Wal-Mart - A Case Study in Managing Technical Transitions WAL-MART - A Case Study in Managing Technical Transitions Managing Technical Transitions Prof. Michael Lawless February 24, 2001 Prepared by: Andrew Bender Ann Howell Amy Lavin David Tor gerson Founded in 1962 by Sam Walton, Wal-Mart followed an amazing pattern of success and growth, eclipsing all other U. S. department store retailers by the early 1990's.

In early spring 2001, Wal-Mart enjoyed a huge market capitalization of over $230 B, which was down from highs of nearly $300 B in early 2000. Over the last year, however, Wal-Mart had suffered a number of failures in its Internet-based operations, as it tried feverishly, along with many other traditionally "bricks-and-mortar" companies, to make a transition to the Internet. As much of the commotion in the markets relative to the Internet subsided due to a slowing economy and a number of high-profile "dot-com" failures, Wal-Mart continued to experiment with it's Internet presence and corporate strategy. In this paper, we discuss Wal-Mart and its technical transition to the Internet. First, we examine the company from a value chain and core competency perspective, to gain insight on what value the company brings to the table, both in its traditional and Internet operations.

We give a synopsis of Wal-Mart's recent and current online philosophies, and then turn to Wal-Mart's strategy as it relates to the transition. Finally, we provide an analysis of Wal-Mart's prospects and recommendations for the future. Sources of Value Wal-Mart had always invested heavily in infrastructure. They were among the first to use point-of-sale Uniform Product Codes (UPC) scanning, and intra-store radio frequency (RF) transmission of product UPC and pricing information between central store inventory systems and personnel with scanners on the store shelves. However, their most valuable infrastructure investments were made at a significantly higher level.

A satellite system connecting all stores was initially installed in 1983, and grew into a complex communication network that included all stores, headquarters, and distribution centers, as well suppliers. This system facilitated a modified just-in-time process of inventory control, a feat virtually unheard of in general merchandise retailing. Put simply, as each store sells an item, a message is automatically sent to the supplier of that item, who then knows to include a replacement in the next shipment (usually that day) to the nearest distribution hub. This degree of connectivity allows rapid response to inventory needs, and reduces dramatically the amount of inventory required. A second area of major investment was in distribution technology. Wal-Mart established a network of innovative hubs which used "cross-docking" to minimize distribution center inventory and to facilitate the need-based inventory delivery system enabled by the satellite network.

In this model, as shipments arrive at the warehouse, merchandise is moved directly to the trucks carrying the outbound shipments to specific stores. In many cases, the same trucks can even be used for inbound and outbound shipments, including those carrying new merchandise to stores and those carrying returned, outdated, or unneeded merchandise from stores, thus minimizing round-trip shipping costs. Wal-Mart operates as an aggregator, distributor, and retailer of consumer goods. Due in part to its size, to the connectivity involved in its operations, and to the zest with which it has traditionally negotiated supplier contracts, Wal-Mart has established itself in a key position in the value chain of its suppliers.

It is consumer goods giant Procter & Gamble's largest customer, and holds a significant power position relative to other smaller suppliers. This position has enabled Wal-Mart to obtain superior price breaks relative to the competition on the products it carries. It's size has obviated the need for separate distributors or wholesalers in the value chain. Coupled with the efficiency of its distribution network and store model, Wal-Mart has achieved a well-entrenched position in the value chain of its customers as well - that of the lowest cost consumer goods retailer. Hence, the value that Wal-Mart provides is two-fold. First, it provides value to its suppliers by operating as a large, relatively stable, nearly omnipresent channel for sales of goods, which provides rapid feedback on unit sales and localized demand.

Secondly, and arguably more importantly, Wal-Mart provides value to customers by offering aggregation of a wide variety of consumer goods in a single location, and selling those goods at the lowest prices. With respect to traditional operations, Wal-Mart continues to enjoy success. Despite the emergence of other bricks-and-mortar competitors such as Target, Wal-Mart's cost position and relationships with suppliers still differentiate it from the competition. It's value proposition continues to be successful, and it remains a darling of Wall Street analysts.

Finally, as the fervor over business-destroying dot-com ventures wanes, Wal-Mart continues to show a high level of durability potential in it's traditional operations. Selected financial information for Wal-Mart is provide in Exhibits 1-3. Competencies With an eye toward the online environment, it is useful to examine the competencies that Wal-Mart possesses in its current operations. It has been theorized that companies deliver superior customer value by performing exceptionally well in one or more of three areas, Operational Excellence, Customer Intimacy, and Product Leadership[1]. Based on the above discussion, it is relatively easy to theorize that Wal-Mart's primary strengths lie in the area of Operational Excellence. Specifically, Wal-Mart's ability to coordinate a complex information management and distribution network, and to efficiently manage supplier relationships are the cornerstones of its success.

What isn't as obvious is how Wal-Mart's competencies translate to an online environment. Clearly this is highly dependent on the type of online strategy Wal-Mart pursues. We will discuss Wal-Mart's online strategy in detail later in this paper. However, it is useful to examine some common areas in which Wal-Mart might excel or face challenges. For many companies, the thrust of an online presence is perceived to lie in the business to consumer (B 2 C) arena.

As shown in the operations of pure play online retailers such as Amazon. com, or clicks-n-mortar companies like Toys 'R Us, one of the keys to success in the realm of B 2 C online retailing is the ability to efficiently fulfill large quantities of small orders. A highly efficient back-end fulfillment system is therefore a key competency that large scale online retailers must master. On the surface, it would seem that Wal-Mart, with its heavy investment in back-end infrastructure, would excel in this area. However, we note that a key difference in Wal-Mart's systems is that they are currently designed to optimize large shipments of varied products to relatively few locations through relatively proprietary transportation networks, not small shipments to a large number of public locations. Could Wal-Mart's systems be expanded or adapted to handle such shipments efficiently? Perhaps.

But, we see it as potentially being a significant challenge. A second broad area of expertise linked to success in the B 2 C arena is a the customer interface: the degree of customer intimacy, community building, and one-to-one marketing. While it can be argued that Wal-Mart has successfully created a "community feel" within its bricks-and-mortar stores, and by virtue of their omnipresence and comprehensive information management systems have garnered superior knowledge of consumer purchasing habits, it would be a stretch to state that Wal-Mart excels at customer intimacy. It is therefore uncertain as to what degree Wal-Mart's rather macroscopic knowledge of relationships with customers is transferable to an online B 2 C environment. It should be noted that there is one aspect of B 2 C retailing advantage which Wal-Mart clearly exemplifies in its traditional operations: that of beating competitors on price. Wal-Mart's efficiency and relationships with suppliers represent a competency that could potential transfer very well to online operations.

The degree to which Wal-Mart's cost, and hence price, advantage can be leveraged on the internet will depend heavily on how parallel the online cost structure turns out to be, with key areas of concern likely to be distribution and shipping costs. With respect to the business-to-business (B 2 B) online environment, many companies are using the Internet as an inexpensive medium over which to efficiently link entities in their respective value chains. Suppliers, distributors, wholesalers can relatively easily be connected. Exchanges can be created for the buying and selling of commodities, supplies, and other goods or services. The list of applications goes on. Wal-Mart clearly has a competency in the management of information and communication among all upstream parties in its value chain.

Currently, this expertise is played out in a set of interwoven proprietary systems and networks. It is possible that value could be garnered by Wal-Mart in the B 2 B environment should the Internet be used as a logical migration destination for current systems, or via the generation of enhanced systems which improve upon their proprietary predecessors. However, the entrenchment of current systems could prove as much a hindrance to Wal-Mart in a transition to the Internet as it is a competency in their current operations. Again, the degree to which this competency is transferable is highly dependent on the strategy Wal-Mart elects to pursue Thus far, we have attempted to outline Wal-Mart's position and value proposition, as well as the set of competencies that have made it successful. We have noted the opportunities and challenges those competencies present relative to a transition to the Internet.

We now look at Wal-Mart's motivation and strategy for moving to the Internet and then we examine Wal-Mart's real actions and Internet operations to date. Finally we close with a summary of key issues Wal-Mart must considered going forward. The Strategy for Walmart. com Wal-Mart looked to venture on-line as a means to continue delivering on its promise to customers, "a wide assortment of good quality merchandise; the lowest possible prices; guaranteed satisfaction with what you buy; friendly, knowledgeable service; convenient hours; free parking; a pleasant shopping experience." While the Internet can be used to achieve many of these objectives, initially Wal-Mart hastily overlooked two key things: the value of the Internet as it relates to Wal-Mart's traditional business and the ability of the Internet to leverage Wal-Mart's core strengths. These factors have become increasingly evident over the past three years. Wal-Mart's traditional business was based on bringing "contemporary retail shopping advantages to small-town America." Since the beginning of Wal-Mart.

com, people have asked how Wal-Mart would successfully transition its customer base to e-commerce. The paradox being that many present customers may not use the Internet while savvy Internet users may not be Wal-Mart shoppers. In line with its mantra, Wal-Mart sought to bridge the digital divide by extending reasonably priced Internet access to rural communities. Consequently, Wal-Mart forged a deal with America Online to distribute AOL CD ROM's and disks in the Wal-Mart stores. This would enable the majority of current customers to get on-line and ultimately shop at Wal-Mart. com.

Unfortunately, AOL and Wal-Mart have not been able to roll-this program out in the targeted timeframe. Further, while this effort serves to extend Internet access to a broader population it does not help those individuals / families who do not own computers. As mentioned in the first section, Wal-Mart has enjoyed technological leadership as one of its core strengths and sources of competitive advantage. In 1996, it seemed logical for Wal-Mart to establish an early presence on the Web, the next new technological advancement. With that, Wal-Mart also developed the most secure technology for managing on-line payments and forged a partnership with MasterCard to offer digital certificates to cardholders. Unfortunately, as mentioned earlier, the web site was poorly designed, difficult to use, and did not take advantage of the information-value of the Internet and the ability to have a one-to-one customer relationship.

Likewise, Wal-Mart saw the Internet as a means to conveniently deliver a wide assortment of goods at low prices. The complexity arose when Wal-Mart recognized the difficulty of translating assortment, convenience, and low prices to the Internet. On-line shoppers perceive convenience as the ease and speed with which one can find what they are looking for. Assortment is only valuable to on-line shoppers if it is easily navigable and accessible.

To-date the Wal-Mart. com web site has been neither. Moving to the Internet Wal-Mart began its love-hate relationship with the Internet in July of 1996 when it launched a bare bones site targeted at the online B 2 C retail market. At that time, the company did little with the site, as they waited for more of their customers to get on-line. The site operations were conducted from the corporate headquarters in Bentonville, Arkansas.

Competitive pressures to beef-up the site didn't arise until 1999, when they began reworking the site to prepare for the holiday season. However, when the holiday season arrived, the company had trouble delivering items on time. As early as December 10 th, Wal-Mart couldn't guarantee that purchases from the web site would be delivered by Christmas. Thus, in January of 2000, Wal-Mart announced yet another makeover of their site. The new site would include everyday household items as well as special features such as a travel center, which offered airline tickets and hotel reservations. Reviews of Wal-Mart's new site were lack-luster, siting difficult navigation and search capabilities.

In September of 2000, the site was ranked fourth among department stores in the number of unique visitors, behind J. C. Penny, Sears and Target. [2] It appears Wal-Mart knew all along that the website was filled with problems which is why Wal-Mart and Accel announced the break-out of Wal-Mart. com just days after the site re-launched for the third time in early 2000. This division would operate as a co-owned independent company located in Silicon Valley, isolated from Wal-Mart's headquarters in Arkansas.

This entity would have a separate board and management team, which would be hired in the following months. Additionally, two outside fulfillment centers would handle shipping. While full details of the financing and ownership arrangement haven't been disclosed, it is known that Wal-Mart owns at least an 80% stake, with Accel making up the remainder. Fortunately Wal-Mart's pockets have been deep enough to afford experimentation with the right mix of bricks-and-clicks. The company failed to achieve success with a fully integrated structure, and therefore made the decision to separate operations. Reports indicated that Wal-Mart had been contemplating a partnership for some time before deciding to partner with Accel.

Wal-Mart had strategically waited to find a partner that could bring key relationships to help them thrive in the Internet community, and lend expertise in how to operate and recruit in a talent-drained industry. Accel also demonstrated a history of longer-term business relationships, which was attractive to Wal-Mart. The benefit to earlier failed attempts at the Internet was the acknowledgement of the need to have a separate culture in order to get business done in the warp-speed of Silicon Valley. In anticipation of a culture-clash, Accel addressed key points, like going public and offering employees stock options, well in advance of the deal being announced. The ability to attract high-quality management was essential to Wal-Mart. Wal-Mart's "good-old-boy" executives understood the importance of luring talent with oodles of stock options and found that by separating the companies an incentive structure could be formed that included stock options, with the intent to take the company public at some point.

Another overlooked reason for spinning off Internet operations into a separate company was the avoidance of sales tax -- a key factor for price-sensitive on-line shoppers. Because Wal-Mart had physical presence in all 50 states, all Internet customers would have to pay sales tax. By spinning off the Internet operations, Wal-Mart. com could avoid sales tax in states in the 47 states where the dot-com doesn't operate. In the spring of 2000, Jeanne Jackson joined Wal-Mart. com as the CEO.

Jackson came from the Gap, where she transformed Banana Republic in to a chic, urbane shopping destination, increasing sales from $750 million to $1. 5 billion in four years. Jackson was chosen for the position because of her strong background in traditional retailing and her leadership of the Gap's Direct division, which included managing its Internet sites. Because Wal-Mart did not have direct sales expertise, launching a Web store required creating a new direct-marketing infrastructure and developing a new set of management skills. Jackson provided this link.

Since arriving at Wal-Mart. com, Jackson has slimmed down product offerings and re-vamped the site, which re-launched in early November of 2000, just in time for the holiday season. Under Jackson's leadership, Wal-Mart. com has purchased the assets of several smaller e-tailers and formed partnerships with Time Warner and RealNetworks to offer proprietary music events via the web. Jackson's stated strategy for the site is to start with a reliable, easy-to-use web site which both get back to Wal-Mart's traditional strengths. In addition to stripping away the bells and whistles from the site, Jackson also stripped away products that made no sense on the web (i.

e. $0. 25 plastic cups) and expanded categories that complemented store offerings, such as patio furniture. Ultimately, Jackson would like to have shipping and customer-service in-house, and to fully-integrate the stores and the web. This last item will be essential in achieving the right mix of bricks-and-clicks to fully service the Wal-Mart customer. Currently Wal-Mart.

com is working on the ability to offer online listings of real-time inventories in individual stores. This would allow customers to decide whether to head to the store, or to buy the item on-line. This type of seamless integration could determine the success of Wal-Mart's on-line presence by leveraging the strengths of physical and on-line stores to offer a full-service capability to customers. As discussed earlier, the Wal-Mart customer may not have been the ideal Internet shopper three years prior. However, as the digital divide narrows, Wal-Mart may find many customer service benefits to the web, which would bolster their already strong customer service reputation. In analysis of Wal-Mart's decision to take Internet operations out-of-house, we refer to the article entitled "Get the Right Mix of Bricks & Clicks." Components of the seamless strategy and joint venture strategy make sense for Wal-Mart.

In support of their early decision to integrate operations, Wal-Mart's brand and customers lend well to an integrated platform. Wal-Mart's brand needed no introduction s, and they could advertise the web site throughout their numerous stores nationwide. Additionally, the brand is known for everyday low-prices, which fits well with Internet shoppers' priorities. Opposition to the seamless strategy lies in Wal-Mart's lack of direct sales experience and fulfillment capabilities.

Additionally, the importance of benefits derived from seamless customer service may have been mitigated for Wal-Mart at the time, as many felt the Wal-Mart customer profile was not web-savvy. Real Results Perhaps the transition difficulty in the early years rested in the area of Wal-Mart's technical prowess. As discussed previously, one of Wal-Mart's core competencies is its operational ability to streamline the supply chain through cross-docking inventory systems and efficient means of communication through technology. While Wal-Mart has achieved technology efficiency in its supply chain, shipping to a store is a much different game than shipping direct to a customer. In this case, the web presented much more than just a technological advancement.

Perhaps the secret to the web relied more on the ability to use the channel to reach customers to develop an efficient relationship. Wal-Mart had an expertise in operations, not in one-to-one customer relationships. Finally, the definition of "low price" is more tied to value on the Internet. Value includes the information available to an on-line shopper, convenience and ease of purchasing items, and actually obtaining those goods as a result. In reality, leading web sites like Amazon.

com do not offer the lowest price. Instead, they offer the best value. They make "the right product available at the right time in the right place." Customers are willing to pay a small premium for that convenience. Additionally, low-priced goods on-line typically net out to be of equal or higher price once shipping is included. Wal-Mart may not be able to successfully offer the lowest on-line price as it incurs added costs through direct marketing and delivery to customers.

Another asset has driven Wal-Mart's growth: a friendly shopping environment. It is important to assess whether this strategic advantage easily translates to an Internet environment. While an easy-to-use site makes a shopping experience more pleasant, it doesn't necessarily equate to a smiling salesperson helping you shop. Wal-Mart also forgot to capitalize on one of its greatest strengths in the traditional, physical world. Wal-Mart's wide aisles with a multitude of shelf facings have enabled Wal-Mart to increase sales per store visit simply by suggesting products to shoppers.

Wal-Mart has taken advantage of the tendency to impulse shop. Wal-Mart has yet to translate this ability into the virtual world. What's Next Although Wal-Mart appears on the right track with its partnership with Accel and the creation of Wal-Mart. com, its responsibility to manage the technical transition has only begun. Wal-Mart and Wal-Mart. com must create a plan to both monitor internal operations and technological advances.

For Wal-Mart, it appears that a separate company is the right option based on the aforementioned analysis, however, this may not always be true. Most analysts agree that the role of the Internet is in its nascent stages, and will continue to develop over the next few years. With this in mind, Wal-Mart must monitor the progress of its company and determine if there is an advantage, whether from a financial, managerial or even marketing standpoint, that would favor integration. Similarly, with the rapid change in technology effecting customer relationships, Wal-Mart and Wal-Mart.

com must institutionalize their monitoring of developments. Rather than jumping on the Internet bandwagon, Wal-Mart must learn from its mistakes in this case and keep an eye out for future disruptive technologies. As many cases show, a company's strength can quickly become a competency trap. In order to help prevent this, Wal-Mart and Wal-Mart. com must create incentives for managers at both organizations to follow technological developments. Managers should focus on more than simple NPV and DCF analysis and factor in some benefit of being a part of the technology.

The introduction of real options could potentially solve this problem. Although it may be difficult to implement at present, keeping it in mind in going through project decision analysis will benefit Wal-Mart. There are three unique ways for Wal-Mart to access disruptive industry changes: partnerships with third parties (like the Accel deal), the acquisition of companies with complementary technologies, or through internal development. Wal-Mart.

com can become a breeding ground for technological and managerial innovation. Since Wal-Mart is a well-established firm, it requires large scale projects with high ROI's. This characteristic may prevent adaptation and adoption. In contrast, Wal-Mart. com will be smaller in scope and potential projects, making it easier to experiment with new means of serving the customer. Regardless, a system of knowledge management must be created to allow the two companies to share innovations and great ideas.

Whether these systems are institutionalized (ex - group of Wal-Mart and Wal-Mart. com people who meet semi-regularly) or informal (ex - Wal-Mart encourages people to meet cross-company for events or discussions), the management of both sides must explicitly support the sharing of information. Clearly this integration is where the true efficiencies can be realized. As evidenced by the lack of profitability in the pure-play e-tailing sector, Wal-Mart's best bet for return on Wal-Mart. com is to leverage efficiencies between the two organizations.

With the establishment of a well-functioning Internet operation, Wal-Mart can also begin to examine its customer base more intimately. Based on new abilities to tailor offerings under Customer Relationship Management (CRM) theory, Wal-Mart can start differentiating its customers and customizing its offerings to them. For example, there may be some customers who want to shop exclusively through the web and others who will use a combination of web and store shopping. For each of these customers there is unique value that Wal-Mart brings. Wal-Mart must gather its information about its customers and then interact with them further to deliver an end product that provides the most value. In conclusion, Wal-Mart appears to be in the position to finally manage the technical transitions related to the Internet.

Through its partnership with Accel and its creation of a separate entity it is on track to begin to exploit the Internet to its benefit. Wal-Mart must learn from its mistakes during this period and create systems to manage future technical transitions. Fortunately, the size of Wal-Mart's pockets allow for these mistakes. In fact, the capital support could even facilitate more flexibility with experimentation, which could greatly increase its competitive position. Wal-Mart. com can still enjoy the benefits of purchasing leverage available to the parent company, as well as the brand recognition and advertising opportunities.

Wal-Mart must find the right set of incentives and dialogue between the two companies to provide the customers with an integrated full-service offering. Once this equilibrium is reached, hopefully Wal-Mart will begin to fully appreciate the synergies of the Internet. Exhibit 1 WAL-MART STORES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in millions) ASSETS October 31, January 31, 2000 2000 (Unaudited) ( Note) Cash and cash equivalents $ 1, 311 $ 1, 856 Receivables 1, 468 1, 341 Inventories 24, 975 19, 793 Prepaid expenses and other 1, 675 1, 366 Total current assets 29, 429 24, 356 Property, plant and equipment, at cost 45, 833 41, 063 Less accumulated depreciation 9, 619 8, 224 Net property, plant and equipment 36, 214 32, 839 Property under capital leases 4, 385 4, 285 Less accumulated amortization 1, 273 1, 155 Net property under capital leases 3, 112 3, 130 Net goodwill and other acquired 8, 994 9, 392 intangible assets Other assets and deferred charges 1, 302 632 Total assets $ 79, 051 $ 70, 349 LIABILITIES AND SHAREHOLDERS' EQUITY Commercial paper $ 5, 751 $ 3, 323 Accounts payable 15, 872 13, 105 Accrued liabilities 6, 373 6, 161 Other current liabilities 3, 470 3, 214 Total current liabilities 31, 466 25, 803 Long-term debt 13, 412 13, 672 Long-term obligations under capital 2, 973 3, 002 Leases Deferred income taxes and other 884 759 Minority interest 1, 082 1, 279 Common stock and capital in excess of par 1, 736 1, 160 Value Retained earnings 28, 433 25, 129 Other accumulated comprehensive income (935) (455) Total shareholders' equity 29, 234 25, 834 Total liabilities and shareholders' $ 79, 051 $ 70, 349 Equity Exhibit 2 WAL-MART STORES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Amounts in millions except per share data) Three Months Ended Nine Months Ended October 31, October 31, 2000 1999 2000 1999 Revenues: Net sales $ 45, 676 $ 40, 432 $ 134, 773 $ 113, 619 Other income - net 505 466 1, 443 1, 322 46, 181 40, 898 136, 216 114, 941 Costs and expenses: Cost of s 35, 694 31, 606 105, 403 88, 970 Operating, selling and general administrative expenses 7, 918 6, 907 22, 862 19, 368 Interest costs: Debt 307 251 842 502 Capital leases 68 66 206 197 43, 987 38, 830 129, 313 109, 037 Income before income taxes, minority 2, 194 2, 068 6, 903 5, 904 interest, equity in unconsolidated subsidiaries and cumulative effect of accounting change Provision for income taxes 807 757 2, 540 2, 161 Income before minority in tere 1, 387 1, 311 4, 363 3, 743 equity in unconsolidated subsidiaries and cumulative effect of accounting change Minority interest and equity (18) (17) (72) (84) unconsolidated subsidiaries Income before cumulative effect of 1, 369 1, 294 4, 291 3, 659 accounting change Cumulative effect of accounting - - - (198) change, net of tax benefit of $119 Net income $ 1, 369 $ 1, 294 $ 4, 291 $ 3, 461 Net income per common share: Basic net income per common share Income before cumulative effect $ 0.

31 $ 0. 29 $ 0. 96 $ 0. 82 of accounting change Cumulative effect of accounting - - - (0. 04) change, net of tax Net income per common share $ 0. 31 $ 0.

29 $ 0. 96 $ 0. 78 Average number of common shares 4, 468 4, 454 4, 463 4, 451 Dilutive net income per common share Income before cumulative effect $ 0. 31 $ 0. 29 $ 0. 96 $ 0.

82 of accounting change Cumulative effect of accounts - - - (0. 04) change, net of tax Net income per common share $ 0. 31 $ 0. 29 $ 0.

96 $ 0. 77 Average number of common shares 4, 487 4, 475 4, 484 4, 473 Dividends per share $0. 0600 $ 0. 0500 $ 0. 1800 $ 0. 1500 Exhibit 3 WAL-MART STORES, INC.

AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in millions) Nine Months Ended October 31, 2000 1999 Cash flows from operating activities: Net income $ 4, 291 $ 3, 461 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2, 014 1, 612 Cumulative effect of accounting change (net of tax) - 198 Increase in inventories (5, 315) (4, 621) Increase in accounts payable 3, 007 2, 699 Other (184) 412 Net cash provided by operating activities 3, 813 3, 761 Cash flows from investing activities: Payments for property, plant & equipment (5, 846) (4, 013) Investment in international operations (net of cash (617) (10, 653) acquired, $195 million in 1999) Other investing activities 53 (179) Net cash used in investing activities (6, 410) (14, 845) Cash flows from financing activities: Increase in commercial paper 2, 441 6, 709 Proceeds from issuance of long-term debt 1, 523 5, 755 Dividends paid (802) (668) Payment of long-term debt (1, 292) (838) Purchase of Company stock (193) (101) Proceeds from issuance of common stock 582 - Other financing activities (207) (217) Net cash provided by financing activities 2, 052 10, 640 Net decrease in cash and cash equivalents (545) (444) Cash and cash equivalents at beginning of year 1, 856 1, 879 Cash and cash equivalents at end of period $ 1, 311 $ 1, 435 Supplemental disclosure of cash flow information: Income taxes paid $ 2, 588 $ 1, 895 Interest paid 1, 123 614 ASDA acquisition cost satisfied with Wal-Mart stock - 175 Capital lease obligations incurred 254 266 Property, plant and equipment acquired with debt - 65 Resources: Associated Press Newswires. "Revamped Wal-Mart Site Runs Into Glitches," December 5, 2000. Business Week. "Why Banana Republic's Star Jumped to Wal-Mart" November 6, 2000. BusinessWeek Online. "Will Wal-Mart.

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