Good ideas are a dime a dozen. The magic that turns a person's vision into a profitable enterprise lies in the execution of those ideas. The great entrepreneurs, the ones that took their vision and built exceptional businesses from the bottom up, needed managerial skills and financial acumen – not just creativity and imagination.
By 1950, the fates had seemingly stymied Sam Walton's attempts at building a retailing empire. His turnaround operation at a Ben Franklin store in Arkansas was lost over a lease. The landlord, seeing that Walton had turned the store into the leading one in the region by consistently pricing lower than nearby competition, refused to renew so he could give the store to his own son.
Walton moved to a new location and insisted on a 99-year lease this time. He continued to consistently beat his competitor's price and was soon running 16 variety stores, but Walton saw trouble on the horizon. Large discount stores like Kmart were emerging to push out small-scale variety stores. After unsuccessfully pleading with Ben Franklin to change their strategy and open large discount outlets, Walton decided to go it alone. (Find out more about starting your own business in Starting A Small Business In Tough Economic Times and Start Your Own Small Business.)
Walton knew he couldn't go head to head with the larger stores because he had less capital to work with. Instead, he focused on rural locations that his bigger competitors ignored in favor of dense population centers. The rural focus posed challenges in both warehousing and shipping, so Walton built huge warehouses in areas between several stores.
Walton's shipments to the warehouse were much larger than they would have been to any single store, allowing him to save on shipping costs through volume discounts from suppliers. From the warehouse, the newly-christened Wal-Mart stores kept a constant inventory flow, reducing storage costs and keeping an accurate tally of demand via new electronic scanners. The stores then passed these cost savings on to customers, making a very small profit on each sale but making up for it with a huge volume of sales.
Walton took the company public in 1970, and was ready to go head to head with other discounters in larger cities. Wal-Marts weren't opened in the expensive malls or leasing areas of city centers, but on the outskirts where land could either be purchased outright or leased affordably. Then, Walton depended on his consistently low prices to attract customers to his store. Cost consciousness, a commitment to increasing efficiency and the ability to negotiate volume discounts with suppliers gave Wal-Mart a pricing edge that few retailers have yet to match.
In much the same way as Sam Walton started off in the sticks of retailing, Charles Schwab made his name in a largely ignored segment of investing – the individual investor. Using money borrowed from relatives, Schwab was running a small brokerage firm, Charles Schwab & Co. These were lean years for small firms that couldn't land institutional clients willing to part with large fees. It all changed on May Day, however, when the SEC moved away from fixed-rate commissions. While most brokerages lowered fees to lure in more institutional clients, they were either maintaining or increasing the pound of flesh they took from small investors. Schwab saw his chance to go the other way and took it. (Find out how to go it alone in Start Your Own Financial Planning Firm.)
Charles Schwab & Co. began offering discount brokerage services to any investor who wanted to buy or sell a stock. Schwab changed the structure of his company to streamline costs to justify the discounted rate. Gone were the research, advice and bonuses. In their place was a salaried staff executing orders via an automated computer system.
Again, the volume of orders made up for the lower profit realized on each fee. Schwab used the profits to make his brokerage more attractive to individual investors with 24-hour service, cash management accounts, insurance, more branch offices and a commitment to educating potential investors until they felt confident in investing for themselves. Schwab's vision was much larger than his available capital, so he sold his company to the Bank of America, in hopes of reaching individual investors everywhere.
Unfortunately, Schwab found Bank of America too cost-heavy, and he bought his own company back in 1987 – it turned out to be one of the most successful LBOs of the era. In 1990, Schwab embraced emerging technology once again to become a leader in internet trading. Schwab democratized investing, making it as easy and affordable for individual investors to make and lose money in the market as it is for the large institutions. (Read Full-Service Brokerage or DIY? to learn more about the difference between these two types of brokerages.)
Bernie Marcus and Arthur Blank
The rise of Bernie Marcus and Arthur Blank offers a synthesis of what made Walton and Schwab successful entrepreneurs. Marcus and Blank were part of the management at Handy Dan, a hardware retailer. In the 1970s, the two began applying discounting principles at their outlets, noticing the same increase in overall profits on which Walton built Wal-Mart.
Unfortunately, Marcus and Blank abruptly found themselves out of a job when a raider bought up their parent company and fired the management. Raising cash from investors, Marcus and Blank decided to start their own hardware chain. They wanted to combine discounting on a wide array of products with superior customer service. Their niche, as they saw it, was in supplying their customers with both the supplies and the knowledge needed to carry out home improvements by themselves.
Although the low prices were important, it was the staff that turned out to be the clincher for most customers hesitant about the move from calling professionals to do-it-yourself. Home Depot held educational sessions about every aspect of home improvement. Soon, terms like "tongue-in-groove," "caulking" and "plumbing trap" were no longer the exclusive vocabulary of professionals.
Home Depot kept on the leading edge of consumer education, publishing guide after guide and making, "You Can Do It. We Can Help" the company mantra. Loyal repeat customers provided a solid base for Home Depot to expand rapidly, going public in 1981. It became the world's largest hardware retailer and used its position at the top to pass on lower prices to its customers. Marcus and Blank are no longer involved in the day-to-day management, but the corporate culture they created has kept Home Depot at the top of a very competitive industry.
Conclusion: Working For The Customer
The tie that binds these three stories is the idea of working for the customer. Walton, Schwab, and Marcus and Blank were successful because they were constantly looking for ways to attract and retain customers. This manifested in diverse ways (cost-conscious strategies, negotiating with distributors, commitments to client education), but the same principle was at the heart. Although strong management skills and vision are important, it's the relentless drive to bring the customer what they want at the best price that helped these entrepreneurs and their firms succeed. This same drive has powered the careers of entrepreneurs from Henry Ford to Michael Dell. Sam Walton said it best, "There is only one boss: the customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else." (Find out if you have what it takes in our article: Are You An Entrepreneur?)
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