Operations, Information & Technology , Leadership , Management

Lee Scott: Criticism May Produce Innovation

The Wal-Mart president and CEO says with some issues, like sustainability, feedback can be used to get ahead of society's expectations.

March 01, 2008

| by Margaret Steen

Wal-Mart had $375 billion in sales last year and $12.8 billion in earnings. It has 1.9 million employees in more than 7,200 stores around the world. These big numbers have made it a lightning rod for criticism, which sometimes can be an advantage.

Speaking to the Sloan Class of ‘08 at Stanford GSB in February, Wal-Mart President and CEO Lee Scott explained how criticism has taught his company not just to look at the specific criticisms being levied but also to anticipate future hot-button issues with the public. For example, the company is currently focused on sustainability, an issue that emerged as a key area in which Wal-Mart could benefit from being ahead of society’s expectations, rather than simply following the law.

As a result, Wal-Mart now is well ahead of others in reaching its goal of being supplied by 100 percent renewable energy, creating no waste, and selling products that sustain the environment. That initiative, Scott told the fellows, stemmed partly from conversations he and other top managers had about various class-action lawsuits on other issues the company was facing. A decade from now, they wondered, what will society hold us accountable for? What will the company’s future leaders today’s managers had done differently? “What we found out, though, is that it is not a defensive strategy,” Scott said. “It is an offensive strategy.”

Employees throughout the organization — and Wal-Mart’s suppliers — brainstormed ways to make less of an environmental impact. The company sold about 140 million compact fluorescent light bulbs last year — enough to eliminate the need for three power plants, Scott said.

Scott emphasized that although people with higher incomes may be willing to pay more for products that are environmentally friendly, that’s not true of everyone. So the company’s solutions couldn’t add to the cost of the products it sells.

“People care about the environment,” Scott said. “But the average person who shops at Wal-Mart can’t afford to pay more. When you give them an affordable choice and you eliminate waste, they like that.”

Another area in which criticisms have led to new business opportunities is health care.

Scott said that at first, when the company was criticized for not providing adequate health care for its employees, he and other managers tried countering with facts, such as the percentage of employees with insurance. Then a consultant he was working with pointed out how much energy was being spent rebutting each specific charge.

Instead, Scott said, the management team started focusing on what would help employees with their health insurance needs. They found ways to improve their employee health care plans. And they realized that many of their customers probably wanted a less expensive way to get health care, as well.

So Wal-Mart started setting up in-store clinics that offer standard treatments and services for low, fixed prices of $19 to $59. The company plans to open several hundred more clinics in the future.

Wal-Mart’s entry into health care is discussed in a research paper by GSB Professor Robert Burgelman and Andy Grove, former chairman of Intel. The paper, “Cross-Boundary Disruptors: Powerful Inter-Industry Entrepreneurial Change Agents,” explores how a large, established company can enter a new industry, forcing that industry to remake itself. A likely target is an industry that startups have tried and failed to change.

This sets the stage for a cross-boundary disruptor — a large company from another industry that enters the market and forces change. Burgelman and Grove discuss how Apple disrupted the music industry with the iPod. And they speculate that Wal-Mart may be in a good position to challenge the health care industry to change.

The two cited Wal-Mart’s strong record of innovation, such as introducing radio frequency identification into its supplier network. Wal-Mart also meets other criteria for being a cross-boundary disruptor, they said: It is already a large player in its core markets, and it is looking for other areas for expansion.

Scott said Wal-Mart is “committed to grow,” in terms of sales and earnings, and also by expanding its already large international presence. And the criticism the company has received along the way is helping.

“We used to put up the sand bags and get defensive about everything,” Scott said. “Once we got past that, we started seeing business opportunities.”

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