In the May 1999 issue of The Systems Thinker, we focused on an unfortunate trend that has arisen in the retail industry: failure to file with the courts “reaffirmations,” or special deals that some stores have made with bankrupt credit-card customers in order to collect bad debts. As we saw, companies that neglect to file these arrangements risk FBI investigation and heavy fines (as Sears discovered).
A team from Arthur Andersen Business Consulting in London rose to the Workout challenge and sent in some intriguing causal loop diagrams capturing various aspects of the story—from the culture at Sears, to the role of financial pressure on retail stores, to buying patterns of individual customers. We’ve printed several analyses here.
Levers for Change?
As these analyses make clear, the retail-industry “reaff scandal is complex and can be explored from a number of different perspectives. How might companies begin to untangle these complexities and avoid the trap into which Sears fell? Becky Martin suggests three possible levers for improving matters: (1) watching for the pitfalls of an aggressive, “can do” culture, (2) resisting the temptation to neglect long-term sales strategy investments, and (3) insisting on stringent evaluation of new customers’ credit ratings. For any company that relies substantially on extending credit as a way to boost revenue, Sears’ story offers both some hard lessons and some valuable ideas for managing the intricate systemic structures at work.
Hooked on Credit-Card Revenue
Our first analysis tells the story of Sears’ reliance on credit-card revenue and the strain that supposed solutions like “reaffs” can put on a system. This analysis features a causal loop structure that is represented here as a composite of two contributors’ work: David Stephens from Arthur Andersen and Michael Crockett from Pegasus Communications.
In this scenario, general pressure to stimulate revenue leads the company to focus on credit-card proceeds as a possible financial boost (R1). But as the number of cardholders and debtors increases, dependency on credit-card revenue also rises. The company invests less in cultivating other sources of income. As a result, total revenue decreases, once again putting pressure on the organization to go after the “low-hanging fruit”: signing up more credit-card customers.
The Folly of Arrogance: A Cultural Fix That Failed
In Andrew Crossley’s analysis, the structure tells the story of a cultural “fix that failed.” The story begins with public judging of Sears (in this case) as an “exhausted, defeatist bureaucracy” (B1). This reputation would prompt many organizations to devote attention and resources to remaking their image, resulting in an “aggressive, can-do” attitude that does in fact achieve the desired effect.
Draining Long-Term Investment Capacity