At Sears Holdings’ annual stockholders meeting this week, we talked a lot about the difference between turnarounds and transformations. I want to share some of those thoughts here.
Turnarounds happen when a company succeeds again at doing what it had once done successfully before. Transformations are almost entirely different – they occur when companies adapt their business model to fundamental shifts in technology, competitive landscapes, government policies and regulations, or macro trends to serve their customers (or, in our case, members) in new ways. Over the last decade, incidentally, Sears and Kmart have faced all of the challenges I just listed.
As you might expect, we talked a lot about Sears and Kmart at our annual meeting. But we also took a close look at the transformations of three other companies: Apple Inc. (formerly Apple Computer), General Dynamics Corporation, and Eastman Kodak Company. I want to be clear that I am in no way saying that Sears Holdings is just like any of these companies, but there are lessons to be learned from them, two that were successful and one that was unsuccessful in their transformations.
With the Cold War ending and other political changes affecting it, the future looked uncertain for General Dynamics in the early 1990’s. The company’s revenues declined from $10 billion in 1990 to only $3 billion by 1995. It divested several businesses representing about 60 percent of its 1990 revenues, repurchased $960 million in stock in 1992 and returned $1.5 billion to shareholders via special dividends in 1993. Capital expenditures plummeted by more than 90 percent. It looked like General Dynamics was liquidating. But they weren’t – they were focusing on transforming their business portfolio. They had the discipline to make adjustments based on the circumstances they were facing, to provide the foundation for a better future. General Dynamics’ $3 billion in 1995 revenues has climbed to over $30 billion today, including several large acquisitions, with significant returns for its shareholders.
In the late 1990s, Eastman Kodak knew it had major problems. While they couldn’t have foreseen the phenomenon of Instagram, many at the company knew that improved digital imaging technologies and decreasing prices for digital cameras were an existential threat to the world’s biggest film company. They tried acquisitions – more than $3.8 billion from 1997 to 2005. They continued to spend heavily on research and development, despite their declining financial performance. And then they went bankrupt in 2012. Investing heavily isn’t always the right solution (or at least not sufficient) when addressing changes in industry conditions or competitive dynamics.
Apple Computer took a different tack. Not everyone remembers how perilous the company’s future looked in the late 1990s. They had a 40 percent drop in revenues from 1996 to 1998 and lost over $1 billion in one year alone. Its research and development spending was cut in half and SG&A was cut by more than a third. A Wired Magazine cover featuring the company said, simply, “Pray,” and Michael Dell said that if he were running the place, he’d liquidate the company and return the money to the shareholders. When Steve Jobs came back in 1997, he transformed the company – Apple Computer eventually became Apple Inc. It focused much less on computers and much more on developing products and a platform – iTunes – to serve its customers. Later, they added and invented new technologies including smartphones and tablets. While Apple had other benefits like a significant cash balance, the lessons of its transformation, however counterintuitive, are clear.
In 2001, Kmart lost about a billion dollars. In January 2002, the company entered bankruptcy and proceeded to lose another billion dollars that year. By 2004, however, Kmart had emerged from bankruptcy and we had pared locations – though far fewer than many people suggested – improved inventory management and made stores far easier to operate. As a result, we restored Kmart’s financial strength and credibility, and we posted nearly $1 billion in EBITDA in 2004. But as impressive as the results of all our associates and partners’ work were, at that point we had only accomplished a turnaround.
Fortunately, Kmart’s turnaround gave us the foundation to begin the execution of a transformation. First, Kmart merged with Sears to form Sears Holdings. Though Kmart had many well-located stores, it was not differentiated compared to Walmart, Target, and others. Sears had great brands and excellent service businesses, but the perception was that it was stuck in mall locations while its competitors were opening hundreds of big box stores away from malls that were more convenient for consumers.
The merger was the initial phase of our transformation, but only the start. Other aspects have included divestitures and store closures. But, more important was our early recognition that no matter where stores were located, people were beginning to shop in fundamentally different ways than they ever had before.
Few in retail were trying to integrate their store and online channels before we did. But transformations are about innovations and iterations – new and often incremental versions of changes. We didn’t fully hit on the importance of our Shop Your Way platform at first, but serving our members – wherever, whenever, and however they want to shop – is how we are transforming our company today.
Turnarounds are challenging, but transformations are even harder because not everyone sees the direction you’re heading in or your destination. After spending our annual meeting with shareholders, associates, and other partners, however, I am hopeful that looking carefully at other companies’ transformations sheds more light on the actions we are taking and why.
One thought on “Turnarounds and Transformations”
I was present at the shareholders’ meeting, and I would like to add two statements you made which I think add to the topic:
1- The company is like a patient in a surgery. It usually looks worse before it looks better.
2- Differently from what people are always saying, your focus is not on liquidating the company. As you said, your focus is on having a profitable, cash generating core.
Congratulations on your courage and will.
All the best.
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