A happy, former Walmart employee

You don’t often hear this side of the Walmart story (H/T Carpe Diem). Here are a few of the things this former Walmart employee had to say:

I worked hard and came back during a break from college to be promoted to work in the photo lab (more responsibility, higher rate of pay). I also saw many full-time employees that I worked with move up to become department managers, assistant store managers, and even move on to the corporate office.

Every evening I would go to a meeting with the store manager, who would tell us the stock price, how much we had sold that day, and if there were other expectations before we left for the night.

I also saw the opposite end of the spectrum. Some fellow associates seemed content to do the bare minimum and didn’t go anywhere in the company because of it. In fact, they are still at the same level.

In my opinion, these are also the employees that you hear speaking negatively of Walmart’s employment practices. They want something for nothing from the company and they aren’t getting it.

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Walmart emerged from a willingness to try new things and learn

Thanks to Mark Perry at Carpe Diem for the link to this video illustrating Walmart and Sam’s Club growth.

We see the success stories after they’ve become successful and don’t often think how they got to that point.

I recommend reading Sam Walton’s book Made in America. It paints a good picture of how Walmart emerged from Walton’s constant experimentation and trial-and-error learning, in the store, store location and in the supply chain. It took him years to evolve the retailing model into something that would fund its own expansion by simply pleasing its customers.

It’s been awhile since I’ve read it (~15 years), but a few stories are stuck in mind.

Walton started his first store in a town on the eastern side of Arkansas. He grew it into a success and when it came time to renew his lease, the landlord kicked him out to take Walton’s store for himself. There Walton learned to build renewal options into his leases.

When Walton opened his store right across from a competitor in Bentonville, most people thought he was crazy, but Walton relished the competition and would try things to get people to try his store and keep them coming back, which was great for the customer. Walmart still gets a lot of resistance to this strategy — generally from people who care less about the customer.

He wasn’t too proud to borrow ideas from competitors. When he read an article about a store with a self-serve model in Minnesota or Wisconsin, he hopped on a bus (or train) and visited to see how it worked and then adopted the model in his stores and changed the retailing industry forever.

As he opened more locations, he tinkered with various ownership structures and incentives to drive the right behavior. He discovered joint ownership was the best incentive structure, which carried through all the way to employees of the eventual Walmart earning shares of stock. Early stores were partnerships between him and the store’s general manager.

Even after Walmart was getting larger, they tried new things. They took on a massive project in the warehouse in the 1980s to improve product distribution efficiency. It took years and a few costly mistakes, but it eventually paid off. I often think about that when I see companies ditch a project after the first failure. I wonder if it could be successful with some more learnings applied.

Businesses emerge from the interactions of customers and business owners. They aren’t designed by consultants in board rooms.

The “cheaper to keep a client than get a new one” myth

I’ve heard this repeated dozens of times to focus an organization on client retention.   The trouble is, it isn’t always true and if an organization focuses too much on client retention when it isn’t true, it can hurt.

Most organizations would love to have 100% client retention, except maybe non-profits whose goal is providing temporary help.

In the real world, no organizations have 100% client retention.  Even the best lose clients. Sometimes clients die, move or change what they value or just discover they want something different.

Good organizations will have client retention in the 70% – 85% range.  Organizations with less than 65% to 70% retention might have the opportunity improve retention, depending on the nature of the business.

But, at some point above 70% retention (and this varies depending on the type of organization and service, etc.) you reach a retention rate where you run into the law of diminishing returns.  To increase the retention by another 1%-point, for example, is costlier than bringing in new clients who value what you offer.

Let me illustrate with an example.

I use to use a small plumber for my home plumbing needs.  He was good and reasonable and good enough, in fact, that sometimes I had to wait a few days for him to come out. Once this proved to be a problem, because I had a leak that couldn’t wait a few days to fix.

I called another company and found they also did good work and I didn’t have to wait a few days.  They could have someone out within two hours.  That convenience advantage, along with their good work and reasonable prices, was enough to get me to switch.

However, my previous plumber still has plenty of work.  Losing me didn’t cost him much business.

For him to change his business to satisfy folks like me would cost him a lot.  He’d need to hire enough plumbers to cover the demand 24/7 and invest in more trucks and equipment. He’d need to hire schedulers and manage a larger workforce.

But, he’s happy with the business and profits he earns from his set of loyal clients, who don’t place as much value on how quickly the plumber arrives.  Perhaps his customers are builders and commercial accounts who can schedule work in advance, or simply people who can get by for a few days with a leak.

Even in a market that appears as homogeneous to outside observers as plumbing, there are some key things that differentiate the value proposition of what different plumbing companies offer and it is difficult for any one company to satisfy all these value differences.

For my previous plumber, it is cheaper to let me go to the competitor that offers what I value while spending his resources on finding another client who values what he offers.

That holds true until you reach a point where fewer and fewer customer value what you have to offer.  At that point, the market (i.e. customers) is sending you a signal that you need to change what you offer, or go out of business.

Admittedly, there’s a fine line and art between knowing when you need to just focus on finding clients that value what you offer and when you need to change.

Based on these thoughts I have a few recommendations for businesses.

First, don’t always assume that increasing retention is cheaper than finding new clients. It’s actually not very difficult to estimate the costs of each for any business.  Try it and see if you can compare the acquisition and incremental retention cost per client.

Second, if your retention is stable within a few percentage points, plus or minus, then that’s likely a sign that it’s just as effective to keep focus on both finding new clients and retention.  You should not favor one over the other.  You need both.

Third, be prepared for when retention does start to plummet.  Consumer preferences do change in unpredictable ways.  One way to prepare your organization for such changes is to run small experiments with various business model approaches and see which ones resonate. Also, keep and eye on what your competitors are doing differently and understand why that may or may not work for you.

I’ve seen too many organizations who only focus on their bread-and-butter value proposition and get caught by surprise when consumer preferences change.  That puts them in a dangerous position of throwing hail mary’s when preferences change rapidly. The chances of hail mary’s succeeding are less than the chances of small, unforced experiments.

I’ve also seen organizations who move too rapidly to change their business model even when it’s doing fine.  In the process, they often fundamentally lower the value proposition for existing clients.  New Coke is a good example.

Starbucks irked some of its faithful recently be introducing a light roast.  But, they didn’t repeat the mistake of New Coke, by replacing dark roast with light roast, they just added the new light roast to the existing product line.  Starbucks’ faithful will get over it, because they can still get the products they love and now more of their friends (the 40% of coffee drinkers who prefer lighter roasts) will come with them.

Fourth, develop a deep understanding of the value proposition your organization offers. Why do customers use your product or service?  Ask them and ask them again.  Don’t take their first answer as the real answer. There is probably four to ten reasons why they use you. Also, don’t just look for the answers you think are right. Some of the worst business strategy blunders come from folks who impose their own incorrect view of the value proposition on the organization.

Would Buffett want to give politicians more of his money to spend if they ran his company?

President Barack Obama and Warren Buffett in t...

Would Buffett hire this guy to run Berkshire-Hathaway?

Warren Buffett makes another plea for government to take more from him and his net worth peers.

First, I’ll point Buffett to my advice for those who would like to raise taxes.  Thankfully, many others are calling for Buffett to lead by example and voluntarily cut a check as well.  Maybe Buffett will hear that message and respond.

I’ve also addressed Buffett’s analytical hypocrisy on this matter before.  That didn’t seem to work.

I’ll try another approach.

Carefully read Buffett’s words from this paragraph of his editorial:

They’ve [Twelve members of Congress] been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness.

He never mentions spending — only deficit.  Buffett seems unwilling to hold our elected representatives accountable for spending way beyond our means.

I believe that’s partly due to an incentive effect.  If it were Buffett’s own pocketbook that representatives spent from he might think otherwise.

Buffett’s business, Berkshire Hathaway, is a holding company that owns lots of other companies.  He grew wealthy by buying good businesses run by good managers, keeping those managers and letting them do what they do best, run their businesses.

What do you think Warren would do if a business manager began spending much more than he was bringing in with no hope of closing that gap?

Do you think he would beg that manager to take even more of Buffett’s money so the manager could continue his spending spree?

I don’t think so either. I think he would fire him swiftly and find a replacement.

In my opinion, Buffett and his net worth peers, do much better for the economy by continuing to invest their wealth in productive ventures that make products and services that we value as consumers and provide jobs for millions of people, than by handing it over to politicians to help sustain the bureaucratic, rent-seeking behemoth we know as government.

I also think Buffett and his net worth peers could do much better by explaining this to folks and encouraging us to support and vote for politicians who would like to reduce the bureaucratic drain on society and double down on productivity.

Government is overhead

In this post, I quoted from a Reagan radio address where I thought he created a good mental image of how the private sector and government work together.  Here’s the key point from his address:

To sum it up roughly 70 million Americans [working in the private sector] provide a living for themselves and 143.4 [million] additional people.

Those 143.4 million people included the non-working family members of the 70 million Americans and the folks who receive a check from government — be it through a government job or transfer payment.  (Though, come to think of it, I think Reagan neglected the private sector jobs that are paid by taxes, like with government contractors.  But, perhaps he was simplifying.)

Reagan’s analysis came up in a conversation with an old friend when we discussed the political theater that has been going on in Washington DC.  Specifically, how liberals are hostile to the private sector and business, even though the private sector and business pay for government. Or put another way, without the private sector, government wouldn’t exist.  And, therefore growing government faster than the private sector is not sustainable.

It then occurred to me that few people seem to understand the value creation process that goes on in the private sector and how that pays for government.  They don’t recognize that this value creation process is the very source of our standard of living, which provides for government and that government is just the overhead.

As a rough analogy for economy, let’s consider a business that makes burritos.

The burrito business has two types of costs — direct and overhead.

Direct costs pay for the materials to make the burritos like flour, meat, seasonings, tomatoes, labor and the cost of the space to make the burritos (I’m getting hungry).  This might also include the sales force and advertising used to sell the burritos and the cost of the trucks to deliver them.

Overhead are the indirect costs like accountants, lawyers, and HR and IT people and the resources these folks use like space and utilities.  These folks aren’t necessarily needed to make the burritos.  Their jobs wouldn’t exist without the value created from the burrito making operation.

Now, overhead does perform some useful functions for the business, just as government performs some useful functions for society.  It’s much better that the business has an accurate accounting of its financials and pays its bills on time.  These sorts of things helps the business remain in good standing with the folks they do business with.

But most people intuitively understand that there’s a limit to the overhead costs the business can support.  It’s not an exact number, but they understand that if a business grows it’s overhead costs faster than profits from making and selling burritos, it would not last long.  And everyone who depends on the business for a living and for good burritos would be in trouble.

They also understand that if the company’s burrito sales declined, the best strategy to fight this probably is not to expand overhead costs.  The best strategy is probably to focus on producing and selling burritos folks will buy.

Yet, when the economy declined, increasing overhead was the idea to save it.  Not surprising that it didn’t work.

This is one reason I dislike the equation for economic output or GDP.  It treats overhead costs, or government spending, as if it were interchangeable with direct costs, like buying more flour to sell more burritos.  And this leads politicians to do crazy things, like increase overhead when what really need to do is make a better burrito.

The hard sell

I recently stayed in a timeshare.  I rented it.  I don’t “own”, as they call it.  I’m not interested in “owning” timeshare, but I liked what the property had to offer for this vacation.  I was satisfied with the property, felt it was worth the price and would recommend it to others.

Upon check-in, though, I had to deal with a pushy salesman whose job was to get me to schedule a sales tour using some hard selling techniques.  He was not successful.

That got me thinking about the hard sell.  Car, life insurance, investments and timeshares are some industries that tend to employ hard selling tactics.

I wonder if it’s effective.

It’s not effective on me.  It turns me off and I go elsewhere. But, I could be in the minority or maybe just in a different target market.  Maybe some folks need the hard sell.

 

Where do jobs come from? II

Here’s a nice follow-up to this post on jobs via Marginal Revolution.

The chart on Mother Jones blog shows a declining trend in the number of new jobs from startups since the late 90s.

It seems there are a few possible explanations.

Maybe startups are creating fewer jobs in the U.S. because they are hiring overseas.

Perhaps there are just fewer startups.  Maybe fewer startups are a demographic artifact.  It seems like baby boomers may have been around peak startup age in the 90s.

Or, maybe this evidence supports Nothhaft’s contention that government regulation is suppressing startup activity.  Regulation certainly doesn’t seem to help startup activity.  Perhaps regulation is good, but as always, there are trade-offs.  Startup activity and fewer jobs may be one of those trade-offs.