Technology Strategy

Costco’s Underinvestment in Technology Leaves it Vulnerable to Disruption

Introduction

The conventional wisdom with respect to Costco is that its business model forms a “defensive moat” against the conquering retail army of “House Bezos”. Costco offers its loyal shoppers a reason to visit its warehouses replete with low cost bulk items, pharmacies and food courts. This sentiment has held, but nothing drains a moat faster than when Amazon expands its physical retail presence into your market with a splashy $13.7 billion acquisition (see Whole Foods). We don’t quite know what Amazon is up to in the grocery sector (and meal kit delivery space), but given its track record of disruption, Costco better start taking up a stronger defensive position to enable long term success. At a minimum, we can expect Whole Foods to adopt best practices and leverage world-class data mining capabilities from the Amazonian fiefdom. The prevailing thought is that Amazon will revolutionize how groceries are purchased.

Unfortunately, Costco is a laggard in the technology investment arms race as compared to B2C heavyweights Amazon and Walmart; even as e-commerce has captured a larger share of sales industry wide. Costco’s main competitors are devoted to having formidable omni-channel presences which will drive future revenues. In the second quarter of 2017, Walmart’s e-commerce revenue grew 63%; even Target saw a 22% increase as compared to Costco’s 11% [1].

Amazingly, Costco consciously chooses to underinvest in its e-commerce capabilities, which I believe is a disservice to an otherwise strong business model (and the continuing availability of $4.99 rotisserie chickens). In an industry where market share is being gobbled up by a noted technology disruptor, it’s as if Costco has subscribed to the “IT Doesn’t Matter” philosophy. Costco is not only on the defensive technology wise, it’s in catch-up mode. 

On June 15th, 2017 the day before Amazon’s Whole Foods acquisition was announced, Costco stock opened at $180.39. One day later the stock dropped 8.5% to close at $165. As of August 4th, 2017 the stock trades at $156.44 representing a 13.2% drop from June 15th. A more competitive grocery sector combined with Costco’s underwhelming investments in e-commerce technology have not inspired investors as of late.

In this post I’ll touch upon Costco’s advantages with respect to its competitors in the consumer staples and grocery sector, as well as offer some recommendations for its burgeoning digital strategy.

What Costco Does Well (Its Defensive Moat Against Competitors):

The “Treasure Hunt”

Let me be clear, Costco is not going anywhere in the medium run. Its revenues in 2016 totaled $119 billion as compared to $136 billion by Amazon. Costco’s value proposition relies upon attracting customers to its bricks and mortar warehouses, which are infused with “treasure hunt” and impulse purchase appeal. Shoppers explore the vast warehouses and stumble upon unexpected items, bargains and free samples that they didn’t know they wanted in the first place. The company believes that in-store customers will purchase many more items than they would otherwise purchase via an online channel.

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“We still are a bricks-and-mortar entity and we want to get you into the store because you’re going to buy more in the warehouse. You’re going to buy more when that happens, and we’ve got a lot of reasons for you to do that. We also recognize we don’t want to lose the sale to somebody else because they only buy online.” [2] – Costco CFO Richard Galanti

Because Costco sells many items in bulk, it is rightfully apprehensive of the freight costs associated with e-commerce. However, it needs to make progress in shoring up delivery capabilities if it wants to keep pace with Amazon and Walmart; potentially through investments in additional fulfillment centers. Walmart offers many bulk items online through Samsclub.com. Walmart is even experimenting with online order pickup at Sam’s Club locations.

“About a year ago, Costco CFO Richard Galanti said the only thing keeping him up at night is ‘everybody in the world never wanting to leave their house and only typing stuff to order and get it at the front door.’” [3]

Low Prices

In-store customers load up their baskets with groceries and other items in bulk with minimal price markups. Low prices are a strong competitive differentiator for Costco in that it has some of the lowest gross margins in its industry.

“Wal-Mart and Whole-Foods price their goods up higher. Wal-Mart posted 25.65% gross and 2.81% net margins in 2016. Whole Foods, known for its pricey merchandise, had 34.41% gross and 3.22% net.” [4]

Consider that Costco’s numbers are razor thin gross margins of 13.32% and net margins of 1.98%. The bottom line is that Costco shoppers obtain industry leading pricing from the company’s warehouses. Costco appeals to a wide variety of shoppers and it even attracts business customers looking to buy in bulk. In contrast, Whole Foods (derisively known as Whole Paycheck) appeals to a higher income demographic in search of artisanal offerings; thus there is minimal overlap with Costco’s broader range of shoppers. However, Amazon Prime members and Costco members overlap as both customer bases are in search of low prices.

Further enabling Costco’s low price scheme is its strategic use of vertical integration for enhancing product quality and increasing profitability. “Such integration includes Costco working with farmers to help them buy land and equipment to grow organics, building its own poultry farm, owning and operating its own beef plant and hot dog factory, and having its own optical grinding factory.” [5]

Memberships

Costco makes most of its money from selling memberships. The company is able to offer such low pricing and still make a profit because of its successful membership model. Costco charges $60 for its standard memberships and $120 for its executive memberships which pay-out a 2% redeemable award on pre-tax purchase amounts.

“Our membership format is an integral part of our business model and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase penetration of our Executive members, and sustain high renewal rates, materially influences our profitability.” [6] – Costco 2016 10K Filing

In other words, it’s easy to match or beat competitor pricing when your business model is buoyed by piles of membership cash. Costco’s 88 million memberships worldwide represent a healthy revenue stream for the company, accounting for an astounding 72% of pretax profits [7]. Furthermore, Costco shoppers renew their memberships at a high rate (roughly 91% in the U.S. and Canada and 88% on a worldwide basis). However, Costco would be wise to note that its “membership revenue growth has decelerated to around 5.5% from around 7%” [8].

Kirkland Signature: The Private Label Brand Everyone Loves

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Whether you are a Costco member or not, you are most likely familiar with its “Kirkland Signature” in-house brand which was started in 1992. The successful brand sells everything from dress shirts to luggage to vodka (i.e. the consultant staples). Costco has done a first-rate job of making Kirkland Signature a strong value play alternative to national brands.

“‘Costco’s Kirkland Signature is the best store brand there ever was,’ said one writer at foodie bible Bon Appetit in August, the same month Wal-Mart paid $3.3 billion for Jet. ‘You wouldn’t expect a brand that makes cashmere sweaters, batteries, and 900-count packs of baby wipes to also produce some top-notch food products’” [8]

Sales of individual Kirkland items have been reported to exceed $1 billion and the brand itself constitutes roughly 25% of Costco’s revenue. Although Amazon’s Whole Foods carries a “365” private label brand and Walmart carries “Sam’s Choice” and “Member’s Mark” (amongst others), both competitors offer Costco’s Kirkland Signature brand through their e-commerce properties.

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According to research from 1010data Market Insights, 69.5% of Kirkland online spend [9] is generated on Amazon! This unofficial cross-platform selling indicates a mashup between strong brand preference and the number one retail e-commerce portal. Since the current selection of Kirkland Signature branded products available on Amazon is offered by third parties, there is an opportunity to capture a portion of that online demand through the official Costo.com channel. Jet.com (recently purchased by Walmart for $3.3 billion) has indicated a phase out of Costco products in order to boost the popularity of the Sam’s Club “Member’s Mark” private label.

Recommendations for Costco:

I’ll open this section with Costco’s own words from its 2016 Annual Statement:

“If we do not successfully develop and maintain a relevant multichannel experience for our members, our results of operations could be adversely impacted. Multichannel retailing is rapidly evolving and we must keep pace with changing member expectations and new developments by our competitors.” [6]

Costco’s relative lack of ambition in e-commerce capabilities leaves the company vulnerable to disruption. Its online sales are currently $4 billion or barely 3% of sales; this figure is far less than smaller revenue retail players like Best Buy and Macy’s [10]. Walmart has poured billions of dollars into its digital and e-commerce capabilities in order to keep pace with Amazon. Costco would do well to leverage some items from the Walmart playbook.

    • Invest in an e-commerce research division to help bolster the organization’s base expertise in this space. Acquire the necessary pool of data scientists, software engineers and PhDs to inject new life into a digital and technology focused strategy. 
      • This approach will allow the company to increase its capabilities in e-commerce basics such as search functionality, order tracking and predictive analytics. Costco is already located in the technology rich talent pool known as greater Seattle.
    • Offer more items online at Costco.com. Focus on re-capturing some of the demand for Kirkland branded Costco products from Amazon. It bears repeating that 69.5% of Kirkland online spend is generated on Amazon!
    • Acquire startups to gain access to digitally focused management teams and their respective technology and insights (a la Walmart’s purchase of Jet.com and Marc Lore). Internal disruptors help cross-pollinate successful ideas that are not considered by the core legacy business.
      • In this sense Costco should acquire Chieh Huang’s e-commerce warehouse startup “Boxed”. Boxed was started in 2013 out of the founder’s garage and is currently known as the “warehouse in your pocket” by millennials. Boxed enables bulk goods to be ordered directly from a mobile app without the need for membership fees.
      • Currently Boxed offers free deliveries on orders of $49 or more. Although Boxed delivers non food items in bulk, it currently purchases its food items from Costco and marks up the price for delivery! [11] Costco has an opportunity to acquire a startup rival in order to gain access to its e-commerce talent.
    • Install drive through stations where customers can pick up online orders at either Costco warehouses or dedicated “click and collect” facilities. Walmart’s Sam’s Club currently offers this service at about 65 of its 660 US stores [12]. The company should be aware that members will not want to pay the markup associated with delivery specialists Instacart and Google Express; especially Costco members who have shelled out for a yearly membership.
    • Increase investments in fulfillment centers that will help temper the expenses associated with shipping bulk products ordered online.
    • Get better at the basics with respect to information technology infrastructure. Granted, core IT infrastructure is not necessarily a strategic resource but it is the cost of doing business. Consider this quote from Costco CEO Richard Galanti:
      • “You know, about three-and-a-half years ago, when we embarked on this dark journey, [we recognised that] we probably had the lowest-cost IT out there. I always joke we were in the greatest MASH unit. It was always up and running, but band-aided to death.” [2]

Costco needs to realize that its “treasure hunt” appeal to customers needs to be paired with a more robust omni-channel approach. This means Costco must ramp up its capital expenditures in e-commerce and mobile just to keep from losing pace with industry competitors who have a substantial head start. Costco will be fine in the medium run for all the reasons I’ve highlighted earlier. But how long until continued e-commerce disruption crosses the organization’s defensive moat and treats Costco like one of its mouthwatering rotisserie chickens?

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References:

[1] Sozzi, B. Jul 19, 2017. Here Is What Costco Should Do to Keep Amazon From Being the Largest Company on Earth. https://www.thestreet.com/story/14233036/1/here-are-the-big-things-costco-could-do-to-keep-amazon-from-being-the-largest-company-on-earth.html

[2] Lauchlan, S. March 8 2017. Costco – an e-commerce tortoise takes on the omni-channel hares. http://diginomica.com/2017/03/08/costco-e-commerce-tortoise-takes-omni-channel-hares/

[3] Levy, A. March 12, 2017. Not Even Costco Is Safe From Amazon. https://www.fool.com/investing/2017/03/12/not-even-costco-is-safe-from-amazon.aspx

[4] GuruFocus. June 22, 2017. After Amazon’s Whole Foods Acquisition, Investors Are Looking At Costco. https://www.forbes.com/sites/gurufocus/2017/06/22/after-amazons-whole-foods-acquisition-investors-are-looking-at-costco/#18b01a50271d

[5] Tu, J. June 19, 2017. Amazon’s move into groceries could squeeze Costco. http://www.seattletimes.com/business/retail/amazons-move-into-groceries-could-squeeze-costco/

[6] Costco Wholesale Corp. 10K/A Annual Report for the Fiscal Year Ending Sunday August 28, 2016. https://www.last10k.com/sec-filings/cost/0000909832-16-000034.htm#

[7] Fonda, D. July 2017. Costco Is Surviving in the Age of Amazon. Warehouse giant Costco continues to prosper despite the growth of internet retailing. http://www.kiplinger.com/article/investing/T052-C008-S002-costco-is-surviving-in-the-age-of-amazon.html

[8] Boyle, M. June 12, 2017. Jet.com Will Phase Out Costco Products After Wal-Mart Acquisition. https://www.bloomberg.com/news/articles/2017-06-12/wal-mart-s-jet-com-carries-costco-products-but-not-for-long

[9] Wilson, T. September 13, 2016. Kirkland’s Online Enterprise. https://1010data.com/company/blog/kirkland-s-online-enterprise/

[10] Wahba, P. December 8,2016. Costco’s Battle Plan for the E-Commerce Wars. http://fortune.com/2016/12/08/costco-ecommerce/

[11] Fickenscher, L. August 4, 2017. Boxed buys from rival Costco before hiking prices for delivery. http://nypost.com/2017/08/04/boxed-buys-from-rival-costco-before-hiking-prices-for-delivery/

[12] Young, J. April 5, 2017. Why Costco Loves Store Sales: You Try Shipping a Tub of Mayo http://www.foxbusiness.com/features/2017/04/05/why-costco-loves-store-sales-try-shipping-tub-mayo.html

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The Definitive Walmart E-Commerce and Digital Strategy Post

Introduction:

Walmart has long been a dominant player in the traditional “bricks & mortar” retail space. The retailing giant has about 4,600 stores in the United States and about 6,000 stores worldwide that helped it generate fiscal year 2017 revenues of $485.9 billion. However, this retailing “Death Star” has a weakness as technological changes and innovations in its industry represent both an opportunity and a threat. The biggest threat to Walmart is the consumer preference shift from traditional in-store purchases to on-line digital channels. E-commerce is a small piece of the retail pie currently (roughly 10.4% of all retail sales in 2015), but it is growing at a pace that is much faster than growth at bricks and mortar locations. If Walmart does not evolve to defend its dominant market position, the company will erode (see Montgomery Ward, Woolworths, K-Mart, Sears) allowing other industry competitors to capitalize.

Previous disruptions in the retail space have not been kind to dominant players. Sears was able to overtake dominant retailing incumbent Montgomery Ward in the 1950’s by aggressively investing into suburbs (which was a new phenomenon for the time), while Montgomery Ward skittishly hoarded cash in anticipation of another great depression [1].

Walmart is not willing to be a Montgomery Ward in this scenario as the company became aware of the risks of e-commerce underinvestment and complacency. However, e-commerce giant Amazon is more than willing to be Sears in this example by over-investing in the more recent retail business model (e-commerce). Furthermore, Amazon recently encroached into Walmart’s home turf (i.e. physical locations) by purchasing Whole Foods for $13.7 billion. This high profile acquisition signaled to Walmart and the rest of the retail industry that Amazon is willing to take unanticipated bets to develop a competitive advantage across multiple channels.

Walmart certainly has a challenging road ahead if it wishes to catch Amazon in overall e-commerce sales but it is finally competing effectively. Although the company does not break out specific e-commerce dollars, it stated that its e-commerce sales had increased 64% domestically in the first quarter of 2017. Consider that Amazon generated $136 billion in annual sales during 2016, which accounted for half of all online shopping in the United States [2].

“With approximately 160 million items for sale, Amazon has become the go-to outlet for anything. In comparison, Walmart.com sells “only” 15 million items — and just 2 million of them are available for the free two-day shipping. It’s no wonder 52% of online shoppers start their search on Amazon, according IHL Group.” [3]

Walmart will not be able to overtake Amazon’s position as the dominant e-commerce player in the near future, but the company is positioning itself to remain competitive.

Walmart’s Main Strategic Risks in E-Commerce

Walmart’s annual 2017 10-K filing (a comprehensive summary of financial performance) details the strategic risks that the company faces. As mentioned previously, Walmart is aware of the risks of e-commerce underinvestment and complacency. Consumer preferences are shifting to shopping online and mobile platforms.

Failure to grow our e-commerce business through the integration of physical and digital retail or otherwise, and the cost of our increasing e-commerce investments, may materially adversely affect our market position, net sales and financial performance [4].

Many companies fail to adequately capitalize on the shift in consumer preferences (e.g. Smith Corona, Blockbuster, Kodak), while other firms are able to successfully capitalize (e.g. Intel, Apple). Unsuccessful companies either refuse to risk capital, lack the vision, or lack the execution competency to produce the new products and/or technologies necessary to maintain success. With that being said, Walmart plans to increase its investments in e-commerce and technology, while moderating the number of new store openings.

Screen Shot 2017-06-11 at 5.52.14 PM.pngFigure 1. [4]

Walmart’s capital expenditures back up its strategy. Observe that a $1.023 billion reduction in new stores and clubs dove-tails with a $199 million dollar increase in already impressive expenditures related to information systems, distribution and digital retail ($4.162 billion line item).

Walmart recently divested itself of its Walmart Express brand which contributed to the reduction in new store capital expenditures. These convenience store sized locations were originally conceived in 2011 to compete in the price conscious dollar store segment. Dollar General (a digitally un-savvy competitor) purchased 41 Walmart Express stores and plans to rebrand them under the Dollar General moniker. In an age of stalled wage growth, Walmart is experiencing pricing pressure from both Dollar General and Family Dollar for the most price conscious consumers.

The bottom line is that Walmart has to walk a fine line in the implementation of its e-commerce strategy. On the one-hand, the company may not be successful in implementing and integrating its physical and digital retail channels. As of late the company has been criticized for “overpaying” for growth in regards to its acquisitions. If its e-commerce acquisitions underperform or sustain large losses, this can harm Walmart’s market position and financial performance.

On the other hand, if the company is “too successful” with their e-commerce strategy, the company runs the risk of lowering physical store traffic which could also adversely impact in-store economics. The company seems to be facing a “dammed if you don’t, damned if you do” conundrum.

“The challenge for Walmart, and for all other retailers in the e-commerce era, is to protect both sales and profits. But these goals nay be mutually exclusive. Retailers face pressure to offer both free shipping and competitive prices, which generally makes selling a product online less profitable than doing so in existing stores. To expand sales online, retailers must spend on technology, which squeezes margins further. Making matters even worse, retailers are often not gaining new customers but simply selling the same item to the same person online for less profit. ‘You pour from one bucket into a less profitable bucket,’ explains Simeon Gutman of Morgan Stanley.” [5]

Backend E-Commerce Acquisitions

Walmart’s initial e-commerce forays focused on acquiring companies that helped bolster its prowess in backend technologies. This approach was a departure from the company’s traditional “build rather than buy” philosophy which helped it obtain and retain technological competitive advantages in its supply chain processes. Its research division @WalmartLabs, augmented its e-commerce war chest by making multiple purchases in the first half of the decade. “Between 2011 and 2014, Walmart acquired 15 small companies tied in some way to e-commerce. The other thing most of them had in common was that they were selling for a bargain after failing to attract a new round of venture funding.” [6]

For example, in 2013 @WalmartLabs purchased a company named Inkiru for its predictive analytics technology to target customers in marketing campaigns. The company purchased Kosmix in 2011 to revamp its Walmart.com search capabilities; a project known as Polaris. Site optimization start-up Torbit was purchased in 2013 to optimize page loading of its e-commerce sites. The acquired technology compresses files to an optimum size based upon display by phones, tablets or desktops. The company also purchased Adchemy for its strong pool of data scientists and PhDs who have specialized knowledge in the areas of ad technology and search engine optimization (SEO).

As an aside, “CEO Murthy Nukala and four top executives all got payouts of between $1.5 million and $2 million in the deal” while employees who held common stock saw their holdings become worthless [7]. 

The point of these acquisitions along with others of similar characteristics, was an attempt to grow e-commerce sales organically.

The Acquisition of Marc Lore and Jet.com

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Walmart learned that it is both difficult and time consuming for a firm to obtain organic growth intrinsically. When asked of his biggest regret at the helm of the company, former CEO Mike Duke who held the position from 2009 to 2013 said that the company should have moved faster to expand in e-commerce. One could draw the conclusion that Walmart either believed that growth in e-commerce would shift too much volume from bread and butter physical stores or that Amazon’s rise to e-tail prominence was not a significant threat to its dominant market position.

“When I look back, I wish we had moved faster. We’ve proven ourselves to be successful in many areas, and I simply wonder why we didn’t move more quickly. This is especially true for e-commerce. Right now we’re making tremendous progress, and the business is moving, but we should have moved faster to expand this area.” – Former Walmart CEO Mike Duke [8]

As Walmart’s sales growth continued its trend downward, new CEO Doug McMillon was tapped in 2014 to implement a new e-commerce, digital and technology focused strategy. In fact, for the first time since Walmart became a publicly traded company in 1970, annual sales shrank for the first time in 2015. McMillon was asked why did it take so long for Walmart to get into e-commerce and if the profitability of their original model affected its urgency to change. McMillon responded.

“We wish we had been more aggressive early on, no doubt. In some ways we experienced what Clay Christensen calls the ‘innovator’s dilemma.’ We hired talent, invested, and just kind of meandered along rather than hammering down, being aggressive, and making it a must-win aspect of our business. That’s partly because we had a bird in hand. We knew that if we continued to open Walmart Supercenters, they would do well.” – Walmart CEO Doug McMillon [9]

McMillion, true to his mandate, made a splash by acquiring online retailer Jet.com for 3.3 billion in cash and stock. The deal is reported to be the largest ever purchase of a U.S. e-commerce startup [10]. There were multiple reasons stated by the company for making a splashy purchase of this nature. However, the crown jewel of the acquisition was the procurement of e-commerce wunderkind Marc Lore who was immediately tapped to head both Jet.com and Walmart.com.

Marc Lore established his digital retailing bona fides by founding Quidisi. The start up was known for its diapers.com and soap.com sites amongst others. Quidisi was sold to Amazon in 2010 for $550 million. The purchase of Quidisi at the time was an attempt by Amazon to stifle competition.

“Amazon was slashing the price on diapers on its own site, putting pressure on Quidsi’s margins and making outside investors hesitant to put in more money. Furthermore, Amazon promised to keep dropping prices if Quidsi sold to Wal-Mart.” [15]

Lore stayed at Amazon for two years and then left to ponder his next move. Subsequently, in 2014 Lore founded Jet.com based upon the premise of charging members a yearly fee, encouraging consumers to buy in bulk and incentivizing consumers to purchase items from the same distribution center to lower product prices. On the strength of his name and new business model, Lore was able to raise $500 million in investment capital on this venture. Lore earned $243.9 million in 2016 making him the highest compensated CEO in the United States after the sale. Expect Lore to be at Walmart for at least five years, as he will lose substantial compensation if he exits beforehand.

Walmart previously missed out on buying Quidisi in 2010 as both Walgreens and Amazon were in a bidding war for Lore’s e-commerce property. Walmart decided with the Jet.com acquisition that they were not going to lose an opportunity to buy Marc Lore’s services again.

How Will Walmart Benefit from Jet.com?

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In just one year of operation, Jet.com scaled up to 12 million different products and reached a run-rate of $1 billion in gross merchandise value [11]. With this acquisition, Walmart is buying additional diversity of online product offerings. The brands that Jet.com offers are those that appeal to consumers that reside outside of Walmart’s more suburban, rural, older cost conscious demographic. Jet.com’s brand positioning is targeted to younger, “urban”, millennials who constitute a faster growing demographic than the demographic that Walmart has traditionally attracted. Walmart plans to keep the Jet.com brand identity separate from Walmart.com. Jet.com has relationships with more upscale brands that may not want to sell their products on Walmart.com. Additionally, this brand separation helps maintain Jet’s appeal to higher income consumers.

According to CNBC, Jet.com shoppers are more likely to have $150,000 and up incomes. Additionally, only 20% of Jet.com buyers also purchased from Walmart.com in the past six months (as of August 8th, 2016) [12]. There was little overlap between the customer bases of both companies making the acquisition by Walmart highly attractive. Furthermore Jet.com’s innovative supply chain business model and focus on low prices dovetailed with Walmart’s penchant for supply chain innovation and focus on low prices. Here is how Marc Lore described the company’s novel “smart cart” business process:

“Here’s how it works: If you have two items in your cart which are both located in the same distribution center and can both fit into a single box, then you will pay one low price. If you add a third item that is located at a different distribution center and cannot be shipped in a single shot with the other two items, you will pay more. As you shop on the site, additional items that can be bundled most efficiently with your existing order are flagged as ‘smart items’ and an icon shows how much more you’ll save on your total order by buying them.”

It should be noted that Jet was experiencing a high cash burn rate prior to being acquired by Walmart. Jet.com dropped its annual $50 membership fee which caused it to lose money on every shipment. The advantage of Jet.com being acquired by a deep pocketed industry player like Walmart was to help alleviate the stress of private fund-raising for an unprofitable company [13].

Walmart has to allow Jet.com to maintain its startup, entrepreneurial culture or risk losing talent. For instance, Walmart’s conservative, southern influenced culture clashed with the office drinking, happy hour culture of Hoboken New Jersey based Jet.com. Walmart eventually reversed course and did not impose this “in-office prohibition” rule on subsequent startup acquisitions. However, the more conservative Walmart did ask Jet employees to be mindful of swearing in the office [14].

Jet.com has the potential to infuse Walmart with much needed digital innovation. This fresh perspective has the potential to add tremendous value to the organization as a whole. The “old guard” rooted in Walmart’s core business model needs to allow acquisitions to thrive instead of imposing the more conservative legacy culture. According to CEO McMillon, the core business itself must learn to become more digital.

“The people who run the older parts of our business must also become digital. We can’t have some people live in yesterday while others live in tomorrow. And given the effects of inertia, we need people to lean into the future even more than other companies might. We’re trying to move large numbers of people to change their established habits.” [9]

E-Commerce Executive Shakeup

There was an immediate shakeup in the executive ranks once the Jet.com acquisition materialized. Neil Ashe, Walmart’s global e-commerce head previously ran CBS Interactive and had been named head of technology shortly before the acquisition, was transitioned out to make room for Marc Lore. Lore will assume the title of president and CEO of e-commerce at Walmart. Lore will head not only Jet.com but also all of Walmart’s e-commerce functions. Also leaving is Michael Bender, Walmart’s global e-commerce COO.

Fernando Madiera who previously headed Walmart.com and was previously CEO of Walmart’s Latin American e-commerce business was transitioned. Mr. Madiera had just taken the Walmart.com post in 2014. Other high level executives that transitioned were Dianne Mills, senior vice president of global e-commerce human resources; and Brent Beabout, senior vice president of e-commerce supply chain. Not even Wal-Mart’s chief information officer Karenann Terrell was spared, as she left the company late February of 2017.

Key executives from Jet.com that will join Marc Lore’s new team include Scott Hilton who was previously chief revenue officer at Jet.com. Jet.com co-founder Nate Faust will become the senior vice president for U.S. eCommerce and supply chain for Walmart’s domestic operations.

The point of this game of executive musical chairs is to provide Marc Lore with the executive team he deems necessary to launch an effective attack on Amazon’s e-commerce dominance. Walmart has 3.3 billion reasons to make sure Lore feels he has the necessary team in place to win.

Walmart & Jet.com E-Commerce Timeline

  • February 2016: Jet.com purchases online furniture retailer Hayneedle.com for $90 million. The move is seen as way for Jet.com to acquire revenue growth. Of note, the Hayneedle CEO (John Barker) received a parachute package worth $3.4 million while other employees saw their investment stakes effectively wiped out.
  • August 2016: Walmart purchases Jet.com for $3.3 billion. The deal is reported to be the largest ever purchase of a U.S. e-commerce startup.
  • January 2017: Jet.com purchases Boston based ShoeBuy for $70 million. The purchase increases Jet’s online catalogue of items substantially and will allow the same items to be sold across Walmart.com, Jet.com and Shoes.com.
  • February 2017: Walmart purchases hip Michigan based outdoor retailer Moosejaw for $51 million. Moosejaw sells brands like Patagonia and North Face online and in its 10 brick and mortar stores. Moosejaw has expertise in online sales and social marketing that Walmart wishes to tap. Moosejaw and Its 350 employees will continue to exist as a standalone subsidiary.
  • March 2017: Jet.com purchases women’s online clothing retailer Modcloth for $75 million. The site caters to size diversity and body positivity. The acquisition represents an attempt to appeal to a younger, hipper demographic than Walmart currently courts.
  • March 2017: Walmart launches a Silicon Valley based tech incubator called Store No. 8. The initiative is named after a store where Sam Walton was known to experiment. Walmart plans to invest in businesses like a venture capitalist firm would and then grow this group of startups as a portfolio. “The incubator will partner with startups, venture capitalists and academics to promote innovation in robotics, virtual and augmented reality, machine learning and artificial intelligence, according to Wal-Mart. The goal is to have a fast-moving, separate entity to identify emerging technologies that can be developed and used across Wal-Mart.” [18]
  • June 2017: Walmart purchases NYC based men’s clothing retailer Bonobos for $310 million. The brand started modestly by selling chino pants and expanded its line of offerings for sale in its own stores and in Nordstroms. “Its co-founder and chief executive, Andy Dunn, will oversee Walmart’s digital brands, which also include the independent women’s brand ModCloth.” [16] Passionate Bonobos fans have mocked the acquisition on social media snarkily asking if the popular chinos will be refitted for the average Walmart customer.  Bonobos has a vertically integrated supply chain as it designs and manufactures all products in-house, which allows it to cut out middlemen costs [17]. Walmart is eager to tap founder Andy Dunn for his expertise in this area.

Peddling upscale merchandise will allow Walmart to expand its reach from low and middle income consumers to a more affluent base. As middle income consumers slowly shrink, Walmart is diversifying its customer base.

“Between 2000 and 2014, middle-class populations decreased in 203 of the 229 metropolitan areas reviewed in a Pew Research Center study. In an economically divided America, Walmart has tried to sell not only to shoppers looking for extreme discounts, but also to shoppers with higher incomes seeking higher-quality items. Walmart has been working to increase its sales to more affluent customers for years, especially in e-commerce.” [19]

Conclusion

Walmart’s e-commerce strategy appears to be reaping dividends as of the writing of this post. As mentioned earlier, Walmart stated that its e-commerce sales had increased 64% domestically in the first quarter of 2017.

For years, Walmart has dominated the retail space with its low cost/low price strategy (see my Micheal Porter post). In today’s e-commerce environment, the key is to compete on low prices and convenience, as well as appeal to diversified income groups. Only time will reveal if Walmart has the innovative capacity and leadership to overtake Amazon. The company is making bold bets in the e-commerce space and is aware of the shift in consumer preferences.

Walmart’s core business must be willing to be disrupted by its internal innovators. The current retail landscape is one of declining profits and closing stores. The organization as a whole must not be ideologically wedded to its massive assortment of physical stores while ignoring threats from outside competitors (namely Amazon).

Additionally, Walmart cannot ignore fresh retail ideas emanating from internal disrupters like Marc Lore, Andy Dunn or successful Store No. 8 startups if they materialize. The company must cross-pollinate successful ideas and quickly post-mortem and move on from unsuccessful ones. If Walmart continues to buy online growth at the expense of organic growth, then it must ensure that it does not continually overpay for growth and assets. If its e-commerce acquisitions underperform or sustain large losses, this can harm Walmart’s market position and financial performance.

For more Walmart coverage please check out Part 1Part 2 and Part 3 of my series on Walmart’s overall technology strategy, where I address areas such as:

  • Strategy for Technology Infrastructure
  • Strategy for IT Capability & Staffing
  • Strategy for Information Risk & Security
  • Strategy for Stakeholder Requirements, Testing & Training/Support
  • Project ROI and Key Success Measures
  • Strategy for Data Acquisition and Impact on Business Processes
  • Strategy for Social Media/Web Presence
  • Strategy for Organizational Change Management, Project Strategy and Complexity

If you’re interested in Business Intelligence & Tableau check out my videos here: Anthony B. Smoak

References:

[1] Kaufman L. & Deutsch, C. Dec 29, 2000. Montgomery Ward to Close Its Doors. New York Times. http://www.nytimes.com/2000/12/29/business/montgomery-ward-to-close-its-doors.html

[2] Abrams, R., May 18 2017. Walmart, With Amazon in Its Cross Hairs, Posts E-Commerce Gains. New York Times. https://www.nytimes.com/2017/05/18/business/walmart-online-sales-jump-63-percent.html?mcubz=0

[3] Yohn, D., March 21, 2017. Walmart Won’t Stay on Top If Its Strategy Is “Copy Amazon”. Harvard Business Review. https://hbr.org/2017/03/walmart-wont-stay-on-top-if-its-strategy-is-copy-amazon

[4] Walmart STORES, INC., ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 2017. http://d18rn0p25nwr6d.cloudfront.net/CIK-0000104169/c3013d40-212d-409e-bf30-5e5fd482fc2f.pdf

[5] The Economist. June 2, 2016. Walmart: Thinking outside the box. As American shoppers move online, Walmart fights to defend its dominance. http://www.economist.com/news/business/21699961-american-shoppers-move-online-walmart-fights-defend-its-dominance-thinking-outside

[6] Levy, A. April 24, 2017. Is Wal-Mart’s New E-Commerce Acquisition Strategy Any Better Than Its Old One? https://www.fool.com/investing/2017/04/24/is-wal-marts-new-e-commerce-acquisition-strategy-a.aspx

[7] Edwards, J. May 27, 2014. Some Employees Are Furious At Management Payouts In Walmart’s Big Adtech Acquisition. http://www.businessinsider.com/adchemy-stock-payouts-in-walmartlabs-acquisition-2014-5

[8] Lutz. A. Dec 12, 2012. Walmart CEO Mike Duke Shares His Biggest Regret. Business Insider. http://www.businessinsider.com/walmart-ceo-shares-his-biggest-regret-2012-12

[9] Ignatius, A. March 2017. “We Need People to Lean into the Future”. Harvard Business Review. https://hbr.org/2017/03/we-need-people-to-lean-into-the-future

[10] Nassauer, S. Nov 1, 2016. Wal-Mart E-commerce Executives Depart in Wake of Jet.com Purchase. Wall Street Journal. https://www.wsj.com/articles/wal-mart-e-commerce-executives-depart-in-wake-of-jet-com-purchase-1478038997

[11] Gustafson, K. August 8, 2016. Wal-Mart: This is why Jet.com is worth $3.3 billion. CNBC. http://www.cnbc.com/2016/08/08/wal-mart-this-is-why-jetcom-is-worth-33-billion.html?view=story

[12] CNBC Interview with Marc Lore. Aug, 9. 2016. https://www.nytimes.com/2016/08/09/business/dealbook/walmart-jet-com.html?mcubz=0

[13] Abramsaug, R. & Picker, L. August 8, 2016. Walmart Rewrites Its E-Commerce Strategy With $3.3 Billion Deal for Jet.com. New York Times. https://www.nytimes.com/2016/08/09/business/dealbook/walmart-jet-com.html?mcubz=0

[14] Baskin, B. & Nassauer, S. June 25, 2017. It’s 5 O’Clock Somewhere—Unless You’ve Been Acquired by Wal-Mart. The retailing giant bought Jet.com for $3.3 billion, then had to cope with its weekly happy hour. Wall Street Journal. https://www.wsj.com/articles/its-5-oclock-somewhereunless-youve-been-acquired-by-wal-mart-1498410840lipi=urn%3Ali%3Apage%3Ad_flagship3_feed%3Bu3d9V%2FcPTBqo%2BB0cP7nSZQ%3D%3D

[15] Levy, A. August 9, 2016. Why Wal-Mart couldn’t let Jet.com’s founder get away…again. CNBC. http://www.cnbc.com/2016/08/09/why-wal-mart-couldnt-let-jetcoms-founder-get-away-again.html

[16] de la Merced, M. June 16, 2017. Walmart to Buy Bonobos, Men’s Wear Company, for $310 Million. https://www.nytimes.com/2017/06/16/business/walmart-bonobos-merger.html?smid=li-share

[17] Sergan, E. June 19, 2017. Bonobos Founder Andy Dunn Knows You Might Be Mad At Him For Joining Walmart. Fast Company. https://www.fastcompany.com/40432313/bonobos-founder-andy-dunn-knows-you-might-be-mad-at-him-for-joining-walmart

[18] Soper, S. March 20, 2017. Wal-Mart Unveils ‘Store No. 8’ Tech Incubator in Silicon Valley Bloomberg. https://www.bloomberg.com/news/articles/2017-03-20/wal-mart-unveils-store-no-8-tech-incubator-in-silicon-valley

[19] Taylor, K. March 24, 2017. Walmart’s latest move confirms the death of the American middle class as we know it. Business Insider. http://www.businessinsider.com/walmart-invests-as-american-middle-class-shrinks-2017-3

Photo Copyright: moovstock / 123RF Stock Photo

More Than You Want to Know About State Street Bank’s Technology Strategy Part 3

This article is a continuation of my earlier analyses (Part 1, Part 2 here) where I waded into State Street’s strategy for Technology Infrastructure, IT Capability and Staffing, Information Risk & Security, Stakeholder Requirements, and Project ROI. In this final part of my three part series I will broach the company’s strategy for Data Acquisition, Social Media, Organizational Change Management and Project Strategy. State Street’s cloud implementation and virtualization initiative is a worthy example of business strategy/need influencing the firm’s information technology strategy.

State Street: Strategy for Data Acquisition and Impact on Business Processes:

The nature of State Street’s business as a custodian bank with trillions of dollars under custody management and multiple clients distributed worldwide means that the organization houses and processes a tremendous amount of data (internally generated and externally collected). The sheer volume and complexity of this data presents challenges as the bank looks to file regulatory reports and provide data back to its clients. The company receives an untenable 50,000 faxes a month from its client base (Garber, 2016). According to consulting firm Accenture, “(State Street) was unable to adequately track trades through each step in the trading lifecycle because there were multiple reconciliation systems, some reconciliation work was still being done manually and there was no system of record. To maintain industry leadership and comply with regulations, the company’s IT platform had to advance” (Alter, Daugherty, Harris, & Modruson, 2016).

The bank’s cloud initiative helped facilitate and speed up the burdensome process of transferring data back and forth between its clients. In addition, (as of 2016) a new digital initiative (code named State Street Beacon) will potentially help drive more cost savings. The cloud architecture project was a boon to data analysis capabilities as it enabled clients to access their data in the State Street cloud and subsequently enrich the data from multiple sources to support forecasting (Camhi, 2014). In this case, the bank’s infrastructure as a service (IaaS) enabled platform as a service (PaaS) capabilities.

The bank has embarked upon the development of 70 mobile apps and services that support its PaaS strategy. In one case, the bank developed a tablet and mobile accessible app for its client base named State Street Springboard. This application put investment portfolio data in the hands of its client base. Additionally, “Since State Street’s core competency is transaction processing, its Gold Copy app is one of the most important new tools it offers: The app lets a manager follow a single ‘gold’ version of a transaction as it moves through all of the company’s many departments and office locations — say, as it makes it way through trading, accounting, and reporting offices globally” (Hogan, 2012). This capability of the Gold Copy app enables more effective management of counterparty risk as an asset moves through the trading process.

State Street’s new infrastructure and massive data collection provides the bank with new big data capabilities that can better inform business units in the area of risk management. Data insights can potentially fortify stress testing, “What-If” and “Black Swan” scenario modeling. As we’ve seen in the recent 2016 case of Britain’s pending withdrawal from the European Union (i.e. “Brexit”), uncertainty in global financial markets is a certainty.

State Street: Strategy for Social Media/Web Presence:

State Street has traditional Facebook, LinkedIn and Twitter social presences but it has also used other social platforms to support various aims such as employee interaction and brand awareness. The bank was named a “Social Business Leader for 2013” by Information Week. As part of a “social IT” strategy (in which technology supports a collaboration initiative), the company held an “Innovation Rally” on its eight internal online forums to gather employee ideas on how best to improve its business. From 12,000 total submitted postings, employees could attempt to build a business case around the best ideas for executive management to implement (Carr, 2013). The company also launched an internal “State Street Collaborate” platform with the aim of crowdsourcing employee knowledge to help people find an appropriate in-house expert regarding diverse work related topics of interest.

Additional social initiatives include a partnership with TED to provide employees the opportunity to give a “Ted Talk” in front of their peers; the aim is to promote knowledge sharing within the organization. The bank also experiments with a presence on the (almost defunct) video sharing platform “Vine” where it can showcase the organization in quick six second sound bites. This approach caters to clients and the future millennial talent base.

State Street: Strategy for Organizational Change Management, Project Strategy and Complexity:

As stated earlier in this series, State Street started migrating its new cloud applications to production by selecting those with low volume and low complexity and then gradually ramped up to migrating the more complex applications (McKendrick, 2013). The standardization and virtualization aspects of cloud infrastructure that the bank implemented is conducive to agile development. Standardization and a reusable code approach reduces complexity by limiting development choices, simplifying maintenance and enabling new technology staff to get up to speed on fewer systems. Developers are placed in agile teams with business subject matter experts to provide guidance and to increase stakeholder buy-in. Per Perretta, “We circle the agile approach with additional governance to ensure that the investments are paying off in the appropriate timeframe” (High, 2016).

Another key approach that State Street uses to gauge project complexity is that of predictive analytics. The bank can help its internal business teams better understand the project costs and delivery timetables by analyzing historical data on all of the projects implemented over the years. The predictive analytics model uses inputs such as “…scope, team sizes, capability of the team, the amount of hours each team member spent, and ultimately, how well it delivered on these programs” (Merrett, 2015). As the business teams list their project requirements, the predictive model is created in real time which provides all parties with additional clarity.

Finally, it would be remiss to mention banking and transformation in the same breath without mentioning the requisite layoffs and outsourcing activities. For all the benefits of the bank’s cloud computing initiatives, technology workers who do not fit in with the new paradigm find themselves subjected to domestic and non-domestic outsourcing initiatives. A standardized infrastructure platform leads to fewer distinct systems in the technology ecosystem, an emphasis on code reuse and increased automation. This perfect storm of efficiency gains has lead to roughly 850 IT employees shuffled out of the organization to either IBM, India based Wipro or outright unemployment. Staffing cuts occurred amongst the employees who maintained and monitored mainframes and worked with other non-cloud based infrastructure systems. The bank was interested in shifting fixed costs for variable costs by unloading IT staff who were perceived as not working on innovative cutting edge technologies. The layoffs amount to “21% of State Street’s 4,000 IT employees worldwide” (Tucci, 2011b).

Revisit earlier analyses here:

References:

Alter, A., Daugherty, R., Harris, J., & Modruson, F., (2016). A Fresh Start for Enterprise IT. Accenture. Retrieved from https://www.accenture.com/us-en/insight-outlook-journal-fresh-start-enterprise-it

Camhi, J. (2014). Chris Perretta Builds Non-Stop Change Into State Street’s DNA. Bank Systems & technology. Retrieved from http://www.banktech.com/infrastructure/chris-perretta-builds-non-stop-change-into-state-streets-dna/d/d-id/1317880

Carr, D. (May 30, 2013). State Street: Social Business Leader Of 2013. Retrieved 6/25/16 from http://www.informationweek.com/enterprise/state-street-social-business-leader-of-2013/d/d-id/1110179?

Garber, K. (February 29, 2016). State Street doubles down on digital. SNL Bank and Thrift Daily. Retrieved from Factiva 6/20/16.

High, P. (February 8, 2016). State Street Emphasizes Importance Of Data Analytics And Digital Innovation In New Role. Retrieved from http://www.forbes.com/sites/peterhigh/2016/02/08/state-street-emphasizes-importance-of-data-analytics-and-digital-innovation-in-new-role/#a211b1320481

Hogan, M. (September 3, 2012). State Street’s Trip to the Cloud. Barron’s. Retrieved from Factiva 6/20/16

McKendrick, J. (January 7, 2013). State Street’s Transformation Unfolds, Driven by Cloud Computing. Forbes. Retrieved from http://www.forbes.com/sites/joemckendrick/2013/01/07/state-streets-transformation-unfolds-driven-by-cloud-computing/#408e1acf64cf

Merrett, R. (April 2, 2015). How predictive analytics helped State Street avoid additional IT project costs. CIO. Retrieved from http://www.cio.com.au/article/571826/how-predictive-analytics-helped-state-street-avoid-additional-it-project-costs/

Tucci. L. (July, 20, 2011). State Street tech layoffs: IT transformation’s dark side. Retrieved from http://searchcio.techtarget.com/blog/TotalCIO/State-Street-tech-layoffs-IT-transformations-dark-side

More Than You Want to Know About State Street Bank’s Technology Strategy Part 2

This article is a continuation of my earlier analysis (Part 1 here) where I waded into State Street’s strategy for Technology Infrastructure and IT Capability and Staffing. In this second part of my three part series I will broach the company’s strategy for information risk and security, stakeholder requirements and project return on investment. State Street’s cloud implementation and virtualization initiative is a good example of business strategy/need influencing the firm’s information technology strategy.

State Street: Strategy for Information Risk & Security:

State Street has acquired a substantial client base and houses sensitive financial data that is subjected to regulatory scrutiny. Given the sensitive nature of its data and operations, the cloud infrastructure that the bank chose to implement was that of a virtualized private cloud. Former Chief Innovation Officer Madge Meyer stated, “We’re totally virtualized, our network is a virtual private IP network. Our servers are 72 percent virtualized and our storage is all virtualized for structured/unstructured data” (Burger, 2011). For State Street, a private cloud offers the benefits of a public cloud with the added benefit of being owned and operated by the bank (i.e. exclusive dedication). While no architecture is 100% secure, the risk of an information breach is mitigated as the controlling organization’s data can be completely isolated from the data of another organization.

Additionally, the cloud implementation and virtualization initiative gave rise to shared services that are centrally managed but enforced across the enterprise. This single security framework can be applied across all of the application touch points precluding the need for multiple security frameworks across disparate systems.

State Street: Strategy for Stakeholder Requirements, Testing & Training/Support:

The architecture group within State Street works together with the business to tie together strategic objectives. The idea to embrace cloud implementation (and the additional data functionality it enabled for the bank’s clients) emanated in the architecture group. Thus, the business and the board of directors were key stakeholders in the initiative. The board of directors has a special dedicated technology committee that receives “a complete rundown of the technology strategy and the work that we (IT group) are doing in terms of digitizing the business” (High, 2016). According to Perretta, “They (architecture group) created a proof of concept with an eye toward: Here are the capabilities that our entire organization is going to need, here are the technologies that we can deploy, and here’s how to make them operational” (Camhi, 2014).

State Street started migrating its new cloud applications to production by selecting those with low volume and low complexity and then gradually ramped up to migrating the more complex applications (McKendrick, 2013). Dual pilots of the cloud architecture were conducted using roughly 100 machines. Once favorable results were achieved, a larger pilot consisting of 500 machines was stood up. Approximately 120 use cases were tested in the pilot in order to let the development team understand the failure points of the system (Tucci, 2011a).

The standardization and virtualization aspects of the cloud infrastructure the bank implemented was conducive to agile development. Virtual machines on the cloud allowed development teams to spin up multiple server instances as opposed to physically installing a new box in the legacy non-virtualized environment. Contention between teams waiting for server use is virtually eliminated. “When adding cloud computing to agile development, builds are faster and less painful, which encourages experimentation” (Kannan, 2012). The relative ease at which development and testing servers can be instantiated promotes “spur of the moment” experimental builds that could yield additional innovative features and capabilities.

State Street: Project ROI and Key Success Measures:

Prior to State Street’s cloud infrastructure upgrade initiatives, potential operating cost savings were projected to be $575 million to $625 million by the end of 2014; which State Street is on track to achieve. “The bank had pretax run-rate expense savings from the initiative of $86 million in 2011, $112 million in 2012, and $220 million in 2013” (Camhi, 2014).

When the IT group makes a budget request for substantial investments, they must lay out the potential benefits to the business. Some of the benefits are timely payback, regulatory compliance, data quality improvement and faster development cycle times (providing features and functionality with re-use and less coding). The ultimate aim is to connect the IT strategy to business results in a way that yields advantage for the organization.

In 2011, State Street published a matrix on the advantages of cloud computing vs. traditional IT. The following figure provides insight into State Street’s IT and business unit considerations with respect to making an investment in a fixed or variable cost infrastructure (Pryor, 2011).

Traditional IT Cloud Computing
Cash Flow Hardware / software purchased upfront Costs incurred on a pay-as-you-go basis
Risk Entire risk taken upfront with uncertain return Financial risk is taken incrementally and matched to return
Income Statement Impact Maintenance and depreciated capital expense Maintenance costs only
Balance Sheet Impact Hardware / software carried as a long-term asset Cost incurred on a pay-as-you-go basis

From a funding perspective, State Street employs the chargeback funding method for its private cloud initiative. Architectural capabilities empower end-users to automatically provision virtualized servers for usage. There are policies in place that determine how long a virtual server may remain instantiated and how much load balancing is performed across the infrastructure. Server usage is monitored, measured and chargeback is calculated based upon end-user processing time. Subsequently, the usage is billed back to the end-user’s respective business unit. “In short, it puts a management layer of software over the virtualized servers and operates them in a highly automated, low touch, fashion” (Babcock, 2011).

Don’t miss part 3 of the analysis:
More Than You Want to Know About State Street Bank’s Technology Strategy Part 3

References:

Babcock, C. (November 9, 2011). 6 big questions for private cloud projects. Information Week. Retrieved from Factiva.

Burger, K. (October, 1, 2011). Riding The Innovation Wave; Technology innovation has been key to State Street Corp.’s success, according to chief innovation officer Madge Meyer — and she’s been willing to take some risks to prove it. Bank Systems + Technology. Retrieved from Factiva

Camhi, J. (2014). Chris Perretta Builds Non-Stop Change Into State Street’s DNA. Bank Systems & technology. Retrieved from http://www.banktech.com/infrastructure/chris-perretta-builds-non-stop-change-into-state-streets-dna/d/d-id/1317880

High, P. (February 8, 2016). State Street Emphasizes Importance Of Data Analytics And Digital Innovation In New Role. Retrieved from http://www.forbes.com/sites/peterhigh/2016/02/08/state-street-emphasizes-importance-of-data-analytics-and-digital-innovation-in-new-role/#a211b1320481

Kannan, N. (August 20, 2012). 6 Ways the Cloud Enhances Agile Software Development. CIO. Retrieved from http://www.cio.com/article/2393022/enterprise-architecture/6-ways-the-cloud-enhances-agile-software-development.html

McKendrick, J. (January 7, 2013). State Street’s Transformation Unfolds, Driven by Cloud Computing. Forbes. Retrieved from http://www.forbes.com/sites/joemckendrick/2013/01/07/state-streets-transformation-unfolds-driven-by-cloud-computing/#408e1acf64cf

Tucci. L. (July, 2011a). In search of speed, State Street’s CIO builds a private cloud. Retrieved from http://searchcio.techtarget.com/podcast/In-search-of-speed-State-Streets-CIO-builds-a-private-cloud

More Than You Want to Know About State Street Bank’s Technology Strategy Part 1

Introduction:

In November of 2010, Investment Management firm State Street Bank publicly announced an overall transformation of its technology infrastructure. State Street is a massively sized transaction services provider to both mutual and pension fund managers. The custodian bank holds $23 trillion in investor accounts in 29 countries around the world. In an organization with a massive store of data (most of it subjected to regulatory oversight), enterprise wide data conformity and accessibility is a challenge.

In a case of business strategy/need influencing information technology strategy, State Street’s COO in 2009 (Jay Hooley) wanted to help an institutional client calculate its exposure to a particular market. The information request was highly urgent given the financial consequences of late reactions during the great recession. “Getting the numbers turned into a painful exercise as State Street’s middle- and front-office staffers reconciled disparate data sets housed in different client systems and in nine of State Street’s 29 global locations” (Fest 2013). This failure to deliver for the client in an instantaneous manner spurred Hooley to call upon his information technology leadership to present a strategy to address this business need. The result of the IT leadership planning effort was the idea to move the bank’s diverse legacy infrastructure to a more standardized and nimble cloud computing architecture.

State Street: Strategy for Technology Infrastructure:

Former State Street CIO Chris Perretta, who as of 2016 holds a similar position at MUFG America’s Holdings Corporation, spent a considerable amount of time evangelizing the benefits of cloud computing to both the business and the bank’s board members. In its early stages, the technology vision resulting from the COO’s planning request was to position an updated infrastructure as a competitive advantage for the business in terms of cost savings, automation, and future development efficiency. Furthermore, the updated infrastructure could be an enabler of new product revenue streams. It should be noted that a shift to the cloud for a financial organization the size of State Street was unusual. “Too Big to Fail” sized banks are not typically known for their innovative technology development. Derisively, the bank has been known as “Staid Street” for its conservative manner. Within financial services, innovation is usually the domain of smaller, nimbler “fintech” startups looking for scalability and speed to market.

From an infrastructure perspective, State Street embarked upon migrating from disparate legacy data centers running proprietary Unix servers to a standardized cloud architecture based upon commoditized x86 servers running Linux. The initial cloud service was built from a Massachusetts based disaster recovery center and the bank currently has six major data centers in the U.S., Europe and Asia along with three backup facilities (Brodkin, 2011). In addition to the rollout of virtualization capabilities and distributed database functionality, Perretta states, “New tools for provisioning, change control, load balancing, a common security framework and various types of instrumentation to enable multi-tenant infrastructures are all part of the mix” (Brodkin, 2011).

Traditionally State Street has relied upon the “build rather than buy” approach as it builds customized software (development traditionally accounting for ~20%-25% of annual IT budget) to meet its needs (CMP TechWeb, 2012). The standardized cloud platform now enables developers to reuse code for future development which can shorten project timeframes.

State Street: Strategy for IT Capability & Staffing:

State Street’s IT organizational structure can be characterized as federalism. With the federalist approach, the organization gains the benefit of having centralized leadership and vision at the “top of the house”, yet allows decentralized co-located IT groups to remain responsive to their respective divisions. As described by former CIO Perretta, “We line up delivery capacity with each unit, and each CIO is responsible for delivering business services to that unit” (MacSweeney, 2009). For example, The CIO has a direct report on the ground in China where the company operates a subsidiary (State Street Technology Zhejiang Co). Furthermore, the bank is tolerant of “skunk works” style projects that organically develop in different IT divisions throughout the enterprise (MacSweeny, 2009).

On the centralized side of the federalist equation, the bank operates a shared services group that is responsible for technical necessities distributed throughout the enterprise (i.e. security, information and communications). This federalized approach makes sense for a sprawling organization that is comprised of disparate business operations across its custodian bank, investment management, investment research and global divisions.

With the introduction of the cloud infrastructure at State Street, the technology staffing vision is to acquire individuals with architectural knowledge who can think “big picture” yet are able to wallow in the details as necessary. The bank employs a chief architect whose aim is to drive technology innovation that leads to strategies that will impact the business in an advantageous manner. Perretta states, “We don’t use him to manage projects; we use him to come up with the ideas that make sense for our business community. Now he does those pilots, and then we industrialize them for the rest of the organization” (Tucci, 2011).

To be continued in Part 2 and Part 3 where I address additional areas such as:

  • Strategy for Information Risk & Security
  • Strategy for Stakeholder Requirements, Testing & Training/Support
  • Project ROI and Key Success Measures
  • Strategy for Data Acquisition and Impact on Business Processes
  • Strategy for Social Media/Web Presence
  • Strategy for Organizational Change Management, Project Strategy and Complexity

References:

Brodken, J. (April, 14, 2011). State Street modernizing with cloud, Linux technologies; Virtualization, open source drive cloud project at State Street. Network World Fusion. Retrieved from Factiva 6/19/2016

CMP TechWeb. (June, 25, 2012). State Street Private Cloud: $600 Million Savings Goal. Retrieved from Factiva 6/19/2016

Fest, G. (January 1, 2013). State Street’s Dig (Data); Championed by CEO Jay Hooley, boston-based state street is remapping a huge technology infrastructure to reap the benefits of the cloud and big data. American Banker Magazine. Vol.123, No.1. Retrieved from Factiva

MacSweeney, G. (August, 1, 2009). Serious Innovation; CIO Christopher Perretta supports all of State Street’s IT needs by mixing new technologies and rapid development and even encouraging ‘skunk works’ experimentation when appropriate. Wall Street & Technology. Retrieved from Factiva

Tucci. L. (July, 2011). In search of speed, State Street’s CIO builds a private cloud. Retrieved from http://searchcio.techtarget.com/podcast/In-search-of-speed-State-Streets-CIO-builds-a-private-cloud

Photo courtesy of DAVID L. RYAN/GLOBE STAFF

More Than You Want to Know About Wal-Mart’s Technology Strategy Part 3

This article is the final piece and a continuation of my earlier analyses (Part 1, Part 2) where I waded into Wal-Mart’s strategy for information risk & security, stakeholder requirements and project ROI. Whether you love or hate Wal-Mart, no one can argue that historically the organization has been highly innovative, effective and efficient. In this third part of my three part series I will broach the company’s strategy for data acquisition, social media, and project execution.

Wal-Mart: Strategy for Data Acquisition and Impact on Business Processes:

Wal-Mart has always been on the forefront of how an organization acquires, handles and shares data with internal and external parties. The company’s information technology spans across their 11,500 stores operating under 63 banners in 28 countries and e-Commerce websites in 11 countries (Wal-Mart Stores, Inc, 2015). This diverse assortment of digital and traditional brick and mortar assets services 260 million customers. The company’s sprawling POS system must remain highly operable and robust enough to harvest daily sales data across its global footprint. In order to accommodate data from a substantial customer base of millions of shoppers, the company must have the requisite back end storage infrastructure. As of 2015, Wal-Mart is embarking on a plan to build a massive private cloud which is expected to make 40 petabytes of data available everyday (Buvat et al., 2015). From a strategic standpoint the in-house cloud build-out makes sense, as employing Amazon Web Services would be making the company reliant on a key competitor’s technology offering to house sensitive data.

The data acquired from its POS systems allows the company to better allocate its product mix in real time. For example, on “Black Friday”, which is typically the busiest shopping day of the year, the company’s buyers mine the day’s sales data as early as 6am on the East Coast in order to optimize the company’s product offerings for the day (Sullivan, 2004).

From a data acquisition perspective, Wal-Mart pioneered the use of bar code scanners. The usage of scanners and Universal Product Codes was not just to register the price and make the cashier’s job of processing customers faster (as its early competitors had used the technology); Wal-Mart realized that bar codes enabled the company to determine where and how sales were made. In order to link POS, inventory and supply chain management data together with headquarters, the company invested in its own personal satellite system in 1984 (Sherman, 2013). This investment impacted in-store business processes as analytics could be run against purchase data to determine customer market basket mix and product to product correlations. Being on the forefront of purchasing data analytics allowed the company to more effectively place products in-stores that customers demanded.

This information linkage enabled by Wal-Mart’s satellite investment also led to profound business practice impacts with respect to its supply chain management process. As mentioned earlier in this analysis, with the development of Retail Link, Wal-Mart led the industry by providing first P&G and then the rest of its supplier network with direct visibility to real time store-shelf data. This was a highly innovative move as suppliers and internal buyers could work together on “forecasting, planning, producing, and shipping products as needed” (Sherman 2013). Enabled by its new technology system, the data sharing of information between supplier partners allowed those suppliers to manage inventory at Wal-Mart stores with a more comprehensive understanding of product demand, while Wal-Mart benefited from lower inventory storage costs.

Wal-Mart: Strategy for Social Media/Web Presence:

Wal-Mart operates e-commerce web presences across 11 different countries. Although it is by far the biggest brick and mortar retailer in the world, it has struggled to compete with online “e-tail”, competitors such as Amazon and Target. Updating its digital know-how and refreshing its digital properties will be a requirement in order to keep pace in a shifting industry dynamic. To this end, Wal-Mart has embarked upon a number of strategies to keep itself relevant and enhance its digital capabilities. The company is leveraging its web properties to not only analyze purchasing behavior but also review customer search histories and customer social media interactions. The latter activities are aimed at boosting its online sales and predicting customer demand for its brick and mortar locations.

“Teams at WalmartLabs use visualization techniques to analyze social activity to capture insights that may indicate changes in product demand. Walmart can then use these insights to stock extra inventory at locations where it expects higher demand and reduce it from locations with lower demand” (Buvat et al., 2015).

Wal-Mart has also embarked upon a strategy of purchasing startup companies with the intention of adding to the retailer’s knowledge in the mobile, analytics and social media realm. The retailer purchased a company called Kosmix, whose founders had sold a digital company to Amazon in the late 1990’s. Kosmix is a social media data aggregator which analyzes data from Twitter and other social networks with the aim of helping the company understand the relationship between customers and products. Shortly after the Kosmix acquisition, a small team at @WalmartLabs prototyped a new search capability code-named “Polaris”. Polaris helps to determines customer intent when embedded within Walmart.com. “As a result, if a user types in the word ‘denim’, it returns results on ‘jeans’ while ‘chlorine tablets’ returns results related to pool equipment (Ribiero, 2012). Within 9 months the prototype was production ready as it replaced an Oracle based product (Endeca) whose search functionality was simply keyword based. The company claims that it sees a 10% – 15% boost in shoppers completing a purchase using the Polaris search algorithm.

One recent splashy acquisition in the e-tail space involved Wal-Mart’s purchase of Jet.com for 3 billion in cash. Wal-Mart realizes that customer preferences have shifted to the online retailer space while Wal-Mart has a substantial legacy footprint in brick and mortar locations. According to the Wall Street Journal, “The retailer gains access to a larger group of young, wealthy, urban shoppers through Jet” (Nassau, 2016). The company also gains access to a startup minded employee talent base, startup executive experience and Jet.com’s proprietary pricing software and customer data.

Additional social project activities employed by Wal-Mart include adding a ratings review capability to its products on Walmart.com and a partnership with Facebook to offer individual pages for each of the retailer’s 3,500 stores. The company has also used the hashtag #lovedata to appeal to potential technology hires.

From an employee social engagement perspective, Wal-Mart developed an internal web site called mywalmart.com with the aim of developing an employee social media community where employees are allowed to blog and answer questions related to the company. Roughly 75% of the company’s 1.4 million U.S. based associates log on to the site (Tuttle, 2010). This effort required integrating multiple disparate websites running on different web platforms (for example payroll and benefits sites).

It should be noted that although the company is taking positive steps in the social media space, its initial attempts in the early 2000’s were clumsily executed. “Its Walmarting Across America blog in 2006, about two Wal-Mart enthusiasts traveling around the U.S. in an RV, was revealed to be less than authentic when it was learned that Wal-Mart paid for the flights, the RV and the gas of the two protagonists. ‘The Hub,’ a MySpace-like clone, closed in October 2006, just 10 weeks after it launched, while a Wal-Mart sponsored Facebook group reportedly had lackluster results” (Edelson & Karr, 2011).

Wal-Mart: Strategy for Organizational Change Management, Project Strategy and Complexity:

Best practice project management principles for handling complexity include implementing risk management practices and analyzing project risk/rewards. This series has already addressed Wal-Mart’s heavy reliance on ROI as a measure of project success. But Wal-Mart also has the advantage of running a common information systems platform for its global operations. This has allowed the company to offset the higher costs of developing in-house systems by building a system once and then rolling it out along with the respective business processes enterprise wide.

The company also lowers IT project complexity by closely examining the current process that the system is supposed to improve. This activity has been described by former CIO Kevin Turner as “eliminate before we automate”.

“Eliminate steps, processes, reports, keystrokes; eliminate any activity that you possibly can for two reasons: One, you’ll end up building a whole lot better system that’s easier to support, and two, invariably you will have a better solution that’s more [user] friendly” (Lundberg, 2002).

Once the system is built, then a piloting phase occurs amongst the stores, distribution centers and customers that will present the most challenges. If the challenges are caught and addressed by pilot builds in the most trying situations, then installing at less challenging locations should experience minimal interruptions.

From an Enterprise Risk Management standpoint Wal-Mart uses a 5 step process that allows its ERM group to work with the business to mitigate many of the risks that the company faces. “The five-step ERM process involves: 1. risk identification, 2. risk mitigation, 3. action planning, 4. performance metrics, and 5. shareholder value” (Atkinson, 2003).

An additional project strategy is to funnel all IT projects through the central IT office with a single enterprise-wide portfolio overseen directly by the CIO. King (2014) asserts that objectively ranking projects by using an automated spreadsheet tool helps to eliminates politically-driven decisions. Resources are assigned to projects based upon criticality and available funds. When available employees and funds are exhausted for the quarter, remaining projects on the list do not make the cut. Technology resources are asked to remain flexible as they rotate to different jobs within the company to gain additional skills. The flexibility of IT resources is a boon to change management plans as resources can be swapped out without minimal interruption to the overall project plan.

In case you missed something, make sure to revisit Part 1 & Part 2 of the series.

If you’re interested in Business Intelligence & Tableau check out my videos here: Anthony B. Smoak

References:

Atkinson, W. (December, 1, 2003). Enterprise Risk Management at Wal-Mart. Risk Management. Retrieved from Factiva.

Buvat, J., Khadikar, A., KVJ, S. (2015). Walmart: Where Digital Meets Physical. Capgemini Consulting. Retrieved from https://www.capgemini-consulting.com/walmart-where-digital-meets-physical

Edelson, S., & Karr, A. (April, 19, 2011). Wal-Mart to Buy Kosmix. Retrieved from Factiva.

King, R. (October 2014). Wal-Mart Becomes Agile But Finds Some Limits. Dow Jones Institutional News. Retrieved from Factiva

Lundberg. A. (July 1, 2002). Wal-Mart: IT Inside the World’s Biggest Company. CIO magazine. Retrieved from http://www.cio.com/article/2440726/it-organization/wal-mart–it-inside-the-world-s-biggest-company.html?page=2

Nassau, Sarah (2016). Wal-Mart to Acquire Jet.com for $3.3 Billion in Cash, Stock. Wall Street Journal http://www.wsj.com/articles/wal-mart-to-acquire-jet-com-for-3-3-billion-in-cash-stock-1470659763

Sherman, Richard J.. ( © 2013). Supply chain transformation: practical roadmap to best practice results. [Books24x7 version] Available from http://common.books24x7.com.libezproxy2.syr.edu/toc.aspx?bookid=49746.

Ribeiro, J. (August 31, 2012). Walmart rolls out semantic search engine, sees business boost. Retrieved from http://www.computerworld.com/article/2491897/internet/walmart-rolls-out-semantic-search-engine–sees-business-boost.html

Sullivan, L. (September 24, 2004). Wal-Mart’s Way: Heavyweight retailer looks inward to stay innovative in business technology. Retrieved 6/17/16 from http://www.informationweek.com/wal-marts-way/d/d-id/1027448?

Tuttle, D. (February, 17, 2010). Wal-Mart’s social media community earns accolades. Retrieved 6/17/16 from Factiva

WAL-MART STORES, INC. (January 31, 2016). FORM 10-K. Retrieved from https://www.sec.gov/Archives/edgar/data/104169/000010416915000011/wmtform10-kx13115.htm

Photo Copyright: dutourdumonde / 123RF Stock Photo

More Than You Want to Know About Wal-Mart’s Technology Strategy Part 2

This article is a continuation of my earlier analysis (Part 1 here, continued here at Part 3) where I waded into Wal-Mart’s strategy for technology infrastructure and strategy for IT capability & staffing. Whether you love or hate Wal-Mart, no one can argue that historically the organization has been highly innovative, effective and efficient. In this second part of my three part series I will broach the company’s strategy for information risk and security, stakeholder requirements and project return on investment.

Wal-Mart: Strategy for Information Risk & Security:

Wal-Mart operates a massive information system infrastructure that has been called the largest private computer system in the country. As such, the company must be strategic in implementing the proper information security protocols and vigilant in order to react to attempted compromises to its confidential information. Any compromise of sensitive customer information could lead to a significant expense in compensating affected parties and lead to updating systems, processes and procedures to restore customer confidence. This scenario is especially relevant as Wal-Mart’s extensive point of sale system, from a black hat hacker’s perspective, registers a veritable treasure trove of customer debit, credit and gift card information.

In order to mitigate the aforementioned risks, Wal-Mart has complied with the PCI DSS or Payment Card Industry Data Security Standard. PCI DSS offers, “compliance guidelines and standards with regard to our (Wal-Mart’s) security surrounding the physical and electronic storage, processing and transmission of individual cardholder data” (Wal-Mart Stores Inc., 2016). Some operational system components of PCI DSS include maintaining a secure network via use of firewalls to protect sensitive data, encrypting cardholder data that is transmitted across public networks, regularly updating anti-virus software as well as tracking and monitoring all access to network resources and cardholder data. (PCI Security Standards Council, 2016). Former CIO Turner has stated, “Necessity is the mother of invention, and we’ve invested a lot of knowledge and capital in intrusion detection and playing as much offense as we can to make sure that we’re protecting our company. Personally, every day I spend time on security” (Lundberg, 2002).

From a disaster recovery perspective, Wal-Mart maintains redundant primary and secondary information systems to mitigate the risks of operational downtime and/or significant loss of information. The organization keeps primary and secondary information systems physically separated. In 2005, the company was lauded for its disaster recovery and business continuity efforts in the wake of Hurricane Katrina. The company stood up satellite links for its retail centers enabling those centers to correspond with headquarters despite the loss of phone lines and internet connectivity (Worhten, 2005). Wal-Mart also maintains an Emergency Operations Center (EOC) established in the wake of the September 11, 2001 terror attacks. The organization has a central EOC located at headquarters in Arkansas which works in concert with decentralized EOCs at a division level. During Hurricane Sandy, the organization was successful in moving generators across state lines in order to reopen stores and provide systems operability in a timely manner (PricewaterhouseCoopers, 2005).

Wal-Mart: Strategy for Stakeholder Requirements, Testing & Training/Support:

Wal-Mart’s immense size allows it considerable influence over its supplier stakeholders. Typically, suppliers reside in an inferior position (Wal-Mart can end the supplier relationship or demand sub-optimal concessions from the supplier) which enables the retailing behemoth to dictate industry wide changes in how suppliers and merchants interact. This unbalanced power relationship allows the company to micromanage its supply chain partners from a business process and respective information technology project perspective. When the power balance is more on an equal footing, Wal-Mart is willing to work collectively with a supplier.

Case in point is the lauded cooperation between Procter & Gamble and Wal-Mart in the late 1980’s to implement Retail-Link. Retail-Link was a joint business process and related technology systems project between the two organizations for mutually beneficial gains. Wal-Mart’s in-store point of sale data acted as a pull to automatically trigger manufacturing orders to P&G when stocks were low (Wailgum, 2007). When this concept proved successful, Wal-Mart dictated to 2,000 supplier stakeholders that they must all update their information systems to integrate with Retail-Link. The integration and information sharing with Retail-Link was a boon to Wal-Mart’s suppliers as it provided predictable volumes and constantly humming factories, but the takeaway is that Wal-Mart mandated the terms to stakeholders based upon its asymmetrically favorable power position.

In some cases, Wal-Mart’s technical project mandates to suppliers did not yield mutually beneficial Return on Investment (ROI). An example of this scenario is embodied in the much publicized initiative to have its suppliers adopt RFID in the mid 2000’s. Wal-Mart was seeking to increase its inventory visibility at the warehouse and in its stores. In this case, Wal-Mart did not adequately consider stakeholder technology implementation concerns before issuing its RFID mandate. A supplier is on record stating that the consumer packaged goods industry was not the best early adaptor for RFID and that the small margins and project complexities didn’t offer compelling ROI (Wailgum, 2007). The ROI that could be established from a supplier standpoint was to continue doing business with Wal-Mart while only investing the bare minimum in upgrades required to implement RFID. A Gartner analyst has estimated that the implementation costs of RFID for smaller companies would cost between $100,00 to $300,000, while larger manufacturers could experience investment costs of up to $20 million (Network World, 2008).

Once a critical mass of important supplier stakeholders decided that their operating costs were being negatively impacted, Wal-Mart decided to back down from its mandate. Only when the favorable power dynamic shifted from Wal-Mart to the supplier network, did the company walk back its mandate.

From a development standpoint, Wal-Mart traditionally used the more structured Systems Development Lifecycle (SDLC) methodology. All systems within the company require testing & validation. According to former CIO Turner, “In any development effort, our [IS] people are expected to get out and do the function before they do the system specification, design or change analysis. The key there is to do the function, not just observe it. So we actually insert them into the business roles. As a result, they come back with a lot more empathy and a whole lot better understanding and vision of where we need to go and how we need to proceed” (Lundberg, 2002). Turner also eschews testing systems in low volume stores or with the easiest customers.

Recently, in its more cutting edge Silicon Valley based development division (@WalmartLabs) the company has moved to adopt an Agile development methodology. Agile methodology allows the group to react faster to changing market conditions with respect to the much slower SDLC methodology. This approach is necessary in a cut-throat marketplace where competitors such as Amazon have been using Scrum for over a decade (King, 2014).

Wal-Mart: Project ROI and Key Success Measures:

Despite the less than successful analysis and grasp of intended project benefits related to its RFID initiative, Wal-Mart relies heavily on ROI as a measure of project success. Cost is a major driver of IT related expenses thus a reliance on ROI is a sensible approach. Former CIO Turner has stated that 33% of Wal-Mart development projects are canceled before they are completed and that 56% of completed projects are subjected to budget overruns of 189%. “One of the problems is that a lot of companies don’t require an ROI except for major purchases. ‘At Wal-Mart, everything has to pay its way, even infrastructure [investments]. A lot of people say you can’t cost-justify infrastructure, but you can. There is a way. You have to make ROI the center of what you’re about, to begin to pay your way’” (Power, 1998). At Wal-Mart all technology implementations are assigned a payback analysis and the savings from the analysis must be incorporated into the business plan. A quarterly report on each project is shared at the executive level to ensure that business unit profit and loss statements reflect the investment value that was initially calculated. The mentality at Wal-Mart is a focus on turning information technology from a traditional cost center to a profit center.

Additionally, the centralized information technology group at Wal-Mart does not saddle its divisions with a chargeback funding method. The company takes a holistic enterprise wide view approach with respect to determining which projects make sense for the company. Wal-Mart can be said to employ the corporate budget funding method where IT managers have considerable control over the entire IT budget. When it’s time to implement a project, the divisions with the largest budgets are treated the same as divisions where resources are more scarce. As of 2004, the organization lacked an IT steering committee which helped speed up the project selection process (Sullivan, 2004). The drawback to this funding method approach is that IT competes with all other budgeted items for funds (Pearlson, Galletta & Saunders, 2016).

Project completion dates in the organization’s nomenclature are referred to as “end dates”. All projects are tracked against the end dates and problem projects are scrutinized when they fall behind schedule. When new systems are deployed it is not uncommon for high level management to solicit feedback from line employees involved in using the system. When necessary, personnel are replaced on project teams in order to increase project effectiveness (Lundberg, 2002).

To be continued in Part 3 where I address these three areas:

  • Strategy for Data Acquisition and Impact on Business Processes
  • Strategy for Social Media/Web Presence
  • Strategy for Organizational Change Management, Project Strategy and Complexity

If you’re interested in Business Intelligence & Tableau check out my videos here: Anthony B. Smoak

References:

King, R. (October 2014). Wal-Mart Becomes Agile But Finds Some Limits. Dow Jones Institutional News. Retrieved from Factiva

Lundberg. A. (July 1, 2002). Wal-Mart: IT Inside the World’s Biggest Company. CIO magazine. Retrieved from http://www.cio.com/article/2440726/it-organization/wal-mart–it-inside-the-world-s-biggest-company.html?page=2

Network World. (September, 2008). “Wal-Mart’s RFID revolution a tough sell; Even for the world’s biggest retailer, championing an unproven technology with no clear ROI has been difficult” Retrieved from Factiva on June 13/16

PCI Security Standard Council. (2016). Maintaining Payment Security. Retrieved from https://www.pcisecuritystandards.org/pci_security/maintaining_payment_security

PricewaterhouseCoopers. (September, 2013). Interview with Mark Cooper. Walmart takes collaborative approach to disaster recovery. Retrieved from http://www.pwc.com/gx/en/industries/capital-projects-infrastructure/disaster-resilience/walmart-disaster-response-strategy.html

Power, D. (June, 1998). WAL-MART: TECHNOLOGY PAYBACK IS IMPERATIVE. Supermarket News. Retrieved from Factiva

Pearlson, K., Galletta, D., & Saunders, C. (January, 2016). Managing and Using Information Systems: A Strategic Approach, Binder Ready Version, 6th Edition

Sullivan, L. (September 24, 2004). Wal-Mart’s Way: Heavyweight retailer looks inward to stay innovative in business technology. Retrieved 6/17/16 from http://www.informationweek.com/wal-marts-way/d/d-id/1027448?

Wailgum, T. (October 2007). How Wal-Mart Lost Its Technology Edge. Retrieved from http://www.cio.com/article/2437953/strategy/how-wal-mart-lost-its-technology-edge.html

WAL-MART STORES, INC. (January 31, 2016). FORM 10-K. Retrieved from https://www.sec.gov/Archives/edgar/data/104169/000010416915000011/wmtform10-kx13115.htm

Worthen, B. (November 1, 2005). How Wal-Mart Beat Feds to New Orleans. CIO Magazine.Retrieved from http://www.cio.com/article/2448237/supply-chain-management/how-wal-mart-beat-feds-to-new-orleans.html

More Than You Want to Know About Wal-Mart’s Technology Strategy Part 1

Wal-Mart has long been associated with innovations in its home-grown information technology systems, which in turn have exerted tremendous influence on its business strategy of everyday low prices. The company was a pioneer in bar code scanning and analyzing point of sale information which was housed in its massive data warehouses. Wal-Mart launched its own satellite network in the mid 1980’s which led to profound business practice impacts with respect to its supply chain management process. Strategic systems such as Retail-Link, spearheaded by industry luminary Kevin Turner, enabled data integration and sharing between Wal-Mart and its suppliers. These systems also enabled the concept of vendor managed inventory. However, not every technology project in which the company invests significant resources turns to gold as Wal-Mart encountered missteps with its RFID technology initiative. Despite the less than stellar ROI and supplier adoption rate of RFID, that effort demonstrated the willingness of its technology to push the envelope in exerting tremendous changes on business processes not only within Wal-Mart but throughout the industry.

Storm clouds are on the horizon as consumer preferences change from “big-box” brick and mortar stores to online retail platforms such as Amazon. To counter Amazon’s online dominance, the company must continue to invest in its digital know-how. Adding new capabilities to its online presences and refreshing its digital properties will be a requirement in order to keep pace in a shifting industry dynamic.

Wal-Mart: Strategy for Technology Infrastructure:

Wal-Mart’s architectural philosophy can be classified by the twin sentiments of “build rather than buy” (the organization has historically held the belief that their information systems provide a competitive advantage over other industry players) and one of innovation. Recently, as consumer preferences have shifted away from “big-box” brick and mortar stores to the convenience of online “e-tail”, competitors such as Amazon and Target have begun to erode Wal-Mart’s retail dominance. In order to react, Wal-Mart has been allocating resources to invest in digital capabilities that will allow the organization to effectively compete and become better aligned with consumer shopping preferences.

Historically, Wal-Mart’s information technology strategy has long favored an internal “build rather than buy” approach which has spawned innovative business strategies. Wal-Mart prefers to build in house strategic systems that allow the company to gain competitive advantages. Retailers are known to prefer home-grown systems and Wal-Mart’s immense size has traditionally been a hindrance in running off the shelf packages (Wailgum, 2007). Globally, the company runs a heavily modified version of IBM’s elderly point of sale (POS) supermarket application at all of its checkouts with the exception of Japan (Zetter, 2009). The in-house systems approach has been a source of competitive advantage for Wal-Mart. “Wal-Mart was a pioneer in applying information and communications technology to support decision making and promote efficiency and customer responsiveness within each of its business functions and between functions” (Ustundag, 2013).

The advantage of an in-house strategic system is that it offers tight alignment between the company’s business strategy and the finished solution. Another advantage of in-house strategic systems as opposed to running off the shelf packages from third parties is the ability to keep proprietary business process and systems knowledge out of the hands of competitors. A third party developer would have no problem advertising a system that was in use at Wal-Mat and then selling that system to competitors. The advantages of the in-house development approach must be weighed against the downsides, namely the higher cost of development and the internal staffing required for new innovative development and on-going maintenance.

Recently, as Wal-Mart tries to use its geographic reach and existing retail infrastructure to compete with Amazon, it is making a move to ramp up its cloud based technology assets. In keeping with its “build rather than buy” approach, the company built its own data centers and developed supporting cloud based commerce applications using open source tools. “‘We took back control of the technology and largely built it ourselves,’ explained Jeremy King, chief technology officer for global e-commerce at Walmart” (Lohr, 2015). Additionally, as of 2015, the company is in the middle of an IT systems overhaul called Pangaea that “includes a hybrid cloud platform and search technology” (Nash 2015). King, in keeping with the Wal-Mart approach has stated, “Most people don’t replace entire systems in one shot, especially with from-scratch development…but given how rapidly this place is changing, we didn’t have time to screw around” (Nash 2015).

Wal-Mart: Strategy for IT Capability & Staffing:

Wal-Mart is not a technology company, but it is a company in which technology is a key enabler of business strategies. Since technology has been a crucial component of the organization’s competitive advantage, its IT governance archetype can be characterized as an IT duopoly. The IT duopoly arrangement allows technology executives and business unit leaders to collaborate on technology projects and decisions. Kevin Turner, who was a Wal-Mart vice president for application development, a former CIO and the current CEO of Citadel Securities, has stated that technology payback figures for Wal-Mart initiatives are put into writing, “which in turn requires the affected business units to acknowledge savings and work them into their business plan — or dispute the savings and work with the IT department toward a resolution” (Power, 1998). “‘Do the [business units] always agree with us? No. Will they work with us? Yes. If they don’t, we won’t do anything more for them in the future. And I’ll tell you, that works,’ said Turner” (Power, 1998).

Traditionally, Wal-Mart’s IT staff have a background in other non-technology areas of the business. The company looks to promote its staff out of the IT department which allows a technological “cross-pollination” of knowledge to occur across the organization. When Wal-Mart is looking to develop new systems it dispatches its top engineers to perform “regular” operations jobs so they can gain working hand knowledge of the challenges that line employees face (Boyer, 2003).

As Wal-Mart has looked to withstand new online retail challenges from chief competitors Amazon and Target, its technology staffing mix and organizational structure have had to adapt in order to remain competitive. Former CEO Mike Duke was looking to combine the organization’s stores, information technology assets and logistics expertise into one channel in order to drive growth (Buvat, Khadikar, & KVJ, 2015). Wal-Mart was cognizant that it could not realistically expect the technical staff that it required in order to compete with Amazon, to relocate to Bentonville Arkansas. Therefore, in 2010 Wal-Mart re-organized and consolidated its worldwide e-commerce staff into a new Global division located in Silicon Valley California. Historically, the company has favored a centralized Information Systems structure coupled with an in-house development approach. Former Wal-Mart CIO Turner has stated, “What we’ve come up with is a model of decentralized decisions but centralized systems and controls. We will have a common system and a common platform, but we have to allow a great deal of flexibility in our systems so that the people in those local markets can do their job in the best, most effective way” (Lundberg, 2002).

The new Global E-Commerce initiative is in keeping with that philosophy as the new division’s key responsibilities include, “running Walmart’s ten websites worldwide, building and testing cutting-edge technology at @WalmartLabs, and building Walmart’s eCommerce capabilities” (Buvat et al., 2015). Additionally, in order to bolster its e-commerce staff, Wal-Mart has purchased 14 companies primarily for the purpose of gaining access to engineering personnel. As a result of Wal-Mart’s emphasis on ramping up e-commerce talent, its e-commerce sales grew from 4.9 billion to 12.2 billion dollars between 2011 and 2014; an increase of nearly 150% (Buvat et al., 2015).

To be continued in Part 2 and Part 3 where I address additional areas such as:

  • Strategy for Information Risk & Security
  • Strategy for Stakeholder Requirements, Testing & Training/Support
  • Project ROI and Key Success Measures
  • Strategy for Data Acquisition and Impact on Business Processes
  • Strategy for Social Media/Web Presence
  • Strategy for Organizational Change Management, Project Strategy and Complexity

Also check out The Definitive Walmart E-Commerce and Digital Strategy Post to see how Walmart is ramping up to compete with Amazon.

If you’re interested in Business Intelligence & Tableau check out my videos here: Anthony B. Smoak

References:

Boyer, J. (February, 2003). Technology Helps Stores Order Only As Much As They’ll Sell. Albany Times Union. Retrieved from Factiva

Buvat, J., Khadikar, A., KVJ, S. (2015). Walmart: Where Digital Meets Physical. Capgemini Consulting. Retrieved from https://www.capgemini-consulting.com/walmart-where-digital-meets-physical

Lohr, S. (October 2015). Walmart Takes Aim at ‘Cloud Lock-in’ Retrieved from http://bits.blogs.nytimes.com/2015/10/14/walmart-takes-aim-at-cloud-lock-in/

Lundberg. A. (July 1, 2002). Wal-Mart: IT Inside the World’s Biggest Company. CIO magazine. Retrieved from http://www.cio.com/article/2440726/it-organization/wal-mart–it-inside-the-world-s-biggest-company.html?page=2

Nash, K. (October, 2015). “Wal-Mart to Pour $2 Billion into E-Commerce Over Next Two Years.”, Dow Jones & Company, Inc. Retrieved from Factiva

Power, D. (June, 1998). WAL-MART: TECHNOLOGY PAYBACK IS IMPERATIVE. Supermarket News. Retrieved from Factiva

(ed), Alp Ustundag. ( © 2013). The value of rfid: benefits vs. costs. [Books24x7 version] Available from http://common.books24x7.com.libezproxy2.syr.edu/toc.aspx?bookid=49466.

Wailgum, T. (October 2007). How Wal-Mart Lost Its Technology Edge. Retrieved from http://www.cio.com/article/2437953/strategy/how-wal-mart-lost-its-technology-edge.html

Zetter, K. (October 13, 2009). BIG-BOX BREACH: THE INSIDE STORY OF WAL-MART’S HACKER ATTACK. Wired. Retrieved from https://www.wired.com/2009/10/walmart-hack/