How did Sears leadership cause the company’s success to dwindle and how could they

have fixed it?

Christine
Nguyen

IB Number:
hdn339

03/01/20

Leadership

Word count:
1498
Table of Contents

1. Introduction

a. 1.1 Background information

b. 1.2 Introduction to the topic

c. 1.3 Purpose

d. 1.4 Essential Question

e. 1.5 Objective

2. Findings

a. 2.1 Article 1

b. 2.2 Article 2

c. 2.3 Article 3

3. Analysis

a. 3.1 Tool 1 (Leadership Styles)

b. 3.2 Tool 2 (SWOT)

c. 3.3 Tool 3 (Ansoff Matrix)

4. Conclusion

5. Bibliography

6. Appendices

6.1 Article 1

6.2 Article 2

6.3 Article 3
 1.0 Introduction

1.1 Background Information

Sears is a department store chain that was founded in 1893 by Richard Warren

Sears and Alvah Curtis Roebuck. The company began as a mail-order business that

started in rural Chicago. As their company gained attraction, they began selling stock in

1906 to build up capital. Sears began expanding their company to city areas due to the

influx of migration toward cities. From then, Sears continued to expand its company and

labeling several brands such as Craftsman and Allstate Insurance.

1.2 Introduction to Topic

Sears had been tremendously prosperous up until the new age of department

stores in the early 90s when Wal-Mart began to become more successful than Sears. It

could not keep up with the new stores and could not keep up their employees happy

either. After buying Kmart’s bonds in 2003 (a company in which was already going

through bankruptcy), Eddie Lampert bought Sears and merged the two together in 2005.

From then on, Sears’ valuations and shares per stock began to dwindle as the leadership

wrecked the company.

1.3 Purpose

People believe that the reason Sears began failing after years of success is that

Lampert’s lack of knowledge for retail and his leadership left employees unsatisfied. The

purpose of researching this company is to reflect on how the leadership failed to keep

customers satisfied and how to better the company for the future.

1.4 Essential Question

 After thoughtful analysis, the question proposed here is: How did Sears leadership

cause the company’s success to dwindle and how could they have fixed it?

1.5 Objective and Methodology

The objective of this project is to gain more knowledge on the basis of running a

business and how Sears could have prevented its bankruptcy. Analysis of Sears will

follow based on its leadership style. A company is only as its leader and gaining

knowledge about how the business is being handled is essential to analyzing its

infrastructure. Another tool will be the SWOT analysis which will highlight the points in

which Sears excels and what it needs work on. Lastly, the Ansoff matrix will be helpful

in examining Sears’ marketing strategy which explains how successful they are in

diversifying their company.

2.0 Findings

2.1 Article 1

Sears had been successful for years, up until the late 1900s when other department stores

like Walmart began to rise above Sears. After Ed Lampert merged Kmart and Sears together,

sales for both businesses decreased as the years went on. Lampert had little experience with retail

management; he did not keep up with the appearance of the stores, which lead to a loss of

customers because of the lack of concern for aesthetics. He made many other mistakes as well

during his management that kept Sears from recovering from its prior mess in the early 90s.

Many of its stores had a lack of merchandising and Lampert decided to sell off Sears’ most

popular brands. He also began to pay less attention to employee training but focused on the

company’s website to gain more customers online. This led to sears losing even more customers
because of a lack of well-informed employees. If Lampert had shown more regard to customer

feedback, Sears could have still been successful today.

2.2 Article 2

Sears’ revenues and sales began to lessen, and Lampert’s solution for this is to close more

stores and sell off more of Sears’ assets. Lampert acted as an autocratic leader and was

meticulous about every detail of the company. He allowed little employee input and tended to

focus more on the aspect of following his orders rather than doing what he could to run a

successful business. He also made sure his team was on his side about everything, which limited

the perspective they had on many of his ventures. Lampert ignored the fact that trends have an

impact on Sears’ numbers. Due to his extensive background in finance as a hedge fund manager,

he thought the company’s success would depend on its numbers, but this only led to a more

severe disinterest in the company. Sears had many brands that became household necessities, but

instead of selling these brands to another company or mass-marketed them to increase sales, he

let those brands die along with Sears. All in all, Sears’ value had dropped $9.4 billion and their

shares per stock dropped $77. Although he was clearly not right for the job, Lampert continued

his management at Sears and failed to rebuild the company as it was before.

2.3 Article 3

As a hedge fund manager, Lampert is used to making drastic decisions and still profiting

from it, however, running a business like Sears and Kmart is different. He invested his time and

energy into Sears because he wholeheartedly believed that he could salvage the company and try

to bring it out of bankruptcy. Lampert had little experience with owning a department store, so

he made many mistakes like limiting advertisements and cutting inventory. He did not make an

effort to visit stores to see how they were run and paid no mind to employee or customer input.
He deeply relied on his prior knowledge of finance to run Sears, but this only led him to

bankruptcy.

3.0 Analysis

3.1 Leadership Style

As he is inexperienced in the art of running a department store, he failed to see how he

needed to have a well-trained team of partners that could give him insightful feedback on his

plans and strategies. Instead, he did not allow employees to have much say in any matter. He

expected them to follow his orders and not to question them. Out of all the leadership styles

Lampert could have taken a liking to, he chose to be an autocratic leader. Autocratic leaders limit

autonomy in the workplace and take full control of the company. Lampert wanted his team to

agree with him on all of his ventures, which led him to make decisions that doomed the

company. He does not focus on how employees feel, which can bring up Sears’ employee

turnover rate. He also does not pay mind to the customers’ trends, but his focus remains on the

numbers. He is headstrong and does not have a complete understanding of how retail works. His

autocratic leadership has caused him to isolate his coworkers and not provide a safe place for

workers to expand their minds. Without help from his colleagues, the company will continue to

sink.

3.2 SWOT Analysis

Strengths Weaknesses

● Successful in developing new ● Autocratic leadership

 products-- innovative ● Low inventory
● Offers many different types of ● Employee turnover rate
products ● Poor strategic planning
● Online shopping

Opportunities Threats

● Selling off major brands ● Constantly-changing customer taste

● Increasing advertisement ● Competition i.e. Walmart
● Partnering with another company ● Exchange rate fluctuation

Sears has been established for years and the reason they were successful for so long was

because of their wide variety of goods. They sell items that appeal to both male and female

audiences and they have done well in developing new products and working on their e-store.

Sears fails in having a strong leader that considers more perspectives than just his own. His plans

were not well-developed and caused much bigger problems for the company that led to a

plummet in sales. If Sears wants a chance at redemption, they could profit off of selling their

brands and increasing advertising. Making these changes will not protect them from threats like

competing department stores that keep up with customers’ trends. The exchange rate is also

threatening due to its uncertainty and the chances it could lower profit rates for the company.

Lampert not only ignored his coworkers on the basis of business strategy, but he also ignores the

terms in which they are treated.

3.3 Ansoff Matrix

Strategy Products and Markets Sears

Market Penetration Existing Products Sears offers a wide variety of

Existing Markets items such as appliances,
 clothing, jewelry, electronics,
and auto repairs. They also
already ship internationally.

Market Development Existing Products Sears could start marketing

New Markets their products to appeal to the
younger age groups.

Product Development New Products Their products are well-

Existing Markets produced and attract
customers of all genders.

Diversification New Products Sears could start limiting the

New Markets categories of products that
they sell.

Sears already has a wide range of products for customers to buy. However, many of their

products are marketed towards older generations. They need to work on their marketing strategy

and appeal more to the younger generations to gain a broader audience. Although they have

many different products, the diversity may be overwhelming for shoppers, therefore they should

cut down to a few categories.

4.0 Conclusion

To answer the proposed question, Sears’ CEO, Eddie Lampert failed to keep Sears above
water because of his hubris and lack of experience in retail. Lampert took the hedge fund
approach to manage Sears department stores, but this only lead to its demise. He focused on the
numbers of the company rather than looking at the trends and applying them. As this was one of
his biggest mistakes, he did not allow any of his coworkers or employees to help him in making
these decisions. With his head-strong persona, he believed that he could handle the load himself,
which resulted in his leadership being more autocratic than he expected. Although he had good
intentions when he bought Sears in 2005, he did not know enough about the retail world to
manage it. From disregarding aesthetics in stores to cutting down on inventory, Lampert had no
real idea about what he was doing. To help Sears in the future, they could start cutting down on
the products that they offer. Sears had been diversified to a larger extent, but it got to a point
where all the departments got too confusing for customers to handle. Lampert should also
understand that he is not right for the job and step down. He is hurting Sears even further by
maintaining his position and managing the company as a hedge fund rather than a department
store.

5.0 Bibliography

Baldoni, John. "Edward Lampert: Sears Gone Wrong." Forbes, 18 Oct. 2018,

www.forbes.com/sites/johnbaldoni/2018/10/18/edward-lampert-sears-gone-wrong/

#11d0221738ed.

Chatterjee, Sharmila. "With better leadership, Sears could've been a contender."

The Hill, 29 Oct. 2018, thehill.com/opinion/finance/

413623-with-better-leadership-sears-couldve-been-a-contender.

Forbes. 11 Feb. 2016, www.forbes.com/sites/adamhartung/2016/02/11/

the-5-ways-ed-lampert-destroyed-sears/#77ddd1bc7a16.

History.com Editors. "Sears." History.com, 13 Mar. 2019, www.history.com/topics/

early-20th-century-us/history-of-sears.

6.0 Appendices

6.1 Article 1

With better leadership, Sears could've been a contender

 Sharmila C. Chatterjee

When I arrived in the U.S. for graduate school in the mid-1980s, I asked my host family in a
Philadelphia suburb where to shop to outfit my dorm room. They didn’t skip a beat: “Sears,”
they said. “It has everything you need.”

To say that I was in awe of Sears would be an understatement. Having grown up in small cities
in India that were dominated by mom and pop stores, I’d never seen anything like it. I bought
pillows and bedsheets; a hot pot, microwave, a mini-fridge; and also rain boots, socks, and a pair
of earrings. I remember thinking, “This is the American store of my dreams.”

So last week’s news that Sears filed for bankruptcy struck a personal chord. The company has
been under pressure for years: shuttering stores, jettisoning assets and taking on ever more debt.
Finally, facing a $134 million payment that it could not afford, Sears capitulated.

The main culprit, according to media coverage, was the rise of online shopping and Amazon.
Amazon, of course, has become the familiar villain in these tales — allegedly responsible for the
death of many once-dominant American retailers, from Toys "R" Us to Sports Authority to
Radio Shack.

But considering e-commerce accounts for only 9 percent of all retail sales, that explanation rings
hollow. The truth is, Sears’s bankruptcy is of its own making. Its management, led by Eddie
Lampert — Sears's chairman and its biggest individual creditor and shareholder, made a series of
missteps that ultimately crippled the iconic chain.

These include focusing too narrowly on cutting costs at the expense of investing in the in-store
experience, spinning off key brands and competing on price.

For most of its 132-year history, Sears was on the vanguard of U.S. retail. The company started
out as a mail-order business. Its co-founders, Richard Warren Sears and Alvah Roebuck took
advantage of two revolutionary networks — the United States Postal Service and the railroads —
to deliver its catalogs and ship its products to homes all across America.

Its "Wish Book" sold everything from wristwatches and wigs to sporting equipment and Singer
sewing machines. With its reach and marketing ingenuity, Sears became what the New York
Times recently dubbed, “the Amazon of its day.”

Sears had been around for four decades before it opened its first brick-and-mortar store in 1925
on Chicago’s west side. The company quickly expanded, and within 10 years, hundreds of Sears
stores dotted the country.

Its merchandise ran the gamut — from tools and hardware to bicycles and baby buggies. Never
flashy, its wares emphasized practicality and rugged reliability. Sears offered value: sturdy
products at reasonable prices.

Over the next decades, Sears continued to thrive and move into new lines of business. It
leveraged the latest and greatest technology to market and sell prefab home kits, creating an
affordable avenue to homeownership. It established Allstate to provide insurance to the growing
car-buying population.

It made a foray into financial services with the Discover card, which was the first-ever credit
card to give rewards to customers. To boot, it even had the tallest building in the world as its
headquarters. Sears occupied a special place in the American imagination as a forward-thinking
retailer with its finger on the pulse of customer’s needs and desires.

Sears’s fortunes began to dwindle in the 1970s and 80s. It was slow to respond to the emergence
of megastores, such as Walmart, and specialist stores, such as Home Depot. Employee morale
dipped, and shareholders were not happy.
When Arthur Martinez took the reins in 1992, Sears was losing about $3.4 billion a year.
Martinez undertook a $4 billion store-refurbishing program with the goal to make Sears “a
compelling place” to shop, work, and invest.”

Under his leadership, Sears had a dramatic turnaround. In 1999, Fortune declared it the most
“innovative general merchandise retailer.”

But the honeymoon did not last long. Sears was soon again in dire financial straits. In 2003,
Lampert, the billionaire hedge fund manager, purchased the bonds of Kmart, which was already
in bankruptcy, taking control of the company and assuming its chairmanship. Two years later,
Lampert bought Sears and merged it with Kmart.

Lampert knew little about retail — as is now painfully obvious. With his relentless focus on
trimming costs, he failed to make investments that would entice and excite shoppers (and bring
in new revenue.) For example, he elected not to renovate or refurbish Sears and Kmart stores. As
a result, the stores look dated and ugly.

He declined to invest in inventory and product development. As a result, the stores were poorly
merchandised. Lampert also decided against maintaining an interest in Sears’s prized brands and
instead sold off assets like Land’s End and Craftsman tools.

He made other tactical errors, too. Early in his tenure, he went all-in on Sears’s website with the
goal of attracting online shoppers. But Sears’s customers proved elusive. And because he didn’t
devote resources to hiring and training sales staff in his physical stores, the customers who
remained received barebones service.

This was a critical mistake: Customers need a reason to want to shop. Helpful and
knowledgeable salespeople are very often a key differentiating factor. After all, research shows
that emphasizing human-to-human customer service is key to driving revenue and keeping
customers loyal.
Perhaps most importantly, though, Lampert insisted on competing on price discounts, which
research shows are least effective for driving sales in the long term.

Simply put, physical stores, because of overhead and other costs, cannot match the price-
comparing capabilities the internet offers.

What’s more, price discounts cut into the very resources needed for long-term success in brick-
and-mortar retailing: merchandising to cater to customer preferences and prevent stock-outs;
hiring and training store staff to provide exceptional service, and creating attractive store
ambiance.

Under different leadership, Sears could have been a contender. Customer experience should have
been the centerpiece of Lampert’s strategy. Unfortunately, only a shell remains of the firm I
thought of as the American store of my dreams. It’s no longer the store of anyone’s dreams.

6.2 Article 2

The 5 Ways Ed Lampert Destroyed Sears

Adam Hartung

USAToday alerted investors this week that when Sears Holdings reports results 2/25/16 they will
be horrible. Revenues down another 8.7% vs. last year. Same-store sales down 7.1%. To deal
with ongoing losses the company plans to close another 50 stores and sell another $300 million
of assets. For most investors, employees and suppliers this report could easily be confused with
many others the last few years, as the story is always the same. Back in January 2014 CNBC
headlined "Tracking the Slow Death of an Icon" as it listed all the things that went wrong for
Sears in 2013 - and they have not changed two years later. The brand is now so tarnished that
Sears Holdings is writing down the value of the Sears name by another $200 million - reducing
intangible value from the $4 billion at origination in 2004 to under $2 billion.
This has been quite the fall for Sears. When Chairman Ed Lampert fashioned the deal in which
formerly bankrupt Kmart bought Sears in November 2004 the company was valued at $11 billion
and had 3,500 stores. Today the company is valued at $1.6 billion (a decline of over 85%) and
according to Reuters has just under 1,700 stores (a decline of 51%.) According to Bloomberg,
almost no analysts cover SHLD these days, but one who does (Greg Melich at Evercore ISI) says
the company is no longer a viable business and expects bankruptcy. Long-term Sears investors
have suffered a horrible loss.

When I started business school in 1980 finance Professor Bill Fruhan introduced me to a concept
that had never before occurred to me. Value Destruction. Through case analysis, the good
professor taught us that leadership could make decisions which increased company valuation.
Or, they could make decisions that destroyed shareholder value. As obvious as this seems, at the
time I could not imagine CEOs and their teams destroying shareholder value. It seemed
anathema to the entire concept of business education. Yet, Professor Fruhan quickly made it
clear how easily misguided leaders could create really bad outcomes that seriously damaged
investors.

1. Micro-management in lieu of strategy. Mr. Lampert has been merciless in his tenacity to
manage every detail at Sears. Daily morning phone calls with staff, and ridiculously tight
controls that eliminate decision making by anyone other than the top officers. Additionally,
every decision by the officers was questioned again and again by the Chairman. Explanations
took precedent over the action as micro-management ate up management's time, rather than
trying to run a successful company. While store employees and low- to mid-level managers
could see competition - both traditional and on-line - eating away at Sears customers and core
sales, they were helpless to do anything about it. Instead they were forced to follow orders given
by people completely out of touch with retail trends and customer needs. Whatever chance Sears
and Kmart had to grow against intense competition was lost by the Chairman's need to micro-
manage.
2. Manage-by-the-numbers rather than trends. Mr. Lampert was a finance expert and former
analyst turned hedge fund manager and investor. He truly believed that if he had enough
numbers, and he studied them long enough, company success would ensue. Unfortunately,
trends often are not reflected in "the numbers" until it is far, far too late to react. The trend to
stores that were cleaner, and more hip with classier goods goes back before Lampert's era, but he
completely missed the trend that drove up sales at Target, H&M and even Kohl's because he
could not see that trend reflected in category sales or cost ratios. Merchandising - from
procurement to store layout and shelf positioning - are skills that go beyond numerical analysis
but are critical to retail success. Additionally, the trend to online shopping goes back 20 years,
but the direct impact on store sales was not obvious until customers had long ago converted. By
focusing on numbers, rather than trends, Sears was constantly reacting rather than being
proactive, and thus constantly retreating, cutting stores and cutting product lines.

3. Seeking confirmation rather than disagreement. Mr. Lampert had no time for staff who did not
see things his way. Mr. Lampert wanted his management team to agree with him - to confirm his
Beliefs, Interpretations, Assumptions, and Strategies -- to believe his BIAS. By seeking
managers who would confirm his views, and execute rather than disagree, Mr. Lampert had no
one offering alternative data, interpretations, strategies or tactics. And, as Mr. Lampert's plans
kept faltering it led to a revolving door of managers. Leaders came and went in a year or two,
blamed for failures that originated at the Chairman's doorstep. By forcing agreement, rather than
disagreement and dialogue, Sears lacked options or alternatives, and the company had no chance
of turning around.

4. Holding assets too long. In 2004 Sears had a LOT of assets. Many that could likely be
redeployed at again for shareholders. Sears had many owned and leased store locations that were
highly valuable with real estate prices climbing from then through 2008. But Mr. Lampert did
not spin out that real estate in a REIT, capturing the value for SHLD shareholders while the
timing was good. Instead, he held those assets like real estate in general plummeted, and as retail
real estate fell even further with more revenue shifting to e-commerce. By the time Lampert was
ready to sell his REIT much of the value was depleted.
Additionally, Sears had great brands in 2004. DieHard batteries, Craftsman tools, Kenmore
appliances, and Lands End apparel were just 4 household brands that still had high customer
appeal and tremendous value. Mr. Lampert could have sold those brands to another retailer
(such as selling DieHard to Walmart, for example) as their house brands, capturing that value.
Or he could have mass-marketed the brands beyond Sears stores to increase sales and value. Or
he could have taken one or more brands on-line as a product leader and "category killer" for e-
commerce customers. But he did not act on those options, and as Sears and Kmart stores faded,
so did these brands - which largely no longer have any value, had he sold when the value was
high there were profits to be made for investors.

5. Hubris - unfailingly believing in oneself regardless of the outcomes. In May 2012 I wrote that
Mr. Lampert was the second-worst CEO in America and should fire himself. This was not a
comment made in jest. His initial plans had all panned out very badly, and he had no strategy for
a turnaround. All results, from all programs implemented during his reign as Chairman had
ended badly. Yet, despite these terrible numbers Mr. Lampert refused to recognize he was the
wrong person in the wrong job. While it wasn't clear if anyone could turn around the problems
at Sears at such a late date, it was clear Mr. Lampert was not the person to do it. If Mr. Lampert
had been as self-analytical as he was critical of others he would have long before replaced
himself as the leader at Sears. But hubris would not allow him to do this, he remained blind to
his own failings and the terrible outcome of a failed company was pretty much sealed.

From $11 billion valuations and a $92/share stock price at the time of merging KMart and Sears,
to a $1.6 billion valuation and a $15/share stock price today. A loss of $9.4 billion (that's billion
dollars). That is amazing value destruction. In a world where employees are fired every day for
making mistakes that cost $1,000, $100 or even $10 it is a staggering loss created by Mr.
Lampert. At the very least we should learn from his mistakes in order to educate better, value-
creating leaders.

6.3 Article 3
Edward Lampert: Sears Gone Wrong
 John Baldoni

The reason hedge fund managers are not as distrusted as much as used car salesmen are because
most people don’t know what hedge fund managers do.

Hedge fund managers are essentially gamblers; they place big bets and bucks where others fear
to tread. Sometimes they win; very often, they don’t, but they still make money.

This brings us to the case of Edward Lampert whose hedge fund ESL bought Kmart and then
Sears. Sears has filed for Chapter 11, closing over 140 stores, but keeping some 550 operating.
That move saw Mr. Lampert come in for a large share of criticism.

The Wall Street Journal ran a long story on Lampert’s legacy with Sears. “People have been
trying to figure out why I haven’t given up or what’s in it for me,” Lampert said a few months
ago. “I really believed this could be something special.” Lampert blamed Sears’ inability to adapt
to e-commerce. “If we could play that game and play it well, we had a chance.”

As the Wall Street Journal points out, Lampert made some questionable moves. As one investor
said, “Just because you’re a smart investor, doesn’t mean you’ll be a good operator of a
department store.” Former hedge fund manager Whitney Tilson said, “It’s exhibit A of hedge-
fund hubris. This is a case study I will teach in my seminars for years.”

Lampert sought to run Sears “lean and mean.” He limited television advertising and trimmed
investment in store upgrades, giving them a hollowed-out, forlorn appearance. Lampert also cut
inventory, which means he cut down on the shopper choices, something that Sears had prided
itself on for generations. He also sold off the Craftsman brand.

Lampert was at a remote CEO, rarely visiting the stores and checking in via teleconference.
From my experience in working with retail executives, one thing is certain. The shop stores. Sam
Walton prowled the aisles always asking questions, continually seeking to improve.
The best retailers are those who have an intimate knowledge of customer habits and how their
merchandise is positioned to satisfy those needs. They also spend time speaking to those who
work in the stores to find out what customers think of the store's merchandise and selection.

By contrast, Lampert once told his management team that Hermès was an example of customer
service as a “deeper notion of what it is to serve people.” That is like comparing Carnival Cruises
to the Cunard Line. Two different customer sets, two different sets of customer expectations.
Neither the twain shall meet.

Regardless, it seems that, save for a move to e-commerce, little could make Sears relevant again.
Its time had come and gone. Amazon, for all intents and purposes, is the “all-in-one store” that
Sears was a generation ago.

William D. Cohan, himself a former investment banker, writing in the New York Times, blames
Lampert’s faith in financial engineering. While Lampert had success with automotive retailing
ventures (AutoZone and AutoNation), it eluded him with Sears. Cohan believes that hubris kept
Lampert running Sears despite the heavy losses.

Lampert serves as an example of an executive who meant well but invested in something in
which he did not understand. And instead of bailing as most outside investors would, he kept
plowing resources into the dying store. Bankruptcy was inevitable.

Lampert acted from a standard playbook for reviving a dying business: cut costs. That approach
stems from the bleeding, but it does not provide an avenue to a new tomorrow. If Sears is to
survive, it must be a completely different enterprise with new and different ways of reaching its
customers. Sadly, that road forward might be closed forever.

In fairness, Lampert was looking to be a savior, not a plunderer, something that cannot be said of
some hedge fund managers. He wanted his Sears gamble to work.
For that reason, it is hard, at least for me, to be overly critical of Lampert. His heart was in the
right place; his investment savvy was elsewhere. Some 175,000 Sears employees will have lost
their jobs. Lampert, however, will remain as chairman, still hoping to revive the brand.