Beyond IT: Business Strategy Was a Problem, Too

Heads turned 18 months ago when Kmart Corp. CEO Charles Conaway announced that the discount retailer would pour more than $1 billion into IT over a two-year period.

Kmart had spent just $263 million on technology during the prior two years, 1998 and 1999, and it had become crystal clear that the discount retailer's supply chain and store systems were becoming increasingly inferior to those of rival Wal-Mart Stores Inc.

"From any consulting group that's ever gone in and talked with them for the last 10 years ... the issue was that there was a very strong desire to keep up earnings," said Steve Nevill, a consultant at Atlanta-based Kurt Salmon Associates Inc. "There was a hesitation to make significant investments in all areas, but certainly in IT."

James Dion, president of Chicago-based retail consultancy Dionco Inc., said Kmart's IT woes became acutely apparent to him two and a half years ago when he worked on a project for a major consumer software company as it tried to improve sales by supplying goods directly to top retailers.

Interfacing to Wal-Mart systems proved simple, Dion said. By contrast, the software firm had difficulty connecting to Kmart's distribution systems and getting data from its point-of-sale and inventory systems, he said. Some orders came in on paper, Dion added.

"Retailers have got to make their software as open and transparent as possible for suppliers to be able to interface with it," Dion said. "Wal-Mart uses their IT strategically, and they fully integrate it into their operating model. With Kmart, it's always been a quick fix or patch kind of thing. They never fully integrated their systems into the philosophy or strategy of the company."

"It seems like they never could get the business side and the IT side to be focused in one direction," said Peter Abell, an analyst at Boston-based AMR Research Inc. He said Kmart has a "history of mismanagement" and sometimes used its own developers to create software in areas where "perfectly good" commercial packages were available.

Despite Kmart's present plight, the retailer has noted some improvements as a result of recent IT projects. For instance, a Kmart spokeswoman said the retailer's in-stock position improved to 86% last November, up from 73% when Conaway came on board in May 2000. "Our near-term target continues to be 90%," she said.

But since arch competitors Wal-Mart and Target Corp. produce better in-stock and inventory turnover numbers thanks in part to their more finely tuned IT systems, Kmart is under intense pressure to show far greater improvement.

"If they don't have a supply chain structure that will allow them to compete with the two best players in the space, they won't have a chance," said Jeff Roster, an analyst at Gartner Inc.'s San Jose-based Dataquest Inc. division. "If you're not efficient, you're not going to compete. Period."

Marie Driscoll, an equity analyst at New York-based Argus Research Corp., said Kmart had to bring down its prices because they were higher than Wal-Mart's. "But they can't compete with Wal-Mart on price," she said. "They won't win, and they'll undermine their financial strengths, and that's what happened in the last six months."

Other contributing factors to Kmart's financial woes include its lack of differentiation and inability to figure out a unique selling proposition to make it stand out from its chief competitors, its aging and underperforming stores, its poor store execution and its store locations.

"IT has to follow the needs of the business, and the business strategy is also at issue here," said Karen Peterson, an analyst at Stamford, Conn.-based Gartner. "If I don't have a good business strategy, I'm not going to have the best-in-class IT strategy."

Copyright © 2002 IDG Communications, Inc.

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