by Adam Hartung | Jul 18, 2013 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in
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.
by Adam Hartung | Feb 18, 2011 | Current Affairs, In the Swamp, Innovation, Leadership, Lock-in, Openness, Television, Web/Tech
Business people keep piling onto the innovation and growth bandwagon. PWC just released the results of its 14th annual CEO survey entitled “Growth Reimagined.” Seems like most CEOs are as tired of cost cutting as everyone else, and would really like to start growing again. Therefore, they are looking for innovations to help them improve competitiveness and build new markets. Hooray!
But, haven’t we heard this before? Seems like the output of several such studies – from IBM, IDC and many others – have been saying that business leaders want more innovation and growth for the last several years! Hasn’t this been a consistent mantra all through the last decade? You could get the impression everyone is talking about innovation, and growth, but few seem to be doing much about it!
Rather than search out growth, most businesses are still trying to simply do what their business has done for decades – and marveling at the lack of improved results. David Brooks of the New York Times talks at length in his recent Op Ed piece on the Experience Economy about a controversial book from Tyler Cowen called “The Great Stagnation.” The argument goes that America was blessed with lots of fertile land and abundant water, giving the country a big advantage in the agrarian economy from the 1600s into the 1900s. During the Industrial economy of the 1900s America was again blessed with enormous natural resources (iron ore, minerals, gold, silver, oil, gas and water) as well as navigable rivers, the great lakes and natural low-cost transport routes. A rapidly growing and hard working set of laborers, aided by immigration, provided more fuel for America’s growth as an industrial powerhouse.
But now we’re in the information economy. Those natural resources aren’t the big advantage they once were. Foodstuffs require almost no people for production. And manufacturing is shifting to offshore locations where cheap labor and limited regulations allow for cheaper production. And it’s not clear America would benefit even if it tried maintaining these lower-skilled jobs. Today, value goes to those who know how to create, store, manipulate and use information. And success in this economy has a lot more to do with innovation, and the creation of entirely new products, industries and very different kinds of jobs.
Unfortunately, however, we keep hiring for the last economy. It starts with how Boards of Directors (and management teams) select – incorrectly, it appears – our business leaders. Still thinking like out-of-date industrialists, Scientific American offers us a podcast on how “Creativity Can Lesson a Leader’s Image.” Citing the same study, Knowledge @ Wharton offers us “A Bias Against ‘Quirky’ Why Creative People Can Lose Out on Creative Positions.” While 1,500 CEOs say that creativity is the single most important quality for success today – and studies bear out the greater success of creative, innovative leaders – the study found that when it came to hiring and promoting businesses consistently marked down the creative managers and bypassed them, selecting less creative types!
Our BIAS (Beliefs, Interpretations, Assumptions and Strategies) cause the selection process to pick someone who is seen as less creative. Consider these comments:
- “would you rather have a calm hand on the tiller, or someone who constantly steers the boat?”
- “do you want slow, steady conservatism in control – or irrational exuberance?”
- “do we want consistent execution or big ideas?”
These are all phrases I’ve heard (as you might have as well) for selecting a candidate with a mediocre track record, and very limited creativity, over a candidate with much better results and a flair for creativity to get things done regardless of what the market throws at her. All imply that what’s important to leadership is not making mistakes. Of you just don’t screw up the future will take care of itself. And that’s so industrial economy – so “don’t let the plant blow up.”
That approach simply doesn’t work any more. The Christian Science Monitor reported in “Obama’s Innovation Push: Has U.S. Really Fallen Off the Cutting Edge” that America is already in economic trouble due to our lock-in to out-of-date notions about what creates business success. In the last 2 years America has fallen from first to fourth in the World Economic Forum ranking of global competitivenes. And while America still accounts for 40% of global R&D spending, we rank remarkably low (on all studies below 10th place) on things like public education, math and science skills, national literacy and even internet access! While we’ve poured billions into saving banks, and rebuilding roads (ostensibly hiring asphalt layers) we still have no national internet system, nor a free backbone for access by all budding entrepreneurs!
Ask the question, “If Steve Jobs (or his clone) showed up at our company asking for a job – would we give him one?” Don’t forget, the Apple Board fired Steve Jobs some 20 years ago to give his role to a less creative, but more “professional,” John Scully. Mr. Scully was subsequently fired by the Board for creatively investing too heavily in the innovative Newton – the first PDA – to be replaced by a leadership team willing to jettison this new product market and refocus all attention on the Macintosh. Both CEO change decisions turned out to be horrible for Apple, and it was only after Mr. Jobs returned to the company after nearly 20 years in other businesses that its fortunes reblossomed when the company replaced outdated industrial management philosophies with innovation. But, oh-so-close the company came to complete failure before re-igniting the innovation jets.
Examples of outdated management, with horrific results, abound. Brenda Barnes destroyed shareholder value for 6 years at Sara Lee chasing a centrallized focus and cost reductions – leaving the company with no future other than break-up and acquisition. GE’s fortunes have dropped dramatically as Mr. Immelt turned away from the rabid efforts at innovation and growth under Welch and toward more cautious investments and reliance on a set of core markets – including financial services. After once dominating the mobile phone industry the best Motorola’s leadership has been able to do lately is split the company in two, hoping as a divided business leadership can do better than it did as a single entity. Even a big winner like Home Depot has struggled to innovate and grow as it remained dedicated to its traditional business. Once a darling of industry, the supply chain focused Dell has lost its growth and value as a raft of new MBA leaders – mostly recruited from consultancy Bain & Company – have kept applying traditional industrial management with its cost curves and economy-of-scale illogic to a market racked by the introduction of new products such as smartphones and tablets.
Meanwhile, leaders that foster and implement innovation have shown how to be successful this last decade. Jeff Bezos has transformed retailing and publishing simultaneously by introducing a raft of innovations, including the Kindle. Google’s value soared as its founders and new CEO redefined the way people obtain news – and the ads supporting what people read. The entire “social media” marketplace is now taking viewers, and ad dollars, from traditional media bringing the limelight to CEOs at Facebook, Twitter and Linked-in. While newspaper companies like Tribune Corp., NYT, Dow Jones and Washington Post have faltered, pop publisher Arianna Huffington created $315M of value by hiring a group of bloggers to populate the on-line news tabloid Huffington Post. And Apple is close to becoming the world’s most valuable publicly traded company on the backs of new product innovations.
But, asking again, would your company hire the leaders of these companies? Would it hire the Vice-President’s, Directors and Managers? Or would you consider them too avant-garde? Even President Obama washed out his commitment to jobs growth when he selected Mr. Immelt to head his committee – demonstrating a complete lack of understanding what it takes to grow – to innovate – in today’s intensely competitive information economy. Where he should have begged, on hands and knees, for Eric Schmidt of Google to show us the way to information nirvana he picked, well, an old-line industrialist.
Until we start promoting innovators we won’t have any innovation. We must understand that America’s successful history doesn’t guarantee it’s successful future. Competing on bits, rather than brawn or natural resources, requires creativity to recognize opportunities, develop them and implement new solutions rapidly. It requires adaptability to deal with new technologies, new business models and new competitors. It requires an understanding of innovation and how to learn while doing. Amerca has these leaders. We just need to give them the positions and chance to succeed!
by Adam Hartung | Aug 25, 2010 | Books, In the Rapids, Leadership, Lock-in
Summary:
- We are biased toward doing what we know how to do, rather than something new
- We like to think we can forever grow by keeping close to what we know – that’s a myth
- Growth only comes from entering growth markets – whether we know much about them or not
- To grow you have to keep yourself in growth markets, and it is dangerous to limit your prospects to projects/markets that are “core” or “adjacent to core”
Recently a popular business book has been Profit from the Core. This book proposes the theory that if you want to succeed in business you should do projects that are either in your “core,” or “adjacent to your core.” Don’t go off trying to do something new. The further you move from your “core” the less likely you will succeed. Talk about an innovation killer! CEOs that like this book are folks who don’t want much new from their employees.
I was greatly heartened by a well written blog article at Growth Science International (www.GrowthSci.com) “Profit from Your Core, or Not.. The Myth of Adjacencies.” Author Thomas Thurston does a masterful job of pointing out that the book authors fall into the same deadly trap as Jim Collins and Tom Peters. They use hindsight primarily as the tool to claim success. Their analysis looks backward – trying to explain only past events. In doing so they cleverly defined terms so their stories seemed to prove their points. But they are wholly unable to be predictive. And, if their theory isn’t predictive, then what good is it? If you can’t use their approach to give a 98% or 99% likelihood of success, then why bother? According to Mr. Thurston, when he tested the theory with some academic rigor he was unable to find a correlation between success and keeping all projects at, or adjacent to, core.
Same conclusion we came to when looking at the theories proposed by Jim Collins and Tom Peters. It sounds good to be focused on your core, but when we look hard at many companies it’s easy to find large numbers that simply do not succeed even though they put a lot of effort into understanding their core, and pouring resources into protecting that core with new core projects and adjacency projects. Markets don’t care about whatever you define as core or adjacent.
It feels good, feels right, to think that “core” or “adjacent to core” projects are the ones to do. But that feeling is really a bias. We perceive things we don’t know as more risky than thing we know. Whether that’s true or not. We perceive bottled water to be more pure than tap water, but all studies have shown that in most cities tap water is actually lower in free particles and bacteria than bottled – especially if the bottle has sat around a while.
What we perceive as risk is based upon our background and experience, not what the real, actual risk may be. Many people still think flying is riskier than driving, but every piece of transportation analysis has shown that commercial flying is about the safest of all transportation methods – certainly much safer than anything on the roadway. We also now know that computer flown aircraft are much safer than pilot flown aircraft – yet few people like the idea of a commercial drone which has no pilot as their transportation. Even though almost all commercial flight accidents turn out to be pilot error – and something a computer would most likely have overcome. We just perceive autos as less risky, because they are under our control, and we perceive pilots as less risky because we understand a pilot much better than we understand a computer.
We are biased to do what we’ve always done – to perpetuate our past. And our businesses are like that as well. So we LOVE to read a book that says “stick close to your known technology, known customers, known distribution system – stick close to what you know.” It reinforces our bias. It justifies us not doing what we perceive as being risky. Even though it is really, really, really lousy advice. It just feels so good – like sugary cereal for breakfast – that we justify it in our minds – like saying “breakfast is the most important meal of the day” as we consume food that’s probably less healthy than the box it came in!
There is no correlation between investing in your core, or close to core, projects and high rates of return. Mr. Thurston again points this out. High rates of return come from investing in projects in growth markets. Businesses in growth markets do better, even when poorly managed, than businesses in flat or declining markets. Where there are lots of customers wanting to buy a solution you simply do better than when there are lots of competitors fighting over dwindling customer revenues. Regardless of how well you don’t know the former or do know the latter. Market growth is a much better predictor of success than understanding your “core” and whatever you consider “adjacent.”
Virgin didn’t know anything about airlines before opening one – but international travel from London was set to boom and Virgin did well (as it has done in many new markets.) Apple didn’t know anything about retail music before launching the iPhone and iTunes, but digital music had started booming at Napster and Apple cleaned up. Nike was a shoe company that didn’t know anything about golf merchandise, but it entered the market for all things golf (first with just one club – the driver – followed by other things) by hooking up with Tiger Woods just as he helped promote the sport into dramatic growth.
Success comes from entering new markets where there is growth. Growth can overcome a world of bad management choices. When there are lots of customers with needs to fill, you can make a lot of mistakes and still succeed. To restrict yourself to “core” and “adjacent” invites failure, because your “core” and the “adjacent” markets that you know well simply may not grow. Leaving you in a tough spot seeking higher profits in the face of stiff competition — like Dell today in PCs. Or GM in autos. Sears in retailing. They may know their “core” but that isn’t giving them the growth they want, and need, to succeed in 2010.
by Adam Hartung | Mar 28, 2009 | Current Affairs, In the Whirlpool, Leadership, Lifecycle, Quotes, Web/Tech, Weblogs
"If you don't read the newspaper you are uninformed. If you do read the newspaper you are misinformed." — Mark Twain
"All I know is what I read in the newspaper. That makes me the most ignorant man alive." —- Will Rogers
What both these great writers understood was that when you get most of your news from one source, you get only what that source chooses to tell you, and only a single interpretation of the news. Since newspapers began there has been controversy about bias in news reporting. Many famous newspapers were considered "conservative" or "liberal" based upon the political opinions of the owners. The reality is that when a newspaper reporter tells you a story, what you read – down to the word choices - is affected by the opinions and feelings of the author, as well as those of the editor and perhaps even the publisher.
The great breakthrough of the internet is you aren't restricted to a single (or possibly) two sources. You can find articles about anything from a political speech to an automobile accident published by 5, 10 maybe hundreds or thousands of sources. And for many news items the internet provides you not only multiple opportunities to read how the "facts" are told, but you can find multiple articles that interpret those facts. This plethora of coverage means that internet readers have the opportunity to be as selective, or as broad, as they choose. And it means that the ability of publishers to "control the direction" of a story is dramatically diminished. Readers, by looking across multiple sources, can determine as a group which "facts" they find accurate, and which "interpretation" they find most genuine. Because of the internet, news coverage is "democratized" in a way that has never before been possible.
Newspapers provided a method of informing the public for a very, very long time. But they have an internal weakness they cannot overcome – the printing means that only one version of a story is told and it can only be economically told once per day. The distribution method makes newspapers an "event" that occurs at "deadline", and the cost is high enough that there's only enough advertising to support the printing and distribution of one newspapers in most markets. When you get down to the printing – the "paper" in "newspaper" – it has limits that create a weakness.
The internet is disruptive because it overcomes the limitations of printing. It is available 24×7 not just to read, but to be updated and current with the latest information. A person anywhere can read input from multiple sources. The internet makes up-to-the-minute news coverage of everything available to people in rural, remote locations as quickly as it does those "on the scene", thus opening an interest in world or very local events to everyone on the planet, regardless of location. And this means this "no cost distribution" (not no cost of fact acquistion, or interpretation, or writing – just distribution) allows the internet to do what economist Joseph Schumpeter called "creatively destroy" the old value in newspapers.
Those who bemoan the loss of newspapers need to spend more time on the internet. There are so many sources for so much news that we are today the best informed society in the history of mankind. The financial problems at newspaper publishing have not diminished the quantity or quality of news coverage. Those are higher than ever. And the businesses that jump into this market, by developing networks to access the most/best news and interpretation at the lowest cost – while delivering it in a format that is easy for readers to find and absorb – will be successful. And it will be harder than ever for those trying to create the news (such as politicians and political pundits) to decry "bias" in a world where all opinions are available to everyone.
