For Wal-Mart, too, IT is a commodity

“I never viewed computers as anything more than necessary overhead,” Sam Walton once said. Nevertheless, after I wrote “IT Doesn’t Matter” back in 2003, critics would routinely present Wal-Mart as the killer counter example to my argument that information technology rarely provides a competitive edge anymore. Wal-Mart had famously set itself apart from its retailing rivals, IT analysts would point out, by building a lot of highly customized IT systems that its competitors were hard-pressed to match.

It was true, but it was also telling that the most prominent counter example relied on systems built years earlier, when business software was in a much earlier stage of maturation and commoditization.

Now, with commodity software greatly advanced, Wal-Mart’s custom systems have turned from advantage to disadvantage, and the IT analysts have changed their tune. As CIO magazine’s Thomas Wailgum writes in How Wal-Mart Lost Its Technology Edge:

“Wal-Mart was making their margins on sourcing and great technology systems, but everyone has got that now,” says Patricia Edwards, a portfolio manager and managing director at Wentworth, Hauser and Violich who focuses on retail … Furthermore, analysts say that Wal-Mart’s reliance on homegrown IT systems—and its conviction of their superiority—needs to change. [CIO Rollin] Ford and his team, they say, must bring in best-of-breed commercial applications, such as BI and price-optimization tools, that can help it compete with rising retail superstars such as Target, JCPenney and Tesco. “We cannot overestimate how much packaged software can help them right now,” says Paula Rosenblum, an analyst and managing partner with Retail Systems Research.

And switching from homegrown systems to packaged software is exactly what Wal-Mart is doing. The company has recently purchased off-the-shelf pricing and business-intelligence software from Oracle and HP, and on Thursday it announced it would install an SAP system for financial management and reporting. It was, as Wailgum reports, “another piece of evidence that the IT strategy of the world’s biggest retailer is shifting in favor of packaged applications.” SAP, in a press release, noted that the software would “replace some legacy systems.” That’s the way it is with IT: the custom systems that once set you apart are now the “legacy systems” that hold you back.

17 Comments

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17 Responses to For Wal-Mart, too, IT is a commodity

  1. John Proffitt

    I think you can generally match Wal-Mart’s mistake to Dell’s mistake — the belief that once you’ve developed some innovative process or technology, you’re untouchable by competitors because — shoot — they’ll never figure out how you did it, right?

    I also think you can use Apple as a contrast (or at least the recent Apple). They have made repeated leaps of innovation to stay ahead of competitors for as long as possible. I suspect Steve Jobs learned the impact of commoditization decades ago with the introduction and mass adoption of Windows. Whine, cry and even use lawyers and the courts to fight it if you like, but markets ultimately commoditize even the most innovative products and services.

    Consider the case of the iPod mini, the first small, multi-colored hard drive based iPod. It was Apple’s biggest-selling model of all time… right up to the moment Apple killed it. The mini was dumped in order to bring the iPod nano to market. Apple was willing to sacrifice lucrative sales of a perfectly good product that no competitor had yet duplicated in order to introduce the next generation, pulling further ahead. They correctly used the cash earned in one innovation cycle to pay for the next and kept product turns too tight for competitors to match.

    Wal-Mart and Dell were caught in a classic business success story. Everyone lauded them for their innovations and case study after case study was written. It felt like no one could catch them. They came to believe in their press and in their superiority and let their gains go to waste. A little sad, but very understandable.

  2. The IT curve must constantly be replenished if IT is to matter. Those that focus on doing what everyone else is doing can’t generate much value other than keeping up with the mediocre middle.

    http://smoothspan.wordpress.com/2007/10/20/the-it-productivity-curve-must-constantly-be-replenished/

  3. Andrei

    “Wal-Mart was making their margins on sourcing and great technology systems, but everyone has got that now,” says Patricia Edwards…

    Indeed. Haven’t we seen this story many times before? We can remember back to the ’80s where in IT trade publications of the era, Max Hopper’s photograph appeared routinely next to some sort of lionizing tribute about how SABRE was American’s “strategic weapon”, etc., etc. If not, then substitute Merrill Lynch’s CMA, Baxter-Travenol, Wells-Fargo, Citibank ATM network, etc., etc.

    .

    In retrospect the strategic advantages were never as large as claimed, certainly not as enduring as implied, and, as the “strategic IT” school proliferated, were increasingly dubious to begin with.

    It’s hard to separate these trends from the organizational and managerial imperative to elevate what was once the “data processing” function to whatever it has become today. Other than John Reed at Citibank, it’s hard to remember an example of meaningful elevation and transcendence of that function.

  4. It is interesting that the analysts praise Wal-Mart’s decision to adopt these packages for a few reasons. First, the pricing and BI software from Oracle and HP coupled with SAP for financial management and reporting represents an odd strategy. Oracle and SAP are at odds in the market (probably the most heated rivalry in the enterprise software business) and won’t likely provide an easy path to integration. Second, projects of this size, regardless of technology, can be “company killers”. Will the same analysts that praise this decision now be watching closely to see how these projects progress from a budgetary perspective? Will they be delivered on time with the full scope of funtionality planned at the outset? What opportunity costs will be incurred during these large implementations (e.g. Will Wal-Mart be forced to choose between important systems projects due to resource constraints during this implementation?)

    I hope that Wal-Mart is very successful with these initiatives, but these projects are non-trivial and a wholesale migration from custom to packaged software is not always the panacea that organizations are seeking.

    (Disclosure- I work for Microsoft.)

  5. The big problem I have found with packaged software like SAP is that you can not redesign your business practices around it. If you do you live in packaged software’s “box”.

    Companies write a lot of “glue” code to interface their existing systems with packaged software.

  6. SidneyV

    I have a somewhat different take. Sam Walton understood the importance of computers – they were overhead alright but was necessary overhead.

    I believe the reason Wal-mart has floundered has to do with their not evolving with the end customer, and that is only tangentially (if at all) related to IT. In that sense “IT doesn’t matter”, and their new IT strategy (by itself) is going to make little difference.

    Walton’s successors have been, in a sense, more Catholic than the Pope. They stuck to their cheap-to-the-point-of-shoddy strategy a tad too religiously, when the great man himself was pragmatic to the core. Still, Wal-mart has survived its founder and has kept going a lot, lot longer than I would have thought.

  7. Tony Healy

    This move seems to be more a matter of a dispirited IT department finally acquiescing to the eternal blandishments of big outsourcers. And for a company with Wal-Mart’s expertise, that’s a retrograde step.

    Based on the CIO magazine report, I would speculate that a successful and innovative culture was disrupted by the immediate past CIO. This was probably compounded by the fallout from mistakes in shifting to the web and web shoppers. Or those mistakes might have been a symptom of the disruption.

    I agree with your thesis that “IT doesn’t matter,” but only in the sense of organisational infrastructure.

  8. I wanted to add to Tony’s comment- I think it is spot on.

    A radical migration from custom software to packaged solutions is often a sign of cultural/people change in the IT organization more than it is a realignment with business priorities. At least that’s my experience.

    Since custom business software is about “business process”, there is an element of business change that comes with any software migration. I wonder though just how much Wal-Mart intends to change business process or if they just attempt to shoehorn existing ways of doing business into the “packaged solution”. For companies that don’t adopt significant business change with the implementation of packaged software, much of the value is often lost in the implementation.

  9. sorry Nick, I think it is a yawm of a story. Wal-Mart competitive advantage comes from its merchandsising and supply chain IT investments. It is not letting SAP or other packages there. The back office – accounting etc. is where it is adopting packages…big deal…they should have a while ago. The bigger story is 2 decades after the ERP vendors promised “wall to wall” coverage, one throat to choke so few non-mfg companies, banks, utilities, retailers etc have given up proprietary operational systems. And even in mfg companies how much custom development is going on with Java, ,net and yes even proprietary development tools like SAP’s ABAP.

  10. Since I’m quoted in this story, I thought I’d take the opportunity to respond and amplify my remarks.

    Vinnie is 100% correct. No retailer ever got a competitive advantage from the strength of its financial systems…it makes no sense whatsoever to put resources into such a mundane area. But it goes deeper than that. Wal-Mart has put a lot of its muscle and dollars into its supply chain systems (most recently RFID). Obviously, that gave them an advantage in the late 90′s. It was their core competency. But that’s no longer enough.

    I would argue that the company is not even not up to “standard” in its merchandising applications – in store segmentation, in localized assortments…and it (wisely, in my opinion) turned to Oracle’s markdown optimization program to manage its way through apparel (which the company doesn’t know much about).

    So while a radical change in philosophy of packaged vs. in-house systems often is indicative of a change in management and creates little positiive change (Home Depot under Nardelli comes to mind), it’s a sign of wisdom for a company to recognize that it has fallen behind, so that it can take steps to come up to level.

    What will Wal-Mart’s next critical core competency be? I don’t know. Right now, it sure as heck isn’t merchandising, or finance, or even in-store systems. At the moment, it seems to rely more on its sheer mass, even as it recognizes that it has to change. The company’s recent lackluster results speak for themselves.

    I really do applaud WM for looking for its next groove.

  11. dubdub

    Don’t any of you think some of walmart’s “problems” are due to its size (over 5 times the sales of favorably-compared target, over 30 times the sales of amazon), and (more importantly) recent public perception issues?

    Not to gloss over problems, but if the RFID project had worked, then we’d be hi-fiving them again, right? And Amazon.com is the quintissential example of a retailer doing things in house, right?

    So I am confused about your conclusions nick, even if I could have predicted them before reading the story. You probably should wait to see if the strategy “works” before praising it (that’s usually the M.O. of business consultants, right? :))

    Also, I think @vinnie’s comment above has alot of merit.

  12. Nick Carr

    I think it is a yawm of a story.

    As Paula notes, this is hardly just about back-office systems. Would you, Vinnie, call pricing a back-office function for a retailer? It took a while for basic retailing applications to be commoditized by vendors – big vendors go for cross-industry apps before shifting to the verticals, for obvious reasons – but now that’s happening. Vinnie’s certainly right that packaged apps are no panacea for business problems – lord knows – but the fact that the IT advantages of poster children like Wal-Mart and Dell have been neutralized by commoditization certainly underscores the evolution of IT’s role in business. It deserves more than a “yawm.”

  13. Nick Carr

    Don’t any of you think some of walmart’s “problems” are due to its size

    Sure. Not least, it’s basically run out of new territories in its home market. Still, size has for quite a while been Wal-Mart’s central competitive edge. Eventually, every sword becomes two-edged.

  14. If I read you correctly, you seem to be arguing that there is no longer a first mover advantage in I.T. systems. Hence, a better strategy would be a me-too approach after someone else has risked their business es switching over to a newer system. Large vendors can develop off-the-shelf systems quickly once another similar system has been specified and built.

    While what you say essentially applies well to any kind of information based technology, I’d argue that businesses will constantly seek to gain incremental advantage over their competitors. Take you as an example, you have risked reputation with a radical thesis. If this turns out to be accepted wisdom, it doesn’t necessarily mean that your speaker’s fees will be commoditized to a lower rate. Wink! In fact, your insights would be valued.

    Similarly, companies which have run particular technologies over a longer time frame gain deeper insight in order to move on to the next level of implementation. Not all will be winners of course, but an occassional home run will suffice.

  15. An extremely thoughtful discussion about my colleague Tom Wailgum’s story (I edited the piece). I think it’s true that many innovations eventually become commonplace—that’s why companies have to keep innovating. But there’s another question we should be interested in, too, which has to do with Wal-Mart’s meta-story.

    I think the reason that Wal-Mart’s management recognized the bang they would get from their supply chain had mostly to do with the story the company had always told about itself as a low-cost retailer. If you look at the technology timeline that accompanies Tom’s article, it’s pretty clear that almost every major breakthrough Wal-Mart made with IT supported who they believed they were. I think the significance of Wal-Mart’s decision to buy packaged software isn’t only—or primarily–that the packaged software may be just as good or better than anything they could develop in house, but that they need new IT – and fast – to tell a new story about themselves. Getting the story – the strategy – right is the big key here. I interviewed Gary Hamel recently and his argument, that managing for efficiency won’t get you competitive advantage anymore, seems apropos to me here. If efficiency is the price of entry into the marketplace now, then IT departments, like the rest of management, have to start looking elsewhere to put their companies on the map, whether or not they invent the technology that fulfills their vision.

  16. Jeff W.

    I know we’re discussing IT primarily, but what about aesthetics? Walk in to a Wal-Mart and then walk into a Target and tell me that the overall presentation of a Target or other large retailer isn’t better than Wal-Mart. Wal-Mart in comparison looks ransacked and run down. The look and quality of the merchandise at other retailers is far superior than what Wal-Mart usually offers. The shopping experience, or lack thereof, I think has been the main problem for Wal-Mart.

    I always laugh at the low price commercials that Wal-Mart runs taking about how they pass on the lower prices to the consumers. IT systems at some point can be reproduced so that advantage is out the window. I think the sheer size of Wal-Mart allowed them to push foreign companies (governments) to pay their workers a cheaper wage. Sorry for the political tangent but look at the physicality of things that Wal-Mart has vs. others retailers. Everything that Wal-Mart has, be it trucks, people, buildings, etc., so does every other retailer. When you break it all down, the fact is that Wal-Mart pays less for it’s good than other retailers, allowing greater price ranges and margins. Now other companies are catching up because they too deal with the same foreign companies/governments so now Wal-Mart’s true advantage is being eroded as well.

  17. Interesting to compare this with Edeka. http://www.heise.de/english/newsticker/news/97892/from/rss09

    The German retail space is fascinating, with very fierce competition. Grocery prices are one of the lowest in Europe.

    In terms of globalisation in retail and the use of technology, I think one could learn more from the metrogroup,Aldi,Edeka,Lidl and co than first meets the eye.

    The future store is worth a peek.

    http://www.future-store.org/servlet/PB/menu/1007466_l2_yno/index.html