Tuesday, May 13, 2008

Analogy #179: Taking it to the Max

Back in the 1920’s there was a person named Max who immigrated to the United States from Poland. In 1929, just prior to the Great Depression, Max opened a grocery store in Milwaukee, Wisconsin.

That was a tough time to open a new business, but because he was a very efficient operator who knew how to please the customer, he survived the Depression. He did well enough to eventually build up a chain of 48 supermarkets in Wisconsin, before selling the business in 1970.

Along the way, the story goes that one day Max went out to buy some clothing. He went to the available department stores in Milwaukee and did not like the experience. Max came to the conclusion that the only way he would ever get to patronize a Department Store to his liking would be if he built his own. So he did, opening his first department store in 1962.

Max didn’t know much about department stores or fashion, but he did know how to build successful supermarkets. He applied those supermarket principles to his department store. He put in centralized checkouts. He put in efficient and easy to shop fixtures in an easy to navigate “racetrack” format. He emphasized extreme efficiency in operations and made sure he had depth of inventory in the most wanted brands. Finally, Max took the supermarket emphasis of low prices to his department store. He could afford the low prices because of the efficiencies he applied from his supermarket heritage.

At the time, this was all Department Store heresy. Nobody in the industry did things that way. But since Max was not from the department store industry, he did not see it as heresy. He simply saw it as the type of store he would like to shop in.

He only built a few of these department stores, because he was more interested in running supermarkets. However, by the mid-1980s, the management of the Department Stores group felt they were sitting on a powerful concept. Therefore, they started ramping up expansion. They took the department stores public in 1992 and have had quite a good run.

By the way, Max’s last name was Kohl, and the department store chain he started in 1962 was called Kohl’s Department Stores. There are now nearly 1,000 of these stores in operation, and sales for fiscal 2007 were $16.5 billion.

There’s an old saying that most new innovation comes from outside the industry. That was certainly the case for Max Kohl. It took an outsider—a supermarket man—to show the department store “experts” a new way to do department stores.

This happens in all types of industries. The inbreeding of executives and the lack of fresh insight causes the insiders to become blind to new ways of doing business. The “old ways” become the “only ways” of looking at the world.

In the long run, this can be shortsighted. Innovation is the lifeblood of growth. Innovation usually requires new approaches to the business. Outsiders, who aren’t wedded to the old ways, tend to embrace more options and different approaches. As a result, new businesses like Kohl’s, replace old established businesses like the May Department Stores.

If you don’t want your business to be replaced by an outsider, then you need to start thinking more like an outsider.

The principle here has to do with having a fresh set of eyes. Being around young children can be very entertaining, because the see the world with a fresh set of eyes. Everything is new and wonderful to them, and they come up with some of the craziest ideas.

Businesses also need fresh sets of eyes—people who are not wedded to the ways of the past. These are people who have not been around long enough to have bought into to the idea that the “standard operating procedures” are the only way to get things done. Like children, they ask “Why can’t we do this differently?”

In the department store industry, most of the insiders are “fashion” people. They approach problems from a strong sense of fashion and a keen eye for style. Max Kohl was a supermarket guy who approached problems from a strong sense of efficiency and an eye for value. By looking at the industry from this different perspective, he developed a different solution.

Even today, his legacy lives on. Kohl’s department stores tend to have an operating cost structure which is about half that of many of its competitors (as a % of sales). This allows them to provide superior and still be very profitable.

Not too long ago, I was talking to the President of a Department Store brand. He had worked in the industry for many decades. I suggested that he might be better off if he changed his store design around a bit. He looked at me condescendingly and said something like this,

“Gerald, I know you’re trying to help, but you don’t know this industry as well as I do. I’ve been doing this a long time, and let me tell you, that is not how it is done. People expect a department store to look a certain way and they will not accept change.”

Well, it’s true that I haven’t been in the department store industry as long as him. But it is also true that my experience with supermarkets, supercenters, big box retailers and discount stores gives me a fresh set of eyes that can borrow from these other related businesses and apply them in a fresh way to his business.

After he made his comment that people expect things a certain way and will not change, I started thinking about the outsiders who have been extremely successful in reinventing the way people shop for department store goods. In addition to the Kohl’s example, there is DSW, who successfully reinvented the way people shop for department store quality shoes. You can read about DSW's fresh approach in their IPO document.

If the old ways are so good, then why isn’t Sears doing any better than it is? It hasn’t changed much in decades, sticking to the old ways of running a department store. The old ways are causing it to lose market share. Yes, the new owner, Eddie Lampert, has a fresh set of eyes, but everyone is still waiting for a fresh set of ideas.

This is not to say that you want a company which only has fresh sets of eyes. You need a mix—people who have experience in the industry and understand its subtle nuances, as well as industry newbies who bring different experiences to the problems. Kohl’s really did not start to grow rapidly until it got a good blend of people into the mix. The key is diversity—diversity in age, background, experiences, and so on.

A friend of mine once interviewed at a major international retailer. When he got back from the interview, he said that everyone he interviewed with seemed like a clone of everyone else he interviewed. They were of the same gender, the same general age, had an MBA from one of the same small number of universities, and had all previously worked at the same consulting company.

Unfortunately for my friend, he was of a different gender, a different age, had an MBA from a different school and had never worked for that consulting company. As a result, he did not get the job.

This is so sad, because that company would have been better off with a more diverse employee base, with eyes that see problems from many fresh perspectives. To quote former general and US Joint Chief of Staff Colin Powell, “If you surround yourself with people who think like you, then at least one of you is redundant.”

The irony is that the company in question was not doing well at the time. It was shrinking in size and destroying profitability. Why continue to fill your company with clones if the current thinking isn’t working?

Seek out variety of thought and perspective. Bring the outsiders inside your company so that the next innovation comes from the inside, rather than the outside.

Eventually, the conventional wisdom of your industry will be replaced by an innovation based on a different set of wisdom. If you cling too long to conventional wisdom, your firm will die off and be replaced by outsiders with a fresh set of eyes. It is better to have a diverse blend in your business, so that you can exploit those fresh ideas yourself.

If you want to take your company to the Max, you need to find people like Max (Kohl), who bring a fresh new perspective.

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