Organization Diagnosis and Change Analysis Term Paper

Kmart Corporation and its performance problems that have become evident over the past few months. First we will provide an overall description of the organization including its macro and microenvironments. Next we will diagnose the apparent problems that the Kmart Corporation has. The paper will then present a plan of intervention and implementation. In addition we will evaluate the plan and discuss the effect the changes will have on the corporation. Finally we will discussed the lessons that we have learned in attempting to implement changes to the corporation.


Kmart Corporation is a discount and general merchandise retailer. It began as the S.S. Kresge Co. founded by Sebastian S. Kresge in 1899. (Yahoo Finance) The name was changed to Kmart in 1977. In 1984 the company purchased Walden Books and Home Centers of America. Kmart began to collaborate with Martha Stewart in 1987; she became their primary spokesperson and consultant. Kmart bought The Sports Authority in 1990 and obtained 90% of Office max in 1991. (A Kmart Timeline) In 1995 Kmart sells all stakes in the Sports Authority and Office Max. In the year 2000 Charles Conaway becomes the chairman and CEO, replacing Floyd Hall. Finally in 2001 Kmart purchase the Internet site (A Kmart Timeline).

Today the Company operates in the general merchandise retailing industry through 2,105 Kmart stores, with locations in all 50 United States, Puerto Rico, the United States Virgin Islands and Guam. Yahoo Finance) Its general merchandise retail stores are in 321 of the 331 Metropolitan Areas in the United States. The Company’s stores are usually single floor, freestanding units, in sizes from 40,000 to 190,000 square feet. Kmart is the country’s second-largest discounter after Wal-Mart stores nationwide. (Yahoo Finance) microenvironment is defined as the environment that is close to a firm, which affects the ability of the firm to serve its customers. (Dictionary of Business) The factors that make up this environment include; the firm itself, firms in its market channel, its competitors, and customer markets. Kmart’s microenvironment includes the retailer Wal-mart and Target. A macroenvironment or the physical environment is characterized by cultural influences, demographics, economics, political beliefs and legal infrastructure. (Dictionary of Business) In most firms as is in Kmart’s case many of these characteristics cannot be controlled by the company. The factor that Kmart has the most control over is the demographic areas that it chooses for its stores.


In January of 2002 Kmart filed for chapter 11 bankruptcy protections. This action by Kmart marked the largest retail bankruptcy in U.S. history. CNN reports,

Kmart, which has about $37 billion in annual revenue, said it had secured $2 billion in debtor financing to pay its $1.6 billion in debt and expected to emerge from bankruptcy in about a year. A company in Chapter 11 is protected from creditors while it reorganizes and tries to work out a plan to pay its debts.” (Kmart files Chapter 11)

The bankruptcy filing came after Fleming Companies Inc., which is the retailer’s largest food distributor, dissolved shipments to Kmart after failing to make payments to the distributor. According to CNN, this action by Fleming was apparently the breaking point for Kmart, which has grappled for months with lethargic sales and tough competition from Wal-Mart. In addition Kmart’s credit ratings had been downgraded causing its stock to disintegrate.

Kmart files Chapter 11)

On March 8, 2002 Kmart Corporation closed 284 of its under performing stores as part of its Chapter 11 financial objectives review. The stores to be closed are 271 Kmart discount retail operations and 12 Kmart Supercenters in 40 states, and a Kmart in Puerto Rico. The closure of these stores is projected to enhance the Company’s performance. (Kmart To Close 284 out of their over 2,100 Stores)

The Problem

Analysts believe that there are a number of factors that led to Kmart’s performance problems but the consensus seems to be that Kmart begin to run into trouble about 15 years ago when the company started to implement elaborate diversifications into its overall business plan. These large-scale attempts, such as the purchase of the Sports Authority and Builders Square, distracted the retailer from its primary business of discount retail. This distraction allowed competitors such as Wal-Mart to gain the competitive advantage that Kmart once held. And even though Kmart has since given up its stakes in these companies the effect of the distraction lingered and it has been all but impossible for Kmart to regain its advantage over the competition.

In addition, poorly integrated technology has mangled crucial inventory channels. Beyond that poor advertising is believed to have cost Kmart millions in sales for the 2001 holiday season.

Kmart’s organizational structure was converted to a field structure on February 5, 2001. Kmart’s field organization structure will include five different operating divisions including four geographic area; West, Southeast, Northeast and International and a separate Super Centers division. Prior to this the retailer’s organizational structure was geographic.

The problems that the corporation has are most apparent at the organizational level. As mentioned earlier many of Kmart’s woes came when they decided to diversify, this is a decision that was made at the organizational level. As a result of these organizational problems groups and individuals were affected. For instance, the organizations lack of a comprehensive inventory system caused confusion at individual stores and with individual employees. In essence the organizational problems had a trickle down effect that created problems on every level.

Kmart’s problems have a mixture of sources, which include technology, goals and objectives, and structure. Kmart’s technology, or lack their of, led to the supposed breakdown of the retailers accounts payable system, that lasted for six weeks. During this time vendors were not paid appropriately. A Bank of America analyst reports that vendors were only paid 80 cents on the dollar during this six-week period. (How Kmart Blew It) This led Sega to sue Kmart for an unpaid balance of $2.2 million. In addition decades of under-investment in technology have made a mess of Kmart’s supply chain. According to an article in Forbes Magazine, scanners in the stores were archaic and didn’t supply purchasing information to headquarters, which made it impossible for central planners to know what products customers were purchasing. (How Kmart Blew It) The distribution centers were late to deliver merchandise to stores 11% of the time, compared to the 5% of most retailers. The supply chain system also messed up 15% of stores’ inventory from the distribution centers, while the rate for the industry is less the.5%. And until 2001 the percentage of inventory loss due to mishandling and theft for Kmart stores was three times the percentage of competitors. (How Kmart Blew It)

The company’s goals and objectives also led to many of their problems. Many of these goals and objectives were unrealistic and unattractive to clients. As mentioned earlier many of the goals and objective set forth in the late 80’s caused Kmart’s downward spiral.

Kmart’s problems with structure caused poor communication between stores in various regions and headquarters. These breakdowns in communication along with poor technology led to under performing stores because headquarters did not know what the customers were buying and there was a lack of understanding about certain demographics and so there was poor advertising.

The data that I would use to evaluate these problems would be individual stores’ inventory. Also I would investigate the shipment behavior at distribution centers. I would seek to uncover which employees are mishandling products and also why there are so many wrong orders sent to stores. I would also evaluate which technologies would help the stores to better keep track of inventory. In addition I would examine competitors’ organizational structures to gain a greater understanding of what changes may need to be made in order to secure the competitive advantage.


The changes that I would make would include a comprehensive 10-year plan to aid the company in gaining back financial stability. I would intervene at every level because that’s what’s needed to gain financial stability. The targets of change would be technology, store cleanliness and store image. I would hope these targets would bring about change that would increase sales and help the company out of the bind that it is in.

The first thing I would do is make sure that there are higher standards for the cleanliness of stores and that every product in the store is price and in the correct departments. There would be no trash and boxes lying around the store. This is a simple step that does not require vast amounts of money and could improve the overall environment of the stores so that people want to shop there. These standards would have a 90-day implementation period.

This plan would also include a new identity for Kmart that would separate the company from its competition. This new identity would be incorporated into every aspect of the business from the boardroom to the home and garden…

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