Wednesday, July 17, 2013

Using Factors Of Production With Vision

"Capital isn't scarce; vision is."

Sam Walton (1918-1992)

In economics, the word "capital" can mean many things.

It does not necessarily mean money.  As a home inspector my capital includes my inspection experience and knowledge, coupled with useful tools.

But what did Mr. Walton mean when he used the word capital?

Long-term assets, or "fixed" assets - land, labor and capital, some of the factors of production?  Seed capital?  Investment capital?  How about venture capital?

I think he is probably referring to the whole ball of wax, everything it takes to start and maintain a business.

After all, he had experience doing that.

His well-rounded nature was forged by the time he was in 8th grade, becoming one of the youngest Eagle Scouts in Boy Scout history.  As an adult he continued to support the Boy Scout program becoming a recipient of the Distinguished Eagle Scout Award.  There are not many recipients of such an award.  This circumspect background got him voted the "Most Versatile Boy" by his high school graduating class.

Becoming the first in his family to go to college, and after earning a Bachelor's degree in Economics in 1940, he worked for a short while for the J.C. Penney Company.  He quit to join the war effort. 

After the war he invested a $20,000 loan from his father in law and his personal savings of $5,000 in a small Ben Franklin variety store in Newport, Arkansas.

He kept the shelves stocked with a wide variety of goods and grew annual sales from $80 to $225,000 in the three years.

The building's landlord saw Walton's success and refused to renew the lease, wanting the location to open his own store in that same location.  Unknown to him, at the same time his father in law negotiated a deal for the shop next door to that first store even while Sam was looking to open another location in Bentonville, 220 miles away.  The Newport store next door was remodeled and opened immediately in 1950.  But the new far-away location was in the works as well.

Negotiating to buy that other small store and obtaining title to the building in Bentonville, Arkansas, it was opened.   He then had two locations not near each other.  He called his stores the "Walton Five & Dime."   That second location more than doubled sales in three years.  But he also had opportunity to employ some of his own ideas in the development of both stores.

With the help of family he owned and managed 16 Ben Franklin stores by 1962.  One new idea he tried was to encourage his store managers to invest as much as $1,000 in their stores and the next outlet to open.  Walton thought that would sharpen their managerial skills and objectives.  It gave them a stake in the business.  Entrepreneurism is another economic factor of production, something he no doubt learned in college.

It all worked.  By the time he opened the first WalMart in 1962 he was well versed in business management and how to operate a number of widespread locations. 

Interestingly he thought it important to find American manufacturers to give him a great volume discount price.  He wanted to compete against foreign competition.  And did.

At the same time, his philosophy was to open WalMarts in small towns, not large cities.  And each location was within one day's drive from a distribution center.  That way he could follow sales, and quickly market and restock the best-selling products.  Even today it is Walmart's exceptional marketing and distribution management system that sets it apart from other department stores.

This logistical management grew the chain to 800 stores by 1985.  At the time of his death in 1992, WalMart had $50 billion in annual sales from 1,735 stores, 212 Sam's Clubs and 13 Supercenters.  Continuing its growth, it is larger than that now.

WalMart survives today as it does because it continues to offer a variety of products, at exceptional prices.  Its size has not come by accident or through luck.  Yes, that makes it difficult for smaller entities to survive.  Yes, they have grown more international as the world has shrunken economically.  Their aim has been to focus on WalMart.

But, like the butcher, the baker and the beer maker, they are interested in providing their wares in the most efficient way possible, and to get their clientele to come back time and again.  They have a very loyal group of employees and clientele.  That is the essence of capitalism - employing the factors of production (land, labor, capital and entrepreneurs) in the most visionary ways possible.  Capitalism can be the vehicle for super growth just as it can do the opposite to crush the less visionary and efficient.

WalMart has employed its capital with vision.  And they seem to see pretty clearly.

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