The Paradox Of Intangible Asset Success – Part 2
The Paradox Of Intangible Asset Success – Part 2
Remember why your company exists
[Recap: For a century, Sears built an impressive portfolio of intangible assets. It had key supplier relationships, a great brand, customer data and deep industry expertise. But because Sears didn’t know it had these intangible assets, its leadership made a few crucial decisions that ultimately led to the collapse of the American retailer. Part two of this story digs into those decisions]
Hindsight is 20/20, as they say (whoever “they” is…) but to someone living in 2023, it might seem strange that the largest retailer in the US didn’t understand what the internet was going to be.
The internet seemed to be the perfect amplifier tool for a company like Sears. It was essentially the final piece of the puzzle for everything the retailer had accrued over a century. And yet, the Sears executive team didn’t “get it.”
In quite possibly the greatest example of corporate short-sightedness, Sears decided to close its mail-order system – the most extensive and sophisticated retail operation on the planet – to save on costs. It also spun off the insurance arm Allstate and then dumped both the financial firm Dean Witter and real estate broker Coldwell Banker.
Two years after the Sears catalogue published its final edition, Amazon.com launched and was soon selling everything that Sears offered in its catalogue – and more.
By the late 1990s, Walmart's strategy of sourcing low-cost imports from China was gnawing a large chunk of Sears’ retail market share. Online banking had also taken off and credit card use surged as mail orders and purchases shifted to the internet.
All the pieces that might have given Sears an advantage in this emerging online-first market environment were now gone. It had sold them off in what the company assumed were astute business decisions. Now it was forced to watch on the sidelines as inferior (at the time) companies raced ahead to fill the gap.
What went wrong?
Let’s break down what happened:
Sears had its own computer network in 1993 and a warm relationship with IBM, so it should have understood the power of the internet. All Sears needed to do was shift its famous catalogue online and promise in-store returns. The Sears catalogue might have become sears.com and owned online retailing from the outset, completely blocking out Amazon’s fledgling business.
The Discover card could have been the credit card of choice for security and protection online. Back in the mid-90s, when many people were hesitant to trust any business transaction online, Sears could have offered a familiar face that might have encouraged more people to use the internet. Dean Witter could have been what Charles Schwab Corp, E-Trade and Ameritrade eventually became.
It might have owned online brokerage and banking. It could have made huge profits in real estate by leveraging its real estate arm (imagine if Amazon sold houses).
By my estimate, Sears would only have needed to invest about $200 million between 1994-1996 to develop and promote retail and financial services online. That might have felt like a large amount at the time, but Sears would be reaping billions in raw profit today.
Unfortunately, Sears blew the chance just to save a few bucks. Instead of developing into a huge American company, it will only be a historical footnote.
It’s not that Sears should have tried to become Amazon in 1993. The point is that Sears didn't try and fail, it killed the catalogue in 1993 just when things were getting interesting. All it had to do was keep the catalogue alive for another two years and somebody at the company would probably have figured it out.
But with the catalogue already gone for two years by 1995, there was no one at the company in the position to think about anything other than brick-and-mortar retail, and no division capable of leveraging any new ideas. Sears didn’t know what to look for because it didn’t know what it had.
Amazon lost money early on because it had to build everything from scratch and promote itself. Think of all the fixed costs for distribution centres, for example. Sears didn't have to do this. It already had everything in 1993. It would have to be changed, sure, but it had already convinced consumers that everything could be bought through a catalogue. Amazon now sells everything, including general merchandise.
Failing to see the inevitable
Maybe it’s the size of a company that makes it myopic? Smaller companies do have a bit more dexterity to pursue opportunities. But even SMEs regularly fail to see the inevitable.
The true culprit for this kind of oversight, according to American businessman Lou Gerstner, is more likely to be the mindset that emerges when companies forget why they were founded in the first place. As mentioned in part one of this story, every business was created to solve a problem.
When Gerstner took over as CEO of IBM in April 1993, the chatter on Wall Street was that the computing company was going out of business and he was sent in to soften the landing. After all, Microsoft had outpaced IBM in software, Dell had destroyed the PC business and both Sun and HP were pushing workstations to replace IBM’s big iron mainframes. The future looked rather grim for IBM as Gerstner sat down in his corner office.
The staff at IBM felt the same way about Gerstner. IBM had a tradition of promoting management talent from within its own sales team so Gerstner was seen as an outsider. What did this tobacco executive know about high-tech? And why should they take him seriously when it appeared his only job was to shepherd the company into the sunset?
But Gerstner’s mental distance from the company helped him notice a few blind spots. One of his first acts as CEO was to gather the top vice presidents of every IBM division into the same room and ask them to write down, in one sentence, what IBM’s business was.
The result? No two VPs gave the same answer. There was no vision, no understanding of the company's business from the very people who had worked with the company and in the technology sector for their entire careers. The responses he received varied widely, with some saying it was selling mainframes and others saying it was selling software or providing services.
Gerstner famously replied that IBM's core business was none of these things, but rather it was "customer relationships." He recognised that IBM's success depended on understanding the needs of its customers. Everything the company did was in service of that goal.
Under Gerstner's leadership, IBM shifted its focus from selling individual products to providing integrated solutions to solve customer problems. This strategy helped turn around the struggling company and led to its resurgence in the 1990s.
Gerstner wasn’t a wizard. He couldn’t make Microsoft or Dell disappear. But he knew that getting positive results from any effective turnaround required showing IBM’s key staff that they no longer shared a common vision about the company’s future.
Starting from first principles
This type of thinking plagued the Sears leadership team as it made the fateful decisions in the 1990s.
For more than a century, Sears’ core business was selling goods to consumers. Not selling them in stores, or out of a catalogue, or even on the side of the road. Its business was selling goods. That’s it.
If Gerstner had asked his question to the management at Sears, the only correct answer would be: “We sell things.” What made Sears a powerhouse was the simple strategy to stock and sell decent quality products at reasonable prices while offering exceptional customer service.
This is what’s known as first principles thinking.
It’s the sort of thinking a founder does when they conceptualise the idea for a new company. They saw a problem in the market and created a product or service to solve that problem. They might already have invented a special tool or special sauce, but solving a market problem is always the driving factor for creating a business.
First principles thinking asks: if we want to solve this problem, how might we achieve that?
This framing is useful because it opens the aperture for ideas and pathways. It doesn’t really matter how a problem is solved, all that matters is the efficiency of doing so. Understanding intangible assets allows people to approach business like an engineer.
For Sears, the market problem it was created to solve – as a business – was that people wanted items to be in their homes and were willing to pay for that to happen. You know, basic commerce.
The obstacle was that, for 99% of Sears’ potential customers, those desired items were stored far away in a manufacturer’s warehouse. Sears’ engineering solution was to collate these items, match them with prices and offer a service to ship the items to the customer.
It was elegant and simple. What did Sears do? Sears sold things.
Over time, Sears forgot its fundamental reason for existing. It began to think that its business was the retail stores. If it had retained its focus on solving the core market problem by always looking for a more efficient process, it would have quickly noticed the power of the internet.
In a way, remembering the problem your company was founded to solve is an important intangible asset in itself. It’s called strategy, and without it, all the other assets might as well be fantasies.