4–14–1Copyright © 2006 Thomson Business and Economics. All rights reserved. Agenda and Announcements – 2/14 Agenda – Kmart Buys Sears Case Study – Complete.

4–1Copyright © 2006 Thomson Business and Economics. All rights reserved.

Agenda and Announcements – 2/14Agenda and Announcements – 2/14

• Agenda– Kmart Buys Sears Case Study– Complete Chapter 4 – Decision Making– Review Chapter 13 - Leading –Material Review – Chapters 4,9,12,13

• Announcements– Test 2/16

• Same Parameters – 60% Multiple Choice, 40% Essay

• Allowed One Page Single Sided Reference Sheet

• Bring Scantron and Pencil


Stages in the Creative Process

Stages in the Creative Process

Exhibit 4–6

Become familiar with the problem; generate as many solutions as possible.

Take some time before working on the problem again to gain additional insight.

Before implementing the solution, evaluate the alternative to be sure it is practical.

Innovation and Creativity


Group Decision-Making Techniques That Foster CreativityGroup Decision-Making Techniques That Foster Creativity

Exhibit 4–7


Generating Creative AlternativesGenerating Creative Alternatives

• Brainstorming (Very frequent)– The process of suggesting many possible alternatives

without evaluation.– Build on Ideas, NO Evaluation– Group into Alternatives

• Synectics (Used to Invent Items we don’t have a need)– The process of generating novel alternatives through role

playing and fantasizing.

• Nominal Grouping (Can Follow Brainstorming)– The process of generating and evaluating alternatives

using a structured voting method that includes listing, recording, clarification, ranking, discussion, and voting to select an alternative.


Generating Creative Alternatives (cont’d)Generating Creative Alternatives (cont’d)

• Consensus Mapping (Ringi)– The process of developing group agreement on

a solution to a problem.

• Delphi Technique– The process of using a series of confidential

questionnaires to refine a solution.


Responses That Kill CreativityResponses That Kill Creativity

• “It can’t be done.”• “We’ve never done it.”• “Has anyone else tried it?”• “It won’t work in our department

(company/industry).”• “It costs too much.”• “It isn’t in the budget.” “Let’s form a committee.”• “This is the way we have always done it”• “There’s no reason, it’s just our policy”


Kmart Acquires SearsKmart Acquires Sears

• Instructor Pull Up Web Q Responses


From 11/17/04 Merger AnnouncementFrom 11/17/04 Merger Announcement

• Mr. Lacy (Sears) said, "The combination will greatly strengthen both the Sears and Kmart franchises by accelerating the Sears off-mall growth strategy and enhancing the brand portfolio of both companies. This will clearly be a win for both companies' customers while significantly enhancing value for all shareholders. We will have a total combined store base of nearly 3,500 stores and the leading service organization in the industry capable of a major expansion to serve the needs of existing Kmart and Sears customers."

• Mr. Lewis (Kmart) said, "Kmart has made great progress over the past 18 months to strengthen the organization in terms of profitability and product offerings. We believe the combination of Kmart and Sears will create a true leader in the retail industry -- both as a key part of local communities and as a national presence. Together, we will further enhance our capabilities to better serve customers by improving in-store execution and ultimately transforming the customer's in-store experience."

• The combination of the two companies is conservatively estimated to generate $500 million of annualized cost and revenue synergies to be fully realized by the end of the third year after closing.

• Edward Lampart (Kmart) will be Chairman.


Sears Holding Corp. 10/4/05 AnnouncementSears Holding Corp. 10/4/05 Announcement

Kmart Names New Senior Vice President For Kmart Stores And Executive Vice President, Restructuring And Business Improvement

• Oct. 4 -- Kmart Holding Corporation, a wholly-owned subsidiary of Sears Holdings Corporation (Nasdaq: SHLD), today announced Donald J. Germano, as senior vice president and general manager for Kmart's more than 1,400 stores and Dene L. Rogers as executive vice president, restructuring and business improvement..

• Rogers previously served as executive vice president of Kmart stores., "Dene has made substantial progress in improving the performance and the efficiency of the stores. We have asked him to apply his considerable change management skills more broadly across Sears Holdings.

• Rogers joined Kmart in 2003 and served in a variety of roles before assuming the position of senior vice president, stores in 2004. Before joining Kmart, Rogers was senior vice president, planning, development and new products for Starwood Hotels & Resorts Worldwide Inc. He also served as senior vice president, business development at General Electric Capital.


Example ProblemExample Problem

• Symptom: Long Lines at Balmer Cafe• What kind of Problem? (Routine or Complex?)• What are the penalties? (So What)• Why, Why, Why, Why, Why?• Redefine Problem• PROBLEM PROCESS? GROUP OR INDIVIDUAL?

• Determine Objectives/Criteria• Generate Alternatives

– Financials & Stakeholder Impacts

• Analyze Alternatives & Select Decision• Plan and Implement• Control (Monitor) P-D-C-A


Decision TreeDecision Tree

Exhibit 4–8


Analyzing the Feasibility of AlternativesAnalyzing the Feasibility of Alternatives

• Quantitative Techniques– Break-even analysis**– Capital budgeting (Investment)***

• Payback

• Discounted cash flow– Net Present Value (NPV)

– Linear programming– Queuing theory– Probability theory

• Sensitivity Analysis - Used on all

– Combination***Use Whatever the Organization Uses Unless It’s Wrong



The Kepner-Tregoe Method (a.k.a. weighted factors)

The Kepner-Tregoe Method (a.k.a. weighted factors)

1. Assess each alternative with regard to the “must” criteria.

2. Rate the importance of each “want” criterion on a scale of 1 to 10 (10 being the most important).

3. Determine how well each alternative meets the “want” criterion.

4. Compute the weighted score (WS) for each alternative on each criterion.

5. Select the alternative with the highest total weighted score.


The Kepner-Tregoe Method for Analyzing AlternativesThe Kepner-Tregoe Method for Analyzing Alternatives

Exhibit 4–9


Cost-Benefit (Pros and Cons) AnalysisCost-Benefit (Pros and Cons) Analysis

• Cost-Benefit Analysis– A technique for comparing the cost and benefit

of each alternative course of action using subjective intuition and judgment along with math. (often financials become cost/benefit)

• Continuum of Analysis Techniques:

Exhibit 4–10


Plan, Implement, and ControlPlan, Implement, and Control

• Plan– Develop a plan of action and a schedule of

implementation.

• Implement the Plan– Communicate and delegate for direct action.

• Control– Use checkpoints to determine whether the

alternative is solving the problem.• Schedule, Key Metrics, Observations, Surveys• In Process vs. End Process Metrics

– Avoid escalation of commitment to a bad alternative.


Time-Driven versus Development-Driven ModelTime-Driven versus Development-Driven Model

Making effective decisions through maximum

development of group members

Making effective decisions with minimum cost

Emphasizes group development

Emphasizes timely decision making

Has a long-term horizon, as group development

takes time.

Has a short-term time horizon

Time-Driven Development-Driven

ValueValue

OrientationOrientation

FocusFocus

Must Also Adhere to Leadership and Group Style


Balmer CafeBalmer Cafe

• Symptom – Long Lines during Class Passing Period.

• Penalties - So What? – Late Students to Class

• Student Stress• Faculty Dissatisfaction

– Lost Contribution Margin• Estimate = $160/day• $24,000 per year

– Hungry Students– Non-caffeinated students

• #1 Why for lost business– Long lines discourage students

• #2 Why Long Lines– Passing Period Demand Up

• Can’t do anything about this.– Not Enough Help/Equipment

• #3 Why Not Enough Help/Equipment?– Custom Drinks Take Time– Equipment too slow and not

enough cash registers

• #4 Why not buy equipment or hire people?– Never understood penalty or

alternatives

• #5 Why never studied?– No Metrics to measure


Balmer Café – Objectives & WhyBalmer Café – Objectives & Why

1. ___________________________

2. ___________________________

3. ___________________________

4. ___________________________

5. ___________________________


Balmer Cafe - Decision Criteria & Why?Balmer Cafe - Decision Criteria & Why?

1. __________________________

2. __________________________

3. __________________________

4. __________________________

5. __________________________


The “Balmer Cafe” Case DecisionsThe “Balmer Cafe” Case Decisions

• Based on our Root Cause Analysis, we have determined that there are three root causes to the long lines (that we can do something about) in addition and implementing some waiting time metrics (no cost). The three options are:– Add another person ($7/hour with taxes) = $280/week– Buy more and faster equipment for $35,000 that will last for 5

years.– Simplify the menu and remove custom coffees (50 less

orders per day at $5.00 (direct cost is $3))• We believe strongly that any of these changes will result

in an extra 20 customers per passing period (4 per day) coming to “The Bottom Line” because of the lower wait time and they will buy an average of $4 worth of products (average direct cost is $2).

• What should we do?


Financial AnalysisFinancial Analysis• Contribution Opportunity (C) (Revenue – Direct Expenses)

– = 20 add’l customers X 4 passing periods (80 Customers) X $2 = $160 per day.

• How many days/year will we make this extra money?– 5 days/week X 10weeks/quarter X 3 quarters = 150 Days (= $24,000 Annually)

• Option 1 Analysis for additional Person:– New Contribution = $160/Day; Extra Person = $56/day = $104/day – Break Even = $56/$2 = 28 additional customers/day)– Annual Cost = $8,400

• Option 2 Capital Budgeting - Investment Analysis:– Invest new machine $35,000: – Payback = If Contribution is $24,000/year = 1.5 years payback

• Option 3 Reduce Menu– Sell 50 less sandwiches at $2 Contribution = $100/Day – $100/day less Contribution X 150 days = lose $15,000/year

• Financially – Which one should we pick?


Alternatives Decision MatrixAlternatives Decision Matrix

Option

Criteria

Option 1

Hire Person

Option 2

Buy Equipment

Option 3

Reduce Menu


Financial Analysis – Net Present Value (NPV)(@ 10% Discount, No Inflation)

Financial Analysis – Net Present Value (NPV)(@ 10% Discount, No Inflation)

Year 1 Year 2 Year 3 Year 4 Year 5 TotalIncome - 80 Customers Per Day

24,000$ 24,000$ 24,000$ 24,000$ 24,000$ 120,000$

Option 1 - Hire NewCost (8,400) (8,400) (8,400) (8,400) (8,400) (42,000)$ Cash Flow 15,600 15,600 15,600 15,600 15,600 78,000 NPV $59,136Option 2 - Hire NewCost (35,000) (35,000)$ Cash Flow (11,000) 24,000 24,000 24,000 24,000 85,000 NPV $59,161Option 3 - Change MenuCost (15,000) (15,000) (15,000) (15,000) (15,000) (75,000)$ Cash Flow 9,000 9,000 9,000 9,000 9,000 45,000 NPV 34,117$


Alternatives Decision MatrixAlternatives Decision Matrix Option

Criteria

Option 1

Hire Person

Option 2

Buy Equipment

Option 3

Reduce Menu

BEST FINANCIAL

NPV = $59K NPV = $59K NPV = $34K

IMPROVE CUSTOMER SATISFACTION

HIGH HIGH LOW

LOW RISK LOW RISK HIGH RISK$35k purchase

MEDIUMMore customers leave

GOOD EMPLOYEE IMPACT

HIGH MEDIUM LOW

OTHERS?


Alternatives Decision MatrixAlternatives Decision Matrix

Option

Criteria

Option 1

Hire Person

Option 2

Buy Equipment

Option 3

Reduce Menu


The Bottom Line – Our Recommendation:The Bottom Line – Our Recommendation:

• Solution:

• Benefits:

• Cost:

• Concerns/Risks:

• Implementation Plan:

4–14–1Copyright © 2006 Thomson Business and Economics. All rights reserved. Agenda and Announcements – 2/14 Agenda – Kmart Buys Sears Case Study – Complete.

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