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.

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A few reasons why Felix Dennis is rich

Here are some more bookmarks from Felix Dennis’ book How to Get Rich.

One:  He doesn’t let spite get the best of him.  When people who are on their way up decide to leave Felix Dennis’ company and set up their own, Dennis has a rather interesting approach (p. 16).

I always wish them well. Not only outwardly, but in my heart, too. Often I throw a party for them.  Or write glowing testimonials.  Once or twice I have even underwritten their office lease or introduced them to a banker or a lawyer I trust.  Why do I react this way?

Three reasons.  Firstly, I’m proud of them.

Second, it’s win-win.  If they fail, they may well return to our company, especially if they remember that my senior colleagues and I sincerely wished them success in their new venture.  Thus, if they fail, the company will be enhanced by their return.  While if they should succeed — then we will be all richer for having an old alumnus as a friendly rival in the industry, rather than having created an enemy who wishes us anything but well.

Lastly, it’s because I fear them.  I fear they may have spotted something we may have missed, some gap in the market. I fear we may have failed to listen to them. I fear that their new venture will grow at our expense while it poaches our personnel and our market share.  And the only way to deal with fear is to cozy up to it.

Two: He’s always looking for the next hit.  One of his cardinal virtues is to listen and learn.  He has four assistants assigned to handle the strangers that want to bring ideas to him (p. 129 – 133).

Why? Because I want to hear what they have to say.  …when you stop listening, you stop learning.  And if you stop learning, it’s time to get out of the kitchen and let someone else do the cooking.

Listening is the most powerful weapon after self-belief and persistence you can bring into play as an entrepreneur.  And yet I’m familiar with numerous senior executives running large companies who might spend two or three weeks in between listening to a “stranger”–or a “minion.”

He goes on to give advice on courtesy and how to handle meetings from outsiders and insiders.  I especially appreciated this one:

…what of the young lady who works for your company and brought you (or her manager), the great idea that worked so well?

If you’re a sensible, decent, worthwhile human being, you will reward her handsomely and promote her.  And you will thank her publicly.

If you’re a rotten, ingrate scumbag, without any decent feelings whatever, you will not reward her.  And you’ll get rich.  But perhaps not quite as rich as a more enlightened owner. Because if your clever employee has had one such great idea, she may well have another later.  And she is unlikely to stay working for a company that stiffed her so badly, or to hand them another gem, isn’t she?

Three: It looks like he uses the experimentation model I described in this post to keep business growing (p. 123).

I am one of the richest self-made men in Britain for two reasons.  I own my own company outright, and I began to make more baskets [as in don’t put all your eggs in one basket] the minute the first had a few eggs in it.

Take any business and any idea.  You need focused, tunnel vision to get it on the road and to begin to make some money.  You can expand it, maybe franchise it or take it to other cities or even other countries.  But, in reality, it is still the same basket with a lot more eggs.

If you had created a chain of fast-food stores, then it would be unwise to leave matters there.  Public tastes chance and customers are fickle.  To protect your investment, you would need to create new baskets.

Dennis then explains that Chock full o’Nuts is the more successful basket from a former shelled nut chain store and convinced me to finally buy a can of it on my next trip to the store (I’ve been looking at that can for years trying to figure it out).

Four: Proper definition of persistence (p. 112):

Stubbornness is not persistence.  Stubbornness implies you intend to persist despite plentiful evidence that you should not. A stubborn person fears to be shown he or she is wrong.

“Persistence” is a vital attribute for those who wish to become rich, or wish to achieve anything worthwhile for that matter.  As is ability to acknowledge that one has made a mistake and that a new plan of action must now be made. Any such acknowledgment is not a weakness, it is a sign of clear thinking.  In its way, it is kind of persistence in itself.  Try, try try again, does not mean doing what has already failed, over and over again.

Many folks I know mistake stubbornness for persistence.

The Secret to Good Business

Another Seth (Godin) posts on his blog:

The sure-fire recipe for business success

Wait, I was confused. There’s a sure-fire recipe for delicious chocolate chip cookies. There is in fact a magic formula.

For businesses, not so much. There isn’t one secret, one process, one solution. Instead, there are a thousand or maybe a million.

It’s not a jigsaw puzzle, it’s a strand of DNA, easily rearranged and sometimes it even works.  For a while.

First, recipes for delicious chocolate chip cookies are maybe as numerous as recipes for successful businesses.

Second, I agree with the strand of DNA analogy.  But, I like to think of it as a trial-and-error experiment.  That’s what different configurations of DNA are as well – trial and error experiments.

Every new product, every new business, nearly every decision made in the running of the business is a trial-and-error experiment with an uncertain outcome.

The business experiment tests whether customers find enough value in whatever is being sold to trade what’s needed to encourage the producers to make more.  Some experiments work out and many others don’t.  There’s no sure fire way to tell if you’re on to something without trying it.

While I agree with Godin that  there is no sure-fire recipe business success, I do believe there’s a way to improve chances of finding successful businesses with good experimentation.

For existing businesses the lesson is to try many new things on small and inexpensive scales.  Many businesses flip-flop this.  They try a limited number of expensive experiments.

Mature companies forget they were founded as a result of a trial-and-error experiment.  Some never even realize it.

Managers appoint themselves as the judge of what will work and what won’t and they filter out many ideas based on their own preferences, never realizing that their preferences aren’t worth a heck of a lot.

Mature companies become old and clunky because they reduce experimentation, sometimes without realizing it.  Even after choking off conscious experimentation, most companies have natural experimentation happening within their business and they tend to ignore the results or kill them if the new process or product deviates too far from their comfort zone.

I remember sitting in a meeting discussing a new experiment at one company.  The 20 people in the room from different parts of the business were each interested in getting their stamp on the experiment so they could appear to be adding value and have something to plug in their next performance appraisal.  None of them had been a part of any previous successful experiment.  The experiment was a Homer (as in the car designed by Homer Simpson).  It had a little something for everyone and worked for no one.

Folks from this company will tell you that they experiment.  They just don’t realize that they experiment poorly.  They don’t conduct enough experiments, don’t have the right people working on them and the experiments they do conduct are subject to too many political stakes.

Here are my suggestions for companies who are interested in tapping into the power of experimentation:

  • Increase the number of experiments.
  • Make the experiments as cheap as possible.
  • Measure success on actual customer response and feedback.
  • If you need a statistician to tell you if the experiment worked, it didn’t work or it didn’t work well enough.  You want experiments that work really well.
  • Keep an eye out for natural experiments.   These may take the shape of an accident that has a good result or someone in a remote location doing something a little different that’s generating good results.
  • Associate successful experiments with people.  Don’t expect anyone to bat a 1,000, but notice and reward that some people have a talent for hitting on successful experiments.  You want to keep these people around and let them have some runway and reward them when they do hit on something.
  • Resist temptation to impose arbitrary preferences on experiments.  I’ve seen leaders kill any hopes of a successful experiment by imposing their own preferences into it (e.g. “it must use our brand name” or “it can’t cannibalize our existing business”).
  • Kill failed experiments.  I’ve seen failed experiments carry on far too long because the experiment happened to be the pet project of someone with political power in the organization…
  • …but don’t be afraid to evolve experiments.  Sometimes an experiment needs to evolve a little before it hits.
  • Start small and expand slowly.  Another crazy thing big companies do is roll something out big that has little or no experience, battle testing and evolution.  These are either ego-driven projects, hail mary acts of desperation or just bad business management.   These types of projects may have been the origin of the phrase epic fail.  Management tends to over react to gain a first-mover advantage, but that’s a myth.  The eventual winner tends to be the product that is most battle tested and evolved to best suit the needs and preferences of the customers (e.g. Google vs. Yahoo!, MySpace vs. Facebook, Lotus 1-2-3 vs. Excel).
  • Use an entrepreneurial model with small project teams and get those teams away from HQ so they won’t be influenced by office politics.

Show me a company that is lagging, let me speak to a few people there and I can likely tell you how they are snuffing out the power of experiments.  Show me a successful company and I can find out how they came upon the successful experiments and see if there’s trouble in the future due to a bad experimentation model.

To use a band analogy, some companies end up being one-hit wonders while others endure.  And for the very same reasons.  One hit wonders may make enough money and decide they no longer need to experiment with new music. Enduring bands never seem to lose that experimental motivation.  They continue to experiment with music and continue to hit upon new hit songs.

To sum up, the secret to good business is good experimentation.

Education: It Doesn’t Need to be One-Size-Fits-All

While watching my kid with his gymnastics teacher last weekend it occurred to me how much my child has learned from private education:  preschool, gymnastics, swimming lessons, soccer league, story time and reading programs at the local library (though technically public), youtube, wikipedia, internet games and even the Wii (which has helped learn how to play real games like bowling, golf and tennis).

All of these classes and activities were relatively inexpensive, yet valuable.  I could see that my kid learned things.

It made me think of how we’ve standardized one model of K-12 education throughout our country and I wonder if that really is such a good idea.  That model is based primarily on the preferences of a group of experts for college prep education that may or may not be good.

Realizing how much my kid has learned through private activities that exist on the periphery of public education makes me wonder what would emerge if the K-12 model wasn’t thrust upon us by the experts and their tight grip over how our property tax dollars are spent on education.

Before I go on, it’s important to understand my underlying belief.

I believe that much of the improvement in our lives result from innovations discovered from trial-and-error experimentation.  I also believe that many of the best innovations result from accidental and often failed experiments (that is they failed to do they thing they were intended to do, but someone discovered some other use for it).

I believe this is true for all areas of our lives.  The classic business example is the 3M Post-It Notes which resulted from a failed attempt to make a super strong adhesive, but the weak, non-residue-leaving adhesive was discovered to be quite useful for other things.

We all experiment nearly every day and sometimes find things that improve our lives, even when we didn’t expect it.  The experiment might be as simple as trying a new product or recipe. Sometimes we find things we like and we continue to use (success) and sometimes not (failure). Often those experiments occur by accident or at random.

We can all probably think of something we do or use that we discovered by accident.  I once had a hard time running. The pounding hurt my legs. I bought a pair a shoes for general use once that happened to be on sale and discovered that I could run in them without pain.  I’ve been running ever since using that same model (currently the Asics GT-2000 series).

Further, not every innovation works for everyone.  The Asics running shoe works for me, but it may not for others.  There’s no reason to limit all running shoes to the model I prefer. Yet, that’s what we’ve done with public education. We’ve basically said that we should have one model of running shoe, even if that doesn’t work for every one. Some might say that we have experimented with the education model a little and it is not one-size-fits-all.  To me, that’s like saying that we’ve made the one running shoe model available in different colors. The variations are cosmetic, not fundamental, because ultimately the educational experiments also have to adhere to the standards that have been pre-decided.

To sum up I think there are two key advantages to experimentation: innovation and evolution of variations that better serve our individual tastes and needs.

A key upside to providing universal education is everyone has access.

Downsides include that it’s more-or-less a one-size-fits all model with very limited experimentation to drive innovation and discovery of variations that might better meet everyone’s specific needs and preferences.  It’s no wonder to me that we haven’t seen significant innovations in the classroom for decades and we have groups of people who say public education doesn’t serve their needs.

I think we are seeing some experimentation with charter schools, but that’s very limited and contained to variations of the existing K-12 model since charters have to meet standards created by the same people who run public schools.

The result might be that we find better ways to manage the existing model, but that also limits us to that model and doesn’t allow for much experimentation of other models.  Which means that it will remain to be unseen what we’re missing.

As I was writing this blog post, I came across a related post on Matt Ridley’s Rational Optimist blog which discusses one educational innovation.   The excerpt below demonstrates how embedded the one-size-fits-all model is in our thinking:

Everybody knows that the Internet will transform education, but nobody yet knows how. Most of the models sound like dull attempts to reproduce, at a distance, the medieval habit of schooling—one teacher telling a bunch of children what to think. Now, though, I think I have glimpsed a better idea: the self-organized learning environment (SOLE).

Perhaps SOLE is a better idea than our current model, or perhaps its a better idea for some people and not for others. Our problem with education is that as soon as we see promise in something like this, we want to scale it to everybody.  The iPhone, while a remarkably successful product, does not meet the needs and preferences of everybody. Other phones are selling fine for those who have different tastes.

If we want to improve education, I recommend that we remove barriers to experimentation and allow different variations to emerge to meet varying tastes rather than trying to find the next one-size-fits-all solution.