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Chapter 1

Sears' History:
The Bad and the Brilliant

In the life of every individual and in the life of every corporation there is a defining moment. The thinking, the abstraction of planning, melts away, the fog lifts, the air clarifies, and under a bright sun and fresh sky, what must be done takes on a stunning, undeniable shape. It is rare that an event of that nature would happen in the life of a corporation and in the life of an individual at the same time.

My moment, and Sears' moment, too, came on a company jet with a handful of Sears executives heading home from a trip to Mexico to review the company's business there. It was early December 1992. I had been on the Sears team for only three months. I had been brought in to revive the Sears retail business, its merchandising group, and potentially to run the whole company. (I'll tell you later about the unusual journey that carried me to Sears, a trip that led some to conclude I had lost my mind.)

My first weeks on the job had been real eye-openers.

I dove deep into this treasure of a company and found layer upon layer of trouble, a hemorrhaging of red ink, indecision about what to do, and an almost palpable anxiety.

My most formidable adversary, and ultimately my strongest ally, would be culture, a century of culture and the mammoth bureaucracy it had created. Bureaucracy was so deeply developed and planted at Sears that it seemed for all the world as though the place had been designed by one of those obsessive Soviet functionaries at mid-century. At the same time, a lot of it took on the earmarks of the classic Potemkin village, with fresh paint and flowers on the outside masking an operation that was close to collapse. The enemy, I knew from the outset, was us. The challenge would be to find what was solid, dependable, even brilliant inside of this company and use it to create an entirely new Sears.

That had been my message and my mantra since the day I arrived at Sears: Cultural transformation must always be at the top of the agenda at Sears. The reason for that was the same on the day I left as it was on the day I first walked in.

Sears was in love with its past and entrapped by it at the same time.

Trapped in the Amber of Its Own History

These kinds of things happen to institutions all the time. They keep playing out yesterday's agenda without recognizing that the world has changed and that it continues to change every minute of every day. They ride their old horses onto a modern battlefield, then puzzle about why they are losing a war to an enemy who has tanks and machine guns.

The great irony was that Sears had been a model for change from the very beginning, from its huge catalog operation to its shift to retail stores, a wrenching struggle that transformed the nature of the company, and the nature of the American retailing industry at the same time. Even as I was leaving in the fall of 2000, Sears was embarking on another in its long string of adventures, this time moving onto the Internet, finding a new way to reach customers and meet their needs.

At the same time, the company I walked into in 1992 was becoming the poster child of the business stagnation movement. It was as though Sears had forgotten the strongest parts of its own history, the most important lessons it had learned in decades of serving the American consumer.

Sears' roots were more than a century deep. The company had earned a strong and important place in American history. It could not be viewed as just another big business slipping off track, or as an ailing dinosaur waiting for time to bleach it into whitened bones. If the company died, a big piece of history would die with it, along with the dreams of thousands upon thousands of customers, employees, and investors everywhere.

I was the outsider on that flight from Mexico, but I was beginning to know what had gone wrong, and I had a strong sense of where we had to go to fix it. It was going to be a tough, long march, a struggle to save the part of Sears history that was golden and shed the parts that were locking the company in a bad place. This would be a battle with a vast bureaucracy and a deep, troubled culture and everything that entails. I am not a shy man, but I knew the scope of the challenge I was facing. No one had ever revived a retailing business of this size-or, for that matter, just about any other business of this size.

Resistance to Change

I didn't know then that I would have to face that challenge twice during my eight years at Sears, that the same demons that caused problems for Sears the first time around were waiting on the sidelines, even as we were racking up strong numbers and basking in the glory of a successful transformation.

The basking, I came to understand, was one of the problems at Sears. There was, and there remained, a strong institutional tendency to sit back and conclude that all the problems were solved, that the retailing heroes had fixed it once and for all.

That was never the case. Sears was an institution that needed to be pushed, prodded, or shaken at least once a day. The story was in the numbers.

In 1992, Sears had sales of more than $50 billion in some 800 stores and 2,000 other locations around the nation. It was an insurance company, a real estate company, a banker, an investment company. It wound up losing $3.9 billion in that awful year.

It was a humbling experience, but, apparently, not humbling enough. Even that level of loss was not enough to shake the company to its foundation and force it onto a different track.

Ed Brennan, chief executive officer at the time and a Searsman to his very soul, the last in a long line of Searsmen in his family, was on the jet, along with a few other Sears veterans and financial people who had been wrestling with the company's problems for years. Sears was lost in the sea of the marketplace, clinging to its remarkable history the way a shipwrecked sailor clings to the one piece of oak that keeps him from drowning. The customers who had made Sears a marketplace legend were abandoning us. The stores were in bad shape, capital starved and looking it.

Our competitors were coming from all sides. Home Depot and Wal-Mart were gobbling up market share. In malls all over America, many of them there because Sears put them there by deciding on its location a long time ago, competitors large and small were stealing our customers. They were offering state-of-the-art retailing to enlivened shoppers who had found so many new places to spend money that we simply weren't competing anymore.

We had made embarrassing mistakes. We were struggling with the fallout of an auto store fraud scandal on the West Coast. A whole decade of internal tinkering had failed to address the company's problems in the marketplace. The institution was turning almost completely inward, focusing on itself instead of its customers and its competition, a problem I would struggle with for eight years. My challenge was to take that declining retail business and revive it: to find out what was wrong, find a new customer, and strengthen what Sears had to sell to bring the place into the black again.

That flight from Mexico was all about the kinds of changes that had to happen if we were to save Sears from its competitors and, in a very real way, to save it from itself. That was one of the deepest problems at Sears, a culture that simply would not change, that kept looking to the past for solutions to problems that were brand new. As the outsider, I had very bad news to deliver. I had looked at the Sears universe from every conceivable angle, and what I had concluded was that there was trouble at its heart. We had to invent a new Sears that would compete with the best, that would draw back its customers, enliven its employees, and reward its shareholders once again.

But before we could do that, we had to fix what was broken at the heart of Sears. In Ed Brennan, I was facing a man whose very life was defined by this company, the embodiment of all those tall, handsome Searsmen who had built the institution over a century. I had to convince him that if we were to save Sears and bring it back to health, we had to kill the one part of Sears that almost everyone could identify.

The Sears catalog was a big part of the problem. It was 108 years old, employed 50,000 full- and part-time workers, and, along with its mall stores, was the most familiar part of Sears' history. On billions of dollars in annual revenue, it had lost $150 million in each of the past seven years.

I delivered the news.

Ed excused himself for a moment to go to the rest room. When he returned, it seemed to me as though there were tears in his eyes. But he knew we were right about this, that it took an outsider to make and carry out this kind of decision.

I had done my homework before I joined Sears. I knew these were honorable, hardworking people who had a strong measure of pride in the institution. But I was waiting for an important answer. It would determine whether I would have the freedom I needed to begin working on a vast transformation, a metamorphosis so important that it would determine the future of the company.

Ed gulped hard.

And then he agreed.

At that instant, a new Sears was born, not yet a healthy baby, but, I believed, a baby with a brilliant future. This was the decision that paved the way for one of the most remarkable turnarounds in American business history. All we had to do was mother it back into the marketplace, educate it, and transform it. We had to change its culture, change its way of doing business, change the very way it thought of itself.

I knew it was going to be hard.

I didn't know how hard.

I would be a fool to suggest that Sears is done with this process, that I walked away from the CEO's office leaving the Perfect American Corporation in my wake. The picture looks better now (we had the best year in our history in 2000), but if you were reading the headlines only a few years ago, you might have thought we were headed for a decline as deep as the one I found in 1992.

A Revival That Was Widely Doubted

There was widespread doubt about the sticking power of the first turnaround. In 1997 and 1998, we were in deep trouble with the federal government (and state governments just about everywhere, too) because of the bankruptcy reaffirmation problems. We plummeted from the media heights, no longer viewed as the hottest story in retailing. We got into deep credit trouble when personal bankruptcy became the favorite pathway for solving debt problems in 1997 and 1998. We built a first-rate transformation team full of highly attractive executives, the kind of people outsiders are always eager to steal away, and steal them they did.

And we fell prey, once again, to Sears' old nemesis, that assumption that you only have to do it right once and that everything will be fixed and humming along forever after. Then we reached down and grabbed our bootstraps and started pulling hard, fixing the problems one at a time, just as we had between 1992 and 1996.

I could spend all of my time thinking about nothing but trouble, because handling trouble is one of the unavoidable realities of being in business today. In fact, I believe that every business is in trouble, but some know it and some don't. But to focus only on trouble, I would have to overlook that remarkable transformation the first time around, our successful climb back into healthy numbers the second time around, and the contributions of thousands and thousands of people, employees and customers alike.

The Importance of "We"

"We" is the most significant word in this book.

Take Sears out of America and what is lost? A huge chapter in business history, a million wonderful stories, fortunes made, blown, and made again, a golden contract with generations of Americans who shopped there. Sears was the vehicle that an emerging middle class turned to for its belongings, for the material comforts that would define quality of life.

It was and is simply that important. Keeping Sears alive was as much of an obligation to history as it was an obligation to the marketplace. Because of that, it would be convenient to anoint myself America's double turnaround king and to spend a lot of time telling everyone exactly what I did to take what is undeniably the most important company in the nation's business history and bring it back to life.

But it didn't happen that way.

The credit must go first to the employees of Sears and second to the only collection of people who could possibly be more important to the fortunes of the company: its customers. It is not as though we forced them to come back. It would be more accurate to say that we invited them back into our stores by creating a good place for them to shop and by telling them how and why they were important to us. The loyalty and the interest and some of the trust Sears had earned across generations were still there.

Weld those two factors together-the loyalty of Sears' customers and the diligence of all of the Sears people who answered the call for transformation-and you have the keys to the Sears turnaround the first time, when we finally got marketplace traction in 1993 and 1994 and put the company $1 billion into the black ink again.

The second time around was harder.

If our victory in the first transformation was a victory over the Sears of the past, our challenge in the second turnaround was dealing with the present, with the Sears tendency to sit back, look at the landscape from the high ground of some good numbers, and conclude we had figured it all out.

In both cases, the same institutional forces were at work, the biggest one being the tendency to coast, to think yesterday's numbers dictate tomorrow's fortunes. In the modern retailing environment, that is just not true.

Today's numbers describe yesterday's success, and they have to be built every single day. If you are not thinking about how you are going to win tomorrow, you will most certainly lose. Our own transformation the first time around and the decline that followed it is strong evidence of that reality.