How to Destroy a Commercial Icon

Sears Blog PhotoLeadership is one of the most important topics in human affairs. When good leaders are in place, institutions and their incumbents thrive; when bad leaders are in place, institutions fail and the incumbents suffer accordingly. The core task of leadership is to build high performing teams; leader behaviors that disrupt this process inevitably lead to failed enterprises. The data show that four leader behaviors are key to building a team or successful collective effort:

– Integrity: Leaders must be trustworthy. Subordinates need to know that leaders keep their word, don’t exploit resources, don’t play favorites, and treat their staff with respect. The dark-side tendencies that lead to managerial derailment mostly concern leader unpredictability, which erodes trust.

– Competence: Leaders need to understand the business at the level of the shop floor. This is easy when leaders come up through the ranks (e.g., in the military). But beginning sometime in the 1970s, the idea took hold that there are formal principles of business (which can be learned in MBA programs) that apply universally, and that if one understands these principles, then one doesn’t need to master the details of the business at a more granular level. I believe this view is dangerously wrong, and it almost guarantees managerial failure.

– Judgment: Judgment has to do with the quality of a leader’s decision making, and that, in turn concerns being able to recognize when they have made bad decisions and then changing them. Bad leaders, when confronted with evidence that their decisions were wrong, tend to double down—e.g., send more troops to Iraq.

-Vision: Making a case for the importance of what the group is doing. As Peter Drucker noted, if the only reason you are in business is to make money, then you should quit. Greed is not an appealing vision for many people.

With these precepts in mind, let us consider the case of Edward S. Lampert, the brilliant hedge fund manager who recently drove Sears, the iconic American retailer, into bankruptcy. Lampert is unusually bright and ambitious. He graduated from Yale in 1984, summa cum laude and Phi Beta Kappa, with a degree in Economics. He then joined Goldman Sachs and worked directly with Robert Rubin as an arbitrage trader. Encouraged by his success at Goldman Sachs, he left in 1988 to launch his own hedge fund, ESL Investments. He was again very successful; he started his hedge fund with $29 million and quickly made hundreds of millions of dollars for himself and his backers. He made big bets in Honeywell, IBM, AutoZone, and AutoNation. Before and after making his investments, Mr. Lampert and his team would visit stores, talk to managers, check back rooms for inventory levels—they were known for outworking their competitors. With mountains of cash on hand, Mr. Lampert took control of K-Mart, accumulated a controlling share of Sears, and in 2005, he merged the two, installed himself as chairman, and took an active role in management. I listened to this story on National Public Radio in 2005—while driving by my local K-Mart store—and the experts were pessimistic, saying that Lampert was a financial wizard who knew nothing about running a retail empire. At ESL Lampert had 35 employees, at Sears he had 300,000 employees.

Sears was the Amazon of its day; it transformed shopping in America by shipping its goods to every part of the country. Under Lampert, it crashed fast: In 2007, Sears’ stock market value was $30 billion; on October 17, 2018, its value was $.069 billion. In 2007, revenues were $50.7 billion; in 2017 revenues were $16.7 billion. In 2007, Sears operated 3,418 stores; in August of 2018, Sears operated 866 stores. The reasons for this rapid decline seem pretty clear, and there are four of them. The first problem concerns the way Lampert treated his employees. He, for example, institutionalized absentee leadership. He only occasionally visited Sears headquarters; he preferred to meet with his top management team via conference calls from ESL’s headquarters in Florida. Although most retail executives visit their stores weekly, Lampert asked his executives to meet with their store managers via Skype—because it was more efficient. In addition, Lampert was widely criticized for “shredding” employees during management meetings, and he burned through 3 CEOs in eight years before installing himself as CEO. He split the business into a large number of competing divisions, believing that competition between them would increase profits. The result was massive internal rivalry and falling sales. Lampert’s management style was deeply problematic because it created internal divisions, rivalries, and mistrust.

The second problem concerns the fact that Lampert knew very little about Sears’s core business. As Whitney Tilson, a prominent investor and hedge fund operator said in the Wall Street Journal: “What on earth does he know about running a retailer? It’s exhibit A of hedge fund hubris. This is a case study I will teach in my seminars for years.” Lampert cut back on TV and newspaper advertising and started email marketing, which was cheaper—but Sears’s customers were much less likely to read the email marketing and business declined accordingly. Lampert then cut back on purchasing goods for his stores in order to avoid marking down items at season’s end; as a result, many departments had empty shelves causing customers to conclude that Sears was going out of business. He refused to invest in the maintenance of his stores, allowing them to become dingy and shoddy. Rather than offering discounts, he raised prices. In addition, Lampert didn’t understand Sears’s customer base. At one management meeting, Lampert suggested that Sears should model its customer service after Hermes, the French luxury goods provider; he said his suggestion was intended to provide a “…deeper notion of what it is to serve people.”

The third problem concerns Lampert’s judgment. He was correct in his view that the Amazon model was the future of retailing. But a vision is nothing without implementation and the way to transform a huge bargain-priced retail operation into a just-in-time logistics company is not obvious. Lampert maintains his vision even today, insisting that with his vision, Sears will become leaner and more profitable: The Wall Street Journal article on the fall of Sears is titled: “Fund star stands by Sears Bet.” Good judgment doesn’t involve making the right bet, it involves changing the bet when the data indicate that the bet was wrong. Lampert appears to be quite stubborn and incapable of admitting he has made a mistake.

Finally, there is the nature of Lampert’s vision for Sears. For Lampert, Sears was a pure financial play, an investment designed to make him even wealthier. The result: working for Lampert would be like working for Louis XIV—the only reward would be the fact that one has a job, and having a job is better than not having a job. This of course creates an alienated work force accompanied by high absenteeism, high turnover, low productivity, and poor customer service ratings. Lampert wanted to compete with Amazon; Amazon’s vision is one of providing superior customer service, something at which they clearly excel.

Lampert was right that the long-term prospects for the big U.S. retailers (JC. Penny, Target, Walmart, Sears) are uncertain because they are caught between trying to compete with Amazon on price, convenience, and customer service and compete with high-end retailers who have better stores and products. And the data indicate that Amazon’s business model is steadily gaining popularity across the board. In addition, Sears had been declining for years: its stores were poorly maintained, it lost its focus and moved into insurance, property, and auto repair, and it closed its mail order business, which was its original competitive advantage. Sears has remained in a slow death spiral, and unless its leadership changes, the company could collapse entirely.