Post 4 — Eddie Lampert Knew Exactly How Free Markets Work
Eddie Lampert believed free markets make companies efficient. So he built one inside Sears — 30 autonomous business units, each competing for the same resources, each with its own P&L. He was right that it would work. He was wrong about what “working” would produce.
Every week I take one real case — a company, a government program, a league — and show how the reward shaped the behavior. Welcome to Behavior Follows Rewards.
He Built One Inside Sears.
Many organizations have an internal zero-sum structure: divisions and teams measured on their own results, competing for the same limited resources, with minimal accountability for how the whole performs. In theory, it works, as theories often do. Then there is Sears.
The theory was straightforward: give business units their own P&Ls, let them compete for capital, and discipline would follow. Eddie Lampert applied that theory to Sears. The discipline followed. The company did not.
In the early 2000s, Eddie Lampert was being compared to a young Warren Buffett. He had built ESL Investments after leaving Goldman Sachs, compounding returns year after year with a discipline that impressed the most sophisticated money in the world. When he engineered the merger of Kmart and Sears in 2005, creating Sears Holdings — a company that would generate approximately $49 billion in revenue in its first full fiscal year — the financial press treated it as a master move.
Lampert's conviction was genuine and coherent. He believed in the power of free markets to allocate resources efficiently. Competition produced better outcomes than central planning. Decentralization beat hierarchy. He decided to build a market inside the company he ran.
“The notion of spending money on the business, I’m not opposed to it. I just want a return for it.” — Eddie Lampert, Fortune, 2006
Starting in 2008, three years into his tenure, Lampert broke Sears Holdings into more than 30 autonomous business units — appliances, apparel, tools, Kenmore, Lands’ End, and more. Each unit had its own leadership, profit-and-loss statement, CFO, CMO, and Board of Directors. Each unit competed internally for capital. Resources — floor space, marketing budget, staff — went to whoever made the strongest financial case. Bonuses were tied to each unit’s operating profit. He would let the market decide.
The theory was clean. The incentive structure was explicit and precisely designed.
So what followed was predictable, in retrospect.
Basic retail tactics became impossible to execute. Business units stopped using loss leaders — items sold below cost specifically to draw customers into the store — because the cost came out of their P&L. It didn’t matter that more foot traffic would have lifted overall store performance. Each division’s incentive was to protect its own margin. What happened at the store level was someone else’s problem.
Sears’ own flagship brand was turned against itself. Kenmore appliances were given inferior floor space in Sears’ own stores because outside competitor brands offered the appliance unit a better internal transfer price. The incentive architecture had made Sears its own worst competitor, in its own building, with its own inventory, staffed by its own employees.
Cooperation collapsed at every level. Units that needed IT support or HR services had to negotiate formal contracts to obtain them — services that in any normal organization would simply be available. The appliance unit and the apparel unit shared store floors but not customer data or marketing budgets. Managers hoarded associates during their own busy seasons rather than share them with units that needed them. Buyers for different product categories refused to coordinate even where coordination would have been obvious to any customer walking through a store.
The incentive said: Protect your P&L. Each unit obliged.
The stores degraded — not because Lampert didn’t care (by all accounts he was intensely focused), but because the incentive architecture he built did not reward the cooperation required to maintain a coherent retail experience. It rewarded units for protecting their own numbers. The stores around them fell apart. Customers noticed — and stopped coming.
By fiscal year 2017 — the last full year before its bankruptcy — Sears Holdings’ revenue had fallen from approximately $49 billion to approximately $16.7 billion, a decline of roughly 66 percent in twelve years. The company had closed hundreds of stores. The autonomous-unit structure had not produced the entrepreneurial energy he expected. It had produced fragmentation.
Lampert did not stumble into this. He designed the incentive architecture deliberately, with a well-developed intellectual framework and genuine conviction. The ideology was coherent. The execution was precise.
The architecture did exactly what it was designed to do. It created competition between units. It generated exactly the behaviors those incentives asked for.
Lampert found out the hard way. Many organizations find out the same way. Some never find out at all.
On October 15, 2018, Sears Holdings filed for Chapter 11 bankruptcy. The following day, Lampert spoke to employees at the company’s headquarters in Hoffman Estates, Illinois. “I did everything I could think of to try to make this company great again because I care deeply about it,” he told them. “There were mistakes along the way, for which I take responsibility.”
He did not name his autonomous business units as a mistake.
In the months that followed, he bid on the remaining stores through a new entity and won. He kept the Sears name alive. As of December 2025, five full-line stores remain open in the United States — Braintree, MA; Concord, CA; El Paso, TX; Orlando, FL; and Coral Gables, FL.
His 288-foot yacht is named The Fountainhead — after Ayn Rand’s novel about the supremacy of individual will over collective compromise.
The architecture he built inside Sears was that philosophy applied to a retail company. The stores needed the opposite.
He did not get the wrong behavior from a broken system. He got the right behavior from a system pointed in the wrong direction. That distinction is the point.
Worth pausing on this. Lampert wasn't running a scheme. He was running a philosophy -- coherently, deliberately, with real conviction behind it. That's what makes this one worth sitting with longer than the others: the architecture didn't fail because the architect was careless. It failed because he built exactly what he believed in, and the stores needed something else.
The behavior an organization gets is the behavior its incentive architecture rewards. Not the behavior leadership hopes for or the behavior the mission statement describes — the behavior the structure rewards.
Ask yourself: in your organization, is there a unit, team, or function being measured on a number it can hit by making things harder for another part of the company? If so, you have already built the incentive architecture that produced what Lampert produced. The behavior you are getting is the behavior the structure asks for.
If you are working through an incentive design challenge in your organization — trying to understand why a policy, initiative, or team isn’t doing what you designed it to do — that is the work. Advisory Services →
Behavior Follows Rewards. The pattern shows up wherever people are measured and rewarded.
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—Wayne
Going Deeper
If you were a Sears division president in 2008 — your bonus set by your own unit's profit and loss, your rivals sitting on the same executive floor — would you have lent your best people to the division next door to help it recover? Or would you have protected the number that decided what you took home?
Last time: eight Olympic athletes were disqualified for losing on purpose — because the tournament structure made losing the rational move.
Next: A government target required that ninety-eight percent of emergency patients be treated and discharged within four hours. Financial rewards were attached to the number. Hospitals found six ways to stop the clock. None of them improved the care.
In development — a pro sports league that rewarded losing for four decades; farmers who grew exactly what a foreign government paid them to grow; a whistleblower who showed officials what was happening and was told people wouldn’t do that. More on the way.
Sources
Kimes, Mina. “At Sears, Eddie Lampert’s Warring Divisions Model Adds to the Troubles.” Bloomberg Businessweek, July 11, 2013.
Coleman-Lochner, Lauren, and Mina Kimes. “Lampert Channeling Bezos Can’t Remake Sears as Amazon: Retail.” Bloomberg, October 31, 2013.
Sears Holdings Corporation — Annual Report (Form 10-K), fiscal year ended January 28, 2006. Filed March 15, 2006. SEC EDGAR, CIK 0001310067, Acc. No. 0001047469-06-003414.
Sears Holdings Corporation — Annual Report (Form 10-K), fiscal year ended February 3, 2018. Filed March 23, 2018. SEC EDGAR, CIK 0001310067, Acc. No. 0001310067-18-000006.
Sears Holdings Corporation — Chapter 11 bankruptcy filing, October 15, 2018. United States Bankruptcy Court, Southern District of New York. Case No. 18-23538 (RDD).
Sellers, Patricia. “The Best Investor of His Generation. (So What Is He Doing With Sears?)” Fortune, February 20, 2006, pp. 90–104.
Celarier, Michelle. “Eddie Lampert Shattered Sears, Sullied His Reputation, and Lost Billions of Dollars. Or Did He?” Institutional Investor, December 3, 2018.
Sears.com. “Store Locator.” Accessed June 2026.
BFR is written to be accessible, welcomed, and celebrated by every reader — not simplified, not elevated. Just clear.