The Content Trap by Bharat Anand

Author:Bharat Anand
Language: eng
Format: epub
Publisher: Random House Publishing Group
Published: 2016-10-17T16:00:00+00:00

HOW CONNECTIONS AFFECT STRATEGY

Connections Generate Sustained Success: Why No One Could Stop Walmart—as Early as 1985

Perhaps the most famous example of sustained business excellence during the past half century is found in the retailer Walmart. Founded in 1961, Walmart was the largest retailer in the world by the early 1990s. By 2015 its annual revenue reached nearly $500 billion—more than the gross domestic product of Austria, and of another 150 countries. The intensity of its operations was no less impressive. For example, each year the company’s drivers logged roughly 700 million miles, enough to circle the Earth nearly 30,000 times.

Dozens of books have been written about Walmart’s success, including one by the company’s founder, Sam Walton. A new article appears virtually every day. Walmart is perhaps the most studied company in the world. Yet what’s most striking is that it has turned out to be one of the hardest to replicate.

It’s tempting to attribute Walmart’s spectacular success to the fact that it was one of the first to enter discount retailing and therefore grew large more quickly than everyone else. But that was not the case. In 1985, a full twenty-five years after Walmart’s founding, it was still smaller than Kmart and only a fraction of the size of Sears. Yet no one could stop it.

The reason for Walmart’s success rests not on the fact that the organization was smarter, faster, or better than the others. Its advantage came from a myriad of decisions that collectively were hard for others to mimic. Its advantage came from connections.

Here’s one example. In 1990 roughly 2 percent of Walmart’s cost advantage came from its savings on regional offices: It had none. Yet regional offices can perform useful functions—price setting, store control, coordination. Where were these functions handled at Walmart? Some, such as pricing, were pushed down to store managers. Others were pushed up to the corporate center.

That raises another question: If eliminating regional offices saved 2 percent, why didn’t competing retailers do the same? Giving store managers pricing autonomy or shifting more responsibilities to the corporate center wouldn’t seem particularly hard to replicate. But they were. Giving store managers pricing latitude didn’t just mean empowering them; it meant making sure they had information on product demand. So, starting in the 1970s Walmart invested billions of dollars in sophisticated IT systems that could provide daily information on every single SKU—what was selling and what wasn’t. Similarly, corporate managers could take on more control because of relatively seamless information transfers between the stores and the center.

The reason competing retailers couldn’t mimic Walmart’s “no regional offices” policy was not that they didn’t know how to shut the offices down but that they wouldn’t want to. It would have required substantial follow-on investments—in retraining managers, in reworking incentive structures, in information technology. Absent these investments, eliminating regional offices would only create havoc.

A similar logic extends to virtually every other activity in Walmart’s operation—and why it was hard to pick them off, one at a time. Consider Walmart’s famous “Everyday Low Prices” mantra and its accompanying “no sales” policy.

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