Kmart and Sears Merger – Summary and Analysis

The acquisition of Sears Roebuck & Co, cost to Kmart Holding Corporation $ 11 billion (Dess, Lumpkin, Eisner, Strategic Management, 211, 2008). This merger occurred for economical reasons. This merger will benefit both companies in different ways separately and as Sears Holding Company.

Kmart will benefit from the planned cost sharing of several of Sears leading proprietary brands as well as present opportunities to capture significant revenue and cost synergies including merchandise and non-merchandise purchasing, distribution and other SG&A expenses.

Sears will be out of malls, and will benefit from Kmart’ stores locations which are in the high-income customer target of Sears. Moving out off malls means that Sears will sell some of it real estates which will bring money to the company.

According to Edward S. Lampert, former chairman of Kmart and new chairman of SCH, the goal were to seek to leverage the combined strengths of Sears and Kmart to obtain greater long-term value either could have generated on a stand-alone basis.

SHC will offer a wide variety of products and combining both their strong brands such as Kmart’s brands; Martha Stewart Home and Sears’s brands like Kenmore, Craftsman and Die Hard, they will compete among others.

Combining two forces (even in our case where we have two weak companies) increase their merged company’s market presence. Choosing from previous companies the best human resources, information technology, operations, finance, strategy lead them to a stronger organization.¹ Based in all the above SHC will become the third largest retailer in the United States with $ 55 billion in annual revenues and 2,350 full-line and off mall stores and 1,100 specialty retail stores in the USA.

Higher market shares often result in greater purchasing power over suppliers. Increased orders result in lower purchase prices for materials and services, allowing the company to be more price competitive.²

The issues SHC will face are internal and external such as organizational culture, organizational structure, organization identity, competition, trained staff, customer’s loyalty and SHC store’s design.

Organizational culture is a system of shared values (what is important) and beliefs (how things work) that shape a company’s people, organizational structures and control systems to produce behavioral norms (the way we do things around here) (Dess, Lumpkin, Eisner, Strategic Management, 309, 2008).
In merger there will be employees from Kmart and Sears which will share different organizational culture. And according to an AT Kearney research study; in mergers the more powerful partner imposes his culture on the less powerful one. The key to a strategic merger is to create a new organizational culture for SHC.

First they need to see what the organizational culture before merger is. They can do this through an OCI which provides a picture of an organization’s operating culture in terms of the behaviors that members believe are expected or implicitly required. By guiding the way in which members approach their work and interact with one another, these “behavioral norms” determine the organization’s capacity to solve problems, adapt to change, and perform effectively. ³

First alternative is that they can conduct a separate OCI for Kmart and Sears’s employees and decide which the best organizational culture is and apply it. The advantage is that this will not be time consuming since one part is already used to this organizational culture, the disadvantage is that there will be resistance from the employee’s of the other company since they will see this not as SHC culture but as Sears or Kmart culture (depending on which of the two company’s culture will be chosen) and they will not be willing to share common values and beliefs of another company.

The other alternative which I think is the best solution is to cross results from both Kmart and Sears and take the best elements from both companies. The advantage here is that the employees will see this as SHC culture and will share these values. The new SHC culture will encourage individual identification with the organization and its new objectives (Dess, Lumpkin, Eisner, Strategic Management, 309, 2008).

This is important because people should start to cooperate; they are not competitors, not anymore.
Organizational structure refers to the formalized patterns of interactions that link a firm’s tasks, technologies and people. Structures help to ensure that resources are used effectively in accomplishing an organization’s mission (Dess, Lumpkin, Eisner, Strategic Management, 340, 2008).

Since SHC is a new company there should be applied a new structure. I think the best structure in this case is a Matrix structure. Since SHC will operate under at least six different formats and since there were past problems related to the organization’s identity and image, the Matrix structure will keep them in contact and through continuous communication between the ‘’directors of stores’’ they can manage to combine their changes and so keep uniform corporate image and identity.

The advantages of this structure are that it: Increases market responsiveness through collaboration and synergies among professional colleagues, allow more efficient utilization of resources, improves flexibility, coordination and communication, increases professional development through a broader range of responsibility.

The disadvantages are that: the dual-reporting relationship can result in uncertainty regarding accountability, intense power struggles may lead to increased levels of conflict, working relationships may be more complicated and human resources duplicated and excessive reliance on group processes and teamwork may impede timely decision making (Dess, Lumpkin, Eisner, Strategic Management, 350, 2008).

Even after the merger both companies will continue
to operate separately under their respective names. And as I mentioned above this is not the right thing to do, because there should not be anymore Kmart or Sears. The quicker they manage to change their previous identity into Sears Holding Company, the better. Buyers need to see that this merger brought changes and the reason they were not preferred from them, are being improved into this new company. As longer they continue to act as Kmart as Sears the more difficult will be for them to be seen as SHC. They need to have ‘’one’’ identity and show improvements and finally get some attention, people must perceive SHC as a new company but which still have the good quality (their brand names are preferred from the clients) and low prices and which continue to improve; they cant effort anymore to be seen as ‘’second hand’’ store.

Kmart was placed as a discount store and Sears as a department store. SHC must be placed as a discount store since department stores are not longer liked from customers.

Before the merger Kmart was competing against a low-price Wal-mart and a high-style Target and Sears against Home Depot and Lowe. Also as SHC they have to compete against Kmart and Sears as they was and change the way people sees them, and through their past experience try to not make the same mistakes and improve their products.

Now as SHC they have to decide against whom they want to compete. Who is more important? They definitely can’t compete against Wal-Mart which is from several years the largest US Corporation. The best move is to compete against Target and Lowe’s who are more easily to compete. They can take advantage of the good allocation of Kmart stores in key urban and high density suburban markets with high-income customers and far from these 2 competitors. They also can fill areas that are overlooked from the others.

There are 3 types of competitive advantage: overall cost leadership, which is based on creating low-cost position, which means that SHC must also be able to manage the relationship throughout the value chain and lower costs throughout the entire chain.
(Dess, Lumpkin, Eisner, Strategic Management, 156, 2008) The advantage here is that SHC will increase sales but due to cut costs in operating expenses the companies operations will become weaker, and if they offer low prices means they will compete directly with Wal-mart which is a leader in low-prices, and SHC can’t afford such direct competition with them.
Then there is differentiation which means that SHC must launch in the market products there are unique and valued, and the price is not an issue since because of the high quality customers will pay more. The disadvantages here are that: SHC a merger company of Kmart and Sears can not be easily perceived by customers as a high-quality company and the high prices they will offer will push the customers away.

And there is a focus strategy where the company can gain competitive advantage through a combination of low cost and differentiation. This I think is the best strategy since they can compete through their strong brand such as Martha Stewart, Kenmore, Craftsman and Die Hard, which are perceived very well from customers, against Target which is known for the high-style provided, and with low-cost they can compete against Lowe’s. They need also to attract more brands.

Both companies had problems with human resources. SHC must recruit talented people-employees at all levels with the proper sets of skills and capabilities coupled with the right values and attitudes. Such skills and attitudes must be continually developed, strengthened and reinforced and each employee must be motivated and his efforts focused on the organization’s goals and objectives (Dess, Lumpkin, Eisner, Strategic Management, 119, 2008). They need to find and train people who are identified with company’s mission and values, and whom trying to achieve their personal goals, achieve also the company’s goals.

There will be also lay-offs which SHC need to manage well. Because there will be people affected by this and the biggest mistake companies do is that they focus in the fired people and how to make them feel better through compensations or explanations of the style ‘’ you are a good manager, is not your fault’’ and forget that they should focus in the remaining employees which is their primary resource. The remaining people will be demotivated because of the large number of firings and think they can be next, so this process is crucible; CEO must talk to them, tell them the truth about the situation, explain them the reasons why they fired their colleagues, motivate them and show them that SHC counts on them and that they are part of the merge process which will be a difficult one and there will be a lot of stress. SHC need to keep the remaining staff motivated in order to share the same vision and mission of the company.

The most important part of the remaining employees is the former high level managers, who probably will loose their previous positions and need to work in lower positions. So, this is the part there could resist more to the changes and maybe the part where the attention of SHC should be concentrated.
Another issue to be solved for SHC is customers. SHC should focus primarily on them and then in profit maximization, which will come if they are able to fill the customer’s need for good quality, competitive prices, service, time and possibility to easily reach them. Marketing should try to anticipate needs and has customer satisfaction as its primary goal. They need to do surveys to see how people perceived them as Kmart and Sears and what they are expecting from SHC.

The design of their stores is keeping customers away because they see the stores as old, not attractive and with a cheap design. SHC stores are what people see in first place, and in order for someone to enter the store they need to redesign its ambient.
From the internal design people will see that there are being changes in SHC, and this will help SHC being separated from the previous Kmart and Sears.
To conclude SHC should do post merger monitoring, and if there are needed additional changes to enhance results do them.

References:
¹ ² http://www.investopedia.com/articles/stocks/07/drive_stock_price.asp
³ http://www.humansynergistics.com/products/oci.aspx

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