Sears Battles Socialism and Itself With Risky New Business Model

Sears’s recent struggles are, in part, intentional, as it pits its departments against each other, down to floor displays and who gets to be where in their advertising circulars.

Photo: justj000lie/CC by 2.0

One of the frustrations of journalism can be the press person. Not all are bad, but many serve as prophylactics for the fertile information below the surface. The best, by which I mean worst, exemplar that comes to mind was legendary White House spokesman Ari Fleisher, who could spin epics of white noise to lull his audience to sleep.

Rarely do you get a spokesman who says something weirder than the people he is nominally there to take the bullet for. Fortunately, Mina Kimes, a gifted young business reporter at Bloomberg Businessweek, got a hall-of-fame quote (via e-mail!) that’s so exquisitely weird that it enriches the whole of her piece and explains a lot about the ongoing trainwreck at one of Chicago’s most legendary companies:

In an e-mail, Chris Brathwaite, a Sears spokesman, writes that executives work together if it makes sense. He added: “Clashes for resources are a product of competition and advocacy, things that were sorely lacking before and are lacking in socialist economies.”

So Sears’s business model makes a lot more sense now. I was under the impression they were competing with Target and WalMart; it turns out they’re competing with Cuba.

Kimes’s piece is about how hedge-fund manager Eddie Lampert has implemented a heady brew of Ayn Rand, Moneyball, and Freakonomics within the company, forcing the departments that make up his department store to compete against each other for resources. Some forms are not entirely uncommon and will be familiar if you’ve worked for a large company:

When [Dev] Mukherjee unveiled the plan in January 2008, many Sears executives were befuddled. From then on, they were told, the units would act like autonomous businesses. If product divisions like tools or toys wanted to enlist the services of the IT or human resources departments, they had to write up formal agreements—or use outside contractors. Each unit had to craft its own financial statement, presenting a strategy to Lampert and his committee of top executives.

I’ve seen this sort of thing before, not so much inspired by the zero-sum game of nature in the eyes of an ambivalent Creator, as resource management and tracking. Other aspects of Lampert’s management philosophy are more oddball:

The bloodiest battles took place in the marketing meetings, where different units sent their CMOs to fight for space in the weekly circular. These sessions would often degenerate into screaming matches. Marketing chiefs would argue to the point of exhaustion. The result, former executives say, was a “Frankenstein” circular with incoherent product combinations (think screwdrivers being advertised next to lingerie).

Eventually Lampert’s advisory committee instituted a bidding system, forcing the units to pay for space in the circular. This eliminated some of the infighting but created a new problem: The wealthier business units, such as appliances, could purchase more space. Two former business unit heads recall how, for the 2011 Mother’s Day circular, the sporting-goods unit purchased space on the cover for a product called a Doodle Bug minibike, popular with young boys.

Paul Krugman has a good analysis of Kines’s piece: “why some things are better done through market mechanisms, while others are better done through at least a bit of command-and-control — is a deep issue.” And our knowledge of why that is begins, in large part, with the legendary U. of C. economist Ronald Coase (still going strong at 102, 76 years after publishing “The Nature of the Firm"). Here’s a short explanation:

His central insight was that firms exist because going to the market all the time can impose heavy transaction costs. You need to hire workers, negotiate prices and enforce contracts, to name but three time-consuming activities. A firm is essentially a device for creating long-term contracts when short-term contracts are too bothersome.

[snip]

But Mr Coase’s narrow focus on transaction costs nevertheless provides only a partial explanation of the power of firms. The rise of the neo-Coasian school of economists has led to a fierce backlash among management theorists who champion the “resource-based theory” of the firm. They argue that activities are conducted within firms not only because markets fail, but also because firms succeed: they can marshal a wide range of resources—particularly nebulous ones such as “corporate culture” and “collective knowledge”—that markets cannot access. Companies can organise production and create knowledge in unique ways. They can also make long-term bets on innovations that will redefine markets rather than merely satisfy demand.

In other words, what Sears is doing is giving up the efficiencies of the firm, with the belief that departments will find efficiency not through collaboration but through competition—a risky choice, turning a big-box department store into a hothouse model economy: “Turf wars sprang up over store displays. No one was willing to make sacrifices in pricing to boost store traffic.” It’s creative destruction, and fascinating, but risks creatively destroying the company.

 

Share

Advertisement

Comments to this blog are moderated. We review them in an effort to remove foul language, commercial messages, and irrelevancies.

Submit your comment