The Sad State of Sears: Proof that Customers Cannot be Removed From Business Strategy

By Curtis Bingham

A couple of weeks ago there was an article in the Wall Street Journal that describes Sears’ attempt to sell Lands End and other assets in an effort to improve the company’s liquidity. On the surface this might seem like yet another corporate divestiture, but let’s rewind a bit for context.

Sears Chairman Eddie Lampert purchased via his ESL Investments a controlling stake in Sears in 2005 and embarked on a strategy that was lambasted widely in the financial press. At the time, Sears had a very strong brand, valuation, and stock price. Lampert’s strategy was to slash expenditures and focus solely on superior financial returns. Lampert dismissed industry best practices and experts saying in a NY Times article, “[W]e do not subscribe to the view that more is better, or that there is a certain amount that must be spent on cap ex every year. The question we ask at Sears (and I believe every business should ask) is: ‘What is the most productive way to allocate the capital that we have on hand and the cash flow the company generates?’”

For all the hubris, Sears stores now stand out as worn-out. The company has lost touch with younger customers, and dilapidated stores where lights flicker, carpet is worn, and traffic is nonexistent are the norm. Sears lost $3 billion in 2011, and despite buybacks of nearly $6 billion, share price is less than half what it was when Lampert took over.

What happened?

Three things:

1. Hubris: Eddie Lampert decided to stand the industry on its head and ignore best practices, convinced that he knew better than anyone else how to maximize profitability. Some rules are made to be broken, and the real innovators are those who break more than others. However, innovation that ignores customers simply isn’t sustainable.
2. Wrong Metrics: Eddie Lampert focused solely on financial returns at the expense of customer returns. When customers are removed from the value equations of business, the precipitous slide to ruin begins. One of the greatest challenges facing business today is that businesses are following the wrong metrics and driving themselves off the cliff and out of business. Executives are measured nearly exclusively on financial metrics, yet as Drucker said, “The purpose of business is to create and keep a customer.” Where is the impact on the customer considered in strategic decisions?
3. The CFO Running the Show: There are too many Eddie Lamperts in the CEO or CFO position in the company and they have entirely too much power. The stereotypical CFO is trying to minimize risk and maximize (short-term) financial gain. But adding the customer into the strategy is messy and sometimes wreaks havoc on carefully laid plans. Think recalls, or credits for lousy service. More importantly, changing customer needs, competitive threats, and other strategies to grow customer base or penetrate markets are less easily quantified, but imperative. You simply cannot shrink your way to growth.

In modern business, any technology- or service-based competitive advantage can be copied or stolen in less than six months. The only sustainable competitive advantage is the company’s ability to deeply understand and profitably satisfy customer needs and desires. To expand, you cannot shrink your way to growth. As Sears has shown, that strategy precludes deeply understanding customers and certainly doesn’t enable profitably satisfying customer needs and desires.

To be successful, every company must ask at every major decision point, “What is the impact of this decision on our customers?” If it is a positive impact, then leverage it. If it is negative, then find a way to mitigate or lessen the impact. Only by incorporating the impact on customers into strategic decision-making can companies avoid the near-certain demise currently faced by one of America’s household brands.