1-GM and Sears…slip sliding away

Most of us have not lived long enough to see many dominant industry leaders fall miserably. They do fall, though. In fact, over a longer period of time, many dominant industry leaders fail in leadership. In recent and past years, consider Boeing, Intel, IBM in personal computers, Lotus 1-2-3, Netscape, AOL, Yelp, eBay, RCA and GE in color televisions, Barnes & Noble, Xerox, Blackberry and DeBeers. The market is unforgiving to a company who does not keep up its leadership position. Here is the story of two dominant leaders who failed to keep up.

Posted 3/7/08

Over the last few weeks, both GM and Sears, while leaders in their markets, have announced a new round of layoffs. This is a sad development to watch, especially since these layoffs are unlikely to be the last.

I have watched these two great companies stumble toward oblivion throughout my entire working life. I have been fortunate to have nearly forty years in a professional life. In my earliest years, I consulted for a company who wanted to sell to Sears. In those days, the early 70s, Sears was then what Wal-Mart is today. They were extremely demanding and highly quality conscious. No products got into Sears without jumping over many hurdles. Today that no longer seems the case. Each year, Sears continues to lose market share to more successful retailers at price points above, below and comparable to them.

GM offers a similarly sad story. I recall that back in the late 70s, after the oil crises of the times, GM beat its domestic rivals to the market with appropriately downsized automobiles. Its market share at the time was about 50%. Today its market share is about half that… and it continues to fall.

These layoffs are unlikely to be the last for Sears and GM. Layoffs will continue until these companies find a way to reverse the market share losses both have suffered in an almost uninterrupted slide over the past generation. Economies of scale work against a share losing company. You may not see economies of scale as a company gains share in its industry because many industry leaders do not force them to develop as the company grows. On the other hand, you will always see the effects of economies of scale when a company shrinks. In that case, declining economies of scale make things a lot worse.

A company cannot reduce its costs unless it has customer sales volume with which to do it. These layoffs at GM and Sears are simply catching up with the excess capacity created in each company as customers leave them for greener pastures. As market share losses continue, there will be another period of catch-up. For everyone’s sake, I hope that both GM and Sears find a way to make their market shares grow again. If not, the future is bleak indeed.

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Update 5/26

We will review GM first and then Sears.

Prior to the 1970s, GM enjoyed a stellar reputation and market share position. Its products were stylish and high quality. It owned 50% of the market, compared to 17% today. Something happened in the early 1970s. The Japanese were that something. Beginning in the 1970s, GM began to stumble. This blog will take a rapid trip from the 1970s until today to document how GM lost so much market share. We will also compare GM’s philosophy to the approaches taken by both the Japanese and the Koreans. In short, GM thought little of the consumer as it managed its business. The company lost share on Function and Reliability failures. In contrast, the Japanese and the Koreans always put the consumer first. To do this review we will use the Customer Buying Hierarchy. Every buyer, in every industry, evaluates potential suppliers using four sequential criteria, in this specific order: Function, Reliability, Convenience and Price. The buyer uses this Customer Buying Hierarchy several times to eliminate potential suppliers until there is only one standing, from whom the customer buys. HERE and HERE are short explanations

Across the last 50 years, GM consistently made decisions to gather short-term profits at the expense of its long-term competitiveness. Its apparent core beliefs were to exploit the high-margin vehicles they already produced and optimize finance rather than auto engineering. Where was the consumer in that philosophy? Time and again, GM failed the consumer on both Function and Reliability. Function: The characteristics of the product that affect the way it is used by the customer. Function includes all the features of the product. For the customer purchasing a manufactured product, Functions affect the operating capability of the product, the environment in which the product can operate, or the capability of the product’s operator. Reliability: The consistency with which the company delivers on the promises made, or implied, to the customer in its product/service package. A customer purchasing a manufactured product sees three categories of Reliability: Reliability of delivery, the supplier’s performance record in getting the product to the customer at the promised quantity and time; Reliability of Function, the consistency with which the product performs the Function promised; and Reliability of market presence, the consistency with which the company supports its customers and distributors over time.

Here is a short history of the last 50 years at GM:

– 1970s: GM ignored the fuel crises and small new entrants. They treated the new low-cost Japanese automobiles with contempt. In answer to them, they produced the Chevette and the Vega, both low-quality products that damaged consumer trust in the brand. A Function and Reliability failure.

– 1980s: GM began to cut costs by “badge engineering.” The company shared platforms across their brands (including Chevrolet, Pontiac, Oldsmobile and Buick, and  Cadillac) to reduce costs. The result was that the brands appeared identical. Competitor advertising parodied GM products by showing a Cadillac owner asking a valet to bring his parked Cadillac to the front of the restaurant. The poor valet brought a Chevrolet and two other cars before he got to the Cadillac. The company sacrificed product uniqueness for short-term margins. A Function and Reliability failure.

– 1990s: GM introduced the Saturn as its Japanese fighter brand. The Saturn innovations did not spread inside GM because it was isolated from main engineering. GM underinvested in powertrains and electronics. It then went on a global acquisition campaign to create scale and cost advantages. Most of the foreign acquisitions were failures.  GM sold its European division in 2017. Again, Function and Reliability failures.

– Early 2000s: GM doubled down on high-margin SUVs and pickups. Gas prices spiked and demand for the larger vehicles collapsed. GM had limited small or midsize cars to fill the gap. On the other hand, Toyota and Nissan gained share in sedans and hybrids. More Function and Reliability failures.

– 2009: bankruptcy. GM shed brands and reduced debt and legacy costs. Product quality improved but not to the same standard as the Japanese. The Japanese, the emergent Koreans and Tesla captured the innovation narrative with consumers. Function and Reliability failures.

– 2010s: GM planned to position itself as an EV pioneer but never committed fully. The company launched the Chevy Volt and the Bolt. The EV programs were underfunded and inconsistent. They lacked marketing support and suffered recalls. Function and Reliability failures.

– 2020s: the company planted the flag with autonomous driving with its Cruise product. The company announced an all electric future with 30 EV models to be available by 2025. Cruise suffered safety incidents and the company halted funding in 2024. The new Ultium platform, meant to serve as a universal EV architecture, developed slowly, delaying key models. GM’s EV lineup did not reach the quality reputation of either Tesla or Rivian. In China, its once thriving business, faced intense pressure from BYD and other Chinese EV makers offering more features. A continuation of Function and Reliability failures.

Over the same time period, what approach were the Japanese, and then the Koreans, using? They followed the opposite approach from GM. They were product first, process first and customer first in their philosophy. As has been amply demonstrated elsewhere, the Asian competitors adopted an approach that compounds success: build quality to gain reputation, use reputation to gain market share, use market share to create scale and lower costs, invest profits in more R&D to produce better quality. The Japanese sought long-term market share through quality products, reliability and process excellence. Their core belief: “Win by building the best product at the lowest defect rate. Profit follows Reliability.” By the early 2000s, the Koreans espoused a philosophy similar to that of the Japanese: improve quality faster than competitors expect, offer more features for the price and reinvest aggressively. Hyundai’s chairman claimed: “Quality is our future.”  The Japanese and the Koreans won their market shares with Function and Reliability as their key differentiators. That has turned out pretty well.

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Update 5/26

The Sears implosion leading to its 2018 bankruptcy parallels the decline of GM. GM thought of margins and profits first and consumers last. Sears followed the same approach and failed its retail customers on both Function and Reliability. As with the GM example, we will examine a short history of the downfall of Sears. We will outline what they were trying to do and how they failed. Importantly, we will conclude with a comparison of the philosophies of the most successful retailers of today in contrast to the philosophy of Sears as it declined.

To undertake this analysis, we will use the Customer Buying Hierarchy (CBH). Every buyer, in every industry, evaluates potential suppliers using four sequential criteria, in this specific order: Function, Reliability, Convenience and Price. The buyer uses this Customer Buying Hierarchy several times to eliminate potential suppliers until there is only one standing, from whom the customer buys. Sears failed its customers on both Function and Reliability. Function: The characteristics of the product that affect the way it is used by the customer. Function includes  the features of a retail product. For the customer of a channel of distribution (a Retailer), Function includes the product selection or choice offered the customer along with the physical surroundings where the product is presented for sale. Reliability: The consistency with which the company delivers on the promises made, or implied, to the customer in its product/service package. For the customer of a channel of distribution, Reliability refers to the predictability of product availability, the return policy of the channel, and the quality of problem resolution the channel offers the customer.

-1970s: Sears began the decade as the unquestioned catalog king.  It was the Amazon of its day, with the information the catalog carried on customers and their purchase habits. Sears migrated with its middle-class customers to the suburbs where it became an anchor store in malls as they exploded. Then, they began to lose retail focus. They saw financial services as higher margined businesses and bought Allstate, Discover, Dean Witter and then invested in prime real estate, such as the Sears Tower. Management shifted its attention away from the core retail experience, which stagnated. In the meantime, Kmart, Walmart and Target focused on everyday low prices and operational efficiency. Sears began to fail on Function and Reliability.

-1980s: As the age of conglomerates began to lose its glisten, Sears stayed on its path to become a diversified financial – retail conglomerate, adding Coldwell Banker to its other financial assets. The concept was to cross sell, using store traffic to sell credit cards, insurance and other financial products. In this timeframe, the stores began to age. Assortments stagnated and services declined, while Walmart and Target were relentlessly improving service, operations and pricing. Walmart was the cheapest. Specialty retailers became trendy and Nordstrom represented the upscale retail experience. Sears stayed in the middle as the middle hollowed out. Sears again failed its retail customers on Function and Reliability.

-1990s: overreliance on core retail reputation. In 1993, as the Internet revolution began, management concluded that the catalog was expensive and outdated, so they closed it, missing the internet revolution. It tried to stabilize the department store model to compete with the Walmarts and Targets, emphasizing core categories like appliances, tools and apparel. Management’s approach was to cut costs, hold market share, and avoid overextending the company. While other retailers created focused positions, Sears remained a generic, aging department store. Its Value proposition was no longer distinctive. Once again, the company failed its retail customers on Function and Reliability.

-2004 – 2005: The financial engineering era begins. A hedge fund manager merged Sears with Kmart, to develop cost synergies and employ financial engineering. Kmart had a discount position while Sears offered well-known brands such as Kenmore, Craftsman, and Diehard. The company used real estate transactions to monetize valuable store properties. It then began to run the company like a portfolio of assets rather than as a traditional retailer. It structured competition at all levels, even among departments within the company. This undermined collaboration and strategy coherence. The stores became visibly shabby. In a move that reflected the GM pattern of reliance on financial engineering rather than product and customer experience, the company failed its retail customers on Function and Reliability.

-2010s: Asset stripping, brand selloffs and bankruptcy, a.k.a. Take The Money and Run. The company sold or spun off the brands that had made it distinctive. It sold Craftsman to Stanley Black and Decker. It spun its real estate into Seritage Growth Properties. A separate company owned by the hedge fund manager bought the Kenmore brand. This left Sears hollowed out while it tried to compete with Walmart, Target, Home Depot, Costco and Amazon. The company declared bankruptcy in 2018. What remained was a shell of a once dominant retailer. The final failure of Sears’ retail customers on Function and Reliability.

We close this analysis with the same review of philosophies of Sears compared to Walmart and Amazon. Sears suffered from a lack of focus and underinvestment in the core product. It seemed to believe that they were the default American retailer and that diversification would strengthen the company. As diversification was slow to contribute as expected, management adopted a cost reduction mindset, counting on the hope that brand equity would save them. By the 2000s, the company adopted the hedge fund values of monetizing assets, cutting costs to the bone and treating retail as a financial asset rather than a core calling. Where was consumer Value over those years? Walmart staked its future on operational excellence and everyday low prices. They focused incessantly on supply chain, logistics, constant reinvestment, and systems. They became what they claimed: “we are the low-price leader.”  They lead the industry on product availability (Function), well stocked stores (Reliability), locations accessible to its consumers (Convenience) and Price. They lead on all four components of the Customer Buying Hierarchy. As Amazon emerged, Walmart committed to its own e-commerce offerings (Function). Amazon focused on the customer with Convenience, selection (Function) and low Price, in that order. Amazon was willing to sacrifice current profits for growth, infrastructure development and innovation for its customers. Both Walmart and Amazon prospered on the backs of consumers who believed that the two companies looked out for them first, profits second.

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THE SOURCES OF STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many Hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.