Management And Accounting Web

Rucci, A. J., S. P. Kirn and R. T. Quinn. 1998. The employee-customer-profit chain at Sears. Harvard Business Review (January-February): 82-97.

Summary by Kellie Quinn
Master of Accountancy Program
University of South Florida, Summer 2002

Balanced Scorecard Main Page | Strategy Related Main Page



This article, written by three upper-level managers employed by Sears between 1993 and 1995, describes the changes that were required to transform the retailing giant. In 1992, Sears realized a net loss of $3.9 billion on sales of $52.3 billion. The authors attributed this to Sears’ diversification into insurance, financial services, brokerage and real estate while its competitors remained focused on retailing and gained market share. In order to revive the company, a culture shift that extended from senior management down to the hourly sales associates was needed. What resulted were Sears’ Employee-Customer-Profit model and the creation of Total Performance Indictors used to measure both financial and non-financial performance.

Sears’ turnaround began late in 1992 when Arthur Martinez was hired to head up the merchandising group. Immediate changes included selling Sears’ non-retail business, marketing the "softer side of Sears" and adding private lines of apparel and cosmetics to attractive women, expanding and accelerating off-mall specialty stores (such as Sears HomeLife), closing 113 mall-based stores and initiating plans to renovate the remaining stores over a 5-year period. The results for 1993 were remarkable, with Sears having one of its most profitable years in history. However, upper level management knew that in order to "turn its short-term survival program into a platform for long-term excellence" (p. 86), the entire culture at Sears would have to be changed.

In order to identify the changes that needed to be made, senior management created five task forces for the five factors – customers, employees, financial performance, innovation and values - considered most important to Sears’ future. Out of these task forces, grew Sears mission statement for the transformation: "Sears, a compelling place to work, to shop, to invest" and "Passion for the customer, our people add value, and performance leadership" or the three C’s and the three P’s.

Two major obstacles became apparent. First, measurement of non-financial data or "soft data" are hard to define and collect. If Sears wanted to mold its transformation around its customers and its employees, it was mandatory that customer and employee satisfaction was captured and analyzed. In response to this need, Sears developed a set of measures, similar to a balanced scorecard, which gauged how well Sears was doing with customers, employees and investors. These measures were called Total Performance Indicators or TPI. Unlike a balanced scorecard, however, Sears expended the resources to determine the actual drivers of future financial performance through causal pathway modeling.

Through this process, Sears discovered that an employee’s understanding of the connection between his work and the company’s strategic objectives would have a positive impact on his work performance. Moreover, an employee’s attitude towards the job and towards the company had the greatest impact on the employee’s loyalty and customer service than all the other employee factors combined.

This discovery became the starting point to Sears’ Employee-Customer-Profit Chain. By measuring the improvement in employees’ attitudes about the job or about the company, or any of the other drivers identified, Sears could predict the improvement in revenue growth. For example, a 5% improvement in employee attitudes will result in a 1.3% increase in customer satisfaction resulting in a .05% improvement in revenue growth (See the graphic illustration below).

The Employee-Customer-Profit Chain at Sears

The second major obstacle was deploying the model, created by senior management, to the Sears workforce. First, employees did not understand what was expected of them. When asked what they considered to be the primary thing they were paid to do, more than half of the respondents replied," I get paid to protect the assets of the company." Sears hired employees to satisfy its customers and this needed to be communicated to each employee. Misunderstanding was considered a second obstacle to creating this shift in culture. For example, the employee questionnaire asked employees how much profit they thought Sears was bringing in for each dollar in revenue. The median answer was 45 cents while, in reality, Sears was only bringing in 2 cents for each dollar. There was such a large discrepancy between perception and reality, that the likelihood of employees reacting well to the drastic changes that needed to be implemented was slim.

To mitigate these misconceptions, Sears created a program that combined learning maps and "town hall meetings". The learning maps used by Sears were designed to walk small groups of employees though the changing demographics, economics, and competitive circumstances of retailing. The map includes questions that stimulate ideas and require that employees think about the company’s future in terms of the change in the retail environment. The "town hall meetings" allowed employees who have completed the learning map to discuss any of their ideas that could be implemented on the local level. Sears then immediately implemented as many of those ideas as possible. Sears has created several maps to accomplish their training objectives including the original map, "A New Day on Retail Street", "Voices of Our Customers", "The Sears Money Flow" and, most recently introduced the map, "Ownership."

To complete the deployment of the Employee-Customer-Profit model and TPI, Sears initiated three more changes – a change in leadership behavior, changes in the compensation and reward structure and changes that allow departments and individual sales associates to reap the benefits from TPI. To alter leadership behavior, Sears began using 360-degrees reviews that allow a manager’s boss and small groups of the manager’s peers and subordinates, to evaluate the manager based on 12 criteria. Sears also established Sears University, which offers courses in every subject considered necessary to implement and continue the TPI and the Employee-Customer-Profit model. The change in Sears compensation structure was initiated in 1996 when pay for 200 upper-level managers was changed so that all long-term incentives were based on TPI, therefore considering both financial and non-financial indicators. This compensation structure made its way to field managers and, at the date of publication, was being tested with hourly associates at more than 45 locations.

According to the authors, the deployment of the Employee-Customer-Profit model was almost complete at the time of publication. The authors explained that, due to the turnover rates in the retail industry, there is a continual effort to train new employees in the three C’s and economic literacy maps. The change in culture to incorporate Sears Employee-Customer-Profit model appeared to be paying off. National studies indicated that customer satisfaction had fallen in 1997 but, according to Sears’ TPI, employee satisfaction has increased by 4% and customer satisfaction by almost 4% during the same period of time. This translated into an increase in Sears’ market capitalization by nearly a quarter of a billion dollars.

__________________________________________________________

Related summmaries:

Kaplan, R. S. and D. P. Norton. 1992. The balanced scorecard - Measures that drive performance. Harvard Business Review (January/February): 71-79. (Summary).

Kaplan, R. S. and D. P. Norton. 2001. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business School Press. (Summary).

Kim, W. C. and R. Mauborgne. 1997. Value innovation: The strategic logic of high growth. Harvard Business Review (January-February): 103-112. (Summary).

Kim, W. C. and R. Mauborgne. 1999. Creating new market space: A systematic approach to value innovation can help companies break free from the competitive pack. Harvard Business Review (January-February): 83-93. (Summary).

Kim, W. C. and R. Mauborgne. 2002. Charting your company's future. Harvard Business Review (June): 77-83. (Summary).

Porter, M. E. 1996. What is a strategy? Harvard Business Review (November-December): 61-78. (Summary).