How CEO Lampert’s BIAS Is Killing Sears – and Maybe Your Company Too

Sears has performed horribly since acquired by Fast Eddie Lampert's KMart in 2005.  Revenues are down 25%, same store sales have declined persistently, store margins have eroded and the company has recently taken to reporting losses.  There really hasn't been any good news for Sears since the acquisition.

Bloomberg Businessweek made a frontal assault on CEO Edward Lampert's leadership at Sears this week.  Over several pages the article details how a "free market" organization installed by Mr. Lampert led to rampant internal warfare and an inability for the company to move forward effectively with programs to improve sales or profits. Meanwhile customer satisfaction has declined, and formerly valuable brands such as Kenmore and Craftsman have become industry also-rans.

Because the Lampert controlled hedge fund ESL Investments is the largest investor in Sears, Mr. Lampert has no risk of being fired.  Even if Nobel winner Paul Krugman blasts away at him. But, if performance has been so bad – for so long – why does the embattled Mr. Lampert continue to lead in the same way?  Why doesn't he "fire" himself?

By all accounts Mr. Lampert is a very smart man.  Yale summa cum laude and Phi Beta Kappa, he was a protege of former Treasury Secretay Robert Rubin at Goldman Sach before convincing billionaire Richard Rainwater to fund his start-up hedge fund – and quickly make himself the wealthiest citizen in Connecticut.  

If the problems at Sears are so obvious to investors, industry analysts, economics professors, management gurus and journalists why doesn't he simply change? 

Mr. Lampert, largely because of his success, is a victim of BIAS.  Deep within his decision making are his closely held Beliefs, Interpretations, Assumptions and Strategies.  These were created during his formative years in college and business.  This BIAS was part of what drove his early success in Goldman, and ESL.  This BIAS is now part of his success formula – an entire set of deeply held convictions about what works, and what doesn't, that are not addressed, discussed or even considered when Mr. Lampert and his team grind away daily trying to "fix" declining Sears Holdings.

This BIAS is so strong that not even failure challenges them.  Mr. Lampert believes there is deep value in conventional retail, and real estate.  He believes strongly in using "free market competition" to allocate resources. He believes in himself, and he believes he is adding value, even if nobody else can see it.

Mr. Lampert assumes that if he allows his managers to fight for resources, the best programs will reach the top (him) for resourcing.  He assumes that the historical value in Sears and its house brands will remain, and he merely needs to unleash that value to a free market system for it to be captured.  He assumes that because revenues remain around $35B Sears is not irrelevant to the retail landscape, and the company will be revitalized if just the right ideas bubble up from management.

Mr. Lampert inteprets the results very different from analysts.  Where outsiders complain about revenue reductions overall and same store, he interprets this as an acceptable part of streamlining.  When outsiders say that store closings and reduced labor hurt the brand, he interprets this as value-added cost savings.  When losses appear as a result of downsizing he interprets this as short-term accounting that will not matter long-term.  While most investors and analysts fret about the overall decline in sales and brands Mr. Lampert interprets growing sales of a small integrated retail program as a success that can turn around the sinking behemoth.

Mr. Lampert's strategy is to identify "deep value" and then tenaciously cut costs, including micro-managing senior staff with daily calls.  He believes this worked for Warren Buffett, so he believes it will continue to be a successful strategy.  Whether such deep value continues to exist – especially in conventional retail – can be challenged by outsiders (don't forget Buffett lost money on Pier 1,) but it is part of his core strategy and will not be challenged.  Whether cost cutting does more harm than good is an unchallenged strategy.  Whether micro-managing staff eats up precious resources and leads to unproductive behavior is a leadership strategy that will not change.  Hiring younger employees, who resemble Mr. Lampert in quick thinking and intellect (if not industry knowledge or proven leadership skills) is a strategy that will be applied even as the revolving door at headquarters spins.

The retail market has changed dramatically, and incredibly quickly.  Advances in internet shopping, technology for on-line shopping (from mobile devices to mobile payments) and rapid delivery have forever altered the economics of retailing.  Customer ease of showrooming, and desire to shop remotely means conventional retail has shrunk, and will continue to shrink for several years.  This means the real challenge for Sears is not to be a better Sears as it was in 2000 — but to  become something very different that can compete with both WalMart and Amazon – and consumer goods manufacturers like GE (appliances) and Exide (car batteries.) 

There is no doubt Mr. Lampert is a very smart person.  He has made a fortune.  But, he and Sears are a victim of his BIAS.  Poor results, bad magazine articles and even customer complaints are no match for the BIAS so firmly underlying early success.  Even though the market has changed, Mr. Lampert's BIAS has him (and his company) in internal turmoil, year after year, even though long ago outsiders gave up on expecting a better result. 

Even if Sears Holdings someday finds itself in bankruptcy court, expect Mr. Lampert to interpret this as something other than a failure – as he defends his BIAS better than he defends its shareholders, employees, suppliers and customers.

What is your BIAS?  Are you managing for the needs of changing markets, or working hard to defend doing more of what worked in a bygone era?  As a leader, are you targeting the future, or trying to recapture the past?  Have market shifts made your beliefs outdated, your interpretations of what happens around you faulty, your assumptions inaccurate and your strategies hurting results?  If any of this is true, it may be time you address (and change) your BIAS, rather than continuing to invest in more of the same.  Or you may well end up like Sears.

Irrelevancy leads to failure – Worry for Yahoo, Microsoft, HP, Sears, etc.

The web lit up yesterday when people started sharing a Fortune quote from Marissa Mayer, CEO of Yahoo, "We are literally moving the company from BlackBerrys to smartphones."  Why was this a big deal?  Because, in just a few words, Ms. Mayer pointed out that Research In Motion is no longer relevant.  The company may have created the smartphone market, but now its products are so irrelevant that it isn't even considered a market participant.

Ouch.  But, more importantly, this drove home that no matter how good RIM thinks Blackberry 10 may be, nobody cares.  And when nobody cares, nobody buys.  And if you weren't convinced RIM was headed for lousy returns and bankruptcy before, you certainly should be now.

But wait, this is certainly a good bit of the pot being derogatory toward the kettle.  Because, other than the highly personalized news about Yahoo's new CEO, very few people care about Yahoo these days as well.  After being thoroughly trounced in ad placement and search by Google, it is wholly unclear how Yahoo will create its own relevancy.  It may likely be soon when a major advertiser says "When placing our major internet ad program we are focused on the split between Google and Facebook," demonstrating that nobody really cares about Yahoo anymore, either. 

And how long will Yahoo survive?

The slip into irrelevancy is the inflection point into failure.  Very few companies ever return.  Once you are no longer relevant, customer quickly stop paying attention to practically anything you do.  Even if you were once great, it doesn't take long before the slide into no-growth, cost cutting and lousy financial performance happens. 

Consider:

  • Garmin once led the market for navigation devices.  Now practically everyone uses their mobile phone for navigation. The big story is Apple's blunder with maps, while Google dominates the marketplace.  You probably even forgot Garmin exists.
  • Radio Shack once was a consumer electronics powerhouse.  They ran superbowl ads, and had major actresses parlaying with professional sports celebrities in major network ads.  When was the last time you even thought about Radio Shack, much less visited a store?
  • Sears was once America's premier, #1 retailer.  The place where everyone shopped for brands like Craftsman, DieHard and Kenmore.  But when did you last go into a Sears?  Or even consider going into one?  Do you even know where one is located?
  • Kodak invented amateur photography.  But when that market went digital nobody cared about film any more.  Now Kodak is in bankruptcy.  Do you care?
  • Motorola Razr phones dominated the last wave of traditional cell phones.  As sales plummeted they flirted with bankruptcy, until Motorola split into 2 pieces and the money losing phone business became Google – and nobody even noticed.
  • When was the last time you thought about "building your body 12 ways" with Wonder bread?  Right.  Nobody else did either.  Now Hostess is liquidating.

Being relevant is incredibly important, because markets shift quickly today. As they shift, either you are part of the trend going forward – or you are part of the "who cares" past.  If you are the former, you are focused on new products that customers want to evaluate. If you are the latter, you can disappear a whole lot faster than anyone expected as customers simply ignore you.

So now take a look at a few other easy-to-spot companies losing relevancy:

  • HP headlines are dominated by write offs of its investments in services and software, causing people to doubt the viability of its CEO, Meg Whitman.  Who wants to buy products from a company that would spend billions on Palm, business services and Autonomy ERP software only to decide they overspent and can never make any money on those investments?  Once a great market leader, HP is rapidly becoming a company nobody cares about; except for what appears to be a bloody train wreck in the making.  In tech – lose customesr and you have a short half-life.
  • Similarly Dell.  A leader in supply chain management, what Dell product now excites you?  As you think about the money you will spend this holiday, or in 2013, on tech products you're thinking about mobile devices — and where is Dell?
  • Best Buy was the big winner when Circuit City went bankrupt.  But Best Guy didn't change, and now margins have cratered as people showroom Amazon while in their store to negotiate prices.  How long can Best Buy survive when all TVs are the same, and price is all that matters?  And you download all your music and movies?
  • Wal-Mart has built a huge on-line business.  Did you know that?  Do you care?  Regardless of Wal-mart's on-line efforts, the company is known for cheap looking stores with cheap merchandise and customers that can't maintain credit cards.  When you look at trends in retailing, is Wal-Mart ever the leader – in anything – anymore?  If not, Wal-mart becomes a "default" store location when all you care about is price, and you can't wait for an on-line delivery.  Unless you decide to go to the even cheaper Dollar General or Aldi.

And, the best for last, is Microsoft.  Steve Ballmer announced that Microsoft phone sales quadrupled!  Only, at 4 million units last quarter that is about 10% of Apple or Android.  Truth is, despite 3 years of development, a huge amount of pre-release PR and ad spending, nobody much cares about Win8, Surface or new Microsoft-based mobile phones.  People want an iPhone or Samsung product. 

After its "lost decade" when Microsoft simply missed every major technology shift, people now don't really care about Microsoft.  Yes, it has a few stores – but they dwarfed in number and customers by the Apple stores.  Yes, the shifting tiles and touch screen PCs are new – but nobody real talks about them; other than to say they take a lot of new training.  When it comes to "game changers" that are pushing trends, nobody is putting Microsoft in that category.

So the bad news about a  $6 billion write-down of aQuantive adds to the sense of "the gang that can't shoot straight" after the string of failures like Zune, Vista and early Microsoft phones and tablets.  Not to mention the lack of interest in Skype, while Internet Explorer falls to #2 in browser market share behind Chrome. 

Browser share IE Chrome 5-2012Chart Courtesy Jay Yarrow, BusinessInsider.com 5-21-12

When a company is seen as never able to take the lead amidst changing
trends, investors see accquisitions like $1.2B for Yammer as a likely future write down.  Customers lose interest and simply spend money elsewhere.

As investors we often hear about companies that were once great brands, but selling at low multiples, and therefore "value plays."  But the truth is these are death traps that wipe out returns.  Why?  These companies have lost relevancy, and that puts them one short step from failure. 

As company managers, where are you investing?  Are you struggling to be relevant as other competitors – maybe "fringe" companies that use "voodoo solutions" you don't consider "enterprise ready" or understand – are obtaining a lot more interest and media excitment?  You can work all you want to defend & extend your past glory, but as markets shift it is amazingly easy to lose relevancy.  And it's a very, very tough job to play catch- up. 

Just look at the money being spent trying at RIM, Microsoft, HP, Dell, Yahoo…………

Avoid Value Traps – Sell Dell and Hewlett Packard


In “Screening Large Cap Value Stocks24x7WallSt.com tries making the investment case for Dell.  And backhandedly, for Hewlett Packard.  The argument is as simple as both companies were once growing, but growth slowed and now they are more mature companies migrating from products into services.  They have mounds of cash, and will soon start paying a big, fat dividend.  So investors can rest comfortably that these big companies are a good value, sitting on big businesses, and less risky than growth stocks.

Nice story.  Makes for good myth. Reality is that these companies are a lousy value, and very risky.

Dell grew remarkably fast during the PC growth heyday.  Dell innovated computer sales, eschewing expensive distribution for direct-to-customer marketing and order-taking.  Dell could sell individuals, or corporations, computers off-the-shelf or custom designed machines in minutes, delivered in days.  Further, Dell eschewed the costly product development of competitors like Compaq in favor of using a limited number of component suppliers (Microsoft, Intel, etc.) and focusing on assembly.  With Wal-Mart style supply chain execution Dell could deliver a custom order and be paid before the bill was due for parts.  Quickly Dell was a money-making, high growth machine as it rode the growth of PC sales expansion.

But competitors learned to match Dell’s supply chain cost-cutting capabilities. Manufacturers teamed with retailers like Best Buy to lower distribution cost. As competition copied the use of common components product differences disappeared and prices dropped every month.  Dell’s advantages started disappearing, and as they continued to follow the historical cost-cutting success formula with more outsourcing, problems developed across customer services.  Competitors wreaked havoc on Dell’s success formula, hurting revenue growth and margins.

HP followed a similar path, chasing Dell down the cost curve and expanding distribution.  To gain volume, in hopes that it would create “scale advantages,” HP acquired Compaq.  But the longer HP poured printer profits into PCs, the more it fed the price war between the two big companies.

Worst for both, the market started shifting.  People bought fewer PCs.  Saturation developed, and reasons to buy new ones were few.  Users began buying more smartphones, and later tablets.  And neither Dell nor HP had any products in development where the market was headed, nor did their “core” suppliers – Microsoft or Intel. 

That’s when management started focusing on how to defend and extend the historical business, rather than enter growth markets.  Rather than moving rapidly to push suppliers into new products the market wanted, both extended by acquiring large consulting businesses (Dell famously bought Perot Systems and HP bought EDS) in the hopes they could defend their PC installed base and create future sales. Both wanted to do more of what they had always done, rather than shift with emerging market needs.

But not only product sales were stagnating.  Services were becoming more intensely competitive – from domestic and offshore services providers – hampering sales growth while driving down margins.  Hopes of regaining growth in the “core” business – especially in the “core” enterprise markets – were proving illusory.  Buyers didn’t want more PCs, or more PC services.  They wanted (and now want) new solutions, and neither Dell nor HP is offering them.

So the big “cash hoard” that 24×7 would like investors to think will become dividends is frittered away by company leadership – spent on acquisitions, or “special projects,” intended to save the “core” business.  When allocating resources, forecasts are manipulated to make defensive investments look better than realistic.  Then the “business necessity” argument is trotted out to explain why acquisitions, or price reductions, are necessary to remain viable, against competitors, even when “the numbers” are hard to justify – or don’t even add up to investor gains.  Instead of investing in growth, money is spent trying to delay the market shift. 

Take for example Microsoft’s recent acquisition of Skype for $8.5B.  As Arstechnia.com headlined “Why Skype?” This acquisition is another really expensive effort by Microsoft to try keeping people using PCs.  Even though Microsoft Live has been in the market for years, Microsoft keeps trying to find ways to invest in what it knows – PCs – rather than invest in solutions where the market is shifting.  New smartphone/tablet products come with video capability, and are already hooked into networks.  Skype is the old generation technology, now purchased for an enormous sum in an effort to defend and extend the historical base. 

There is no doubt people are quickly shifting toward smartphones and tablets rather than PCs.  This is an irreversable trend: Platform switching PC to phone and tablet 5-2011 Chart source BusinessInsider.com

Executive teams locked-in to defending their past spend resources over-investing in the old market, hoping they can somehow keep people from shifting.  Meanwhile competitors keep bringing out new solutions that make the old obsolete.  While Microsoft was betting big on Skype last week Mediapost.com headlined “Google Pushes Chromebook Notebooks.”  In a direct attack on the “core” customers of Dell and HP (and Microsoft) Google is offering a product to replace the PC that is far cheaper, easier to use, has fewer breakdowns and higher user satisfaction. 

Chromebooks don’t have to replace all PCs, or even a majority, to be horrific for Dell and HP.  They just have to keep sucking off all the growth.  Even a few percentage points in the market throws the historical competitors into further price warring trying to maintain PC revenues – thus further depleting that cash hoard.  While the old gladiators stand in the colliseum, swinging axes at each other becoming increasingly bloody waiting for one to die, the emerging competitors avoid the bloodbath by bringing out new products creating incremental growth.

People love to believe in “value stocks.”  It sounds so appealing.  They will roll along, making money, paying dividends.  But there really is no such thing.  New competitors pressure sales, and beat down margins.  Markets shift wtih new solutions, leaving fewer customers buying what all the old competitors are selling, further driving down margins.  And internal decision mechanisms keep leadership spending money trying to defend old customers, defend old solutions, by making investments and acquisitions into defensive products extending the business but that really have no growth, creating declining margins and simply sucking away all that cash.  Long before investors have a chance to get those dreamed-of dividends.

This isn’t just a  high-tech story.  GM dominated autos, but frittered away its cash for 30 years before going bankrupt.  Sears once dominated retailing, now its an irrelevent player using its cash to preserve declining revenues (did you know Woolworth’s was a Dow Jones company until 1997?).  AIG kept writing riskier insurance to maintain its position, until it would have failed if not for a buyout.  Kodak never quit investing in film (remember 110 cameras? Ektachrome) until competitors made film obsolete. Xerox was the “copier company” long after users switched to desktop publishing and now paperless offices.

All of these were once called “value investments.”  However, all were really traps.  Although Dell’s stock has gyrated wildly for the last decade, investors have lost money as the stock has gone from $25 to $15. HP investors have fared a bit better, but the long-term trending has only had the company move from about $40 to $45.  Dell and HP keep investing cash in trying to find past glory in old markets, but customers shift to the new market and money is wasted.

When companies stop growing, it’s because markets shift.  After markets shift, there isn’t any value left.  And management efforts to defend the old success formula with investments in extensions simply fritter away investor money.  That’s why they are really value traps.  They are actually risky investments, because without growth there is little likelihood investors will ever see a higher stock price, and eventually they always collapse – it’s just a matter of when.  Meanwhile, riding the swings up and down is best left for day traders – and you sure don’t want to be long the stock when the final downturn hits.