By  on May 24, 2005

Rogers, Ark. — On a brisk spring morning, much of northwest Arkansas' power elite, in suits and cowboy boots, waited in a field about five miles from Wal-Mart headquarters for the groundbreaking of a lifestyle center mall.

Lt. Gov. Win Rockefeller exited from a helicopter, but the crowd hardly noticed. Instead, many gawked in the opposite direction, where Lee Scott had arrived with his wife, Linda, in a silver Honda Odyssey SUV. It was a rare local public appearance for Wal-Mart's president and chief executive officer, whose plastic Wal-Mart badge saying "Lee'' dangled from his lapel.

More than five years into his tenure, Harold Lee Scott Jr., 56, is trying to sell the public on a kinder, gentler Wal-Mart and persuade increasingly skeptical Wall Street analysts that the world's largest retailer, based in Bentonville, Ark., is still a growth juggernaut. That pressure intensified this month when Wal-Mart reported first-quarter earnings that missed expectations as rival Target posted better-than-expected profit.

Scott, a private person in corporate America's most public job, is an executive at a career crossroads. He has broken with 45 years of corporate protocol by spending the last year in a blitz of speeches, town hall meetings and television appearances. Scott believes it is imperative for Wal-Mart to answer detractors by telling its story. Just last week, he told a business forum in Chicago: "We democratize merchandise'' for consumers.

"He's the E.F. Hutton of retail — when he speaks, everyone listens," said Marshal Cohen, chief industry analyst for The NPD Group, a research firm in Port Washington, N.Y. "But over time, staying on the same message loses its luster. We've got to start hearing some of the insights he's arrived at that are going to change the way the company addresses the needs of its customers and communities today, and in the future."

The past two years have been a perfect storm for Wal-Mart. Criticism over employee wages and benefits, development fights, lawsuits and scandal coincided with declining same-store sales and downgrades from analysts.

Goldman Sachs analyst Adrianne Shapira, in a research note after Wal-Mart missed earnings for the second time in its history, wrote: "We believe several key changes at Wal-Mart could be a negative to [same-store sales] momentum and include: significant executive turnover, focus shift away from internal sales goals and toward external, headline risk factors [and] new focus on medium and higher-price point items."Wal-Mart stock closed at $47.85 on Monday, near a 52-week low of $46.20, a blow for a company that posts its share price everywhere from the headquarters' lobby to outside employee rest rooms. Competitors such as Target, perceived as more hip; Costco, better at cultivating affluent shoppers, and Walgreens, which offers a more convenient shopping format, are pushing ahead with new stores, benefiting from supply-chain technologies Scott and Wal-Mart pioneered.

Now, Wal-Mart, which Moody's Investors Service said had $33 billion in clothing sales last year — to make it the world's biggest seller of apparel — is seeking to upgrade its fashions without alienating core customers.

Scott, who declined interview requests, presides over an international corporation that accounts for about 2 percent of the U.S. gross domestic product and employs 1.6 million people. On his watch as ceo, revenues have swelled to $285 billion from $165 billion. In the last fiscal year, he took home almost $12 million in salary, bonus and stock awards, with an option to buy 339,001 shares.

Wal-Mart is a cultural phenomenon, a lightning rod for criticism of corporate power and globalization. It is the subject of blogs and bomb threats, novels and reams of newsprint.

"Nobody is prepared to be a statesman,'' said Elizabeth Sanders, a former Nordstrom executive and a Wal-Mart board member from 1992 to 2003. "So the company has to ask this role of Lee that very few people in the world have.''

Scott believes in, and lives by, the Wal-Mart culture. It is a system of values initiated by founder Sam Walton stressing hard work, frugality, perseverance, suppression of ego and teamwork.

Wally Switzer, who managed Wal-Mart stores and worked 23 years for the company, said, "It's never about 'I.' It's about how well we do collectively, together."

Like most Wal-Mart executives, Scott strives to be a "servant leader," a term with Christian religious derivations that is popular executive-speak internally.

"There is a self-confidence to the Wal-Mart culture that's almost on the verge of arrogance," said Nelson Lichtenstein, a labor historian at the University of California, Santa Barbara. "It's 'we know how to do it, we have our own ethical, moral sense of right.'"Scott refused to pose for Fortune magazine's 2003 Most Admired Company cover because he didn't want to be seen as taking individual credit for team success. Colleagues describe him as unsentimental, dryly funny and consistent. He prefers to read (Jimmy Buffett's biography, recently) rather than talk on long flights, is impatient with inaccuracy and spends a day each week in stores. He drives a Volkswagen Beetle.

Organizational philosophy texts such as "The Geography of Thought: How Asians and Westerners Think Differently and Why" are required reading for Scott's top lieutenants. Another requirement: being quick on the uptake when Scott asks for help on The New York Times crossword puzzle, which he does while traveling.

"If you're with him, you're accountable for helping him finish that puzzle," joked Jay Allen, Wal-Mart's senior vice president of corporate affairs. "If you don't add anything of value, you might not be invited to play next time."

A registered Republican, Scott has supported President George W. Bush. Vice President Dick Cheney and his wife, Lynne, toured a Wal-Mart distribution center in May 2004, three months after Laura Bush attended a $1,000-a-plate fund-raiser at the Pinnacle Hills Country Club, where Scott is a member.

His ties extend beyond Republicans. Last year, Scott sought advice from former members of Bill Clinton's White House staff on Wal-Mart's public relations problems.

Like Walton, Scott comes from humble beginnings. He was raised in Baxter Springs, a town of about 4,600 in southeast Kansas most notable for a robbery by Jesse James. He has some of Walton's famed common touch, chatting with Wal-Mart associates via an internal Web site dubbed "Lee's Garage," in honor of his father Harold's Route 66 gas station.

His late mother, Avis, was a music teacher, and Scott attended her alma mater, Pittsburg State University in Pittsburg, Kan., majoring in business. Growing up, he loved golf, football and baseball (he played outfield).

He caught one coed, Linda Aldridge, his sophomore spring. By fall of his junior year, they were married, and eventually had two sons. Scott worked nights at a tire-mold factory, he recalled in a 2003 interview with the college radio station. His $1.95-an-hour wage barely covered tuition and rent, and when the plant laid him off his senior year, he had to finish his final credits by correspondence.The Scotts now live in Pinnacle Hills, a gated community a long way from the Lone Star Trailer Court where they started married life. They own a boat moored on the Florida coast, which they use for deep-sea fishing. They are homebodies, preferring the company of their two-year-old granddaughter to an evening out, Allen said.

Scott occupies Walton's corner office, with its laminate-wood paneling and views of traffic lights on Walton Boulevard. Some analysts question whether Scott has turned Wal-Mart into a distribution engine with a retail veneer. Others wonder if an executive who has spent 26 years around the battleship gray corridors of the home office can separate legitimate criticisms from the clamor that surrounds the company.

They also wonder why Wal-Mart seems to say one thing but do another, promising better listening in high-profile Los Angeles, for example, but circumventing size restriction ordinances in Dunkirk, Md., and building two stores side by side. There is a disconnect between Scott, praised by colleagues as a good listener, and Wal-Mart, which is perceived by unions, some communities, environmental activists and others as unwilling to listen.

Clues about Scott — the man and the ceo — are in a Wal-Mart career that began in the company's trucking fleet.

MANAGEMENT LESSONS

Scott worked at Wal-Mart for 16 years before an exodus of senior talent in the mid-Nineties landed him in his first high-profile job, executive vice president of merchandising, and set him on a path to the top.

After stints at two Missouri freight operators, Scott arrived at Wal-Mart in 1979 when it was a regional player with $1.2 billion in sales and about 200 stores.

Scott set about tightening operations with a suffer-no-fools attitude and a series of abrasive memos.

"When I was 30, I thought I knew everything," he recalled in a 2003 interview with trade journal Supply Chain Management Review. He also remembered a Wal-Mart executive warning: "If I was trying to make enemies, I was headed in the right direction."

Scott learned diplomacy. He calls his leadership "management by erosion," and it consists as much of questions and suggestions as it does of giving orders.When he meets with people in his office — decorated with family photos, a fish tank and a football signed by former New York Giants star Frank Gifford, whose wife, Kathie Lee, sold a clothing line at Wal-Mart — he comes around his desk to sit beside a visitor.

Addressing groups, Scott speaks quietly and without inflection, hands in his pockets. He is witty and sarcastic, often catching audiences off-guard. He also can be curt. "It doesn't make a diddly squat what people have on the signs they march around with," he said in response to a reporter's question about expansion protests during the company's first-ever media conference in April.

TIME AND TRUCKS

Scott is a tactician and a problem-solver.

In transportation and logistics, where he worked from 1979 until 1995, he squeezed time and money to make operations more efficient. He automated routing and implemented backhauling — scheduling trucks to pick up loads on their way back to a distribution center so they never travel empty. That business generates almost $1 billion in revenue, said Rollin Ford, Wal-Mart executive vice president of logistics.

In his autobiography, Walton recalled Scott's predecessor, David Glass, challenging Scott to "try to locate every truck in the fleet on a single day." Within 24 hours, Scott tracked down 2,000-plus tractors and 11,000 trailers.

As he matured, Scott's forte was seeing how logistics could benefit the entire organization. He replaced Walton's distribution system with a hub-and-spoke model, which positioned stores in a ring within a day's drive from a distribution center for quick restocking. He initiated a system called cross-docking, in which goods move through a distribution center within 24 hours, reducing inventory costs.

He also oversaw construction of grocery distribution centers and the first import warehouse, both integral to rolling out Supercenters, the company's most profitable format.

Scott's distribution system is "what's absolutely killing competitors," said Michael Bergdahl, a former Wal-Mart executive-turned-author and retail consultant. "There is more [expansion] ahead of them than they've done so far, and his distribution will be pivotal."

Some critics said Scott's leadership has meant efficiency at the expense of store experience. "In the early Nineties, the culture of the company turned inward toward logistics, sourcing and distribution,'' said Richard Hastings, analyst with Charlotte, N.C.-based RBH Co. "They discovered this was the way to stay ahead. By doing this, they neglected the outer shell of the business — the store experience, the store aesthetics, the employee morale."Eli Portnoy, owner of Orlando, Fla., branding consultant The Portnoy Group, said with Scott trying to "fill potholes" in corporate reputation, the retailer is neglecting its brand identity as a vibrant low-cost place to shop. "They seem to be shifting focus backward rather than taking the customer forward," he said.

Same-store sales, which increased 2.9 percent in fiscal 2005 compared with 5.7 percent in fiscal 2003, suggest Wal-Mart is not persuading customers. April comps went up 0.1 percent.

There are also questions about Michael T. Duke, a Scott protege from logistics who runs about 3,700 Wal-Mart Stores in the U.S., after flat sales last Christmas capped a disappointing year.

Still, Scott has shown good instincts for merchants. In 1996, he tapped Vanessa Castagna, then running Wal-Mart's home and crafts areas, for ladies' apparel. She eventually departed to help turn around J.C. Penney.

"I think Lee is still irritated I left,'' she said.

NPD's Cohen said, "Ultimately, it comes back to Lee's responsibility to surround himself with good merchants. Wal-Mart keeps coming up short on merchandise, and [is] beaten when it comes to trend and outlook."

A PASSION TO COMPETE

Raising prices — even by a penny — to pay for additional wages or benefits for store associates could give competitors an edge. And the competition is always on Scott's mind.

He arrives for work a bit after 6 a.m. By then, the cafeteria has been scrambling eggs for two hours and Glass, a board member with an office next door to Scott's, is likely at his desk.

In Wal-Mart headquarters, which has the lightless feel of a Las Vegas casino, competitive juices run rampant. The focus is to outmaneuver, outwork and outsell the other guy 365 days a year.

As Scott's star rose, the focus was on beating rivals, particularly Kmart. The company churned out anti-Kmart lapel pins depicting a red K with a devil's face being choked or knocked out by the Wal-Mart "Smiley."

"There was always an emphasis on aggressively going after the business," said Les Dietzman, a former Wal-Mart vice president with a chain of Christian merchandise stores. "The emphasis was: 'How can I sell more?' as opposed to 'How can I control or manage better?'"That has come to haunt Wal-Mart in the form of managers reducing store operating costs by forcing associates to work off the clock. The retailer faces about 40 "off-the-clock" lawsuits, according to its 2005 annual report. In response, Scott implemented forms of corporate baby-sitting — from hiring compliance officers to investing in software that locks cashiers out of their registers when they are legally mandated to take a break.

He seems to regard these endeavors as irritants and distractions.

Speaking at a 2004 Prudential analysts' conference, Scott began with a financial recap: "I want to make sure I cover that, because, at times, people read so much about Wal-Mart that all of a sudden they get to believing that the focus of the company is on headlines or issues external to retailing." Management "cannot allow these extraneous issues to somehow brood over and stop what it is that we are so capable of doing."

The attitude angers those who say setting employment standards is part of Wal-Mart's social responsibility.

"They've gotten so caught up in their own culture, they've lost sight of the implication of how they treat people," said George Whalin, president of Retail Management Consultants in San Marcos, Calif.

But Neil Stern, analyst with Chicago-based McMillan Doolittle, said Scott should not get mired in social agendas to remake Wal-Mart.

"No other retailer in history has ever had such a clear mission as Wal-Mart,'' he said. "Messing with that clarity would be messing with foundations of the company and…its success."

RIVALS AND PARTNERS

In recent months, Wal-Mart turned over evidence to federal prosecutors implicating retired vice chairman and board member Thomas Coughlin in a pattern of expense-account abuse and phony invoices totaling as much as $500,000 in corporate funds. Coughlin has denied the allegations through his lawyer. Coughlin, who started at Wal-Mart in 1978, the year before Scott, had alternately been Scott's partner, rival and top deputy for the last decade.

His departure signaled Scott's willingness to excise anything — or anyone — who didn't play by the rules.

"Let's all keep in mind that an incident like this once again underscores the strength of the Wal-Mart culture," Scott e-mailed employees after Coughlin's ouster, the Arkansas Democrat-Gazette reported. "Our standards of integrity apply to everyone, with no exceptions."The bombastic Coughlin and the reserved Scott were the operations-merchandising duo (Coughlin had operations) that pulled the retailer out of a slump after it missed its earnings estimates for the first time in the fourth quarter of fiscal 1995.

To rally the troops, Scott and Coughlin danced on stage at Wal-Mart's semiannual store managers' meeting in dark suits, sunglasses and skinny ties a la the Blues Brothers.

"They were making a point to the store managers ... It wasn't Elvis and Mick Jagger, two stars. It was the Blues Brothers, a partnership," Wal-Mart's Allen said.

The pair cleared stale inventory, pruned redundant shelf items and improved in-stock levels on fast-moving items. Sales jumped, inventory fell and Wall Street rewarded the company by bidding up the stock. Both names were bandied about for the top job.

Their partnership was in a tradition of yin-yang pairings at Wal-Mart, where a charismatic individual such as Coughlin, adept at preaching "culture'' to employees, functioned in tandem with a more reserved, strategic thinker. Many inside and outside the company felt the Blues Brothers as a team were stronger than either individually.

THE FUTURE

Scott is often asked what he wants his legacy to be.

"He's always answered the same way," Allen said. "That when he walks out the door, he wants to know if Sam Walton were standing there that he'd say, 'You did a good job.'"

Analysts agree that one of Scott's achievements has been grooming the next generation. Within his direct reports, Scott has a mixture of homegrown talent such as Kevin Turner, ceo of Sam's Club, and external hires such as chief financial officer Thomas Schoewe, recruited from Black & Decker. He also mentors about 40 junior executives with his Key Leaders program.

Among his biggest challenge is communicating Wal-Mart's mission "in a global kind of way," RBH'S Hastings said. "GE is not a perfect company, but it's a mature company, and it does a good job of explaining and exploring its relationship with the changing societies of the world."

Scott may be on his way there, with more visibility and perhaps a slightly broader view, but it is not likely he'll ever seek, or receive, the recognition of iconic business figures."I think everyone needs to understand this is not about Lee Scott," he said during the 2003 interview on his college radio station. "It is the fact that Lee Scott is at Wal-Mart that has provided the great emphasis on this career. And as long as you keep that in perspective, you can handle this thing."

Management Effectiveness Ratios
Return on Assets/Return on Equity
April 30,2004-April 30, 2005
StoresReturn on Assets Return on Equity
Wal-Mart Inc.9.38%23.26%
Target Corp. 6.28% 15.63%
J.C. Penney Co. Inc. 4.66%14.32%
Source: Yahoo Finance; results for the 12 months ended April 30. Return on assets equals net income before minority share of earnings and nonrecurring items, divided by average total assets. Return on equity equals net income before nonrecurring items minus preferred dividends, divided by average common equity.

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