Doug McMillon’s Dilemma: Clay Christensen or Peter Drucker?

Already, Doug McMillon has had moments of decisive leadership, including the speedy elimination of the Rube Goldberg-esque “tethering” concept, and allowing the Express and Supermercado concepts to go gentle into that retail format night. But as McMillon continues to define the course of WMT’s future, a looming question is whether he can revive this maturing company’s prospects by placing all of his emphasis on channel-shifting the big-box business model toward e-commerce, smaller formats and other “innovative” strategies.

At the October 15 analysts’ meeting, McMillon referred to Clayton Christensen, author of the Innovator’s Dilemma, as he talked about the need to protect WMT’s new initiatives from the legacy business. While there is a lively debate about the merit of Christensen’s work (see here and here), we suggest that a more pressing concern for WMT is the need to repair the company’s badly broken store operations and internal culture. It would be a stretch to suggest that worker advocates admired Sam Walton’s labor practices, but most would acknowledge the simple fact that Mr. Sam created a cohesive and effective organizational culture appealing to the Christian values of WMT associates, through servant leadership, as well as to their material interests, through profit sharing. But the draconian staffing cuts have undermined associates’ ability to be effective servant leaders, and the elimination of profit sharing in 2010 marked a decisive end to the era of organizational alignment at WMT. This explains why some of the company’s worst critics today are long-time employees.

As the noted management consultant Peter Drucker reportedly remarked, “Culture eats strategy for breakfast.” The ill-will in WMT’s internal culture will likely “disrupt” any strategy—innovative or otherwise—Doug McMillon might seek to implement, and he would do well to put down his copy of Innovator’s Dilemma and listen to what his employees are saying.

In order to fix WMT’s culture McMillon should move quickly to change the bonus structure for WMT store managers, which inevitably results in the excessive cutting of labor costs. Bonuses can make up a significant portion of total pay for store managers, and are currently awarded based on the following formula: 40% based on store operating profit, 40% based on store sales and 20% based on market operating profit. Why does this formula lead managers to cut labor costs? Store sales are extremely difficult for store managers to influence, particularly in the short term. In contrast, store operating profit can be directly boosted by cutting costs, and the largest controllable cost in retail is labor. This dynamic is compounded by the fact that, as MIT professor Zeynep Ton has shown, “the financial benefits of cutting employees are direct, immediate, and easy to measure, whereas the less-desirable effects [lost sales] are indirect, long term, and difficult to measure.”

And while we are talking about culture it should be emphasized that there has been a double standard at work over the past several years when it comes to executive and manager bonuses on the one hand, and associate bonuses on the other: store associates are judged on same store sales at their store (40%), profit at their store (40%), inventory turnover at their store (10%) and customer experience scores at their store (10%). In 2010, the same store sales metric was removed from the bonus structure of WMT executives, but not from associate bonus structure, just as same store sales was turning negative (see here); in 2013 as inventory levels became an obstacle to improving inventory turnover that metric was eliminated from store manager bonuses, but not from associate bonuses; and also in 2013 sales and profits were “adjusted up” for the calculation of executives’ bonuses due to the negative impact of cuts to food stamps, yet associates bonuses received no such upward adjustment. The challenge, to paraphrase Susan Chambers, WMT’s infamous EVP for People, is to craft compensation and performance measures that create a culture of “one for all and all for one.”

What do you think?