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Troubles at Wal-Mart, IBM and the New American Century

By Peter Morici
web posted October 26, 2015

With Wal-Mart sales and profits falling, pundits are asking if the economy is again headed down. Hardly, like IBM and other business icons in trouble, the Arkansas retailer is simply being squeezed by better competitors—and mostly Americans—who herald a new age of American innovation.

Wal-Mart's recipe for success was simple. Through a detailed knowledge of supplier costs, disciplined supply chain management and low wages for store personnel it bargained hard with manufacturers and delivered goods at the lowest prices.

Unfortunately, its methods were hardly occult and others like Dollar General and Target caught on, undermining the Arkansas behemoth's competitive edge. Moreover, along with other big employers like McDonald's, Wal-Mart is under increasing social political pressure to pay workers more.

Wal-Mart attributes 75 percent of its drop in projected earnings to raising entry level wages to $9 an hour, but employers don't get much paying a single mom so little. Shoppers complain its stores are unfriendly, messy and often poorly stocked.

Other bargain retailers are suffering a similar malaise, because millennials—and older folks willing to change buying habits—can get better products, cheaper on-line.

For $99 a year, Amazon Prime provides prime-time TV and free shipping directly from the folks that make products. That virtual marketplace offers more choice, competition that drives down prices, and cuts out altogether the retail supply chain—shipping to warehouses and stores, and retailers inventory carrying costs. That drives consumer prices to their lowest possible level.

Brick and mortar is not going away but simply when consumers know exactly what they want they can save even more by avoiding the cost and pain of negotiating Wal-Mart's congested parking lots and "courteous" employees.

Alas, much the same is happening over at IBM.

The tech giant's competitive advantage was in helping moderate-sized and large companies manage on-site computing, software and related services—and then using the resulting access to hawk its mainframes, software and businesses services, such as Lotus Notes email and artificial intelligence systems.

Unfortunately for IBM and traditional rivals Hewlett-Packard, Dell and Oracle, businesses large and small can rent or lease computer services more cheaply on "the cloud"—on-line, just like discount granola bars.

Amazon Web Services leads by offering 10-times the cloud computing capacity as the next 14 largest rivals combined and boasts clients like General Electric, BMW and Capital One.

AWS is building a marketplace for software and services from a wide range of suppliers—with obvious advantages over an IBM consultant who has an interest in hawking Big Blue's offerings.

Many other firms like Juniper Networks, Equinix and Red Hat are also offer computing power, software and other services on the web.

Both Wal-Mart and IBM are moving what they do to the web and cloud but both have CEOs more comfortable with another age and executives who feel entitlement to out-sized compensation their revenue and earnings trends indicate they hardly deserve.

The good news is that so many of the leaders in e-commerce, and the infrastructures of data management, computing, software and business services that define the cloud, are American.

The story repeats in so many places—Tesla, not BMW or Toyota, with electric cars that break performance meters, and Twitter and Facebook that turn all of humanity into a village square.

We entered the 21st Century being told by so many economists and pundits this would be the Asian Century. China's woes and inept leadership throw cold water on that thinking.

Just as in Henry Ford's age, the future belongs to people with a "better idea."

Thankfully, many of those are the American entrepreneurs who are defining a New American Century. ESR

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1

 

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