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FEATURE: Driving Wal-Mart's growth engine

Sam Walton once said, "I always wanted to be the best retailer in the world, not necessarily the biggest." In that light one has to wonder how Wal-Mart became the megachain it is today. In fact, when Walton died in 1992 many retail experts and competitors expected an eventual dilution of the company culture, along with irreparable damage to Wal-Mart's competitive advantage. Despite the predictions, Wal-Mart embarked on the greatest decade of sales growth in all of business history. At the time of Walton's death, Wal-Mart had become a $43.8 billion business; by 1995 its sales had more than doubled to nearly $100 billion, and by 2001 sales had skyrocketed to $219 billion.

This acceleration of Wal-Mart's growth engine, which coincided with a leadership succession to c.e.o.'s David Glass (1988-1999) and H. Lee Scott (since 2000), raises a couple of intriguing questions: What caused the explosive growth? Was the style of leadership Wal-Mart required during this period better supplied by Walton's successors? Since Walton himself acknowledged, "I've always been a little bit afraid that big might get in the way of doing a good job," one has to ask whether his continued leadership would have tempered this unprecedented sales spurt.

Foundation of a strategy

Based on results, Sam Walton was one of the brilliant retail leaders of the 20th century. As Wal-Mart founder, he created a formidable business model that defied conventional retailing wisdom by locating discount general merchandise stores in small towns across the United States. While competitors claimed that towns with populations of less than 50,000 were insufficient for generating necessary sales volumes, Walton disagreed. The savvy businessman reasoned that Wal-Mart would become a preferred destination for families who would rather drive a few miles to take advantage of low prices on national brands than travel several hours into the city for the same products.

By the time Kmart and other mass merchants recognized the brilliance of his strategy, Wal-Mart's advantage was firmly rooted. Unfortunately for the rivals, most of the prime rural locations were no longer available, and costs of constructing a massive distribution network had become prohibitive. Walton had created a minimally contested market space from which to launch his company.

Under the reign of Sam Walton, Wal-Mart was run with the mindset of a contrarian retail merchant. Besides the strategic decision to locate stores in backwater towns, a second counterintuitive assumption was at the heart of discount retailing: Lower your markup to earn more because of increased volume. Accordingly Walton abandoned the variety store format, which typically took a 45 percent markup, in favor of the more efficient discount retailing format of the original Wal-Mart stores.

All leaders have strategic assumptions that govern their choices, actions, and judgments, and even filter what they see in a situation. These strategic assumptions exert enormous influence on a company's success. Depending on emerging problems and opportunities, the strategic assumptions of the leader will either empower effective innovations or frustrate progressive initiatives.

Wal-Mart still adheres to a number of assumptions that support its mission "to lower the world's cost of living." However, achieving that mission and managing the complexities of international growth require the company to adopt different strategic assumptions from the ones it followed 10 years ago. Since Wal-Mart's national brand selection is now stocked by many competitors, and superior customer service on the scale of a Publix or a Nordstrom has never been a point of differentiation, the key success driver is the logistical capabilities that enable Wal-Mart to be the perennial low-cost operator and low-price leader. Treasurer Jay Fitzsimmons confirmed the transition of strategic assumptions in a 2003 statement to shareholders: "The misconception is that we're in the retail business. We're in the distribution business."

The chart on the following page summarizes the strategic assumptions that shaped the Sam Walton era in contrast to the assumptions of his successors, which support supercenters and global expansion.

While Walton may have, at an earlier time, cautioned against the inevitable problems that accompany massive growth, one can only deduce, based on his choices for executive positions, that he was prepared for organizational transformation. To jump-start the growth engine, Walton seemed to realize Wal-Mart would need a c.e.o. who enthusiastically championed the crucial changes that fortify a sustainable competitive advantage, instead of someone who would only tolerate the "necessary evils" that accompany growth.

Brilliant succession

As he pondered the leadership succession plan, Walton basically had three choices: bring in an outsider, promote from within, or select a family member to lead the organization. Eventually he appointed his son, Rob Walton, chairman of the board and David Glass c.e.o. Even though the senior Walton believed family involvement would ensure a continued alignment with his core values, he began grooming Glass to sit at the helm of the company's daily operations.

More important, the strategic assumptions of Glass perfectly matched the evolving Wal-Mart growth strategy. According to Richard Slater in The Wal-Mart Decade, Glass said that the biggest single difference between his approach and Walton's was "that a long time ago, I had a strong belief that technology would ultimately drive this business to be the size that it is." While other Wal-Mart executives feared getting involved in the low- margin grocery categories, Glass saw an industry with high volume, inelastic pricing, fragmented market share, and inefficient distribution--competitive conditions he believed ideal for unleashing the logistical advantage of Wal-Mart.

Glass was also a risk taker, willing to put billions of dollars at stake to keep the Wal-Mart growth engine running at full throttle. Rather than being swayed by the cultural bias for cost cutting, Glass knew investing properly was imperative to orchestrating a superior logistics infrastructure. While other Wal-Mart executives harbored doubts that the culture would translate well overseas, Glass readily embraced the inherent challenges of becoming a global retailer.

Perhaps the most impactful decision Sam Walton made during his reign was to select and develop successors equipped to lead Wal-Mart to the next level of complexity. Slater, who studied the leadership transition at the company, concluded, "He saw in Glass--and this was Walton's genius as much as Glass'--someone who had the management skills to preserve all that Walton had built and the imagination and guts to take it to new heights."

One former Wal-Mart executive, speculating on what the company would be today if Sam Walton were still c.e.o., said, "I believe Mr. Sam knew what he was good at, but, more importantly, he had a keen awareness of what his weaknesses were. In order to be the best retailer in the U.S. and eventually the world, he knew he had to hire key executives who could do those things he wasn't good at and by doing so, round out the executive leadership team. This might be why he chose David Glass and not Jack Shewmaker to succeed him as c.e.o. I'm sure if Mr. Sam was alive today, he would still be visiting stores and conducting business in much the same way he was in the 1980s. I'm also confident he would have key executives in place assisting him in all of those areas where he lacked experience that you encounter when running a global retailing empire."

Based on this, one might assume "Mr. Sam" would have approved wholeheartedly of Lee Scott's assumption of c.e.o. responsibilities. Scott joined the Wal-Mart leadership team after many years at Yellow Freight System, which was at the time the fastest-growing trucking company in the United States. His assumptions aligned with those of David Glass, and, because of his experience in the freight industry, Scott easily recognized the sustainable competitive advantage brought about by superior handling of inventory.

Perhaps Scott is even more ambitious than Glass, as evidenced by Scott's recent proclamation, "Our strategy is to be where we're not." With Wal-Mart holding only a 7.9 percent share of all U.S. retail sales as of January 2003, he reasoned that the other 92.1 percent is still up for grabs. Scott often points to industries and product categories in which single companies have achieved 35 percent to 40 percent market share. Retail Forward predicts that by 2008 Wal-Mart will have amassed 35 percent of all grocery sales.

Leadership lessons

Achieving four decades of continuous growth is an unprecedented accomplishment. Wal-Mart's leaders have never strayed from Sam Walton's overriding assumption to "swim upstream," to move away from the conventional wisdom and create "purple cow" strategies.

As an outcome Wal-Mart launched two full-blown business model innovations. First Walton innovated around "who" Wal-Mart's target was--the neglected small-town customer--and his company eventually overtook Kmart, the 800-pound gorilla of discount retailing. Later Glass and Scott innovated around "how" to operate an efficient distribution network combined with a one-stop-shopping supercenter format, to take a substantial slice of supermarkets' business. This continuous flow of fresh strategic assumptions was the source of Wal-Mart's innovations that helped overtake entrenched market share leaders.

To capitalize on Wal-Mart's leadership lessons, you should vigilantly examine the strategic assumptions held by your management team, who are the drivers of your growth engine. At each of your upcoming management meetings, appoint one participant to record any strategic assumptions being expressed directly or implicitly. These assumptions might include rationales for strategic moves, beliefs about target customers, capabilities to develop or acquire, and risk tolerance.

Allow at least 15 minutes at the close of the meeting for this list of assumptions to be read and evaluated, by asking the following questions:

--Are the assumptions still accurate, given changes in the marketplace?

--Do these assumptions limit or enhance our chances for sales growth?

--In what ways do our assumptions reflect or depart from prevailing industry thinking? Do our distinctive assumptions provide room for a competitive advantage?

--What is the net effect of our assumptions? Are they fitting for our history but limiting progress, or do they empower the changes we need for our future vision?

A second lesson from Wal-Mart is to carefully take stock of who's doing the driving of your growth engine, thereby determining your company's strategic direction. In his book Good to Great, Dr. Jim Collins notes that great companies take time to consistently evaluate whether the right talent is in place to deliver both the short-term and long-term goals. In a speech delivered at the 2003 GMA Multi-Channel Conference, Collins offered these principles for composing leadership teams:

--Figure out where the bus is going.

--Figure out who should be on the bus.

--Be sure those people are in the right seats.

--Get the wrong people off the bus.

The leadership development plan of Sam Walton ensured the Wal-Mart bus would drive in light competitive traffic, because David Glass and Lee Scott were capable bus drivers. Are your company's bus drivers ready to floor the gas pedal to energize sales growth momentum?

Art Turock delivers customized speeches at corporate and trade association meetings, facilitates "strategic innovation consultations" with senior management teams, and is author of the strategic report Achieving Sales Growth When Wal-Mart Makes the Rules. To receive an executive summary and ordering information, call (800) 473-8997 or e-mail [email protected].
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