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Wal-Mart — Yesteryear's GM?

Just how great is Wal-Mart's influence over the U.S. economy?

January 17, 2005

Just how great is Wal-Mart's influence over the U.S. economy?

Founded just over 40 years ago by Sam Walton and his brother Bud, Wal-Mart is today the largest profit-making enterprise in the world — with sales of a quarter of a trillion dollars and 1.4 million employees.

No company of Wal-Mart’s size and influence can long remain a truly private enterprise. By its very existence and competitive success, it rezones our cities, determines the real minimum wage, channels capital throughout the world — and conducts a kind of international diplomacy with a score of nations.

In short, the company’s management “legislates” for the rest of us key components of U.S. social and industrial policy.

The last time a U.S. corporation had such power was 50 years ago, when General Motors was the largest and most profitable U.S. corporation. GM’s sales at the time amounted to about 2% of U.S. GDP — which is just about where Wal-Mart stands today.

In its heyday — from the 1930s through the 1970s — General Motors was the largest corporation in the United States, dominating the country’s most important industry. And it was not just the largest manufacturer of cars — but also of heavy trucks, locomotives and military equipment.

It was a major player in aircraft production, in household appliances — and the GM Acceptance Corporation was by far the largest retail credit institution in the United States. Like Wal-Mart today, GM had no competition that could threaten its supremacy.

It is therefore useful to juxtapose these two corporate templates to understand how the history, economics and sociology of these giant enterprises can help us see what is uniquely transformative about Wal-Mart — and what is merely a function of its sheer size and market leverage.

Both General Motors and Wal-Mart are themselves high productivity workplaces — and both generate economies of scale that have had a substantial ripple impact throughout the rest of the economy.

They did not invent the technologies and the organizational innovations that generated this productivity dividend. Ford was more creative in the early years of the 20th century.

And Chrysler pioneered many of the innovative engineering breakthroughs we associate with the mid-20th century automobile.

Likewise, the Walton brothers took the idea of self-service from Ben Franklin, employee stock ownership from J. C. Penny, the large-purchase discount club from Price Club — and the Supercenter from the French Carrefour Markets.

But Wal-Mart — like GM — perfected, integrated and systematized technological and marketing ideas put in play by its competitors.

In doing so, both companies ratcheted up their own overall productivity — and made it impossible for any competitor to survive without emulating their respective template.

Indeed, both firms’ success had a nationwide impact. In the immediate postwar era, General Motors may well have been responsible for more than 20% of the astonishing yearly productivity gains enjoyed by U.S. manufacturing.

And in the 1990s, Wal-Mart’s capture of an every increasing share of the retail market in food and consumer durables has had a measurable impact on the $10 trillion U.S. economy. It has measurably dampened inflationary pressures, both in the boom of the late 1990s and in the less robust last few years.

The key issue, of course, is who will reap the benefits of the productivity surge generated by Wal-Mart’s organizational innovations. Will the benefits flow in disproportionate measure to the shareowners, top management, the customers, the workers — or some complex combination of all of these?

To put these issues in perspective, the General Motors experience is once again instructive. GM was not a charitable institution. It was a hard-nosed corporation that sought to insure a 20% return on shareholder investment — year in and year out.

But after 1937, GM was a unionized firm, strikes were frequent — and the organized pressure of its workers, seeking a larger share of the GM productivity dividend, was incessant.

Right after World War II, the ex-socialist leadership of the United Automobile Workers actually proposed that GM freeze the price of its cars — so as to share the post-war productivity dividend with the entire car-buying public.

To the corporation this seemed a union assault on cherished managerial prerogatives — and they took a four-month strike in 1945-46 to demonstrate their rejection of the idea.

In response to continued UAW pressure, General Motors agreed — in the landmark collective bargaining negotiations of 1948 and 1950 — that the corporation was prepared to guarantee an annual increase in the real income of its 400,000 blue collar workers, regardless of inflation, recession, or corporate profitability.

Thus, between 1947 and 1973, the real income of auto workers doubled. And because GM was the template firm of the mid-20th century, the auto industry wage pattern was quickly adopted by a large slice of all the big firms — unionized or not.

For the first and only time during the 20th century, the real income of those in the bottom half of the income distribution rose as rapidly as those in the top 10%. And given the growth of health and pension benefits, industrial workers secured a measure of life security never before enjoyed by blue collar Americans.

In contrast, Wal-Mart is a ferociously anti-union company whose wages and benefits are rigorously controlled and increasingly emulated by all those firms within Wal-Mart’s competitive reach.

Wal-Mart’s prospective entry into the California grocery market was largely responsible for the length and bitter outcome of the supermarket strike in southern California in December 2003.

Wal-Mart exerts a powerful downward pressure upon both the wages it pays directly and those of its competitors — current and prospective. It is therefore the most important social policy “legislator” in the United States today.

And if one compares the internal job structure at Wal-Mart with that which union and management put in place at GM during its mid-20th century heyday, one finds a radical transformation of rewards, incentives and values.

GM workers were often lifetime employees and factory turnover was exceedingly low. These were the best jobs around — and they were jobs that rewarded longevity. At Wal-Mart, in contrast, employee turnover often approaches 100%.

GM and Wal-Mart also generated extraordinarily divergent pay hierarchies. Factory supervisors at GM — hard-driving men in charge of between 2,000 and 3,000 workers — took home about five times as much as an ordinary production employee.

At Wal-Mart, district store managers — in charge of about the same number of workers — earn more than ten times that of the average full-time hourly employee.

And when one calculates the ratio of CEO compensation to that of the journeyman or female employee, the disparity in pay becomes even greater at these two template corporations.

Charles E. Wilson — who was one of the best paid executives of his era — earned about 135 times more than an assembly line worker in 1950. H. Lee Scott, the current Wal-Mart CEO, takes home about 1,450 times of what his full-time hourly employees make.

And finally, there is politics. GM could have put Chrysler into bankruptcy and pushed Ford to the wall had it chosen to expand its market share beyond the 50% it enjoyed during the years after World War II.

But it correctly feared federal antitrust action had it chosen to pursue such an overtly aggressive pricing strategy. Instead, GM maintained a price umbrella under which smaller competitors might shelter and auto workers win higher take home pay.

Wal-Mart’s competitive strategy has been just the opposite. And not unexpectedly, it has generated a howl of outrage from unions, small businesses — and those communities that see the company’s “everyday low prices” as a threat to main street vibrancy.

Inglewood’s April 2004 defeat of the municipal referendum facilitating a new Wal-Mart supercenter may well signal the start of an era in which Wal-Mart’s model is subject to much greater political challenge and constraint.

Wal-Mart’s major competitive problems now arise on Capital Hill and from the capital cities of so many U.S. states.

Professor Lichtenstein is the author of the upcoming “Wal-Mart: Template for 21st Century Capitalism?”, on which this feature is based.