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Failing to Plan: How Ayn Rand Destroyed Sears

Sears-

While companies like Walmart operate within the market, internally, as in any other firm, everything is planned. There is no internal market. The different departments, stores, trucks and suppliers do not compete against each other in a market; everything is coordinated.

It is no small irony then, that one of Walmart’s main competitors, the venerable, 120-plus-year-old Sears, Roebuck & Company, destroyed itself by embracing the exact opposite of Walmart ’s galloping socialization of production and distribution: by instituting an internal market.

The Sears Holdings Corporation reported losses of some $2 billion in 2016, and some $10.4 billion in total since 2011, the last year that the business turned a profit. In the spring of 2017, it was in the midst of closing another 150 stores, in addition to the 2,125 already shuttered since 2010—more than half its operation—and had publicly acknowledged “substantial doubt” that it would be able to keep any of its doors open for much longer. The stores that remain open, often behind boarded-up windows, have the doleful air of late-Soviet retail desolation: leaking ceilings, inoperative escalators, acres of empty shelves, and aisles shambolically strewn with abandoned cardboard boxes half-filled with merchandise. A solitary brand-new size-9 black sneaker lies lonesome and boxless on the ground, its partner neither on a shelf nor in a storeroom. Such employees as remain have taken to hanging bedsheets as screens to hide derelict sections from customers.

The company has certainly suffered in the way that many other brick-and-mortar outlets have in the face of the challenge from discounters such as Walmart and from online retailers like Amazon. But the consensus among the business press and dozens of very bitter former executives is that the overriding cause of Sears’s malaise is the disastrous decision by the company’s chairman and CEO, Edward Lampert, to disaggregate the company’s different divisions into competing units: to create an internal market.

From a capitalist perspective, the move appears to make sense. As business leaders never tire of telling us, the free market is the fount of all wealth in modern society. Competition between private companies is the primary driver of innovation, productivity and growth. Greed is good, per Gordon Gekko’s oft-quoted imperative from Wall Street. So one can be excused for wondering why it is, if the market is indeed as powerfully efficient and productive as they say, that all companies did not long ago adopt the market as an internal model.

Lampert, libertarian and fan of the laissez-faire egotism of Russian American novelist Ayn Rand, had made his way from working in warehouses as a teenager, via a spell with Goldman Sachs, to managing a $15 billion hedge fund by the age of 41. The wunderkind was hailed as the Steve Jobs of the investment world. In 2003, the fund he managed, ESL Investments, took over the bankrupt discount retail chain Kmart (launched the same year as Walmart). A year later, he parlayed this into a $12 billion buyout of a stagnating (but by no means troubled) Sears.

At first, the familiar strategy of merciless, life-destroying post-acquisition cost cutting and layoffs did manage to turn around the fortunes of the merged Kmart-Sears, now operating as Sears Holdings. But Lampert’s big wheeze went well beyond the usual corporate raider tales of asset stripping, consolidation and chopping-block use of operations as a vehicle to generate cash for investments elsewhere. Lampert intended to use Sears as a grand free market experiment to show that the invisible hand would outperform the central planning typical of any firm.

He radically restructured operations, splitting the company into thirty, and later forty, different units that were to compete against each other. Instead of cooperating, as in a normal firm, divisions such as apparel, tools, appliances, human resources, IT and branding were now in essence to operate as autonomous businesses, each with their own president, board of directors, chief marketing officer and statement of profit or loss. An eye-popping 2013 series of interviews by Bloomberg Businessweek investigative journalist Mina Kimes with some forty former executives described Lampert’s Randian calculus: “If the company’s leaders were told to act selfishly, he argued, they would run their divisions in a rational manner, boosting overall performance.”

He also believed that the new structure, called Sears Holdings Organization, Actions, and Responsibilities, or SOAR, would improve the quality of internal data, and in so doing that it would give the company an edge akin to statisti- cian Paul Podesta’s use of unconventional metrics at the Oakland Athletics baseball team (made famous by the book, and later film starring Brad Pitt, Moneyball). Lampert would go on to place Podesta on Sears’s board of directors and hire Steven Levitt, coauthor of the pop neoliberal economics bestseller Freakonomics, as a consultant. Lampert was a laissez-faire true believer. He never seems to have got the memo that the story about the omnipotence of the free market was only ever supposed to be a tale told to frighten young children, and not to be taken seriously by any corporate executive.

And so if the apparel division wanted to use the services of IT or human resources, they had to sign contracts with them, or alternately to use outside contractors if it would improve the financial performance of the unit—regardless of whether it would improve the performance of the company as a whole. Kimes tells the story of how Sears’s widely trusted appliance brand, Kenmore, was divided between the appliance division and the branding division. The former had to pay fees to the latter for any transaction. But selling non-Sears-branded appliances was more profitable to the appliances division, so they began to offer more prominent in-store placement to rivals of Kenmore products, undermining overall profitability. Its in-house tool brand, Craftsman—so ubiquitous an American trademark that it plays a pivotal role in a Neal Stephenson science fiction bestseller, Seveneves, 5,000 years in the future—refused to pay extra royalties to the in-house battery brand DieHard, so they went with an external provider, again indifferent to what this meant for the company’s bottom line as a whole.

Executives would attach screen protectors to their laptops at meetings to prevent their colleagues from finding out what they were up to. Units would scrap over floor and shelf space for their products. Screaming matches between the chief marketing officers of the different divisions were common at meetings intended to agree on the content of the crucial weekly circular advertising specials. They would fight over key positioning, aiming to optimize their own unit’s profits, even at another unit’s expense, sometimes with grimly hilarious result. Kimes describes screwdrivers being advertised next to lingerie, and how the sporting goods division succeeded in getting the Doodle Bug mini-bike for young boys placed on the cover of the Mothers’ Day edition of the circular. As for different divisions swallowing lower profits, or losses, on discounted goods in order to attract customers for other items, forget about it. One executive quoted in the Bloomberg investigation described the situation as “dysfunctionality at the highest level.”

As profits collapsed, the divisions grew increasingly vicious toward each other, scrapping over what cash reserves remained. Squeezing profits still further was the duplication in labor, particularly with an increasingly top-heavy repetition of executive function by the now-competing units, which no longer had an interest in sharing costs for shared opera- tions. With no company-wide interest in maintaining store infrastructure, something instead viewed as an externally imposed cost by each division, Sears’s capital expenditure dwindled to less than 1 percent of revenue, a proportion much lower than that of most other retailers.

Ultimately, the different units decided to simply take care of their own profits, the company as a whole be damned. One former executive, Shaunak Dave, described a culture of “warring tribes,” and an elimination of cooperation and collaboration. One business press wag described Lampert’s regime as “running Sears like the Coliseum.” Kimes, for her part, wrote that if there were any book to which the model conformed, it was less Atlas Shrugged than it was The Hunger Games.

Thus, many who have abandoned ship describe the hare- brained free market shenanigans of the man they call “Crazy Eddie” as a failed experiment for one reason above all else: the model kills cooperation.

“Organizations need a holistic strategy,” according to the former head of the DieHard battery unit, Erik Rosenstrauch. Indeed they do. But is not society as a whole an organization? Is this lesson any less true for the global economy than it is for Sears? To take just one example: the continued combus- tion of coal, oil and gas may be a disaster for our species as a whole, but so long as it remains profitable for some of Eddie’s “divisions,” those responsible for extracting and processing fossil fuels, these will continue to act in a way that serves their particular interests, the rest of the company—or in this case the rest of society—be damned.

In the face of all this evidence, Lampert is, however, unrepentant, proclaiming, “Decentralised systems and structures work better than centralised ones because they produce better information over time.” For him, the battles between divisions within Sears can only be a good thing. According to spokesman Steve Braithwaite, “Clashes for resources are a product of competition and advocacy, things that were sorely lacking before and are lacking in socialist economies.”

He and those who are sticking with the plan seem to believe that the conventional model of the firm via planning amounts to communism. They are not entirely wrong.

This is an excerpt from People's Republic of Walmart by Leigh Phillips and Michal Rozworski.