Insights on Strategy

Business Makeovers

Insights on Strategy

A Monthly Newsletter published by Strategy Development Group, Inc.                          April 2002 Issue

Kmart Struggles with Its Business Strategy

In recent newspaper articles Kmart was often negatively compared to successful rivals, Target and Wal-Mart. Why has Kmart fallen on hard times and what lessons can we learn from this unfortunate turn of events?

How Did Kmart Compete?

How did Kmart keep its customers coming back? What was its business strategy?

For years, Kmart heavily advertised lower prices on selected items using coupons and sales. Its advertising budget as a percentage of sales far exceeded rivals, Target and Wal-Mart. This policy successfully brought customers to its stores. Kmart also promoted special brand relationships with Sesame Street, Martha Stewart and others to differentiate its product offerings from other discounters.

But with Kmart's recent lackluster performance, new management abruptly changed this business strategy by offering lower prices "across the board" all the time and reducing its heavy dependence on promotional advertising. In other words, it would follow Wal-Mart's successful strategy of everyday low prices "Always". Was this really a good idea?

What Did Kmart Forget?

Kmart's financial troubles may have had nothing to do with its long established strategy of promotional advertising. The same newspaper articles referred to earlier also pointed out constant complaints from customers regarding, service, unbalanced store inventories, sloppy merchandising, and uncaring employees. Kmart customers expected a higher level of service because companies like Wal-Mart and Target had "raised the bar" on service. Customers might have avoided bargain opportunities if they were constantly disappointed with the level of service. Kmart may have let its weaknesses in customer service undermine its competitive advantage in promotional selling.

Kmart also learned the hard way that there are risks in changing directions too quickly. When it abruptly stopped advertising and followed Wal-Mart's successful strategy of every day low prices, Kmart lost the "branding" value or good will it had built up over the years (that is, why a customer chose to shop at Kmart) in an attempt to compete head on with the best in its class. Loyal Kmart customers preferred promotional shopping over "consistent value". That's why they shopped at Kmart in the first place. When promotional sales stopped, many of these same customers probably looked elsewhere for promotional opportunities. It was not surprising that many of its long-time customers did not show up at their stores. Strategy changes must be gradual and well thought out keeping the customer's needs clearly in focus.

Following an industry leader's business strategy is also a hard way to go, sInc.e leaders generally have a lot more experience, resources, and momentum behind them. Wal-Mart can offer the lowest prices because of its buying power and lowest operating costs in the industry.

What Can We Learn?

As business owners, what can we learn from Kmart's recent hardships? Consider these four points:

1. Respect what your customer already expects you to be.
2. Don't let your weaknesses as an organization undermine your strengths
3. Implement change gradually without confusing or offending your customer.
4. "Trying harder" is often a more difficult path to follow than "being smarter".

As you can see the big guys can make the same mistakes; but their falls can be a lot more painful.