The First Information-Age CEO?

The tremendous growth of Wal-Mart can be attributed to more than store location and Moon Pies. In fact, a key part of the Wal-Mart story is how the company won the information technology race. Although he needed some convincing at first, Walton soon grasped the importance of harnessing information technology in order to cut costs and create a genuine competitive advantage. In fact, Time magazine made the case that Walton may have been "the first information age CEO."

As early as 1983, Wal-Mart pioneered the application of new systems, including the use of satellite technology, that enabled the company to get incredible amounts of data flowing between stores, warehouses, and the home office in Bentonville, Arkansas. The satellites were the key, Walton wrote, because once the system was in place, they had all sorts of vital information "pouring into Bentonville over phone lines."

The scale of this effort is staggering. In the late 1980s, for example, Walton had a 135,000-square-foot building constructed just to house Wal-Mart's sophisticated computer system. By 1992, the company had spent $700 million on its information systems, amassing one of the largest such systems in the world (second only to that of the Pentagon). The key to the technology, of course, was not how much was spent, but how the company used this new resource. Walton said that the faster people got information, the faster they would use it. Useful applications emerged almost immediately. For example, the huge flow of data played a pivotal role in helping the company work more closely with its suppliers. Armed with all that data, the company was better positioned to use its inventory knowledge to cement working relationships with key manufacturers.

In 2002, Philip Kotler assessed the relative sophistication of Wal-Mart's use of information technology and the role of that technology in inventory management: "Some people call Wal-Mart an information company, and that's not an exaggeration. They are so advanced in their information systems. They know every night how many Pampers have sold that day, and they get Procter & Gamble, through this alliance they have worked out, to ship enough Pampers on a daily basis to make up for what was sold .... What this really means is that Wal-Mart's secret is inventory management. They don't believe in stock, they believe in flow. And they have a thing called 'rossstocking.' Cross-stocking means that it doesn't actually get stored into the warehouse.... The big truck comes and brings stuff that is . . . unloaded into the smaller trucks, that then go out and to where it is put onto the shelf."

Of course, it is in the interest of suppliers to forge these close relationships. Procter & Gamble has an office in Bentonville, Arkansas, with 150 employees that is devoted to a single brand of toothpaste. According to David Glass, Wal-Mart was the first company to transform the supplier relationship from an adversarial one to something more akin to a partnership. Once the philosophy of "supplier as partner" was established, Wal-Mart's systems became an even more powerful tool that helped the company become more efficient and cost-effective. As Glass puts it, "We used to go through a spiel that we'd say to the supplier, we're not really your customer. The consumer is your customer. We're only a conduit to get your merchandise to them. So if you believe that, then the right thing to do is say, all right, let's look at the whole thing from the time you manufacture the goods until the consumer carries them out of the store, and what's the most efficient way to do it. And what we found was that they could eliminate a lot of costs that they built into their business to protect their interests against us, and we could eliminate costs and do things more efficiently....If you form this partnership and it works, then you can really revolutionize the business."

By almost any measure, Wal-Mart did indeed revolutionize the business. In late 2002, Wal-Mart was the largest civilian employer in the world, with more than 1.2 million associates worldwide (23 percent of them outside of the United States). In addition, Wal-Mart was responsible for a substantial percentage of the total U.S. retailing market and more than 1 percent of America's gross domestic product.

And Wal-Mart's accomplishments go well beyond scope and scale. The company has actually changed the way we live. The New York Times, citing a study that was conducted by the McKinsey Global Institute, concluded: "By making goods cheap and available, Wal-Mart has raised the standard of living of average Americans." Not bad for a small-town retailer who got into the business because he didn't want to be run over by his competitors.

What Would Sam Walton Do?

Returning to the case of the editor-in-chief with the novel ideas for expanding your business, what should you do? While there is not necessarily one answer to this particular scenario, chances are that Sam Walton would have rejected all of his editor-in-chief's ideas. All of them are a departure from the original vision of the company, and there are better ways to grow the company than by tinkering with the success model or acquiring a business that you know nothing about. Let's take a closer look at the ideas.

First, Sam Walton would not have broken his word by raising the prices of the books. If he had vowed not to raise the price of the books above $10, he would never break his promise or let down his customers—particularly in the realm of keeping prices down!

As for distributing the books via bookstores, this is a more complex question. In fact, unless you knew that retail bookstores have 100 percent return privileges, you would not have had all the information you needed to figure this one out. But Walton would have asked a thousand questions before deciding on this, and he would almost certainly have decided not to go the traditional bookstore route. First, he would have learned that bookstores usually receive close to a 50 percent profit margin on books like his, not the more attractive 20 percent that he gave his existing distributors. (Also, the book's format would not lend itself very well to traditional store shelves.) Lastly, if the retail bookstores couldn't sell the books, they could return them and get all of their money back! That could create a big inventory problem for his small company.

As for buying a cookbook company, he would probably avoid that as well. Cookbooks are not woodworking books, and this alternative would not capitalize on any of the company's strengths (e.g., your ability to do the graphics, your knowledge of woodworking, your existing customer base and distribution system). The cookbook market is crowded, and your editor-in-chief hasn't published one in 20 years! This is a very difficult market for a small company to penetrate. Sam would have wrestled with those issues before making any company acquisition.

Better growth ideas include woodworking books for kids (projects that parents could work on with their children) and project books on crafts other than woodworking, such as working with clay or ceramics. This would be closer to the original vision of the company.