It may not be as bad as it seems. Despite the painful passing and decline of retail industry stalwarts including Linens ‘n Things, RadioShack, The Bon-Ton Stores, Toys R Us, Sears and Kmart, retail chains including Macy’s, Kohl’s, Walmart, Target and other major retailers are showing financial improvement. Macy’s stock price is up 40+ percent year-to-date, Kohl’s is up 30+ percent, and Target is up 25+ percent. The rumors of the death of brick-and-mortar retail have been greatly exaggerated. Sears, Kmart and JC Penney are still open for business.
Recently, I participated in the Annual Retail Forum at Columbia Business School where a keynote speaker addressed a question from the audience: “How would the speaker approach the precarious position of a challenged major retailer? What steps would you recommend?” The response was, “Shut it down…they don’t deserve to stay in business.”
This, “throw in the towel,” response brings to mind a key question we should ask ourselves. What would we do if we found ourselves as CEO of a retailer at risk of complete cataclysmic failure? One obvious metaphor is that of being captain of the Titanic. You may not remember, but the Titanic had a bonafide captain: his name was Edward John Smith.
Edward John Smith
Raised in a working environment, Edward Smith left school early to join the Merchant Navy and the Royal Naval Reserve. After earning his master’s ticket, he entered the service of the White Star Line, a prestigious British shipping company. He quickly rose through the ranks and became the commodore of the entire company, responsible for controlling its flagships. In 1912, he was the captain of the maiden, and only, voyage of the RMS Titanic.
The first four days of the voyage passed without incident, but shortly after 11:40 PM on April 14th, Captain Smith was informed by First Officer William Murdoch that the ship had just collided with an iceberg. It was apparent that the ship was seriously damaged. The Titanic’s designer, Thomas Andrews, reported that the first five of the ship’s watertight compartments had been completely breached and that Titanic was doomed to sink in under two hours. Over 1,500 passengers and crew, including Captain Smith, would perish in the frigid North Atlantic that evening.
By many standards, Captain Smith acted in exemplary fashion. Smith issued a “mayday” transmission, used a megaphone to shout instructions to passengers and crew to lower the life boats, stay calm and board women and children first. He did his duty, followed procedures, and helped save over 700 passengers. And he paid the ultimate sacrifice by going down with his ship.
It’s not fair to second guess the captain of the Titanic. Nonetheless, let’s do it anyway. First and foremost, a change of strategy, as provided by the board of governors, would have helped. The entire collision might have been avoided in the first place by plotting a longer, slower route. Keep in mind that the Titanic was considered “unsinkable,” and the White Star Line was under intense competitive pressure to show extraordinary luxury and blazing speed.
To his credit, Smith followed legacy guidelines and historical emergency conventions:
- Protect the ship and its valuable assets.
- In the event of an emergency, optimize the number of people per lifeboat.
- Save women and children first, then 1st Class passengers prior to 2nd Class and 3rd Class passengers.
- Save the crew last.
Here’s Captain Smith’s scorecard when viewed through this legacy lens and traditional Key Performance Indicators:
But what if we change the key performance metrics? What if we ask different questions, use different resources and challenge the conventional guidelines? The primary objective at the time of Smith’s decision making was to, “put people in lifeboats.” Titanic carried a total of 20 lifeboats: 14 standard wooden Harland & Wolff lifeboats with a capacity of 65 passengers each, plus four Englehardt “collapsible” lifeboats with a capacity of 47 each. These 20 crafts met the British Board of Trade’s regulations at the time and was sufficient to contain half the passengers and crew. Carrying fewer lifeboats provided Titanic with greater speed and less fuel burn. As she was considered unsinkable, lifeboats were intended merely to transfer passengers to nearby rescue vessels, if necessary. However, with only 14 standard lifeboats, and the traditional “put people in lifeboats” objective, a tragic survival rate in the event of emergency was unavoidable.
However, what if the objective was to, “keep people out of the water, keep them warm and keep them breathing?” (as posed by Tony McCaffrey and Jim Pearson of Innovation Accelerator). Do you recall the scene in James Cameron’s “Titanic” with Kate Winslet and Leonardo DiCaprio floating on the wooden door? In addition to lifeboats, many objects onboard the Titanic could float in water. Among these buoyant items were life jackets, life buoys, wooden tables, planks, piano lids, and doors.
Could doors, planks or tables be placed on the gunwales between lifeboats to create additional dry areas above the water? How about simply throwing these objects in the water to create more floatation options?
It is estimated that 40 automobiles were onboard. These cars represent 160 tires and inner tubes, plus additional spare tires, which were at the passengers’ and crew’s disposal. Tying together rubber tires and inner tubes might have created a floating raft on which wooden boards could have been placed.
Titanic carried over 3,000 steamer trunks. How could these have been used? Using tables, doors, and tires represents the “destruction of luxury assets,” which is against the primary directive and contrary to legacy behavior. Of course, all of these assets were doomed, under the circumstances, to be lost regardless of policy.
Here’s a thought: Floating nearby, was a hard-to-miss 40,000 square-foot iceberg. A surface large enough to hold all of the passengers and crew.
Stuck in the Past
Legacy procedures work best under historically predictable and repetitive circumstances. However, disruption and changes to the environment create new circumstances. Necessity is the mother of invention. Smith was a victim of the human tendency toward cognitive bias. Prime among these are:
- Confirmation Bias, the tendency to search for, interpret, favor, and recall information in a way that confirms one’s pre-existing beliefs. This bias locked Smith into narrow, legacy thinking.
- Selection Bias, narrows choices to a smaller group of options than actually exist. Particularly when we are under stress, we tend to view options through blinders. In most instances, selection bias narrows our view to historical standards and options, or a small set of options that have been previously discussed.
- Sunken-Cost Fallacy, (not intended as a pun here), the sunken-cost fallacy is the tendency to view prior costs and decisions as being highly influential toward current or future decisions. In this case, “We have 14 expensive lifeboats; we must use these as our primary means of survival.”
As we sit here, warm and dry, it is easy to second guess Captain Smith, who was under extreme stress and a very short deadline to make life and death decisions. I am grateful that I do not face his decisions or circumstances.
Retail Facing the Iceberg
Edward John Smith was the ideal candidate to command the Titanic under conventional operating conditions. Piloting a new, larger ship with untried technology on a faster course through iceberg-rich waters is anything but conventional – and sounds a lot like today’s disrupted retail landscape. You can’t navigate new waters with outdated maps.
Which brings us back to retail leadership operating under disruptive circumstances. Kmart was originally incorporated as the S.S. Kresge Company in April of 1912, the same month and year of RMS Titanic’s fatal voyage. And unlike Captain Edward John Smith, Eddie Scott Lampert, Chairman & CEO of Sears Holdings (which owns Sears and Kmart) will not be going down with his ship. He draws his own maps and plays by his own survivalist rules.
Excellence in execution remains essential. However, as Peter Drucker once wrote, “There is nothing so useless as doing efficiently that which should not be done at all.” Quite simply, today’s retail leaders must not automatically accept legacy business models, conventional best practices or traditional performance indicators. Inventory turn, maintained margins and average unit retail will continue to be important. However, the cost of customer acquisition, consumer lifetime value, social media engagement, customer review quotients, the acquisition of customer data and other indicators may be of equal or greater value.
When you hit an iceberg, each model, practice and metric must be reevaluated for relevance considering the new, rapidly evolving consumer path-to-purchase, global supply chain, ubiquity of information and competitive environment. Some legacy retailers are already navigating around their own icebergs. Much of Macy’s and Kohl’s recent success is a result of managing traditional retail metrics, including inventory turn, assortment, brand matrix and store productivity. However, the winners in the new retail landscape will innovate new models, best practices, and performance measurements relevant to tomorrow’s consumers. And when these innovative captains of industry achieve success, they will have to continue to reassess and reinvent. It’s the circle of life and the cycle of business. Sometimes, the best ships in the world hit an iceberg. You want a completely capable captain at the helm. Manning the lifeboats may not be the only, or best, option.