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GM and Sears...slip sliding away

Over the last few weeks, both GM and Sears, while leaders in their markets, have announced a new round of lay-offs. This is a sad development to watch, especially since these lay-offs are unlikely to be the last.

I have watched these two great companies stumble toward oblivion throughout my entire working life. I have been fortunate to have nearly forty years in a professional life. In my earliest years, I consulted for a company who wanted to sell to Sears. In those days, the early 70s, Sears was then what Wal-Mart is today. They were extremely demanding and highly quality conscious. No products got into Sears without jumping over many hurdles. Today that no longer seems the case. Each year, Sears continues to lose market share to more successful retailers at price points above, below and comparable to them.

GM offers a similarly sad story. I recall that back in the late 70s, after the oil crises of the times, GM beat its domestic rivals to the market with appropriately downsized automobiles. Its market share at the time was about 50%. Today its market share is about half that… and it continues to fall.

These lay-offs are unlikely to be the last for Sears and GM. Lay-offs will continue until these companies find a way to reverse the market share losses both have suffered in an almost uninterrupted slide over the past generation. Economies of scale work against a share losing company. You may not see economies of scale as a company gains share in its industry because many industry leaders do not force them to develop as the company grows. On the other hand, you will always see the effects of economies of scale when a company shrinks. In that case, declining economies of scale make things a lot worse.

A company can not reduce its costs unless it has customer sales volume with which to do it. These lay-offs at GM and Sears are simply catching up with the excess capacity created in each company as customers leave them for greener pastures. As market share losses continue, there will be another period of catch-up. For everyone’s sake, I hope that both GM and Sears find a way to make their market shares grow again. If not, the future is bleak indeed.

Posted 3/7/08

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