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Managing Change at the Worlds Most Admired Specialty Retailer

EDITORS NOTE: Leonard A. Schlesinger is vice chairman and chief operating officer of Limited Brands. He also sits on the companys board of directors. In this capacity, he is responsible for operational and financial leadership, on an enterprise-wide basis, of the functions that support the operations of Express, Limited Stores, Victorias Secret Beauty, Stores, and Direct, Bath and Body Works, and the White Barn Candle Company.

Schlesinger joined Limited Brands in October 1999 as executive vice president of organization, leadership, and human resources. Prior to his appointment he served as senior vice president, counselor to the president, and professor of sociology and public policy at Brown University (1998 – 99). Until October 1998, he was the George F. Baker, Jr. professor of business administration at the Harvard Business School and a member of the Harvard Business School faculty from 1978 to 1985 and 1988 to 1998. He holds a bachelors degree in American civilization from Brown University, an MBA degree from Columbia University, and a doctorate in organizational behavior from Harvard Business School.

Schlesingers academic research and organizational consulting focused broadly on the areas of service management and organizational change. He is the author or coauthor of nine books, including his latest, The Value Profit Chain (Free Press 2003), The Service Profit Chain (Free Press, 1997), and The Real Heroes of Business and Not a CEO Among Them (Doubleday Currency, 1994) and has written over forty articles for academic audiences as well as The New York Times, Fast Company, and Harvard Business Review

EDITOR: There are major changes underway at Limited Brands throughout the corporation. Would you summarize some of those recent initiatives that have taken place here?

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SCHLESINGER: This is a company that has recently marked its fortieth anniversary in the specialty retail business, which is an accomplishment in and of itself. We have been able to survive because weve been willing to change as the business climate changed. In the early 90s, we managed the transition from knock-off design and speed-sourcing to original content, higher quality, branded goods and branded retail concepts. To make that change we had to build new skills, new capabilities, and add new talent to the organization. The end result is that we have managed a process of enormous change…in business strategy, in the talent agenda, in the organizational agenda…all the while maintaining our relevancy to what the America consumer wants.

EDITOR: How has this transition affected loss prevention?

SCHLESINGER: We had a loss prevention model that was largely rooted in the traditional security model of the 60s, 70s,and 80s. Over the last several months we have attempted to update that model and to shift its focus to one that is much more rooted in education, training, and support of our operating brands. This has required a fairly large talent shift and a substantive organizational shift from a brand-based loss prevention activity to one that is now enterprise-based.

EDITOR: Are you seeing results yet from this transition?

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SCHLESINGER: We increased our field coverage by over 100 percent almost overnight without any increase in cost. But in a larger sense, what weve been able to do conceptually at this point is nothing short of amazing. The proof obviously will be in the pudding. But the leadership of the loss prevention function has been quite willing to put their jobs, and their money, where their mouth is, and to establish loss prevention and shrink targets inside the enterprise; the likes of which we have never met before.

EDITOR: The loss prevention function has been in your pyramid of responsibility for a while, but you now have Paul Jones, the vice president of loss prevention, directly reporting to you. What caused you to make that decision?

SCHLESINGER: Loss prevention was a function that historically had not been top of mind with the line leadership of the organization. With the dramatic changes in the organization, I wanted to make absolutely clear to the enterprise that there was no doubt about the nature and magnitude of our commitment going forward. From my perspective, there was no better way to make that point than to put myself on the line alongside Paul. I have communicated every step of the way that [CEO] Les Wexner and I are fully supportive of the strategy, the program, the data that underlie it, and the loss prevention leadership teams ability to carry it out.

EDITOR: Paul has been here less than a year. In light of the changes underway in the corporation, tell us about the processes that you went through in hiring a new VP of loss prevention.

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SCHLESINGER: I was convinced that I had an inadequate understanding of the function of loss prevention in the field. I get your magazine and other magazines that I read, but I didnt know how much of it was the hyperbole of vendor-generated press releases and how much of it was real.

EDITOR: We dont publish vendor press releases.

SCHLESINGER: Thats good. Coming out of academia, I tend to go to the Internet and do my own research. I kept running up against the Hollinger studies (National Retail Security Surveys conducted at the University of Florida, He seemed like a well-trained sociologist with an academic appointment, but I didnt know him from Adam. So I asked my staff to get him up here and have him spend time with our senior management so we could share with him what we have, what we dont have, what were thinking about, and to have him share from his own perspective what the state-of-the-art is in the loss prevention industry.

We hired him as a consultant to help us noodle through this, recognizing full well that we needed to go outside of the organization just to get our groundings. A large part of what we did was translate his input into the broad elements of a go forward concept for the function. Once we got to a point where we had alignment with the store’s organization, then and only then did we go to the market looking for talent.

The vast majority of people would simply go to the market and say, I want a loss prevention person. However, if we didnt know what we were looking for broadly, we could not have accurately assessed the talent that came through our door. It would have been just a personality contest, and we would inevitably have made the wrong choice.

I assumed whoever we hired would know the tactics of LP. I think I have enough appreciation at this point about the function to be able to delineate things that make sense from things that dont, and how it all adds up. But I dont perceive myself or anybody else in the organization to be the repository of tactical expertise. What I do believe is that we have to have a point of view about what we want, what the expectations are for what the function can achieve, and the way we want the function to achieve it. So, at that level, Dick Hollinger was very, very useful.

EDITOR: Since you have undertaken the reorganization, as the vice chairman and COO, what are your expected outcomes from loss prevention?

SCHLESINGER: Its really pretty simple. Number one, I expect to have a level of partnership between the loss prevention function and the stores function primarily, thats significantly better than weve had in the past. This partnership must develop the capacity to not only self-diagnose their loss prevention situations, but be actively involved in developing and managing their environments, including both safety and loss prevention.

Number two, I expect the organization to have dramatically enhanced processes and procedures to track and manage inventory and assets. I think we have the basics down as well as anybody, but the disciplines have to be defined in a systematic way across all of our brands simultaneously. Throughout all this, I expect to see the perception of our loss prevention organization rise to among the most responsive support functions that exist in the company. Further, I expect to be able to tie their support of the respective line functions and the efforts of their work directly to the P&L, and be held accountable for investments in that function against the returns that they drive.

Finally, which in some respects is first, I expect them to be major contributors to developing and managing the environment where everybody who works here feels safe and secure. As we find ourselves in very uncertain times now with war and threats from all over the place, I need to know that we have crisis preparedness activities inside the organization that are allied with loss prevention and safety services in a seamless way. This is necessary so that people feel comfortable, the business assets are protected in a significant way, and we are generating economic returns.

EDITOR: You are the author of nine books. Lets talk about the most recent one, The Value Profit Chain. I was taken by your comment that some of your research encompassed not only many companies and executives, but also the New York City Police Department. How was that experience relevant?

SCHLESINGER: I would argue that the reorganization proposal that Paul has developed here and the logic that drives the reorganization activity here is strikingly similar to what happened in New York City. The first step was to do a systematic analysis of all of the resources that you have at your disposal and reallocate the resources against the needs. We hadnt done that here in years, but that was a part of the LP teams start-up process. We looked at our resources in safety services, our resources in the field, in contract guards, in technology, and in the office, and asked the question, Where is the need?

For example, one of the issues that Paul examined in his upfront analysis was understanding how much time our people were actually spending in the stores. The same issue was addressed in New York City where many senior police officers held desk jobs in great neighborhoods working days. Yet the realities were that crime was generally at night in bad neighborhoods. Bill Bratton, the head of the NYPD then, came to the conclusion that you have to match resources to the needs. So he moved the well-trained desk sergeants out of their administrative offices and put them on the streets doing community policing. That was a huge change.

The second part of the strategy was to not let little problems become big problems. Historically, we have not had enough data and enough intervention to understand issues until they got large enough to get noticed. You have to have more systematic control and check points and more diagnostic points up front with higher levels of awareness within the stores organization in the field, so that little things get identified early. If you are spending a fair amount of time helping people on the little issues, fundamentally I believe that the probability of having big issues dissipates dramatically.

And so if you accept the fundamental reductions in crime in New York City and the restoration of nightlife and the publics perception of safety were a result of rigorous measurement and matching resources with needs, I maintain that reductions in shrink combined with the better feeling of our population can be achieved in much the same way.

EDITOR: You talk in this book about hiring for attitude and training for skills. Talk a little bit about that.

SCHLESINGER: The vast majority of our stores’ jobs dont require profound levels of training or enormous depth of understanding of complex phenomenon. They are primarily individuals interacting with customers. I can teach you how to do the tactical skills. I cant teach you to be a warm, nurturing, caring individual. So the bottom line is that if someone comes through the interview process and doesnt bring those skills to the equation, the likelihood is that working for me isnt going to change their orientation towards life. Its been verified in countless numbers of settings, but most profoundly with Herb Kelleher at Southwest Airlines. If you dont have the right disposition, the right level of optimism, the right orientation towards the day, theres nothing that working on your environment is going to do. All other things being equal, I start with attitude.

EDITOR: What an interesting concept from an LP standpoint to hire positive, energetic, enthusiastic individuals in loss prevention, because you have the same expectations of that group as you do of any other group.

SCHLESINGER: I agree with the first Southwest Airlines ads when they started hiring against this profile, which read, Fly Southwest AirlinesWhere attitude is more important than altitude.

EDITOR: You also talk about something that is a major challenge for retailers and that is breaking down the cycle of mediocrity. Retail shrinkage hasnt moved very much in the last 10 years. The longer that goes on, it becomes acceptable. But doesnt that simply accept mediocrity?

SCHLESINGER: Theres no question about it. I read your interview with [Wal- Mart Stores CEO] Tom Coughlin [The View from the Top].One of the issues that he addressed in the interview was recognizing that their current performance was unacceptable and setting targets that were so low as to almost be laughable. Thats exactly what weve done in the past.

Now, weve basically said, Were going to set a very challenging goal…a goal weve never met before as an organization…and if its met, were perfectly delighted to pay for it. Why, because if we tackle shrink effectively, were going to share the gains.

The book, Built to Last: Successful Habits of Visionary Companies, highlights the notion that good is the enemy of great. What ends up happening is when everybody benchmarks themselves against each other, you reach a level of acceptability of mediocre results that is defined as good, and as a result nobody wants to get to great.

The fact that the industry shrink average is X shouldnt establish my long-term goal. It might establish my short-term goal. But fundamentally we must instill inside our organization that no matter how good you are, you can always be better. No matter how good you are, theres always someone out there who has better performance. So,go find out who they are and learn from them. A mindset of continuous improvement, regardless of the function, has got to be instilled in every one of the elements of this organization.

EDITOR: I think you used a great example around the issue of hiring.

SCHLESINGER: Hiring managers hear that theres a labor crisis and its hard to find good people. So they reinforce that notion by hiring mediocre people. You dont have to look hard to find mediocre people. And then you wonder why they say they dont want to work today. The bottom line is you didnt spend any time recruiting them, you didnt spend any time hiring them, you certainly didnt give them any training, and youre paying them poorly. So why would you expect them to want to be excited to work for you?

For all of the academic jargon in my book, its simply about managing the golden rule in your relationships with your employees, in your relationships with your customers, with investors, and with the community. You live in a community, you owe it. Customers are your economic lifeblood. They only come to you and they only express loyalty over time when theres a relationship between what they give and what they get, both in terms of product and the shopping experience.

The same is true with employees. Regardless of the state of the economy, employees have lots of choices about where theyre going to spend their working hours. The question is, Why are they going to spend their working hours with you? What are you going to do above and beyond a wage to demonstrate the value of your brand as an employer? The bottom line is all of these relationships rely on reciprocity. If I treat the customer well, they come back. If I treat employees well, they dont leave. If I return value to our shareholders, theyll continue to invest in the business.

EDITOR: You comment in your book that change initiatives fail because of lack of sufficient top management commitment and investment. I dont know of any retailer who would say that they dont have commitment and that they havent made an investment in loss prevention, but what do those words mean to you?

SCHLESINGER: Its easy to sit in your office and write epistles and memos that say, I believe this, and I believe that. But in large, complex organizations, people want you to walk the talk. It goes back to your earlier question about why loss prevention reports to me. Loss Prevention reports to me because talk is cheap. At the end of the day, is it much more important where I visit, where I spend my time, and who I see, than what I talk about.

I believe that unless someone at a senior level is willing to engage at a level of more than words, you cant achieve the kind of change that were trying to manifest here in loss prevention. It just wont happen, because people wont believe you. Its not in the front of their minds.

Loss prevention historically has not been a high-profile function inside this organization. People have not focused on the economic consequences of shrink. Theyve not seen a clear link between the actions of the function and the results that were looking for. As a result, its easy to assume it doesnt exist. So when somebody like Paul comes in and says, Im going to do it differently, the tendency is to answer, Why am I going to believe you?

EDITOR: Many companies use the term partners. In your book, you talk about a partnering mentality, a willingness to be owned. What does that mean?

SCHLESINGER: There are three fundamental rules associated with partnership inside this organization. The first is completely transparent economics. Coming from a decentralized environment where all of the decisionmaking authority was in the brands to where we are today, the economics on the brand side of the equation and the center-function side of the equation must be completely transparent. If the economics arent transparent and open to everybody, someone is going to assume that someone else is taking advantage of them.

Secondly, if were in a service relationship, that relationship must be mediated by a service-level agreement. We must have defined levels and standards of support that meet internal customer needs the same way were obliged to meet external customer needs. In addition, the functions must be evaluated against those service-level agreements on a routine and regular basis.

And third is that we actually have to talk. Over the last 18 months, weve aggregated all of the support functions that are engaged in advisory or service-delivery relationships with the brands. On a quarterly basis, they come to what we call Service Update Meetings, where we review with the brands the agendas and work of all of the various functions.

EDITOR: Typically, loss prevention is challenged with directives like You need to become partners with store operations, with HR, and other cross functions. What is it that these other areas need to do to become partners with loss prevention?

SCHLESINGER: They need to know what LP is. The HR people and the stores people have an obligation to learn what our loss prevention agenda is. I need to hold, not just the LP people accountable, but I need to hold the stores people accountable for shrink at the store level. That means the shrink measures have to be as much on the scorecard of the stores people as they are on the LP people. There has to be a joint accountability, which incidentally helps cement that partnership andbrings it together. HR is exactly the same.

Managing Change at the Worlds Most Admired Specialty Retailer

EDITOR: You recently had what was called a Loss Prevention Community Week here. What was the purpose or objective of that?

SCHLESINGER: Three years ago, again, because this was a completely decentralized organization, the notion of bringing people together from across the businesses to deal with common agendas inside this organization was a foreign concept. At that time, I was heading up human resources. I discovered that across the organization, we had somewhere in the neighborhood of 300-plus professionals who had never met. If I have to change the agendas and strategy of the organization, which, of course, will touch everybody in some way, it just strikes me as ridiculous to not bring them together. So we started something called HR Community Day. It evolved to a Merchant Community Day. That was the first time in the history of the company that we ever brought the merchants together. A Marketing Community Day. Again, the first time in the history of the company we ever brought the marketers together. Interestingly, as the quality of those meetings increased and the depth to which people wanted to work through issues increased, we came to realize that a day was not enough time for these meetings.

So, steeped in this culture, Paul suggested we get everybody together. We clearly had a number of issues to address, not the least of which was a major reorganization. We wanted to give people the opportunity to sign up with their eyes wide open. Instead of dealing with all of the kind of nonsense that exists in the rumor mill about the new director and the new organization, we put Paul in front of everybody and let them shoot whatever questions they wanted. He laid out his vision for the function for everybody to hear. We discussed a number of hard issues in depth…the issue of inclusion, teambuilding skills, the technical dimensions of what shrink means here. Before, every brand was allowed to define things their own way. Now, theres one definition, theres one language system. We told them that theres one process and you may not like it. So, it was my expectation that at the end of the week, when you have been fully informed, you raised your hand and said, I want to work here. In a speech I gave that day, I said, The decisions been made. We are clear about what the directions are. We realize that some of you might not like it, and we understand. That doesnt mean youre a bad person. It just means you shouldnt work here. And, we gave people the opportunity to elect in or elect out.

Managing Change at the Worlds Most Admired Specialty Retailer

If somebody signed up after the week, we can treat them as full participants with a set of expectations for their behavior and their performance that, I think, we can realistically hold people accountable to.

EDITOR: Theres obviously a tremendous amount of change underway at Limited Brands. What do you say to those inside the organization who might be struggling with the idea of change?

SCHLESINGER:The answer is, Its never going to stop. A quote showed up in my in-basket today from the army chief of staff that says, If you dont like change, you really wont like irrelevance. I think thats fundamentally where were at.

Ours is a business founded on a principal of changing the way it went to market because of perceived deficiencies in strategies used by full-line specialty and department stores of the 50s and 60s. This business has evolved and changed in so many ways over its forty years, which is why it has survived.

The changes have been more intense in the last decade largely because the changes in the external environment have become more pronounced. There are more channels of distribution. For example, apparel is the fastest growing channel for the Internet today. Two years ago, it was a non-entity. Four years ago, we had an insignificant little business selling intimate apparel on the net with Today it dominates the Internet direct sales channel.

So at the end of the day, and the thing we keep talking about inside the organization is, if youre not changing as rapidly as your business environment, you just keep falling further behind. A large part of the leadership task inside this organization is to get the organization emotionally adapted to that reality, and then physically and organizationally prepared to execute with the most advantage that we can possibly have. Thats an amazingly marvelous challenge to play with.Everything is changing.

The mall is changing. Ten to 15 years ago, you could count on 50 malls opening in a year and virtually all of them being successful. This year, you can count on maybe three major malls opening up and who knows whether any of the three will be successful. The notion that we can celebrate ourselves as being focused on change is nonsense. We either adapt at a pace that is as rapid as the change that is going on outside us, or we die.

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