Executive Summary

The U.S. discount department store industry had reached maturity by the end of the 20th century, but neither Kmart nor Sears possessed clearly-defined positions within that industry. Their primary competitors were Wal-Mart, Target, Kohl's, and J.C. Penney with secondary competitors in certain categories. Emerging from bankruptcy in May 2003, Kmart still lacked a business strategy to succeed in an extremely competitive marketplace. Its low cost position in discount retailing had been usurped by Wal-Mart. Target now dominated the quality discount position. Sears had a strong position in hard goods, such as home appliances and tools. Nevertheless, Sears was struggling with slumping sales as customers turned from Sears' mall stores to stand-alone, big-box retailers, such as Lowe's and Home Depot, to buy their hard goods. Edward Lampert, Kmart's Chairman of the Board and a controlling shareholder of Kmart, initiated the acquisition of Sears by Kmart for $11 billion in November 2004 (Hays, 2004). The new company was renamed Sears Holdings Corporation. Even though management predicted that the combined company's costs could be reduced by $500 million annually within three years through supplier and administrative economies, analysts wondered how these two struggling firms could ever be successful (Securities and Exchange Commission, 2011).
Statement of the Problem
Both Kmart and Sears illustrate issues in strategy formulation at both the corporate and business level. After many years of retailing success, both companies appeared to have lost their competitive advantage and were forced to merge into Sears Holdings. When comparing Sears' and Kmart's to the primary mass merchandising retailing competitors both fell short against to competitors in terms of their individual strengths and weakness. Their competitors are: Wal-Mart, Target, Kohl's, and J.C. Penney's, . Macy's could also be listed as a more distant competitor in mass merchandising, depending upon how one defines the industry. For most of its history, Kmart had successfully followed a corporate strategy of horizontal growth and a competitive strategy of low cost. In contrast, Sears had unsuccessfully followed a corporate growth strategy of concentric diversification out of retailing into financial services in the 1970s, but was forced to retrench through divesting its insurance and real estate units to return to its retailing concentration in the 1980s. Listed below are the strengths and weakness of Sears Holdings (Securities and Exchange Commission, 2011).
Strengths of Sears Holdings in 2007

 $1.5 billion in cash

 Debt load of only 25% on total capital on balance sheet

 Owned real estate assets in good locations

Potential cost-cutting economies of scope in purchasing and administrative functions
 Sears well known for its quality hard goods

Weaknesses of Sears Holdings in 2007

 Kmart stuck in the discounting middle between Wal-Mart and Target

 Sears losing its competitive advantage in quality hard goods

 Stock price fallen from 195 to 111

 Deteriorating profit margins and same-store sales

 Management failed to invest in store improvements

Causes of the Problem

For most of its history, Kmart had successfully followed a corporate strategy of horizontal growth and a competitive strategy of low cost.

By 1990, Wal-Mart had taken over the industry's low cost position and left Kmart stuck in the middle between Wal-Mart and Target. In contrast, Sears had unsuccessfully followed a corporate growth strategy of concentric diversification out of retailing into financial services in the 1970s, but was forced to retrench through divesting its insurance and real estate units to return to its retailing concentration in the 1980s. Even though its traditional competitive advantage had been its strength in quality hard goods, it had unsuccessfully attempted to grow horizontally in soft goods lines in the 1980s. It found that it could not compete against J.C. Penney's strength in this area. By the 1990s, Sears discontinued its emphasis on quality soft goods, but soon found that its distinctive competency in hard goods was slowly being eroded by fast-growing home improvement retailers, like Lowe's and Home Depot. By 2007, neither Kmart nor Sears appeared to have any sustainable competitive advantage and seemed doomed to be "stuck in the middle" between more competitive retailers.
Decision Criteria and Alternative Solutions
The primary solution for the two struggling companies K-Mart and Sears is the go through a corporate merger and in order to compete together as one company against retail giant Wal-Mart. In general there are several decision criteria and questions for the two companies to consider. According to marketing professor Barbara Kahn, "The rationale for this merger clearly has to be operations efficiencies, including the ability to compete more effectively against Wal-Mart, which is the leader in that area. The downside would be two struggling companies coming together potentially make a bigger struggling company. At the same time, if the merger is done strategically and wisely, it will provide the scale for the new company to go head-to-head with its toughest rivals. (Knowledge@Wharton, 2005)." The following criteria/questions must be addressed prior to deciding to implement the merger strategy:

 How could management mitigate the combined stores' weaknesses and take advantage of any strengths?

 Would combining the store chains mitigate any weaknesses or improve on any of their strengths?

 Can the two chains be combined or must they have separate retailing identities? What sort of functional strategies in marketing and operations (including purchasing, logistics, and information technology) might be considered?

 What corporate and business strategies would get these old U.S. retailing giants growing again?

Recommended Solution, Implementation and Justification

Both Kmart and Sears bring visible strengths and brands into the merger deal. Kmart is strong in home furnishings and apparel, while Sears is well-known for its appliances. The company should focus on two key strategies while implementing the merger. Key strategies:

 Focus on a low price strategy.

 Transform the customer's in-store experience

In order to transform the customers experience, the company will need to enhance their capabilities in serving customers by improving

in-store execution. To support the low price strategy, the company will have to combine a better cost efficiency, which will support a lower price strategy.