Former IT leader Walmart loses its path in Web 2.0 world

Sam Walton didn’t care much for technology. The legendary patriarch of Wal-Mart Stores was well-known for his lack of excitement about “computers,” as he called the company’s IT systems.

“Truthfully, I never viewed computers as anything more than necessary overhead,” he wrote in his 1992 memoir, Made in America. “A computer is not—and will never be—a substitute for getting out in your stores and learning what’s going on.”

If Walton were alive today (he died the year his book was published), he might be saying, I told you so.

Many still consider Wal-Mart’s pioneering, IT-driven supply chain to be the world’s most efficient, and the company’s technology standards still command respectful attention from its thousands of suppliers. But the $349 billion retailer is stumbling, and IT has played a role in its woes.

Last year, the Bentonville, Ark.-based behemoth sold its stores in South Korea and Germany (incurring a $1 billion loss in Germany alone), reportedly due to its inability to adapt to the local cultures and unseat established players. At home, Wal-Mart twice reduced the number of new U.S. supercenters it planned to open this year—the second time, in June, by 30 percent. In August, the company reported that it had missed second-quarter profit estimates and warned that its profits would be lower than expected for 2007.

Wal-Mart executives blamed this slump on the effect of high energy prices on its low-income core shoppers, as well as the company’s failure to move to new high-end apparel and home-decor merchandise. Analysts blame Wal-Mart’s inattention to customer service at home, merchandising mistakes and its insensitivity to local markets abroad. Meanwhile, Wal-Mart has struggled online.

Its Web site lags behind competitors like and Target, and recent marketing experiments using social networking technologies have achieved mixed success. The company has even suffered in its sweet spot, with serious setbacks to its deployment of radio-frequency identification (RFID) tags throughout its supply chain. (Wal-Mart declined repeated requests for interviews with CIO Rollin Ford and others.)

The company’s performance, said President and CEO Lee Scott in a press release, “is not what we expect of ourselves, and not what our shareholders expect of us.” He said management would spend the rest of this year “focused on inventory improvements, delivering quality products at low prices, and store execution at the highest standards.”

At the Crossroads

Wal-Mart today is caught between two worlds: Sam Walton’s, where a zealous commitment to “everyday low prices” is enforced (despite Walton’s skepticism about “computers”) by IT-assisted decisions made in Bentonville, and a new global marketplace in which the retailer’s sheer size is not as big an advantage as it once was. Competitors such as Target and Tesco can match Wal-Mart in technological sophistication and surpass it by innovating in new retailing segments with higher-margin goods.

“Wal-Mart was making their margins on sourcing and great technology systems, but everyone has got that now,” says Patricia Edwards, a portfolio manager and managing director at Wentworth, Hauser and Violich who focuses on retail.

The question for Wal-Mart CIO Ford is how much the legendary IT infrastructure and supply chain systems that turned Wal-Mart into a juggernaut (it has nearly 2 million employees and 6,775 stores worldwide) can help right a listing ship. The command-and-control, technology-enabled culture that allowed Wal-Mart to flourish may not help it to maintain its market dominance.

Greg Buzek, president of IHL Consulting Group, which advises retailers, says that store managers say in key areas where Wal-Mart has tried to grow, such as in apparel sales, the company has relied too much on centralized decision making—for example, letting corporate systems override local input about what items to stock.

Furthermore, analysts say that Wal-Mart’s reliance on homegrown IT systems—and its conviction of their superiority—needs to change. Ford and his team, they say, must bring in best-of-breed commercial applications, such as BI and price-optimization tools, that can help it compete with rising retail superstars such as Target, JCPenney and Tesco. “We cannot overestimate how much packaged software can help them right now,” says Paula Rosenblum, an analyst and managing partner with Retail Systems Research.

In fact, it does appear that the big ol’ dog is learning some new tricks. In 2006 Wal-Mart bought retail applications from HP and Oracle, and quietly contracted with a social networking company, Bazaarvoice. It’s clear that just squeezing more pennies out of the supply chain won’t cut it anymore.

“For years, Wal-Mart was held up as a shining example of cutting-edge thinking in retail technology,” says Edwards. “But today, when I hear about a retailer doing something cutting edge, it’s never Wal-Mart being talked about.”

The Good Old Days

It’s hard to imagine Wal-Mart as a scrappy underdog, but that’s what it was in the 1960s and ’70s. Sam Walton was often heralded as a modern-day Robin Hood, building his retail discount chain for the cost-conscious masses.

Despite Walton’s aversion to technology, he assembled a team that was certain IT could be a game changer—and wasn’t afraid to challenge his Luddite views. “[Sam] was smart enough to know we needed technology,” recalls Bob Martin, who as CIO from 1984 to 1993 and a member of the Wal-Mart executive committee from 1985 to 1999 gets much of the credit for Wal-Mart’s IT innovations. “[But] he made sure the technology never got in the way of keeping our people.”

The emphasis on developing top management talent extended to the IT department. Just as GE is known for turning out CEOs, Wal-Mart has produced several of today’s top technology leaders.

Randy Mott, who succeeded Martin, was CIO of Dell and now HP; Kevin Turner, who followed Mott, is COO of Microsoft. Rick Dalzell, who as VP of IS developed Wal-Mart’s data warehousing systems, is retiring this year as CIO of, where he is credited with creating Amazon’s legendary e-commerce engine and CRM system for gathering and analyzing customer and sales data.

“They are the kind of people that flourished in a competitive environment where innovation was a premium, where risk was allowed,” Martin says. “We all had one mission: to be number one. We were not caught up in our own egos.” Says Turner: “We believed in the power of the team to do extraordinary things.”

That team had a killer instinct. Mott says his 22 years at Wal-Mart nurtured his competitiveness. “I hate to lose,” he says. Martin, meanwhile, pushed his troops hard. “Tough love,” Turner calls it. Martin concedes as much. “I guess it’s part of my DNA,” he says. “It’s a quality that when it’s governed well is a good quality. To a large extent, it’s a culture of Wal-Mart.”

With that culture in place, Wal-Mart IT emerged as a major influence not just in retail but also in the supply chain, B2B communications and data processing fields. “They didn’t make a move without everyone in their industry and beyond copying them,” says John Fontanella, VP of research at AMR Research. “So many ideas that are commonplace today came out of Wal-Mart at that time.”

For example, Wal-Mart was an early adopter of bar-code scanning and was the first retailer to use satellite technologies that enabled daily inventory feeds into its distribution systems. It also pushed the envelope on data storage in a corporate environment (cataloging more than 100 terabytes—a huge amount of data for the time) and exhorted the retail industry to adopt electronic data interchange (EDI) for purchase orders and invoices.

But it was the joint effort with Procter & Gamble in the late 1980s to develop a continuous replenishment system that enabled Wal-Mart to transform supply chain management. Beginning in 1992, Wal-Mart’s Retail Link system integrated point of sale (POS) and store-shelf data to automatically trigger manufacturing orders to its suppliers when stocks were low.

Wal-Mart eventually mandated that its top 2,000 suppliers integrate with Retail Link, and everyone got on board. It was a sign of Wal-Mart’s growing power, though its ability to dictate to its partners was never universally applauded. “Command-and-control works in general,” says Bobby Cameron, a principal analyst at Forrester Research. “The gorillas dance together, but the monkeys dance to not get stepped on.”

Martin recalls that the mandate worked because suppliers got something in return. “We let our suppliers have access to the same information [about sales] that our buyers did,” he says. In fact, even though management sought to keep its control of IT firmly centralized, Martin, and later Mott and Turner, always sought buy-in for new projects from the bottom up. “We’d start with the customer and work backward,” Turner recalls.

IT would generate a great idea, and “they’d bring it all the way down to the store managers, even to the associate level,” concurs analyst Fontanella. “Everyone had to buy into it. There was no innovation that they did that was thought up at the corporate level and forced down into stores.”

That culture of enterprisewide buy-in, combined with a surging belief in using IT to drive the business, recalls Mott, “really allowed us to play a role and to think about IT a little ahead, if not a lot ahead, of some other companies in our time.”

The RFID Experiment

Inside CIO Ford’s IT department today, success on such a grand scale has been harder to come by. Ford, a logistics and supply chain expert who has been with Wal-Mart for 20 years, took over in 2006 from Linda Dillman, who was reassigned as executive vice president of benefits after four years as CIO.

Ford inherited an organization that was in the throes of a bleeding-edge supply chain experiment, which many analysts say distracted the group from concentrating on other pressing needs, such as enabling Wal-Mart’s new merchandising strategies. The signature of the Dillman era was her ambitious program to put RFID tags on a percentage of the products Wal-Mart’s suppliers shipped to its distribution centers.

The idea was to streamline the supplier-Wal-Mart pipeline and solve the age-old out-of-stock problem. Unlike bar codes, RFID tags don’t need to be “seen” to be tracked, and wireless technologies monitoring RFID-tagged stock can provide unprecedented visibility into warehouse and store-shelf inventories.

The initiative, begun in 2003, was applauded for its vision, but also criticized for its technological shortcomings, a lack of a defined ROI and the financial burden it placed on suppliers, many of whom didn’t even know what RFID stood for, let alone how to implement it. Even now, it’s hard to call RFID ready for prime time. A 2007 survey by CompTIA, the IT trade association, found that nearly 70 percent of surveyed organizations believe there’s an insufficient pool of RFID talent to hire.

Simon Ellis, the former supply chain strategy director for Unilever North America, one of the eight Wal-Mart suppliers that joined the company’s initial RFID push, says he “felt very strongly as far back as 2004 that consumer-packaged goods was probably an ill-conceived early adopter industry for RFID.” Ellis now leads the supply chain strategies practice at IDC’s Manufacturing Insights (IDC is a sister company to CIO’s publisher). “The margins are simply not big enough, and there’s an enormous amount of complexity,” he adds.

Most suppliers have done the minimal amount of work necessary to satisfy Wal-Mart’s mandate, and their only ROI is the ability to keep Wal-Mart’s business. “[Wal-Mart] failed to work with suppliers to establish a strong value proposition,” says Fontanella. “They were thinking the value of RFID was self-evident. What they found out was that most suppliers didn’t feel that way.”

As a result, Wal-Mart has achieved less than it hoped. Only 3 percent of Wal-Mart’s 20,000 suppliers are reported to be using RFID. And the retailer has acknowledged that it failed to meet its own goal of deploying RFID in 12 of its 137 distribution centers by the end of 2006.

Wal-Mart brass has claimed the initiative was always focused more on getting benefits from store-level RFID systems, rather than from the distribution centers (in May, the company reported RFID had reduced out-of-stocks in stores by 30 percent). But analysts dismiss that claim. “They thought that it would grow much faster,” says AMR’s Fontanella.

Dillman, the public face of Wal-Mart’s RFID revolution, joined Wal-Mart in 1991 and became CIO in 2002. When she was reassigned, there was speculation that Wal-Mart executives were discouraged with the RFID project’s progress. Ford has affirmed Wal-Mart’s commitment to RFID, although he has also acknowledged that there’s much work to do. No one knows yet if the RFID project will, in time, turn out to be this generation’s Retail Link.

At the same time, analysts say, Ford must turn his attention to new solutions that the business requires. The RFID project “distracted them from the need to become more granular in their merchandising assortments,” says RSR’s Rosenblum.

While IT focused its energy on the supply chain, the business desperately needed help with its new product initiatives and customer relationship strategies. “The object of the game is to align IT with the business, and IT was aligned with business of the 1990s,” says Rosenblum. “In 2006, Wal-Mart decided that it had to shift its priorities and IT couldn’t jump fast enough.”

It’s a New, Web 2.0 World

Wal-Mart is struggling to build an online presence. It ranks 13th in Web sales volume among retail businesses, according to industry watcher Internet Retailer, even though, according to Web data analysis company Alexa, is the third most-popular retailing Web site based on number of users (behind and

“I know that Wal-Mart is not as proud as they would have liked to have been with online retailing,” says former CIO Martin. “The challenge is huge.”

One challenge for is similar to what it faces in its stores: a disconnect between what Wal-Mart is selling and what its customers want to buy. If its core, low-income shoppers aren’t buying more upscale clothes and home decor products in the store, they’re unlikely to buy them online. “I don’t think their original shopper is an online shopper,” says Rosenblum. That means Wal-Mart has to market online to new customers with higher incomes.

Edwards notes that, to date, “is not a huge business for them.” But it should be, she says, because such trends as “clicks leading to bricks” (shoppers researching online and buying in stores) and new forms of customer relations and marketing are Internet based.

In fact, a multichannel approach to selling to Wal-Mart’s customers could have a huge impact on the bottom line. “Any time you can get a consumer that shops multiple channels with you, that consumer is much more loyal to your brand,” Edwards observes. For example, she notes that Nordstrom customers who shop in multiple channels spend four times as much with the upscale retailer as single-channel shoppers. “I would be surprised if the same was not true for Wal-Mart,” she says.

Last year, according to an internal Wal-Mart marketing report obtained by corporate critic, GSD&M Advertising, a marketing and media consultancy, urged Wal-Mart to start utilizing online marketing strategies such as blogs to reinforce the values of its brand (such as its no-hassle return policy) and promote its new products (including high-end consumer electronics such as HD TVs).

Wal-Mart seems to have taken GSD&M’s advice. With a revamp of the site in late 2006, Wal-Mart introduced several new features, among them the ability for customers to review and rate products.

That’s key for Wal-Mart. According to a recent opinion poll conducted by market researcher Vizu and Bazaarvoice, nearly 80 percent of U.S. shoppers consider it important to read customer reviews before making a purchase. A Bazaarvoice spokesperson confirms that Wal-Mart is one of its clients, but says the company is bound not to talk about its relationship. Nevertheless, the fact that Wal-Mart is trying to promote community among its customers suggests executives recognize the need for change.

More evidence can be found in the August debut of Wal-Mart’s “Roommate Style Match” group on Facebook, the popular social networking Web site that caters to 34 million teenagers and college students. Wal-Mart’s hope was that college students would talk up and buy back-to-school products via Facebook and

Some of the early Facebook comments, however, had less to do with futons and pillow cases than with unionizing Wal-Mart workers and the death of small U.S. businesses. Typically, such comments would put Wal-Mart on the defensive. This time, a company spokesperson told Reuters: “We recognize that we are facilitating a live conversation, and we know that in any conversation, especially one happening online, there will be both supporters and detractors.”

Despite the negative feedback from Facebook users, this new attempt to play in the fields of Web 2.0 has so far gone more smoothly than Wal-Mart’s summer 2006 foray. Then, tried to emulate MySpace, another social networking site, to engage its teenage customers. Critics bashed Wal-Mart’s creation, The Hub, for closely monitoring the site and using “fake kids who talked about the clothes they were buying at Wal-Mart,” according to, a corporate intelligence and analysis Web site. “The G-rated site with limited functionality had all the makings of a politician wearing a backwards baseball cap in a bid to win the youth vote,” it wrote. Wal-Mart quietly shut down the site in October, just 10 weeks after launch.

Meanwhile, has gained success with a new online service called Site to Store, which allows customers to order products from and have them shipped to their local Wal-Mart store for free. (Other retailers, including Best Buy and Circuit City, already offer this service.)

During the four-month rollout that began in March, more than 500,000 units were shipped via Site to Store, saving customers more than $5 million in shipping fees. More than 50 percent of orders came from customers making their first purchase, according to Wal-Mart. “Customers are clearly responding to the idea of purchasing online items that are not available in our Wal-Mart stores,” said Mike Smith,’s senior director of operations, in a press release.

IT’s role in facilitating this customer-centric endeavor is critical—especially because has been knocked for customer service. In ForeSee Results’ 2006 “Top 40 Online Retail Satisfaction Index,” ranked 33rd in terms of overall customer satisfaction among online holiday shoppers, and its overall satisfaction score was unchanged from 2005.

Wal-Mart IT’s Customer-Focused Agenda

There’s no magic to what CIO Ford must do to help Wal-Mart execute its new merchandising strategies and goals for growth, say analysts. First, IT should move ahead with its nascent plan to adopt best-of-breed retail technologies where these can quickly benefit the business.

For example, Wal-Mart is known for its ability to collect data. Now, analysts say, it’s imperative that IT enable merchandisers and buyers to use it to make better decisions.

“We know retailers collect this information and we know that Wal-Mart throws it out on Retail Link,” says Rosenblum. “But mashing it up and actually coming out with intelligent merchandising decisions based on that is the next wave.”

Retailers are known to prefer homegrown systems, Rosenblum says, and Wal-Mart is no exception—especially given its size. “They were just too big to run a lot of this packaged stuff,” she says. Recently, however, the major software vendors, including HP, IBM and Oracle, have developed sturdier applications that could scale up. Earlier this year, Wal-Mart implemented Oracle’s retail price optimization application and HP’s Neoview data warehousing platform to crunch the data Wal-Mart collects in its 4,000 U.S. stores. (Neither vendor would divulge any details of its respective partnerships.)

The Oracle tool is going to be important, say analysts, if Wal-Mart continues to expand its presence in the higher-end apparel market, where products have shorter lifecycles. The price-optimization application will allow Wal-Mart to understand when to mark down clothes that are not selling. Edwards says Wal-Mart had trouble last year moving some of its more upscale apparel. “Cheaper clothing isn’t enough anymore—it needs to be cheaper and stylish,” he says. “In that vein, having good systems and data gathering isn’t enough. A retailer must be able to not only gather the data but also interpret it and act on it appropriately.”

HP’s Neoview tool can provide business intelligence data derived from all kinds of customer purchasing information, which in turn can help Wal-Mart stock its stores based on what sells locally, says Rosenblum.

IT can do little about some negative aspects of customer service that have caused analysts to question Wal-Mart’s practices: messy stores, curt cashiers and poorly stocked shelves. Judging customer service can be subjective, admits analyst Edwards, but she says Wal-Mart has not kept pace with competitors such as Target and Costco.

“Up until very recently, Wal-Mart seemed to believe that low prices were all that mattered,” she notes. “A quick walk through the shoe department, for example, would have convinced you that a bomb had gone off, throwing shoes everywhere. Shelves weren’t well stocked. The store was dirty, the bathrooms especially. And the checkout lines were legendary—not in a good way.”

But IT can help with some retailing basics that, according to Sahir Anand, an analyst at AberdeenGroup, Wal-Mart has had trouble with of late: ensuring that POS systems are continually updated; that price checkers and interactive kiosks are up and running at all times; that checkout experiences are speedy and that associates are ready, willing and able to guide and motivate customers to use all these tools.

“Technology and customer service go hand in hand,” Anand says. “Only when in-store customer-service tools are working properly will customers see Wal-Mart as responsive.”

Wal-Mart’s future success depends upon IT’s ability to deliver the applications and systems that the giant needs to compete today—just as it did a decade or two ago. Rosenblum says that although the current IT regime hasn’t directly contributed to Wal-Mart’s troubles, “it is fair to say they didn’t anticipate the shift [in retailing]. And they didn’t realize that [retail software] and hardware had matured enough to where it could support them.”

Now, more than ever, Wal-Mart has to tap into Sam Walton’s legendary gumption, his knack for seeking out partners when he needed expertise he didn’t have, and rely on some of those good ol’ “computers.”


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