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Wal-Mart, the world’s biggest and – in some quarters – most feared retailer, has been the subject of much speculation in recent days, in part because a number of strategic moves, such as its urban and high fashion initiatives, seem to have been less successful than the company hoped.

To get a sense of the company’ prospects and perspective, we turned to author William H. Marquard, who, as a consultant with Ernst & Young, established and ran Wal-Mart's first-ever strategic planning process. His recently published book, “Wal-Smart: What It Really Takes to Profit in a Wal-Mart World,” is a fascinating look into the company, what one can learn from it and how to compete against it…and we thought he’d be an interesting person with whom to speak.

MNB: Watching the goings-on at Wal-Mart reminds me of the old days when Kremlinologists would try and figure out what was happening in the Soviet Union...especially with people changing positions and Lee Scott last week seemingly trying to downplay his role in things like choosing store locations and choosing marketing plans. What’s your sense of the internal climate at Wal-Mart these days?

William H. Marquard: One of the characteristics of a “strong-process organization,” which I describe in detail in Wal-Smart (www.wal-smart.com) , is cross-functional mobility. Strong-process organizations can cross-train their leaders by rotating them through a variety of positions – the processes are strong enough to support and teach the leader in the rotation. For example, Lee Scott started in distribution, and then led merchandising before rising to the CEO role. Therefore, many of the current moves at Wal-Mart are part of an intentional plan to cross-train leaders and bring fresh thinking to departments.

That being said, Wal-Mart is clearly the target of a number of external forces, including unions, environmentalist groups, governmental organizations, and NGOs. As CEO, Lee Scott needs to run interference on these issues in order to give John Menzer, Eduardo Castro Wright, and Mike Duke the air cover they need to run the core business.

MNB: Our feeling is that Wal-Mart has reached the point where it has sold about as much typical Wal-Mart merchandise to typical Wal-Mart customers, which has necessitated it moving into new (urban, upscale) markets. But do you think the company might be better served by developing new formats to serve its existing customers, rather than trying to use tried and true formats to appeal to new customers?

William H. Marquard: In Wal-Smart, I cite that in today’s environment, the battle for retailers is over trips, not loyalty. For example, the average family purchases grocery products five times per week. That includes everything from the stock-up trip to SAM’s CLUB or Costco, the weekly fill-in trip at Kroger, and the convenience trip to the c-store to pick up milk or bread.

Gone are the days when a consumer was loyal to just one primary grocery retailer. Each family assembles its own virtual “shopping mall” with the combination of stores it needs to serve the varying tastes and needs of the family.

Although supercenters are a “one stop shop” for a variety of food, general merchandise, and soft goods, they may only fit one of those five weekly shopping trips. SAM’s CLUB and Neighborhood Markets each fit other types of those five trips. Therefore, an expansion of formats to meet those other weekly trips would intercept more of the target customers’ shopping dollar.

In the U.S., there is a wide-open niche to be the relevant retailer for needs-based urban consumers. Target won’t go there because it doesn’t fit the “target” customer demographic. Kmart should have gone there five years ago because its base of well-positioned urban real estate was a strong competitive advantage. (In fact, as the executive vice-president of Kmart’s largest supplier in 2001-2002, I encouraged them to embrace this market.) Although that customer best fits Wal-Mart’s household income demographic, unions will continue to fight hard to sustain wage levels that don’t necessarily match the price points of Wal-Mart customers.

MNB: You write in your book about the importance of Wal-Mart’s sense of focus, and yet it seems to have lost that lately with its foray into “upscale marketing,” its legal issues with Julie Roehm, and its seeming preoccupation with improving its public image. Is this a fair characterization? And do you think that losing focus is inevitable when a company gets as big and successful as Wal-Mart?

William H. Marquard: When looking at focus, one needs to separate core business execution from “tests.” Focus is most important in executing the core business and making sure that every employee in the company is executing against the productivity loop: reduce costs, reduce prices, increase sales, increase profits (and repeat).

Yet Wal-Mart is constantly testing new ideas, new products, new lines of business, new formats, etc., consistent with the “correction of errors” and “we can make it better” elements of the culture I also discuss in Wal-Smart.

Almost twenty years ago when the hypermarket experiment at Wal-Mart was shut down, it received scant attention. (By the way, what Wal-Mart learned from that experiment became today’s supercenter growth engine). Yet today, every “test,” like upscale marketing, gets the same scrutiny as the paparazzi chasing Brangelina’s newest adoptee.

The critical element for Wal-Mart is not losing focus on the execution of its core business and its core value proposition. With 1.8 million employees worldwide, that is a daunting challenge.

MNB: When Wal-Mart does things like hand out lots of bonuses, get involved with sustainability, etc., do you think that it is cosmetic or a real attempt at a cultural shift?

William H. Marquard: Consumer marketing guru Leo Shapiro likes to tell the story about an ugly and curmudgeonly prince. In order to attract a beautiful woman, he has to wear a mask that projects handsomeness and honor. He ultimately begins to act like the mask, becoming the person he aspires to be. He assumes the mask of the good prince.

What Wal-Mart is embracing is a concept I call “Find the AND” in the book. The winning corporations in today’s economy are the ones who realize that their community, environmental, and social strategies can actually drive shareholder value. Those social and philanthropic activities, once considered a “necessary cost of doing business,” are in fact a portfolio of investments that actually improve shareholder value. Company executives must intentionally align their social and philanthropic activities with their business strategies, going narrow and deep to create a noticeable difference in the communities in which they operate.

MNB: Do you think that because if its size, Wal-Mart may be easier to compete with today than it was, say, five years ago?

William H. Marquard: Former CEO David Glass used to say “if our competition only knew how many mistakes we make.” On the one hand, Wal-Mart has a 10% share of the U.S. retail market. On the other hand, that means they have a 90% rejection rate every day: 90% of Americans choose to shop somewhere else than Wal-Mart each day.

One of the key messages in Wal-Smart is that as competitors in any industry with a giant player, we have to make three smart choices: to differentiate, to emulate, and to dominate. Differentiate away from the giant; emulate that subset of the giant’s best practices that fit your differentiated business strategy, and dominate the major portion of the market the giant doesn’t or can’t play in. The market is wide open for many retailers to fulfill a differentiated position and coexist with Wal-Mart.
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