Each Monday I post the next section of my 2001 book, which was originally called (by the publisher) Hoover’s Vision but which I have now retitled The Art of Enterprise. I have posted over half of it already; click on the “Monday” column to see all the prior sections. The entire book can be downloaded as a PDF for $10 at http://www.scribd.com/doc/25085990/The-Art-of-Enterprise-by-Gary-Hoover-January-2010

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Built to Serve

The first question I ask the leaders of any enterprise is, “Why does this enterprise exist?” Sometimes the leaders of a business will tell me, “this company exists to make a profit.” Some companies fill their mission statements like “our goal is to make a 12% return on investment every year.” These are not the right answers. Saying an enterprise exists to make a profit is like saying automobiles exist to get good gas mileage. Automobiles exist to give us mobility, to allow us to move around. Once the automobile was invented and we want to select the best car, then we look at many measures – gas mileage, maintenance cost, crash resistance, expected years of life. Perhaps one measure, like gas mileage, is more important than any other. But it’s not the reason for building a car in the first place. It’s not the purpose.
I am a “numbers person” at heart, having spent many of my years doing financial projections. I have run every type of spreadsheet since VisiCalc, and I have seen every type of return on investment analysis. If you give me the financial statements of two shoe stores, I can spend hours comparing their gross margins, their sales per square foot, their expense ratios. If you give me the numbers on two airlines, I will stay up all night comparing load factors and block hours. These and other numbers are powerful measures that allow us to compare enterprises, to see which ones use their resources well and which ones waste them. But this fascination with numbers does not change the fact that enterprises do not exist for the purpose of being measured.
The only valid reason to the existence of any enterprise, for profit or non, is to provide products or services to people. To somehow make the world a better place. Enterprises which forget this will soon perish; those that remember, and put it into practice every day, have a chance at long-term survival, even prosperity.
 

The Power of the Customer: A Lesson from Wall Street

A vivid example is the rise of Wal-Mart. In 1973, fresh from college, I arrived at Citibank’s investment management department as a junior securities analyst covering retailing. I loved retailing, having studied it for ten years, and was eager to learn more. At the time, Citibank was one of the biggest institutional stockholders in the nation. I was blessed to have a chance to learn retailing analysis from a veteran analyst, Pete Wetzel. He is one of the few people I ever met who loved and studied retailing as much as I do.
After I had been around a few months, Pete took me into his office and said, “Gary, the bosses here have given me a budget to bring in a summer intern to study some small industry segment, some part of retailing you I shouldn’t invest our time in.” Do you think we should bring one in to look at the small regional discount store chains?”
At the time, our retail investments were concentrated in the stocks of the three industry giants – Sears, Penney, and Kmart. Far behind these industry leaders was a pack of little companies with funny names like Shopko, Kuhn’s Big K, Wal-Mart, Mohr Value, Caldor, and Alco-Duckwall. None of them did over $150 million a year in sales, which was a pittance compared with the established giants. Even Montgomery Ward and Woolworth dwarfed these little regional chains.
Pete and I, “the best and the brightest,” decided No, it would not be worth the time (even of a summer intern) to look at these little outfits. After all, how could any of them survive against the giants? We knew that if any of them ever ventured from their small town, regional bases into the big cities, Sears and Kmart would annihilate them. Our money was safer with the big names, the proven winners.
Of course, over time, Citibank (and every other major investor) changed its tune. In 2000, Wal-Mart made a profit of $6.3 billion on sales of $193 billion. In the same year Sears, Kmart, and Penney combined earned $394 million on sales of $111 billion. Kmart and Penney lost money, with only Sears making a profit. Wal-Mart today has over 1,100,000 employees, more than three times as many as any other US company. 230,000 net new jobs were created by the company in the past year alone. They have risen to the uppermost levels of the Fortune 500.  
How could we, the best and brightest, have been so wrong?
Try to look back through our intensely analytical 1973 eyes. Do a balance sheet comparing Sears (then the industry leader) and Wal-Mart:
Who paid their executives the most? Sears.
Who had the best consultants? Sears.
Who had the most invested in technology? Sears.
Who had the best human resources team? Sears.
Who had the most experience? Sears.
Who paid less for their real estate? Sears.
Who paid less for the merchandise they carried? Sears.
Who had a better-established brand name? Sears.
Who had the best and most visible locations? Sears.
Who had the support of Wall Street and the investment bankers? Sears.
You could go on and on with this list, and you’d be hard-pressed to find a single advantage in Wal-Mart’s favor in 1973.
But of course, they did indeed have an advantage. To illustrate, let me invent a little fiction:
 
One sunny spring Monday in the 1970s, the leaders of Sears were at a Wall Street conference. Their private jet awaited them at Teterboro Airport to fly them back to the Sears Tower, a monument to corporate power. They were smart people, hard working people, nice people. (I know that, because I did meet the Sears people). Their CEO, an attorney, opened a bottle of champagne and proposed a toast: “To the biggest retailer on earth. We have huge market shares. We employ more people than any other retailer. We are going to take on the residential real estate industry by buying Coldwell Banker. We are going to take on the stock brokerage industry by buying Dean Witter. We are going to build Sears stores around the world!”
Everyone at the meeting seconded the toast. Everyone was happy. Sears was at the height of its power, and the future looked bright.
But Sears had forgotten one thing – that the decisions that matter are not made in meetings with accountants and lawyers, on Wall Street or in the Board room. The decisions that matter are made on the selling floor, by customers with cash or credit cards at the ready. If there are any meetings that matter most, they are meetings with clerks and assistant managers.
Sears perhaps could have been allowed a slip here and a slip there except for the fact that, on that same sunny day, Sam Walton drove his truck into Poteau, Oklahoma, site of an early Wal-Mart. He walked into the store. He picked up a bag of dog chow and said, “Someone could trip over this! We need to put it in a neat pile.” He looked at the price and saw $4.99. He said, “I just came from the supermarket, and they have this same bag for $4.49! We can’t let them make liars out of our low-price philosophy.” Then Sam – also a nice guy, a smart guy, a hard-working guy – headed toward the employee break room to have coffee with the stockboys, to learn what their frustrations were, what their aspirations were.
 
While I have invented this story, it is an accurate description of how Wal-Mart conquered Sears. Sears, run for over 70 years by merchants, was now run by lawyers and others far removed from the fray. Wal-Mart was still run by a lowly shopkeeper. Sears began to serve Wall Street; Wal-Mart served Main Street. Everything Sam Walton knew he had learned from the likes of Richard Sears, J.C. Penney, and Harry Cunningham (the inventor of Kmart). Sam was not pioneering a new economy, Sam was focused on the most basic of basics. Sam was focused on the customer. And even the great Sears, Roebuck & Company, with all its assets, with all its brains, with all its accumulated market power, could not stop a force so great as Sam Walton and his organization. Because Sears had taken its eye off the ball.
This same kind of story could be told of General Motors, of IBM, of AT&T, of some of our largest banks. This same story will again be told in the future, in industry after industry. In retailing, the story will again be told when Wal-Mart becomes satisfied with its success, and deludes itself enough to believe that power rests in the hands of board members, or Wall Street, or top management. And some younger, more entrepreneurial retailer will come along and unseat Wal-Mart to become the new “largest retailer in the world.”
The irony is that, as long as Wal-Mart understands their own vulnerability, the company will probably remain on top. The moment they believe they are on top to stay, they will begin the long fall from the top. Study Wal-Mart, Microsoft, and Southwest Airlines and you will find companies that compete with the intensity of struggling startups, despite their enormous success.
It is virtually impossible to overstate the power of the customer. The US Post Office long held a monopoly on deliveries to our home. For some transactions, you had to be home at the right time, or go to the post office on their terms. Their managers felt they had a monopoly that would last forever. But the customer was not being well-served, and Federal Express filled the gap.
Even laws change if enough people want them to change. Thirty years ago, it was illegal to shop on Sunday in many states. It was a violation of the law to discount prescription drugs or eyeglasses in most states. Lotteries and casino gambling were illegal in 49 states; today one or both is legal in 48 states.
When I was growing up in the 1960s, few people imagined that the Cold War between the Soviet Empire and the capitalist West would ever end. But ultimately, as people behind the iron curtain began to get CNN on satellite, as they began to realize that people in Western Europe and the US had access to things like toothpaste and color television, they decided that they, too, wanted a piece of the pie. Leaders like Mikhail Gorbachev jumped on a trend that was well underway, a trend that reflected the power of the consumer, even behind the iron curtain.
 

The only rule is that customers always get what they want. It is just a matter of who gives it to them and when.

     

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