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Case 21 KMART CORPORATION: STILL SEARCHING FOR A SUCCESSFUL STRATEGY (1998)

I. CASE ABSTRACT Kmart Corporation in 1998 was one of the worlds largest mass merchandise retailers. After several years of restructuring, it was composed largely of general merchandise businesses in the form of Kmart discount department stores, Big Kmart stores, and large combination stores called Super Kmart Centers, in all 50 of the United States. Measured in sales volume, it was the third largest department store chain in the United States. Floyd Hall, Chairman, President, and Chief Executive Officer of Kmart Corporation since June of 1995, was pleased with Kmarts financial results reported in the fiscal first quarter of 1998. He was very optimistic about the companys future. He was convinced that a new corporate strategy he had introduced recently would revitalize Kmarts core business, its 2,200 discount department stores, and put the company on the road to recovery. Industry analysts had noted that Kmart had posted 11 straight quarters of disappointing earnings and had been dogged by persistent bankruptcy rumors. They cautioned that much of Kmarts recent growth may have reflected the strength of the consumer economy rather than acceptance of the companys new retail strategies. Kmart had put heavy emphasis on the planning function. Management perceived the role of corporate planning to be making decisions now to improve performance tomorrow. Kmart had been very successful in the area of strategic planning in the past. Management felt that strategic planning, used intelligently by management, would be the key to corporate growth in the future. Kmart and Wal-Mart financial comparison is shown below. Kmart Net Income Wal-Mart Net Income

Sales FY 1990 FY 1997

Sales

$32,070,000 $756,000,000 $32,183,000 $249,000,000

$32,601,594,000 $1,291,000,000 $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: 1997 FY Profit: $32,183,000,000 $249,000,000

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

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Case 21 Kmart Corporation

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____________ Copyright 1999 by Thomas L. Wheelen and J. David Hunger. Reprinted by our permission only for the 7th Editions of (1) Strategic Management and Business Policy and (2) Cases in Strategic Management. II. CASE ISSUES AND SUBJECTS Retailing/Discount Department Store Industry Corporate Governance Chairman Replaced Expansion and Contracting Strategic Planning Hierarchy of Strategies Mission and Objectives Concentric Diversification Industry Analysis Changing Marketplace New Store Formats Hire Celebrity Spokespersons Reorganization and Restructuring Flat Sales Turnaround Strategies Serious Financial Problems Losses in FY 1995 and 1993 Declining Sales Competition Marketing Strategies Acquisitions and Divestitures Sociocultural Factors Stages of Development Competitive Strategy Retrenchment Spin-off Specialty Stores Organizational Life Cycle Environmental Scanning Executive Leadership Losing Market Share (%)

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS (see Figure 1.5 on pages 20 and 21) Strategy Evaluation & Strategy Formulation Implementation Control
Review MBO & Mission 5B Perform ance Corporate Governance Strategic Alternatives 6 Strategic Posture Strategic Factors 5A External Factors 3

1A

1B

Internal Factors 4

O O X O X O O O = Emphasized in Case

X X = Covered in Case

IV. CASE OBJECTIVES 1. To discuss the problems of developing successful turnaround strategies for Kmart. The company has had the same sales for eight years (FY 1990 - FY 1997). To illustrate the importance of continuous scanning in order to adjust to the changing dynamics of multi-dimensional external environment. Kmart did not do a good job scanning its environments (SWOT).

1.

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Case 21 Kmart Corporation 3.

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To illustrate the need to identify emerging target market, then have the corporation respond with the right retailing mix to meet the needs and wants of potential customers. To illustrate the strategic management issues in managing a mature company. To illustrate the problems of a major company as its market share declines. During Chairman Antoninis 7-year tenure with the company, its market share declined from 35% to 23%. Its less now.

4.

5.

6.

To discuss the importance of "lifestyle" research on Kmart and its product line. To discuss the role of celebrity spokesperson. Kmart hired Martha Stewart, Mario Andretti, Fuzzy Zoeller and Jaclyn Smith. To discuss Kmarts new mission statement - "to become the discount store of choice for our desired customer - women between 25 and 45 years old, with children at home and with household income between $20,000 and $50,000 per year." To discuss the impact of Kmarts low-income-buyer image on this new target market in the mission statement.

7.

8.

9.

To discuss the role of the Board of Directors in replacing members of top management when the companys financial position turns negative. To discuss the concept of a centralized merchandise system.

10.

11. To discuss what the new Chairman, Floyd Hall, can do to meet the companys new mission statement. 12. 13. To demonstrate the importance of the planning function. To differentiate between strategic, administrative and operational planning. To dramatize the importance of adjusting to a changing multidimensional external environment. To show how a potentially high-yield performance retailer adjusts to change. To show the differences between Kmart and Wal-Mart since FY 90. FY 1990: Kmart and Wal-Mart had FY 1997: Kmart and Wal-Mart had had sales of $32,070,000,000 and 2,350 stores, sales of $32,601,594,000 and 1,721 stores. had sales of $32,183,000,000 and 2,036 stores, sales of $117,958,000,000 and 3,406 stores.

14.

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Case 21 Kmart Corporation

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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 (discount chain 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 as shown above. Each of the three cases is a complete, stand-alone strategic management case. If you assign both Wal-Mart and Kmart cases, we suggest that you assign the Wal-Mart case first since it includes more information about the issues facing the discount store industry. Kmart is an excellent case that can be used any time in the course. The students are all familiar with discount stores. We suggest placing this case toward the middle of your course. We would suggest that you require the students to do library research 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 case analysis or exam. This is an excellent case for a team presentation. We have asked students in our classes to state on a 5-point scale which retail store offers 1) lowest price, 2) best quality for the price, 3) best designed stores, 4) best customer service, and 5) the best selection of merchandise. We will normally list five companies such as Kmart, Sears, Wal-Mart, and a couple of local chains. We are trying to determine the quality image of each firm. Ask your class whether they shop or would shop at Kmart. Most of my undergraduate students (900-plus students over the past 5 years) would not consider shopping at Kmart. Almost all the female students feel the stores are in neighborhoods in which they dont

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6. 7.

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Case 21 Kmart Corporation

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like to shop. I was shocked by these discussions. low-price/low-value image. 9.

The case author provided the following teaching objectives and suggestions: A. TEACHING OBJECTIVES This case can be used to achieve several teaching objectives: 1. It is an excellent case to demonstrate the importance of the planning function. 2. It can be used to differentiate between strategic, administrative, and operational planning. 3. It dramatizes the importance of adjusting to a changing multidimensional external environment. 4. It emphasizes the need to identify target markets and then to design an appropriate retailing mix to meet consumer needs and wants. B. TEACHING SUGGESTIONS This case dramatically demonstrates the importance of the planning function in a firm with a track record of sales and asset growth. Class discussion may begin by asking the class to discuss the following statement: "Planning has primacy over the other functions and is a necessity for all organizations in the 1990s and into the 21st century." There is a considerable amount of data in Appendix A and Appendix C in the case, which can be used to dramatize the issues of (1) profitability, (2) liquidity and (3) growth. Ask students to assess the financial performance of Kmart using the measures which are emphasized as a part of high-yield strategic management. This type of analysis should span a period of years rather than being a static analysis at a given point. Students should be encouraged to use the Strategic Profit Model to measure the retailers profit performance as part of an outside class exercise. The model is reviewed in Exhibit Tn 1. The U.S. economy is entering an era of power marketing and highperformance management. In a discussion of the competitive environment in retailing, students could be asked how Kmart competes 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 from our students. We suggest the following: 1. Have the class members prepare--individually or as a team--(a) EFAS,

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IFAS, and SFAS or (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 found in this 75-minute class that SFAS alone as a transparency works most effectively. 2. We compare the students work with that of the team or individual students making the presentation to the class. *We also discuss how the WEIGHTS and RATING were developed and the Weighted Score for the case under discussion. 3. We ask each student at the beginning of the class to write down his/her Total Weighted Score for the case under discussion and pass it in. *You can use the results to call on students whose scores seem to be out of line with the case. **It allows for a discussion of the Total Weighted Score as his/her overall evaluation of how the management of the company is managing the companys internal and external environment. ***We ask the students whether they would buy stock in this companythen the Total Weighted Score seems to have real meaning. VI. DISCUSSION QUESTIONS 1. 2. 3. What are the strengths and weaknesses of Kmart Corporation? What are the opportunities and threats facing Kmart Corporation? What are the strategic factors facing Kmart?

The case author provided the following 8 excellent 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 these strategies 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 physical expansion and concentrated instead on getting a greater return on investment in existing stores. Six key strategies were developed for the 90s. They included (1) accelerated store expansion and refurbishing, (2) capitalizing of dominant lifestyle departments, (3) centralized merchandising, (4) more capital investment in retail automation, (5) an aggressive and focused advertising program, and (6) growth through new specialty retail formats.

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A corporate strategy can be defined as a decisive allocation of resources to a major course of action. It can be a long-run, time-phased plan to achieve . . . at a high rate of return on investment . . . a market position so advantageous that competition can retaliate only over an extended time interval and at a prohibitive cost. What Kmart needed was something more dramatic 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 the companys experience in the marketplace to determine what the organization was exceptionally good at and then designed a program to exploit that ability or resource. While there are merits to this approach, it is not a decisive allocation of resources to a major course of action. The firm, although strengthened and revitalized after self-examination, remained vulnerable to newer types of retail organizations which could emerge 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 effect on the development of the organization? Kmart had a reasonably formal planning organization. It involved a constant evaluation of what was happening in the marketplace, what competition was doing, and what kinds of opportunities were available. The organization provided for a Director of Planning and Research who reported directly to the Chief Executive Officer. A planning group made up of individuals representing a number of functional areas of the organization aided and assisted the Director of Planning and Research. As noted in the case, management recognized the need to emphasize planning, since it was not going to grow with the Kmart format forever. In retailing, most change is tactical in nature. Revisions are made in marketing practice to gain short-run advantages. There are several constraints that hinder "innovative competition" as part of the planning process: (1) traditional trade practices, (2) limited goals and expectations, (3) deeply entrenched patterns of behavior within the firm, (4) the pressures of other firms within the channel of distribution to maintain the status quo, and (5) efforts to cultivate an identified market segment to the 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 firms future, (3) formulating alternative courses of action to reach identified goals, (4) analyzing the consequences of identified alternatives, (5) deciding which strategies are most feasible in light of limited corporate resources, and (6) devising methods for measuring progress toward a planned goal when a program has been chosen.

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Kmart had developed a corporate culture that was accustomed to challenges. Management was obligated to find ways to expend that energy. With the discount department store industry at maturity, management would have to recognize that it must decide where it wants to go and how it is going to get there. It had to make major 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), is the primary planner of the organization. Management had recognized that the Director of Planning and Research and his group are only advisory in nature and in a staff position. They function 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 result of 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 to improve performance tomorrow. 8. Discuss the importance of changes in the external environment. How much impact do they have on strategic plans in retail firms like Kmart? The external forces confronting the retail enterprise are typically 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) the socioeconomic environment. New forms of retailing generally emerge as a response to changing environmental factors. As the environment changes, retail organizations must change to survive and to prosper. An analysis of three retailers indicates WalMart, Target (Dayton Hudson), and Sears have learned to do better than Kmart. The analysis is shown in Exhibit 1. Sears, Roebuck & Company was formerly the nations largest retailer in sales volume. It also should be noted that Sears figures were historically 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 useful vehicle for analyzing the financial performance of retail firms like Kmart. It dramatizes the performance imperative in retail organizations, a defensible return on net worth. Net income as a percent 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 not shown in case. In earlier years, sales have increased each year as 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 Kmart Corporation for selected years, 1983-1997, are shown in Exhibit Tn 2. Kmart is an organization which emphasizes margin management with price as an appeal. Profit margins have continued to be low with defensible asset turnover. The basic conclusions that can be drawn from the review are: (1) Kmart is a potentially high-yield performance firm which has not increased its return on net worth substantially over the past years. (2) Kmart sales volume performance is mixed. (3) Kmart has used margin management, asset management, and financial management to dramatize the principle areas of decision making.

As noted, "a retailers profit performance can be clearly specified 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? Strategic planning that is risk-oriented has to emerge as a central corporate concern and be the primary responsibility of senior management. The role of looking ahead at Kmart widens managements perspectives and dramatizes the necessity for continually 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 the 1990 marketing program. Management planned to upgrade and remodel its Kmart stores while aggressively diversifying into membership clubs, bookstores, home improvement centers, and warehouse stores. In some sectors it has been highly criticized for this attempt to revitalize a maturing company. Louis W. Stern of the Marketing Science Institute suggests, "Kmarts real ace in the hole is a warehouse technology - they buy goods in huge quantities at good prices and deliver value. . . Once you begin to deviate from that core actively," he continues, "you have to begin to wonder." Kmart re-emphasized its core retailing strategy in the late 1990s following the divestiture of 11 noncore and peripheral businesses. High-yield performance retailers in the 1990s were found primarily in the following four categories: (1) off-price retail outlets, (2) broad-line mass merchandising, (3) specialized mass merchandising, and (4) positioned specialty stores. Kmart is dominant as a broad-line mass merchandiser in the discount department store field. The case suggests reviewing alternative approaches with emphasis upon planning, positioning, and technology. Exhibit Tn 1: Strategic Profit Model with Normative Ratios After Taxes Net Profit Net Sales 3-5% x Net Sales Total Assets 3-4 (x) = Net Profit x Total Assets = Net Profit Total Assets Net Worth Net Worth 8-10% 1.5-2.5 (x) 15-20%

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Exhibit Tn 2: Kmart Selected Strategic Profit Model Ratios (%) 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 (0.7) x (0.6) x (1.4) x 00.9 02.5 02.0 02.0 01.1 02.0 02.0 02.4 02.1 02.4 02.7 x x x x x x x x x x x (0.8) x (x) 2.4 2.2 2.2 2.0 2.0 2.0 2.1 2.3 2.3 2.3 2.3 2.3 2.2 2.2 2.3 = = = = = = = = = = = = = = = (%) (01.8) x (01.5) x (3.1) x 01.7 05.0 05.0 05.0 02.5 06.0 06.0 05.7 04.7 05.7 06.0 x x x x x x x x x x x (1.6) x (x) 2.10 2.32 2.92 2.82 2.87 2.51 2.32 2.58 2.6 2.4 2.5 2.7 3.1 2.8 2.8 = = = = = = = = = = = = = = = (%) (3.86) (3.4) (9.3) 04.9 (4.1) 12.5 12.5 14.0 06.5 16.0 15.0 17.4 14.6 17.1 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 5 objectives (11-15) were provided by the case author. C. Teaching Suggestions Presented earlier in Section V - Suggested Classroom Approaches To The Case.

*Reprinted by permission of the author. VIII. STUDENT STRATEGIC AUDIT / STUDENT PAPER

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Case 21 Kmart Corporation I. CURRENT SITUATION A. Performance:

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Kmart Corporation is one of the worlds largest mass-merchandise retailers. The dominant portion of Kmarts business consists of its 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, the US Virgin Islands, and Guam. Nonetheless, Kmarts financial situation is disappointing. FY 1997 1996 1995 1994 1993 Sales $32,183,000 31,473,000 34,389,000 34,025,000 34,156,000 Net Income $249,000 (220,000) (571,000) 296,000 (974,000) Stores 2,136 2,261 2,161 2,481 2,435

Note: dollars are in thousands. B. Strategic Posture: 1. Mission Broad To become the discount store of choice for low- and middle-income families with children by satisfying their routine and seasonal shopping needs, as well as or better than the competition. choice for our 25 and 45 years old, household incomes year.

Narrow - To become the discount store of desired customer: women between with children at home, and with between $20,000 and $50,000 per 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 Kmarts financial 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, and administrative costs. Build flexibility and stability into the Kmart balance sheet by improving the corporations bank debt. Elevate companys image: use popular celebrities and remodel stores.

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Adopt a merchandising strategy of improving product assortments, category management, customer focus, and store cleanliness (which will translate into substantially improved financial results and enhanced shareholder value). 4. Policies The corporation will emphasize top brands and a strong program of private label products for the value-conscious customer. Every product should fall under the "satisfaction always" policy (which means customers receive refunds and exchanges with ease). The stores must provide the customers with good value quality products at low prices. The corporation must "bite the bullet" in order to accomplish 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 an active level of participation from the members. Floyd Hall was hired in 1995 as the former Chairman and CEO of Target discount stores. Warren Flick is President and COO of U.S. Kmart Stores. Lilyan H. Affinito, a Director of Kmart since 1990, is the former Vice Chairman of Maxxam Group Inc. Enrique C. Falla, a Director of Kmart since 1992, is the former Executive Vice President and CFO of Dow Chemical Company. Seven of the 15 directors joined the board of directors after 1995. B. Top Management CEO and President is Floyd Hall. A strong group of senior executives has diverse talents and backgrounds. Of the eight members of Kmarts Executive Committee, five have joined the company within the last 18 months. III. A. EXTERNAL ENVIRONMENT (EFAS see EXHIBIT 1) Societal Environment Opportunities: Quickly advancing technology reduces the cost of communication 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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Case 21 Kmart Corporation Threats:

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Economic environment is difficult. Competition is offering something that is new and different in 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 a Kmart 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 where substantial growth is occurring. Threats: Fierce competition. Mature market. Decreasing margins. Demographics changes/shifts. IV. INTERNAL ENVIRONMENT 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 cycle and 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-ceasing exploration of new modes of retailing. Turmoil is due to management changes and lack of corporate direction. Management believes in making decisions now to improve performance tomorrow. C. Corporate Resources (IFAS see EXHIBIT 2)

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Case 21 Kmart Corporation 1. Marketing Strengths:

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Aggressive and focused advertising. Competitive prices across a clearly defined "image list." Private label credit card. Celebrity endorsements including: Jaclyn Smith, Kathy Ireland, Martha Stewart, and Fuzzy Zoeller. More than 100,000 items for sale. Weekly ad circular that reaches 72 million households in the United States. A new and bold Kmart logo. Weaknesses: Negative public image of Kmart (blue-light special). Poor customer service despite corporate beliefs in customer 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 $3.7 billion credit facility and a $1 billion public offering of 7.75% convertible preferred securities. Sold subsidiaries (Waldenbooks, Pace Stores, and OfficeMax) Weaknesses: Too many non-core assets. Approximately $700 million in aged and outdated inventory. Downgrade of Kmarts long-term senior unsecured debt rating. Seven years of disappointing earnings. FINANCIAL COMPARISON - 1997 FY Kmart Sales (millions) Net income (millions) Sales per sq. foot ROE % Profit Margin % WalMart Sears Dayton Hudson

$32,183 $117,958 $41,296 $27,757 249 3,526 1,188 751 211 N/A 318 226 5 19.8 20 16.8 0.8 2.9 2.9 2.7

3. Research and Development

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Case 21 Kmart Corporation Strengths:

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

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 the profitability of their own units and have the authority to make certain independent decisions. Each store manager has the power to match competitors prices. Category management system is in place. Kmart pharmacy is the third-largest in the US with 1588 pharmacies. Kmart is the worlds number-one photo processor. Most stores are less than one days drive away from a distribution center. Five-year, $2.3 billion renewal program is in effect. Under-performing stores in the United States are being shut 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 least part-time. Weaknesses: Turnover rate among employees is high. A work force reduction (due to closing of underperforming operations) will cause low employee morale. Management turnover is high. 6. Information Systems

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Case 21 Kmart Corporation Strengths:

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Satellite-based communications network is in place. Point-of-sale (POS) system improves accuracy and inventory control. Weaknesses: Systems are unreliable at times and require frequent and costly maintenance schedules. Some stores are still on older system. V. STRATEGIC FACTORS (SFAS see EXHIBIT 3)

VI. STRATEGIC ALTERNATIVES 1. Stability Pros: Will allow Kmart to focus on improving store layout and profitability without losing valuable market share. Cons: Will continue to have disappointing financial position as a result of non-core assets. 2. Retrenchment Pros Will give Kmart the opportunity to dispose of its noncore assets, including any under-performing stores. Will allow the corporation to lay the foundation for a bottoming out of Kmarts financial decline and a return to profitability. 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 quarterly losses) of the Kmart Corporation, we recommend that the company pursue turnaround strategies. Allow the company to start growth strategies. The company has been in limbo for seven years. VIII. IMPLEMENTATION Purpose of the two plans below is to implement a retrenchment strategy. Plan 1 For: 1. 2. 3. Too many non-core assets (W) Eleven consecutive quarters of disappointing earnings (W) 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 highly competitive markets, will be given a new appearance through Kmarts 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. 2. 3. Negative public image of Kmart (W) Celebrity endorsements (S) 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 plan will consist of advertising campaigns that will show improved store layouts and better customer satisfaction, which will be tied into Kmarts current and future celebrity endorsements. Moreover, these advertising campaigns will directly compare Kmart with competitors as far as prices, sales, and the availability of items. Also, a toll-free 800 line will be established (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 the overall financial position of the company. Guidelines will have to be met for the closing of under-performing stores as well as budgets for improving store layouts. All decisions and expenses

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will have to fall within those budgets and guidelines set by Marvin P. Rich. The loop will be completed by quarterly meetings and 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-Mart and Target in areas like prices and customer satisfaction. Furthermore, toll-free lines will be monitored and their performance evaluated. Based on their effectiveness, the plan should either be replaced or taken to a national level.

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IX.

EFAS, IFAS and SFAS EXHIBITS

EFAS (External Factor Analysis Summary)


KEY EXTERNAL FACTORS Opportunties: Many Kmart stores are located in suburban communities 80% of the U.S. population is within a 15-minute drive of a Kmart store Vigorous and healthy relationships with suppliers Well-educated and informed consumers Economy Threats: Competitors offering depth of assortment, low prices, and superior formats Rumors of possible takeover and bankruptcy .15 2 WEIGHT .10 .12 RATING 3 3 WEIGHTED SCORE .30 .36 COMMENTS Substantial growth is occurring in these areas Approximately 180 million people shop at Kmart each year. Imperative that Kmart continue these relationships Customers want good value, and they know it when they see it

Exhibit 1

.07

.21

.10

.20

.10

.30 0 .30 Fierce competitors include Wal-Mart, Sears, and Target Rumors are hurting Kmarts efforts to increase its profitability and enhance shareholder value Consumer wants quality and price Lower image for price/quality than WalMart

.10

.30

Price/value conscious consumer Image problem

.14 .12

3 3

.42 .36

TOTAL SCORES

1.00

2.75

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IX. IFAS, EFAS and SFAS EXHIBITS

IFAS (Internal Factor Analysis Summary)


KEY INTERNAL FACTORS Strengths: Store management teams are responsible for the profitability of their own units $2.3 billion renewal program Change image - celebrity endorsements/product lines WEIGHT .05 RATING 3 WEIGHTED SCORE .15 COMMENTS Have authority to make certain independent decisions about their operations Update stores Stars youll find at Kmart include Jaclyn Smith, Kathy Ireland, Martha Stewart, and Fuzzy Zoeller to change image 7 new board members (1995)

Exhibit 2

.10 .10

3 4

.30 .40

New management team and board of directors Weaknesses: Negative public image Market share / sales flat Strong competition Merchandising mix Finance losses 3/5 years

.15

.45

.10 .15 .14 .08 .11

2 2 3 2 2

.20 .30 .42 .16 .22

A long-standing problem for Kmart - poor blue-collar

Wal-Mart, Sears, and Target Aged and out-dated Major reshaping of the Board of Directors may improve the situation. Kmarts strategic planning usually arose after the fact

Reactive versus proactive management style TOTAL SCORES

.07

.14

1.00

2.74

21-21

Case 21 Kmart Corporation

(1998)

IX. SFAS, EFAS and IFAS EXHIBITS

SFAS (Strategic Factor Analysis Summary)


KEY STRATEGIC FACTORS Changing image/now poorer New management team and board of directors Customer base/located near 80% of population Economy - good Finance losses 3/5 years and flat sales Marketing strategies Competition Market share declining WEIGHT .12 .14 RATING 3 3 WEIGHTED SCORE .36 .42 ST x x DURATION IT LT x x x

Exhibit 3

.10

.30

.10 .16

3 2

.30 .32

x x

x x

.10 .18 .10

3 2 2

.30 .36 .20

x x x

x x x x x

TOTAL SCORES

1.00

2.56

21-22

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