Monday, May 11, 2009

Wal-Mart and San Miguel responding to global economy?

The Wal-Mart story is a microcosm of how the global economy plays out.

Blue chip Western companies, not unlike the Ayala group of companies, are committed to progressive business and management practices. Yet, it took a company in the middle of nowhere from a very poor, conservative, Midwestern state to force Western businesses to update their practices.

The Proctor & Gambles of the world were caught flatfooted when Wal-Mart started dictating terms and conditions of doing business with them. Despite the history of progressive management education and training in these companies and cutting-edge innovation and technology, they woke up one day to realize that they were not geared to deal with the new Wal-Mart – their sales force were not equipped to negotiate with Wal-Mart buyers; as bad if not worse were their infrastructure, systems and processes especially sales forecasting and supply chain – production planning, materials, warehousing and logistics management.

How can these pillars of Western business not foresee what Wal-Mart saw much earlier?

Paraphrasing George Soros (in reflecting the influence of Karl Popper, Aristotle and his own life experience): our cognitive function cannot be divorced from our own view of what we consider reality such that our understanding is not a pure outcome of our thinking but colored by our culture, ideology and other biases.

In particular, Wal-Mart saw that their margins were at risk as they faced greater competition from other retailers; and so they had to reassess their business model, beliefs and practices. Early on they assumed that economies of scale were the key to their success. But retailing is not a high-value adding (essentially a brick-and-mortar and no R&D) business such that their margins were very thin; while a manufacturer (given greater value-adding elements) is able to generate double-digit profit margins north of 10% - retailers net a much lower 3% to 4%.

Wal-Mart did not have to go very far to seek models to adopt given the learnings from the challenge the U.S. faced with Japan, Inc. – that threatened the profitability of Corporate America. From Japan they “shamelessly copied just-in-time” inventory management principles and from the U.S. (and later Germany) they acquired state-of-the-art computing and communicating technology; while still pushing economies of scale but in a more aggressive manner – they put together a plan to rapidly build more stores across the U.S. and in numerous strategic international locations.

And then they announced to the manufacturers that henceforth there would be new rules that they had to meet if they expected Wal-Mart to continue to carry their products – Wal-Mart accounting for upwards of 10% of their revenues.

Here was where the manufacturers were caught off-guard: Their sales force’s skills-set was based on relationship selling; while logistics was driven by traditional inventory practices, e.g., safety stock levels.

Wal-Mart buyers could run rings around the sales managers of the manufacturers. To begin with, they were savvy MBAs and financial analyst-types who were writing up orders based on: “just-in-time” delivery (so that they would not be carrying safety stocks and hence reduce inventory and improve working capital), shelf-space allocation by market shares of categories/brands/SKUs as well as planned in-store promotion programs (designed to cover any margins of error in their forecasting and/or realize incremental revenues). Such a bias for driving revenues may not be inherent in the public sector but given our negative balance of trade and if we are to become a developed country, do we need to put our collective brainpower behind gearing up to drive export revenues? Both Thailand’s and Malaysia’s exports alone are bigger than our total GDP – this is where we need to invoke and rally national pride; but we can’t go it alone with our limited resources; we need to partner with the right global players?

The Wal-Mart buyers were no longer predisposed to oblige and indulge in such niceties inherent in relationship selling as having coffee or a meal or even a night out with the manufacturers. The manufacturers were blown-away! They had to say yes to most everything Wal-Mart demanded or lose the business.

The manufacturers had to quickly do their homework and then in rapid succession: developed the appropriate training and education programs, installed enterprise-wide information systems and linked their order-processing to the Wal-Mart system (i.e., integrated checkout scanners and warehouse network) which in turned drove their own inventory management and production planning processes.

The result of all these combined efforts and on-line processes was to reinforce Wal-Mart’s “everyday low-price” pitch while the manufacturers similarly achieved greater efficiency, productivity and profitability – and at the macro-level they held inflation at bay thus fueling consumption and higher GDP.

The rest of the retail industry including those outside the U.S. (Metro/Macro, Carrefour, etc.) did the same thing thus elevating competition to an even higher level – and challenging human capacity once more.

How will a retailer in a smaller market like the Philippines deal with this development? As we now know, a couple of our taipans partnered with these global retailers so that they co-own the business in the Philippines. Another opportunity they pursued was to partner with these global retailers as they set up shops in other countries. “Partnering” is today’s mantra as opposed to “monopolizing” (a throwback to our cacique history), e.g., San Miguel very recently sold a major stake in the company to Kirin to diversify and optimize its investment portfolio; and generate greater profit potential – that would reflect a bigger dent on our GDP. (It appears San Miguel is not waiting for the global economic turnaround and instead is gearing up to exploit the moment – mirroring the investment philosophy of Warren Buffett.)

The Wal-Mart story is a microcosm of how economies of scale drive businesses to go global and how smaller businesses and countries can piggyback on and partake in the benefits/positives of the global economy and engender a healthy GDP.

In the same manner that a typical negotiation does not have to be a win-lose proposition, leveraging the global economy does not have to be a zero-sum game. (But there is anecdotal if not empirical evidence that countries with hierarchical cultures see things otherwise, i.e., the “master” will always get the better of the “servant” especially when transparency is the exception than the rule. Yet, China and the Asian tigers have overcome their cultural and ideological baggage in pursuit of free-market economics.)

And as importantly even blue chip institutions (or the Proctor & Gambles of the world – progressive, cutting-edge and innovative) can be overtaken by the rapid and accelerating generation of new thinking, knowledge and practices in today’s age – of Gmail,, iPods and Black Berrys.

At the country level, invoking ideology that shunt “imperialism” or multinationals or foreign investors will not stop the speed and progress of today’s cyber world. At best it will stunt the progress of economies like the Philippines, i.e., limiting our options means establishing an economic model that will be characterized by sub-optimization – sub-optimized: capital formation, investment, market, technology, efficiency, productivity and competitiveness; and in the final analysis, sub-optimized GDP growth yielding more not less poverty. And that is without factoring corruption yet; and when combined equates to a perfect storm?

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