Wal-Mart and Kmart - the Structure of the Five Main Business Functions - Essay Example

of the of the Assignment no: QUESTION 850 words For the two chosen organisations, compare and contrast the ways in which the five main business functions (marketing, operations, human resource management, accounting and finance, and information management) are structured and organised. The key to any successful business or organsation depends upon the five key functions namely, the marketing, operations, human resource management, accounting and finance, and information management. These functions do not operate in isolation with each other. They are interdependent. However, it must be noted that these management principles are general in nature and not specific to any particular industry. Business functions are structured and operate differently in different contexts. With this in mind we shall consider here the success or failure of two competitors namely, Wal-Mart and Kmart, both of who are general merchandise discounters. While Sam Walton (CEO Wal-mart) did start off with the basic idea borrowed from Kmart but his strategy was unique. At the outset it was the marketing strategies of Wal-Mart that fetched them a smooth take off. While Kmart opened up shops in large metropolitan cities like New York, Wal-Mart opened good sized stores in smaller towns. Wal-Mart chose isolated rural towns where more than one retailer could not survive and hence in no time all the local shops had to down their shutters. While Kmart wanted to supply private cheaper brands to the affluent, Wal-Mart chose the national brands at low prices. This could be possible because of bulk purchase. He managed to keep the prices so low that people could shop from home rather than make trips to the cities. They understood the needs of the customer. Human resource management was another stronghold of Wal-Mart as right from the inception they did not believe in allowing or forming a union (Mitchell Levy and Paul A. Losch 2002). They felt it was detrimental to the interest of the company and the union only fed itself from both the management and the labors. They believed in exhorting their own people, motivating them through incentives and awards such as company stocks by which they could also make up for the low wages. A corporate culture was set which encouraged the employees and managers to consider the customer the focus of business. The customer is the king was the policy at Wal-mart whereas at Kmart customer service was poor. Staffing is a perennial challenge for any business. They should know when and where to employ the right number of people. This is another sector where Kmart lost out on Wal-Mart. While Wal-Mart had 313 people per store Kmart had only 120 (Wiley, 2003). This resulted in poor customer service which Kmart did not pay heed to. Wal-Mart kept a tight rein on finances right from the beginning and its managers too knew that they were working on low margins. They also sourced their purchases at very competitive rates. Because of bulk purchases they were in a position to dictate terms to the suppliers. They also sourced their purchases globally, picking up goods from countries with low-cost labor. They never spent more than 2 percent of sales on administrative costs which was less than half the industry average. With its cutting edge information system when Wal-Mart was spending only 2 cents per dollar getting goods to its stores, Kmart was spending 5 cents (Case study 8th US edition). This is the reason that Wal-Mart could sell goods 3% cheaper than Kmart. Kmart was ‘penny-wise and pound-foolish’ whereas Wal-Mart was willing to spend money by which they could save money for the company in the long run. They paid low wages, just slightly above the minimum wages. They could afford this because they employed immigrants or retired senior citizens and being mostly in the rural areas they could procure low paid staff. Kmart stores on the other hand are in urban areas where the personnel cost is not as low as what Wal-Mart pays. The most important factor for the success of Wal-Mart can be accounted for its efficiency and fore-sightedness in keeping itself well informed through the adoption of information technology. Kmart too installed computers at all its stores but the cash registers were not scanned which meant that the sales figures were not updated real time. They collected the necessary data but did not use it to forecast or take management decisions. They relied on the management’s judgments rather than facts and figures and hence their investment in technology was rendered useless. Wal-Mart could adjust the sales and inventory records and hence never faced shortage of supplies. Besides, each store of Wal-Mart had the discretion to place orders with the vendors directly and receive supplies also directly. This strategy of decentralization leads to efficiency in terms of time and administrative costs apart from making the employees feel ‘associates’ and not wage earners. Kmart lacks in strategic decisions. When they introduced groceries at their stores they did not pay heed to the infra-structure changes to go with it. The shopping carts were too small as they were originally intended for clothes; the aisle was too narrow due to which the carts bumped with each other. Wal-Mart understands the need for a clear strategy and also implements it. It is this strategic management due to which their shelves were never out of stock. We can thus conclude that though Kmart started off at a very fast pace Wal-Mart took over due to its efficient planning, strategic decisions and cutting edge technology. QUESTION 2: 850 words Explain the differences that exist between the ways in which these two organisations manage their business functions. Competition is necessary to drive sales growth. Competition results in better services and lower prices for the consumers. Competition should make the companies sit up and take stock of its people, management polices and process. Kmart started off as a perfect hit opening more than 600 stores within a decade. This success gave it complacency and it refused to take note of competition that had come up in the name of Wal-Mart. In the face of competition Kmart did not recognize the need to upgrade technology, renovate its dingy stores or reduce prices. They felt that they catered to the up market niche clients in the suburbs whereas Wal-Mart was predominantly in the rural areas. Hence Kmart did not consider Wal-Mart a threat, which is where their decisions went wrong. They took pride in their early success which only increased their complacency. Both Kmart and Wal-Mart started off as entrepreneurial companies but Kmart suffered a setback when the CEOs after Cunningham could not pursue his ideals and goals. Cunningham himself is responsible to some extent because Wal-Mart’s Sam Walton, while constantly upgrading and expanding did not ignore the need to identify and groom a successor. Long term goals were not set by Kmart where Wal-Mart scored. The managers that came into Kmart did not take note of the constantly changing market and its trends. Kmart could not compete with Wal-Mart because its inventory control systems were less efficient. Wal-Mart squeezes profits at each point in its supply chain and uses these to negotiate deals with the vendors. Even though Kmart did start off with computers in the early seventies the managers felt it would reduce autonomy and hence refused to make the best of use of it. It is this field of information technology alone that gave Wal-Mart an edge over Kmart. All their managers were motivated enough to track inventory and sales and place orders with the vendors directly. Kmart used newspaper ads instead of television commercials. They cut down on IT costs when the going was bad, which amounts to cutting of air supply to the lungs. A supply chain stores of the magnitude of Kmart failed to give due recognition to the IT sector, which resulted in late performance or wrong decisions. Wal-Mart had cutthroat pricing and solid logistics whereas Kmart steadily grew complacent. They were orthodox in finances and lost three CIOs in the 90s within a span of five years. Wal-Mart was pouring money into IT while Kmart’s budget grew smaller. Product, price and location are the three key factors to be considered for success in sales Stevens Sessions). Kmart initially succeeded on all three fronts but Wal-Mart intelligently and skillfully got an edge by introducing branded products at low costs. Initially Kmart had very low priced product range (although inferior brands) and they thought this was enough to drive competition out of the market or not allow competitors to penetrate the market. This proved to be a wrong strategy in the long run. Kmart was driven to a situation where to improve cash flow they had to concentrate on cost reduction. They chose to cut costs in the IT sector and publicity, both being the key areas. Wal-Mart on the other hand was constantly learning and improving, conscious of the fact that competitors would stay. They were always alert at finding and implementing new retail concepts. The most remarkable fact was that they concentrated on each store depending on its location. The merchandise was available according to the need of that community. Besides, the associate in charge of that store was given incentives to plan out promotional campaigns for a given period for the product that he felt would be a hit in that market. These innovative strategies and constant upgradation keep any organization ahead of competition, which Kmart failed to recognize. In fact all their CEOs lacked the vision and capabilities so essential for an entrepreneur. The business goals and focus differed in the two companies. Kmart concentrated on opening new stores while maintenance of existing stores was not paid heed to. They also ignored the customer needs and merchandise assortment; their procurement costs were too high. Wal-Mart on the other hand kept its operating and procurement costs low and concentrated on the changing needs and tastes of the customers. The failure of Kmart can be attributed to its complacency and incompetence. Kmart ignored the value of strategic branding. While it started off as unique in its retail category it did not create a place for itself in that category. In a mature discount retailing industry, Kmart’s pace of growth was stunted. It was having lower margins and stocks were not moving fast enough. Price war is not the solution in such competition. Individual companies should concentrate on its own strengths and build a brand image. It should specialize and create a place for itself in that particular category. At any cost the customer satisfaction and expectations have to be met. Hence we can conclude that Wal-Mart formulated strategic policies and kept customer’s needs at the helm while Kmart took a back seat expecting its past success to see it through. QUESTION 3: 1800 words In each case, critically evaluate the benefits, and any disadvantages, of the organisational arrangements for managing these business functions that you have identified. Kmart opened its first store in 1962 and Wal-Mart followed close at heels in the same year. By the end of next year Kmart had 53 stores while Wal-Mart was just planning its second. With the advent of the next century Wal-Mart’s profit margins was more than ten times that of Kmart’s. What were the benefits and disadvantages in both their management functions which brought about the turn of events? Where did Kmart go wrong? Was Wal-Mart right in all its decisions? Wal-Mart with sales of $256 billion is the largest retailer in the world today (C Gopinath 2004). Kmart lost to bad strategy and is only recovering from bankruptcy in 2003. Kmart had to lay off employees and close almost 300 stores which is a reflection of its poor cost control and finance management. Any supply chain management has to take into account several factors. Demand needs to be forecast or planned based on past market performance. This invariably differs from season to season. Promises of orders should be made taking into account the lead time and constraints in procuring the merchandise. Which store should stock which products also depends upon the community it serves. Optimal order quantity has to be decided which enables to keep costs of procurement low. Constant track on the movement of stocks has to be kept. Above all a continuous evaluation process helps one to decide if the decisions taken are correct. All this ultimately translates into logistics management which means the right item should be available at the right place at the right price of the right quality and at the right cost. As far as Wal-Mart was concerned this is the area which fetched them success. It was their foresightedness and the decentralization of responsibilities which enabled them to manage over 2000 stores which such efficiency. It is not humanly possible for any CEO to take stock of all that happens at all the stores everyday. Responsibilities have to be shared but monitoring has to be done to ensure smooth functioning. Kmart on the other hand neglected this field and relied more on the manager’s. They did not have accurate and timely information of the fast moving products which need frequent replenishment nor were they aware of the products for which heavy inventory was not called for. Customer relationship is another key factor responsible for success in sales. In today’s competitive environment a holistic approach to customer relationship management is necessary to get effective results. It is absolutely necessary to have automation in marketing, sales and service. Customer behaviour has to be analyzed from time to time and the changes adapted accordingly. In 1987 Kmart did invest in faster technology adoption but it was never used to full potential. Date warehouse could have been used more aggressively for demand forecast and historical data can help eliminate products which do not sell. Data may be available but it has to be put to use by the managers otherwise of what use is the data? Every organization has to be conscious of its responsibility to the society. Wal-Mart may be the largest retailer in the world today but it has reached there at the cost of the livelihood of many. It started opening stores in small towns or rural areas where it was difficult for more than one retailer to survive. The local traders had to shut down because they were no match to the prices and the variety that was offered. Their discriminatory pay and promotion practices are highlighted by the fact that employees have filed suits against the company. Kmart has definite structural disadvantages. It feels Wal-Mart is a threat whereas this should not be a concern because both have their own market areas defined. Where Kmart fails is to provide the merchandise suitable to the market that it caters to. It is not necessary to make all products available to everyone but specific customer needs at specific locations. Kmart has to adopt strategic marketing. It has to re-think and plan its business policies which it has been following for decades. It lacks vision, operational and low cost position as Wal-Mart enjoys, which is amply evident from its policy of varied merchandising. Wal-Mart has the culture to allow its associates to run the stores like ‘family stores’. This makes the employees feel a part of the store and compensates for the low wages. Employee benefits and better work environment attract good people. This is no doubt a good business strategy but they could attract the immigrants or the senior retired people who were willing to work on low wages. Kmart has most of its stores in urban or semi urban areas due to which they could not escape the unionizing of staff. This is yet another region which Wal-Mart did not have to encounter. The geographical locations of Wal-Mart stores helped in keeping its capital investment low in terms of real estate, taxes and utilities. Low capital investment with high turnovers gave it a smooth success. Even with success all through Wal-Mart does not venture into high end stores in suburbs or the urban areas which clearly shows its effective cost management policies. Kmart being in the urban areas has a higher cost in terms of real estate, taxes and employee wages. Their overall operation costs are higher which to some extent is set off by higher margins as they cater to a niche client who are willing to pay for unique products. High volumes give Wal-Mart the bargaining power with the vendors but this aggressive attitude does attract attention negatively amongst the suppliers and does cause heartburn. Both these companies have internet sites and provide ecommerce. Wal-Mart prefers its vendors to do more business via the internet. Of late Kmart too has increased its investment and commitment to internet. Kmart has also slashed costs inventory cuts but good financial management does not necessarily mean they could be successful in retailing too. Today Kmart is at crossroads unable to decide which way to go. This itself proves its deficiency in management. Wal-Mart is not a threat to them. In fact they have clear advantages because of their store locations and have also roped in some vendors which Wal-Mart will not touch simply because these products are meant for the urban crowd. Kmart can take advantage of these facts and concentrate on brand names and logos instead of competing with competition. Kmart cannot compete with Wal-Mart because its inventory control systems are less efficient. Kmart’s suppliers too are responsible to the extent that they urged Kmart to sell goods in which they (the suppliers) were interested rather than helping Kmart to focus on the fast selling items. But the fact that an organization of the size of Kmart could be lured by the suppliers speaks of the lack of focus and direction on the part of the company. They were interested in just selling, not in selling what is profitable; they just wanted to procure merchandise, not what was necessary. They wanted to sell; they were not interested in building relations with customers. The onus ultimately falls on the core management team which they lacked. They diversified into various businesses, opened newer stores, added product lines but kept losing ground to Wal-Mart. They ignored the more important factors like relying on IT for information and decision making, on giving a facelift to its existing stores or brushing up its customer services. When it reached the verge of bankruptcy it started selling off the newer stores and started concentrating on its discount stores. Tall plans were made even in 2000 to restructure and increase productivity of its stores, cut prices and be back on the right tracks. They closed stores, reduced staff, cut prices and slashed the advertising budget. Allocation of goods was centralized which also proved to be a failure. It was a failure because the central allocation department seldom used the data from the computers and hence was not aware of what sold and what goods should be in low stocks. This should have been at the discretion of the local stores who are at the point of sale. Because of low sales warehousing became a problem as inventory did not move. Trucks remained blocked and there came a time when they had to choose between shipping tooth paste and Christmas trees. This problem may have been temporary and was also successfully removed but the management did admit that supply chain management was Kmart’s most serious problem. Their technology was outdated such that supplies were not recorded in the central tracking system even for twenty four hours. They relied on manual labor even to place orders within their organization. Their communication system was not effective. Strategic planning is the key to success for any company. It is usually performed by the CEO and the policies and objectives formulated gives direction to the company. This involves a situation analysis and based on this assessment the objectives are set. Wal-Mart right from the inception adopted this strategy. As per reports in 2003 it formed 2 percent of the U.S. economy. It is a one stop shopping experience for the customers who can ‘buy diverse products and services, get their eyes checked, do their banking or get the oil changed in their car’ (Ravi Kalakota, Marcia Robinson 2003). At these outlets sales are mostly on self service which results in high sales volumes and keep costs low. Their area of expertise as discussed above lies in store management, logistics and information technology. Technology is the back bone of success on any industry today and Wal-Mart took full advantage of this technology. Mobile computing has enabled Wal-Mart to keep real time track of sales and inventory at distribution centers. Their shelves are hardly ever empty. The success of Wal-Mart can be pinned down to being technology savvy while Kmart had a pragmatic approach. While Wal-Mart had an annual technology and communication budget of $500 million Kmart had four CEOs in four years which speaks amply of instability and lack of strategy. It can hence be concluded that Wal-Mart was very strategic right from the inception in the choice of location. They knew where to cut costs and where to spend; they knew and enjoyed the benefits of information technology. They had an excellent distribution system; they sourced their merchandise globally. They have two drawbacks though. One is their trend to start in remote areas where small traders have to close shop and the other is their aggressive attitude with the vendors. But in today’s economy there is room for everyone. All it requires is a change of strategy on the part of the local traders and perhaps makes them sit up too. Since it is a buyer’s market Wal-Mart’s vendors too have to comply keeping in mind the high volume of merchandise ordered. Kmart on the other hand had an excellent start but ignored the need to keep itself abreast with the changing market and its demands. They felt their brand name was enough to keep them going and also ignored the fact that competitors were gaining ground. They were unable to retain the service staff at its numerous stores due to mismanagement at all levels. They do have plans to reinvent and can do so without a feeling of threat from Wal-Mart. All their stores are located in bigger cities and hence they do not have to concentrate on low cost products. Instead a strategy to concentrate on brands with higher margins may be able to see them through this crisis. They have realized the value of technology and data warehousing and perhaps the situation would take a turn for the better. Works Cited: C Gopinath, A big deal in US retail accessed 17th September 2005 Case study chapter 3, (8th US edition) accessed 16th September 2005 Frank Hayes, Lessons From Kmart, accessed 17th September 2005 Mitchell Levy and Paul A. Losch, Top Discount Merchandisers Analyzed via the Value Framework accessed 16th September 2005 Ravi Kalakota and Marcia Robinson, From e-Business to Services: Why and Why Now, Steven Sessions, Kmarts Branding Blunders, accessed 17th September 2005 How Kmart Fell Behind accessed 16th September 2005 Read More