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. JackWelch 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.

My Leadership Excellence magazine article “Seven lessons from a turnaround CEO”

Leadership Excellence magazine published my article: "Mastering Leadership - Seven lessons from a turnaround CEO"

By Robert F. Amter

There are many theories about what it takes to be an effective Chief Executive Officer.  Most are based on observation and research.  They lack the hands-on, in the trenches experience of what it really takes to lead a company – especially one that is experiencing bad times.

When I enter a company that is severely distressed and losing money I find that the previous CEO whom is usually a decent, hard working executive, has failed because he or she simply did not know how to be a leader.

Having worked 22 years as a turnaround CEO, I’ve learned seven key practices that have worked for me in restructuring distressed companies.

1. Understand the True Meaning of CEO

Naturally born leaders are very rare.  It takes hard work to learn how to lead effectively.  You must be a serious, passionate, and accessible student, to develop into a capable CEO.

Focusing on the true definition of the Chief Executive Officer is central to illustrating the basis for sound leadership.  Common dictionary descriptions may be simplistic, but they accurately define the position:

Chief: The person with the most authority, who ultimately controls or commands all the others.

Executive:  A person having administrative or supervisory authority in an organization with the power to put plans into effect. To execute.

Officer:  One who holds an office of trust, authority, or command.

Yes, the Chief is the highest in rank; however, the ability to execute is key. Anyone can write a plan, but few can execute it - implement it. Having a team carry out a focused plan is vital.  To guide all to remain disciplined in the executing a strategy can be difficult.  Providing clear-cut direction only grows more problematic, while facing competing forces, considerable distractions, and intense challenges.

The word Officer is also significant. A person appointed to this elevated position is held in trust with genuine fiduciary accountability. They are entrusted with the management of the property, with the power to act on behalf of the owners. Fiduciary is a solemn responsibility – take it seriously.

2. Learn To Whisper 

A CEO’s primary focus is people.  A CEO gets the job done by working through others.  People greatly appreciate a CEO who can command authority without condescension.  Moreover, there is no room for hubris.

Some leaders believe a tormenting style can motivate, but the mistreatment of people eventually leads to loss for all.  At no time should a CEO bully employees.  If an officer yells at an employee, the news will spread and reduce the CEO’s effectiveness.  Even high-ranking officers, will become timid, wary, fearful, and suspicious.  Many will wonder if they will be next to receive ugly treatment.  Trust is lost, eroding confidence and efficiency.

When I joined General Electric, this training precept was passed on to me:  “When you become a CEO remember that people are your most important resource.  Successful leaders motivate.  They do not intimidate.  They whisper to get results and remain calm.  They are viewed as having high integrity and being distinctly competent.  Leadership is learned.  Respect is earned.”

3. Interact With Employees at All Levels

Whether newly appointed or a 10-year veteran, a CEO only knows 10 percent of what is actually going on in the company – particularly the key issues and problems.  To be successful, CEOs must submerge themselves into all levels to learn the status of the company’s vital issues – to get the facts. 

Effective Chief Executive Officers are not office bound, nor isolated from employees. They are seen walking the halls, the floors of the manufacturing plants and distribution facilities.  People are curious about you.  I’ve had employees touch me and remark in an excited voice “I’ve never touched a CEO”. That’s a humbling experience.  Remember how much influence you can have on people.

When walking around, be approachable.  Today, many company dress codes are business casual. If there is a formal dress code, do not wear a suit coat – be more informal. Interact with people. Stop to answer questions and ask what the employee is working on. Do not be aloof. You are the ultimate boss and people will be nervous around you. Display a likeable personality, a sense of humor – don’t be judged a stiff. Do not answer requests for improvements in work rules, bonuses or wages by saying “I’ll check and get back to you.” Be decisive and say no – if the ultimate answer is no – but explain why the answer is no.

4. Demand Excellence

It is perfectly acceptable for a CEO to demand excellent performance.  Expectations for above average results can motivate a team.  Intense encouragement for quality will inspire all to work harder. 

This winning style can grow capabilities.  People will stretch and can reach higher performance. Success foments self-confidence.  It builds a gung ho team – the enthusiastic and dedicated attitude of working together.

Always use a constructive tone.  Never intimidate anyone with bullying.  Again, instead of raising your voice, remember to whisper in a productive manner.

5. Consider Failure

Managers often require that rigorous, in-depth and detailed analyses be completed prior to implementing priorities, initiatives and capital investments. Management wants to know what positive incremental profitability and free cash flow will result from executing the project or making an acquisition.  But the analysis should also analyze the impact on the company if the initiative fails. What will the effect of the capital expenditure be on the capital structure and the cash flow?  If it’s a new product introduction, what will the reaction be in the channel segment, with customers and competitors?  If an acquisition, are we ready to handle integrating the new operation into existing operations?  Does management have the time for an acquisition, or will they be overwhelmed with other priorities?  What are the short and long-term consequences on the businesses that may result by an overwhelmed management? 

Once a management team decides on its priorities, a project tends to get a life of its own, to not be killed once work has started on it.  Still you need to periodically judge its viability. 

6. Foster Communication

Well-run companies have candid cross-functional communication.  It is essential for the new CEO to maintain open exchanges of information.  Meetings should include everyone involved with the initiative, issue, or problem including those from the third and fourth tiers of the company.  For example, do not invite only the VP of sales and his team, while investigating a problem with sales.  Include marketing, manufacturing, supply chain, product and accounting in the meeting, since each of these functions affect sales.

Cross-functional communication is almost always lacking in distressed companies, because it takes the direction, energy, and patience of management to maintain it. Silo management with top-down decision making is easier but always results in a failing business.  Mistakes are easily hidden and multiply when information isn’t shared.  When internal functions do not discuss vital issues, a business becomes uncoordinated and produces negative surprises.

I encourage leaders to meet face-to-face.  Avoid depending on email, telephones or video conferencing. Judging performance and initiatives is best evaluated first hand, in the same room with the people orchestrating the endeavor.  Seeing body language, facial expressions, and sensing a person’s passion, provides signals often missed when using various technologies.

7. Empower The Team

Ownership of the strategic plan to fix or run a company must be held by the people on all the levels who contribute to creating the plan and are crucial to its being implemented.  It cannot be only the CEO’s action plan.  It will never get implemented.  Do not legislate the strategies and tactics.  Do not dominate the process.  Persuade your subordinates and remember to listen to their input.

While it’s important to have consensus and ownership of decisions by the officers and managers, in the end the CEO is the final decision maker.  Don’t abdicate the role or decide based on since we all agree.  If, as CEO you do not agree, don’t approve a group decision.  You may decide on an alternative solution and not implement the consensus solution. 

As the CEO, you have fiduciary responsibilities.  Take them seriously.

Being a CEO is a position of great power, but not an easy one.  If you follow the steps, you and the company you lead will thrive.

An Avoidable Manufacturing Failure?

Google announced in May that it has decided to close its Motorola MotoX smartphone plant. The Texas plant has been in operation for one year. Its smartphones will be manufactured in China and Brazil.  

One goal for this plant was to “challenge conventional wisdom that manufacturing in the U.S. is too expensive.” But unit quarterly sales were so low that economies of scale could not be realized.

Keeping manufacturing operations in this country depends on several criteria:

• Quality management down through the 3rd organization tier;
• Disciplined strategic focus – with an honest and periodically updated Situation Analysis;
• Superior culture with the absence of hubris and politics;
• Best Cost Producer – utilizing Lean, Kanban and Kaizen protocols;
• Productive, lean salaried employee organization – not just lean for hourly manufacturing employees;
• Regular Competitive Benchmarking and Value Analysis of the product lines;
• Effective application of capital spending – which is essential.

The photographs of Motorola’s Texas plant show an unusually large number of hourly direct labor employees assembling product. This seems excessive.

This raises questions of how effectively “Best Cost Producer” and capital spending protocols were applied to create a low cost, high thru-put operation normally found in this type of technical product. Did Google Motorola have an engineering and manufacturing team capable of putting together an equipment plan to reduce direct labor headcount and increase thru-put resulting in a profitable USA plant? Was the equipment plan supported by the correct level of capital expenditures? Advanced manufacturing technology such as robotics is fairly easy to do.

Is the Moto X smartphone competitive in features, performance and price point? CNET’s review concludes that it is a good quality and relatively competitive smartphone. Not perfect. But if the price points were set correctly and its manufacturing costs yielded positive profit margins, profitable unit sales should have been realized.

While Motorola has struggled, Google appears to be well-run. It is hard to believe that Google did not put top people and resources behind making its Texas smartphone facility successful. But did they?

Google’s failure does not bode poorly for manufacturing operations being successful in this country. It is certainly possible that the USA’s manufacturing base can be increased if the criteria for successful operations are in-place – particularly for technical products.

General Motors – Has It Lost Its Credibility?

The news is full of criticism of General Motors’ announcement that it has repaid the money it owes the United States government for bailing GM out with TARP money (Troubled Asset Relief Program).

General Motors' April 2010 announcement: “G.M. is able to repay the taxpayers in full, with interest, ahead of schedule, because more customers are buying vehicles like the Chevrolet Malibu and Buick LaCrosse.”

The facts:

General Motors' April 2010 repayment totaled $6.7 billion.

The United States government gave General Motors $49.5 billion in 2009 to finance its bankruptcy. Thus only 14% of the total aid GM received from the government has been repaid. Not a full repayment.

Further complicating the issue comes from Mr. Neil Barofsky, the Inspector General overseeing the troubled asset program, when he testified before the Senate Finance Committee on April 20, 2010 that G.M. was using taxpayer money to make the loan repayment – not General Motors’ earnings.

Apparently the $6.7 billion came from the $13.4 billion of the United States government’s TARP money that had been put in a General Motor’s escrow account when GM was in bankruptcy. Thus the company is using US government money--to pay back the US government loan.

Further complicating the issue is the General Accountability Office’s December 2009 report that: "The Treasury is unlikely to recover the entirety of its investment in Chrysler or GM, given that the companies' values would have to grow substantially more than they have in the past."

Also coloring GM’s financial condition is that:

● It has applied to the Department of Energy for a $10 billion loan to retool its plants.
● In 2009 it was unprofitable with deficit gross profits and operating losses.
● In the first months of 2010 its market share declined.

Is all of this true? If it is, the real issue is General Motors' loss of trust and credibility. Will consumers figure out that General Motor’s announcement is not true? That it was a misleading public relations ploy? If consumers do not trust a manufacturer, will they stop purchasing its product? For this short-term gain, will GM lose in the long run?

Sources:
New York Times.
Power Line.
Reason Foundation.

Lenders Change their Treatment of Troubled Loans

An interesting recent Reuters article, titled 'Lenders More Willing To Own Bankrupt Firms', documents a fairly significant change in the distressed and bankrupt marketplace. Lenders, it reports, are no longer selling their delinquent and troubled loans. They are not selling the loans at steep discounts. They are converting loans to equity ownership and managing the companies themselves.

Reportedly lenders are “kicking the proverbial can down the street" by granting waivers. They are no longer forcing companies to default, or marking loans to market. This is quite unusual, as compared to prior practice.

Will this continue? Once the economy improves, will lenders focus on lending money? Or will lenders continue to be owners and manage the operating companies? Or will they return to selling troubled loans?

Ford Motor Company Reports Profit – Positives and Negatives

The Positives:

“…the only major U.S. automaker to avoid bankruptcy, posted third-quarter net income of $997 million and its first operating profit since early 2008…”.

“…finished the third quarter with $23.8 billion in automotive cash, up from $21 billion at the end of the second quarter.”

“…U.S. market share increased to 15.8 percent for the first nine months, compared with 14.8 percent from a year earlier…”.

Certainly, registering a third-quarter 2009 positive profit with a market share gain are excellent and solid signals. Unfortunately it overlooks Ford’s negatives, which give pause and concern for the future.

The Negatives:

“…workers have overwhelmingly rejected contract changes that would have allowed the automaker to cut labor costs.” “Ford sought the deal to bring its labor costs in line with Detroit rivals Chrysler Group LLC and General Motors Co….”.

Bringing Ford's hourly labor costs in line with General Motor's and Chrysler's should not be the priority. The priority is to become cost competitive with USA based Japanese automotive manufacturers. Ford's, GM's and Chrysler's hourly base wage rates and benefit costs are reportedly $20 to $30 per hour higher than Japanese competitors. Doubtful these costs were reduced in the GM and Chrysler bankruptcies. This remains a huge problem.

“…workers felt they were being asked to sacrifice more than the company's executives. Ford CEO Alan Mulally made $17.7 million last year…”.

There is some justification in the Unionized Employees position on this issue. Hourly employees are well aware that officers of a major company have significantly higher incomes. This is not an issue in healthy economic times. But in poor economic periods, if Management is perceived as not sacrificing with all on board, then a disconnect is created, and polarization with contract rejection occurs.

A helpful signal for Unionized employees, to convey Management is being serious about reducing overhead costs, is if Ford has cut back on some Executive perks. Does Ford still have an executive dining room, replete with waitresses, multi-course menus, and silver finger bowls?

“He (Alan Mulally, CEO) hasn’t presided over an annual profit at Ford, which has posted three straight full-year losses totaling $30 billion.”

Other questions exist. For example, did the quarterly profit rely heavily on favorable product mix and pricing? Will these same conditions be available in future fiscal years?

The list of negatives should not detract from the solid job Mr. Mulally and his team has done in beginning Ford's turn around. The challenges are enormous, and Mr. Mulally has clearly moved it in the right direction.

Bankruptcy and the Financial Crisis

On June 30, 2009 New York University held an excellent seminar on “Bankruptcy and the Financial Crisis".

The link to view NYU's webcast of the seminar is included below.

The subjects discussed included:

1. Federal government policy on large financial institutions and managing too-big-to-fail firms.

2. Creditor’s rights particularly reconciling Chapter 11 filings with section 363 of the federal bankruptcy code. Has anything changed in the distressed trading markets based on the handling of the Chrysler and General Motors bankruptcies?

3. Will a large bank fail? Actions the federal government will take if there are failures. Is capitalism affected and sacrificed to expediency?

4. Bankruptcy trends and risks – increase in distressed businesses.

The “Creditor’s Rights” panel:

• Moderator: Thomas Cooley, Dean, NYU Stern School of Business
• Barry Adler, Professor, NYU School of Law
• Edward Altman, Professor, NYU Stern School of Business
• Gerald Rosenfeld, Deputy Chairman, Rothschild North America

The keynote speaker: Thomas M. Hoenig, President, Federal Reserve Bank of Kansas City:

1. Mr. Hoenig rejected the notion that some firms are too-big-to-fail. He laid out a three-step plan to address troubled, large institutions and the need to avoid ad-hoc approaches.

2. He suggested that large firms be held accountable including replacing management.

The “What if a Large Bank is Failing?” panel:

• Moderator: Matthew Richardson, Professor, NYU Stern School of Business
• William Ackman, Pershing Square Capital Management LP
• Edward Altman, Professor, NYU Stern School of Business
• Micheal Krimminger, Special Advisor, Federal Deposit Insurance Corporation
• Nouriel Roubini, Professor, NYU Stern School of Business
• Myron Scholes, Chairman, Platinum Grove Asset Management

Click here to access the webcast link to NYU’s seminar.