Friday, December 28, 2012

Do or Die for Four Old Line Retailers ... Creative Destruction and The "Theory of Bureaucratic Displacement"

In the private sector, creative destruction rules. Private sector companies either grow sales by competing effectively for profitable consumers or lose in their attempts to sell those customers, and then lose investors and go out of business.

No such existential thing is in play in a public sector bureaucratic enterprise supported by taxpayer dollars. Then it's the "bureaucratic displacement theory" at work. As bureaucracy grows, additional and unproductive bueaucratic work displaces useful work. As a result, the added expense results in less useful output.

But in the public sector, the customer doesn't rule when government bureaucrats are calling the shots, so the increasingly unproductive government agency neither changes its ways nor ceases to exist. Think of government run and heavily taxpayer supported health care, K-12 public schools, universities, Social Security offices, the postal service, drivers licensing bureaus and such.

At least the vast majority of unprofitable bureaucratic private sector companies eventually change their ways or cease to exist, and they don't absorb taxpayer monies while in the process of doing so. Think of GM as a good example but for the government bailout, which I believe was just a temporary "fix" at best. In the end, the customer will rule when it comes to GM's future as a private sector employer.

But let's discuss retailing today.

Montgomery Ward used to be the second largest retailer in America behind #1 Sears. J.C. Penney was the third largest.

Kmart passed Montgomery Ward in the 80s to become #2.

At that time Wal-Mart was a little known regional discounter of low priced goods whose business was centered on customers in small towns in approximately 10 southwestern states. The idea was to bring big city prices to small towns through improved logistics, information and physical distribution facilties. The low cost Wal-Mart business model of everyday low pricing and minimal advertising worked as customers flocked to its stores. Companies like Target soon followed.

The word Amazon was known only as a rainforest or jungle in the Amazon Basin of South America.

Fast forward to today and the effects of capitalistic "creative destruction" where free to choose customers rule and retailers like Wal-Mart and Amazon prosper the most.

Through the process of creative destruction in retailing, Amazon and online selling have made huge strides throughout the U.S. retail marketplace, showrooming is a truly big deal, and direct to home delivery is becoming no big deal. In fact, it's commonplace. Logistics is the name of the game in customer service and low cost business models are the winners. Price, quality and delivery capability are still the name of the game, but the game continues to be played differently and consumers are the beneficiaries and the bosses as well.

Thus, what hasn't changed in retail is the power of consumers  to determine who wins the retailing game. That said, just about everything else has changed, thanks to the creative destruction of the marketplace where MOM still runs the show.

For Four Retailers, Do or Die is subtitled 'The New Year Has New Urgency for Best Buy, RadioShack, J.C. Penney and Sears:'

"While 2013 will be a tough year for retailers due to the tepid economic recovery, a few in particular face a critical 12 months. Their experiences highlight the challenges facing store chains, from increasingly cautious consumers to fierce online competition.

These unlucky retailers are going into the New Year with extra woes: slipping sales, questionable strategies and tight finances—which is why they are the ones to watch, and not in a good way.

Best Buy has been plagued by the retail phenomenon called "showrooming," where shoppers examine products in its stores but buy online through rivals. A quarter of shoppers who said they had showroomed had done so at Best Buy, according to a recent Harris Poll, so analysts will be watching to see if it can capture more of those sales on its own website.

J.C. Penney  has been trying to ditch its image as an old-fashioned department store where Middle America went seeking bargains. But its rapid and radical makeover has left it burning through cash and struggling to attract shoppers, leading to questions about how long the company can afford to stick to its new strategy.

RadioShack Corp.'s bet on mobile phones and tablets has backfired. It has sold more of these low-margin devices but is making less money than it did retailing old standards like cameras and computers. Though it staved off a cash crunch earlier this year by suspending its dividend, mounting losses cloud its future.

Sears Holdings sales and profits continue to slide. The 124-year-old department store chain has been shoring up its liquidity by selling itself off in pieces—but some of its remaining assets might be tough to unload when retailing is under pressure."


Summing Up

Private sector businesses stay viable through constantly reinventing themselves in the face of new competition and by continuously finding improved ways to serve customers. Otherwise they cease to exist.

On the other hand, public sector taxpayer supported government agencies like the postal service, public schools, drivers licensing bureaus and countless other OPMers are under so such competitive pressure.

The all important customer serving and productivity enhancing feature of creative destruction is largely missing from the public sector, and it shows.

This brings us to a general rule known as the "theory of bureaucratic displacement." The theory posits that in a bureacracy an increase in expenditure is accompanied by a fall in production. In other words, the greater the spending, the less productive the bureaucracy will become.

The system functions as a 'black hole' where the input of more resources yields less useful output. Sounds like the typical government entity to me.

Thus, as government bureaucracy grows, societies tend to become less prosperous, and individual citizens suffer lower living standards and also enjoy less individual freedoms as the OPM way replaces the MOM way.

And with respect to the phenomenon of "bureaucratic displacement," the more bureaucratic an organization becomes, the greater the extent to which useless work displaces useful work.

To repeat, bureaucratic displacement suggests that as government grows and the role of MOM based decision making shrinks, freedom of choice decreases and useless work acts to replace useful work. It's systemic, pure and simple.

Of course, bureaucratic displacement frequently is in action in private sector companies as well. The case of GM is a good example of bureaucracy gone bad. And it very much looks like Best Buy, J.C. Penney, RadioShack and Sears fit the bill, too. As did Montgomery Ward and Kmart before their demise.

But there is one huge distinction and fundamental difference in the effect of bureaucratic displacement in the public and private sector workplaces. Eventually private sector companies who practice bureaucratic displacement through rigid internal rules and lose focus on better serving customers cease to exist. That's creative destruction at work.

Count me on the side of creative destruction where free to choose customers spending MOM are in charge. And definitely count me as totally opposed to the tendency of all organizations, public and private alike, to become more bureaucratic and displace useful work with more expensive and unproductive useless work.

That said, there's an effective remedy for bureaucratic displacement in the private sphere where MOM reigns. It's an existential thing.

No such remedy exists where the political aristocracy reigns in the public sector.

What a shame that is for customers, taxpayers and citizens where the only winners are the aristocratic politicians --- of both political parties.

OPM or MOM. It's that simple.

Thanks. Bob.

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