There’s No Best Age to Start a Business: The Story of Sam Walton and Wal-Mart

Walton

Photo by tsweden

After graduating from the University of Missouri in 1940, Sam Walton took a job with J.C. Penney.  He was 22 years old.  He spent five years with J.C. Penney learning the retail industry.  In 1945, Walton became an entrepreneur and bought a Ben Franklin variety store in Arkansas for $25,000.  He was 27 years old.  Walton spent five years growing his Ben Franklin store.  But in 1950, after Walton’s landlord refused to renew the five year lease he had on the Ben Franklin store location, Walton had no choice but to sell the franchise.  He sold it for a fair price, and then had to start all over again.  Walton was now 32, and it was at this age when he opened his first Walton’s Five and Dime (again in Arkansas).  But it wasn’t until he was 44 years old that he opened the first Wal-Mart.  It was a very gradual progression.  So, does age really matter when starting a business?  I doubt it.  There is no best age to start a business, no perfect time – none of that.  And Sam Walton is the perfect example of this. 

In 1992, Sam Walton sat down to write his story, Sam Walton: Made in America.  It’s the story of Wal-Mart, and how a small variety store eventually led to Sam Walton becoming the richest man in the United States.

Walton was a unique individual.  A lot of who he was led to what Wal-Mart became.  But he also had a system.  He was absolutely a fanatic about discounting, evidenced by the fact that a normal day at the office for him started at 4:30am.  And as with most great businessmen, Walton used this early morning time to think about the business and sort things out.  And this thought led to a very basic business philosophy: his business existed to provide value to customers, which meant that in addition to quality and service, he had to save them money.  In his efforts to provide value, he was continuously trying to improve how he did things.  Here’s his philosophy, or really his formula, broken down by discipline:

  • Strategy:  This was such a simple concept to Walton.  For example, almost everything he did in retail, he copied from somebody else.  And why not?  Is there some rule against this?  Sometimes strategy is this simple.
  • Innovation: Yes, Walton initially followed the franchise guidelines when he owned the Ben Franklin variety store.  But it didn’t take him long to start experimenting.  He thrived on change, and no decision was ever sacred.  He strongly believed in constant change and keeping people a little off balance.  Much of his innovation was “borrowed innovation,” but that still counts.
  • Leadership:  Walton believed in Servant Leadership, and wanted all his managers to practice it.  He believed that when this happened, the team (both manager and associates alike) could accomplish anything.
  • Management:  As soon as Walton realized the importance of growth (Scaling) in his industry, he started looking for ways to control what would become an absentee organization (by utilizing Comparative Advantage).  In order to do this, he had to have timely information.  And what he was looking for in that information was how well employees and customers were being taken care of.  He believed if he took care of that, Wal-Mart would be successful.
  • Economics:  The idea behind discounting is that by cutting prices, sales increase so much that total earnings are more than they would have been at the normal retail price.  Why?  It has to do with consumer behavior.  Consumers act one way at what they perceive to be fair and expected prices, but they go through a Phase Change in their purchasing behavior at what they perceive to be discounted or cheap prices.  People are willing to buy a certain amount of goods at normal prices, but they shift into a completely different type of consumer at reduced prices.  And this different consumer is a whole lot more willing to buy at reduced prices.  Simple Arithmetic showed Walton that the extent of the Phase Change was well worth pursuing.  There is also a cognitive bias at work here called the Reciprocity Tendency.  It basically says, the more you give me, the more I give you.  And this is absolutely at work in discounting.
  • Finance: Walton was never really comfortable with debt, but he recognized it as a necessity of doing business.  But debt just wasn’t working very well for him, so he decided to go public in 1970.  This equity capital is what really fueled Wal-Mart’s aggressive expansion.  In other words, while debt is a very common way to finance the start of a business, it poses growth limitations.  Every business inherently faces Constraints, and funding decisions are certainly no exception.
  • Accounting:  Walton was more of a salesman than an accountant.  When he first began, he used a method of accounting he called the ESP Method.  It’s a pretty basic method: if the books don’t balance, take however much they’re off by and enter it under the heading ESP, which stands for Error Some Place.  Obviously, Walton was a funny guy.  And although this method may sound crazy, it sped things along when it came time to close the books.  And most importantly, it allowed Walton more time to spend being a fanatic about his business, which seems to have worked out well for him.
  • Marketing:  Walton’s thoughts on Marketing were very simple: when customers thought of Wal-Mart, they should think of low prices and satisfaction guaranteed.  If Walton could corner that space in the consumer’s mind, he would win.
  • Human Resources:  Walton felt that people who lacked experience and know-how, but had the real desire and the willingness to work their tails off and get the job done, would make up for what they lacked.  And this proved true for him nine times out of ten.  It was one of the ways Wal-Mart was able to grow so fast.  Since there’s no true formula for hiring, and Walton’s method provided results 90% of the time, maybe everyone could benefit from rethinking hiring practices.
  • Supply Chain: Wal-Mart owned and managed its distribution and logistics channel.  This gave them a great Competitive Advantage over companies that relied on third party suppliers.  It shortened lead times, and allowed them to constantly look for way to improve operations.
  • Negotiations:  Wal-Mart was originally populated with negotiating zealots who firmly believed that they were negotiating for the customer instead of Wal-Mart.  They would leave nothing on the table.  Eventually, Proctor & Gamble and Wal-Mart got together and figured out a better way: transparency.  Proctor & Gamble was able to see Wal-Mart’s inventory levels, and therefore was able to replenish at minimal expense.  The shift to viewing suppliers as partners (at least in the U.S.) was largely pioneered by Wal-Mart, and is now copied by many.  Of course, Japan was doing this in the 1950’s.

So there it is.  A formula based largely on simplicity and continuous change.  Walton never could just leave things alone.  He was constantly tinkering.  But more than anything, he was a complete fanatic (or maybe a lunatic).  How many people start their working day at 4:30am?