Dec. 21, 2004
Unfinished turnarounds have roots in ignoring the customer.

The business media and Wall Street analysts often are ready to glorify the success of turnarounds well before such praise is deserved. Good (and bad) things that happen in companies don't occur suddenly. Such events usually are the result of one to two years (or more) of good (or bad) management. There are a few well-known companies whose turnarounds have been amply complemented and in some cases rewarded with higher stock prices, but as they say in the old detective movies, "Not so fast, there!" "Chainsaw" Al Dunlap's deceptive turnaround misadventures at Sunbeam Corp. have been well documented. But there are others that remain unfinished and uncertain of success. Sears, Roebuck & Co. took years to fall out of step with the shopping habits and desires of consumers, so it isn't fair to expect Arthur Martinez to turn it around overnight. He made admirable progress in promoting "the softer side of Sears." The clothing in the stores is more fashionable, and the overall merchandise selection has improved. Unfortunately, Sears still is saddled with old stores, pricey mall locations, and the ambiance of a bowling alley. It seems the widely proclaimed turnaround in profits was created mostly by liberal credit card policies, which in turn have led to large bad-debt risks. Whoops. Martinez himself often admonished that the turnaround was not complete. The question is -- when a big one like this stalls in midturn, can he get it moving again? Retailers such as Target, Wal-Mart, Dillard's, and Kohl's are not waiting to see. The central message: Sears improved a lot, but so did everyone else. Relative positions changed little. George M. C. Fisher had an admirable track record at Motorola Inc. Then he left to fix Eastman Kodak Co. Both companies might have been better off had he stayed at Motorola. He was too "nice" to hack away the excessive overhead at Kodak right away. Too many of the same people who got Kodak in trouble were allowed to stay in place. Although Fisher did get rid of distractions like pharmaceuticals, Kodak continued to believe that consumers would pay a premium price for the film in the yellow box. Wrong! Fuji Photo Film Co. Ltd. dropped prices, attacked aggressively, and took large chunks of Kodak market share; so did mass retailers' cheaper private label film. Once consumers found that their snapshots came out fine with these other products, Kodak's job was even tougher. Slow in entering and capitalizing on digital photography, Kodak is still one of many competitors in this photo-technology of the future. After making some hard cuts in recent years, Fisher is leaving with the turnaround stalled in midturn. The message of this one is in Einstein's famous quote: "We cannot solve today's problems by thinking the way we thought when we created them." As I was growing up, Levis was a generic name for jeans. Now Levi Strauss & Co. is fighting for market share -- and maybe its life -- as leaders close plants and lay off employees. The Haas family's noble concern for the culture and the well being of Levi Strauss employees has been undermined by their failure to pay attention to customers and trends in clothing. The successful Dockers line and the massive move to business casual attire have kept the company from even further decline. But youth dictates the fashion in jeans. Levi Strauss became great by remembering that, but somewhere along the way the company caught the same disease that afflicts many large industry leaders -- thinking they know better than the customers. Designer jeans took the high end. Private labels and VF Corp.'s Lee and Wrangler brands took the lower and middle. Levi Strauss was left holding little more than a shadow of its former dominant market share. The message in this one is simple: The customer is always right -- never forget it. What other turnarounds have stalled in midturn? Two of the most obvious are both Detroit based: General Motors Corp. and Kmart Corp. Documenting the "General's" misadventures already has filled several books, so I will devote only a sentence or two to the subject. GM is making much better cars, although still not as good as leading Japanese and German producers. The big problems for GM are that Ford is more productive and has added Volvo and Jaguar to its repertoire, and that Chrysler now has found a "big brother" in DaimlerBenz and it was quicker and more innovative than GM all along. I'll say it here -- GM will be the world's No. 3 automaker in less than five years. There is no turnaround coming here. Kmart has made great progress, but its problem is like Sears'. While the company has been making progress, its competitors have also. The same message applies to both GM and Kmart: You cannot overtake and pass others in the race if everyone accelerates at the same rate; and if you miss a beat, it is all over. Look for Kmart to be acquired by a big grocery chain before much longer -- it is the only way the company can survive long term. Big turnarounds are tricky and difficult to complete. The best policy is to keep from getting in that kind of arrogant trouble in the first place. John Mariotti, a former manufacturing CEO, is president of The Enterprise Group. He lives in Knoxville.

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