UK: HELLER ON MANAGEMENT - NEWS THAT PASSED SMITH'S BY.

UK: HELLER ON MANAGEMENT - NEWS THAT PASSED SMITH'S BY. - Residual brand strength and a new management may initially revive W H Smith's fortunes, says Robert Heller, but organic growth must be forcefully stimulated to prevent a return to Smith-style smug

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Last Updated: 31 Aug 2010

Residual brand strength and a new management may initially revive W H Smith's fortunes, says Robert Heller, but organic growth must be forcefully stimulated to prevent a return to Smith-style smugness

The ultimate test of top managers lies in their legacy. By that demanding criterion, the previous guardians of W H Smith's fate have failed. Last year's £195 million loss, the first in 204 years, was the inevitable consequence of a chain of squandered opportunities.

That wasn't for want of venturing. From its age-old base in printed matter and domestic stationery, Smith's voyaged into toys and typewriters, office and school stationery, gifts and recorded music, even (an especially awful excursion) into do-it-yourself. The activities shared one grave defect: Smith was rarely the true leader.

True leadership doesn't mean biggest: it means best. Smith's managed to become an also-ran in most of its activities. In some, it failed to protect its stunning franchise: its book business suffered from strange neglect; it appeared powerless as supermarkets gnawed away at magazine and newspaper sales. In others, it failed to build on the opportunities with which it was presented: for obvious instance, why didn't it dominate the booming markets in office-type gadgetry?

Everywhere Smith's moved, others outdid it. Waterstone's and Dillons sold books better, Ryman's was a far superior stationer, Our Price and Virgin retailed music with even greater superiority, while a host of firms flourished on PCs and faxes. Unable to beat 'em, Smith's bought 'em: but the dearly purchased virtues of Waterstone's and Virgin Our Price, and of the US interests, failed to lift the group, which was weighed down by the neglect of its original business.

Smith's had looked at its high street chain, disfigured by too many offerings for the available shelf and floorspace and too many low-profit lines, and concluded, wrongly, that it had no growth potential. That became a self-fulfilling prophecy, as the group failed to define or defend the crucial brand for any retail chain - the chain itself. The key question is simple: why should customers buy from my brand, and not from anyone else's?

In Smith's case, the question was often irrelevant: they simply didn't buy. Almost 40% of the passing trade just passed. People entered shops and left without buying. Those who did buy didn't buy enough. Nevertheless, the parental chain was still able to contribute a third of the group's total revenues of £2.83 billion and a healthy cash-flow. But too little of the cash-flow was directed back into the chain's core businesses to prevent the erosion of their franchise. Instead Smith's used too much of the cash-flow to wander into other businesses.

The group isn't alone in unbalancing its business portfolio. Unilever has found its way into 57 different businesses - and now admits that only half the 57 varieties are strong points. The Wall Street Journal attributed Unilever's meanderings to the fact that its origins date back more than 100 years; this applies even more powerfully to Smith's, whose longevity is a major factor in its failings.

Not only do lines of business accrue over the decades, so does a modus operandi. Smith's methods had advanced considerably from the time, not that long ago, when management control relied on directors recording their financial commitments by hand in a large volume. But the culture of a family fiefdom outlasted the book. The company's last-ditch stand against ending the Net Book Agreement partly reflected that attachment to the past.

With 549 stores, Smith's was in the strongest position to exploit discounting.

But the old culture was averse to merchandising books - sometimes, it seemed, even to selling them. It had rediscovered the charms of books after shelf analysis showed them earning more per foot than Matchbox cars. The literary harvest, though, couldn't be reaped by poorly stocked shelves.

The new management under Bill Cockburn is now grasping nettles that should have been eradicated years ago. Time and again, only financial disaster, experienced or impending, stimulates management into correcting even blatant failure. Smith's had toyed with reform but never grasped the truth that every success carries within it the seeds of its own decay - and that each specific shortcoming shows you where those seeds have been sown.

Smith's wholesalers used to track in remorseless detail the frequent failure of the old Fleet Street to deliver its newspapers on time. If management ever tracked the chain's own relative performance, it clearly didn't act effectively on what was found. Testing performance against the best standards of competitors, and against the judgment of customers, by a management that won't settle for second-best is the spur.

Recovery by itself, however, is not an adequate response to stimulus, especially if the turnround rests primarily on cost-cutting. Unless the organic growth of a turnround is forcefully stimulated, there's renewed danger that Smith-style smugness will develop. That can turn even sterling recovery into renewed failure - witness Woolworth, in many ways a similar case to Smith's.

Smith's residual brand strength should allow initial resurgence. But it will only be transformed into a lasting legacy if the new management builds the business by remembering at the peak what managers learn too late in the trough: that the better you get, the better you have to become.

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