Of Mergers and Brands

Quality of Customer Experience(SM) Suffers in Most Mergers--Thoughts about Sears/Lands' End and HP/Compaq

May 16, 2002

Can merged companies, such as HP/Compaq and the proposed Sears/Lands’ End maintain a superb customer experience? After all, these mergers are about more than just brand name; they are all about reaching, and satisfying, more and more customers.


My first reaction to hearing about the proposed merger between Sears and Lands' End was dismay. My second reaction--which came within 30 seconds was, "Of course, this makes sense." The dismay was emotional and visceral. And it's not to be underestimated. I was reacting, at a gut level, as a loyal Lands' End customer. "Oh no," I thought, "the brand experience I've come to know, love, and trust is going to be diluted and diminished." You see, the Lands' End brand experience isn't just about the ease of online and catalog shopping and the great, supportive customer experience. It's also about comfort. The clothes are comfortable--that's the bottom line. This is a brand you wear, not because you want to look good, but because you want to feel good.

The Sears brand is much more tarnished in my mind. It's utilitarian, useful, and somewhat problematic from a customer experience standpoint. My happy childhood memories of pouring over the toys section in the Sears Christmas catalog have long been dimmed by unpleasant sessions on the phone trying to order spare parts for an old rider mower that goes through them regularly or receiving two dishwashers when one order "got lost." On the positive side, Craftsman tools and sturdy appliances are the things I now associate with Sears.

So, why does this merger make sense to me? From Lands' End's standpoint, it gives the direct marketer a massive retail store presence. In this customer economy, customers are making it clear that they prefer a multichannel strategy. From Sears' standpoint, there are two big benefits:

* Customer Base. First, Sears gains a loyal customer base with a high customer lifetime value. Lands' End has the advantage that all direct marketers have. It knows its customers. In fact, Lands' End knows everything that I have ever bought and all the members of my extended family for whom I have shopped. Sears, on the other hand, may know that I have a long-unused Sears credit card, but it has no history of most of my transactions since, as with most retailers, I paid cash or used a third-party credit card.

* Strong Brand. But, what Sears' executives really wanted (and presumably valued) out of the Lands' End deal, apparently, was the strong apparel brand that would enable Sears to compete more effectively with Wal-Mart, Target, and others.

Direct Marketing Culture versus Retail Culture

Many retail executives have warned me that the merging of these two distinct business models and corporate cultures--direct marketing versus retail--is very difficult to pull off. However, Sears may still have enough of its old catalog/direct marketing DNA left to make it somewhat easier for the two cultures to combine the best of each one.

What Will Customers Expect?

First, Lands' End customers will expect no change in the quality of the customer experience they have when dealing with Lands' End online, by catalog, and over the phone. When they walk into the Lands’ End section in the Sears stores, they'll expect that brand to be well-represented. They'll be disappointed if merchandise isn't well organized and easy to find. They'll be looking for comfortable shopping surroundings to match the comfort of the clothes. They'll expect to find a comfy play area for their toddlers nearby.

The Challenge: A Seamless Cross-Channel Shopping Experience

Most of all, Lands' End customers will expect and demand a seamless experience. They'll want to be able to shop online at the Landsend.com Web site or leaf through the catalog and pick up the phone; then they'll want to know if the Sears store in their neighborhood has that item in stock; if so, they want it to be held for them so they can run by and pick it up. And, if they're in the store and want an item that's not in stock but is offered in the catalog, they'll want to be able to find it, order it, and have it delivered to their homes. I wonder if Sears is really up to the challenge of delivering a Lands' End-style blended channel strategy?

Unless Sears is willing to invest heavily in providing a seamless branded experience for its customers across channels and touchpoints, the Lands' End brand is likely to suffer and the value of its customer franchise is bound to diminish.


Critique of HP's New Organizational Structure

I give the new HP a B- for its merger design and an A+ on execution after the first 10 days. At first, I was very impressed by the speed and completeness of the detailed game plans and the attention to customers' concerns. But I'm disappointed on one major score. I had hoped that Carly Fiorina and Michael Cappellas would organize their new company around customer segments, not product lines. HP had an historic opportunity to kick the entire IT industry in a direction that it has been avoiding (at its peril) for years: to design the P&L structure of the company around customer segments with product lines supporting those customer groupings. This is the way the "old HP" was ostensibly organized--into two consumer and business companies, with four major product and service delivery business units supporting both of them.

But the new HP is not as bold. Instead, it is organized into product-focused businesses with geographic representation in each business unit. Product line focus is front and center. Customer focus is the "go-to-market" strategy.

This is, unfortunately, the way systems and software companies have been historically organized. It breeds an over-emphasis on product marketing and product line P&Ls and makes it difficult for companies to do as good a job in customer marketing, customer experience, and in developing customer P&Ls.

The HP/Compaq merger team did identify five distinct customer businesses--corporate, enterprise, commercial, SMB, and consumer/microbusiness--each of which accounts for $10 billion of revenues. And the new HP has organized its go-to-market model around these customer segments, with dedicated account teams, partners, resellers, and retailers as well as direct and teleweb channels coordinated for each customer segment.

HP has also targeted a set of vertical markets it will pursue with the help of its partners and identified those verticals in which it will not compete. But the "real" HP organizational structure is four business groups--representing the different clusters of product solutions--imaging and printing, personal systems, enterprise systems, and services.

I imagine that this was the best the company could do, given the massive product line, organizational, and geographic integration that needs to take place. It's probable that the strategy team looked at the options and decided to coalesce the organization around product lines and within geographies first, anticipating that the customer focus would emerge naturally as customers vote with their wallets and demand certain behaviors. And HP is relying on the Total Customer Experience business process and measurement systems to keep everyone focused on doing what's right for customers.

From our perspective, HP missed out on an important opportunity to redesign itself from the customer in, as opposed to from the products out.

Superb Merger Execution Under Way

Carly and Mike hosted a meeting with many of their top joint customers on the first day of the merger. Customers got the first look into the new HP, before the financial or industry analysts did. That's as it should be. The three-year product road maps, which were promised to be unveiled within 30 days of the merger, were ready on day 1. The organizational structure was outlined and the top 300 managers identified and deployed. The sales teams were prepped and equipped to meet with their accounts (large customers got to choose their account executive, of course). And the HP corporate calendar has meetings scheduled for the next year to handle everything from the half-day weekly integration issues meetings that Mike and Carly will co-chair for the next 12 months, to the Total Customer Experience metrics reviews, to the quarterly business reviews, the strategic business reviews, and the new business initiative process. We give the merger execution an A+ so far. Of course, there's a huge amount of work to be done and lots of unforeseen hurdles to overcome.


Of course, what HP is doing is building a new, revitalized branded experience for customers. The new HP brand is built out of the best of both companies' DNA. It has been forged by overcoming adversity.

So far, the brand that the new HP is conveying is safe, secure, stable, and competent. There's not a lot of sizzle. Not a lot of edginess. And, despite HP's and Compaq's claims to innovation, that innovative spirit is playing second fiddle to the other brand attributes at the moment. HP is trying to build a trusted utility. Think of banking and trust without the bureaucracy. That's the image HP wants you to feel. And, most of all, the new brand is being shaped by the two top executives' core values.

Carly & Mike: A Winning Team

Respect, commitment, and caring are the words that come to mind when you see or hear CEO Carly Fiorina and President Mike Cappellas in action. You can tell by watching the smooth teamwork between them that there are no ego games that will get in the way of this merger execution. They are comfortable with one another, complimentary, respectful, and clearly share the same mental model. So, even when one of them improvises, the other is comfortably able to pick up the thread and continue the riff.

How does HP's top executive style represent its brand and go over with customers, compared to that of the competition? We believe that top customer execs will warm more quickly to this management style than to the equally in synch, but rather belligerent and arrogant, camaraderie of the Bill Gates and Steve Ballmer show. And, of course, Scott McNealy, minus Ed Zander, displays a pugilistic zeal that is often unsettling to business execs. Like Carly and Mike, Sam Palmisano, IBM's new CEO, also projects the confidence, openness, and business savvy that customer execs find reassuring.

Trustworthy and Responsive

HP is letting us know that it wants to keep and earn customers' trust. Right now, that's the brand experience that the new company has to bet its considerable business on. In two years, HP may be able to come out with a new, hipper brand experience.

But, for the time being, this is probably the right brand image. It's one the new company will still have difficulty mastering.

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