21st Century Economic Realities and Moats: Sears

The recent news that Sears Holdings Corporation was going to close 100 plu

s stores caused concern by people all across the country. The immediate reaction by many was that their local Sears or Kmart store would be closing. Although Sears Holdings has not released the list of stores that will be closed, the impact may not be what many people expect. According to the Sears Holdings Corporate Web Site, “Sears Holdings Corporation is the nation’s fourth largest broadline retailer with over 4,000 full-line and specialty retail stores in the United States and Canada” (Update Chariman’s Letter, 2011).

A press release from Sears Holdings on December 27, 2011 contained the following comment from the company’s Chief Executive Officer, Lou D’Ambrosio.

Given our performance and the difficult economic environment, especially for big-ticket items, we intend to implement a series of actions to reduce on-going expenses, adjust our asset base, and accelerate the transformation of our business model. These actions will better enable us to focus our investments on serving our customers and members through integrated retail – at the store, online and in the home. (D’Ambrosio, 2011)

Changing market realities is forcing Sears Holdings to transform the company’s business model. Changing markets and changing financial realities are issues every company in America and around the world must adjust to. In the period from just after World War II, until the advent of internet marketing, retail businesses enjoyed decades of market stability that closed many eyes to the changes that would transform the way business is accomplished in the 21^st century global marketplace.

In his book, What the Best CEOs Know: 7 Exceptional Leaders and Their Lessons for Transforming Any Business, Jeffrey A. Krames describes a time when the computer chip company Intel was facing a monumental business crises. In response to the crises the company was facing, Andy Grove the cofounder of the company provided the following insight on how the Intel must adjust to changing market realities.

According to Grove, the rules that had governed his business for decades were no longer valid. Suddenly, what Intel thought—about quality, about reliability—no longer mattered. For the first time, computer users, who were not even Intel’s direct customers, were demanding that an Intel product be replaced. Intel had reached what Grove calls a “strategic inflection point”—a point at which a company comes face to face with a massive change, one that is powerful enough to threaten the life of the enterprise. (Krames, 2003)

The one overriding constant that every business will face in the 21^st century is the rapid pace of change. The pace of technological advance cannot and should not be slowed. Society wants technology to find solutions to the world’s problems, and society wants access to all the latest products technology has provided that make life easier and more enjoyable. People desire the choice of doing their business in the local store or online. Businesses must transform their business models to face these market driven realities. A company with the ability to effectively react to change through the development of products and marketing distinctions that catch the public’s attention will have a strong competitive advantage over its competitors.

 

Sustainable Competitive Advantage

The well known investor Warren Buffett describes competitive advantage as “sustainable advantages that protect a company against its competitors – the way a moat protects a castle” (Buffett, 2010). Sears Holdings’ economic moat was breached by competitors that forced them to face the transformation of their business model. According to figures provided by Sears Holdings Corporation, “the Kmart brand experienced a year-to-date decline in comparable store sales of -1.8% as of December 25, 2011. For the same period the Sears brand experienced a sales decline of -3.3%” (D’Ambrosio, 2011). The changes being made by the company are recognition that the company must transform itself to meet 21^st century market realities.

Businesses at every level are faced with creating an environment within their company that embraces change. Employees at every level will be faced with this reality. Technological advances will eliminate some jobs, and at the same time create new jobs. Workers may face the challenge of learning and training for completely new jobs every few years. Managers must be ever watchful of changes in the marketplace that require the acceptance of new approaches to meeting customer desires and needs. A company’s competitive advantage, or castle and moat, will be breached by competitors if management is not on top of the need to regularly transform the company’s business model.