The Halo Effect: Sears Ed.

UNTIL 1991, SEARS WAS THE LARGEST RETAILER IN the United States with more than 500,000 employees. By the mid-1980s, its market share had fallen 15 percent from its high in the 1970s, and the stock price had plummeted. The CEO at that time, Ed Brennan, tried to change the company’s strategy, largely without success. As one observer notes, Sears was like “a runner with a 50-pound pack and Army boots competing in a marathon.”1 Service was problematic and customers fled to competitors such as Wal-Mart. One shopper in 1991 claimed after visiting Sears, “It’s like shopping at a store in Russia. The people are unhelpful, the stock’s not there, and you have to wait in line forever to pay.”2

This was the challenge facing Arthur Martinez when he joined Sears as head of retail operations in 1992. Since that time Sears’s stock price has doubled, operating margins are up more than 400 percent, administrative costs are down substantially, and operating profits in 1994 were $890 million compared to the $2.9 billion loss posted in 1992. How has Martinez turned Sears around? First, recognizing that the company’s strategy and structure were misaligned with the realities of retailing in the 1990s, he dramatically changed the strategy, structure, and culture of the old Sears. He focused the business, selling off insurance and financial services, closing the money-losing catalog business, and even selling the corporate headquarters building. He closed more than 100 stores, laid off more than 50,000 people, and spent more than $4 billion to remodel stores. But Martinez understands that strategy by itself isn’t enough. “I think our biggest challenge has been and will be how well we execute,” he says.3

And understanding the importance of vision, he began simply and clearly communicating the aspirations of the new Sears throughout the organization. At the new Sears one thing is clear to all employees: “Never disappoint a customer.” It is up to the associate to figure out how to do this. The old Sears had 29,000 pages of policies and procedures; there is now a single folder one-eighth inch thick entitled “Rights and Obligations.” Its focus is on what is referred to as the three Cs: “A compelling place to shop, a compelling place to work, and a compelling place to invest.” Liam Strong, a former British Airways executive who now runs Sears in the United Kingdom, says, “People can only take away very simple ideas.…”4 When communicating this new vision, Martinez often holds up as a challenge to employees the very Fortune article that declared Sears a dinosaur and uses this as a rallying cry for the revolution.5

Martinez has also instituted a revolution in the organizational alignment of Sears culture to accomplish his strategic objectives. These efforts include establishing Sears’s “P.S.E. Circus” (Pure Selling Environment) to convey a sense of urgency and excitement as well as discussion groups, task forces, extensive training sessions run by Sears University, new job descriptions, new operating procedures, 360-degree evaluations, and a new pay system that ties half of executives’ pay to customer satisfaction. Further, employees are educated about Sears’s financials so that they can make economically informed decisions. One observer characterizes these initiatives as “Fomenting a cultural revolution, a re-education effort that would make Mao proud.”6 The point of these efforts is to help people understand exactly what attitudes and behaviors characterize the new culture, energize them, and help them feel good about the future.

But Martinez realizes that not all Sears employees agree with the need to change. “Part of the trick in getting this company moving again is not dishonoring its past but trying to honor the parts of its past that are relevant to the future.”7 Just as important, he also emphasizes that the new Sears is not for everybody. Those who can’t or won’t change are encouraged to leave. These efforts originate with the senior team. To break up the firm’s former bureaucratic ways, Martinez even forbids managers from using the old number-oriented department references, requiring anyone who uses a number instead of a noun to put $1 in the kitty. He has also replaced 40 of the top 100 senior managers.

Will Martinez’s revolution succeed? Some skeptics question whether the focus on higher margin clothing and fashion may be misdirected. Others wonder if there is the service-industry equivalent of a new dominant design emerging with category-killer stores like The Home Depot and Staples, eliminating the need for value-added department stores like Sears. But these criticisms, while reasonable, miss an important point. Under Brennan, Sears failed to execute. Whether he had the right strategy was irrelevant—the bureaucracy stifled change. Martinez has developed an integrated plan for realigning Sears to execute the new strategy. He has communicated his strategy and vision and attacked the culture head on. He has made transparent the crisis facing the company and involved the entire work force in effecting the change effort. Whether Sears’s strategy is ultimately proved correct, Martinez has been successful at implementing revolutionary change.

From Winning through Innovation, 2002.