"Sears Axes Ad Budget As Sales Slide" is the latest Crain's article. Revenues have been falling at Sears ever since Mr. Ed Lampert took control of the venerable Chicago retailer. His initial actions were to cut costs in order to prop up profits. Which worked for about 8 quarters. But then the impact of cost cutting cracked back like a bullwhip, shredding profits. Mr. Lampert reacted by further cutting costs to "bring them in line with sales." And the whirlpool started. Cut costs, revenue falls, cut costs, revenue falls, cut costs…… And now he largely blames the recession for Sears poor performance. As if his Lock-in, and that of the management, to old approaches had nothing to do with the dismal results now at Sears.
There are those who think these actions are smart, to bring costs "in alignment with retail trends" as Morningstar put it. But reality is Sears is now in the Whirlpool of failure. Looking at the lifecycle, they've gone past the point of no return – out of the Swamp of slow growth – and into the last stage - failure. The stores would be closed and sold to other retailers, except there's a dearth of retail buyers out there these days. Thus shareholders are stuck with underperforming real estate, constantly declining revenues and falling cash flow.
Not all retailers are seeing declining revenues. Bloomberg.com reported today "Apple May Be Highest Grossing Fifth Avenue Retailer." While Sears and others are watching sales go down, Apple's retail store revenues rose 2.5% this year – and it's Fifth Avenue store has seen traffic increase 22% this last quarter. In a town where tourists often put an emphasis on shopping, they used to ask locals how to find Bloomingdales or Saks. Now they want to know where to find the Apple store.
Markets shift. When they do, you have to change your Success Formula or your results decline. When customers change their behavior, you have to change as well or your sales and profits go down. But most leaders react to market shifts by trying to do the same thing they've always done, only faster, better and cheaper. Oops. That only leaves you chasing your tail – just like Sears. You keep working harder and harder but results don't improve. Then eventually something happens that throws you into bankruptcy, or an acquisition for your assets, and it's "game over." Meanwhile, all the time you're watching returns shrink shareholders watch value decline, employees grow disgruntled as you whittle away bonuses, benefits, pay and jobs, and vendors grow tired of the impossible negotiations for lower costs while waiting to get paid on strung-out terms. Nobody is having a good time. Just go ask the folks at Sears.
But there are always businesses that catch the market shift and use it to propel their growth. Like Apple. Once a niche and low-profit computer manufacturer, they've turned into a producer of music players, music distributor and mobile phone supplier as well as computer manufacturer. And when everyone would have said that retail is a terrible investment, they've turned into a surprisingly successful retailer as well. Appple keeps throwing itself back into the Rapids of growth, rather than slipping into the Swamp of stagnation and Whirlpool of failure.
Apple keeps going toward the market shifts. Apple's CEO (and increasingly other executives) Disrupts the company's Success Formula, always challenging the company to do new things. And White Space is constantly created where permission is given to operate outside old Lock-ins and resources are provided for the opportunity to grow. Apple could have done a half-hearted job of retailing, trying to act like Best Buy or Nike with its stores and merchandise, or only funding stores in suburban malls instead of tier 1 retail space on the very best (and most expensive) retail avenues.
The next time you're asking yourself "when will this recession end?" think about Sears and Apple. If your business acts like Sears your recession won't be anytime soon. If you keep doing more of the same, cutting costs and hoping to hold on for a recovery, your doing nothing to end the recession and it's unlikely you'll find much improvement in your business. But if you develop scenarios about the future which allow you to attack competitors, using Disruptions to change your approach and the market, then using White Space to develop new solutions you can bring this recession to an end sooner than you think. People in your business will have chances to grow, and so will your revenues and profits.
For more about how we set ourselves up for failure, and how to avoid the traps download the free ebook The Fall of GM: What Went Wrong and How To Avoid Its Mistakes.