The makings of Walmart
Walmart is one of the great American success stories. And while it is tempting to portray its founder Sam Walton as a business genius, Walton himself says that he is no far-seeing architect. In fact, the only reason he “got into retailing [was] because… [he] wanted a real job”, and did not have the funds to attend Wharton School of Finance.
Similarly, it wasn’t brilliant strategic insight that led Walton into small city retailing. As Walton explains in his autobiography Made in America, he “was all set to become a big city department store owner” until his wife Helen “laid down the law”. “Don’t ask me to live in a big city”, she told him. And that was that. Walton had to find a way to make small-town retailing work.
So how exactly did the man from Kingfisher, Oklahoma build the titan that Walmart is today?
Walton says that “if [he] had to single out one element in [his] life that has made a difference…, it would be [his] passion to compete”. Rather than avoiding or waiting for competitors to arrive, he wanted to “meet them head-on”. This nature bled into the company’s culture — an ethos that “honed and sharpened [Walmart] to an edge”.
Whales, minnows, and horse buggies
Indeed, while Walmart began as a minnow among whales, they compensated for experience by studying their competitors relentlessly. Walton himself is happy to “bet [that he’s] been in more Kmarts than anybody”. With every store visit, he’d be on the lookout for gaps and new ideas, scrawling whatever he found on his yellow notepad and audio tape recorder.
As Walmart manager Charlie Cate recalls:
“I remember [Walton] saying over and over again: go in and check our competition. Check everyone who is our competition. And don’t look for the bad. Look for the good.”
Charlie Cate in Sam Walton and John Huey (1992). Sam Walton: Made in America.
In Walton’s assessment, the evolution of discount retailing was inevitable, much like the car and the horse buggy. The ‘50s and early ‘60s were “full of high-living, big-spending promoters driving around in Cadillacs”. Decent operators were far and few between, at least until the arrival of Kmart, Target and others in 1962.
“The small stores were just destined to disappear… because the whole thing is driven by the customers, who are free to choose where to shop… the truth is that a lot of these folks just weren’t doing a very good job of taking care of their customers… And they didn’t do a very good job of reacting to our arrival either”.
Sam Walton and John Huey (1992). Sam Walton: Made in America.
Commit, saturate, and execute
True, competing with large incumbents with better systems and scale economies might seem a herculean feat. But Walmart’s competitors, Walton writes, “didn’t really commit to discounting” in the same way that Walmart did. Unwilling to give up their mark-ups and high margins, “they held onto their old variety store concepts too long”. Walmart, by contrast, had a straightforward response: “keep our prices as low as possible by keeping our costs as low as possible”.
Walmart’s strategy then was “to saturate a market area by spreading out, then filling in”. They would put stores in “little one-horse towns” that their competitors ignored. Kmart, Gibson, and other retailers would not go to towns with less than 10,000 people. But Walmart was lean enough to make it retailing work in towns with as little as 5,000 heads.
Small town saturation produced another benefit: Walmart didn’t need to spend as much on marketing and advertising. “When you move like we did from town to town in these mostly rural areas, word of mouth gets your message out to customers pretty quickly”, Walton explains. And unlike their big city peers, Walmart had learned to survive in small towns under the tight economic constraints. So when competition escalated in the 1970s, Walmart was battle-hardened.
A personal touch
Of course, it’s not just about competitiveness. It’s also about how you compete. Small independent merchants, for example, needed to “rethink their merchandising and advertising and promotional programs”, Walton notes. They cannot beat the likes of Walmart in head-to-head pricing. They had to find a “personal touch”.
“Most independents are best off, I think, doing what I prided myself on doing for so many years as a storekeeper: getting out on the floor and meeting every one of the customers. Let them know how much you appreciate them, and ring that cash register yourself. That little personal touch is so important… because no matter how hard Wal-Mart tries to duplicate it — and we try awfully hard — we can’t really do it”.
Sam Walton and John Huey (1992). Sam Walton: Made in America.
Variety stores, likewise, needed to “completely reposition themselves” to compete with large discounters. Ben Franklin variety stores, for example, became craft stores in the wake of Walmart and Kmart’s ascendency — focusing instead on craft selections, craft classes, and customer experiences that general discounters cannot replicate. If the store “gets [its] assortment right…, makes sure [its] salespeople have excellent knowledge… [and takes] care of [its] customers”, they will do just fine.
“I don’t care how many Wal-Marts come to town, there are always niches that we can’t reach — not that we won’t try. Just like everybody else, in order to survive, we need to keep changing the things we do.”
Sam Walton. (1992). Sam Walton: Made in America.
The folly of ego
But failure in business, as we know, is often a product of personality and resistance to change. “Most of these early [retailers]”, Walton recalls, “were very egotistical people”. They bought frivolities, expanded mindlessly; and believed wrongly that store visits were unworthy of their time and status.
“Exercising your ego in public”, Walton reminds, “is definitely not the way to build an effective organization”. The reason most discounters failed in the 1970s is simple: they did not look after the customer. And they did not look after their customers because they did not care for their employees.
“If you get too caught up in that good life, it’s probably time to move on, simply because you lose touch with what your mind is supposed to be concentrating on: serving the customer… A lot of what goes on these days with high-flying companies and these overpaid CEO’s, who’re really just looting from the top and aren’t watching out for anybody but themselves, really upsets me. It’s one of the main things wrong with American business today”.
Sam Walton and John Huey (1992). Sam Walton: Made in America.
Ego and bureaucracy
What’s more, workplace “bureaucracy is really the product of some empire builder’s ego”, Walton argues. You’re familiar, I’m sure, with the stereotype: an ego-driven manager who wants a legion of staff under his or her command. It’s most problematic when multiple managers are vying for internal dominion. As these power structures accumulate, more and more employees begin to play politics. This kickstarts a vicious cycle that leads to greater bureaucracy and customer neglect.
“I have always cross-pollinated folks… and that has bruised some egos… But I think everyone needs as much exposure to as many areas of the company as they can get, and I think the best executives are those who have touched all the bases… I hate to see rivalry develop within our company when it becomes a personal thing… Philosophically, we have always said, submerge your own ambitions and help whoever you can in the company.”
Sam Walton and John Huey (1992). Sam Walton: Made in America.
The double-edged sword
Competitiveness, in this light, is a double-edged sword. It has to be cultivated in the right way. Walton himself attributes Walmart’s success—its ability to focus on customers, downplay internal politicking, and ignore external influences like Wall Street—to its “strong corporate culture with its own unique personality”.
But such cultures, Walton warns, may also promote groupthink and resistance to change. Sears, for example, fell by the wayside because “they wouldn’t admit for the longest time that Walmart and Kmart were their real competition”, Walton writes. Psychological denial and the inertia of success turned them into laggards.
Similarly, Kmart was slow to respond to Walmart because it “seemed to have a management philosophy… of avoiding all change”. A “resistance [that] included investment in systems”. During those early days, Walmart was small and insignificant. But they were busy buying computer systems and reducing their cost structures. It was like “a flea attacking an elephant”, Walton writes. But “the elephant didn’t respond right away”
Competition, culture, and constant change
Every company, you see, is in constant tension with itself. Competition and culture can bring about fantastic innovations and efficiencies. But it can also poison the company from within by way of ego, infighting, and bureaucracy. What Walton sought to imbue in Walmart was a readiness for “constant change”. Sometimes, he’d even mix things up “for changes’ sake alone”. He wanted Walmart to retain “the ability to drop everything and turn on a dime”.
While this may sound expensive, or excessive even, it is evolutionarily rational. After all, problems are inevitable. No amount of planning will save the company from competitive threats, internal blockages, and unseen crises. But the company that knows how to learn, reflect, and adapt — a competitiveness that embraces constant change — will have better fighting chances.
As Walton reflects:
“Had [Walmart] gotten smug about our early success… and just kept doing everything exactly the way we were doing it,… we would be out of business today… So I’ve made it my own personal mission to ensure that constant change is a vital part of the Wal-Mart culture… This requires overcoming one of the most powerful forces in human nature: the resistance to change. To succeed in this world, you have to change all the time.”
Sam Walton. (1992). Sam Walton: Made in America.
Sources and further reading
- Walton, Sam., and Huey, John. (1992). Sam Walton: Made in America.
- Rumelt, Richard. (2011). Good Strategy / Bad Strategy.
- Grove, Andrew. (1988). Only the Paranoid Survive.
- Munger, Charlie. (1995). The Psychology of Human Misjudgment.