FORTUNE -- It wasn't much of a honeymoon. Less than a year after Wal-Mart's new chief executive, Mike Duke, took control of the world's biggest company, he was faced with a not-so-little problem. Shortly before he became CEO in early 2009, Wal-Mart had announced, with great fanfare, Project Impact -- a plan to freshen up the stores and make them a better place to shop. For the most part it worked pretty well. The stores were cleaner and brighter, the logo's blue and yellow color scheme was warmer and more appealing, and the company embraced a catchy new slogan: "Save money. Live better." Even the yellow smiley face was dropped in favor of a perky new "spark" resembling a twinkly star. Nice.
The only trouble was that customers were buying less stuff. Part of Project Impact's mission was to cut down on the number of items sold in the stores. Fewer products meant less clutter. But if you happened to be a fan of Wisk laundry detergent, for instance, you were flat out of luck. Customers were voting with their feet -- sales at existing stores were down -- and some of Wal-Mart's big suppliers were even less cheery. Says one executive: "What happened was, shoppers said, 'We love clean aisles.' But they stopped shopping there."
For a company Wal-Mart's size -- for a company of any size, for that matter -- Duke, 60, moved quickly. By March of this year he had started to bring back many of the products that had been dropped, including Wisk, and he eventually reassigned the chief of the U.S. stores division; another top executive, who had been brought in from archrival Target, left the company.
No wonder his predecessor CEO, Lee Scott, calls him "a doer."
This, in fact, is vintage Duke. Study a problem; take action. When he ran Wal-Mart International, one of his first acts was to close Wal-Mart's German division, which had plagued the company for years. He's also a chief executive who isn't afraid to get down and dirty in the details. As you'll see, he's as comfortable analyzing cereal displays and the price of bananas in the company's China stores as he is dealing with big-picture issues such as environmental sustainability.
As just the third CEO to follow founder Sam Walton -- and the first who had never known the man employees still refer to as "Mr. Sam" -- the career retailer and 15-year Wal-Mart veteran remains largely anonymous to the wider world. Not much for cooperating with stories like this one, the Georgia Tech--educated engineer much prefers studying sales data or analyzing a store shelf by shelf. He is so low-key and friendly that you might mistake him for the company's human resources chief -- as opposed to one of the world's most powerful businessmen. Still, to those who know and work with him, he's a demanding boss and a tough negotiator. He's constantly coaching everyone around him. He trusts but always verifies. And he typically has a smile on his face, even when he's doling out blunt feedback.
On paper his job sounds nearly impossible. Managing an enterprise the size of Wal-Mart (WMT, Fortune 500), based in Bentonville, Ark., is a task of almost unimaginable complexity. The mega-retailer topped Fortune's Global 500 list this year, with 2010 sales of $408 billion -- but that number alone doesn't do justice to the social, legal, and logistics issues that come with running an operation so enormous. Growing a business that size -- 8,500-plus stores and 2.1 million employees -- is equally hard to fathom. To increase revenue by a modest 3% this year, for instance, Wal-Mart would have to produce additional sales of some $12 billion. That number alone would put a company at No. 194 on the Fortune 500 list.
While he moves to reinvigorate the U.S. business, Duke is also working to build what he calls a "next-generation Wal-Mart." To get there, all he has to do is make sure the company doesn't backslide on social issues that have plagued it off and on for years, recruit and develop vast numbers of new leaders talented enough to implement his vision, and re-create Wal-Mart's success at home in growing markets like China and India. Big job.
You can't expect to succeed as the CEO of any Fortune 500 company if you're easily intimidated, but the bar is set pretty high for chief executives in Bentonville. The shadow of Sam Walton looms large a full 18 years after his death -- and not just because his family owns 45% of the company's stock. Visitors to the home office walk past a bronze bust of the legendary retailer as they enter the low-slung brick and corrugated-metal building just off Walton Boulevard. His likeness and his words of wisdom are painted in meeting rooms and hallways. And one of his folksy quotations has recently been distilled into the company's new mission statement: "Saving people money so they can live better."
The other thing is, the two guys who came after Walton weren't half bad either. In the 1990s David Glass took the company global and rolled out the supercenter stores that allowed Wal-Mart to strike it big in the grocery business. In the decade that followed, Lee Scott kept Wal-Mart on its sales growth trajectory while improving the company's negative image by tackling head-on issues like environmental sustainability and health benefits for his employees. Between the two of them, Glass and Scott boosted revenue by a multiple of 25 and increased the company's market capitalization from $15 billion to $185 billion over a 21-year period.
"Go into the service industry"
So who is the man following in these very large footsteps? Mike Duke grew up in the 1950s and '60s in rural Fayette County, Ga., southwest of Atlanta. Both his parents came from farming families in the area. Duke's father worked as a truck driver in Atlanta for Johnson Truck Lines, and his mother stayed home with Mike and his three younger sisters. The family's social life centered on their large extended family and the little Ebenezer United Methodist church down the road. Duke and his sisters grew up helping tend the acres of corn and tomatoes his parents grew on their land. As fondly as he remembers the farm work now, says Duke, "I concluded at about 12 years old that I did not want to do that for the rest of my life."
In school Duke excelled at math and science and threw himself into baseball and football. Neal Dettmering, now a judge in Douglasville, Ga., was a year ahead of Duke at Fayette County High School and a teammate on the football team. He remembers Duke as a nice guy with smarts who brought more "want-to" than raw talent to the gridiron. "He was one of those players who just didn't quit," says Dettmering. "He was tougher than he ought to have been on the field." In his senior year Duke blossomed as a leader. He won the sportsmanship award on the football team and was elected president of his senior class.
Duke likes to tell the story that it was his high school physics teacher, Mr. McDaniel, who determined his life's path. "Go to Georgia Tech," the teacher advised him. "Study industrial engineering. And then go into the service industry. That's the future of opportunity in this country." Already a diehard Georgia Tech sports fan -- his dad bought him a Tech yellow and black Chevy Chevelle Super Sport after graduation -- Duke dutifully complied with the first two pieces of advice.
But he forgot about the service industry -- until he started interviewing for jobs after graduation in 1971 and met a man named John Weitnauer, who was launching a discount chain called Richway's for the regional department store company Rich's. Weitnauer's pitch about the fast-paced appeal of retailing was so persuasive that Duke turned down a promising job at Procter & Gamble (PG, Fortune 500). "Actually, (P&G's) offer was a lot higher," says Duke. "Don't tell my friends there. They won't like it." After a few years at Richway, Duke moved on to jobs with the May department store chain and discounter Venture Stores, climbing the ladder as a specialist in logistics, the science of moving merchandise quickly and efficiently.
Duke was recruited to Wal-Mart in 1995 by Scott to be his deputy running logistics in Bentonville. "I never actually thought about Mike working for me," he says. "We worked together." Indeed, after just a few months, the company moved Scott to head up merchandising and promoted Duke to run logistics.
That partnership progressed after Scott became CEO in 2000. He moved Duke out of logistics and into other parts of the business to broaden his experience. He was put in charge of U.S. stores in 2003. Then, in 2005, Duke was made vice chairman and installed as the head of Wal-Mart's international unit. Soon after, he demonstrated that he was ready to make a really tough call -- one that shows you a lot about how Duke operates. He came to Scott and recommended that Wal-Mart pull out of Germany, where it was struggling despite heavy investments. It was hard for Scott to admit defeat, but Duke made it an easy decision. "He came in and said, 'Here we are again looking at a five-year plan that is tough in the first three years, then a hockey stick that shows we're going to be wonderful five years from now,' " says Scott. Duke had gone back and pulled all the plans for several years, and they all showed hockey sticks five years out -- and many of those hockey sticks had already passed with less than wonderful results. So they gave up on Germany. But it didn't hurt international growth. During Duke's three-year tenure running the business, sales grew from under $60 billion to nearly $100 billion.
When Scott was thinking about what qualities his successor should have, he saw a match with Duke's skills. "I kind of thought -- and I think the board thought -- that the company could be better managed," says Scott, who is careful to say that it was the directors who picked Duke for the job, not him. "And Mike is not only a good leader but a really good manager. There's so much said today about leadership. But I don't think in business you can forget the fact that you don't just have to lead, you have to manage."
So Duke is a better manager than Scott? "Yeah, he's a better manager than I am," says Scott. "I think it's his ability to deal with data, his ability to set a schedule and follow that schedule, and to get all of the things done that he needs to get done. Mike is disciplined, and I think that causes him to be able to accomplish a great deal -- how he manages his time, how he manages his people, and the effectiveness of the time he spends with people."
When Scott announced he was stepping down, Duke was viewed as the clear choice, despite some other strong internal candidates, such as Eduardo Castro-Wright, who had parlayed a successful run as head of Wal-Mart Mexico into a job running Wal-Mart's U.S. business. The directors did look at candidates from outside the company, but bringing in an outsider to run an operation as big as Wal-Mart is almost impractical. "When you're a $400 billion company and you look at people from outside, they typically either have the retail background but don't have experience with the size and complexity of Wal-Mart," says Allen Questrom, a former CEO of J.C. Penney (JCP, Fortune 500) who left the Wal-Mart board recently, "or they don't have the international scale of Wal-Mart. Or they're in a totally different kind of business."
The price of bananas in China
Duke and his wife of 40 years, Susan, are devoted churchgoers and have three grown children. Duke describes his outside interests as golf and his five grandkids. If he has a vice, it's a fondness for sports cars, which he indulged after he became CEO by purchasing a used black Porsche 911 Carrera to drive on weekends. "When I met him, at first I thought, 'Wow! He runs International at Wal-Mart?' " recalls PepsiCo (PEP, Fortune 500) CEO Indra Nooyi of her initial impression of the low-key, 6-foot-1 executive. "And then you sit down with him and you find that this person, who's very unassuming, is a very, very global thinker, a very worldly person."
He also possesses a strong sense of business curiosity -- and it often leads to marketplace epiphanies. Consider the story of the Chinese bananas. Last fall Duke and Doug McMillon, the new 43-year-old head of Wal-Mart's international division and an oft-mentioned candidate to be Duke's successor, flew to China to check in on the company's fast-growing business there. While scouting competitors, Duke became preoccupied with the price of bananas.
All the local stores they visited, he noticed, sold both domestic and imported versions of the fruit -- and they didn't appear much different in quality. But the homegrown kind cost about 20% less, on average, than the foreign fruit. Then Duke and McMillon walked into Wal-Mart's Wanda supercenter in Beijing. Duke went straight to the produce section and found that while Wal-Mart had a better price on imported bananas, it didn't have cheaper domestic bananas in stock at all. The CEO pointed out to McMillon and the local executives that Wal-Mart was ceding the entry-level portion of the banana market -- not exactly the formula that a little discount chain from northwestern Arkansas used to become the world's biggest retailer. At that point Duke's team reacted with the kind of speed and efficiency that would make Sam Walton smile. Within 24 hours, the Wanda supercenter had local bananas in stock at a market-beating price. In less than a week, all 49 stores in Wal-Mart China's North Region had them, followed quickly by the rest of its nearly 300 stores across the country. But for Duke the issue was not about the price of fruit alone. "It turned into a great conversation about opening price-point items: 10-packs of chopsticks, soccer balls, basketballs," says McMillon. "We started looking around the store differently because of his attention to detail."
Leading by example
Visit Duke in the 15-by-17-foot office he inherited from Scott -- yes, the same one that Sam Walton once occupied, with the same cheap wood paneling -- and you will see evidence of the disciplined approach to managing that Scott and others admire. The CEO is known for his rigid adherence to his tightly packed schedule. If a meeting is scheduled to end, he's not above getting up to leave while you're still talking He's similarly systematic when it comes to his e-mail. "I keep up with e-mails," he says. "I don't like carryovers. At the end of the day, I don't want there to be any phone messages that haven't been returned or e-mails that aren't addressed." He reads and deletes, prints, or forwards messages to his assistant, Paula, for more action. "For me this is more e-mails left over than I like," he says, gesturing at an in-box with seven messages visible at 2:30 in the afternoon.
He is similarly meticulous when it comes to preparation. On a credenza Duke keeps eight red folders, one for every direct report. On the outside of each, his assistant puts a small, color-coded Post-it note with the name of the executive and the time of his or her next meeting written neatly in pen. One day in early August, Duke's folder for Brian Cornell, the chief executive of Sam's Club, included sales figures, a note with some questions Duke had about the real estate purchasing strategy at Sam's, and an e-mail from a club member complaining that the retailer's private-label Member's Mark facial tissue gets stuck in the box and doesn't come out properly. "Brian's team identified that as a real problem," says Duke. "And I said, 'Great, now that we've identified the problem, when are we going to solve it?' And I keep this in here until Brian tells me it's solved. It's a follow-up mechanism."
Sometimes Duke doesn't wait and finds out whether a problem is solved himself. In July, at the company's monthly Saturday morning meeting, the CEO decided to bring up a problem he had spotted with ladies underwear. "Is Anne Marie Kehoe here this morning?" he asked, microphone in hand, turning to look for one of his merchandising executives. "Anne Marie, how's our in-stock? Yesterday I asked about our in-stock in ladies underwear, and it wasn't as good as we wanted. So I was going to see if we had improved any in the last 24 hours."
Dressed casually in a lime-green polo, khakis, and dock shoes, Duke was holding court for the 900 or so employees and visitors packed inside the main auditorium at the mega-retailer's home office -- and also for workers around the globe. Duke is keenly aware of how important it is to use this time to get some work done and communicate with his troops. So it's no accident that after chatting with celebrity guests, such as actor Ed Harris -- who was promoting the DVD of a new indie film being sold at Wal-Mart -- the CEO decided to do what he loves best: go really, really granular, and remind everyone that he's always watching.
Kehoe stood and explained that Duke had been in some local stores and noticed that the ladies underwear section was not fully stocked. Turns out, Hanes had been having some problems keeping up with Wal-Mart's insatiable demand for underwear. But the good news is that her team was already on the case. "I did go back later to see if it was true," Duke adds, grinning widely for the benefit of the crowd. "And that's why I'm complimenting her today."
The heart of Duke's changes
And it's not just underwear that gets him going. The CEO is also going cuckoo for the Cocoa Puffs display. It's a Thursday afternoon at Wal-Mart store No. 1, just a couple of miles from the home office in Bentonville, and Duke is admiring the way his troops have positioned a pallet of the chocolaty breakfast cereal out in the open to emphasize the bargain price of $2.50 for a big box. "This looks great," he says to the managers. "A display like that one -- it's not overdoing it. But when you've got something at a really good price, you want to show it off." They beam, and he gestures at the open space around him. "If you came here a few years ago, every few feet there would have been shelves stacked to the ceiling," he says. "We then went to the extreme and took everything out. We think we adjusted too much, and now we're going back."
What Duke is describing may sound like Retail 101, but it gets to the heart of the changes he made repairing Project Impact. When he stepped into the CEO job in February 2009, Wal-Mart was already well into implementing the radical overhaul of its U.S. business. Masterminded by Castro-Wright, the goal of the ambitious Project Impact was to tighten up the company's operations -- from the logo to making the stores look better and brighter. Duke determined that the marketing changes and the cleaner stores were a good thing. But the merchandising? Well, not so good.
Sam Walton himself always favored a cluttered presentation. "Stack 'em high and let 'em fly!" was his philosophy about how to display products to his customers, and it remained the organizing principle long after he was gone. For decades, when shoppers entered a Wal-Mart, they could expect the so-called Action Alley -- the primary traffic artery from the front to the back of the store that crosses aisles -- to be packed with deeply discounted items. Citing shopper survey data, Castro-Wright and John Fleming, the head of merchandising for Wal-Mart U.S. and a former exec at rival Target (TGT, Fortune 500), set out to create a cleaner -- both literally and figuratively -- shopping experience that would appeal to more upper-middle-class shoppers. They made store maintenance a priority and rolled out a redesign program that opened up sightlines and made signage more readable. (More Target-y, many said.) Store managers were ordered to clear the Action Alleys completely. Most controversially, Wal-Mart cut by thousands the number of items that it carried in each store, deciding that it would be more efficient to focus on fewer brands.
For the past few months Duke has been moving to undo the damage -- same-stores sales have slumped five consecutive quarters -- by adding back most of the items the retailer had dropped, giving more autonomy to store managers, and returning displays to the Action Alley -- albeit to a more limited degree. The CEO says the company has learned some lessons but contends he's thrilled with Project Impact overall. "This is not about dialing back to where we were three or four years ago," he says. "This is really about taking where we are and advancing to the future."
The path forward involved a reshuffling of executive roles, another big Duke move. In July, Wal-Mart announced that Castro-Wright would be leaving his job as the CEO of Wal-Mart U.S. to focus on running the company's global sourcing. (The move allows Castro-Wright to live full-time in California to be near his wife, who recently underwent heart-transplant surgery.) Taking his place at the head of Wal-Mart U.S. is Bill Simon, who had been COO of the division for the past three years. At the same time it was announced that Fleming, the godfather of the new merchandising strategy, was leaving the company. Duke declines to link the changes to Project Impact and calls the move a "win-win" for both Castro-Wright's family and the company, since it enables him to take on a new challenge. But at the very least, observers say, the changes have allowed Duke to move one of his people into a key role. Best known for spearheading Wal-Mart's much-lauded $4 prescription plan for generic drugs back in 2006, Simon is an extremely popular executive both internally and with suppliers and investors. "Bill Simon is a very capable executive with strong ideas of his own," says David Poneman, the head retail analyst for TIAA-CREF, which is one of Wal-Mart's largest shareholders. "I think he's going to bring urgency to addressing the negative aspects of Project Impact."
Keeping ahead of the critics
Project Impact won't be the last problem Duke has to solve. For instance, the company has made huge gains in public perception on social issues over the past few years, notably through its embrace of green business practices. Duke has continued to drive the company in that direction, launching the Sustainable Product Index last year to track progress by its suppliers. He also broke new ground for the company this year when Wal-Mart pledged $2 billion to address the issue of hunger in America.
But when you're as big as Wal-Mart, there's always something. And lately it continues to be haunted by a nine-year- old class-action lawsuit that may or may not make its way to the Supreme Court. The suit, filed by six female employees in 2001, asserts that the company pays women less money than men for the same jobs and that women receive fewer promotions. In the spring a California circuit court ruled that the suit could proceed to trial as a class action on behalf of all women employees at the company since 1998. Wal-Mart has appealed that ruling to the high court, arguing that such a small group can't plausibly argue that it represents more than a million employees. But if it loses and the lawsuit is successful, the company could be exposed to billions of dollars in damages for back pay. And another big black eye.
Duke, unlike some Wal-Mart execs of the past, has been trying to stay ahead of the company's critics. Shortly after becoming CEO last year, he created the President's Global Council of Women's Leaders. The group of 15 top female executives meets once a month to discuss things like creating more networking opportunities. Duke denies that the decade-old lawsuit has had any influence on his desire to launch the women's council. "I've spent enough time in stores talking to women and see that 70% to 80% of our customers are women in every country where we operate," he says. "It's the right thing to do. But it's also good for our business if we have more women in leadership." Roz Brewer, 48, the chair of the council and chief of the chain's South division in the U.S., says her boss sincerely embraced the project: "He came to our meeting and said, 'You know, this isn't aggressive enough.' "
But ultimately -- the class-action suit, the green initiatives, the executive musical chairs aside -- Duke's biggest challenge is finding ways to keep the world's largest company growing. Even with 3,765 stores in the U.S. already, the company is convinced that it can keep expanding at home. And the recent news out of Chicago that Wal-Mart had reached an agreement to open at least 21 stores in the city was a major milestone for the retailer, which has long coveted access to urban populations and been denied it by fierce opposition from labor groups in big cities.
To meet Wall Street's modest expectations over the next five years, the company must increase its profits by a mind-boggling $3.68 billion. To use the Fortune 500 comparison again, that's greater than 463 of the companies on this year's list. Sales, meanwhile, are expected to top half a trillion dollars. That means a lot of expansion overseas in markets like China, India, and Brazil, and a virtual army of new-store managers and other executives. "In the old days when the company was smaller, everyone could take their lead from Sam Walton," says Duke. "Today we need hundreds of Sam Waltons, many of them in China, Brazil, and other countries around the world."
They'd better make sure to stock plenty of underwear. And watch the price of bananas.