Running head: PRELIMINARY STRATEGY AUDIT
i
Abstract
Kmart is one of the leading discount stores chain in the United States. Despite having
gone through turbulent times over the years, the company has experienced resurgence after
resurgence to remain among the top three largest chains. However, it ranks third behind Wal-
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Mart and Target, despite being a pioneer of the discount stores ‘movement’. This paper took
a closer look at Kmart’s value proposition, market position and competitive advantage. it also
scanned its current environment and that of the industry by applying the Porter’s five forces
model.
Identified several strategic issues that Kmart must re-look so that it can either regain
its leadership position in the industry or remain as a worthy player in the industry. For
instance, it should tailor its target market from the urban areas where its stores are
predominantly located. It should also abandon the cost leadership approach in its pricing
strategy. Adapting technology in managing its inventory and merchandising would go a long
way in cutting its costs. Revitalising its brand image should focus on creating a unique
customer experience. Furthermore, besides transforming its methods the company should
look at management changes to steer it from repeating similar mistakes that has led it to the
current situation.
PRELIMINARY STRATEGY AUDIT
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Table of Contents
ABSTRACT .............................................................................................................................. I
TABLE OF CONTENTS ..................................................................................................... III
1
INTRODUCTION ............................................................................................................ 1
1.1
1.2
1.3
2
VALUE PROPOSITION .................................................................................................... 1
MARKET POSITION ....................................................................................................... 2
COMPETITIVE ADVANTAGE .......................................................................................... 2
EXTERNAL ENVIRONMENTAL SCAN/FIVE FORCES ANALYSIS.................... 3
2.1 CURRENT ENVIRONMENT ............................................................................................. 3
2.2 FIVE FORCES ANALYSIS ............................................................................................... 3
2.2.1 Buyer Power ............................................................................................................ 3
2.2.2 Supplier Power ........................................................................................................ 3
2.2.3 Rivalry ..................................................................................................................... 4
2.2.4 New Entrants ........................................................................................................... 4
2.2.5 Substitutes ................................................................................................................ 5
3
STRATEGIC ISSUES ...................................................................................................... 5
3.1
3.2
3.3
3.4
3.5
4
TARGET MARKET ......................................................................................................... 5
PRICING ........................................................................................................................ 6
INVENTORY MANAGEMENT .......................................................................................... 6
BRAND IMAGE .............................................................................................................. 7
MANAGEMENT ............................................................................................................. 7
SUMMARY/ KEY FINDINGS AND RECOMMENDATIONS .................................. 7
REFERENCES: ....................................................................................................................... 9
Running head: PRELIMINARY STRATEGY AUDIT
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1
Introduction
Kmart’s story began when Sebastian Kresge opened a store in Detroit back in 1899. His
low prices appealed to many customers and he was able to open an additional 84 stores in the
next thirteen years. Currently, the Kmart business empire has about 1500 stores and operates
an online store, Bluelight.com. The brand stands for quality products and low prices. Despite
many challenges presented by wars and financial crises, the business did not fizzle out. It
continued its expansion and opened ‘discount stores’ that sold goods for a dollar or less
(searholdings.com). The discount stores chain has beat all odds to become the world’s third
largest chain behind Target and Wal-Mart.
1.1
Value proposition
Kmart is a subsidiary of the Sears Holding Corporation that offers its customers quality
products at affordable prices. The discount stores chain offers an assortment of merchandise
that includes consumer electronics, toys, garden equipment, outdoor living, food products,
apparels and seasonal products. A few years back, it acquired Sears and thus offers some
Sears brand merchandise such as Kenmore and Craftsman. Some Kmart stores operate Sears
Auto Centres that offer professional motor repair, maintenance and a wide array of motor
accessories. Kmart carries several exclusive brands such as Smart Sense, Route 66, Joe Boxer
and Jadyn Smith. A majority of Kmart stores run in-store pharmacies. About 25 Kmart Super
Centres operate 24-hours-a-day and carry groceries and merchandise similar to that offered in
the discount stores. Kmart is part of the ‘Shop Your Way’ social experience where registered
members earn points which they can redeem them while shopping. Kmart runs the layaway
program that lets customers finance their online and in-store purchases in a cost-effective
manner. Customers can also purchase merchandise online and then pick up at their desired
store through a service offered by MyGofer. Kmart customers can also purchase products
through kmart.com as well as by using a mobile application (searsmedia.com)
PRELIMINARY STRATEGY AUDIT
1.2
2
Market Position
Kmart currently ranks as the third largest chain in the discount stores industry, behind
Wal-Mart and Target. Over the past few years, the chain has stumbled due to intense
competition, its dwindling grocery business and an increased onslaught in the urban areas.
This has seen its sales volume decline. Although, Kmart introduced the layaway program,
other competitors have pushed this idea further and thus introduced more competition for
low-income earners (Mattioli, 2013).
Kmart has had its fair share of challenges. For instance, the company had to file for
bankruptcy in the early 2000s. Furthermore, the retail chain has had to close non-performing
stores over the years. When Edward Lampert came in as CEO, the chain received a breath of
fresh air that included the Sears-Kmart merger. However, several missteps have slowed down
the anticipated full recovery (Schultz, 2012).
1.3
Competitive Advantage
Competitive advantage refers to the ability of an organization to generate more sales
and profits, and sustain more customers that its competitors. Kmart offers a quasi-banking
service at its stores for low-income customers who do not operate bank accounts. This allows
individuals to use their social security checks shop at the stores. The stores also offer checkcashing services at over six-hundred stores in its network. It has also collaborated with
different utility companies to enable their customers to pay for water, gas and cell phone bills
at the stores. These services are expected to retain existing customers and lure new ones.
Although, Kmart introduced the layaway program, intense competition has forced it to
respond with a free layaway program (Mattioli, 2013).
According to Schultz (2012), Kmart has many stores located closer to urban
residential areas than any other competitor. This provides it with an opportunity to become a
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niche player. After the Sears-Kmart merger, the discount stores could carry Sears branded
items which increases its customer traffic.
2
2.1
External Environmental Scan/Five Forces Analysis
Current environment
The discount stores industry has grown into an extremely competitive one. This has led
its pioneer Kmart to falter and even seek bankruptcy reorganization. The different players in
this industry compete on price. However, the emergence of new entrants has led to the
evolution of differentiating factors as the clamour for market share intensifies. For instance,
Wal-Mart focused on rural America and the suburbs and became a force to reckon with in its
use of technology to manage its inventory. Conversely, Target adopted a hybrid of lowpricing and high quality experience with its product offerings and its stores.
2.2
Five Forces Analysis
The Porter’s five forces analysis model assists an organization to learn where power is in
the business. It forms the basis for analysis of the attractiveness of the structure of an
industry. Therefore a business can assess its current strength of its competitive position and
the strength of the desired position (notedesk.com).
2.2.1 Buyer Power
Ordinarily, when individual buyers, who are negligible regarding a firm’s total sales,
give threats to switch, then such threats are not overwhelming to the organization (Mcafee,
2012). Over the years, Kmart has faced bad publicity due to investigations on their top
executives and its wanting performance. The closure of non-performing stores has also
reduced the traffic in the remaining stores. This is because a majority of Kmart customers
believe that the stores chain is leaving the business.
2.2.2 Supplier Power
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Kmart relies on its suppliers to deliver products. The company has a nationwide network
of stores even in prime shopping areas; hence its suppliers are many. The supplier power in
the retail industry is fair. Even though Kmart has undergone many challenges that include
bankruptcy it still yields enough power over the suppliers. This is because not many suppliers
or Kmart are willing to end the relationships. Kmart purchases in huge volumes and has huge
shelf space, therefore the suppliers will not just abandon it. For instance, Kmart has the power
to allocate a competing brand larger shelf spaces if a supplier increases their prices.
2.2.3 Rivalry
There is intense competition in the discount stores industry. This is due to the
presence of many rivals offering the same products and services. Furthermore, there also
exists fierce price competition (as implied by the term ‘discount stores’). There industry is
dominated by three main rivals i.e. Kmart, Target and Wal-Mart, which makes it almost an
oligopoly. The rivals have tried to differentiate themselves using different approaches. For
instance, Wal-Mart portrays itself as a low-price leader and Target puts across its value
proposition. Kmart has not really been successful in portraying a steady image. This is
because its carries branded merchandise that fits into its value proposition strategy, as well as
trying to compete on pricing although Wal-Mart remains on top (Hopkins, 2003).
Kmart has not been able to match Wal-Mart’s technological prowess. On the other
hand, Target’s phenomenal growth, partly because of Kmart’s woes, is another troublesome
issue for Kmart. Kmart lost many customers to other stores such as Target and Wal-Mart
during the bankruptcy period and also when it decided to close some of its stores. These
customers may view the switching costs back to Kmart as too high, and thus the retail chain
will have to provide them with convincing differentiators to lure them back.
2.2.4 New Entrants
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The discount stores industry presents high entry barriers to new entrants. In order to
compete effectively with chains like Target and Wal-Mart would first have to be in a position
to compete on cost. Apart from the large capital outlay a new entrant would require, they
would also face difficulties in getting reliable distribution chains and suppliers. Therefore, the
threat from new entrants is minimal. However, Kmart is the third largest stores chain in the
United States. Wal-Mart boasts of superior inventory as well as distribution capacities, lowcost labour and real estate structure, and an advanced satellite-based communications
network.
2.2.5 Substitutes
The substitutes to the discount stores may be grocery stores, club stores, brand-name
stores, dollar stores and other small discount retailers. However, the big discount stores offer
a wide range of merchandise; hence they actually have few true substitutes. On the other
hand, many people would rather look for an item from a huge store that carries many items
rather than in a brand-name store. Kmart also has the advantage of having an online store.
Therefore, all these other alternatives present very low threat.
3
3.1
Strategic issues
Target Market
Kmart has struggled to define its target market guided by customer expectations. The
Sears merger, inclusion of branded house ware, apparel lines amongst other things has helped
Kmart to keep operating. However, to survive in the long run Kmart should expressly define
itself, the target market and see through the implementation of its strategy. Once it has clearly
differentiated itself, Kmart should change its focus to design branded merchandise rather than
commodity-type products. It should also increase its marketing campaign to clarify its brand
position. Schultz (2012) notes that Target and Wal-Mart used about three times in media
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marketing each, than what Kmart spent in 2010 and 2011. Both competitors focused their
campaigns on low pricing.
3.2
Pricing
The discount stores industry is guided by price. Unfortunately, Kmart has limited
options on how to effectively counter Wal-Mart’s and Target’s low-price models. A majority
of Kmart’s customers are price-sensitive, and therefore it cannot segment the customers by
offering them different prices on the basis of different characteristics. Therefore, Kmart is left
with limited options for their price discrimination strategy. For instance, it could adopt
coupons for price-sensitive clients and bulk discounts for customers willing to buy items in
large quantities. However, none of these strategies would be special to Kmart, as it would
lead to enhanced competition. In fact, Wal-Mart with its wide-ranging efficient management
and vertical integration would have a better advantage. Thus, Kmart should abandon the cost
leadership strategy in the short run until it has adequate infrastructure, as it would only eat
into its resources.
3.3
Inventory Management
Kmart has not done well in inventory management and merchandising. Some of the
merchandising problems that Kmart has faced include weak supply-chain management,
recurrent stock outs, unnecessary inventory of slow-moving merchandise and shaky pricing
strategies. Currently, Kmart needs to look into ways it can improve its financial position
without necessarily opening new stores. Therefore it should invest in technology that
guarantees merchandising optimization. This will enable Kmart to come up with solutions
that make it easier to make decisions on pricing decisions and profitable buying on the basis
of consumer demand. Some of the options that Kmart would consider are Retail Revenue
Management, Demand-Based Management and Pricing & Revenue Optimization. Kmart will
PRELIMINARY STRATEGY AUDIT
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then be able to apply advanced data processing techniques on its inventory data and
accurately forecast supply and demand patterns on individual items and the entire store.
3.4
Brand Image
The tough times that Kmart has gone through have dented the image of one of the most
recognizable United States retail brand. This has been occasioned by the closure of some
stores and the bankruptcy. The poor merchandising and unappealing stores have not helped
the situation. That is why Kmart must purposely reinvent and re-design the customer
experience. They must make it about buying the Kmart idea, the Kmart ethos, and the Kmart
lifestyle rather than just buying products from Kmart. However, a transformation of the brand
will require culture changes within Kmart management. They have to focus on the long term
performance and not just close down poorly performing stores.
3.5
Management
A close look at Kmart’s top executives will reveal that the company is exceptionally
insulated i.e. not many outsiders have come on board to steer the company out of the murky
waters. This is perhaps the reason why there have repeated mistakes processes, and the
boardroom has been experiencing internal wars and fiefdoms. Instead of focusing on the
reorganization of processes and procedures, the company should consider management
restructuring for Kmart to re-affirm its relevance in the industry.
4
Summary/ Key Findings and Recommendations
Kmart must expressly define itself and the target customers. Kmart’s presence in the
urban areas gives it an advantage over its competitors who do not have many stores, and
therefore it should develop its product lines to suit the urban residents. Kmart must reposition its brand through advertising to the target groups. It must revamp its inventory
management and merchandising and probably acquire technology that will make these
processes easier. It must hire top-notch senior managers, especially in marketing and
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merchandising, from outside the company to assist it to get over its perennial problems.
These measures will require the management to make some tough decisions if consumers are
going to have the ‘bluelight special’ experience in future.
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PRELIMINARY STRATEGY AUDIT
References:
About Kmart (n.d.), Retrieved 13th Sept 2013 from http://searsmedia.com/kmart/kmart.htm
Corporate History: A retailing legend is born (n.d.), Retrieved 13th Sept 2013 from
http://www.searsholdings.com/about/kmart/history.htm
Hopkins, J. (2003), Wal-Mart’s influence grows: Retailer’s power touches everything from
price to wages. Money
Mattioli, D. (2013), Déjà vu for Sears CEO: Fix Kmart. Retrieved 13th Sept 2013 from
http://online.wsj.com/article/SB10001424127887323783704578247762547817102.ht
ml
Mcafee, R.P. (2012), Competitive Solutions. Princeton University Press: Princeton, New
Jersey
Porter’s Five Forces Model (2009). Retrieved on 13th Sept 2013 from
http://www.notesdesk.com/notes/strategy/porters-five-forces-model-porters-model/
Schultz, E.J. (2012), Why Kmart lost the attention of discount shoppers. Retrieved 13th Sept
2013 from http://adage.com/article/news/kmart-lost-attention-discountshoppers/233369/