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You can't make money in Bentonville

Updated: Mar 27

Reasoning by analogy is fundamental to human intelligence, allowing us to understand new and complex information by drawing parallels between different situations, concepts, or objects. This form of reasoning is valuable in activities from everyday tasks to scientific research and artistic expression, demonstrating its pervasive and profound impact on human cognition. Later, we’ll consider how we might design intelligent agents that reason by analogy like humans. 

When people look back in future decades, the most phenomenally successful intelligent agents are likely to have come from the least expected places. They’ll target customers that today’s leaders see as the backwaters of their markets that are too small and unprofitable to pay attention to. They will emerge from the informed intuition of individuals immersed in these initially small but rapidly growing markets. The intelligent agents these individuals create will establish themselves as leaders of these new markets. By the time the prior leaders fully understand what happened, it may be too late for them to respond effectively. Don’t let that happen to you and your organization. 

Intelligent agents are so new that there are few examples of successes and failures to learn from. We will explore several waves of electronic innovation in the past century that have brought us to where we are today. By analogy, we’ll learn from companies that rode these waves to become market leaders and others that were overwhelmed or even washed away by the waves. Some companies both initially succeeded and ultimately failed. Those that failed didn’t see the wave that got them coming until it was too late. 

Let’s consider a thought experiment to explore how and why a massive wave drowned one of the world’s leading companies. Imagine participating in Sears Roebuck and Company’s October 1969 strategic planning retreat. Executives are reviewing their plans to roll out mall-based stores in affluent suburban markets. Suburbanization all across America is generating growth as far as they can see on the horizon. 

As a retail powerhouse, Sears has information dominance over its rivals, including point-of-sale and customer research data, relationships with almost all mall landlords in the country, and a global supply chain of vendors. Bursting with confidence, Sears’ leadership reviews plans for their iconic headquarters, the Sears Tower in Chicago, which, when complete in 1973, will accommodate their aspirational expansion goals for the world’s largest and most successful retailer with 350,000 employees.

During a brainstorming session at the retreat, a young manager with a southern twang suggests Sears can successfully expand into poor, rural southern markets. Sears’ leadership has an operationally excellent culture built around making data-driven decisions. The Sears store location group is asked to get the demographics for Bentonville, Arkansas, and assess whether or not a Sears store can be successful there. After cranking the demographics through the Sears model, they reach a clear conclusion, which they dutifully report to senior management. “You can’t make money in Bentonville.”

Unknown to Sears’ leadership, at the very time the 1969 planning retreat was occurring, a middle-aged innovator was incorporating a retail chain he had founded only seven years earlier, which had grown to 24 stores across Arkansas and reached $13 million in sales. Had Sears’ leadership even noticed it, a small retailer with $13 million in sales was too small and insignificant to fit into Sears’ need for growth. 

The innovator built on his experience running a chain of five-and-dime stores in rural Arkansas to iterate a new business model that could dominate an emerging market. He wasn’t building mall-based stores; his new store model was large enough to be the mall in rural markets like Bentonville. By the time the Sears Tower was complete, Walmart had gone public with its stock trading on the New York Stock Exchange. When Sam Walton stepped down as CEO in 1988, Walmart had 1,200 stores with sales of $16 billion and 200,000 associates. 

Sears missed an important inflection point in retailing in the United States. Its fortunes declined as the company lost market share. The Sears Tower stood half-vacant during the decade of the 1980s. Sears began moving its offices out of the Sears Tower in 1992.

Sears had some of the world’s best-trained, most highly motivated retail leaders. How could this have happened? 

Sears had immense point-of-sale data, followed the trends of their best affluent, suburban customers, and regularly met with the strongest vendors. They had information dominance over competitors, or so they thought. 

All that finely tuned data also gave them the Curse of Knowledge. Sears’ leadership had such a strongly held view of how their world worked that they could not step back and see the world from a different perspective. Most of Sears’ leadership came to the company after their model was developed, so they didn’t fully appreciate all the assumptions the model was based on.

What Sears didn’t have was an early warning radar to detect a disruptive innovation in the marketplace outside the data they had. Sears’ leadership got blindsided by a wave that was in plain sight had they been open to seeing it. Market disruptions like this are existential threats to market leaders like Sears and targets of opportunity for innovators like Sam. 

In defense of Sears’ leadership team, in any given year, they received hundreds if not thousands of ideas about new business opportunities. They were right to ignore almost all of them. How could they have picked out the signal of a middle-aged innovator in a poor town in rural Arkansas from all the other noise they were receiving? 

Just as Walmart was hitting full stride in 1994, its own existential threat was looming. Jeff Bezos founded At first, Walmart wobbled from the blow. In 2013, for the first time, Walmart’s U.S. store sales dropped from the year before, signaling that their forty-year run of big box discount retailer dominance was challenged.

Unlike Sears, Walmart seems to have survived the storm and even prospered. When looking for a staple, I regularly check the Walmart website. Often, they are cheaper than Amazon. The Walmart website lets me know if it’s available in a local Walmart so I can hop over and get it, which Amazon can’t do. This capitalizes on Walmart’s competitive advantage over Amazon in physical store locations. If I order from Amazon, I’ll have to wait a day or two for the product. Sometimes that’s OK. But other times, I’m in the middle of a project and need what I’m looking for right now. Once in the Walmart store, I usually buy other supplies while I’m there. 

To adapt to the new retail environment, Walmart is a leader in retail operations technology, including supply chain management, warehouse automation, data analytics, and customer-facing technology, including e-commerce, self-checkout, and scan & go. Walmart invests heavily in artificial intelligence, machine learning, and cloud computing. Walmart Global Tech, the company's dedicated technology arm, constantly recruits talent and expands its capabilities.

Today, Walmart’s stock price trades near its historic high. Until 2023, Sam’s family collectively was the richest in the world when the ruling royal family of the Emirate of Abu Dhabi topped them.

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