Building on Bedrock

by Derek Lidow

  Many entrepreneurs that enjoy Sam’s level of success in their first startup spend their profits quickly because they do not anticipate disasters and crises. Sam survived this disaster because he had saved for “rainy days” just as his dad had done. Having lived frugally, even with his family having quickly grown to four kids, Sam had enough money socked away to buy another Ben Franklin store on the town square in Bentonville, Arkansas, on the other side of the state from Newport. The owner, looking to retire, was happy to sell, and Sam was eager to start the process of building a business over again. Even though he remained a Ben Franklin franchisee, he boldly chose not to use the brand name in renaming his new store. Instead, he called it “Walton’s 5&10” to make it clear to everyone who was responsible for the store.

  Using the same techniques that had worked in Newport, Sam made Walton’s 5&10 the most successful variety store in Bentonville. Sam could have stopped with his one store and been financially secure, as had most typical Ben Franklin franchisees. But he was restless and driven to do better. He firmly believed he could make more money if he did things differently, but he couldn’t see clearly what practices he should change, so he experimented further. He particularly loved playing around with merchandising. Some techniques he tried, like buying a popcorn machine and selling popcorn in front of the store, pulled people in. But not everything worked—a cotton candy machine installed inside the store attracted swarms of flies. The techniques that increased sales he maintained, at least until he discovered a new technique that increased sales even more. All the while, Sam kept visiting stores in bigger towns to find new ideas. Sam didn’t view himself as an innovator, and he felt no pride in saying an idea was his. Selling more and more was what drove him.

  Like virtually all successful entrepreneurs Sam discovered how he could increase sales through experimentation. By experimenting with pricing on sale items, Sam found that low prices on women’s panties brought in significant new business, mostly by word of mouth. By selling a thousand panties at $1.30 rather than selling one hundred at $2, he found he could get a big boost in store sales and personally make more money. And many customers who bought low-priced panties bought other things, driving sales up even more.

  Selling products at a deep discount went against Ben Franklin franchising rules and the prevailing wisdom of retailing that focused on profit margins and not profit dollars.[14] Nothing but the law could stop Sam from doing something he thought could make him more money, which he realized meant making his customers happy by offering things they needed at surprisingly low prices.

  Ben Franklin supervisors constantly reprimanded Sam for not following their rules. But as he kept finding goods he could buy at low prices and offer for sale in his store, profits grew month by month. Because Sam’s stores were so successful despite his flouting of the rules, Ben Franklin was happy to let him franchise additional stores in new locations. Sam ultimately became the chain’s single largest franchisor, owning fifteen franchises in total.[15] But after seventeen years of operating franchised stores, he wanted complete freedom in deciding what to sell and how to sell it. To achieve that freedom he created his own independent chain of pure discount stores—Wal-Mart.

  When Sam opened his first Wal-Mart in 1962 in Rogers, Arkansas, the next small town over from Bentonville, a few large discounters, like Kmart and Target, already existed. Like Sam, they had concluded that discount stores could pull in large numbers of shoppers and still be profitable. Fortunately for Sam, major discounters focused on opening stores in major cities, not small towns. The closest small-town retailer experimenting with offering major discounts every day was in Texas, 400 miles away from Sam’s store. But most discounters, whether part of a large chain or just a local store, failed back then. Most still fail today. The lesson: the majority of startups fail even after they find out how to make their customers happy. The founder is unable to execute on his or her insight. They may understand “the what,” but they screw up “the how.”

  Even after opening his Wal-Mart stores, Sam continued to use Ben Franklin bookkeeping worksheets to track his sales, inventories, wages, and profits. Every week, he received reports from each store, initially as letters sent through the mail, about sales and wages. To encourage his store managers to experiment, he asked them to write on the slip they sent a single sentence describing an item they had offered at a new price that had sold especially well that week.

  Saturday mornings, very early, Sam drove to work, sat at his desk, and copied each store’s numbers onto a big worksheet. After filling in the sales and wages, he calculated how much bigger or smaller the figures were compared to the previous year. Personally copying the numbers into his worksheet and then calculating the percentages enabled Sam to understand what might need his attention. Looking at his spreadsheets and his notes, we can practically hear him thinking, “I need to find out why the Fayetteville store didn’t rebound as quickly after last week’s storm as Bentonville did.” On those Saturday mornings, he also called store managers to ask questions and learn. “You sold 4 dozen napkins at 23 cents this past week, how did that work?” After filling in his worksheet and getting his questions answered, Sam had the numbers typed up, along with every store’s best-selling item, and sent the results to the store managers. Each store manager therefore knew how well the company was performing. They were also able to learn from one another, exchanging ideas about items to feature to boost sales. Simple. Simple enough that there were no misunderstandings about what was expected.

  But the numbers were not the only things that Sam relied on to help him understand. He visited his stores, several a week, for most of his life. No amount of time on the telephone and no amount of facts and figures could give him a sense of what was working and what was not. He needed to see, hear, and smell it himself. He visited stores unannounced and took copious notes on what he saw. The first thing he did was look for the manager—whom he expected to find somewhere on the floor, not in an office. He then walked through every department by himself, talking to customers and to each sales associate. He asked customers what they wanted that they weren’t getting. For example, his notes from one store visit read, “Getting a request here from our older customers in this store. Why don’t we have our isles signed by departments, like in grocery stores? Why don’t we tell them where to go? I keep hearing it and we aren’t doing a damn thing about it!” And he’d ask sales associates what was selling and what was not. “Five dollar new baseball collection collage for kids. Who from? Made in the USA…It’s a great item.” He noticed everything that was done differently than he had expected, and he commended people for the efforts they had made to sell more items, “The thing I really like are the benches they have all the way through the middle for customers to sit in. It has a nice open appearance and they have the store looking real good.”

  All the while, Sam took notes to remind himself of things he wanted to tell others about each store he visited. At the end of a visit, he communicated to the store manager what he liked and what he wanted to see improved or changed immediately. And he made a point on returning to the store to make sure the improvements were made. Sam had an intimate understanding of each store, each manager, and for many years, every store employee. When there were too many employees for Sam to know personally, he promoted a trusted store manager to regularly visit the other stores around him and write up his notes for Sam.

  Sam’s strategy—keep things simple and controllable—manifested itself in the stores he opened over the next dozen years. The stores were all located within 130 miles of Bentonville—the distance that someone could travel on small roads, unload a truck, and still return home the same day. That distance was also prescient because once there were about ten stores, Sam could reasonably ask his store managers to travel every week to attend a Saturday morning meeting in his office. There they reviewed the weekly results, answered his questions, debated ideas, and made plans that could be immediately set into motion. The Saturday morning meetin
g became the driving force in how Sam controlled what became the largest retailer in the world. Today, twenty-five years since Sam passed away, Walmart still holds the Saturday morning meeting.

  Sam hated wasting time. But he didn’t feel that getting to know his employees, whatever their position in the company, was a waste of time. He was not cold, or terse, or abrupt. When he talked to people, he listened to them. He might cut them off if they wandered off the subject, but he always cared about what people thought, and he was always considering how their ideas might improve the company.

  Sam’s distaste for wasting time was manifested in how he wanted things done. For example, after he had opened half a dozen stores, Sam found himself spending much of his time driving between locations, often unable to visit more than a single store in a day. So he bought a used two-seat single-engine prop plane and learned to fly. Flying enabled him to visit multiple stores in a day. He’d fly into the closest landing field to a store and ask the first person he could find if he could borrow their car for a couple of hours in return for a few bucks. He also discovered that a plane enabled him to see clearly from the air in which direction a town center would expand based on parking patterns and where homes were being constructed, giving him a better understanding of good locations for new stores.

  Sam’s keep-it-simple-and-understand-it-yourself strategy wasn’t an accident or a lucky call; it was a manifestation of how he thought and what he respected. It also kept costs down; Sam couldn’t help but feel personally poorer for every penny spent, even after Walmart became the most profitable retail chain in the world. People travelling on Walmart business were expected to share the most inexpensive motel rooms they could find. At first, store fixtures were bought second-hand; only years later did Sam find someone who could provide new fixtures for less money than it cost to find, buy, and transport used fixtures to new stores.

  Many entrepreneurs past and present have tried to adapt this keep-it-simple-and-keep-it-frugal philosophy, but were ultimately shackled by it. Sam, however, did not let his desire for simplicity stunt his company’s growth. He appreciated that growth in the number of stores and the number of items sold required more coordination than any person could implement alone. Once Sam owned a couple of stores, he hired an assistant to organize all the information flowing in and out of his office. When he got to six stores, he set up a simple system, similar to a post office, by building slots in the wall near his desk so that his assistant could sort all the orders that stores needed filled. At first, Sam himself placed those orders with Ben Franklin and his other suppliers. But when placing orders got in the way of his two top priorities—visiting stores and reviewing the weekly numbers—he hired another assistant to organize and place orders in exactly the way he had. Only when that person was working long hours every day placing orders did Sam hire another.

  While Sam’s care, competence, and dedication inspired confidence among those around him, he always understood that his personal ability and capacity to make improvements were limited. He counted on everyone around him being appropriately dedicated and skilled to accomplish what he expected of them. He spent his time understanding what could be done to make his stores run more efficiently, and he expected to be able to delegate to others to make those improvements happen within their domains of responsibility.

  To choose the people he could count on, he used a simple and effective process. Sam loved to introduce himself, greeting anyone he crossed paths with. And he clearly cared about them, because he listened and responded to who they were. “Hey, I’ve been to your town,” he’d say, or maybe, “Where’d you get that good-looking jacket you’re wearing?” Sam used this skill to walk into any store that caught his attention, especially stores belonging to competitors, and introduce himself to the store manager, “Hi, I’m Sam Walton. You run a really interesting store. Can I ask you a few questions?” The store manager, almost always flattered by the attention, would show Sam around his (rarely “her”) store, telling Sam all he wanted to know, even answering detailed questions like, “Can I see where you keep your returned merchandise?” All the while, Sam took notes on a legal pad he carried with him (he later switched to a pocket tape recorder). By listening to what store managers were proud of in their stores, he picked up ideas, but he also noticed problems in organization, pricing, training, merchandising, and cleanliness. At the next Saturday morning meeting, Sam discussed with his store managers what was going well and what was going poorly at other people’s stores so his managers could implement the good ideas and steer clear of the bad ones.

  Introducing himself at the stores he visited was also a great way to find store managers who were successful, motivated, and highly skilled. And he stayed in touch with them, often inviting them out to dinner so he could meet their wives and learn more about what they liked—or didn’t like—to do. Sam particularly favored non-smoking, non-drinking, church-going store managers who knew their numbers and took pride in their stores and employees. In fact, he hired most of his early store managers from the collection of store managers to whom he introduced himself.

  By seeing a manager in action in his own store and by getting to know him personally, Sam reduced to near-zero the risk of hiring someone incompetent or immoral (nobody can remember a totally incompetent or immoral store manager hired by Sam). That didn’t mean that every store manager worked out perfectly, but most worked out well. The few who didn’t at least did not set their stores back too far before Sam replaced them. He understood the skills he was looking for and went looking to see people practicing those skills in real time—a great strategy.

  After opening six Wal-Marts, in addition to operating fifteen Ben Franklin stores, Sam began to pay attention to the increasing number of late deliveries to his stores. The reasons for missed deliveries were also increasing: there were too many orders to place in a day, numbers were transposed or copied incorrectly or misread because of penmanship, somebody was sick, or maybe a supplier’s truck broke down. Because his office was right next to the area where the orders from the stores were received and then placed with the suppliers, Sam could see, hear, and understand that there were too many products being delivered to too many stores for his then four assistants to administrate and trouble-shoot effectively. He knew that large chain stores used distribution warehouses, but the idea of owning a building full of products his customers couldn’t buy repelled him.

  From store managers working at other retail chains, Sam heard of a chain in the upper Midwest that moved items through their warehouse very quickly. He arranged a visit, taking along his most senior store manager and buyer to get their opinions on whether Wal-Mart could benefit from a distribution center. Observing in operation a warehouse where items were received and shipped out to stores the same day—and directly questioning the employees who worked there—enabled Sam to see that opening a warehouse would be a simpler, lower-cost way to manage the flow of products to his stores.

  Understanding that designing and running a warehouse differed greatly from anything anyone at his company had done before, Sam hired an employee he knew and respected, one that had previous warehouse management experience, to set up and run his distribution center. Of course, he arranged to move his office next to the new distribution center so he could visit it every day when he wasn’t visiting stores. He needed to see with his own eyes that everything that had come in the previous day had been shipped to a store by the following day.

  Using a warehouse to manage the inflow of many thousands of items and redistribute them to a growing number of locations in exactly the right quantities necessarily centralizes a business. Transitions involving greater systemization in operating procedures and decision-making trip up many entrepreneurs. These transitions involve significant change in what people do, and change scares almost everyone. Asking key performers to do things differently results in a perceived change in their status along the lines of, “I used to be able to decide what to sell in my store and now I’m told what t
o sell.” This transition wasn’t easy to lead. Other than being open with people, Sam didn’t have any magic formula for making them feel comfortable with change. Sam succeeded because he explained the need for a centralized distribution warehouse so that every employee understood why the transition was important. At Sam’s Saturday meeting, every store manager could discuss what was working with the transition and what was not, and actions to mitigate problems could be quickly decided upon. Each Monday, the store managers briefed their own teams about what needed to be done next to make the new systems function as effectively as possible. Ultimately, everyone felt Sam was sincere in wanting to set up the new systems in such a way that store managers had the greatest autonomy possible.

  Even with all the trust Sam had from his store managers and all the competence he had within his warehouse team (and soon thereafter, from his computer systems team), this was an emotional transition for many top managers. It proved so emotional, in fact, that some managers left the company. Critically, almost all the managers understood that the transition ultimately lifted the last constraint on how fast the company could grow. Because Sam had chosen extremely competent managers to design the distribution center (soon centers) and put in place its systems, Sam steered Walmart through a transition essential to its long-term competitiveness. Now a limitless number of items could flow precisely through the distribution center, get delivered to the correct store, and get placed in the right spot inside.