Strategic lessons from Debenhams

Yesterday’s news cycle brought with it the announcement that Debenhams, a staple of the UK high street, was now in the control of its lenders. This kind of news is sad for the employees of Debenhams and certainly for its shareholders, but it is also a good opportunity for reflection. A business that can trace its history back to 1778 may be about to cease trading forever. For leaders in the retail and associated consumer industries, now is a good time to consider what lessons can be learnt from Debenhams and what could be done to seize the opportunity presented by its passing. I’m thinking about the topic of strategic responses to emerging events at the moment because of the seeming inevitability of a recession this year or next, which will doubtless bring with it many similar situations.

Before I get started, a disclaimer. I have no inside knowledge of Debenhams, I have never consulted for them, pitched to them or even met anyone in their management team. This post uses Debenhams as a topical case study on emerging strategy and opinions expressed are my own!

With that out of the way, as those of you who’ve read my book (thanks!) will know, I’m a believer in the O-O-D-A Loop as a basis for decision-making. If we follow Boyd’s structure, the first thing that an executive team therefore needs to do when presented with new information is therefore to observe the situation.

The facts are that a collection of banks and hedge funds now control Debenhams and can decide what to do with it. This is because confidence in the business’s performance was insufficient to allow the large financial debts the business had built up to be refinanced. Alongside those facts are a range of reasons why the business got to this position and some crucial driving forces that impacted them.

We can start by looking at what the Executive Team attempted to do to recover the business - their strategic concept. Debenhams stated ‘strategic plan’ covered five points:

1. Win share online
2. Defend their position in beauty through social and in store experience
3. Revitalise their fashion products
4. Change the in store experience
5. Accelerate cost reduction by saving an additional £20mn

As news hit the streets that this strategy has failed, a number of expert commentators have offered their opinions as to why. Going past the banality of one ‘veteran advisor’, who suggested that Debenhams ‘didn’t shift enough product’ (thanks for that), the consensus seems to be

• Debenhams had too many stores (fact check: 178 stores in the UK, Ireland (11) and Denmark; average lease term 18 years)
• The operating cost base was too high
• They were too slow to migrate online (fact check: c.£530mn of online sales, ranked #10 in the UK and growing 12% p.a. (7% market average)… [opinion] but are a multi-brand and therefore likely to be subscale in each of their categories)
• It was unclear what their proposition was and for whom
• The business was too dependent on discounting to drive sales
• Their debt burden was too high to enable them freedom of action (i.e. it impeded the speed of transformation that could be achieved)

What we don’t appear to have here are any shocks:

• No general issues with the capital markets causing a change in attitude that may impact other businesses
• No change to the Brexit-induced decline in the purchasing power of Sterling
• No change to import tariffs
• Given poor trading last year that resulted in a c.£500mn pre-tax loss, it seems unlikely that Debenhams are a leading indicator of a sudden change in consumer confidence

Each business serving the UK consumer market will also factor in their exposure to Debenhams as a channel. For example, the beauty industry is likely to be particularly impacted as Debenhams appears to have had a relatively outsized market share in this segment (6,000 of its 26,000 staff worked on the shop floor in that department and Management identified this as a core market to defend).

The demographics of the Debenhams customer is useful information here. Short of espionage, the best we can do here is to understand the demographics of the people living around their stores, particularly the differences between those people living around the 50 stores that were already due to close versus the stores they had chosen to keep open. Online, we can gain similar insights by looking at who they use as influencers, who follows them and converses with them.

When considering exposure, we should also consider the past behaviour of the new owners when they have been in similar positions. What is the history of the decision-makers? Do they have stock plays?

We now need to orient on these observations. The first question we should ask is ‘does this new information change our strategic goals?’ Do we now feel that we have a different mandate for society, our people or our shareholders? As individual leaders, have our objectives or perspectives changed based on this new information?

Whatever the answer, we will also need to ask a follow up question: ‘does the new information change our strategic concept?’ In this question we should go back over the distinct choices that we have made about how to realise our strategic goals, testing whether the new information validates or calls into question the underlying assumptions behind those choices. Shared clarity in those choices and assumptions (and in our goals) makes orientation on emerging information radically faster, thus enabling rapid, decisive action.

To help with that process, we should also have played out some scenarios together in advance of the news breaking. It has been apparent that Debenhams was in trouble for well over a year, yet I am sure there are many organisations in the market starting to think about the opportunity and threat for the first time now. Spending a couple of hours a month playing through a couple of scenarios set by the strategy team reduces the novelty of decisions that may need to be made at pace some time in the future.

A number of scenarios were in play a year ago:

• Management’s strategy succeeds; business gradually reoriented
• Mike Ashley/ Sports Direct takes over; new leadership and strategy
• Refinancing fails, lenders take over

We now know that it’s the latter. There are a number of scenarios for what the lenders might do with Debenhams now that they have control (which we could also have anticipated), including:

1. Continue with the current management and strategy and keep the business trading within the special purpose vehicle
2. Replace management and refresh the strategy, but keep the business trading within the special purpose vehicle
3. Close the business, sell all remaining assets to recoup as much value as possible

We can choose to be reactive and wait to see what happens or we may choose to be proactive and attempt to force the market into a different shape. For example, the best case for other retailers and brands who do not sell through Debenhams or who are only marginally exposed is to drive the lenders into a position in which ‘3’ is the best option. The reason is very simple: consumers spent £2.3bn with Debenhams last year. Better still, the evidence suggests that Debenhams were one of the businesses driving discounting on the UK high street and they had a number of own-brands selling over £100mn each p.a. All of that money is now back in consumers’ wallets, waiting to be spent (albeit we should be cautious in assuming that it would be spent off-discount… which might be good for some players).

The questions we could therefore ask ourselves are about how we can cause ‘3’ to happen: are an offensive strategy. Thinking on the fly, there would seem to be a number of lines of attack:

• Beauty
• Online
• Operational management

If we can disrupt one or more of those key domains then performance will get worse, perhaps leading to a cascading lack of confidence and an exit.

If I am exposed then I have other decisions to make. If Debenhams is a key channel (where to play) choice I have made then I need to decide whether to find a way of helping them survive and/ or to change my approach to my chosen customer set. I may even need to rethink my entire strategic concept. I imagine this will be on the minds of many smaller brands and manufacturing facilities that serve Debenhams this morning.

In summary, one main strategic lesson we learn from Debenhams is the value of having accelerated orientation on information by role playing different obvious scenarios in advance, thus creating prepared high level play books that can be implemented in support or mitigation of strategic choices.

Taking the wider perspective

This situation raises some wider questions about the strategies of incumbent businesses. Debenhams was not alone in having restricted room for manoeuvre through a build up of financial, positional and procedural debt. This forced the business into a defensive mode, from which the leadership attempted an orthodox strategy of:

• The creation of a Social Shopping destination on and offline (i.e. a focus on experience)
• A pivot to customer centricity in decision-making (at the stated expense of process optimisation)
• Investment in mobile as the primary digital channel, through a partnership with Mobify
• Simplification of core operations

The first three points are very typical of incumbent retailer strategies. If I were leading a similar business I would be asking myself whether this is actually a good strategy at all. Do customers really want an experience sufficiently badly that they are willing to spend sufficiently to overcome the burden of lease and other operating costs? Should I in fact be spending that money to attack my cost and procedural base such that I have more resilience?

What to do with physical space is clearly a burning issue for pre-digital businesses as they have an abundance of it and fraying customer demand for it. In that situation is an orthodox strategy (it’s retail… but more FUN!) sufficient or is something more unorthodox a necessity? If a business has 180 large city centre locations, is there something else that could be done with them? What would it mean to be truly a social enabler in those communities, on and offline? How could all that stock room space be used for different distribution models? I’m not advocating a particular answer, just for a way of thinking that accepts extraordinary situations often require unconventional answers.

This in turn makes me wonder about the nature of leadership in these situations. Can an industry veteran really turn around a ship in such distress or would it be better to bring in new thinking from outside, either as the CEO or in key executive committee positions? As I understand it, Debenhams had a very conventional Industrial Economy executive team consisting of:

• CEO
• CFO
• Technology and Supply Chain Director
• Transformation & People Director
• Marketing, Beauty & Digital Director
• Managing Director, Fashion & Home

Six executive positions is about half the average FTSE number (10). My immediate observation on the responsibilities of this group are that the roles are composites, making it hard for any individual to balance their priorities. There are also large overlaps - for example, between the remit of transformation, technology and supply chain. This is, again, common and typically represents the CEO handing responsibility for something important to a trusted lieutenant without fully considering how effectively that person can make decisions.

Speaking generally (again, remembering that I know nothing specific about the internal workings of Debenhams), my suggestion is to assign responsibilities in such a way that the outcome can be easily measured and owned. For example, one could regard the processes, supply chain and computing technology of the business as an operating platform that needs to be optimised. By creating a Head of Business Platforms with a mandate and target to radically reduce cost per transaction while improving speed and responsiveness, I may be able to simplify decision making and thus enhance my chances of success.

Since the shop network represented such a crippling problem, a similar organisation could consider a Head of Physical Space, who could rethink that domain. I also wonder whether it would have been possible (or whether future businesses will institute) a split between the infrastructure part of the business and the brand and customer service part. Trading the two separately gives more options to those leaders in creating sustainable businesses.

My underlying point here is that orthodox, incremental solutions are rarely the right solutions to complex, novel problems. An unorthodox, defensive strategy enacted by a new group of leaders might therefore have proved more effective than handing people who’d served the business (and in this case, other businesses) well in more conventional times expanded remits. Your governance choices, illustrated best by the makeup of the executive team, should be distinct and unique to reflect the unique context of the business. The people entrusted with those positions should have the specific skills they need for those mandates. If that means moving people on then so be it. Executives are the most highly rewarded people in the organisation. They need to perform like that and bring the experience that the organisation needs for the future, not the past.

In summary

This has been a long post, so I’ll summarise what we can learn in a few bullets:

• Responding to emerging strategic opportunities effectively in the moment entails forethought ahead of time - playing through scenarios should be a regular part of executive team meetings
• Complex, knotty strategic problems require unorthodox solutions
• Leadership of organisations in complex, unknown situations may require unconventional leaders who see the problem from new and different perspectives

I hope that was an interesting perspective… and that you don’t personally find yourself in the situation the Debenhams leadership have found themselves. I imagine this is a painful time for them and one not of their own making. It is always easier to solve a case in hindsight...