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How a Libertarian Used Ayn Rand's Crazy Philosophy to Drive Sears Into the Ground

Rand bequeathed business the perfect formula for failure. Just ask Sears.

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What background did Lampert have in retail? None at all. But never mind that. He was a Wall Street genius, and he would make this thing work by harnessing the power of data and numbers and letting the invisible hand of the market guide his Franken-company to glory. He even hired Paul DePodesta, the statistician of "Moneyball" fame, to advise him. When Kmart acquired Sears, the new company, Sears Holdings, became one of the largest retailers in the U.S., and Lampert became its CEO. He took on the Herculean task of integrating two vastly complex companies. And he brought on a guy that knew all about restaurants and nothing about retail to help him, Aylwin Lewis, former president of YUM! Brands.

Reactions ranged from surprise to predictions of doom. Mark Tatge at Forbes  called him “ Crazy Eddie” and decided that he must be planning to liquidate the whole shebang, perhaps slowly, by dumping stores (Sears owns a ton of valuable real estate) and using the money to do stock buybacks (more on that later) that would further enrich him.

It turns out that contrary to Lampert’s notion, you actually do need to know something about a business in order to manage it well. There’s really no substitute for industry-specific experience. And bigger is not always better — a gigantic corporation can be too unwieldy and complex to thrive, especially when your management philosophy is derived from a writer of bad novels.

Sears and Kmart are now on well on their way to becoming vaporized as brands.

2. Myth: Self-interest is the greatest virtue

The neoclassical economic paradigm is built upon the idea a human being is little more than a globule of self-interest. It teaches that the market economy is populated by rational individuals whose selfishness is constrained only by expediency. Ayn Rand was an enthusiastic proponent of this idea in extreme form, and her celebration of it can be found in The Virtue of Selfishness: A New Concept of Egoismpublished in 1964, which explains, among other things, the destructiveness of altruism and the virtue of acting solely in your own self-interest.

At Sears, Lampert set out to create the Ayn Rand model of a giant firm, and the company got a radical restructuring. It was something that had been tried at giant industrial conglomerates like GE, but never with a retailer.

First, Lampert broke the company into over 30 individual units, each with its own management, and each measured separately for profit and loss. Acting in their individual self-interest, they would be forced to compete with each other and thereby generate higher profits.

What actually happened is that units began to behave something like the cutthroat city-states of Italy around the time Machiavelli was penning his guide to rule-by-selfishness. As Mina Kimes has reported in Bloomberg Businessweek, they went to war with each other.

It got crazy. Executives started undermining other units because they knew their bonuses were tied to individual unit performance. They began to focus entirely on the economic performance of their unit at the expense of the overall Sears brand.  One unit, Kenmore, started selling the products of other companies and placed them more prominently that Sears’ own products. Units competed for ad space in Sears’ circulars, and since the unit with the most money got the most ad space, one Mother’s Day circular ended up being released featuring a mini bike for boys on its cover. Units were no longer incentivized to make sacrifices, like offering discounts, to get shoppers into the store.