quality workers to work for Wal-Mart. There are millions of people without a High School diploma who can work as a cart pusher in the parking lot; however, there are only a few who have the talent to work their way to the top. This simple truth was never considered in creating the initiative to hire younger workers to reduce operating costs.

From a public relations standpoint, the twin initiatives can be considered as impractical and ridiculous. It was difficult to conceal the gist of Chamber’s recommendations from the public. The leaked memo expedited the process of uncovering a poorly constructed public relations gamble. Chambers made it clear that she was unwilling to spend more money to pay for employee health benefits. However, there was no way to ignore the company’s obligations, and Wal-Mart will be forced to consume a greater percentage of its profits. Therefore, Chambers decided that the best way to move forward was to hire younger workers. With younger workers, especially those that have no High School diploma, it would have been easier for Wal-Mart to persuade them to adopt the Health Savings Account scheme as opposed to conventional healthcare plans. However, this was not a well-developed initiative for the company’s reputation (Payton, 2005).

Chambers and her team misinterpreted the provisions of Wal-Mart’s social contract with stakeholders. In the context of sociopolitical issues in business, Wal-Mart had an existing social contract with internal and external stakeholders. The company also has a social contract with various consumer watchdogs and citizen groups that are watching the company’s major moves. Chamber’s poorly advised initiatives stem from the belief that she can make compromises with her critics and detractors by forcing them to accept a strategy that was only favorable to the company. She made a poor decision when she ignored the fact that there were expectations based on the social contract that the company had with stakeholders and various interest groups. She also ignored the fact that these expectations are non-negotiable. Even small companies that do not boat of multi-million dollar profits are expected to abide by the provisions of the said social contract. Thus, a company that has billions of dollars in revenue is not exempted from the said obligations. The expectations were higher for Wal-Mart.

The company was expected to ensure all the workers. If that is not possible, then, they have to develop a scheme that would make it feasible for the workers to eventually acquire a decent insurance cover. Chambers did not consider the impact of ignoring the ramifications of the social contract. It was too late in the game when she realized that she cannot avoid the issue. Sooner or later, the company will have to find a way to ensure their workers.

Wal-Mart’s 2 Recent Initiatives: Strategy and PR Standpoint

The company learned a great deal about the power of social contracts (Bonini, Mendonca, & Oppenheim, 2006). The primary lesson learned is that it is not prudent to ignore certain expectations, especially when it comes to providing health insurance for the employees. This is probably the reason for the implementation of a new initiative that seeks to reduce costs indirectly. In this recent initiative, Wal-Mart reduced the number of workers, while at the same time pushing for expanding the business. From a strategic point of view, the initiative was an attempt to create a cost-efficient operation. This means more revenue was expected to be generated at a lower operating cost. Wal-Mart implemented a plan to reduce the workforce by 1.4 percent, while at the same time increasing the number of retail stores by 13 percent (Ferrell & Fraedrich, 2013). However, the strategy proved to be ineffective because of numerous complaints regarding the quality of customer service (Ferrell & Fraedrich, 2013). With fewer employees, it was difficult to deal with long lines, and fewer items on the shelves (Ferrell & Fraedrich, 2013). From a strategic standpoint, it was not the correct approach, because the company lost revenue due to poor performance.

From a public relations standpoint, the decision to reduce the number of workforces created a negative perception of the company. According to the American Customer Satisfaction Index, the company ranked lowest among discount stores and department stores when it comes to customer satisfaction (Ferrell & Fraedrich, 2013). Wal-Mart continues to ignore the ramifications of these observations and made claims that the overall shopping experience was still positive (Ferrell & Fraedrich, 2013). Nevertheless, the company is on a slippery slope if it does not create tangible steps to lower cost without negatively affecting the customer’s satisfaction rating.

The company had more success when it comes to another recent initiative. The company announced an initiative that will help reduce the environmental impact of the food it will sell (Strom, 2014). From a strategic standpoint, Wal-Mart is leveraging its scale to compel food producers and food-processing companies to adopt greener methods in food production. The company’s multi-billion dollar revenue enables it to have the necessary clout to achieve its goals. Suppliers are more than willing to comply with the new initiative or risk losing the lucrative deal they have with Wal-Mart. As a result, Wal-Mart will have a direct hand when it comes to reducing the consumption of fossil fuels, reducing the number of pesticides applied to a specific land area, and to improve the water management of the farms.

From a public relations standpoint, the company will endear itself to a significant number of consumers and stakeholders. They will experience positive feedback, especially when it comes to its commitment not only to develop more sustainable practices but also to encourage customers to adopt a healthier diet. The decision to lower the prices of fruits and vegetables will generate goodwill for the company. It can be argued that some of its ardent critics will soften its stance after finding out that Wal-Mart is willing to give back to the community.

Wal-Mart’s Strategic Social Challenges

Wal-Mart’s size is its greatest strength, and at the same time, it is the company’s greatest weakness (Head, 2004). A company that generates hundreds of billions of revenue per year has a certain level of clout that is unique in the corporate world. Thus, Wal-Mart can use its size and economic power to persuade stakeholders to work with the company. At the same time, the company can use its size to ignore the clamor of stakeholders and various interest groups. The company cannot afford to repeat the mistakes of 2005 when Wal-Mart did not pay careful attention to the implications of the social contract it had with internal and external stakeholders.

Wal-Mart must not only develop a deeper level of sensitivity towards sociopolitical issues, but the company must also go even further. Wal-Mart must commit to developing a mechanism that will enable the company to anticipate changes in expectations. The benefits strategy fiasco of 2005 was a sobering reminder that the company cannot afford to bully its way into the hearts and minds of the stakeholders. Wal-Mart cannot afford to develop a “take-it-or-leave-it” mentality. Wal-Mart executives must learn how to correctly interpret the observations, suggestions, and complaints of various stakeholders. More importantly, Wal-Mart executives must learn to communicate the specific steps undertaken to demonstrate its commitment to honoring the terms of the social contract. Finally, Wal-Mart executives must learn to collaborate with various stakeholders in the retail industry.

Without a doubt, Wal-Mart executives are aware of the importance of the social contract. This is the reason for the mapping out of initiatives and priorities for the 21st century. Nevertheless, Wal-Mart executives must learn how to develop tangible steps to implement these initiatives. It is not enough to make promises. The company must demonstrate its commitment to developing sustainable practices. Wal-Mart must develop proactive strategies and continue to implement new initiatives to revitalize its image in the United States and the rest of the world.

References

Berner, R. (2005). . Web.

Bonini, S., Mendonca, L., & Oppenheim, J. (2006). When social issues become strategic. McKinsey Quarterly, 2(1), 20-32.

Chambers, S. (2005). . Web.

Cullen, J., & Parboteeah, K. (2013). Multinational management. CA: Cengage Learning.

Ferrell, O., & Fraedrich, J. (2013). Business ethics: Ethical decision making & cases. CA: Cengage Learning.

Greenhouse, S., & Barbaro, M. (2005). . Web.

Head, S. (2004). Inside the Leviathan. Web.

Payton, P. (2005). Wal-Mart experimental stores: Environments of scale. European Retail Digest, 48(1), 7-12.

Rugman, A., & Waters, L. (2005). Wal-Mart and Carrefour as home region multinationals. European Retail Digest, 48(1), 61-65.

Scott, L. (2005). Twenty first century leadership. Web.

Strom, S. (2014). Wal-Mart aims to go greener on food. Web.

Weiss, J. (2014). Business ethics: A stakeholders and issues management approach. CA: Berrett-Koehler Publishers.

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