How did the centralization of decisions in Wal-Mart's International division at headquarters create problems for the company's different national operations? Has Wal-Mart's response been appropriate?
For a company with its particular, unique corporate culture, the decision at the beginning of 2010 to centralize its procurement operations was pretty much a natural fit for Walmart. Since its inception, and especially since its explosive growth across North America and into Asia, Walmart has been operated very strictly from its headquarters in Arkansas, and while it has certainly proven an enormous commercial success, it has also generated more ill-will than any company wishes upon itself. And, no small part of the slew of unfavorable reports is a direct result of its strict centralized management structure and corporate culture. That said, the decision to centralize its procurement operations at the expense of its existing supplier chain certainly made sense. Any company that determines that it can reduce operating costs by 10 percent or more by buying direct from manufacturers will almost always do so, and Walmart is no exception. A company historically tough on its vendors with respect to costs – and Walmart’s emphasis on low prices does have repercussions for the welfare, not to mention the morale, of its suppliers – would unsurprisingly look favorably upon the notion of eliminating the middle man and reducing costs by working directly with manufacturers (and even buying out the manufacturers and keeping production in-house when possible). That sort of integration is part of the cycle of business activities that often eventually results in a decision later-on to decentralize all-over-again and outsource more often as the costs of in-house activities becomes increasingly expensive.
As Walmart has learned, over-centralization can prove as damaging as decentralization. Even for a company like Walmart, a balance has to be found. Walmart’s management system is very centralized and rigid in its policies – policies that have been alleged to be discriminatory throughout the company’s vast network of stores on account of the requirement for new management-bound employees to attend the company’s management school, where the corporate culture is instilled in those employees, and that culture can breed narrow-mindedness [See the article the link to which is below regarding the Walmart v. Dukes sex discrimination case].
Over-centralization of business practices, as Walmart has learned, risks ignoring cultural sensitivities unique to individual communities. For a business like Walmart, that seeks to meld its huge retail stores into neighborhood communities at the expense of so-called “mom and pop” operations, that cultural insensitivity can be damaging. The greater the centralization over management policies and procurement practices, the greater the likelihood that Walmart will alienate growing sectors of the public. As another article the link to which is below pointed out,
“Walmart is known for a top-down approach to management. It delivers mandates to employees and suppliers and maintains a fierce focus on price ahead of other aspects of the business. Walmart's rapid expansion into grocery has put pressure on other food retailers to centralize operations, including purchasing. . . Increasingly, shoppers want local merchandise, which is best delivered by companies with decentralized structures. That's why some mid-market supermarkets with autocratic management structures are being outperformed by competitors that can react to local market needs. When it works well, a decentralized structure can lead to new ideas. It also can allow the company to tailor decisions about product sourcing, product assortment, merchandising and shopper marketing programs . . .” [See Ann Meyer, “Striking a Balance,” Retail Leader, linked below].
As the article quoted above notes, large retail chains like Target, Costco, and even Walmart are becoming more sensitive to the local idiosyncrasies of the communities in which they operate their stores. Walmart’s chief executives have been forced to acknowledge that there are practical limits to how far centralization can go when it maintains stores all over the world. Its decision to reconsider some of the centralization that it has maintained is a result of its recognition that, sometimes, one size doesn’t fit all.