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Woolworth Corporation: a case of creativity in action.

Woolworth Corporation: A Case of Creativity in Action


The major purpose of this article is best represented by a statement in Lee Bristol, Jr.'s A Source Book for Creative Thinking, which he attributed to his father. His father was asked: "What is your job as Chairman of the Board of your company?" "My job," he replied, "is to try to keep closed minds open." This approach represents the change in management philosophy we feel is needed and that actually occurred in the early 1980s in the Woolworth Corporation.

This article has two primary objectives. The first is to illustrate the need for the implementation of the creativity concepts, which is the central theme of this issue of the Review of Business, in contemporary organizations and to demonstrate how beliefs in myths by managers can block this implementation. The second objective is to demonstrate how the Woolworth Corporation overcame a number of myths, and successfully applied several creativity concepts to its restructuring in the early 1980s and continues to apply them in developing new store formats.

Myths Blocking Creativity

Based on their forty years of experience in managing, teaching management, and consulting with hundreds of firms, it has become obvious to the authors that managers agree that contemporary organizations must become more creative in their approaches to doing business. Maintaining the status quo is no longer a viable strategy. Terms such as "intrapreneurship" and "internal venture units" are firmly entrenched in the organizational vocabulary.

While managers recognize the need for creativity within their organizations, they do not always operate in a manner to promote creativity. An obvious reason for this reluctance is that change causes stresses in the organization, and is therefore not always welcome, even when management says that it is. What actually happens is that managers purport to operate on a set of objective criteria when in reality, they operate on a set of hidden beliefs and assumptions that, in fact, guide their decisions. These underlying beliefs, ill defined and unspoken, are the myths of management and are the cause of many poor decisions.

Myths always offer simple solutions or explanations to complex problems accompanied by apocryphal tales which, while interesting, are usually undocumented. Myth proponents point out that the myth applies to all problems, even those only remotely related to the apocryphal tale. For example, stories are told of how a single speech by a leader in industry resulted in saving a company from disaster. It was a "quick fix" that took care of all problems. While we know that this is not possible, many managers are searching for their "speech." Hence, myths offer stereotyped approaches to individual problems regardless of their complexity.

Reliance on myths replaces creative thinking for managers. Thinking is hard work so the myth allows managers to do whatever the apocryphal character did and to produce instant efficiency without thought. The myth also applies to everyone in all situations. If the approach offered by the myth does not work, it is not the manager's fault. It is simply the fault of others. Hence, the myth removes the burden of responsibility from the manager. After all, the manager took the correct actions; therefore, failure must reside with someone else.

"Most people think once or twice in a lifetime.

I have become rich and famous by thinking once

or twice a week."

George Bernard Shaw

American management must re-examine its beliefs, and return to the one thing that has always made it successful: thinking creatively. The major industry of the future for the United States is the formulation, use, and the exportation of new and viable ideas. Management must tap and direct this collective creativity in its organization.

Many managers today operate as they think managers did years ago. They are willing to accept the myths of the past to guide their actions today. Often these myths are neither true nor applicable. Managers are constantly searching for answers to their problems without defining their problems. Someone once said that the misguided credo of American management is ready-fire-aim. The problem is not in finding answers, but rather in raising the right questions. Managers are always ready to solve problems but rarely ready to define them. They search for solutions that are consistent with their set of beliefs not necessarily aimed at solving the problems. They accept such solutions not because they solve problems, but rather because they are not disruptive to their methods of operating.

Changing Beliefs

Changing beliefs and subsequent behaviors is not to be taken lightly. The behaviors that are exhibited today are not the result of reading a single book or attending a single seminar. Rather, behaviors are based on a set of beliefs established and nourished over a lifetime. They are not going to be altered easily or quickly.

"Habit is habit, and not to be flung out of the

window by any man, but coaxed downstairs a

step at a time."

Mark Twain

However, if managers are to put into practice the creative techniques addressed in this issue of the Review in order to attain high levels of efficiency, they have to understand that changing beliefs is imperative. Myths must be handled by understanding not only the myth but also the beliefs supporting it. It is essential that managers understand how to analyze myths, extracting the useful and discarding the inefficient.

Managers should detach themselves from present situations rooted in the mythology of the past. They should responsibly face major shifts in their way of life. Global precepts of the past no longer suffice to explain or solve current or future problems. Yesterday's practices will no longer suffice. If we are again to be in the forefront of the world, we must be at the forefront of thinking. We must dispel old myths and replace them with solid philosophies of managing. Most importantly, today's managers must create an environment for creativity to foster self-development, self-expression, and individual success.

Today's managers must envision an entirely new type of organization. These new organizations may or may not change in form but they will certainly be different in substance. Organizations, like managers, will only endure and prosper, if all participants are allowed to grow together.

As an example of how myths can be dispelled, and how creativity can be infused into an organization, the following segment of this article describes what has occurred in the Woolworth Corporation since the early 1980s. Set forth are the situation of the Company in 1982, its transformation since then, the results of that transformation, the management process it entailed, and finally the management philosophy underlying it.

The Early 1980s

In 1982, the Woolworth Corporation faced its greatest challenge - survival. Results at U.S. Woolco stores, then Woolworth's largest retail format, deteriorated from a very small profit in 1980 to a significant loss in 1981. That loss widened in the first half of 1982. Laboring under these large and mounting U.S. Woolco losses, consolidated earnings plunged to 61 cents a share in the 12 months through July 31, 1982.

Interest rates were very high by historic standards and Woolworth's peak short term borrowings were approaching $900 million, in addition common stock prices had drifted downward to very low levels. The Dow Jones industrial averages were just under 780, about the same level as in the mid-1960s or about 18 years earlier. Woolworth's stock price reached a low of just over $8 or about one-third of book value. At that point, the total market value of Woolworth's common shares was less than 1987's operating profit and less than one-sixth of the market value of the Company's stock. In a number of respects, economic conditions were the worst in nearly half a century. Economic activity was at the lowest levels and unemployment at the highest levels since the Great Depression, not only in the United States but in Canada and Germany as well. This situation is an example of environmental uncertainty discussed by Russell in an earlier article.

That was the situation when, in 1982, Woolworth undertook and quickly completed one of the most successful corporate restructurings in retail history. One of the two major features of that restructuring program was the discontinuance of the $2 billion Woolco business in the U.S. by closing down, over a one year period, 372 stores. The other was Woolworth's almost simultaneous sale, for just under $280 million, of its 52.6 percent equity interest in Woolworth in Great Britain. This restructuring resulted in increased resources for reallocation to new and more productive applications.

After the Restructuring

Since 1982, the composition of Woolworth Corporation has changed markedly. The general merchandise business has achieved increases in revenues and profits in each of the past five years, and all indications point to the continuation of this trend. Few general merchandise retailers, and not many of the larger specialty retailers, can make such a statement. However, Woolworth's specialty operations have eclipsed the general merchandise business. Specialty stores have accounted for 50 percent, or more, of operating profit since 1985, and this trend is also continuing. Of the more than 3,600 stores opened or acquired in the years 1983 through 1988, over 3,500 of them, or 98 percent, are specialty stores. In 1988, Woolworth Corporation added, net of closings, almost 1,000 specialty stores, bringing the total to 6,100. Woolworth opened or acquired 661 stores in 1987, and stepped that up very considerably to 1,154 in 1988. That represents a two year total of more than 1,800 new stores. In fact, as recently as the end of 1985, Woolworth had 4,100 specialty stores.

Woolworth made capital investments which totaled $450 million in 1988, including $176 million for acquisitions. Woolworth also purchased $18 million of common shares and paid $100 million in dividends. While this entire investment program was financed with internal cash flow and cash on hand, Woolworth still managed to increase net profits by 15 percent and finish the year with a modest cash balance and no short term debt.

To summarize Woolworth's creative strategy, the Company reoriented its basic business away from a heavy dependence on general merchandise and embarked on an aggressive specialty store development and expansion program, which was designed to avoid dismantling or weakening the general merchandise business. In fact, the general merchandise operations have flourished. The creative specialty store program was not a replacement for, but a supplement to, sustained strength and continued growth in the traditional general merchandise business.

Woolworth was creative in identifying and pursuing its new mission, as well as in broadening its array of specialty store formats by developing and acquiring new, distinctive, and unique specialty store formats. Woolworth now has 1,840 units carrying men's, women's and children's athletic footwear; more than 130 mall-oriented sporting goods stores; more than 270 costume jewelry boutiques in the U.S., Canada, and Germany; and more than 400 children's apparel stores in the U.S. and Canada.

Finally, there has been a broadening and a strengthening of the Company's multi-national operations. Not only has Woolworth reduced its dependence on mature general merchandise operations while simultaneously broadening its array of specialty store formats, but the Company has also become both more format and geographically diversified at the same time. Some of the Company's most successful specialty store businesses originated in Canada, including Lady Foot Locker, Sportelle, Northern Reflections, Randy River, and Raglans.

Woolworth's largest acquisition to date is Mathers Enterprises Limited, the largest specialty footwear store operator in Australia. For just under $70 million, Woolworth obtained 280 stores, producing sales of more than 100 million U.S. dollars. The acquisition of Mathers almost tripled the size of Woolworth's operation in Australia, put it into new product and geographical markets and provided opportunities for considerable buying, marketing and operating economies of scale.

Results of the Transformation

In the short run, creativity can be equated with improvements in day-to-day operations, such as above average profit growth. However, in the final analysis, management's ultimate and most enduring obligation is to increase the value of the shareholders' investment. This is the real measure of creative thinking, and the results of the creative process at Woolworth certainly meet this long run criteria.

As a result of Woolworth's transformation, its revenues have grown faster than store selling area; net income has grown faster than revenues; profits have grown faster than investment; and the Company's ROI (return on investment) has increased more than 50 percent since 1983. Finally, Woolworth's stock price has grown at a compound annual rate of more than 26 percent, and its annual dividend on common shares is $1.64, which is 82 percent higher than the $.90 paid in 1983.

Management Process at Woolworth

Woolworth successfully made the transition to profitable, growing specialty operations through a management process developed and adopted in the early 1980s. In principle, the management process itself is simple, easily understood and adopted as has been shown in many of the articles in this issue. The difficulty for any organization is in execution: dispelling the myths that keep managers from making the necessary changes. The process requires discipline for consistent, timely, periodic tracking and monitoring of results and performance relative to objectives, and the ability to take prompt and effective remedial action when the tracking and monitoring devices determine that action is necessary.

The first part of the process at Woolworth was the creation of a corporate mission statement representing the corporate philosophy. The mission is to provide value to consumers in North America, Germany, and Australia through distinctly individual but complementary retail businesses. Under the general guidance of corporate management, these businesses will generate levels of profit that not only satisfy investors and sustain long term growth, but also provide full, competitive financial rewards for employees and benefit the communities in which they live and work.

The next step in the process was the development and implementation of a "hybrid" type organization structure, consisting of melding highly decentralized operational functions and highly centralized staff, or "overhead" functions, such as accounting, legal, treasury, MIS, human resources, taxation, audit, and finance. Each of the operating units has virtually complete autonomy over buying, merchandising, advertising, distribution, store operations, and store location functions. Operating units are also responsible for development of new specialty store formats, or what Woolworth regards as the "R&D" function. Divisions are urged to be creative, entrepreneurial, and venturesome. The reasons for Woolworth's success in internally developing new specialty formats is that it is a "bottom-up" rather than "top-down" approach. Woolworth's position is that operating units are in a unique position to make such judgments for at least two reasons. First, they know their own operating, merchandising, and organizational strengths and weaknesses. Second, they are much closer to the pulse of the market and have a better insight into customer requirements.

Another feature of the management process was the decision to give major emphasis to specialty retailing, which has generally higher sales per square foot, profit margins, and ROI than does general merchandise. Not only was heavy emphasis put on specialty retailing, but Woolworth selected three techniques for achieving that objective: rapid expansion of existing formats, internal development of new formats, and acquisitions. While the mix has varied over the past six years, all three initiatives have made major contributions toward the objective of rapidly expanding Woolworth's specialty stores.

Finally, the way back to acceptable above average performance was predicated on establishing operational and financial objectives to be attained over a period of time. The rationales for establishing financial objectives included the following: it allows definition of what's expected of Woolworth by both shareholders and the public; it provides realistic, comparable measurement of management performance against its targets and competition; and it establishes a corporate framework to set individual objectives for operating units.

Woolworth established financial objectives by strategically planning what the Company should be. That decision led to channeling resources into specialty retailing with higher growth and return potential. These goals are the result of that decision. In establishing these goals, Woolworth involved all levels of management from the profit center level up to the board of directors.

How Woolworth utilizes its management process to establish, communicate, and track financial objectives also must be noted. The first, and most important part of the process, is strategic planning. Here each division develops goals and strategies consistent with the corporate mission statement. As part of this process, corporate management (the chairman's group) issues a return on investment challenge to each division. This challenge is consistent with the overall corporate goal.

The next stage is the development of capital requests to support the strategic plan. Capital allocation is based on: financial standards, the division's track record, the risk involved in the project, and the divisional organization's strength to accomplish its goals. The divisions, which are treated as profit centers, then prepare a five year financial plan based on the approved strategies and capital allocation. The five year plan measures performance against ROI challenges by profit center.

Then there is the development of detailed annual operating and capital budgets. Again, the same tracking system is used to measure consistency with financial objectives.

The next stage is the development of detailed capital evaluations for all resources allocated. These requests must meet cost of capital criteria. Through every stage, management continually tracks performance and achievement of financial objectives. Execution is vital, and this consists of strategic planning, combined with rigorous tracking and monitoring of results relative to established financial objectives.

The management process really works, that is, it results in first rate performance. Woolworth's ROI has seen a sharp and consistent uptrend, rising from 7.4 percent in 1982 to 11.6 percent in 1987. In this same period, the return on beginning equity has nearly doubled, rising from 8.9 percent to 17.0 percent. The return on equity rose from almost the lowest in the industry to among the highest.

Woolworth's Management


Woolworth's philosophy is applied in its daily operations, and is communicated by both words and actions to all of its managers. Suggestions are both welcomed and rewarded by upper management. Managers are not penalized for trying new ideas, but they are penalized if they don't. This is how Woolworth introduces new formats each year. This approach is productive even if only three out every ten new formats actually become successful. The store formats are physically interchangeable and, as such, when one format does not meet the criteria for success, another can take its place in the same area. Woolworth also emphasizes the human factor in this strategy by relocating managers and employees in other formats. Thus, individuals are not penalized for creative ideas that are not effective.

The programs and strategies for achieving goals and the discipline to continually re-evaluate objectives must be in place and every day the following questions must be addressed by management: are objectives still adequate or relevant, where are we relative to those objectives, and how rapidly are we accomplishing them.

In the final analysis, Woolworth is committed to excellent performance. Dedicated, relentless tracking and monitoring of performance relative to objectives helps Woolworth determine when to drop an unsuccessful venture. Foot Locker, Lady Foot Locker, Afterthoughts, and a number of other specialty store formats demonstrate conclusively that Woolworth's philosophy is successful. J. Brannam, Sacaldi, Face Fantasies, and Backyard, all introduced and subsequently discontinued, forcefully demonstrate that Woolworth knows how to cope with failure and avoid being dragged down by it.

Woolworth is now aiming for a 20 percent return on beginning equity, a 13 percent return on average investment, and a 12-14 percent average annual net profit growth rate. By 1993, specialty stores are expected to be generating 56 percent of the total Company's revenues, up from 39 percent in 1988 and 29 percent in 1983. Specialty retailing by 1993 is expected to produce as much as 75 percent of the total operating profit versus 52 percent in 1988 and 41 percent in 1983. These percentages for specialty stores are in a sharp ascent, not because general merchandise sales and profits are not growing but because specialty is growing even faster.

Summary and Conclusion

The Woolworth example illustrates how a number of the creativity concepts introduced in this issue of the Review can be applied successfully to an operating organization.

In the early 1980, Woolworth faced a high degree of environmental uncertainty and reacted by changing the innovative norms within the Company and decentralizing in much the manner described by Russell. One facet of its approach is particularly important. Upper management looked for creativity at the lowest level of their organization - store managers. This is the group that is most closely associated with the trends in the market, and this certainly has resulted in the successful implementation of the Company's strategy.

The Company also followed closely the precepts of creative planning introduced by Boone and Hollingsworth: an analysis of present resources to determine the capabilities of the organization, a forecast of potential threats and opportunities, the determination of a set of goals, and the development of a set of strategies for reaching goals. They also point out that planners must become more familiar and comfortable with predicting or envisioning, rather than forecasting, the future. Envisioning is a creative process, and is markedly demonstrated by the Woolworth Corporation case. Woolworth also realized that traditional forecasting must be supplemented with instinctive feelings, and one of the authors can attest to the fact that this is not always a comfortable process.

Boone and Hollingsworth also discussed the elements for a creative climate: trust, communication, a variety of personality types, a culture that supports change, and a merit system that rewards creativity. They feel that, in order to be effective, any creative endeavor must be accompanied by managerial support for creative thinking, and this support must be communicated to the entire organization.

Woolworth did establish a creative climate consisting of: trust so that people can try and fail without prejudice, an effective system of internal and external communication so that the organization and its members are fully aware of needs and goals, a variety of personality types within the organization and on its planning teams, a culture that supports change, a process to ensure the survival and ultimately the reward of potentially useful ideas, and a merit system that is based, at least in part, on the generation and implementation of innovative ideas. The Corporation realized that, in order to be effective, any creative endeavor must be accompanied by managerial support for creative thinking, and this support must be communicated to the entire organization. This was done in the process of Woolworth's restructuring.

Woolworth also regularly assesses its organization's creative climate and level of creativity based on: the number of new ideas being generated and the percentage of new proposals being implemented (while this includes a reasonable number of failures within the organization, it is acceptable since Woolworth believes an organization with no failures is not taking enough prudent risks), the flexibility of the organization's structure and financial and accounting systems to permit new approaches to survive, the originality of approaches to old problems and to new opportunities, the independence of judgment exercised by members of the organization, and the permissible degree of deviance from standard operating practices (not doing things "the way they've always been done").

The concepts do work as Woolworth's restructuring indicates, however, the real key is in dispelling the myths of management that block the implementation of creative systems within organizations.

We speak for all those associated with this issue of the Review of Business when we say that we hope that these articles will help you to dispel the myths that may be blocking you and/or your organization's creativity.

William Lavin is Executive Vice President and Chief Financial Officer of Woolworth Corporation in New York, New York.

A. Thomas Hollingsworth, formerly Director of the Business Research Institute and Professor of Management at St. John's University, New York, is now Dean of the School of Business at Florida Institute of Technology in Melbourne, Florida.
COPYRIGHT 1990 St. John's University, College of Business Administration
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Author:Lavin, William; Hollingsworth, A. Thomas
Publication:Review of Business
Date:Sep 22, 1990
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