by Randolph A. Pohlman and Gareth S. Gardiner
with Ellen M. Heffes
We are a society that often holds up successful athletes
as role models for our young people. This is a process that involves hazards,
since some well-known athletes run amok -- alcohol, drugs, violence, and
sex are the usual culprits. When such a role model strays seriously, we
need to do some revisionist thinking and quickly, before we move on to
the next choice. We are being a bit cynical, of course, but we business
authors also run a serious risk when we hold up a single company as a
role model for all good businesspersons to follow: Even our most distinguished
corporations can also run amok, particularly in a customer-driven, rapidly
changing, globalized economy and they can do so quickly. Like, Norstrom.
Unexpectedly, late in the 1990s, Nordstrom experienced
a period of intense stress, precipitated by the usual villains in the
business world: customer defections resulting in slowing sales, weak earnings,
erratic stock performance, and some previously undiagnosed -- but very
real -- organizational problems. As Seanna Browder of Business Week comments
in an article tellingly entitled "Great Service Wasn't Enough," Nordstrom
ran into serious problems after it launched an aggressive expansion strategy:
"It looked like a slam-dunk. In the late
1980s, Seattle-based Nordstrom Inc. set the gold standard in department
store retailing. Its reputation for quality, fashion, and customer care
was unparalleled, its customers among the most loyal in the industry.
And while other chains were still reeling from the buyout craze of the
decade, Nordstrom profits were growing by double digits. So the decision
to expand beyond the West Coast seemed like a no-brainer."
Things didn't work out quite that way, however, as
columnist Browder notes.
The underlying problem was apparently a growth strategy
that had not been fully thought through: Important value drivers had not
been juggled and balanced, nor perhaps even taken into consideration.
Interestingly, the company’s organizational culture, which had served
it so well when it was just a regional chain, became a serious stumbling
block when Nordstrom decided to go national. The firm had long used a
totally noncomputerized and "quaint" system of handwritten notes kept
by associates on customer preferences. These had worked well previously,
but were totally inadequate after expansion, causing the company to lose
track of changes in fashion trends -- the same illness that afflicted
Levi Strauss when teen-aged buyers of blue jeans turned away from its
traditionally successful brands and styles. In market-based management
and Value Driven Management, anticipating changes in customer demands,
which can be fickle, complex, and volatile, is one of the most difficult
and stressful challenges any company can face, particularly in the garment
industry.
In addition to the totally swamped system of manual
tracking, Nordstrom failed to centralize common functions such as buying.
Its system of decentralized buying (Business Week’s Browder points out
that it had 900 buyers chain-wide, when competitor R. H. Macy & Co. had
only 100) drove vendors crazy because it resulted in a blizzard of conflicting
or duplicative orders. The marketing effort was also fragmented because
its ads were created regionally by in-house teams. Earnings and the company’s
share price began to suffer: Net income in 1996 dropped 11 percent to
$147 million, and the share price -- which had been as high as $53 in
1996 -- dropped as low as $34 in 1997 before it recovered somewhat, and
late in 1999 was trading in the $30 to $40 range.
Financial damage resulting from a failed strategic
initiative may be relative, and Nordstrom has very deep pockets, but the
company was under intense pressure not only from industry analysts but
from its other constituents to take action to do something to keep customers
from continuing to bail out. And there was no question they were doing
just that. Nordstrom had missed some major emerging trends in women’s
fashions, such as a switch to more casual styles suitable for today’s
more informal work environments.
In the short-term, perhaps predictably, Nordstrom did
what most firms, including world-class ones do in a crunch: It cut costs.
The number of buyers was reduced by nearly 20 percent, the company was
organized into divisions, and inventory was cut dramatically, all of which
resulted in a jump in net income to $207 million for the fiscal year ending
in January 1999. This move was an obvious attempt to appease investors
and analysts.
Long term, however, strategic changes also needed to
be made and some important changes have been made. A brand new multimillion
dollar data center has been built in Denver to handle basic and vital
information processing tasks, such as developing a database on buying
habits and trends and using the new computers to manage inventory more
efficiently. Nordstrom is the last of the major retailers to computerize
operations management, and Business Week comments that event he salespeople’s
handwritten notes that had historically been placed in binders are now
going online. The company has also made a move into internet retailing,
although its e-commerce web site is not yet profitable. The goal of all
this activity, of course, is increased profitability: to install a more
attractive and fashionable merchandise mix that will bring customers back
into the stores, and to increase same-store sales, which had dropped by
over 2 ý percent per store during the company’s slump.
Perhaps most interesting however, is the fact that
Nordstrom’s Office of the president, which currently consists of six brothers
and cousins who hold the title of Co-President is being restructured.
Several new outside executives have been brought into incorporate a new
perspective into the firm’s decision making process. In addition to this
important move, the company also hired a consulting firm to assist Nordstrom
in its strategic management process. The firm, Marakon Associates, has
already recommended that the company create more clearly defined areas
of responsibility for the six co-CEOs, so that they work more effectively
together as a team and make better decisions -- as well as not getting
in each other’s way.
From the point of view of managing stress, and processing
information more effectively, it appears that Nordstrom is on the right
track. During its expansionary growing pains, and accompanying sales slump,
its cost-cutting measures were undoubtedly necessary to stabilize the
firm in the short run, and prevent a wholesale sell-off of its stock.
This is hardly a wildly over-reactive and panicky reaction to a real problem,
particularly since long-term and strategic moves -- like the development
of its computer center in Denver -- were also being made that are almost
certain to create value for Nordstrom in the future. While a history of
success and a reputation for being a world-class company are no guarantee
of continued success, such companies (IBM and LEVI Strauss are two that
rapidly come to mind) seem to come through periods of strain and stress
successfully, emerging as even stronger entities. From our point of view,
this is in large part because they have never lost sight of the fact that
their mission is to create value for all their constituents over the long
run, which gives them an inner resilience and ability to persevere that
not all firms share. The authors are reminded of the wise words of the
late Roberta C. Goizueta of the Coca-Cola Company, "To make yourself of
unique value to your shareowners over the long haul, you must also make
yourself of unique value to your consumers, customers, partners, and fellow
employees over the long haul."
Randolph A. Pohlman, Ph.D., is dean of the School of Business and Entrepreneurship
at the Wayne Huizenga Graduate School of Business and Entrepreneurship
Nova Southeastern University in Ft. Lauderdale. Gareth C. Gardiner Ph.D.,
is associate professor of management at the same school. Ellen M. Heffes
is owner of EMH Communications, based in Boca Raton.
Excerpted, by permission of the publisher,
from Value-Driven Management: How to Create and Maximize Value Over Time
for Organizational Success by Randolph A. Pohlman, Gareth C. Gardiner,
and Ellen M. Heffes. Copyright 2000, Pohlman, Inc. Published by AMACOM,
a division of American Management Association, New York City.
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