26363123 case study kmart corporation still searching for a successful strategy

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Case 21KMART CORPORATION: STILL SEARCHING FOR A SUCCESSFUL STRATEGY

(1998)

I. CASE ABSTRACT

Kmart Corporation in 1998 was one of the worlds largest massmerchandise retailers. After several years of restructuring, it wascomposed largely of general merchandise businesses in the form of Kmartdiscount department stores, Big Kmart stores, and large combinationstores called Super Kmart Centers, in all 50 of the United States.Measured in sales volume, it was the third largest department storechain in the United States.

Floyd Hall, Chairman, President, and Chief Executive Officer of KmartCorporation since June of 1995, was pleased with Kmarts financialresults reported in the fiscal first quarter of 1998. He was veryoptimistic about the companys future. He was convinced that a newcorporate strategy he had introduced recently would revitalize Kmarts

core business, its 2,200 discount department stores, and put thecompany on the road to recovery. Industry analysts had noted thatKmart had posted 11 straight quarters of disappointing earnings and hadbeen dogged by persistent bankruptcy rumors. They cautioned that muchof Kmarts recent growth may have reflected the strength of theconsumer economy rather than acceptance of the companys new retailstrategies.

Kmart had put heavy emphasis on the planning function. Managementperceived the role of corporate planning to be making decisions now toimprove performance tomorrow. Kmart had been very successful in thearea of strategic planning in the past. Management felt that strategicplanning, used intelligently by management, would be the key to

corporate growth in the future.

Kmart and Wal-Mart financial comparison is shown below.

Kmart Wal-MartSales Net Income Sales Net Income

FY 1990 $32,070,000 $756,000,000 $32,601,594,000 $1,291,000,000FY 1997 $32,183,000 $249,000,000 $117,958,000,000 $3,526,000,000

Kmart is falling behind Wal-Mart in sales, profits, and market share.

Kmart has had flat sales for seven years.

Decision Date: 1998 1997 FY Sales: $32,183,000,0001997 FY Profit: $249,000,000

(1997 Fiscal Year [FY] was February 1, 1997 to January 31, 1998)

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Kmart Corporation (1998)

____________Copyright 1999 by Thomas L. Wheelen and J. David Hunger. Reprinted byour permission only for the 7th Editions of (1) Strategic Management andBusiness Policyand (2) Cases in Strategic Management.

II. CASE ISSUES AND SUBJECTS

Retailing/Discount Department

Store Industry

Corporate Governance

Turnaround StrategiesSerious Financial Problems Losses in FY 1995 and 1993

Chairman ReplacedExpansion and Contracting

Declining SalesCompetition

Strategic Planning Marketing StrategiesHierarchy of Strategies Acquisitions and DivestituresMission and Objectives Sociocultural FactorsConcentric Diversification Stages of DevelopmentIndustry Analysis Competitive Strategy

Changing Marketplace New Store Formats

RetrenchmentSpin-off Specialty StoresOrganizational Life Cycle

Hire Celebrity Spokespersons Environmental ScanningReorganization and Restructuring Executive LeadershipFlat Sales Losing Market Share (%)

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

(see Figure 1.5 on pages 20 and 21)

Strategy FormulationStrategy

Implementation

Evaluation &

Control

Performan

ce

Strategic

Posture

Corporate

Governan

ce

External

Factors

Internal

Factors

Strategic

Factors

ReviewM

BO

&Mission

Strategic

Alternative

s

1A 1B 2 3 4 5A 5B 6 7 8

O O X O X O O X X X

O = Emphasized in Case X = Covered in Case

IV. CASE OBJECTIVES

1. To discuss the problems of developing successful turnaroundstrategies for Kmart. The company has had the same sales for eightyears (FY 1990 - FY 1997).

1. To illustrate the importance of continuous scanning in orderto adjust to the changing dynamics of multi-dimensional externalenvironment. Kmart did not do a good job scanning its environments(SWOT).

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3. To illustrate the need to identify emerging target market,then have the corporation respond with the right retailing mix tomeet the needs and wants of potential customers.

4. To illustrate the strategic management issues in managing amature company.

5. To illustrate the problems of a major company as its marketshare declines.

During Chairman Antoninis 7-year tenure with the company, itsmarket share declined from 35% to 23%. Its less now.

6. To discuss the importance of "lifestyle" research on Kmart andits product line.

7. To discuss the role of celebrity spokesperson. Kmart hiredMartha Stewart, Mario Andretti, Fuzzy Zoeller and Jaclyn Smith.

8. To discuss Kmarts new mission statement - "to become the

discount store of choice for our desired customer - women between 25and 45 years old, with children at home and with household incomebetween $20,000 and $50,000 per year."

To discuss the impact of Kmarts low-income-buyer image onthis new target market in the mission statement.

9. To discuss the role of the Board of Directors in replacingmembers of top management when the companys financial positionturns negative.

10. To discuss the concept of a centralized merchandise system.

11. To discuss what the new Chairman, Floyd Hall, can do to meet thecompanys new mission statement.

12. To demonstrate the importance of the planning function.

13. To differentiate between strategic, administrative andoperational planning.

14. To dramatize the importance of adjusting to a changing multi-dimensional external environment.

15. To show how a potentially high-yield performance retaileradjusts to change.

16. To show the differences between Kmart and Wal-Mart since FY90.

FY 1990: Kmart had sales of $32,070,000,000 and 2,350 stores,and Wal-Mart had sales of $32,601,594,000 and 1,721 stores. FY 1997: Kmart had sales of $32,183,000,000 and 2,036 stores,and Wal-Mart had sales of $117,958,000,000 and 3,406 stores.

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V. SUGGESTED CLASSROOM APPROACHES TO THE CASE

1. We provide you with three mass merchandising (discount chain stores)and department store retailers. The mass merchandising (discountchain store) retailing cases are:

Case 21 - Kmart Corporation (1998)

Case 22 - Wal-Mart Stores, Inc. (1998)

The Department Store retailing case is:

Case 23 - Nordstrom, Inc., 1998

We find these cases work well as two separate packages asshown above. Each of the three cases is a complete, stand-alone strategicmanagement case.

2. If you assign both Wal-Mart and Kmart cases, we suggest thatyou assign the Wal-Mart case first since it includes moreinformation about the issues facing the discount store industry.

3. Kmart is an excellent case that can be used any time in thecourse. The students are all familiar with discount stores. Wesuggest placing this case toward the middle of your course.

4. We would suggest that you require the students to do libraryresearch on the retailing industry.

This industry research helps frame the environment for this

case.

The case still works very effectively without this research.The research just enhances the students learning experience.

5. This case works very well as a written individual caseanalysis or exam.

6. This is an excellent case for a team presentation.

7. We have asked students in our classes to state on a 5-pointscale which retail store offers 1) lowest price, 2) best quality forthe price, 3) best designed stores, 4) best customer service, and 5)the best selection of merchandise. We will normally list fivecompanies such as Kmart, Sears, Wal-Mart, and a couple of localchains. We are trying to determine the quality image of each firm.

8. Ask your class whether they shop or would shop at Kmart. Mostof my undergraduate students (900-plus students over the past 5years) would not consider shopping at Kmart. Almost all the femalestudents feel the stores are in neighborhoods in which they dont

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like to shop. I was shocked by these discussions. It was not justlow-price/low-value image.

9. The case author provided the following teaching objectives andsuggestions:

A. TEACHING OBJECTIVES

This case can be used to achieve several teaching objectives:

1. It is an excellent case to demonstrate the importance of theplanning function.

2. It can be used to differentiate between strategic,administrative, and operational planning.

3. It dramatizes the importance of adjusting to a changing multi-dimensional external environment.

4. It emphasizes the need to identify target markets and then todesign an appropriate retailing mix to meet consumer needs and

wants.

B. TEACHING SUGGESTIONS

This case dramatically demonstrates the importance of theplanning function in a firm with a track record of sales andasset growth. Class discussion may begin by asking the class todiscuss the following statement: "Planning has primacy over theother functions and is a necessity for all organizations in the1990s and into the 21st century."

There is a considerable amount of data in Appendix A and AppendixC in the case, which can be used to dramatize the issues of (1)

profitability, (2) liquidity and (3) growth. Ask students toassess the financial performance of Kmart using the measureswhich are emphasized as a part of high-yield strategicmanagement. This type of analysis should span a period of yearsrather than being a static analysis at a given point. Studentsshould be encouraged to use the Strategic Profit Model to measurethe retailers profit performance as part of an outside classexercise. The model is reviewed in Exhibit Tn 1.

The U.S. economy is entering an era of power marketing and high-performance management. In a discussion of the competitiveenvironment in retailing, students could be asked how Kmartcompetes with Wal-Mart and other mass merchandisers like Sears

and Target (Dayton Hudson) in the area of price leadership.

SUGGESTION FOR DAILY CLASS PARTICIPATION

We have found it is difficult to get quality daily participation fromour students. We suggest the following:

1. Have the class members prepare--individuallyor as a team--(a) EFAS,

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IFAS, and SFASor(b) just a SFAS for the assigned case.

*We have 1 or 2 individual students of a team bring their EFAS,IFAS, and SFAS or just their SFAS on a transparency. We have foundin this 75-minute class that SFAS alone as a transparency works mosteffectively.

2. We compare the students work with that of the team orindividual students making the presentation to the class.

*We also discuss how theWEIGHTS and RATING were developed and theWeighted Score for the case under discussion.

3. We ask each student at the beginning of the class to write downhis/her Total WeightedScore for the case under discussion and passit in.

*You can use the results to call on students whose scores seem to beout of line with the case.

**It allows for a discussion of the Total Weighted Score as his/heroverall evaluation of how the management of the company ismanaging the companys internal and external environment.

***We ask the students whether they would buy stock in this company-then the Total Weighted Score seems to have real meaning.

VI. DISCUSSION QUESTIONS

1. What are the strengths andweaknesses of Kmart Corporation?

2. What are the opportunities and threats facing Kmart

Corporation?

3. What are the strategic factors facing Kmart?

The case author provided the following8excellent discussion

questions and answers:

4. Evaluate the strategies that Kmart has introduced as part of its

marketing program of the 1990s. How much impact did thesestrategies have in the competitive environment as the firm sought

to maintain its position and grow in the future?

Kmarts concept focused on slowing the tempo of physicalexpansion and concentrated instead on getting a greater return oninvestment in existing stores. Six key strategies were developedfor the 90s. They included (1) accelerated store expansion andrefurbishing, (2) capitalizing of dominant lifestyle departments,(3) centralized merchandising, (4) more capital investment inretail automation, (5) an aggressive and focused advertisingprogram, and (6) growth through new specialty retail formats.

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A corporate strategy can be defined as a decisive allocation ofresources to a major course of action. It can be a long-run,time-phased plan to achieve . . . at a high rate of return oninvestment . . . a market position so advantageous thatcompetition can retaliate only over an extended time interval andat a prohibitive cost. What Kmart needed was something moredramatic and major which would be operated on the same concept as

its Kmart stores. The 1990 marketing program might be called an"inside-out" approach to planning. Top management used thecompanys experience in the marketplace to determine what theorganization was exceptionally good at and then designed aprogram to exploit that ability or resource. While there aremerits to this approach, it is not a decisive allocation ofresources to a major course of action. The firm, althoughstrengthened and revitalized after self-examination, remainedvulnerable to newer types of retail organizations which couldemerge as surprise elements and threaten its future.

5. How much importance is placed on the planning function at Kmart?

What are some constraints that are likely to decrease its effecton the development of the organization? Kmart had a reasonablyformal planning organization. It involved a constant evaluationof what was happening in the marketplace, what competition wasdoing, and what kinds of opportunities were available. Theorganization provided for a Director of Planning and Research whoreported directly to the Chief Executive Officer. A planninggroup made up of individuals representing a number of functionalareas of the organization aided and assisted the Director ofPlanning and Research. As noted in the case, managementrecognized the need to emphasize planning, since it was not goingto grow with the Kmart format forever.

In retailing, most change is tactical in nature. Revisions aremade in marketing practice to gain short-run advantages. Thereare several constraints that hinder "innovative competition" aspart of the planning process: (1) traditional trade practices,(2) limited goals and expectations, (3) deeply entrenchedpatterns of behavior within the firm, (4) the pressures of otherfirms within the channel of distribution to maintain the statusquo, and (5) efforts to cultivate an identified market segment tothe neglect of others.

6. Why do you think planning is important to an organization like

Kmart?

It is generally agreed that planning involves such activities as(1) developing the objectives and goals for a company, (2)projecting economic conditions that will affect the firmsfuture, (3) formulating alternative courses of action to reachidentified goals, (4) analyzing the consequences of identifiedalternatives, (5) deciding which strategies are most feasible inlight of limited corporate resources, and (6) devising methodsfor measuring progress toward a planned goal when a program hasbeen chosen.

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Kmart had developed a corporate culture that was accustomed tochallenges. Management was obligated to find ways to expend thatenergy. With the discount department store industry at maturity,management would have to recognize that it must decide where itwants to go and how it is going to get there. It had to makemajor commitments today to continue its high-yield performance

mandate in the future.

7. How does planning fit into the management process at Kmart?

The Chairman of the Board, as Chief Executive Officer (CEO), isthe primary planner of the organization. Management hadrecognized that the Director of Planning and Research and hisgroup are only advisory in nature and in a staff position. Theyfunction much the same as an in-house consulting group.

Recognition of the need for planning is a key phrase here.Management felt that corporate planning at Kmart was the resultof executives, primarily the senior executive, recognizing change

and getting others to recognize that nothing is good forever.Good planning, it was noted, means making decisions now toimprove performance tomorrow.

8. Discuss the importance of changes in the external environment.

How much impact do they have on strategic plans in retail firmslike Kmart?

The external forces confronting the retail enterprise aretypically identified as (1) the technological environment, (2)behavior of channel members, (3) behavior of consumers, (4)behavior of competitors, (5) the legal environment, and (6) thesocioeconomic environment. New forms of retailing generally

emerge as a response to changing environmental factors. As theenvironment changes, retail organizations must change to surviveand to prosper. An analysis of three retailers indicates Wal-Mart, Target (Dayton Hudson), and Sears have learned to do betterthan Kmart. The analysis is shown in Exhibit 1. Sears, Roebuck& Company was formerly the nations largest retailer in salesvolume. It also should be noted that Sears figures werehistorically inflated by catalog sales and insurance subsidiaries.

9. What conclusions can be drawn from a review of Kmarts financial

performance in the period 1983-1995?

The strategic profit model shown as Exhibit Tn 1 is a usefulvehicle for analyzing the financial performance of retail firmslike Kmart. It dramatizes the performance imperative in retailorganizations, a defensible return on net worth. Net income as apercent of net worth has varied from a high of a defensible 17.4%in 1986 to a low in the minus figures for 1993, 1995 and 1996.Major variations in the early 1970s and early 1980s were notshown in case. In earlier years, sales have increased each yearas Kmart increased its share of the market. In later years,sales have shown decreases, primarily because of store closures

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and asset disposition. Strategic profit model ratios for KmartCorporation for selected years, 1983-1997, are shown in ExhibitTn 2.

Kmart is an organization which emphasizes margin management withprice as an appeal. Profit margins have continued to be low withdefensible asset turnover.

The basic conclusions that can be drawn from the review are:

(1) Kmart is a potentially high-yield performance firm which hasnot increased its return on net worth substantially over thepast years.

(2) Kmart sales volume performance is mixed.

(3) Kmart has used margin management, asset management,and financial management to dramatize the principle areas ofdecision making.

As noted, "a retailers profit performance can be clearlyspecified using the Strategic Profit Model."

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10. What new directions are needed to "position" Kmart to meet the

challenges of the next 20 years?

Management must regularly ask itself: (1) Where are we now?, (2)Where do we want to go?, and (3) How do we get there? Strategicplanning that is risk-oriented has to emerge as a centralcorporate concern and be the primary responsibility of senior

management. The role of looking ahead at Kmart widensmanagements perspectives and dramatizes the necessity forcontinually evaluating the organization.

11. Review alternative strategies which Kmart might implement as part

of its new marketing programs.

First summarize the corporate strategies that are part of the1990 marketing program. Management planned to upgrade andremodel its Kmart stores while aggressively diversifying intomembership clubs, bookstores, home improvement centers, andwarehouse stores. In some sectors it has been highly criticizedfor this attempt to revitalize a maturing company. Louis W.

Stern of the Marketing Science Institute suggests, "Kmarts realace in the hole is a warehouse technology - they buy goods inhuge quantities at good prices and deliver value. . . Once youbegin to deviate from that core actively," he continues, "youhave to begin to wonder." Kmart re-emphasized its core retailingstrategy in the late 1990s following the divestiture of 11 non-core and peripheral businesses.

High-yield performance retailers in the 1990s were foundprimarily in the following four categories: (1) off-price retailoutlets, (2) broad-line mass merchandising, (3) specialized massmerchandising, and (4) positioned specialty stores. Kmart isdominant as a broad-line mass merchandiser in the discount

department store field. The case suggests reviewing alternativeapproaches with emphasis upon planning, positioning, andtechnology.

Exhibit Tn 1:

Strategic Profit Model with Normative Ratios After Taxes

Net Profit x Net Sales = Net Profit x Total Assets = Net ProfitNet Sales Total Assets Total Assets Net Worth Net Worth

3-5% 3-4 (x) 8-10% 1.5-2.5 (x) 15-20%

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Exhibit Tn 2:

Kmart Selected Strategic Profit Model Ratios

(%) (x) (%) (x) (%)

1997 (0.7) x 2.4 = (01.8) x 2.10 = (3.86)

1996 (0.6) x 2.2 = (01.5) x 2.32 = (3.4)1995 (1.4) x 2.2 = (3.1) x 2.92 = (9.3)

1994 00.9 x 2.0 = 01.7 x 2.82 = 04.9

1993 (0.8) x 2.0 = (1.6) x 2.87 = (4.1)

1992 02.5 x 2.0 = 05.0 x 2.51 = 12.5

1991 02.0 x 2.1 = 05.0 x 2.32 = 12.5

1990 02.0 x 2.3 = 05.0 x 2.58 = 14.0

1989 01.1 x 2.3 = 02.5 x 2.6 = 06.5

1988 02.0 x 2.3 = 06.0 x 2.4 = 16.0

1987 02.0 x 2.3 = 06.0 x 2.5 = 15.0

1986 02.4 x 2.3 = 05.7 x 2.7 = 17.4

1985 02.1 x 2.2 = 04.7 x 3.1 = 14.6

1984 02.4 x 2.2 = 05.7 x 2.8 = 17.1

1983 02.7 x 2.3 = 06.0 x 2.8 = 16.7

VII. CASE AUTHORS TEACHING NOTE by James W. Camerius*

A. Case Overview

Presented earlier in Section I - Case Abstract.

B. Teaching Objectives

Presented earlier in Section IV - Case Objectives. The last 5objectives (11-15) were provided by the case author.

C. Teaching Suggestions

Presented earlier in Section V - Suggested Classroom Approaches ToThe Case.

*Reprinted by permission of the author.

VIII. STUDENT STRATEGIC AUDIT / STUDENT PAPER

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I. CURRENT SITUATION

A. Performance:

Kmart Corporation is one of the worlds largest mass-merchandiseretailers. The dominant portion of Kmarts business consists ofits domestic general merchandise group which operates a chain of

2,037 Kmart discount stores (including 99 Super Kmart Centers)with locations in each of the 50 United States, Puerto Rico, theUS Virgin Islands, and Guam. Nonetheless, Kmarts financialsituation is disappointing.

FY Sales Net Income Stores1997 $32,183,000 $249,000 2,1361996 31,473,000 (220,000) 2,2611995 34,389,000 (571,000) 2,1611994 34,025,000 296,000 2,4811993 34,156,000 (974,000) 2,435

Note: dollars are in thousands.

B. Strategic Posture:

1. Mission

Broad - To become the discount store of choice for low- andmiddle-income families with children by satisfyingtheir routine and seasonal shopping needs, as well asor better than the competition.

Narrow - To become the discount store of choice for ourdesired customer: women between 25 and 45 years old,with children at home, and with household incomes

between $20,000 and $50,000 per year.

2. Objectives

To be profitable. To use celebrities in ads to change image. To sell lifestyle orientation concept. To attract more customers. To have each customer spend more per visit. To lay a foundation for a bottoming out of Kmartsfinancial decline and a return to profitability. To become the leader in the retail arena once again.

3. Strategies

Adopt a turn-around corporate strategy.Reduce costs, specifically selling, general, andadministrative costs.Build flexibility and stability into the Kmart balancesheet by improving the corporations bank debt.Elevate companys image: use popular celebrities andremodel stores.

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Adopt a merchandising strategy of improving productassortments, category management, customer focus, and storecleanliness (which will translate into substantiallyimproved financial results and enhanced shareholder value).

4. PoliciesThe corporation will emphasize top brands and a strong

program of private label products for the value-consciouscustomer.Every product should fall under the "satisfaction always"policy (which means customers receive refunds and exchangeswith ease).The stores must provide the customers with good value -quality products at low prices.The corporation must "bite the bullet" in order toaccomplish its major financial and strategic restructuring.

II. CORPORATE GOVERNANCE

A. Board of Directors

There are fifteen Board members and only two are internal.Chairman of the Board is Floyd Hall. The Board has anactive level of participation from the members.Floyd Hall was hired in 1995 as the former Chairman and CEOof Target discount stores.Warren Flick is President and COO of U.S. Kmart Stores.Lilyan H. Affinito, a Director of Kmart since 1990, is theformer Vice Chairman of Maxxam Group Inc.Enrique C. Falla, a Director of Kmart since 1992, is theformer Executive Vice President and CFO of Dow ChemicalCompany.

Seven of the 15 directors joined the board of directorsafter 1995.

B. Top Management

CEO and President is Floyd Hall.A strong group of senior executives has diverse talents andbackgrounds. Of the eight members of Kmarts Executive Committee, fivehave joined the company within the last 18 months.

III. EXTERNAL ENVIRONMENT (EFAS see EXHIBIT 1)

A. Societal Environment

Opportunities:

Quickly advancing technology reduces the cost ofcommunication between stores and headquarters. Global expansion is becoming a reality. Customers still want one-stop shopping. Economy is in good shape.

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Threats:

Economic environment is difficult. Competition is offering something that is new and differentin terms of assortment, competitive price image, and format. There are industry-wide price pressures. Customer base is aging.

B. Task Environment

Opportunities:

Each year 180 million people shop at Kmart. 80% of the U.S. population is within a 15-minute drive to aKmart store.Kmart has vigorous and healthy relationships with suppliers.Consumers are informed and well educated.Core Kmart shopper makes 3 or 4 visits per month and spend

about $40 per visit.Many Kmart stores are located in suburban communities wheresubstantial growth is occurring.

Threats:

Fierce competition.Mature market.Decreasing margins.Demographics changes/shifts.

IV. INTERNAL ENVIRONMENT (IFASsee EXHIBIT 2)

A. Corporate Environment

Kmart is a Stage III corporation with a divisional structure.Decision making is highly centralized.

Corporation is in decline phase of organizational life cycleand looking for renewal.

B. Corporate Culture

Excellence and execution are the keys to Kmarts success.Kmart espouses a "can do" attitude.There is strong commitment to customer satisfaction.Kmarts vision calls for the constant and never-ceasingexploration of new modes of retailing.Turmoil is due to management changes and lack of corporatedirection.Management believes in making decisions now to improveperformance tomorrow.

C. Corporate Resources

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1. Marketing

Strengths:

Aggressive and focused advertising.Competitive prices across a clearly defined "image list."Private label credit card.Celebrity endorsements including: Jaclyn Smith, KathyIreland, Martha Stewart, and Fuzzy Zoeller.More than 100,000 items for sale.Weekly ad circular that reaches 72 million households inthe United States.A new and bold Kmart logo.

Weaknesses:

Negative public image of Kmart (blue-light special).Poor customer service despite corporate beliefs incustomer satisfaction.Outdated appearances and layouts in many stores.

Stereotyping of rural customers.

2. Finance

Strengths:

$4.7 billion in new financing through a three-year $3.7billion credit facility and a$1 billion public offering of 7.75% convertible preferredsecurities.Sold subsidiaries (Waldenbooks, Pace Stores, andOfficeMax)

Weaknesses:

Too many non-core assets.Approximately $700 million in aged and outdatedinventory.Downgrade of Kmarts long-term senior unsecured debtrating.Seven years of disappointing earnings.

FINANCIAL COMPARISON - 1997 FY

Wal- DaytonKmart Mart Sears Hudson

Sales (millions) $32,183 $117,958 $41,296 $27,757Net income (millions) 249 3,526 1,188 751Sales per sq. foot 211 N/A 318 226ROE % 5 19.8 20 16.8Profit Margin % 0.8 2.9 2.9 2.7

3. Research and Development

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Strengths:

Created battery recycling program. Developed a high-frequency prototype to improve storelayout.

Weaknesses:

Ineffective method of introducing new items/products.

4. Operations

Strengths:

There are thirteen distribution centers. Merchandising is centralized. Store management teams are responsible for theprofitability of their own units and have the authority to

make certain independent decisions. Each store manager has the power to match competitorsprices. Category management system is in place. Kmart pharmacy is the third-largest in the US with 1588pharmacies. Kmart is the worlds number-one photo processor. Most stores are less than one days drive away from adistribution center. Five-year, $2.3 billion renewal program is in effect. Under-performing stores in the United States are beingshut down.

Weaknesses:

Reluctance to close down under-performing operations. Reactive vs. proactive management.

5. Human Resource Management

Strengths:

Over 7 million people have worked at Kmart at leastpart-time.

Weaknesses:

Turnover rate among employees is high. A work force reduction (due to closing of under-performing operations) will cause low employee morale. Management turnover is high.

6. Information Systems

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Strengths:

Satellite-based communications network is in place. Point-of-sale (POS) system improves accuracy andinventory control.

Weaknesses:

Systems are unreliable at times and require frequent andcostly maintenance schedules. Some stores are still on older system.

V. STRATEGIC FACTORS (SFASsee EXHIBIT 3)

VI. STRATEGIC ALTERNATIVES

1. Stability

Pros:

Will allow Kmart to focus on improving store layout andprofitability without losing valuable market share.

Cons:

Will continue to have disappointing financial positionas a result of non-core assets.

2. Retrenchment

Pros

Will give Kmart the opportunity to dispose of its non-core assets, including any under-performing stores. Will allow the corporation to lay the foundation for abottoming out of Kmarts financial decline and a return toprofitability.

3. Horizontal Growth into more locations.

Pros:

Will expand market share.

Cons:

Will incur more debt. Could over-saturate the market. Could continue to have disappointing financial results.

VII. RECOMMENDATIONS

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Given the current financial situation (low sales and quarterlylosses) of the Kmart Corporation, we recommend that the companypursue turnaround strategies. Allow the company to start growthstrategies. The company has been in limbo for seven years.

VIII. IMPLEMENTATION

Purpose of the two plans below is to implement a retrenchmentstrategy.

Plan 1 For:

1. Too many non-core assets (W)2. Eleven consecutive quarters of disappointing earnings (W)3. Mature market (T)

Lawrence E. Carlson and James P. Churilla will head a group to: Liquidate the majority of Kmarts non-core assets including

those Kmart stores that are currently under-performing.Furthermore, outdated stores, which are located in highlycompetitive markets, will be given a new appearance throughKmarts high-frequency prototype that was developed in 1995.These steps will help to improve sales, decrease long-term debt,and aid Kmarts financial struggles.

Plan 2 For:

1. Negative public image of Kmart (W)2. Celebrity endorsements (S)3. Competition offering depth of assortment, competitive price

image, and format (T)

Larry C. Davis will develop: A long-term plan to help improve Kmarts image. This planwill consist of advertising campaigns that will show improvedstore layouts and better customer satisfaction, which will betied into Kmarts current and future celebrity endorsements.Moreover, these advertising campaigns will directly compareKmart with competitors as far as prices, sales, and theavailability of items. Also, a toll-free 800 line will beestablished (in test markets) to monitor customer feedback.

IX. EVALUATION AND CONTROL

Plan 1:

Marvin P. Rich will evaluate and control quarterly: Mr. Carlson and Mr. Churilla will be evaluated according to their

effectiveness in liquidating non-core assets and improving theoverall financial position of the company. Guidelines will haveto be met for the closing of under-performing stores as well asbudgets for improving store layouts. All decisions and expenses

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will have to fall within those budgets and guidelines set byMarvin P. Rich. The loop will be completed by quarterly meetingsand proper feedback.

Plan 2:

Warren Flick will control monthly: Progress made by Larry C. Davis will be controlled by evaluating

the effectiveness of current and future advertising campaigns.In detail, Kmart will be compared with stores such as Wal-Martand Target in areas like prices and customer satisfaction.Furthermore, toll-free lines will be monitored and theirperformance evaluated. Based on their effectiveness, the planshould either be replaced or taken to a national level.

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IX. EFAS, IFAS and SFAS EXHIBITS

Exhibit 1EFAS (External Factor Analysis Summary)

KEY EXTERNAL FACTORS WEIGHT RATINGWEIGHTED

SCORE COMMENTSOpportunties:Many Kmart stores are located insuburban communities

.10 3 .30 Substantial growth isoccurring in these areas

80% of the U.S. population iswithin a 15-minute drive of aKmart store

.12 3 .36 Approximately 180million people shop atKmart each year.

Vigorous and healthy

relationships with suppliers.07 3 .21 Imperative that Kmart

continue theserelationships

Well-educated and informedconsumers

.10 2 .20 Customers want goodvalue, and they know itwhen they see it

Economy .10 3 .30

Threats: 0

Competitors offering depth ofassortment, low prices, and

superior formats

.15 2 .30 Fierce competitorsinclude Wal-Mart, Sears,

and Target

Rumors of possible takeover andbankruptcy

.10 3 .30 Rumors are hurtingKmarts efforts toincrease its profitabilityand enhanceshareholder value

Price/value conscious consumer .14 3 .42 Consumer wants qualityand price

Image problem .12 3 .36 Lower image for price/quality than Wal-Mart

TOTAL SCORES 1.00 2.75

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IX. IFAS, EFAS and SFAS EXHIBITS

Exhibit 2IFAS (Internal Factor Analysis Summary)

KEY INTERNAL FACTORS WEIGHT RATINGWEIGHTED

SCORE COMMENTSStrengths:Store management teams areresponsible for the profitabilityof their own units

.05 3 .15 Have authority to makecertain independentdecisions about theiroperations

$2.3 billion renewal program .10 3 .30 Update stores

Change image - celebrity

endorsements/product lines.10 4 .40 Stars youll find at Kmart

include Jaclyn Smith, KathyIreland, Martha Stewart, andFuzzy Zoeller to changeimage

New management team andboard of directors

.15 3 .45 7 new board members (1995)

Weaknesses:Negative public image .10 2 .20 A long-standing problem for

Kmart - poor blue-collar

Market share / sales flat .15 2 .30

Strong competition .14 3 .42 Wal-Mart, Sears, and Target

Merchandising mix .08 2 .16 Aged and out-dated

Finance losses 3/5 years .11 2 .22 Major reshaping of the Boardof Directors may improve thesituation.

Reactive versus proactivemanagement style

.07 2 .14 Kmarts strategic planningusually arose after the fact


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IX. SFAS, EFAS and IFAS EXHIBITS

Exhibit 3SFAS (Strategic Factor Analysis Summary)

KEY STRATEGIC FACTORS WEIGHT RATINGWEIGHTED

SCOREDURATION

ST IT LT

Changing image/now poorer .12 3 .36 x x

New management team andboard of directors

.14 3 .42 x x x

Customer base/located near

80% of population

.10 3 .30 x x x

Economy - good .10 3 .30 x x x

Finance losses 3/5 years andflat sales

.16 2 .32 x x

Marketing strategies .10 3 .30 x x

Competition .18 2 .36 x x x

Market share declining .10 2 .20 x x x


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26363123 case study kmart corporation still searching for a successful strategy

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