SAM WALTON

WAL-MART CORPORATION

In 1987 Sam Moore Walton was rated by Fortune as the richest individual in America and the third richest in the world. Walton’s wealth stood at $8.7 billion.

Virtually all of that wealth was amassed in a relatively short span of time from a highly successful retail venture – the Wal-Mart Corporation. In 1987 Walton, his wife and four children held 39 percent of the ownership of the corporation.

Who is Walton? What are the secrets of his success? What lessons can be learned from his career? These are questions that are addressed by the leadership profile which follows.

Background

Sam Walton was born in 1918 in Kingfisher, Oklahoma. His father was a natural salesman who peddled anything he could get his hands on during the difficult days of the Depression. Young Sam Walton adopted his father’s aptitude for selling. The boy also developed a life-long tendency to “pinch pennies”. Throughout his later adult life he was known as a notorious penny pincher. At the time of his retirement as Wal-Mart’s chief executive officer he still drove to the warehouse-looking corporate offices in his beat-up 1978 Ford pickup with balding tires.

Sam received a B.A. degree from the University of Missouri in 1940. There he earned the nickname “Hustler Walton” from his Zeta Phi fraternity brothers. Hustler he indeed was. He was cited for “…numerous club memberships, athletic prowess, and a knack for recruiting top-notch frat leaders.” [Taub, 28]. He was hailed for his “…friendliness in knowing virtually every janitor by name and his community spirit in passing the collection plate at church services”[Taub, 28]. Also contributing to Walton’s reputation as a hustler was the fat that he paid for his college education by operating a paper route.

Walton began his retailing training with J.C. Penney as a management trainee in the 1930’s. Not only did he learn basic techniques but he also adopted a philosophy which would become the cornerstone of his entire business career [Mason and Frons, 143]. The key principle was one that Mr. Penney himself personified … never place profits before people.

Starting a New Business

By 1945 Sam Walton was ready to start his own retail business. In that year he opened a store in Newport, Arkansas under a Ben Franklin franchise. Six years later he lost his lease and was forced to move to Bentonville, Arkansas where he opened another Ben Franklin franchise. There was, however, one change – the sign on the store also read, “Walton 5 & 10.”

Between 1951 and 1962 Walton opened fourteen more Ben Franklin outlets, primarily serving communities with populations under 5,000. The expansion was based on his strong belief in the possibilities of discount merchandising in a small town setting. He attempted to convince the Ben Franklin group of the merits of that discount approach, but to no avail.

That failure led to a change in his plans. Had the Ben Franklin group listened and learned, what was to be the Wal-Mart success story would have been the Ben Franklin success story. Instead, Sam Walton decided to proceed alone and eventually created a merchandising giant that far surpassed anything the Ben Franklin executives could envision.

Walton opened his first Wal-Mart Discount City in Rogers, Arkansas in 1962. He continued to operate his Ben Franklin franchises for over a decade, but his Wal-Mart operations became dominant. By 1976 he had completely phased out his Ben Franklin operations and was able to dedicate all of his attention to Wal-Mart.

By 1983 the Wal-Mart operation had matured to the point where Sam Walton was ready for a new adventure. In that year he opened the first of Sam’s Wholesale Clubs, a membership-based retail outlet adhering the Walton’s discount philosophy. By 1988 the number of Sam’s Wholesale Clubs was approaching 100. At that time the company was experimenting with yet another discount idea – the hypermarket. Two experimental hypermarkets were in place in Garland, Texas and Topeka, Kansas. Representing yet another step in the discount philosophy those hypermarkets may well presage the future of retailing.

One other venture did not work out. Sam and his wife, Helen, opened three specialty outlets under the name “Helen’s Arts and Crafts Store.” These were divested in March 1988.

The scoreboard for all of these activities, as of early 1988, is presented in Table 1.

Sam’s Wal-Mart: What sets it apart from the rest?

The idea of discounting is certainly not a Wal-Mart invention. However, the notion that national brand merchandise can be profitably discounted in smaller communities is novel. Wal-Mart originally found a niche in small, rural communities that the established discounters tended to ignore. As Terrence Foran of Touche, Ross and Company put it, “Walton had the insight to recognize that rural areas can make good markets, while others viewed them as bad markets” [Taub, p.30].

To make discounting work a retailer must control costs. Wal-Mart has done so. Its massive purchasing power gives it an initial advantage. And its tight control of operating costs maintain that advantage. Sam Walton’s penny pinching shows up everywhere. For example, Wal-Mart puts out far fewer colorful promotional flyers and newspaper ads than other discounters. And the Bentonville, Arkansas headquarters is still maintained in a building that appears more like a warehouse than the headquarters of a retailing giant.

The greatest danger in emphasizing cost control is that of forgetting about the customer. Walton is well aware of this and has prevented it from occurring by making good customer relations the number one company priority. Wal-Mart Rule No. 1: The customer is always right. Wal-Mart Rule No. 2: If the customer happens to be wrong, refer back to Rule No. 1!

Cost control and superior customer relations are elements of a broader “Wal-Mart culture” which is very much shaped and modeled by Walton himself. His typical day begins at 4:00 a.m. with an occasional jaunt to his distribution centers as early as 6:00 a.m. Wal-Mart employees are expected to have the same dedication to hard work.

Other elements of the culture include employee participation in decision-making, reliance on seat-of-the-pants judgments, open book policies on company performance, solicitation and utilization of employee suggestions, frequent store visits by the top executives and performance-based recognition of employees.

Rewarding performance includes more than the usual pay and praise. There is a pilferage control program which shares the benefits of success with the participating employees. There is a profit-sharing plan that is tied to corporate profit goals and provides various investment opportunities for employees including the acquisition of Wal-Mart stock.

In spite of the rapid growth of the company, Walton “stages regional sessions every year, when small employee groups can not only discuss ways to raise sales and cut costs, but also vent complaints and (offer) suggestions for improvement” [Taub, p. 31]. An open door policy allows employees to call in or write to the chief executive officer to express their concerns. In one year this program generated some 18,000 responses, every one of which was follows up according to company officials.

In accepting the Gold Medal Award from the National Retail Merchants Association, Sam Walton summed up his philosophy in this way [Palmieri, p.2]:

We believe in people. We have involved our folks in running the company. We’ve developed a partnership through the years and it’s our basic philosophy. This is an approach whose time has come for retailers and manufacturers. Wal-Mart employees…from senior management to part-time floor personnel, are informed about gross margins, rent bills and other operating expenses – they also share in store profits.

These ideas are not novel. They can be found in a number of the current crop of books on excellence in business. But it must be noted that Sam Walton adopted these practices long before the academic and consulting worlds discovered them.

There are some Wal-Mart practices not to be found in the excellence literature. One is Walton’s “Buying American” campaign. An extremely patriotic person, Walton decided to do something about America’s balance of payments problems in the mid-1980’s. He launched a determined effort to market American-made products. Included in the effort was a willingness to find American manufacturers who could supply merchandise for the entire Wal-Mart chain at a price low enough to meet the foreign competition. Between March, 1985 and 1988 Wal-Mart claims to have purchased over $1.2 billion worth of goods under this program, producing 22, 3000 jobs in the United States.

Conclusion

Sam Walton’s early success was achieved without national publicity. But in the 1980’s he was discovered by America’s press. He was named 1985 CEO of the Year by Financial World. The national Retail Merchants Association awarded him its Gold Medal. Business Week predicted he would soon become the nation’s largest discounter [Mason and Frons, 1985]. Fortune put him on the same pedestal as the legendary Woolworths and Hartfords in an article on famous American billionaires [Smith, 1987].

With that recognition came some inevitable criticism. It was noted that there were no women in the ranks of Wal-Mart top management and very few in merchandise buying. Concern was expressed for the small retailers which Wal-Mart is presumed to have driven out of business. Questions were raised about the “Buy American” policy both in terms of possible retaliation by foreign nations and in terms of the possible cost to the American customer.

None of this should bother Sam Walton. He has achieved excellence in business by treating customers and employees unusually well. The message is clear – the success or failure of a business is largely decided by the way its human assets are utilized.

*This article is by Yohannan T. Abraham, Yunus Kathawala, and Jane Heron and was originally published in The Journal of Business Leadership, Volume I, Number 1, Spring 1988.

*Copyright 1990. The American National Business Hall of Fame. All rights reserved. No portion of ANBHF may be duplicated, redistributed or manipulated without the expressed permission of the ANBHF.

REFERENCES

1. Mason, Todd and Marc Frons. “Same Walton of Wal-Mart: Just Your Basic Homespun Billionaire,” Business Week, October 14, 1985, pp. 142-144.
2. Newcomb, Peter, Edward F. Cone, and Eric Schmuckler. “The 400 Richest People in America,” Forbes 400, October 27, 1986, pp. 106-107.
3. Palmieri, Jean E. “It’s Our Folks’ Who Built Wal-Mart, Sam Walton Says,” Daily News Record, January 14, 1988, 2, 4.
4. Sam’s Buy-Line, “Sam’s Adds One Millionth Business Member,” 1988.
5. Smith, Sarah. “The Supermen of Specialty Stores,” Fortune, October 12, 1987, pp. 142-143.
6. Taub, Stephen. “Gold Winner: Sam M. Walton of Wal-Mart Stores Takes the Top Prize,” Financial World, April 15, 1986, pp. 28-33.