Why Sears Failed

The worsening deterioration of Sears is a reminder to all business leaders of how even the greatest companies wither. Millennials may be astonished to learn that Sears was once America’s largest retailer, so utterly dominant that it would obviously be No. 1 forever; with its massive economies of scale, no competitor could ever hope to topple it.

But as the company reported yesterday, sales are plunging; it has lost almost $10 billion in the past six years. To survive, it has sold some of its best-performing stores plus stakes in Sears Canada and Lands’ End. In May it said it was exploring “strategic alternatives” for its Kenmore, Craftsman, and DieHard brands. Having sold the furniture and the silverware, it’s now trying to sell the bathtub and Grandma’s wedding ring.

How did it come to this? Three failings primarily. They’re obviously bad; no leader would dispute that they’re to be avoided. But many failing leaders would dispute that they themselves are committing these crimes against success. That’s why the first failing is…

1. Denial. In early 1991, when I was doing a temporary stint as business editor of our sister magazine Time, I published an item noting that Sears was about to be overtaken as the top U.S. Retailer by a company many Americans had barely heard of, Walmart. Sears was indignant and told me the article was irresponsible and misleading, and that even if Walmart happened to beat Sears in a given month, it could never overtake Sears long-term. The lines crossed the following month and never went back. Even as Sears was losing its crown, it refused to believe what was happening.

2. Insularity. At this same time, shareholder activist Robert A.G. Monks launched a campaign to get elected to the Sears board and to reform its rules; he even ran a full-page ad in the Wall Street Journal headed “The Directors of Sears, Roebuck and Co.: NON-PERFORMING ASSETS.” When he was finally granted an audience with Sears CEO Ed Brennan in his 90^th-floor office in the Sears Tower (now the Willis Tower), the functionary escorting Monks in the elevator reportedly said, “This is the first time bad news has made it above the 78^th floor.” Star consultant Ram Charan asks CEOs if they’re hearing lots of bad news. Why? Every company has lots of bad news, he tells them, and if you’re not hearing it, something’s wrong.

3. Paralysis. As the king of retailing, Sears came to believe it had more to lose than to gain, yet it failed to crush Walmart (WMT) early, when it could have done so. Culturally, vast segments of the organization were focused on protecting themselves rather than on transforming the company in response to changing times.

It’s a miracle that Sears is still around, but here’s how far it is from being the No. 1 retailer: Its revenue last year was $25 billion vs. Walmart’s $482 billion, and after all this time the trend lines are still diverging.

The lesson for leaders is that your organization’s doom is out there right now, sneaking up on you. It’s your job to look for it until you find it.

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