Monday, July 30, 2012

The Productivity Loop (Walmart's Feedback Loop)

This is the fourth post in a series about Amazon's Feedback Loop, the mechanism most responsible for the company's success. See also the previous posts, The Growth Levers in Retail: Price, Selection, ConvenienceUnlocking the Broad Middle (Hint: Price Is the Key); and Sam Walton, Panties and Power Laws.

After three hours of high-energy corporate pep rally, Walmart's CEO - Mike Duke - strides onto stage to bat clean up. The setting is the company's 2011 annual shareholders' meeting, emceed by Will Smith and featuring a cavalcade of senior executive speeches and heart-warming vignettes on the dedication of Walmart associates. 

Whether from Doug McMillon of Walmart International, Brian Cornell of Sam's Club (now departed), or Eduardo Castro-Wright (now departed) of walmart.com, each manager preceding the CEO has used his stage time to extol the virtues of what they call the Productivity Loop: Operate for less through every day low costs (EDLC), which leads to...Buy for less from suppliers, which leads to...Sell for less to customers with every day low price (EDLP), which leads to...GROWTH! And the loop circles around the unifying theme of "Saving people money so they can live better."
Walmart's Productivity Loop
It's a steady drumbeat, and it's loud. Audience members will not leave this meeting foggy on the takeaway points. Yet it's not limited to one meeting. Review any public presentation by a Walmart executive (you can find them here) and you will see that each returns to these same ideas over and over and over again.

Back at the shareholders' meeting, Mike Duke comes on stage, keeping the streak alive with yet another speech about the productivity loop. As he highlights the connection between EDLP and EDLC, he walks to the podium and grabs a well-worn copy of Sam Walton: Made in America, opening it as if he's preparing to read chapter and verse from scripture itself.

Duke says (and I'll paraphrase to a degree),

I picked this book off my shelf and read it again this week, for what must be the third or fourth time. And let me share with you what Mr. Sam has to say about EDLC...'We exist to provide value to our customers, which means that, in addition to quality and service, we have to save them money. Every time Walmart spends one dollar foolishly, it comes right out of our customers' pockets. Every time we save them a dollar, that puts us one more step ahead of the competition - which is where we will always plan to be.'

Duke closes the book and holds it up solemnly for the auditorium to behold. They clap reverently at Mr. Sam's immortalized words just before the current CEO sums it up with this statement: 

No one controls costs better than Walmart because we do it for the right reason. It's for our customer.

Walmart's productivity loop is grounded in the premise that price drives sales volume (as Walton demonstrated with his panties power law). The feedback loop's cardinal trait is recursiveness. As it repeats and churns, the inputs grow larger and stronger, compounding each other in ways that are more exponential than arithmetic. Churning the loop doesn't result in 2 + 2 + 2 +2 = 8, it results in 2 raised to the fourth power (2 x 2 x 2 x 2 = 16). Having lower costs let you charge lower prices. Lower prices lead to a higher volume of sales. The more sales you have, the more you can reinvest in ways to lower prices further. The more you churn it, the bigger that number gets and further away you pull from your competition. 

That's the power law in play. That’s how Walmart grew at such a torrid pace, earning the patronage of the broad middle.

We'll consider a specific example of how Walmart churns its productivity loop to its advantage (and the disadvantage of competitors) in the next post.