When Does Friction Trump Scale in the Corporate Life Cycle?
This month's column raised the issue of size limits on an organization's ability to compete In today's global economy. The specific case in point was Walmart and whether it had become just too big to pursue its business model. Given the nature of some unusually thoughtful responses, there was no consensus on the question of whether Walmart has reached its full potential. Comments raised even more interesting questions surrounding the dynamic of relationships between the benefits of scale and the problems of friction in very large organizations.
Several respondents commented on dangers to the Walmart business model. Benn Manning commented that "The real dangers for Walmart aren't competitors or new business models but are instead itself and how it delivers on its value proposition, potential regulation from federal and state governments, and negative publicity driven by special interest groups." Shadreck Saili added, "Is a company this large manageable?…'Yes' for as long as its policies align with policies of the environments it operates in … 'No' if complacency levels begin to rise to unprecedented levels."
Others cited evidence that Walmart's model has some practical limitations. Evidence of possible friction was presented by Clark Phippen, who cited symptoms that suggest that Walmart is becoming "arthritic."(1) Employees, he wrote, consider themselves ''just a minimum wage earner happy to have the job …; and (2) wastage … (that) seems to abound in the cavernous stores…." Cheri Thomas cited saturation of its markets, especially in the United States, as a concern, adding that "Walmart's fixation on low prices has led it to prey upon other stakeholders.'' She added, ''How long can this be sustained without effective push-back?"
Others noted the benefits of scale in fostering success for the foreseeable future. Robert Duque suggested that the organization will learn from its subsidiaries, such as Sam's Club, which is developing "a more information-driven model by gaining a better understanding of product and customer relationships." Dean Vella cited Walmart's innovation in supply chain management and sustainability as ways in which it is reducing the friction associated with size. Ajit noted the benefits of scale: "Their low costs are a core strength and therefore their commensurate risks (are) lower." And Steve Fotenberry said that "As much as some people like to complain about Walmart … The 'family' atmosphere for the workers continues to exist, and the value to customers has not changed."
These comments suggest that the tradeoff between scale and friction is complex. For example, what effect does a company's origins, its beliefs, and how these are reflected in management behaviors (reflected in Walmart's emphasis on "family") reduce friction? How does scale bind an organization to a low-price, low-cost strategy, eliminating management choice going forward? And do such strategies have much longer lives than those associated with other forms of differentiation among offerings to customers? When does friction trump scale in the corporate life cycle? Under what conditions? What do you think?
There is a body of research that seeks to relate economics to human biology. It's usually associated with the notion that the life cycles of businesses parallel stages of biological life: birth, rapid growth, maturity, and death. Companies are categorized as growth or value investments. Managers think of businesses in their portfolios as question marks (too early to tell), stars, cash cows, and dogs. Entrepreneurs "harvest" the spoils of startups once the rapid growth period is nearing its end. This work has presented evidence that there is a surprising amount of turnover among the largest business firms, characterized in the United States by the fact that only one company, General Electric, has survived in the Dow Jones Industrials index since its beginning.
We are reminded of the matter as Wal-Mart Stores, Inc. names a new CEO, Doug McMillon, who faces a number of very large challenges, including that of how to grow a nearly half-trillion-dollar organization charged with everything from bribery in its Mexican operation to discrimination in its labor policies, and blamed for low wages and reliance on indirect societal subsidies for its labor policies. Is it possible that Walmart is just too big to pursue its business model in the longer-term future?
This is not a trivial question. Walmart, as the world's largest private organization, has a bigger population than several United Nations member countries. Its revenue base is larger than many of the world's economies. And its borders extend far beyond the US.
Everyone has an opinion about Walmart. Mine is influenced by my only visit to Bentonville, Arkansas 20 years ago. Even then it was a big company. The Saturday morning management meeting I witnessed was attended by a thousand members of the Walmart "family"—employees, their families, and guests like me. Every effort was made to recognize individual effort. New products were introduced. Decisions under consideration were even discussed from the stage. The biggest display in the room was an electronic counter on the wall that every two seconds added up the savings delivered to Walmart's customers over the company's lifetime.
How you feel about Walmart's future may depend on how you feel about its policies and business model. Clearly, leadership has chosen to distribute the profits from its remarkable productivity increases to customers and, at least in the early years, owners and investors that largely included managers. More recently, the benefits have gone primarily to customers. Walmart's managers are not among the most highly paid, especially in light of the dedication, travel, and on-the-ground involvement expected of them. Investors do not regard the stock as a "growth" stock.
And what about employees? They are thought by many to be left out of the distribution of the spoils almost entirely. Overlooked is the fact that the company has created 2.2 million jobs, albeit many part-time, but with very few layoffs. Employees with whom I have spoken directly are generally positive about their company and their work. They see senior managers frequently and know and work with many of them in the stores. They seem to feel that they are part of a community, one that quite naturally would take up contributions to put food, including Thanksgiving turkeys, on the tables of their less-fortunate coworkers, regardless of what a cynical outside world might think. The annual employee turnover rate is 70 percent, not especially high for a retail organization.
But we're left with a question that has been posed for many years: How much longer will Walmart's business model be sustainable? Will it be endangered by its size, increases in the minimum wage laws, or other business and social trends that have plagued nearly every other large company in history? Is a company this large manageable? Is Walmart defying economic gravity? What do you think?