Strategic Management Case Study: Kmart Australia's Success Factors

This case study examines the strategic management of Kmart, focusing on its historical evolution, downfall in the United States, and contrasting success in Australia as a subsidiary of Wesfarmers. It highlights the importance of a cost-effective business model and robust supply chain operations, particularly in Kmart Australia's leadership in homewares and fashion. The analysis identifies Kmart's business and corporate-level strategies, emphasizing cost leadership and stability, and recommends a cooperative strategy for the future, considering the company's vulnerability to currency volatility. The study further analyzes Kmart's value chain management and recommends improvements for a more feasible business model, concluding with insights into Kmart's competitive positioning and potential future strategies. Desklib provides past papers and solved assignments for students.

Running head: STRATEGIC MANAGEMENT
Strategic Management
[Kmart]
Name of the student:
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Executive summary
The study is aimed at delivering the various concepts related to strategic management. The
purpose is being served through case study company Kmart. In the first few sections, the study
covers the historical evolution and the downfall of Kmart in the United States. Interestingly, in
1994 with Coles purchasing the entire shares held by Kresge, Kmart in Australia became an
entirely different entity with only similarities in names with Kmart in the United States. The
study shows that Kmart Australia with its cost-effective business model and the robust supply
chain operation has emerged as leaders in homewares and fashion lines. The study thus finds that
it is very important to have an effective business model and also the supply chain operation to
succeed. Kmart has rather focussed on a continuous development of strategies and also identified
its business & corporate level strategies. A cost-effective leadership and stability have been
shows as Kmart's business and corporate level strategies. The study folds up by recommending
the implementation of a cooperative strategy for the future. The study believes that cooperative
strategy will be the most feasible for Kmart considering the company's susceptibility to currency
volatility.

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Table of Contents
Introduction......................................................................................................................................3
Porter's five forces...........................................................................................................................3
Value Chain Analysis......................................................................................................................8
Business and Corporate Strategy Assessment...............................................................................12
Recommendations and conclusion................................................................................................14
Recommendation.......................................................................................................................14
Conclusion.................................................................................................................................16
References......................................................................................................................................17

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Introduction
Kmart currently operates as a subsidiary firm of Sears Holdings. Kmart Australia, on the
other hand, operates as a subsidiary company of Wesfarmers. Kmart as a company and as a
brand of Sears Holdings have faced and been a part of numerous ups & downs. However, the
current status of the company can be considered as dipping on a regular note. Consequently, the
company has witnessed and continues to witness the closures of its numerous stores in the
United States, Canada, Europe and the other parts of the world. The liquidation of stores for
Kmart has continued ever since 2015. The closures continue in 2018 as well. Kmart may
probably disappear and have no independent existence whatsoever if it continues to struggle with
each and every fiscal year performances (Businessinsider.in 2018).
The company that once looked promising and a tough competitor to biggies as such to
Walmart is now declining. The declination may have for a certain set of reasons; however, this
study will specifically focus upon the value chain management and the business & corporate
strategies of Kmart in Australia. This is because the value chain operation and the business &
corporate strategies do matter the most when there is a need to compete on a daily basis.
Additionally, there is no place to even a marginal piece of errors in any of the chosen areas.
The study will, therefore, investigate the value chain management in Kmart. Business and
corporate strategies will also be analyzed. The findings of the analysis will be used to give the
relevant and useful recommendations to Kmart for an improved and feasible business in the
future.
Porter's five forces

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Kmart at once was operating effectively in the United States, Canada, Europe and the
other parts of the world. However, the company is now continually facing the closure of stores in
the United States. On the other hand, it is continually growing in Australia. Hence, the micro
analysis of the industry where Kmart operates in will be a mixture of both positive and the
negative aspects.
Threat of substitute (Moderate)
Kmart at present faces a huge amount of challenge from various shopping formats such
as brick & mortar stores and the online stores. The continuously closing stores of Kmart as a
reflection of business losses in every fiscal year have both affected the Kmart’s competency. The
degree of threat from a substitute is bigger for Kmart as in such case; the company will have to
deal with both its business performance and the new competition. According to the U.S Census,
retail sales hit a new record and garnered $5.7 trillion (The Balance 2018). This is indeed a huge
growth since 2009. The report has also found that technological advancements and the changing
consumer behavior are both the key factors to succeed in the global retail industry. Shoppers will
expectedly never abandon the brick & mortar format; however, they want an alternative and a
convenient online shopping from their retailers (The Balance 2018). The trend is nothing but
asking for a change in the shopping experience. Consequently, Amazon Go has emerged which
is a brick & mortar format of stores from the world’s largest online retailer Amazon. This is a
much different than the normal physical stores for the facts that it is monitored by computer
vision, artificial intelligence and sensor vision (The Balance 2018).
Threat of new entrants (Moderate)

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Although the entry of a new retail brand barely faces any barrier in the retail market, it
still has a lot of other challenges such as the supply chain management. Kmart is not just
required to compete against the existing top retail brands but also with the online firms such as
Amazon. Additionally, the entrant will also pose the additional challenges to Kmart. Kmart at
that point of time will be needed to compete against the different physical store brands, the
online giants and the new entrants. Notably, the company has failed to deliver the profits in
recent fiscal years. Total revenues for Sears Holdings which stood at $4,199 on 29th April 2017
has now reduced to $2,891 on 5th May 2018 (Searsholdings.com 2018). One of the reasons which
are affecting the performance can be the closures of numerous stores of Kmart. The closure is
just happening in every single quarter increasing the level of worries for Kmart. A counter to
such threats can only be posed if the company is well equipped with powers to compete. This
study will eventually find one of such powers to support the future business of Kmart.
Competitive rivalry within the industry (High)
Kmart has a direct competition from the world’s big retailer chains. Kmart had once
stood at the 13th position in the list of top retailers in the United States for 2012; however, the
US-based rankings have now become much poorer for Kmart. The company now stands at the
23rd in the list of top retailers in 2017 (Stores.org 2018). It just indicates that the competitive
rivalry in the United States’ retail industry has now increased. Competitive rivalry is increasingly
becoming stronger even on the global platform. Europe and Australia are also the two of the
world’s highly competitive retail markets. Kmart faces a huge competition from Tesco,
Sainsbury’s, Aldi, Woolworths, Coles and others.

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It also explains that Kmart is becoming weaker in terms of posing a good competition to
its competitors. Walmart, Costco, Target, Kroger, Walgreen, The home depot and CVS
Caremark are the biggest direct competitors to Kmart for a reason that these retailers do produce
and offer more or less the similar kind of products as Kmart does. Kroger and Target will not be
the threats for Kmart in other parts of the world as these retailers do not have any presence in
foreign markets. Target is very much similar to Walmart in terms of offering higher varieties and
discounted offers to customers (Schuetz 2015). The brand is able to attract the high-income
customers and hence, generating the higher revenues. Kmart also faces an indirect competition
from Amazon which is the largest online retailer in the United States. Hence, Kmart faces a stiff
and growing market competition in the United States retail market.
In Australia, the situation is just better for Kmart. Kmart in Australia currently operates
as the subsidiary business of Wesfarmers. Kmart currently has more than 200 stores in Australia.
However, Kmart Australia will consistently need the support of its management in terms of
investments in the right areas. The areas to invest are supply chain operation, HR practices,
R&D, marketing & sales and others. Nevertheless, the Australian retail market has largely been
dominated by Aldi, Woolworths and Coles. Kmart will face a stiff competition from a widely
spread reputation of Woolworth and Coles in Australia. It will also face the innovation and
creativity from Aldi which has also helped the company to perform even better than Woolworths
and Coles in the recent past (News.com.au 2018).
Bargaining power of suppliers (Moderate)
The bargaining power of suppliers for Kmart is now higher in the United States. This is
mainly due to the shrinkage of Kmart stores in the United States and also at the global level. Big

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retail brands like Walmart can efficiently handle its suppliers for quality and price; however, this
is not as easier for a firm which is even struggling to survive. Kmart may certainly face the
challenge in pushing its suppliers for the price and the quality of materials (Schoenherr and
Speier‐Pero 2015). On the other hand, big retailers like Walmart and Tiger will not have the
same story. They will certainly have a much favorable condition than Kmart can have. The
challenges for Kmart are not just limited to get the quality products on competitive prices but are
also extended till the contractual agreement between the firm and the suppliers. Any new
contractual agreement with new suppliers will possibly be creating a lot of challenges to Kmart
as well.
Bargaining power of customers (High)
Normally, customers as a whole can put a lot of pressure on the retail brands. Retailers
are supposed to adapt to the changing demands of customers in context to price, quality and the
product range. The present-day retail industry in the United States is full of retail brands which
offer the discounted price to customers. A discounted price is one of the strategies of those
retailers. It means that any new or existing company which is yet to adapt to the strategy will
certainly face more challenge to attract and retain its customers. The European and Australian
retail industry does follow the very same format. Customers in these regions are of varied kinds.
Some customers never hesitate to purchase costlier products if those are high-in-quality. On the
other hand, there are more others who are exceedingly inclined to discounted offers. Kmart, in
particular, may find this challenging to compete in this segment of the market. This is because of
Kmart’s incapability to bargain with its suppliers and its market reputation also which is now
largely being affected by Kmart’s store closures (Lee and Lubienski 2017).

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Value Chain Analysis
Kmart Australia was produced as a result of a joint venture between Coles in Australia
and S.S. Kresge Company in the United States. Kresge did own a 51% share in the deal. In 1994,
Coles bought back the entire shares held by Kresge. When Wesfarmers took the control of Coles’
group in 2007, it decided to invest a significant sum to improve the Kmart’s supply chain
operation. Kmart’s performance in Australia was poor just prior to Wesfarmers takeover.
However, it really took off afterward (Mortimer 2016).
Primary activities:
Supply chain management: Direct sourcing is one of the keys of the supply chain
operation at Kmart. The company is also good at using the cost-effective approach as it has
recently focused on increasing the sizes of carton used for shipping. This will relatively
accommodate more products and hence, will reduce the number of shipping & the cost incurred.
The company is constantly working for improving its nationwide supply chain efficiency by a
cross-docking arrangement in Perth, Sydney, Melbourne and Brisbane. Kmart is actually the first
company in Australia to introduce a cross-docking system.
Kmart Australia spends a very huge portion of its entire cost over the supply chain
operation. The supply chain operation at Kmart is divided into two sections such as strategic
sourcing and strategic logistics. Kmart Australia does not just focus on performing well in the
Australian market but the whole world. Instead of reducing the cost, Kmart Australia has
increased its spending on the supply chain operation (News.com.au 2018).
Manufacturing & operations: China was the primary location of manufacturing for
Kmart. However, the company has made a significant decision and had announced the same in

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the year 2017 that Kmart is shifting away from China to Java and Indonesia. The reason for
shifting is the increased wages in China. Kmart is focussed on sourcing the cheaper products of
good qualities. According to the company, customer expectations from Kmart are rising high.
They expect better products at competitive prices. This was the reason why Kmart shifted away
from China to Java and Indonesia. Kmart claims that the company will now expectedly produce
better products at competitive prices. Notably, the company is already sourcing its manufacturing
from other regions such as Bangladesh due to the lower minimum wages in the country
(News.com.au 2018).
Customer service: Kmart serves its customers through quality products at even lower
prices. Kmart has identified its consumers’ demands for quality products at cheaper prices.
Therefore, the company has planned to invest more in to lower down the cost of products. There
are certain risks for Kmart which include fluctuation in the foreign exchange rate, new market
entrants, market expansion of its competitors and the maintenance of its price leadership. Price is
the real difference between Kmart and its competitors. Any new entrant will pose a challenge
which may also affect Kmart’s market shares (News.com.au 2018).
Marketing & sales: Kmart is very good at marketing and advertising which has also
benefitted the company in recent years. They know it exactly how to accomplish the branding.
This is also the reason why Kmart shifted away from ‘everyman’ appeal to one which
specifically aims at mothers and women. One of its effective advertising strategies was the
catchy pop songs in a rotating roster which Kmart used for its television commercials. They did
not opt to go with a corporate jingle instead. Kmart has garnered a huge response from its social
media existence for its new fashion lines and homewares. Australian women are crazy about it
and they are also posting images of their purchase. These are genuine posts with no connection

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with the Kmart’s head office. In-store merchandising is another strategy which benefitted Kmart.
The company was able to reduce the product range from 50,000 to around 12000. The move had
helped Kmart in terms of stock control, logistics and the sourcing (News.com.au 2018).
Support activities:
Accounting & finance: Kmart is continuously focussed on deploying the innovative
methodologies for financial disciplines and financial evaluation. Kmart like Wesfarmers was
able to reduce the total cash capital expenditure from $163 million in 2016 to $154 million in
2017 (Wesfarmers.com.au 2018). However, there are some risks which are important to be taken
care with appropriate strategies. Risks for Kmart include currency volatility, condensed access to
funding and adverse movements of commodity price (Wesfarmers.com.au 2018).
Legal: Kmart put high respects on human rights. They claim to have been working
closely with suppliers to enhance the procurement of ethically sourced materials. They are also
working closely with NGOs, government representatives and the unions. This is to generate a
favorable working condition in the country to fulfill its aim to deliver well at ethicality. Kmart
follows the ethical sourcing program supported by the Ethical Sourcing Code (ESC) that
includes the minimum requirements for suppliers for a continued contractual agreement with
Kmart. ESC follows the core labor standards as set by the International Labour Organization
(ILO) (Kmart.com.au 2018).
Environmental: Energy efficiency is a key aspect of environmental cares at Kmart. They
need to control their contribution to the greenhouse gas emission. However, it is exceedingly
becoming a challenge to minimize the environmental impacts of its logistics operation. They are
also needed to work more closely with suppliers, so that; materials are ethically sourced and also

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cause a reduced adverse impact on the environment. Wastes reduction will also create the
challenges (Carayannis, Sindakis and Walter 2015).
Safety: Employee safety is of high concern for Kmart. They do it constantly by working
on to improve the workplace conditions and empowering the workers throughout the supply
chain. This is evident in Kmart’s connection with the Accord on Fire and Building Safety in
Bangladesh and also the ILO/IFC Better Work program in Bangladesh, Cambodia and Indonesia.
Kmart is the only non-European retailer to collaborate with the ACT (Action, Collaboration and
Transformation). It is a union of the global union and the international retailers to address the
living wages. There have been significant drops in casualties showing an improved performance
on part of employee safety. The ‘Lost Time Injury Frequency Rate (LTIFR)’ decreased
significantly from 6.7 last year to 6.0 this year (Wesfarmers.com.au 2018).
Human resources: Like other domains of the company, Kmart is extensively focussed on
lifting its employee’s experience at Kmart. Kmart spends significantly over wages and the other
benefits, so that, employees feel motivated and convinced as well. Employees at Kmart are
essential to success. These are the reasons why the human resource management at Kmart is very
keen on improving the working condition and also the salary structure (Kmart.com.au 2018).
R&D: Kmart like for other domains is equally interested in R&D investments. The R&D
department in Kmart is constantly working upon to find strategies to enhance its capability to
offer cheaper products. Moreover, product quality is also their concern. Kmart has been able to
experiment with its pricing model. The pricing model was initially aimed at offering customers
the cheapest products. However, it is now being changed to offer customers the honest pricing.
Nevertheless, customers have responded to the changes being introduced. It just indicates that

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Kmart knows exactly how to enhance and utilize its R&D capability. Direct-sourcing model was
another effective strategy that worked for Kmart. The number of suppliers was being slashed
which also included the middle-man. They started dealing directly with manufacturers in
Bangladesh, China, India, Indonesia and others. Kmart was able to save immensely with this
strategy which helped the company in offering customers low prices 365 days of the year.
Interestingly, they were able to prevent the strategy to reduce the profit margin and thereby
reducing the sales price (News.com.au 2018).
Profit margin:
Revenues have continued to increase for Kmart with every single fiscal year. The
revenues which stood at $4,167 million in 2013 are now standing at $5,578 million in 2017. The
increment is equal to 7.5 percent over the previous year. The earnings over the same period have
grown by 17.7 percent and were equal to $553 million (Wesfarmers.com.au 2018). The drivers
for sales growth were the increased customer transactions and the higher units sold per
consumer. Factors which supported a growth in the total earnings and the revenues were the
improved inventory management, supply chain management, increased product ranges and
improvement in productivity across stores (Wesfarmers.com.au 2018).
Business and Corporate Strategy Assessment
Business and corporate level strategies are two of the most vital part of operational
techniques. Strategic capabilities of firms are tested when they intend to craft both the business
and the corporate level strategies. Corporate level strategies are of three kinds such as growth,
stability and renewal. On the other hand, business level strategies are also of three kinds such as
focus, differentiation and cost-leadership.

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Business level strategy of Kmart
Cost-leadership: Kmart was initially focussed upon offering the discounted prices on a
daily basis. However, it had required Kmart to lower down the sales price to keep on giving the
discounted offers 365 days a year. Such a strategy was proving to be less beneficial in terms of
profit margin and the result was also evident in the financial reports of Kmart for the recent fiscal
years. Revenues stood at $4,167 million, $4,209 million and $4,553 million respectively in 2013,
2014 and 2015. Kmart did work extensively in this area to improve the performance. The
company considered a shift away from its existing pricing model. Kmart made new promises by
saying that they are honest with their customers. They focussed more on offering the genuine
prices rather than unnecessarily reducing the profit margins. Additionally, Kmart had also
reduced or slashed the number of suppliers and started working directly with manufacturers in
China, Indonesia, India, Bangladesh and others. These strategies have helped in saving a lot on
the supply chain operation. Consequently, it allowed Kmart to maintain the low prices
throughout the year (Wesfarmers.com.au 2018).
Corporate level strategy
Growth: The corporate level strategy of Kmart apparently follows a growth strategy. The
company after 1994 was reinvented as a separate name having no connection with the American
Kmart. It happened when Coles had bought back the entire shares held by Kresge. Since then,
Kmart has continued to move further. The company was being reinvented in the reign of Russo.
Russo had chosen a business model that had too many products with unclear price structure. The
rebranded company did work and was started to be known as the leading name in providing
fashion and homewares retailer in Australia (Kmart.com.au 2018). Price leadership is the one

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aspect that keeps on benefitting Kmart; however, it would be very difficult to sustain the same
for a longer period of time. This is due to its competitors' expansion to wider markets. On the
other hand, the expansion of Kmart is just limited to the Australian market. The company had
effectively moved to different markets in Australia such as Brisbane, Perth, Sydney and
Melbourne. However, it has not yet moved to foreign markets due to certain risks such as
currency volatility (Kmart.com.au 2018). However, cost-leadership which is the business level
strategy of Kmart and also one of its selling points can be in danger and may face potential
challenges in the future. This is due to its competitors’ expansion to wider markets.
Recommendations and conclusion
Recommendation
In the recommendation section, there are three options with which Kmart can proceed
with further in the future. Those three options include Potential M&A, Cooperative Strategy and
International Expansion. One of these three options will be recommended to Kmart for its future
business. Following is the discussion on different strategies:
M&A: As already being mentioned in the aforesaid sections that Kmart is susceptible to
‘currency volatility’. Notably, M&A is the least suitable an option when the currency is not fixed
but volatile or flexible. Kmart imports the manufactured goods from various parts of the world
like India, Bangladesh, Indonesia, China and others. Currency volatility will create challenges
for both local and foreign investors to source foreign exchange to get the imports. Additionally,
investors will have least desire to invest in a business which is largely dependent on imported
goods and is also quite susceptible to currency volatility. M&A slows down in countries where
the currency is not fixed but volatile. For example, Nigeria was a favorite destination for Africa-

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bound investments and had also enjoyed a significant growth. However, the Nigerian
government’s announcement of shifting away from a fixed exchange rate system to a flexible
one has disinterested many investors. Currency volatility has encouraged many investors to
become very conservative in their approach to investments (Tatliyer and Yigit 2016).
International Strategy: The strategy to operate at the global location can also be affected
by currency volatility. Currency volatility may also affect the international operation. When a
business is simultaneously operating in two different countries, it is important that both local and
foreign investors look at it as a potential business. However, currency volatility does disinterest
both local and the foreign investors. Currency volatility is so severe that even the world’s leading
multinational firms have felt the impact. The likes of McDonald’s and IBM have faced the
similar situation while trading with Japan. Both have complained of the negative impacts of
currency volatility on the business. Apple did also face the impact from the weakening of yen in
late 2012 (Forbes.com 2018).
Cooperative Strategy: This can be a much better strategy for Kmart out of the three
strategies being covered in this section. A cooperative strategy will rather be recommended to
Kmart. M&A and international expansion have both been found as unfavorable for Kmart mainly
due to currency volatility. A cooperative strategy is indeed suitable because it allows a strategic
alliance or joint venturing with other. It means that Kmart can certainly make alliances with its
competitors and also avoid a direct competition. Kmart will then be able to maintain its cost-
leadership which is also its one of the selling points. This is justified as well as Kmart is
susceptible to currency volatility and hence, M&A and International Expansion may be the tests
for Kmart.

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Conclusion
In summary, this can be said that Kmart has been doing really well in Australia for quite
a few years. They are particularly doing well in homewares and fashion lines. The ability to
effectively manage the supply chain operation and also implement a cost-effective model has
both helped Kmart attain the price leadership in Australia. Kmart is so good in marketing and
social media activities that its customers upload their images of purchase and do a word-of-
mouth publicity. The publicity looks very genuine and does not appear as coming out from
headquarters. The cost-effective leadership of Kmart can be affected by the increasing market
competition. Kmart's competitors are expanding which is a threat to the cost-effective leadership
of Kmart. The industry is a potential sector for business and competitors those that are expanding
can seriously affect Kmart. Therefore, there is a need to execute the effective strategies, so that,
Kmart stays winning the fashion lines and homewares sector. Kmart can be benefitted from the
recommended strategy which is to follow the cooperative strategy. A cooperative strategy will
allow Kmart venturing with its competitors which is a good way to reduce the competition and
sustain the cost-effective leadership.

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