Broken Business Models: Sears & Kmart

The NY Post’s article and others seem surprised that Sears Holdings may not be able to continue as a going concern. Clearly sale of its Craftsman brand was a signal that Sears was in serious financial straits.

The acquisition of Sears and Kmart was completed ten years ago. But twenty years ago, before e-commerce became a major competitor, it was painfully obvious that Sears and Kmart were in serious trouble. Vendors selling to both companies at that time were questioning whether they could survive against Wal-Mart.

Could it be accurate that Wal-Mart’s physical distribution and information technology systems are so efficient that Wal-Mart receives cash for its products prior to having to pay its vendors for the purchases? All? Some? If true, tough to compete against.

Sears’ and Kmart’s business models were unmistakably broken starting in the 1990s. It is virtually impossible to repair a business model once it is broken. At minimum it would have required major capital investments in information technology and restructuring of their physical distribution operation with its high overhead and slow inventory replenishment. Would there have been a positive return on investment?

Mr. Edward Lampert was certainly considered a successful investor when he acquired Sears and Kmart. Possibly he was optimistic that he could repair both companies. Perhaps taking over as chief executive officer was a mistake as he apparently had never worked as CEO of a large retail company.

To be qualified to be CEO of a retail, manufacturing or service company – particularly one as large as Sears and Kmart – one needs to have started their career in the bowels of a company – at the bottom. Mr. Jack Welch is an example of a successful CEO who started at the bottom.

Working ones way up from the bowels gives experience with all the functions (departments) of a business. How do these functions work together. Why is cross-functional communication so critically important – while simple in concept it is difficult to practice. How to submerge oneself into the lower organization levels to find out the priority problems and solutions without being a distraction. CEOs who started at the bottom are more calmly self-confident and make better decisions when they get to the top position.

Regardless of any mistakes that have been made Sears and Kmart seem to fit the axiom: “not every business can be turned around” – particularly if their business model is broken.

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