Summary
Edward Lampert, Sears chairman and investor, is reorganizing Sears into several companies, or units, in an attempt to improve sales. Mr Lampert is making the changes amid both praise and criticism for the reorganization. Mr Lampert is applying a theory of management known as complexity theory in the reorganization he is planning.
Analysis
Edward Lampert plans to reorganize Sears into several companies, or units, in an attempt to improve the performance of the historic retailer.
Sears has reported a fourth-quarter drop in sales of more than 50% in both its Sears and Kmart chains. Sears reported a 99% drop in third-quarter earnings, and a 39% drop in its shares last year. Sears is blaming unfavorable economic conditions and competition, a slowdown in the housing market, tightening consumer credit, and competition such as Wal-mart, for its performance.
The restructuring will create separate managerial units for its brands such as its real-estate holdings, Diehard, Kenmore, Lands End, and Craftsman brands.
Edward Lampert says the reorganization will revitalize the company. Spokesman Kimberley Freely stated "Sears Holdings is introducing an organizational structure that provides operating businesses with greater control, authority, and autonomy."
Critical analysts say the changes run against prevailing trends where retailers try to craft a single, cohesive business range. Retail Consultant Walter Loeb stated "He's looking to turn it around by using a different approach" and "I think it's risky."
Mr Lampert is looking to use a different approach, and that is because the approach he is using is not working. His third-quarter earnings decreased 99% with the centralized approach, and his fourth-quarter earnings decreased 59%.
Mr Lampert is a seasoned business person, and a world class investor, who is experienced as Chairman of Sears, one of the worlds premier stores. The analysts criticizing him are basically known as 'talking heads".
Mr Lampert is using a managerial concept known as complexity theory. "Complexity theory has been used extensively in the field of strategic management and organizational studies, sometimes called 'complexity strategy' or 'complex adaptive organization'. Broadly speaking, complexity theory is used in these domains to understand how organizations or firms adapt to their environments. The theory treats organizations and firms as collections of strategies and structures. When the organization or firm shares the properties of other complex adaptive systems - which is often defined as consisting of a small number of relatively simple and partially connected structures – they are more likely to adapt to their environment and, thus, survive.
Forming separate companies will provide several benefits. It increases each units responsiveness to the changing demands of its own market and competition by permitting the use of experienced managers who are experts in that area. It permits for greater authority and autonomy over each brand name. By making each unit smaller and more specialized, Mr Lampert is increasing efficiency. Control over the unit is actually being increased by bringing management closer to the operations of that unit.
One big legal advantage, is that if a brand line does not make it financially in an increasingly difficult economy, as a separate unit it is classified as a separate business. This has great legal and financial advantages to Sears should any of its individual brands suffer severe losses or bankruptcy. These brands also become easier to sell or disinvest from.
A centralized managerial structure works well in a smaller organization, managed by highly skilled professionals, but in a company as large as Sears it can become inefficient, difficult to control, can lose touch with the needs of individual brands, may become bureaucratic, lack autonomy and authority, and may make it difficult to respond to fast changing markets, economy, and competition.
Some drawbacks in having separate units for each brand is keeping control over the management of the entire organization, and being certain every brand has competent management. Sears corporate management will need to monitor the performance of each brand carefully, and be certain to hire competent managers for each brand, that are experienced in that specific brand market. Salaries of managers could be mentioned, however, if the brand increases performance and becomes profitable the salary is well worth the expense.
It is Harry Schultze, the great investment analyst, who believes that the smaller the organizational unit the more efficient it becomes. That large organizations have a tendency to become inefficient and bureaucratic. That as the organization grows it creates its own bureaucracy, which continues to propagate itself, until the weight of the organization causes the collapse of the organization itself. There are several economic laws that imply the collapse of large organizations among them Toynbee, Joseph Tainter "The Collapse of Complex Societies", Thomas Homer Dixon who suggested that collapse occurs as a result of a reduction in the Energy Return on Investment or EROI, as well as simpler economic theories such as the Law of Diminishing Returns and Sedentarism.
By reducing the size of managerial units, Mr Lampert is trying to prevent Sears from becoming a dinosaur. A dinosaur is defined as "an organization in which resources are being depleted at an exponential rate and yet nothing is done to rectify the problem because the ruling elite are unwilling or unable to adapt to said changes. They will oppose any solutions that diverge from their present course of action. They will favor intensification and commit an increasing number of resources to their present plans, projects and social institutions."
The fact is that the centralized management system Sears is using now is not working and Sears can not continue to maintain the losses in earnings it is suffering. Mr Lampert is trying a different management theory for Sears that may improve performance in an organization as large as Sears.
