Sears Auto Centers (A) (Abridged)

Analysis:

Richard W. Sears, a railway agent by profession start off with the new business by selling watches initially. The company had its status offering low prices and guarantees to its principal customers that were the farmers. Having demand in the rural areas they opened their first retail stores in 1924, which was basically catered to the farmers who could buy merchandise by travelling to the town. Starting off with Allstate named chain of tire business they further expanded into auto insurance and life insurance services. Moving on in years thye also managed to acquire the real estate broker and stock broker and finally starting off with their Discover credit card.

Being the king in the retail; business Sears was going very good but eventually in the mid of 70’s, they started losing their status and dignity by just being a one stop shopping point. While other competitors had their stores sprouted up nationwide. In addition K-mart and Wal-Mart had been given Sears a head on strike by invaded in most of the small towns.

Pressure grew intense, stock fall down to 40%, investors were losing patience; demanding for action and rumors of possible takeover bids were wandering around the Wall Street. Despite its penetration and high earnings in the US market, Sears began to experiences serious financial troubles in 80’s. Sears responded to Wal-Mart and K-Mart by addition of Non-Sears brands and a new policy and strategy of “everyday low price”. Still, despite these efforts they had to see a 40% decline in their earnings. In addition to this Sears planned for cost control measures and laying off some jobs and further planned to focus in profits at each level.

Moving on in 1991, the company unveiled productivity incentive plans in order to improve its profits of auto centers nationwide. Auto mechanics were initially paid on hourly basis and according to production quotas. But now an additional compensation plan was announced that included a commission element. In that mechanics were now paid basic salary in addition to dollar value fixed for meeting production quotas. Auto services adivisors who mostly are on the counters were basically paid a fixed salary initially. Now, in order to increase sales, commissions and product sales specific quotas were introduced for them as well.

In 1992, California department of consumer affairs accused Sears, that it had been violating the state’s auto repair act and pursued to revoke license of all of their auto centers in the state. These allegations were basically as a result of increasing numbers of complaints by consumers in the past years and by the undercover check investigation of brake repairs. The problem says that Sears had been misleading their customers and charged them for unnecessary repairs at times. Finally all these troubles pointed out Sear’s compensation system as a cause of this issue.

As a response, Brennan, the CEO of Sears, denied that any such fraudulent activity had occurred by any officials of Sears and he attributed all of this as a focus on preventive measures of cars

that were especially old. Though he accepted the fact that within such compensation system problems and mistakes can occur, he planned to resolve the issue. These steps included:

Elimination of service advisors’ compensation system. Commissions based on customer satisfaction. Sales volume quota to be ended.

Further after meetings with BAR, they started internal audit and internal investigation of its auto centers. Thus, the compensation for mechanics was still under process.

So, employees were given a sort of obligation to sell a certain amount of parts, or else they might risk their jobs. So, Sears had got power to manage training their employees how to fraud and given misleading information to customers. So admitting and working on mistakes was a separate thing, but Sears had lost a huge amount of customers by now and it will really not be easy for them to get back their position of course. So, Discipline and Honesty could be the main factors Sears should have pondered upon. They were basically lacking with these traits and if they had maintained discipline and honesty they would not have lost their respect and customers in the market.

Before their compensation system, they had already a lot of trust from their customers. But to date, the story presents a different view.

Qualitative data

Offering low prices and money back guarantee to their principal customers. Losing business by one stop shopping emporium. Growing business specially in financial sector of their business. Started off with new “everyday low price” policy and also with brand name products. Ethical issues involved:

o Giving false and misleading statements.

o Fraud.

o Failure of clearly state parts and labor.

o Failure to return parts.

o Using false means to increase sales and in turn compensation.

Quantitative data

Net income from merchandising fell from $503 million to $240 million. Stocks fall down by 40%. Selling and administrative expenses went down by 30%. Net income from merchandising group at $37 million. 875 auto centers employed 34000 people. 3500 service advisors.

Profits from car repairs grew from 11% to 86% of total profits. Market for brakes part grew from 3% to 4% per year. Fraud related complaints increased by 14% each year.

Merchandising quarterly income shows a very negative trend in its first quarter which further got down to its minimal point and in the fourth quarter started showing profits. So, for a company that has been on top for a number of years, a perfect marketing and pricing strategy should be adopted.

Sears Auto Center Repairs Analysis

Market share in Auto repair industry 10.8%Industry average complaints 1.1%Sears customer complaints 0.12%Investigation by BAR 89% overcharged

Case issues

So, the financial viability and leverage of the firm was at stake, its debt were increasing , profits were not improving with a good ration and on the other hand the operating expenses were also showing an increasing trend. Incentives and compensation system of employees was questioned and Sears had to face the music with this, so they really needed to work up on their compensation plans and see if it really was causing troubles and overcharging. So, a thorough internal analysis had to be conducted to figure out the major causes. If we had a glance in the overall scenario, we can observe that lying down of firms changing pricing strategy over and over are never viable solutions.

For retail stores they can continue with the EDLP strategy and shall cater to high end retail brands to improve profitability. Again, narrowing down their base of specialty products and retrenchment will be an optimal way to move on.

Conclusion

So what we conclude is that there should be amalgamation between:

Auto insurance Auto parts merchandising Auto repair and Sears retail stores

But, keeping in mind an additional factor that there should be separate legal entities for each of their business lines so that, in case if one business fails, other may not.

In addition we propose to make a new incentive system for auto retail part of their business which says:

Base pay + Number of jobs done – Complaints received

Facility Layout