Changing Direction

The Institutional Yes
How Amazon’s CEO leads strategic change in a culture obsessed with today’s customer.
An Interview with Jeff Bezos by Julia Kirby and Thomas A. Stewart

There was an excellent article in HBR’s October 2007 edition that interviews Jeff Bezos, the founder and CEO of Amazon. They have been hugely successful in growing their business organically. I will excerpt the article over the next few postings, highlighting issues I feel are critical to drive organic growth from a leadership perspective.

This is the last of the trilogy. I hope you enjoyed it!

At the end, I took some liberty to do some consulting to emphasize the role of leadership in driving organic growth

CHANGING DIRECTION


(Interview questions) You’ve got two other sets of customers: the third parties who are selling goods through your site and this new set—the developers who can benefit from the tools you’ve created over the years. What are some constants for those groups?

We’re still working on identifying them for the developer community, although we have some good guesses as to what they are. Reliability of the platform would be one, which is kind of a no-brainer. But then a lot of these things are no-brainers. No-brainers are no-brainers for a reason: They actually are important. As for the sellers, the number one thing that sellers want is sales.

Is that why the auction business didn’t work out for Amazon—because eBay already had a lock on the sales those sellers wanted?

Actually, no, it’s a little different from that. It’s that our customers who are buyers are very convenience motivated. We make it really, really easy to buy things. You can see that if you look at a metric like our revenue per click or revenue per page turn. It’s very high, because we’re efficient for people. If you’re a customer who wants that kind of quick service, you do not want to wait till an auction closes. An auction is more about playing a game. There’s some fun involved. You’re not necessarily just trying to get the job done. It’s a different kind of thing and a different customer segment. (This is VERY powerful “experiment” reinforced the true strength of their base. Convenience is one of their critical Decision Criteria and they have a metric for it—you get what you measure. They want third parties because it adds to the breadth of their “selection” criteria while not impinging on "convenience". Amazon customers did not find the auction process convenient!!)
That episode is actually one of the highlights of our corporate history—one that I tell over and over internally, because it speaks to persistence and relentlessness. The basic thought was: Look, we have this website where we sell things, and we want to have vast selection. One of the ways to get vast selection is to invite other sellers, third parties, onto our website to participate alongside us, and make it into a win-win situation. So we did auctions, but we didn’t like the results. Next we created zShops, which was fixed-price selling but still parked those third parties in separate parts of the store. If a third-party seller had a used copy of Harry Potter to sell, it would have its own detail page, rather than having its availability listed right next to the new book. We still didn’t like the results we got. It was when we went to the single-detail-page model that our third-party business really took off. Now, if we’re offering a certain digital camera and you’re a seller with the same camera to sell, you can go right on our own detail page, right next to our product, and underbid us. And if you do, we will put you in the “buy” box, which is on that page.

That can’t have been an easy decision—it gets you the seller customer but loses you the buyer customer, doesn’t it?

It was a very controversial decision internally at the time. Imagine being our digital camera buyer and you’ve just bought 10,000 units of a particular digital camera. Your boss says to you, “Good news: You know all those people you’ve been thinking of as your competitors? We’re going to invite them to put their digital cameras right next to yours on your detail page.” The natural reaction is “What?” A digital camera today is like a fish in a supermarket. It’s aging fast. You don’t want to get stuck with a huge inventory of five-megapixel cameras when customers will shortly want six-megapixel cameras. You’ll have to sell them for pennies on the dollar. So our buyers were extremely concerned—and rightly. They were saying, “Let me just make sure I understand this. I might get stuck with inventory of 10,000 units of this camera that I just loaded up on, and you’re going to let just anybody come in and take Amazon traffic on what is our primary retail real estate, which is the detail page, and I’m going to lose the buy box to this other person because they have a lower price than me?” And we said, “Yeah, we are.”

We talked about that a lot before we did it. But when the intellectual conversation gets too hard because of these potential cannibalization issues, we take a simpleminded approach. There’s an old Warren Buffett story, that he has three boxes on his desk: in-box, out-box, and too hard. Whenever we’re facing one of those too-hard problems, where we get into an infinite loop and can’t decide what to do, we try to convert it into a straightforward problem by saying, “Well, what’s better for the consumer?”

The reality is that we have a highly competitive cost structure and we’re very good at competing on things like digital cameras on that page, so it actually works out very well. But some of the most important things we’ve done over the years have been short-term tactical losers. In the very earliest days (I’m taking you back to 1995), when we started posting customer reviews, a customer might trash a book and the publisher wouldn’t like it. I would get letters from publishers saying, “Why do you allow negative reviews on your website? Why don’t you just show the positive reviews?” One letter in particular said, “Maybe you don’t understand your business. You make money when you sell things.” But I thought to myself, We don’t make money when we sell things; we make money when we help customers make purchase decisions. (We often talk about the Core Mission which defines the strategic space for a company or business. There are two components: the Core Value and Core Process; the former is the ultimate value a company/business can create for their customers while the latter is their fundamantal building block of value creation. My sense is that helping the customers make purchase decisions is Amazon’s Core Value while their Core Process is their incredible system platform that enables convenience, selection, lowest cost and fast delivery. Note, the Decision Criteria must support the Core Mission.

Let’s take a shot at defining Amazon’s Leadership Framing (the first step in our Market Driven Growth process), a critical role of leadership in driving organic growth:

CORE MISSION

TO: Help our target customers make purchase decisions

IN A WAY THAT: builds the breadth and efficiency of our e - platform

SUCH THAT: we continue to increase our competitive separation to sustain our growth and margin goals for our stockholders.

DECISION CRITERIA

Any initiative must satisfy at least one of these criteria without impinging on another. Relative project rankings will be determined by the overall enhancement of these criteria to our target customers:

MORE SELECTION
LOWER COST
FAST DELIVERY
CONVENIENCE

I hope you can see from this example how framing the growth effort for a company or business is a critical job of leadership. Everyone within Amazon will know what leadership will resource and what they will not. This sets the conversation in the company!

Making Decisions

The Institutional Yes
How Amazon’s CEO leads strategic change in a culture obsessed with today’s customer.
An Interview with Jeff Bezos by Julia Kirby and Thomas A. Stewart

There was an excellent article in HBR’s October 2007 edition that interviews Jeff Bezos, the founder and CEO of Amazon. They have been hugely successful in growing their business organically. I will excerpt the article over the next few postings, highlighting issues I feel are critical to drive organic growth from a leadership perspective.

MAKING DECISIONS

How do you have the confidence that an investment will ultimately pay off?

It helps to base your strategy on things that won’t change. (Potentially counterintuitive but very powerful) When I’m talking with people outside the company, there’s a question that comes up very commonly: “What’s going to change in the next five to ten years?” But I very rarely get asked “What’s not going to change in the next five to ten years?” At Amazon we’re always trying to figure that out, because you can really spin up flywheels around those things. All the energy you invest in them today will still be paying you dividends ten years from now. Whereas if you base your strategy first and foremost on more transitory things—who your competitors are, what kind of technologies are available, and so on—those things are going to change so rapidly that you’re going to have to change your strategy very rapidly, too.

What are some of the things you’re counting on not to change?

For our business, most of them turn out to be customer insights. Look at what’s important to the customers in our consumer-facing business.
They want selection, low prices, and fast delivery. (The fundamental decision criteria mentioned in the first posting. This is one of the most powerful things leaders can do in setting direction. Its very simplicity makes it powerful and compelling!) I can’t imagine that ten years from now they are going to say, “I love Amazon, but if only they could deliver my products a little more slowly.” And they’re not going to, ten years from now, say, “I really love Amazon, but I wish their prices were a little higher.” So we know that when we put energy into defect reduction, which reduces our cost structure and thereby allows lower prices, that will be paying us dividends ten years from now.(the application of processes like 6 Sigma create competitive separation in this context) If we keep putting energy into that flywheel, ten years from now it’ll be spinning faster and faster.

Another thing that we believe is pretty fundamental is that the world is getting increasingly transparent—that information perfection is on the rise. If you believe that, it becomes strategically smart to align yourself with the customer. You think about marketing differently. If in the old world you devoted 30% of your attention to building a great service and 70% of your attention to shouting about it, in the new world that inverts. A lot of our strategy comes from having very deep points of view about things like this, believing that they are going to be stable over time, and making sure our activities line up with them. Of course there could also come a day when one of those things turns out to be wrong. So it’s important to have some kind of mechanism to figure out if you’re wrong about a deeply held precept.

The Institutional Yes
How Amazon’s CEO leads strategic change in a culture obsessed with today’s customer.
An Interview with Jeff Bezos by Julia Kirby and Thomas A. Stewart

There was an excellent article in HBR’s October 2007 edition that interviews Jeff Bezos, the founder and CEO of Amazon. They have been hugely successful in driving organic growth. I will excerpt the article over the next few postings, highlighting issues I feel are critical to organic growth from a leadership perspective.
I would like to welcome our newest set of Driving Organic Growth alumni. We had a great program!

SETTING STRATEGIC DIRECTION.

Who is setting strategic direction for Amazon? At the very beginning it was just you, sitting in a car on the way from New York to Seattle, making all the plans. Are you still making them all?

Oh, heavens, no. We have a group called the S Team—S meaning “senior”—that stays abreast of what the company is working on and delves into strategy issues. It meets for about four hours every Tuesday. (Growth is constantly on their agenda) Once or twice a year the S Team also gets together in a two-day meeting where different ideas are explored. Homework is assigned ahead of time. A lot of the things discussed in those meetings are not that urgent—we’re a few years out and can really think and talk about them at length. Eventually we have to choose just a couple of things, if they’re big, and make bets.
The key is to ensure that this happens fractally, too, not just at the top. The guy who leads Fulfillment by Amazon, which is the web service we provide to let people use our fulfillment center network as a big computer peripheral, is making sure the strategic thinking happens for that business in a similar way. At different scale levels it’s happening everywhere in the company. And the most important thing is that all of it is informed by a cultural point of view. There’s a great Alan Kay quote: “Perspective is worth 80 IQ points.” Some of our strategic capability comes from that.

How would you describe that cultural point of view?

First, we are willing to plant seeds and wait a long time for them to turn into trees. I’m very proud of this piece of our culture, because I think it is somewhat rare. We’re not always asking ourselves what’s going to happen in the next quarter, and focusing on optics, and doing those other things that make it very difficult for some publicly traded companies to have the right strategy.

Do you know when you’re planting one of those seeds that it’s, say, an acorn and it’s going to turn into an oak? Do you have a strong vision of how things will materialize? Or does the shape emerge along the way?

We may not know that it’s going to turn into an oak, but at least we know that it can turn out to be that big. I think you need to make sure with the things you choose that you are able to say, “If we can get this to work, it will be big.” An important question to ask is, “Is it big enough to be meaningful to the company as a whole if we’re very successful?”(As you will see in later postings, they use a simple set of what we call Decision Criteria. In addition to potential size, if the opportunity enables Amazon to offer more selection, lower cost, fast delivery and convenience to their target customers better than competition, they will go after it. Bezos treats these as digital criteria, not cumulative – an initiative must have all three criteria in addition to potential size)
Every new business we’ve ever engaged in has initially been seen as a distraction by people externally, and sometimes even internally. They’ll say, “Why are you expanding outside of media products? Why are you going international? Why are you entering the marketplace business with third-party sellers?” We’re getting it now with our new infrastructure web services: “Why take on this new set of developer customers?” (This is a typical reaction to expanding the addressable marketspace of your business) These are fair questions. There’s nothing wrong with asking them. But they all have at their heart one of the reasons that it’s so difficult for incumbent companies to pursue new initiatives. It’s because even if they are wild successes, they have no meaningful impact on the company’s economics for years. What I have found—and this is an empirical observation; I see no reason why it should be the case, but it tends to be—is that when we plant a seed, it tends to take five to seven years before it has a meaningful impact on the economics of the company. (This is NOT unusual when going to very new business designs and/or marketspaces)

As Its Stock Tops $600, Google Faces Growing Risks

By STEVE LOHR
NYT, Published: October 13, 2007

In two previous postings we discussed the challenges of iconic companies like Microsoft (2/3/07 posting) and Wal-Mart (10/8/07 positing) that are trying to maintain their strong positions after years of tremendous growth. This article looks at the challenges of a company that is trying to achieve iconic status……

Can anything stop the ascent of Google’s stock?

What could reset expectations about Google? What are the risk factors — short term and longer range — that could dim the aura of inevitable success that surrounds the company? What could slow the Google juggernaut?

The potential threats, according to industry analysts, fall into three broad categories: those from inside the company, those from rivals, and public policy challenges that could bring regulatory controls and tarnish Google’s reputation and brand.

Size

Any big, fast-growing company confronts the “law of large numbers” — that is, growth rates naturally tend to slow as a company gets bigger. (I see this over and over again. Leaders make pronouncements about desired growth rate target without ever doing the math). That should not be a real issue for Google, analysts say, until it gets to be about twice its current size.

In 2007, the company’s revenue is projected to reach $11.5 billion, a 58 percent annual increase. Google, they say, is riding a tidal shift in advertising onto the Web that is just getting under way. Today, only 5 to 10 percent of advertising budgets are spent online, even though most Americans now spend as much time on the Web as watching television.

But in the short term, the number to really watch is Google’s spending. Last quarter, expenses that came in higher than anticipated surprised Wall Street and temporarily hit Google’s stock price. “The biggest challenge to Google’s stock is going to be if it gets the rap of being an overspender and not rewarding shareholders fully,” said Scott Cleland, an analyst at the Precursor Group.

Google is hiring at a torrid pace. The company keeps doubling the number of engineers it hires each year, adding 4,000 last year. “You simply can’t maintain the quality at 4,000 hires that you had at 250 or 500 or 1,000,” said Edward Lazowska, a professor of computer science at the University of Washington.

Larry Page, a Google co-founder, said at a conference last week that hiring was a big concern. “We never have enough people to do what we want,” he said. “We always need to hire. But there are limitations to how fast you can recruit people.” (Wouldn’t a lot of us like to have this problem)
Google is hiring so aggressively to support its ambitious strategy, which now extends well beyond its core business in search and online ads. (Can they sustain this?)

It has begun offering Web-based software like word processing and spreadsheets — areas where Microsoft is the dominant supplier. Its coming mobile phone software will put Google in competition with telecommunications companies. With YouTube, which it bought for $1.65 billion last year, Google has become a major distributor of entertainment, which could put it in conflict with cable TV companies. (They are expanding their addressable market space to give the room to grow. As they do that, their target customer will expand as well as the number and types of competitors. You determine the addressable Marketspace for your business. You have to be aware of the consequences however and plan for them)
These moves are assaults on huge businesses that have entrenched competitors. Google’s management style, geared to nurture individual innovation, may not be suited to the task, analysts say. (This can be a huge change for the way Google does innovation. There was a great article by Wolcott and Lippitz in the Fall publication of MITSloan titled The Four Models on Corporate Entrepreneurship which describes among others the innovation process at Google that may come under fire)

“Google needs to make sure that its management culture is in sync with the strategy,” said Thomas R. Eisenmann, an associate professor at the Harvard Business School. “I’m not sure the bottom-up approach will do it.”

Competitors

“The great risk to Google is that someday it will face real competition in search,” said Jordan Rohan, an analyst at RBC Capital Markets.

Google looks so strong today in part because of the stumbles of its principal rivals, Yahoo and Microsoft. Both have invested heavily to catch up in search and online ad auctions, but without success so far. In September, Google’s share of Web searches in the United States was 67 percent, up from 54 percent a year earlier, reports Compete.com, a Web analytics firm. The Yahoo share was 19 percent, compared with 29 percent a year earlier. And Microsoft had 9 percent, up slightly from a year ago.

The company’s market lead is so large that advertisers tailor their technology to work best on Google ad networks, and Web publishers design their sites to best pull in more Google users.
Jim Lanzone, chief executive of Ask.com, the fourth-largest search engine with about 4 percent share, sees no “silver bullet” that could greatly shift market share. Ask.com is acknowledged as an innovator in using graphics, audio and video in its results. The search market, he said, is so large that Ask.com can thrive by gradually inching forward.

But Silicon Valley start-ups and venture capitalists are betting that there is room for major innovation in search. Powerset and Haika are two well-financed start-ups working on natural-language search, where a user types a question instead of keywords.

Google, too, is apparently pursuing disruptive new search technologies. Narayanan Shivakumar, a computer scientist who heads Google’s Seattle office, is being given 100 engineers over the next three years to try to come up with search technology that beats its current offering, according to an industry consultant told of the project.

Google’s rising market power could also slow it. George F. Colony, chief executive of Forrester Research, was visiting corporate clients across Europe this week. “Nearly every company I meet here, as in the U.S., sees Google as an enemy or a potential enemy,” he said from Paris. “That could close doors for Google and make it harder to do deals with potential partners.”

Regulation

Not only Google’s market power, but also its reach and influence on how millions of people navigate their digital lives invite scrutiny. Privacy advocates say Google’s dominance and practice of keeping search histories of users raise many dangers. Google’s vast databases and search tracking, they say, raise the prospect of a corporate Big Brother.

Google’s motto is “Don’t be evil.” But Privacy International, a London-based organization, ranked Google last among Internet companies and called it “an endemic threat to privacy.”
Search engines like Google identify the searches done using a particular computer, rather than actually knowing who is at the keyboard. Yet privacy advocates say that unless rules are in place to limit what kinds of personal data can be collected and how long it can be stored, Google can effectively know who you are without knowing your name.

The privacy issue, they say, will only increase as Google grows and extends into new markets. “Google underestimates how strongly people care about privacy and underestimates governments’ willingness to take action,” said Marc Rotenberg, executive director of the Electronic Privacy Information Center, a privacy rights group.

That group and others have urged the Federal Trade Commission and European authorities to block Google’s planned $3.1 billion purchase of the online advertising company DoubleClick, or to make privacy protections a condition of the deal.

History’s Pull

In technology, dominant companies look invincible for years until they are unseated by the next wave of previously unforeseen innovation. I.B.M. ruled the mainframe era and Microsoft the personal computer boom. Google has emerged as a power of the Internet economy. Huge profits and market power are the rewards for being a keystone company in each era. It is no surprise, then, that I.B.M. and Microsoft were the targets of landmark federal antitrust suits. (The classic Innovators Dilemma!!)

What the next technology wave might be is anyone’s guess. But what Wall Street will be looking for is a turn, a shift in momentum. One such shift, analysts suggest, could be a combination of slowing growth and declining profit margins. Google’s ad revenue comes mainly from two sources: text ads from its own search results and ads it places on the Web sites of other companies. On the latter, it pays 80 cents or so of each dollar to the Web site and keeps the rest. Increased competition in ad networks, especially from Microsoft, will drive the payouts higher, nibbling away at Google’s profits.

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Wal-Mart Era Wanes
Amid Big Shifts in Retail Rivals Find Strategies
To Defeat Low Prices; The World is Changing
By GARY MCWILLIAMS
WSJ, October 3, 2007; Page A1

This is a fabulous article delineating incredible learnings as to the traps that a dominant business model can have on stagnating growth. Wal-Mart’s obsession with scale, which built the behemoth, is now a key reason for their troubles on two fronts: more nimble competitors are grabbing share by offering more of what a changing,more fragmented market is demanding (selection, convenience, and service) and the internet has redefined what scale means.

The Wal-Mart Era, the retailer's time of overwhelming business and social influence in America, is drawing to a close.

Using a combination of low prices and relentless expansion, Wal-Mart Stores Inc. emerged from rural Arkansas in the 1970s to reshape the world's largest economy. (basically the current business model) Its co-founder, Sam Walton, taught Americans to demand ever-lower prices and instructed businesses on running a lean company. His company helped boost America's overall productivity, lowered the inflation rate, and strengthened the buying power for millions of people. Over time, it also accelerated the drive to manufacture products in Asia, drove countless small shops out of business, and sped the decline of Main Street. Those changes are permanent. (it has had an unbelievable impact on our society)


Today, though, Wal-Mart's influence over the retail universe is slipping. In fact, the industry's titan is scrambling to keep up with swifter rivals that are redefining the business all around it. It can still disrupt prices, as it did last year by cutting some generic prescriptions to $4. But success is no longer guaranteed.

Rival retailers lured Americans away from Wal-Mart's low-price promise by offering greater convenience, more selection, higher quality, or better service.(this is the evolving model that is hitting them hard by smaller – although still large – competitors that can target key growth markets) Amid the country's growing affluence, Wal-Mart has struggled to overhaul its down-market, politically incorrect image while other discounters pitched themselves as more upscale and more palatable alternatives. The Internet has changed shoppers' preferences and eroded the commanding influence Wal-Mart had over its suppliers. (a major game changer)

As a result, American shoppers are increasingly looking for qualities that Wal-Mart has trouble providing. "For the first time in a long time, quality has a chance to gain on price," says Lee Peterson, a vice president at Dublin, Ohio-based brand consulting firm WD Partners Inc.

Now, the big-name brands that fueled Wal-Mart's climb to the top are forging exclusive distribution deals with other retailers, or working to reduce their reliance on its stores. (really indicates their dilemma)PepsiCo Inc., which favored mass-market campaigns a decade ago, recently skipped Wal-Mart when launching a new energy drink in favor of Whole Foods Market Inc. Consumer-products giant Procter & Gamble Co. gets 15% of its revenue from Wal-Mart, down three percentage points from 2003.


Wal-Mart remains an enormous force in retailing, of course. (they are still huge!!)Its world-wide sales are almost three times those of France's Carrefour SA, the world's second-largest, publicly traded retailer. Wal-Mart's U.S. revenue is 4½ times that of discount-store rival Target Corp., and four times that of second-largest U.S. food retailer Kroger Co. Its clothing and shoe sales last year alone exceeded the total revenues of Macy's Inc., parent of Macy's and Bloomingdale's department stores.

The company's unquenchable thirst for scale has been the secret to its market-changing power. (as you will see, this drive for scale is a major driver in their lackluster growth) "What we are is a 'supercenter' with one-stop shopping," said Wal-Mart's Vice Chairman John Menzer at an investors' conference last month. The company expects each year to build another 170 to 190 of the 200,000-square-foot supercenters that are its hallmark and convert 500 smaller discount stores to the bigger format over the next five years. "We would love to wave a magic wand and [make] every one of our discount stores a supercenter," he says.

But that very focus on scale is now a weakness, for the world has changed on Wal-Mart. The big-box retailing formula that drove Wal-Mart's success is making it difficult for the retailer to evolve. Consumers are demanding more freshness and choice, which means that foods and new clothing designs must appear on shelves more frequently. They are also demanding more personalized service. Making such changes is difficult for Wal-Mart's supercenters, which ascended to the top of retailing by superior efficiency, uniformity and scale.

"All retailers have a formula. They grow as far and as fast as they can with that formula," says Love Goel, a former Fingerhut Cos. executive and now chairman and CEO of Growth Ventures Group, a Minnetonka, Minn.-based private-equity firm that invests in retail businesses. Wal-Mart has outgrown its supercenter recipe, but efforts to win growth from more affluent consumers have fallen flat, he says. "They have hit the wall."

Business history is littered with companies that grew to enormous size and used their girth to re-arrange the world to fit their strengths. Think International Business Machines Corp. in the mainframe business, General Motors Corp. in autos, or Microsoft Corp. in personal computers. For a time, their success bred an ecosystem that sustained their status. In the 1970s, independent software companies piggybacked on IBM's mainframes, resulting in greater demand for mainframe computers.

Such orchestration can produce solid growth for decades. But it can also produce corporate blinders. Over time, IBM's grip on the corporate data center left it unable to anticipate the decentralizing effects of personal computing. GM's knack at brand creation and frequent model changes left it vulnerable to the incremental quality approach of Japanese auto makers. Microsoft was so busy cramming features into its Windows operating software that it lagged others in the shift to the Internet. Each remains among the top in its industry; yet each has relinquished the role of industry definer -- IBM to Intel Corp., GM to Toyota Motor Corp., Microsoft to Google Inc. (Wal-Mart is not alone in hitting the wall)

Wal-Mart's great insight was perfecting the so-called "value loop" in retailing. At its most basic, the system works like this: Lower prices generate healthy sales gains and profits. Some of those profits went into further price cuts, generating more sales. The lower the price, the more consumers flocked to Wal-Mart.

But the value loop is beginning to unravel. For 10 years through 2005, Wal-Mart's sales gains at stores open at least a year averaged 5.2%. So far this year, its comparable-store sales, a measure of market share, is up just 1.3%. The pricing gap between Wal-Mart and rivals has narrowed, and more customers are now choosing convenience over wading through a supercenter.

That compares with comparable-store gains of 4.6% at Target, which markets itself as a trend-setting discounter, and 6% at membership-club rival Costco Wholesale Corp., which peddles $500 Bordeaux wines and $4,000 Cartier watches. While Wal-Mart has been portrayed as a ruthless employer, Costco has been praised for providing some of the best employee benefits in retail.

Wal-Mart's shares trade about where they were at the start of the decade, when the company produced less than half its current revenue. Shares closed yesterday up 40 cents at $44.87, and down 9.3% from the stock's year-earlier price. Earlier this year, Wal-Mart took the extraordinary step of ratcheting down its U.S. expansion plans because its new stores were stealing too much revenue from existing ones. That wasn't a concern in the 1980s and 1990s when Wal-Mart was regularly flattening competitors.

In some ways, Wal-Mart's loss of clout is a reflection of a more fragmented world. Retailing is a mirror to how we live and work. Big-box stores thrived by selling highly recognizable national brands, which themselves were fed by two phenomena: the growth of mass media and freeways, which encouraged large stores in remote areas. Stores and brands together achieved scale efficiencies that allowed them to overwhelm local chain stores and regional brands. (scale was king but……..)

But the Internet is transforming the retail definition of scale. The once-stunning compilation of 142,000 items found in a Wal-Mart supercenter doesn't seem so vast alongside the millions of products available on the Internet. At the same time, the cost of creating and sustaining a national brand is rising because of media fragmentation. Niche brands, created by Internet word of mouth, are winning shelf space and sapping profits required to fund big brands' advertising. Manufacturers such as Apple Inc. and Phillips-Van Heusen Corp., lacking the retail distribution or presentation they crave, are opening their own stores. One result is that retail giants hold less sway over their customers -- and over their suppliers.

And across the landscape, numerous rivals are using a form of competitive jujitsu to keep the Bentonville behemoth off balance. (strategies of their competitors)

Grocery-store chains such as Kroger are resurging on sales of prepared or semicooked meals, which people can grab on their way home. Cincinnati-based Kroger projects sales at stores open at least a year will climb between 4% and 5% this year, on top of a 5.3% increase last year…….

When Wal-Mart pushed heavily into consumer electronics earlier this decade, many industry observers expected it to flatten electronics chains. But five years ago, Best Buy Co. began aggressively marketing installation and other services alongside flat-panel TVs and PCs. Last year, Best Buy's total sales rose 16%. (the importance of service!!!) Wal-Mart, which has struggled to sell big-ticket HDTVs, has only recently begun selling installation services at a few stores using an outside supplier. It doesn't break out consumer-electronics sales, but analysts estimate sales last year rose 7.6% to $22.6 billion……

Wal-Mart has long sold prescription drugs, setting up its pharmacy business in 1978. But national drug chains CVS Caremark Corp. and Walgreen Co. reacted by redefining their role and selling basic health services, such as school physicals, diagnostic tests, and flu treatment, alongside drugstore wares. CVS and Walgreen each acquired in-store clinic operations, redefining the pharmacy business as basic health-care centers.

Same-store sales at CVS and Walgreen are running about double that of Wal-Mart this year. Wal-Mart has begun offering leases to clinic operators.

Then there's the host of new entrants. In apparel, smaller retailers with niche market appeal like Hennes & Mauritz AB's H&M, Inditex Group's Zara and Los Angeles-based Forever 21 Inc. are growing by offering consumers rapid style changes. Outside the U.S., Britain-based Tesco PLC is challenging Wal-Mart by cultivating the Tesco brand across five different formats, including convenience stores and urban stores as well as supercenters. This fall, Tesco will open its first U.S. outlets, stores that will offer fresh and prepared foods and staples

As Wal-Mart's influence erodes, so does its allure to manufacturers. Burt P. Flickinger III, managing director of retail consulting firm Strategy Resource Group, says Wal-Mart now takes a back seat to regional grocery and national drug chains when it comes to striking deals.

He says some manufacturers now sell their wares faster at other retailers. "Four of the top 10 consumer-products companies say they can move merchandise faster with Walgreen and CVS," says Mr. Flickinger, who came up with the estimate from his talks with consumer-products firms. Such retailers have been rewarded with lower costs and better sales gains.

The change is apparent at PepsiCo. Wal-Mart is PepsiCo's largest customer world-wide, accounting for $3.16 billion in sales of drinks and snack foods. But earlier this year, PepsiCo opted to launch Fuelosophy, a new energy drink, at Whole Foods, a high-end supermarket chain.

"We thought that was the best place to introduce and test it," says PepsiCo spokesman David DeCecco. Whole Foods customers'"health and wellness" profile better match that of likely Fuelosophy buyers than Wal-Mart's, he says. He declined to name which other retailers were considered for the rollout.

Wal-Mart's loss of influence can also be seen in logistics. In 1984, Wal-Mart's decision to embrace bar-code scanners in its distribution centers and stores helped quash the use of a less-efficient technology then used at Sears, Roebuck & Co. and other retailers.

In 2003, the retailer brashly jumped onto the next big logistics technology, called radio-frequency identification, and mandated big suppliers begin slapping RFID tags on products shipped to its warehouses. Wal-Mart installed tag readers at warehouses and stores, hoping to further automate warehouses and lower inventory costs.

Wal-Mart quietly dropped the mandate earlier this year and refocused its development after suppliers complained of the high costs and lack of a return on their investment in the new technology. While the company says it's pushing ahead, Wal-Mart says it realigned efforts to focus on areas where the technology offered the most promise, such as assuring vendors' promotional displays are properly deployed in its stores.

Wal-Mart wasn't able to demand big suppliers continue investing in a technology that was raising their operating costs, says Ken Rohleder, president of Rohleder Group, a Louisville, Ky., supply-chain consulting firm. "There was a time when they could have dictated anything," he says.

The Importnace of Leadership to Growth

The following graph was published in the WSJ on October 3. A picture is worth a 1000 words. The only fundamental difference between the American car manufacturers and Toyota is leadership – cumulative leadership over the last 25 years lead to bad decisions on labor, design, and strategies. Toyota’s workforce is not more talented than those of the “Big 3”… it is all about leadership!