Why Amazon out-grows Wal-Mart – Overcoming Bias

by Adam Hartung | Apr 26, 2011 | Defend & Extend, In the Rapids, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech

Summary:

• Everyone discriminates in hiring – just some is considered bad, and some considered good
• Only “good discrimination” inevitably leads to homogeneity and “group think” leaving the business vulbnerable to market shifts
• Efforts to defend & extend the historical success formula moves beyond hiring to include using internal bias to favor improvement projects and disfavor innovations
• Amazon has grown significantly more than Wal-Mart, and it’s value has quadrupled while Wal-mart’s has been flat, because it has moved beyond its original biases

The long list of people attacking Wal-Mart includes a class-action law suit between former female workers and their employer.  The plaintiffs claim Wal-Mart systematically was biased, via its culture, to pay women less and limit their promotion opportunities.  The case is prompting headlines like BNet.com‘s “Does Your Company Help You Discriminate?” 

Actually, all cultures – and hiring programs – are designed to discriminate.  It’s just that some discrimination is legal, and some is not.  At Google it’s long been accepted that the bias is toward quant jocks and those with highest IQs.  That’s not illegal.  Saying that men, or white people, or Christians make better employees is illegal.  But there is risk in all hiring bias – even the legal kind. To avoid the illegal discrimination, its smarter to overcome the “natural bias” that cultures create for hiring.  And the good news is that this is better for the business’s growth and rate of return!

Successful organizations build a profile of “who did well around here – and why” as they grow.  It doesn’t take long until that profile is what they seek.  The downside is that quickly there’s not a lot of heterogeneity in the hiring – or the workforce.  That leads to “group think,” which reinforces “not invented here.”  Everyone becomes self-assured of their past success, and believes that if they keep doing “more of the same” the future will work out fine. Whether Wal-Mart’s hiring biases were legal – or not – it is clear that the group think created at Wal-Mart has kept it from innovating and moving into new markets with more growth.

Markets shift.  New products, technologies and business practices emerge.  New competitors figure out ways of providing new solutions.  Customers drift toward new offerings, and growth slows.  Unfortunately, bias keeps the early winner from accepting this market shift – so the company falls into serious growth troubles trying to do more, better, faster, cheaper of what worked before.  Look at Dell, still trying to compete in PCs with its supply chain focus long after competitors have matched their pricing and started offering superior customer service and other advantages.  Meanwhile, the market growth has moved away from PCs into products (tablets, smartphones) Dell doesn’t even sell.

Wal-Mart excels at its success formula of big, boring, low price stores.  And its bias is to keep doing more of the same.  Only, that’s not where the growth is in retailing any longer.  The market for “cheap” is pretty well saturated, and now filled with competitors that go one step further being cheap (like Dollar General,) or largely match the low prices while offering better store experience (like Target) or better selection and varied merchandise (like Kohl’s).  Wal-Mart is stuck, when it needs to shift.  But its bias toward “doing what Sam Walton did that made us great” has now made Wal-Mart the target for every other retailer, and stymied Wal-Mart’s growth.

A powerful sign of status quo bias shows itself when leaders and managers start overly relying on “how we’ve done things here” and “the numbers.”  The former leads to accepting recommendations fro hiring and promotion based upon similarity with previous “winners.”  Investment opportunities to defend and extend what’s always been done sail through reviews, because everyone understands the project and everyone believes that the results will appear. 

Nearly all studies of operational improvement projects show that returns rarely achieve the anticipated outcomes.  Because these projects reinforce the status quo, they are assumed to be highly accurate projections.  But planned efficiences do not emerge.  Headcount reductions do not happen.  Unanticipated costs emerge.  And, most typically, competitors copy the project and achieve the same results, leading to price reductions across the board benefitting customers rather than company profits.

Doing more of the same is easily approved and rarely questioned – whether hiring, or investing.  And if things don’t work out as expected results are labeled “business necessity” and everyone remains happy they made the original decision, even if it did nothing for market share, or profit improvement.  Or perhaps turns out to have been illegal (remember Enron and Worldcom?)

To really succeed it is important we overcome biases.  Look no further than Amazon.  Amazon could have been an on-line book retailer.  But by overcoming early biases, in hiring and new projects, Amazon has grown more than Wal-Mart the last decade – and has a much brighter future.  Amazon now leads in a large number of retail segments, far beyond books.  It has products which allow anyone to take almost any product to market – using the Amazon on-line tools, as well as inventory management.

And in publishing Amazon has become a powerhouse by helping self-published authors find distribution which was before unavailable, giving us all a much larger variety of book products.  More recently Amazon pioneered e-Readers with Kindle, developing the technology as well as the inventory to make Kindle an enormous success.  Simultaneously Amazon now offers a series of technical products providing companies access to the cloud for data and applications. 

Where most companies would say “that’s not our business” Amazon has taken the approach of “if people want it, why don’t we supply it?”  Where most organizations use numbers to kill projects – saying they are too risky or too small to matter or too low on “risk adjusted” rate of return Amazon creates a team, experiments and obtains real market information.  Instead of worrying whether or not the initial project is a success or failure, market input is treated as learning and used to adapt.  By continuously looking for new opportunities, and pushing those opportunities, Amazon keeps growing.

Every business develops a bias.  Overcoming that bias is critical to success.  From hiring to decision making, internal status quo police try to reinforce the bias and limit change.  Often on the basis of “too much risk” or “too far from our core.”  But that bias inevitably leads to stalled growth.  Because new competitors never stop beating down rates of return on old success formulas, and markets never stop shifting. 

Wal-Mart should look upon this lawsuit not as a need to defend and extend its past practices, but rather a wake-up call to be more open to diversity – in all aspects of its business.  Wal-mart doesn’t need to win this lawsuit neary as badly as it needs to create an ability to adapt.  Until then, I’d recommend investors sell Wal-Mart, and buy Amazon.com.

Chart of WMT stock performance compared to AMZN last 5 years (source Yahoo.com)