Here’s some data on a major U.S.-based retailer used an example in The Halo Effect:
According to the report of independent industry analyst, Alex. Brown & Sons, during the early 1990s, “Qual-Mart” did these things:
- Installed point-of-sale terminals in its stores, which provided better information on sales by item and improved the inventory planning process.
- Expanded central buying to 75 percent of its merchandise, helping to reduce the costs of procurement.
- Modernized its inventory management and thereby significantly improved its “in-stock position.” One result: better management of seasonal inventory, boosting Christmas and Halloween sakes by 60 percent.
- Conducted physical inventory counts more frequently, not just once at year-end, resulting in greater accuracy and efficiency.
- Reduced its expense levels as a percentage of sales.
- Improved its merchandise assortment to match current demand trends, helping to raise sales.
- Installed a toll-free customer service number which led to a sharp improvement in customer satisfaction.
- Implemented a sophisticated client/server technology that led to better merchandise management and savings of $240 million.
Thanks to these many steps, “Qual-Mart” saw an improvement in inventory turns–that is, how many times in a year it sold its inventory, a key measure of retailing efficiently–from 3.45 in 1994 all the way to 4.56 in 2002. That’s a jump of 32 percent, not bad at all.
Then the book asks:
Would you say “Qual-Mart” improved its performance?
Of course it improved. It got significantly better at a lot of things.
But you might be surprised to find that this company, whose real name is Kmart, filed for bankruptcy on January 22, 2002.
Over the same eight years, Wal-Mart’s inventory turns went from 5.14 all the way to 8.08, up 63 percent. Wal-Mart had faster turns at the start of the eight-year period than Kmart had at the end. Kmart got better in absolute terms and yet fell further behind at the same time–and the gap between the two retailers was growing ever wider.
The Halo Effect attributes this assumption that improvement within the company automatically equals success to the Delusion of Absolute Performance:
Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.
While this idea has many implications in a management perspective, I would only point out two in this post:
Be wary of business advice that guarantees success but does not take into consideration your competitors.
Don’t be satisfied with your performance unless you’ve seen your competitors’.