Question:

Please read the case "The Decline of Sears" This case is derived from the textbook/e-textbook
"Management: A Practical Introduction" by Angelo Kinicki. Answer the following questions:

The Decline of Sears

Sears, Roebuck and Company, commonly called Sears, was founded in 1892 to sell one
product—watches. By 1989 the company had grown into the largest retailer in the United
States. Sears initially focused on selling its products via a mail-order business that relied on a
catalogue. "When the catalogue first appeared on doorsteps in the 1890s, it fundamentally
changed how Americans shopped. Back then, much of the population lived in rural areas, and
they bought almost everything from little shops at rural junctions. These general stores had
limited selection and charged exorbitant prices. They were the only game in town." Sears'
mail-order business was a disruptor.
Over the years Sears evolved along with changing consumer tastes. When people moved from
rural areas to cities, for example, the company opened hundreds of standalone urban stores
to meet consumers' desire to shop in attractive department stores rather than via cata- log.
Sears was also one of the first retailers to offer a credit card in the 1980s—the Discover
card—that earned cash rewards for customers based on their purchases. This innovation
brought in a consistent source of revenue for many years. The next change was to
accommodate consumer preferences for shopping at malls. Sears responded by anchoring its
stores in malls across the country.
The retail environment started to change in the 1990s, and Sears began to fall behind as
discount shopping at Walmart and Kmart took off. These companies were nimbler, changing
prices and inventory to meet customer preferences. Sears was more bureaucratic and was
stuck with higher overhead costs and catalogue prices that had been set months earlier. Not
surprisingly, Walmart's revenue grew while Sears' did not. Enter online shopping.
The combination of convenience, selection, speed, and low prices available through online
shopping has been a disruptive force for all retailers. Like its competitors, Sears has struggled
against online sellers such as Amazon. According to a writer from USA Today, however, the
venerable retailer faces even deeper challenges: Sears "has also suffered in the wake of its
management's decisions, including the sale of its more than $30 billion credit card portfolio to
Citibank in 2003, and a merger with Kmart."

THE MERGER OF SEARS AND KMART

In 2004, Sears was acquired by Kmart, a company that was then coming out of bankruptcy.
The new firm was christened Sears Holdings and led by Edward Lampert. He had a background
in investments but no retail experience at that time.
Some business writers suggest Lambert purchased Sears for the land on which hundreds of its
stores stood. According to one writer, "Lampert saw real estate value as the key, and he has
managed the two chains as a value play ever since, ignoring the fundamentals of running a
retail business. Under Lampert, the company chronically underinvested in store maintenance,
spending as little as one-fifth of what its rivals spent to keep stores clean and up to date. The
result has been a customer exodus, as no one likes shopping in dilapidated stores."
Another writer described Sears Holdings as having "all the charm of a dollar store without the
prices, nor even the service, and with even more disengaged employees. Bright fluorescent
lights highlight the drab floors, peeling paint and sad displays of merchandising that are
reminiscent of department stores in the communist Soviet Union. Some employees carry
iPads, others do not: Lampert's affections for technology led to a policy of employees
required to use tablets on the shop floor, even though most clerks said they were
unnecessary."

WHAT LED TO SEARS' DECLINE?

Forbes reported that "the popular opinion is that poor management has led to the demise of
both companies" (Sears and Kmart). The magazine suggested that Lampert pursued the wrong
strategies, assuming the goal was to improve Sears' profitability and long-term survival.
Consider the organizational structure Lampert installed at Sears Holdings.
Following a structural model used in the finance industry in which different teams compete
for scarce company resources, Lampert segmented the company into 30 autonomous business
units such as men's wear, shoes, and home furnishings. Each had its own executive staff and
board of directors. Rather than fostering collaboration, this structural arrangement led to
"cutthroat competition and sabotage. Incentives were tied to the success of the individual
business divisions, which often came at the expense of other parts of the company." A former
executive told the New York Times that "managers would tell their sales staff not to help
customers in adjacent sections, even if someone asked for help. Mr. Lampert would praise
polices like these, said the executive."
Another aspect of Lampert's strategy was to spend on technology rather than on stores.
Lampert thought Sears was competing against Amazon. He thus "ploughed investment, new
talent, and marketing into Sears' website and a customer loyalty program called Shop Your
Way. The program allows customers to earn points, for purchases not only at Sears but at
partnering businesses including Burger King, Under Armour, and Uber, that can be redeemed
for Sears merchandise." Store appearance languished under this strategy.

WHAT'S THE LATEST?

Sears closed more than 350 stores in 2017 and plans to sell an additional 100 in spring 2018.
The company generated much-needed cash by selling off some of its key brands such as
Craftsman for about $900 million. It also established new sources of revenue by making a
deal to sell "its Diehard-branded products—such as car batteries, jump starters, and tires—on
Amazon's web- site. The retailer also started selling its Kenmore- branded appliances on
Amazon" in 2017.
Despite these efforts, Sears is "haemorrhaging money" according to Business Insider. "Sales are
down 45% since early 2013, its debt load has spiked to $4 billion, and the company is losing
well over $1 billion annually."
Making matters worse, "Sears said in a filing with the Securities and Exchange Commission [in
2017] that it had 'substantial doubt' about its ability to stay in business unless it can borrow
more and tap cash from assets." The company is definitely pursuing this strategy according to
CNNMoney. This source reported in 2018 that the company announced it will "cut another
$200 million a year (beyond the stores it already planned to close). And it's looking to
increase the amount of money it is able to borrow."
According to the New York Times, Lampert believes the company can turn things around. He
told a reporter that "while there is still work to do, we are determined to do what is
necessary to remain a competitive retailer in a challenging environment." Others doubt this
conclusion because Lampert is too disengaged from the running of Sears' operations. Former
executives say he managed the company from his home in Miami, setting foot in the company
headquarters only for its annual meeting.

QUESTIONS
Part 1- Problem-Solving Perspective
1. What is the underlying problem in this case from Edward Lampert's perspective?
2. What are the key causes of Sears' decline?

Part 2- Application of Chapter Contents

3. What does the Human Relations Movement suggest went wrong at Sears?
4. Use the four parts of a system to diagnose the company's decline. Provide support for your
conclusions.
5. To what extent did Sears use a total quality management (TQM) perspective in running its
business? Explain.

Answer:

Part 1- Problem-Solving Perspective

1. What is the underlying problem in this case, from Edward Lampert's perspective?

● Because the majority of people are unaware of what hedge fund managers perform,
they are not as feared as used car salesmen. Hedge fund managers are essentially
gamblers; they make enormous bets and invest large sums of money where others
would shun it. They occasionally succeed; very frequently, they fail, but they still
generate income. This takes us to the story of Edward Lampert and the acquisition of
Kmart and Sears by his hedge fund ESL. Over 140 Sears locations will be closed as a
result of its Chapter 11 filing, but 550 will remain open. Mr. Lampert received a lot of
criticism for that decision.
● On Lampert's legacy at Sears, The Wall Street Journal published a lengthy article. A
few months ago, Lampert stated, "People have been trying to understand why I
haven't given up or what's in it for me." Lampert attributed Sears' failure to adapt to
e-commerce to the fact that "I honestly believed this might be something
exceptional." Lampert made some dubious decisions, as the Wall Street Journal
 notes: "If we could play that game and play it well, we had a chance." It's exhibit A of
hedge-fund hubris, according to one investor, who added, "Just because you're a
clever investor, doesn't imply you'll be a good operator of a department store." I'll
continue to teach this case study in my lectures for a long time.
● Lampert wanted to run Sears "lean and mean," so he cut investment in store
improvements and restricted television advertising, giving the stores a hollowed-out,
desolate aspect. In addition, Lampert reduced inventory, which meant fewer options
for customers, something Sears had long taken pleasure in. The Craftsman brand
was also auctioned off by him.
● Lampert was a distant CEO who checked in by teleconference rather than frequently
visiting the stores. One thing is certain based on my experience working with retail
executives. They go shopping. Sam Walton scoured the aisles, constantly looking for
ways to get better.
● The finest retailers are those who have a thorough understanding of consumer
behavior and how to position their products to meet those needs. In order to learn
what customers think of the store's inventory and variety, they also spend time
talking to store employees. That's like comparing Carnival Cruises to the Cunard
Line, but Lampert once told his management team that Hermès was an example of
customer service as a "deeper understanding of what it is to serve people." Two
different customer groups, with two different sets of expectations from those groups.
The two will never meet. Nevertheless, it appears that little could revive Sears'
relevance, barring a switch to online shopping. Its time was already passed. In all
actuality, Amazon is the "all-in-one store" that Sears was a previous generation.

2. What are the key causes of Sears' decline?

● According to William D. Cohan, a former investment banker himself, Lampert's trust

in financial engineering is to blame. Despite having success with his automotive
retailing businesses (AutoZone and AutoNation), Lampert struggled with Sears.
Cohan thinks that despite the significant losses, Lampert continued to manage Sears
out of hubris. Lampert is a prime example of a businessman who invested in a
venture he didn't fully understand but did so with the best of intentions. And rather
of walking away, as most outside investors would, he maintained investing money in
the failing store. Insolvency was unavoidable.
● Lampert used a tried-and-true strategy for saving a failing company: cost-cutting.
That strategy stops the bleeding, but it doesn't offer a way to a brand-new tomorrow.
If Sears is to continue operating, it must become a whole new company with novel
customer-facing strategies. Sadly, that path ahead might be permanently blocked.
● To be fair, Lampert sought to be a savior rather than a thief, which cannot be said of
all hedge fund managers. He desired success with his Sears bet.
● Because of this, I find it difficult to be overly critical of Lampert. His investment
knowledge was lacking, but his heart was in the right place. There will have been a
 reduction in workforce of about 175,000 at Sears. However, Lampert will continue in
his role as chairman and hopes to revitalize the company.

Part 2- Application of Chapter Contents

3. What does the Human Relations Movement suggest went wrong at Sears?

● Poor leadership contributed to Sears' collapse. Because of his lack of retail

knowledge, Edward Lampert was unable to oversee Sears. Departments were
competing with one another rather than cooperating. This would be Theory X by
Douglas McGergor.
● According to the Human Relations Movement, Sears couldn't compete with bargain
retailers like Walmart and Kmart. This caused Sears to experience a decline that
grew rather than shrank. Sears was unable to compete effectively for the benefit of its
customers in the modern era of new technology and times. After the transaction,
Lampert split the business up, creating fierce internal competition that was cited as
another factor in the sales slump and eventual demise of Sears.

4. Use the four parts of a system to diagnose the company's decline. Provide support for
your conclusions.

● The service offered in the store is a factor that Sears contributed to the downfall.
Customers will prefer to shop elsewhere to find what they're seeking for if a store
advertises not helping them. To avoid receiving poor customer service, people are
willing to spend a little bit extra for what they desire. The management at Sears was
the transformational process that contributed to the company's collapse. Because the
consumers were not seeking for things in their department, the store managers
promoted ignoring them. Lampert permitted that and encouraged his staff to do so.
This type of management is poor.
● Customers cease shopping at Sears due to poor customer service, which results in
fewer profitability. This feedback can be seen in the fact that customers are not
purchasing goods from Sears shops or online. The decline of Sears occurred when
management stopped pushing excellent customer service.

The following are the causes of the company's demise:

1. Competition- With its catalog-order strategy, Sears initially performed admirably.
However, it was unable to cope with the aggressive and advanced discount strategy, and this
is one of the points where things went wrong.

2. Merger- The Kmart and Sears merger took place at the wrong moment, under the wrong
circumstances, and under the direction of the wrong individuals. Lampert divided the entire
business.

3. Division of company: Because Lampert separated the business into many divisions, gave
each division incentives, and gave each division its own Board of Directors, the internal
competition became so fierce that workers lost sight of the outside world.

4. Expenses- Because at the time stores were developing technology and consumer demand
was disregarded, Lampert chose to invest money in technology rather than stores, which
cost Sears everything.

5. To what extent did Sears use a total quality management (TQM) perspective in running
its business? Explain.

● Because it provided customers with high-quality goods at fair and reasonable rates,
Sears continued to employ the overall quality management concept up to the merger.
But following the merger, Lampert oversaw the entire business and believed that
Sears should concentrate on its major objectives, which were profitability and
long-term survival. As a result, quality suffered.

Lampert could have managed the business better by remembering these management tips:

1. More emphasis on quality did not split the company's operations, or it should have
divided them in a way that benefited both the customers and the business. made
quality management the ultimate objective, rather than long-term viability and
profits.
2. increased the number of stores rather than spending money on technology, and
emphasized Walmart and other competitors over Amazon.
3. When Sears launched the Shop Your Way consumer loyalty program, they applied
overall quality management. Due to the fact that they are earning money while they
are spending, this was an attempt to entice customers to return. The customer is
satisfied because they believe they are getting more than they paid for.
Lesson:

● After the merger with Kmart, Lampert could have used better operational
management. The decline of Sears was caused by small things. It would be possible
to guarantee that Sears operations would be effective and efficient through the
sensible management of resources and distribution of goods and services.