"Once we rid ourselves of traditional thinking, we can get on with creating the future."
-- James Bertrand

Running a business is all about innovation. Whether you're a biotechnology upstart, a cutting-edge technology company, or a large-scale retailer, innovation is paramount to a business' success. Without innovation, companies run the risk of complacency and getting passed by competitors, or, even worse, folding up shop altogether like Circuit City did a couple of years ago.

No company gets a "free pass" when it comes to adapting its business plan, so when push comes to shove we need to ask ourselves: Will this company innovate or die?

Today, let's take a closer look at Wal-Mart (NYSE: WMT) to determine if the company can adapt to rapidly changing consumer demands or if it will be pushed into the background?

What's wrong with Wal-Mart?
Over the past decade, Wal-Mart shareholders have had very little to cheer about. In that time, its shares have returned a dividend-adjusted 23%, but if you subtract the dividend, its share price has essentially been stagnant, just 7%. Wal-Mart was at one time America's fastest-growing retailer; it's now a shadow of its former self. Rivals Target (NYSE: TGT) and Costco (Nasdaq: COST), and even deep discounters Dollar General (NYSE: DG) and Dollar Tree (Nasdaq: DLTR), have tamed Wal-Mart's growth and even taken market share from the retailing giant.

In its most recent quarterly filing, Wal-Mart reported a 1.1% drop in U.S. same-store sales despite a better-than-expected profit. This raises the question: What does Wal-Mart need to do to turn its stagnant business around?

Getting Wal-Mart back on track
I'm not the CEO of Wal-Mart, but for a moment let's pretend I am. As I see it, Wal-Mart needs to focus on three aspects of its business in order to get back on track:

  • Continue focusing on international growth: International sales account for one-quarter of Wal-Mart's revenue, and sales growth there is still a ripe 12%. Wal-Mart needs a target international revenue allocation of 35%-40% within the next five years.
  • Lose the complacency: Wal-Mart may be large enough to sit back and simply undercut the prices of local businesses, but this is creating a PR nightmare for the company and destroying its image with shareholders and the public. The company needs to think big and bring new products into its stores to avoid the stings of complacency.
  • Spin off Sam's Club: Sam's Club has grown on par with Wal-Mart's U.S. operations over the past five years, but is unfortunately a distraction that's not allowing Wal-Mart to focus on turning around its stagnant U.S. business. I find it likely that there would be significant shareholder interest in a Sam's Club spinoff, and even if Wal-Mart were to spin off Sam's Club, it could still retain a majority interest in the company.

What's the verdict on Wal-Mart?
Speaking and doing are two completely different actions. Thus far, Wal-Mart has stuck to its word and is diligently working on increasing its international sales, but I still see complacency in its U.S. operations, which has mired the company's stock price in the $50s for the better part of a decade. I wouldn't go so far as to say Wal-Mart is dying, but I definitely wouldn't call the company an innovator either. The complacency bug has the better of Wal-Mart right now, and for that reason it may not be a good fit for your portfolio.

What say you? Will Wal-Mart innovate or die trying? Share your thoughts in the comments section below and consider tracking Wal-Mart as well as your favorite retailers with the free and easy-to-use My Watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Wal-Mart Store, and Costco. Motley Fool newsletter services have recommended Costco and buying shares of and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that always on the lookout for a good sale.