Target Corporation just laid off 1,700 of the 10,000 employees working at its Minneapolis headquarters, with more layoffs likely to come.
The buzz here in the Twin Cities is that Target headquarters was what you’d expect of a corporate headquarters — too many managers, too few of whom contributed tangible value, resulting in excessive overhead and a culture of complacency.
In principle, a company that’s become bloated, sluggish and complacent in an industry as vicious as discount retailing does have to do something drastic. Also, good for Target for laying off headquarters staff instead of starving its stores of employees and merchandise.
And, while pointing this out isn’t particularly kind, many large enterprises do accumulate employees who mostly “hide behind the herd.” They look just like productive employees except for not actually producing very much.
Sometimes layoffs provide a smokescreen for clearing out the herd-hiders. If that was part of Target’s motivation for its layoffs we’ll never know.
What Brian Cornell, Target’s CEO, and the company’s other top executives say is that this move and related steps should result in a $2 billion reduction in operating costs that would make Target leaner and more agile in an effort to better compete with Walmart and Amazon.
To give you a sense of scale, Target’s capital budget last year — a decent proxy for what it invests in itself — was $1.8 billion. $2 billion isn’t chump change. It provides much-needed funds for Target to invest in increased competitiveness and profitable growth.
How will Target invest it?
Discount retailing lives and dies on competitive pricing. Target sells about $73 billion in merchandise each year. So … let’s see … carry the 1 … its savings could finance a 3% across-the-board reduction in prices or a much bigger reduction if Target targeted (sorry) specific product lines, channels, or geographies.
Or, the $2 billion could finance Target’s planned expansion of its grocery business. This is hardly a blue ocean strategy … there’s nothing novel or particularly interesting about Target’s grocery section. And supermarketry has notoriously high competition and poor margins besides (2% is common). But it would at least be a strategy into which the company is investing.
Instead …
As the StarTribune’s headline explained without a hint of irony, “Inside Target’s growth plan, buybacks play a strong role.” How strong? Over the next five years, Target plans to buy back $14 billion worth of its stock — $1.5 billion next year, $2 billion per year for the following four years.
Target will save $2 billion per year and spend every cent of it buying back its own stock, leaving nothing at all … nothing … to increase its investment in profitable growth.
It’s financial engineering at its finest.
How can you benefit from these insights?
Put yourself in a Target manager’s place. Your company is planning a round of layoffs, and you’re told what your department’s share of the pain is going to be. Four suggestions:
- Be discreet. As a manager you aren’t a free agent. Quite the opposite, you’re acting as your employer agent. So long as you accept your paycheck, your job is to carry out your employer’s plans, so long as those plans are legal. Disagree vehemently? Keep it to yourself.
- Do lay off your worst performers. You probably have an employee or three on your teams who you’ve kept because they’re nice people, not because they contribute all that much. You no longer have that luxury.
Yes, it’s a shame. Nice people deserve to make a living. But for reasons I hope are obvious, the workplace has to be a meritocracy, not a … nicetocracy?
- Don’t wait to tell them. Your nice employees deserved to understand, long before the layoff planning started, that first and foremost they had to be strong contributors and if they couldn’t be strong contributors in their current roles, it was up to them to find some other role in which they could be strong contributors. They’re nice people. You’re a nice person. Telling these nice people they aren’t succeeding in their current roles and need to do something to fix this might be an uncomfortable conversation, but it’s the nice thing to do.
So do it.
- Plan your own departure. While there are exceptions, companies whose primary strategy is financial engineering usually continue to shrink. When you find out yours is one of them it’s a great time to start exploring your own alternatives.
Because failure is contagious. You can catch it from your employer.
Somewhere I read that the first to leave the failing company get the best jobs and sometimes the only jobs if the market is shrinking. Not only that but the smartest leave first so that the average quality of employee deteriorates thus hastening the demise of the business.
Fortune articles were more positive about Target’s investments – e.g., >1billion into ecommerce – they want to compete more effectively with Amazon.
As it should. My question: Where will that money come from?
A couple questions:
1. Not being a financial person, who benefits from the “financial engineering” of stock buy-backs? I mean, what does it accomplish?
2. Are there any real-life examples of “blue ocean strategy” implementations that I can say “aha, that’s what they’re talking about”?
When companies buy back stock they retire the shares. The result – earnings per share goes up because the same earnings are divided among fewer shares. Which in turn tends to push up the stock price on the grounds that the same price to earnings ratio, applied to higher earnings per share, justifies a higher share price.
Blue ocean: Sure – Apple with the iPod, iTunes, iPhone, and iPad; Amazon with the Kindle/ePublishing and AWS are prominent ones. If you aren’t familiar with the concept, “red oceans” are already full; blue oceans are pretty much empty and ready to grow into.
Bob, thanks for explaining those. My understanding is lacking. 🙂 I feel like I’m still missing some concept.
1. So, the stock price can go up without actually being in higher demand in the stock market? I’m still trying to wrap my head around this. The stock value is increased without the company actually doing anything that it actually does (manufacture, consult, etc.) to merit it. As far as a short-term strategy to “trim the fat”, or maybe a strategy to slowly gain control over more stock, well OK. But otherwise it sounds like a slight-of-hand trick.
2. Blue ocean strategy sounds like “get there first”. How long can that last before someone else thinks they can compete and get a share of the pie? I mean, there’s a diff between being so strategic and/or creative as to create a marketplace and know that someone will fill it, versus actually participating in that new marketplace, which means competition. Don’t all those Apple products have some sort of competition?
1. You understand this one perfectly. It’s based on an economist’s view of the corporation. The theoretical perfect stock price is the sum of the discounted future earnings per share. Same earnings, fewer shares, higher earnings per share. The share price goes up without the company being worth anymore than it was the day before.
2. Absolutely. Blue ocean doesn’t mean you’re protected from competition. It means you’re constantly finding (or defining) new marketplaces. Because you get their first you get the kind of growth you only get when there are no competitors. By the time competitors get there, you’d better have found your next blue ocean.
It isn’t a strategy for the timid.
Bob, thanks for explaining those. I think I understand a little better now.
2. To continue the analogy, the companies with the blue ocean strategy ride a wave solo until the waves start attracting other folks to that body of water. Then the first surfer picks up their board to find a different water body. 🙂