Blog on the Run: Reloaded

Wednesday, July 17, 2013 6:52 pm

Why you don’t want insane Ayn Rand fanboys running your company, Sears Holdings edition


It’s well known that libertarians want government shrunk, and that many of them profess to have been influenced by the Objectivism, the “philosophy” of the awful novelist Ayn Rand, who preached that properly channeled selfishness created the greatest good for the greatest number. And such techniques are supposed to make businesses prosper, right? So after this insane Rand-spouting hedge-fund guy, Eddie Lampert, became CEO of Sears Holdings, broke the company into more than 30 units and told them to be selfish (i.e., turn on each other), guess what has happened?

In January, eight years after (Eddie) Lampert masterminded Kmart’s $12 billion buyout of Sears in 2005, the board appointed him chief executive officer of the 120-year-old retailer. The company had gone through four CEOs since the merger, yet former executives say Lampert has long been running the show. Since the takeover, Sears Holdings’ sales have dropped from $49.1 billion to $39.9 billion, and its stock has sunk 64 percent. Its cash recently fell to a 10-year low. Although it has plenty of assets to unload before bankruptcy looms, the odds of a turnaround grow longer every quarter. “The way it’s being managed, it doesn’t work,” says Mary Ross Gilbert, a managing director at investment bank Imperial Capital. “They’re going to continue to deteriorate.”

Plagued by the realities threatening many retail stores, Sears also faces a unique problem: Lampert. Many of its troubles can be traced to an organizational model the chairman implemented five years ago, an idea he has said will save the company. Lampert runs Sears like a hedge fund portfolio, with dozens of autonomous businesses competing for his attention and money. An outspoken advocate of free-market economics and fan of the novelist Ayn Rand, he created the model because he expected the invisible hand of the market to drive better results. If the company’s leaders were told to act selfishly, he argued, they would run their divisions in a rational manner, boosting overall performance.

Instead, the divisions turned against each other—and Sears and Kmart, the overarching brands, suffered. Interviews with more than 40 former executives, many of whom sat at the highest levels of the company, paint a picture of a business that’s ravaged by infighting as its divisions battle over fewer resources. (Many declined to go on the record for a variety of reasons, including fear of angering Lampert.) Shaunak Dave, a former executive who left in 2012 and is now at sports marketing agency Revolution, says the model created a “warring tribes” culture. “If you were in a different business unit, we were in two competing companies,” he says. “Cooperation and collaboration aren’t there.”

That’s just moronic. Either you’re a company, with all units competing toward a single goal, or you spin off the units you don’t need. You don’t make your people fight internal wars; you have them fighting for customers and you, the CEO, need to have their back with a sensible strategy and adequate supplies/training.  Sure, it’s fun to play sand tiger shark and have your babies eating one another in your womb, but it’s also a good way to become a “species of concern,” “vulnerable” or even endangered.

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6 Comments »

  1. As Krugman noted yesterday, economists have long studied the boundaries of the firm. Coase, who ultimately won his Nobel prize for his transactional theory of the firm, started working on that theory in the 1930s. The fundamental question is when is market organization more efficient than managerial control, and vice versa. If the market were always the best way to organize business activity, there would be no firms, just individuals bargaining for every last little thing. The fact that there ARE firms, some of them quite large, should be strong evidence that market organization is not always the most efficient way to do things. Of course, evidence doesn’t matter if you’re a True Believer.

    http://krugman.blogs.nytimes.com/2013/07/16/john-galt-and-the-theory-of-the-firm/

    This is just the latest example of how intellectually stunted Randians are. On the other hand, I appreciate Lampert’s willingness to trash his company to prove a point. That’s the kind of thing that would never make it past human-subjects review at a university.

    Comment by Andrew Brod — Wednesday, July 17, 2013 9:20 pm @ 9:20 pm | Reply

    • That’s a droll conclusion. I like it.

      Comment by Lex — Wednesday, July 17, 2013 9:57 pm @ 9:57 pm | Reply

    • The fact that there ARE firms, some of them quite large, should be strong evidence that market organization is not always the most efficient way to do things.

      That’s an interesting take. I thought Coase’s point was that the pricing process (unless that’s what you mean by market organization) was not free and that creation of a firm is a market means of overcoming certain inconveniences, primarily transaction costs.

      Comment by Justin L. Oliver — Friday, July 19, 2013 7:33 pm @ 7:33 pm | Reply

      • Precisely. That’s what I meant. Market activity is the process of diving into the market to contract for services instead of bringing them within the boundaries of the firm. But using the market involves transactions costs: to monitor quality, to compare prices, etc. Coase’s insight was to see the firm as a mechanism for reducing transactions costs. Sometimes it’s easier to manage someone by hiring him than to contract with him. In my above comment, I should have referred to Coase’s theory as a transactions-cost theory rather than a “transactional theory,” whatever that is.

        Obviously, what belongs inside the organizational boundary of the firm varies from company to company. Some have in-house travel agents; some don’t. Some employ the workers in their cafeterias; some outsource their food services. The point is that if the market were always superior to managerial control for all activities, there’d be no firms. All we’d see is individuals wasting their time bargaining and dickering and monitoring and so on. The fact that there are firms at all proves (assuming we buy Coase’s insight) that managerial control is sometimes the superior form of business organization, at least for some activities and at some scales. The fact that there are some big firms around implies that managerial control can be dramatically superior.

        Comment by Andrew Brod — Friday, July 19, 2013 11:37 pm @ 11:37 pm | Reply

        • Quick aside: The outsourcing of services like cafeteria food often is mischaracterized as the loss of manufacturing jobs. If a manufacturer employs 20 cafeteria workers and outsources its cafeteria to a separate company, then on the day of the transfer, 20 manufacturing workers lose their jobs and 20 food-service workers are hired. After all, “manufacturing” is an industrial designation, not an occupational one. So even though the stats show 20 manufacturing jobs lost, the fact is that nothing happened other than the re-categorization of 20 workers. By no means does this kind of thing explain the entirety of our manufacturing decline, but it’s been a part of it.

          Comment by Andrew Brod — Friday, July 19, 2013 11:40 pm @ 11:40 pm | Reply

  2. By the way, can you think of a novel in which heroes of individualism run large companies rather than break them down into atomistic units? I can: Atlas Shrugged. If what this turnip is doing is Randian, then Rand herself wasn’t sufficiently Randian.

    Comment by Andrew Brod — Friday, July 19, 2013 12:49 am @ 12:49 am | Reply


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