Wal-Mart released its second quarter earnings release earlier this morning.  The release highlighted some common themes as well as indications regarding recent management focus.

Top-line trends for the company continued, indicating a good quarter.  These top-line trends include significant growth in earnings per share of 12% year on year.  Sales for the quarter increased 5.5% sequentially, or 2.8% year on year.  Overall, a good quarter for the company, with results coming in at the top-end of the consensus range.

The downside related to Wal-Mart’s continued deterioration of its U.S. stores.  Sales declined for its U.S. stores for the 9^th consecutive quarter.  Falling close to 1% year on year, sales for Wal-Mart’s U.S. stores decreased at a higher rate than Wall Street estimates.  With Wall Street hoping to see signs of a revenue correction, the company’s U.S. stores remain in neutral (for more detail on challenges for Wal-Mart’s U.S. Stores, please see an earlier edition of the Barometer: Ground Hog Edition). Within its U.S. stores, sales of grocery items increased slightly, likely due to inflation and price increases the industry has experienced in the last few months.  Sales in other categories declined.

Non-U.S. growth continued to carry a disproportionate load for the company, with sales increasing 11%.  With 39% of revenues outside of the U.S., non-domestic growth has been the reason for the company’s good performance.  Yet, there are no indications the company has made any progress on turning around its U.S. business.  Management raised its earnings guidance for the remaining portion of the fiscal year.  This indicates management’s confidence in their ability to grow internationally and continue to take costs out domestically.  The company’s ability to grow earnings faster than revenue potentially indicates a heightened focus on costs in its domestic business as a stop-gap measure.  Management’s confidence in their ability to decrease costs must be high, given the economic head winds and uncertainty facing its domestic business.

Wal-Mart’s growth picture in the U.S. remains clouded.  The company seems to be experimenting on all fronts.  Smaller format stores are beginning to open.  The company recently launched a video streaming service to gain additional revenue.  After nine consecutive quarters, management has yet to show they are translating into any change in momentum and any reversal in the fortunes of its U.S. stores.

Shareholder pressure may start growing for more drastic actions.  In upstream industries, the trend is clear that getting smaller is perceived as the better strategic course.  That trend cemented itself with Kraft’s recent decision to split itself in two.  For Kraft, one business will now be the cash cow, focused on stable, incremental growth in mature, developed markets.  Kraft’s other business will focus on the fast growth of snacks and emerging markets.   This trend also represents a new models.  Large consumer package goods companies continue to take a portfolio approach, using cash from low growth, developed markets to fund its expansion elsewhere.  Wal-Mart has clearly been using a similar approach to fund its international expansion.  The Kraft decision represents a different, alternative path.

Will there be pressure to apply this new model downstream in retail?  With the clock ticking and more time expiring, management is likely focused on not finding out the answer to this question.

Editor’s Note – please see the Wal-Mart Barometer Page for past analysis of Wal-Mart’s financial releases and background on company performance.

July, 2011

This past month was the 37^th anniversary of the first use of the Bar Code.  In a grocery store located in Troy, Ohio, a pack of Wrigley’s gum that now resides in the Smithsonian was scanned for sale.  In the years after its launch, large retailers such as Kmart and Wal-Mart, adopted its use. By 1980, 8,000 retail outlets had converted to its use.  Rapid adoption by the U.S. Department of Defense followed in 1981 for all goods sold through the U.S. military.  Once the supporting infrastructure was built, costs plummeted and the technology scaled, delivering enormous benefit to the industry.

As the case for many technologies that reach the mainstream, it is easy to take it for granted and to presume that the bar code has always been there. In today’s world, new technologies seem to launch and permeate the mainstream almost immediately.  Think about any product that starts with the letter “i.”  Yet often the most durable, pervasive technologies available start out with humble roots. Such is the case with the bar code.

It took 25 years for the bar code to travel from patent into operation.  Patented in 1952 by two students, issues of cost, standardization, adoption, and investments in hardware stymied its progress.  In a technology that required significant investment from both retailers and manufacturers, neither side wanted to move first. Despite enormous potential, Business Week declared the bar code, in its early days of deployment, to be a failed initiative with an article titled The Supermarket Scanner that Failed.  Despite the initial challenges, the technology is now pervasive and used in almost every industry. They are used when you board your airplane.  Manufacturers use bar codes to track product at points in the production process. Key chains are populated with bar codes printed on the loyalty cards consumers carry.  Just a few examples of how a new technology, originally met with resistance and skepticism, touches every person, every day.

A decade ago, the bar code’s death was once again predicted.  A new technology, Radio Frequency Identification (RFID) Tags, was promised to be a superior technology that would quickly take its place.  The bar code, we were told, was destined to fade into obsolescence and become a relic to sit aside the eight track player.  Instead, the high cost of RFID and limitations of the technology has kept it much more resigned to the research lab.  The bar code’s use, though, has continued to increase.  In recent years, the bar code has extended to 2 dimensions.  These new types of bar codes are seemingly popping up anywhere information needs to be accessed or assets need to be tracked.  They are on real estate signs, so a person can scan the code to hit the URL listing.  I am starting to see 2D barcodes as new emerging standards for the business card.   As everyone starts to have a smart phone, access to information and commerce is becoming real time, accomplished through a brief bar code scan on the smart phone.  In many ways, cutting edge mobile web access and mobile commerce is being facilitated by the generation old, low cost, reliable bar code.

Approaching its fourth decade in use, and more than 60 years after its conception, the bar code has become a case study in durability.  Its rollout, like most technologies, took longer than expected. Its results, greater than imagined.  My guess is that more predictions of its death are ahead, which will be premature.

June, 2011

Like I suspect many of you, economic news passes across my web screen by the second.  When the balance sheet of Greece hiccups, I hear it immediately sitting in Chicago.  One of the common threads in these stories is the engine of small business and entrepreneurship that will power the recovery.  More growth and innovation come from smaller companies. Small companies hire at a faster rate than big ones.  A strong fact base has shown repeatedly this to be true.  The growth equation appears to be that innovators create and grow new ideas that big companies buy in order to scale. The economic growth engine speeds up when this is repeated over and over again.

A wonderful example on the front end of this growth cycle has been Pure Digital.  In late 2007, the company launched a product called Flip Video, which quickly attained icon status.  An elegant example of designed-down innovation, Pure Digital stripped out the complexities of the modern day camcorder, added a slot for a 9 Volt battery and a big red button for recording.  Obvious now in hindsight, their innovation was not a new invention or anything added, but the genius of simplicity by taking things away.  The product took off.  Consumers tired of wires, too many buttons, and recharging lithium batteries snapped up the new cameras in mass.  With one product, a stagnant category was revitalized and a new market was born.  If you have one, you likely love it.  In May, 2009, after less than 2 years of incredible success, Cisco bought Pure Digital for $590 million.  Cisco’s biggest acquisition in a consumer market, the acquisition was heralded as a game changer for the company’s future.  With its purchase, Cisco inherited a mass market product with industry leading position.  Just over 2 years later, Cisco bagged the whole idea and announced this past April they were shutting the business down.

So what happened?  Well, Cisco has been in the news with unfavorable stories in the past year about its strategy.  The company’s skeptics began to question its voracious appetite for acquisitions, buying more than 100 companies since 2008.  This is a far cry from the stories written a few years prior when Cisco was often looked upon as the marquee company for successful acquisitions.  Yet, in 2011, as the company’s financial performance began the wane, something needed to give…and perhaps the tax write offs from recent acquisitions like Pure Digital were too much a temptation to resist.  That $590 million will now be amortized along with a new strategy containing words like “focus” and “core business.”

Perhaps shareholders were best served with this decision.  But still, the decision nags at me.  Didn’t this small business with a few people create an iconic brand and several hundred jobs along the way?  Of course, all the major camcorder manufacturers have launched their version of the Flip Video and you can argue that the company’s legacy, along with new fuel to the economy, can be found there.  But it still feels a bit like a squandered opportunity.

Successful acquisitions are always a challenge and a roll of the dice.  The mixture of start up moxie with big company conservatism can make these efforts even harder.  Subjugating the priorities of the acquired brand to larger corporate priorities means original ambitions can get lost.   The acquirer measures results differently as well.  In some cases, the technology is the acquisition target more than a company’s products.  Taking out an upstart competitor is another potential objective in the acquisition game.

Yet this example is so striking because of the value lost.  It is an example that shows the growth equation can be broken.  Those companies that buy into the equation, unfortunately, have no obligations to see it through.  As we collectively look for answers to drive economic recovery, we are under no obligation to solely rely on a growth equation that can so easily be broken.

Wal-Mart released its latest quarterly earnings this past week.  The release cements a perception of weakness now held by Wall Street about the ultimate main street stock.  “For every positive facet of the quarter, there seemed to be twice as many negatives,” one analyst reported to Barron’s.  Ouch.

Times sure have changed.  On the front side of the global recession, Wal-Mart’s earnings, quarter after quarter, demonstrated the company to be a juggernaut with flawless management execution.  Sales growth consistently beat estimates, margins always improved, and efficiencies continued step-level improvement.  As one example, the company’s earnings release at this time last year demonstrated a cash flow increase of $2.5 Billion (see earlier edition of Wal-Mart Barometer for details).

That was the old model.  The new model shows cracks, with the biggest one being the deteriorating growth of its U.S. stores.  Wal-Mart’s latest release marked the eighth straight quarter of sales declines in U.S. same store sales.  The same store sales decline of 1.1% came in below company expectations set by the company.  It has been decades since the company has been in this position, facing increasingly skeptical investors on its heels.  The core explanation for these results is the stretched economic state of their consumers.  With gas prices rises and economic uncertainty high, management cited these broader reasons for their predicament.  Yet other retailers, such as Target, are not suffering as much.  This is leading some analysts to conclude that they are losing market share in a time when low income consumers should be viewing Wal-Mart as a refuge.

The company’s success abroad helped it once again top overall expectations.  The growth outside the U.S. remains blockbuster.  The company’s market growth priority continues to be international markets.  But with much smaller margin contribution internationally, Wal-Mart’s share price will continue to suffer as a premium is put on restoring the U.S. picture to maintain historical margins.  The model outlined to Wall Street includes outsized international growth funded by U.S. profitability (for details, see an earlier edition of the Wal-Mart Barometer).  Without those domestic margin levels, the internal profits to fund international growth is depleted.  The company’s debt levels are at its highest levels in at least four years.  More debt will likely be needed as long as the current U.S. sales picture continues.

Over the past year, the company threw out the strategy of consolidating the number of items it carries, veering away from every day low price, and revamping stores to attract more upscale consumers.  That strategy was deemed a failure and is gone.  Many of the company’s partners and consumers rejected it.  What is not clear is a coherent strategy to take its place and repair the damage.  There is certainly a lot of experimentation going on.  The company is experimenting with its online business.  It is retrenching to recapture its core base of low income consumers by tailoring its packaging at lower price points.  It is looking to include tablets and other electronics into its assortment to spur demand.  What is not yet clear to the market is a more coherent strategy that combines these initiatives into a defined commitment to improve performance.  It does not appear that management is offering one.  They are likely the most challenged by the law of large numbers.  It could simply be that the Wal-Mart store has simply reached a saturation point, where any significant change will not contribute enough to return the company to U.S. growth.  Perhaps that is why management is considering more formats as the ultimate answer.

The challenge of returning U.S. store growth is daunting due to Wal-Mart’s size.  Recapturing growth will take a clearer strategy, a continued recovering economic picture, and more than a little luck.

May 13, 2011

I walked in on a Sunday evening to a conference room in a Chicago hotel. In normal times for me, such a setting would mean the liberal use of power point charts with an agenda covering a hot new product or the latest corporate initiative.  This night would prove different.

Seated amidst the many chairs were two men I instantly recognized, but had never met.  Their faces are permanently imprinted in my memory long ago after years of study.  It’s been fifty years since their emergence on the national spotlight, a moment in time during the civil rights era that commanded the nation’s attention.  Fifty years ago this past week these two men, James Lawson and C.T. Vivian – joined others on a heroic campaign toward desegregation, called the Freedom Rides.  Supported by previous Supreme Court decisions, hundreds participated by riding Greyhound buses across state lines and forcing integration at bus stations across the southern United States.  Starting out with little fanfare and little conflict, troubling signs soon developed.  During a celebration chaired by Dr. Martin Luther King in Atlanta, the Klan sent word they would be waiting across the border in Alabama.  Dr. King suggested prudence and patience.  The Attorney General at the time, Robert Kennedy, warned of the violence that awaiting them. But the volunteers – mostly students at the time – went on.   They had been trained well by Mr. Lawson, a minister who studied the ways of Ghandi on a mission trip to India years earlier.  Buoyed by idealism and cause, they went on.  They paid a price for doing so, including beatings in Selma and a bus fire-bombed in Anniston.  And then jail, intimidation, and depravation at the now legendary prison in Parchman Penitentary, Mississippi.  Indeed, a multitude of sacrifice that helped change the course of humanity.

And so here we were, these two gentlemen and I, now joined by others who were riders on those buses.  Diane Nash was there, a legend to those in the movement who went on to a regular and relatively obscure life in Chicago.  We sang, prayed to our gods and, most of all, listened to those that came to remember.   Their reflections evolved to a discussion on action and culture.  Their memories are joyful ones for taking the first step by acting, and then persevering by offering an alternative to a culture become accustomed to the perversity of racism.  I was struck by how well most of them have aged.  All of them now in the twilight of their lives, there was a gracefulness to each of them.  They were grateful to – in that brief moment – to provide an example of racial harmony in the most trying of circumstances.  They were grateful to have chosen to make a sacrifice that ultimately proved to help better those around them.  They knew their place in the world, speaking of the linkages between their experience in sacrificial protest to those later in civil rights movement, and then those striving for democracy in present-day Egypt and elsewhere.  In so many words, their message was the formula for changing a culture for the better starts with individual choice, progressing to daily example, multiplied over and over.

After the excitement, tumult, and drama of the Freedom Rides, these volunteers disbanded and moved on to pursue life’s journey in more normal times.  Ministers, teachers, and politicians became their callings.  With a smile, they looked back with satisfaction.  And I looked forward, thinking about what their example means for the rest of us, and myself.  I spoke with one freedom rider about my desire to bring my young son in the hopes of imparting my admiration of the Freedom Riders to him, but instead blaming the school night and homework for his absence.  Removing a button commemorating the event from his lapel, he put it in my hand with the suggestion to give it to my son.  Indeed, both of us will be watching PBS next week to see a new documentary that tells the story of these ordinary people that came together in a moment in time that changed the future.   With that, their example lives on.

April 18, 2011

Border’s Bookstore is one of the more recent and highest profile casualties of recession, going into bankruptcy and closing down most of its store fronts.   Accompanying the closure is a lot of hype – ironically unmatched by the company when they were a going concern – about fire sale pricing and store liquidations.  These declarations of once in a lifetime bargains are attracting the masses.

This event has been a long time coming.  Remember the phrase “Amazoned” in the late 1990’s? The catchphrase entered the corporate mainstream as an attempt to characterize the inevitable decline of brick and mortal business.  Meant for general consumption, it bore specific relevance to the 2 big brick and mortal bookstore juggernauts of the day; Border’s and its chief competitor Barnes & Noble.  Leading up to this period, both chains experienced explosive growth as they expanded across the U.S. consolidating an industry.  The conversation around the water cooler those days – sometimes with power points brought along for added credibility – was that these two chains were dead men walking.  It took longer than expected and now has come in full force.

So, salivating at the prospects, my family and I recently jumped in the car and headed for the nearest Border’s Bookstore set to close.  We all thought it would be like a hunting trip at the library, except this time we get to keep the spoils for pennies on the dollar.  Perhaps our visit would be just like the old times of browsing the shelves and finding that one gem of a book that lifts the spirit.   It didn’t exactly turn out that way.  Instead of a buying spree, our experience was more like a funeral for the past.  Our visit was similar to a wake for a distant relative whom we were once close to but had lost touch with over the past several years.  Oh sure, we recognized the store and there were the familiar memories once again in front of our eyes.  Our reaction to the best seller shelf was a bit awkward, not having access to what others thought of the read through a click of the mouse.  Huge signs gave testament to the large discounts.  These discounts melted away through a quick price comparison on the phone.

We continued to stumble over the old ways of doing things and, like some older relatives, instantly recognized the attempts to stay young that simply translated into a message of increased age.  Do we really need this movie on DVD?  The 50% off did not seem like a bargain for the choice movie on DVD, as our own DVD player starts to collect more and more dust.  Curious about the clearance rack, I asked myself, “What is this thing called the Kobo?,”  With further exploration, I came to the conclusion that it was Border’s version of the Kindle.  Or the iPad.  Or the Nook.   Additional merchandise as we walked through the aisles seemed out of place.  No doubt that crafts, scrapbooking, gift cards are all worthy categories marked by recent growth.  But these items aren’t destination items for Border’s consumer. There are other places, like Michaels stores, for those.  To cross-sell at point of purchase, some orientation and instruction is necessary.  Simply stacking such items without some orientation – are these the best items?  What is this stuff used for?  – means most folks continued walking as these items are not “destination” items for the fire sale.  Our old friend was dabbling in new hobbies, none of which seemed to take hold with passion and commitment.

So we kept walking and waited at the checkout.  Our family hunt netted a few items, mostly books on discount.  We journeyed home feeling a bit unsatisfied compared with the fervor that brought us there. It was visit with the promise of rekindling the past, only to realize that you can’t go back.

Bill Gates has a saying that came into mind as we drove away. “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”  Indeed, Border’s demise took longer than the prognosticators predicted.  It did not happen overnight, but when it came, it happened swiftly and was total.  An indication of the complete transformation in bookselling is that no one wanted to buy the company.  Barnes & Noble has more than enough on its hands dealing with its own problematic and unprofitable real estate and did not see any advantage of inheriting more.

Longer than expected, we reintroduced ourselves to an old friend, realized how long it had been since we had been in touch, and saw that times had passed him by.

You may be already sensing it.  If the keys on your PC touch orders to move product in the supply chain, you have likely already sensed it.    An emerging groundswell to change course.  After preparations to once again retrofit the supply chain towards growth, the consumer supply chain will refocus in a different direction for the second half of 2010.

There are three primary forces driving this.   First is the current market dynamics of retail.  As the economy likely recovers at a more moderate pace, competition among leading retailers for consumer loyalty has intensified. This has led to what many are now referring to as a price war.  The primary weapon in this war is promotion.   Wal-Mart, facing four straight quarters of anemic US growth, has switched out management and cranked up promotions, what they call “roll backs.”  Whatever they are called, price discounting is increasing across more and more categories in an attempt to bolster flagging demand.   Second is the growing competitive intensity down market retail.  Aldi, what a few years ago seemed to be an oddity in the US, is now becoming a force.  In the city of Chicago, they now count 20 locations alone.   Tesco’s entry into the US market, Fresh & Easy, continues to be refined.  Discounters are entering the market and providing additional alternatives for consumers.

The third force  is the increasingly mixed U.S. economic picture.   Just as firms prepared for new growth catalysts, consumer confidence pulled back.  The Conference Board reports that consumer confidence dropped 9.8 points in the month of June.  This is a drop in the index from 62.9 in May to 62.7 in June.  Financial markets have retrenched.  After closing above 10,400, the Dow now stands below 9,800.  The housing bounce back has stalled.  There is a growing consensus that a renewed growth catalyst is on hold for now.

These forces come with a price for today’s consumer supply chain.  Retailers and manufacturers will share the additional promotional investment.  Retailers will bear most of the brunt of higher competition.  For both, payback on growth investments will be delayed.  All these forces will converge into a much different supply chain priority list for the second half of the year.

Efficiency gains will now top the priority list.  Product change has already been done post 2007 melt-down.  For instance, most consumer products firms have already down-sized the portfolio, stripping out underperformers.  These firms have also, in many cases, already redesigned for profitability, a fancy term for re-sizing the package that offers less at the same price point.  Those moves are now past us.
What lies ahead is a renewed focus on process efficiency.  The second half of 2010 will have the following characteristics.

• A search for rapid solutions.  Long-term, transformative, solutions will get less attention if their payback goes beyond 12 months.
• A more intense push on working capital reduction.  A recently released study by the Grocery Manufacturers of America shows the growing change in supply chain priorities.  The study compared survey results from 2008 with 2010.  Working capital efficiency ranked among the top increases in management priority.  Only 23% of those surveyed in 2008 considered it a top initiative.  This year, working capital efficiency increased to about 45%.   It will only increase in priority as we move into the second half of the year.
• New, emerging technologies focused on demand planning that communicate end consumer demand upstream will start to reach an inflexion point.  Many of these technologies are deployed using software as a service models with variable cost, subscription pricing.  Companies will take a deeper dive into using these technologies as a way to seek greater efficiencies.  Bigger, ERP-based technologies will move farther down the priority list..

The US economic picture has grown murkier in the last few weeks.  Most economists continue to forecast a gradual recovery.  We have certainly been here before, as most recent recoveries experienced a period of pause before reaching full recovery.  As a response, supply chain priorities will change to insulate risk.  Priorities that in the first half of the year moved towards growth will now change to emphasize efficiency.

If you live in a relatively large city and have visited an Asian grocery store, you likely did so in a China town.  Outside the store, the parking lot offers an interesting customer study.  There is usually a line of cars streaming out the small lot.  Lexus, BMW, Mercedes are the logos of choice.  The store itself is probably small and less than well-kept.  The narrow aisles were stacked floor to ceiling.   The difficulty in finding items perhaps met with the charm (for some of us) of a chaotic check out.

In north suburban Chicago, a new alternative has emerged.   Asian immigrants come from all over the area to shop at HMart.  They experience clean, wide aisles and a brightly let store.  All the food from home you can buy.  Clearly, this is not your mom and pop Asian grocer of yesterday.  HMart operates 33 stores across the United States. Estimates are these stores total $500 million in revenue.  It has been reported that one of HMart’s stores located in metropolitan Atlanta earns about $35 million annually.

There are examples additional to HMart of Asian-centric grocery stores operating at this kind of scale.  Started in 1993, T&T Supermarkets grew to encompass 17 stores across Canada.  Becoming Canada’s largest Asian grocer, the company was acquired last year by Loblaws Co., a leading mainstream Canadian grocery chain, for $225 million.   The reason?   23% of grocery spending in the large Canadian cities stem from Asian immigrants.  99 Ranch Market, originating out of California in the mid-80’s, now has over 30 grocery stores across California, Washington, and Nevada.  The company opened up a grocery store in the Dallas area with over 80,000 square feet of selling space

Growth in Asian grocers is being driven by several factors.  The large urban centers are increasing becoming populated by an ethnic majority.  Almost 40% of residents in San Francisco County are foreign born.  Asian consumers also benefit from higher incomes.  Asian buying power in the US is expected to increase $250B between 2008 – 2011.  Second, several studies indicate Asian consumers spend proportionally more of that buying power on groceries.  Consumers to these stores, and people who tend to enjoy Asian food, tend to be higher income segments.  A study released my Mintel last year indicated people with incomes above $150,000 are increasingly driven towards these kinds of offerings.  That same study projected annual growth in the ethnic foods market of 20%.

The recent economic downturn appears to be accelerating the trend.  Due to the downturn in commercial real estate, big-box retailers are consolidating their store base, providing opportunities for the growing momentum behind Asian grocery chains.

The grocery market is known as a mature industry with razor-thin margins.  You can only sell the product in so many ways, conventional thinking goes.  It always seems that innovation sneaks up on us, breaking the compromises of that conventional thinking.  And so it is with Asian grocery chains, one of the up and comers in this industry.

June 7, 2010

Innovation comes in many shapes and sizes.  Increasingly, the focus of innovation today is on solving “last mile problems,” providing transparency and collaboration when multiple processes and people converge (see Last Mile Innovation for a deeper view on innovation today).   Textura is a rapidly growing entrepreneurial venture solving the last mile problem for the construction industry.  We recently had the opportunity to talk with John Smith, Product Architect for Textura, to learn more about their success, innovation path, and even a little bit about time travel.

John, welcome, tell us about the first insight that led to Textura’s entry into the marketplace?

The idea was and is about risk transfer in the construction financing and payment process.  The documentation required monthly in the industry today is significant, where the risk associated with any single transaction could be in the millions of dollars.  This drove the industry to develop an absolute addiction to paper and 100% audit processes where no payment is allowed to proceed without scrutiny.  The construction payment process was overdue for the application of collaborative technologies.  Construction as an industry has seen historically low investment in technology – all of which helped pave the way for us.

The innovation applied by Textura is conceptually simple:

1.       Define a best-practice invoicing, compliance, approval, and payment process (tuned for construction’s unique financial, legal, and process issues)

2.       Build a team capable of delivering exceptional customer experience and put the right tools at their disposal

3.       Have fun, change the industry

The applications which we deliver to our customers today, through a SAAS model, are fundamentally derived from the original insight that we could do better.

What further innovations were instrumental as the company has grown?

Let me rephrase the question, to something like; “Were there innovations hidden in that initial implementation which you were not immediately aware of (but which proved instrumental in growing the company?)”

Yes, actually there were quite a few “secrets.”  Simple things like using the internet and standing arms length from any of the direct project participants as a third party.  The simple, structural advantage of being a third party was actually quite powerful.  We are capable of carrying out collaborative transactions which installed software never could.  Our concept of “distributed administration”, where each organization manages their own corporate persona, rules, permissions, etc. has allowed our solutions to greatly reduce the variability in the process.  Each has a common framework for invoicing, compliance and payment with many different general contractors and owners.

Ok, further innovations.  Basically we have stayed true to the idea of connecting construction industry participants to each other with shared tools in a way which decreases their risks, transaction costs, and improves communication and transparency.  We simply branched out into other areas which are either adjacent to the construction payment process, or support the same industry participants in a different process space altogether (but still with the common threads; shared tools, common network infrastructure, and project-based workflows).  We look at the industry participants and the process threads which connect them much more broadly today than five years ago.

So you are branching out.  As you do this, are you managing innovation as a process?  A small group of geniuses that you throw in a conference room?  Customer-centric?

Having a group of geniuses certainly helps.  The problem is that even the best geniuses will occasionally hit a dry spell.  As a recent fortune cookie told me “Success is going from failure to failure without loss of enthusiasm” so at least you’d have that going for you.

Customers are certainly a great source of ideas, likely the best source, and “Thanks” to any of ours who may read this.  Our process for managing new product development is pretty old school; talk to the customers about what they do today and what they would like to be able to do better in the future, cover different perspectives across a range of customers, boil “what they do today” down to basic functionality which is required, and match that with capabilities we have already or could reasonably develop.

Conversations with customers gives us a really good idea of what tools they have, what they value about each and what they find troubling.  These insights help the overall shape of the application unfold.  After a basic scope takes shape, we look for both differentiators and connections.  This is where the geniuses come into the process – that moment of “gestalt”.  You have to take a flyer once in a while and the idea may come from a customer, one of the sales guys, or a developer.  We spread the new of ideas broadly, knowing that anyone could be the one to spot the better way.

It must be hard for your customers to articulate the next generation of needs.  How do you manage through that challenge?

Textura is applying technology in a process where there were conceptually very little in the way of analogous clues.  We could and do look at the flow of the paper process, but when considering the impact of online real-time collaboration to decades old processes you have to get pretty creative to divine the rules.

We are a company founded on a process innovation that has a real impact on our customers business.  I compare it to time travel (and we keep a replica Flux Capacitor in the data center as a reminder). Our customers execute project administration processes far more efficiently with Textura than with manual processes – all the while running a less risky and lower cost process than the industry taken as a whole.  This has the effect of manufacturing time for our customers allowing them to redeploy people to value-adding but often neglected tasks like quality, people development, and customer service.

Textura’s innovations today are usually much more tightly defined.  Keep the change small.  Customers are much better at reacting to deployed features and envisioning extensions than they are at designing Greenfield features.  If I were to create an outline for successful innovation in technology development it would read like this:

1.       Cover the basics

2.       Know what you do (and why the customer wants you doing it)

3.       Take a flyer once in a while

4.       Keep the changes small

It sounds like your innovation focus is shifting as the company grows.  How does your ability to manage innovation and keep the innovation spark alive changing?

Short answer is yes, the focus is shifting.  Once you have a base of shared experience and process vocabulary with your customers, it becomes much easier for them to guide you to the value in your ideas.  They will help you if you keep putting ideas in front of them in a format that they can relate to and use – small extensions may be developed more quickly and give the customer a basis for the dialog.  The lightning bolt becomes less relevant, too risky.

Are you employing technology such as web 2.0 technologies to cast a wider net of ideas?

Yes, we have used a couple different case management tools, and have embedded a variety of idea capture processes and tools around these.  All internal up to this point – all of our external input is direct customer interviews, workshops here at Textura HQ, or client implementation teams coming back with ideas from a particular customer.  We are in process of implementing a crowdsourcing idea management tool with some clever features like a virtual cash stock market for ideas where we can let competing ideas duke it out for investment from the user community (both internal and external).  The idea is to allow for capital budgeting to occur at the very edge of the enterprise where Textura ends and the customer begins.  Using a crowdsourcing tool and the markets to predict the customer (or revenue if you will) impact of each idea.  As they graduate through the process engineering can estimate delivery resources and costs for each potential and while not necessarily scaled in the same currency you have the inputs for a comparative ROI.  The macro-decision making still comes from the center of the organization, but the goal is to get as much feedback and input from the edges as possible.  Keep the cycles short, demo the work, incorporate the feedback and make the customer a partner in the development of new innovations.

The crowd helps us to cast a wide net, refine ideas against a variety of requirements and perspectives, and enables web 2.0-esque community evaluation of ideas which improves the overall hit rate for ideas which reach implementation.  A funny side note – I was working recently on a volunteer project to build a playground for a local preschool and I had someone suggest crowdsourcing with the parents as a strategy for decision making on the build!  With that sort of data coming in I can only conclude – web 2.0, you’ve come a long way baby.

John, thank you.  Congratulations on all the success and thank you for your perspectives on Innovation.

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May 24, 2010

Wal-Mart continues to act as a barometer for the larger economy.  As the largest retailer in the world, its business results reflect an early view of future trends taking hold.  For leaders, these results can be a window in which successful strategies can be viewed.  As an investor, these results can act as both warnings and lights toward greater success.   Just as a the diversified conglomerate GE is often looked at as a barometer regarding infrastructure and business to business spending, Wal-Mart can be viewed in the same way with an eye towards the end consumer.

In February, on this blog, Wal-Mart’s fourth quarter earnings results were reviewed.  In that review, three trends were identified that are taking hold globally (read the post by clicking here).   These trends included changing consumer purchasing behavior, arguing that a segment of consumers felt renewed confidence to begin trading up once more.  These trends also included a heightened focus toward emerging markets as the growth platform in this recovery.  Wal-Mart’s 1Q earnings release occurred last week, so I took a look to see if the trends identified 3 months ago had strengthened as expected and to see what other trends could be emerging underneath the top-line earnings numbers.

Wal-Mart’s recent earnings strengthens the view that consumer behavior is indeed shifting.  Store traffic and same store sales for stores open at least a year in the United States continued to decline.  The decrease, at 1.2% year on year revenue, was double market expectations, illustrating that many consumers are increasingly taking their dollar elsewhere.  A Standard & Poor’s analyst captured the emerging consensus, “We expect U.S. comp-store sales growth to remain under pressure as consumers begin to trade up and take advantage of more convenient, but higher priced, competitors in a more stable economy.”

A heightened focus towards international markets also strengthened with first quarter results.  With US same store sales growth down more than 1%, Wal-Mart’s international division grew revenue by more than 20%.  Taking currency into account, this equated to a constant currency store growth of about 9%. Once again, China and Brazil were singled out as growth catalysts.  The growth rate in emerging markets for Wal-Mart continues to show a solid track record.  In that environment, capital investment and strategic focus will continue to be directed toward these markets, and away from what appears to be an uncertain environment in the United States.  For supply chains, this shift will be dramatic as emerging market supply chains will be reconfigured to serve domestic demand.

The third key trend identified in the fourth quarter, and validated last week, is Wal-Mart’s continued use of cost cutting as a competitive weapon.  On total sales growth of 5.9%, costs grew at 3.9%.  After each successive quarter, the economic recovery strategy being employed starts to emerge; continue to wring costs out, maintain position in the US, plow savings to grow the business in emerging markets.  The execution of this strategy continues.  A recent initiative recently became public that Wal-Mart is seeking to assume warehouse delivery responsibility in the US supply chain for many of its vendors.  Doing so, in essence taking over transportation responsibility up the supply chain, is directed toward lowering fuel costs and extracting more price cuts from its suppliers.

More confident consumers once again trading up, increased focus and capital moving into emerging markets, tightening cost controls in the US are the key strategies being used by Wal-Mart, visible in the earnings releases of the last two quarters.

There are more trends emerging.  In conjunction with its earnings release, Wal-Mart reduced its US sales forecast.  With the much higher than expected US sales declines, Wal-Mart’s view on US markets  is now uncertain.  Their response is to announce a new round of discounting to prop up demand in US stores.  Such discounting is now becoming widespread practice among leading grocery retailers seeking to hang on to their consumers.  With so many leading retailers engaging in this practice, inflationary fears in the broader US economy may quickly give way to industry fears of intensified price cutting.  This will have deep implications for the U.S. consumer goods market going forward.