Value creation is considered the primary function of a business. Creating value for the customers, it helps in selling product and services, while in terms of shareholders, it helps in an increase of stock prices, future availability of investment capital and other financial resources (Chemmanur, Loutskina & Tian, 2014). In financial terms, increasing value in a company happens when the revenue is higher than the expenses of the company. The traditional ways of creating value and accessing organizational performance are no more productive in the modern world economy. Value creatin in today’s world is represented by the innovation, ideas, people, and the brand attributes (Chemmanur, Loutskina & Tian, 2014).
The company being discussed here is Sears, which is an American chain of department stores. The company was founded in 1892 by Richard Warren Sears and Alvah Curtis Roebuck. It first started off as a mail ordering company and later in 1925 began opening retail stores in different cities of USA. Sears also have their own brands related to households, clothing, mens and women wear, electronics, bicycles, and many more. Value creation has always been a core function of Sears. As the company is serving USA only and wants to expand its business internationally, it is important to consider that what value can be added to its products, which benefit the company and the customers at the same time. Sears has a lot of its own brands in the market, which are available at the Sears outlet as well as the other outlets. So, if the business expands globally it will give the leverage to the management to lower the cost of their brands because of the potential products they have in the product line (Dutta & Folta, 2016). Due to the reason that the company has a huge product range, it can also add value for the customers as the consumer is influenced by the choice of products.
International Level
Refering to the international level, Sears might face a lot of pressure in terms of local response to the company and the costs associated with it. Sears is a department store chain and this industry has a lot of competitors who serve to produce the best customer service of their company. These competitors might include Walmart and Carrefour. The pressure in this industry can be placed at a higher rank, because serving the customers with the best service might not be easy when going international (Hong & Li, 2017). The cost pressure of the company in the department store industry in influenced by the number of customer interaction in the stores and the range of products being offered by the company (Hong & Li, 2017). The costs of Sears are usually higher in USA, but for example if the company is looking to enter UK as a new market, it will help if Sears look in to the local companies and their product costs. If the competitors are making their products with a low cost strategy, than Sears should also consider doing the same in the start. Local response of the customers is usually influenced by customer service and the type of products being offered. When a customer plans to make a purchase, they often compare the product with the other companies’ product (Boulay et al., 2016).
The response from the customers for a new department store outlet might be positive, because in this industry the customers always want a new brand name with a lower cost and price (Boulay et al., 2016). Department store industry is diverse and competitive, so is the response from the customers towards the companies in it. If Sears is choosing to start business on a global level, the customer response might be positive if Sears start of with low price and better service to maintain their position in the industry.
Foreign Market
As Sears has chosen to expand its operation on a global level and start business internationally, the company should consider entering UK as a foreign market. The reason of choosing UK is because alike USA, UK has a strong customer base, due to the large population and increased number of tourists in the country. According to the surveys in 2015, the results responded that there was 87% positive response from the customers to the new stores opened in London and affliated areas (Li, Qian & Yao, 2015). Sears should enter the UK market as a foreign new market, in the same industry as it is serving the USA customers. In an international business, when a company decides to expand its business in any foreign market, they identify the entry modes which are best suitable for the company (Li, Qian & Yao, 2015).
There exist three different types of entry modes; export mode, intermediate mode, and hierarchical mode. In export mode, there is low control over the costs, customers, and risks but, there is more flexibility in terms of purchasing goods and export for the company (Li, Qian & Yao, 2015). If a company chooses export mode for a new market, the ownership remains to the parent company. In intermediate mode, there is shared risk and control, as the ownership is split between the parent company and the third party. Mostly, intermediate mode involves franchising, licencing, and joint ventures from the local authorities (Li, Qian & Yao, 2015). While in hierarchical mode, there is high risk and control with less flexibility in the organization. This mode is also known as investment mode, where the parent company has full control over the business but in a new market (Li, Qian & Yao, 2015). Hierarchical mode includes mergers and acquisitions, where the parent company merges with the local companies to improve their business.
As for Sears, the best mode of entry into the UK market will be the intermediate mode, where they will use their parent company name to give out franchises to the local interested participants. It will be beneficial for the company, as the international business cannot be run smoothly by the parent company due to increased market and risks of the market.
Horizontal Integration Strategy
Horizontal integration is the strategy acquired by companies for additional business processes, that are equal to the value chain of the company in the same or different industries (Barrella & Watson, 2016). The best possible ways of horizontal integration can be internal expansion, where the company gathers investment plans of operating profits, and by external expansion, where the company tends to move into merger and acquisitions. As the different departments and companies are involved together at the same level of production, horizontal integration allows them to use the resources collectively at equal level (Barrella & Watson, 2016). Sears has used horizontal integration in the form of a merger with Kmart, in March 2005. Kmart is also a big box department store chain serving the customers in USA. In 2005, Sears and Kmart merged together to perform business more effectively. The reasons behind this merger was more than a plan only.
The Sears CEO Eddie Lampert found that the company was having more costs in a year than its sales, which was effecting the overall growth of the company. While, Kmart at that time was selling more brands of their own, and their customer service was also considered to be top ranked. In the year 2000-2004, Sears had started to purchase more of the Kmart locations and running business effectively in the areas, with the name Sears Grand. So, in March 2005 the board of directors sat down to share the interests and the company merged out with the name Sears Holding Corporation. Now, the company serves as a merger of two companies i.e. Kmart and Sears. The strength of this merger was that both the companies had their own brands in the market, and it turned out to be benefical for the both the companies, in terms of customer service, sales, and operations (Barrella & Watson, 2016).
Vertical Integration Strategy
Vertical integration is a strategy, when a company tends to expand its business operation into different production paths, which can be inside or outside the business entity (Argyres & Mostafa, 2016). In vertical integration, a business might own its suppliers or distributors for the core purpose of the integration. It helps the companies to decrease their costs and improve their business efficiencies by reducing their transportation costs and decreasing their overall manufacturing time constraint (Argyres & Mostafa, 2016). In some cases, it is best for the company to depend on the expertise of their vendors’ economies of scale, instead of involving in vertical integration. Vertical integration in a company occurs when it assumes to have control over distribution or production processes which are included in the product or service creation (Argyres & Mostafa, 2016).
There are two types of vertical integration; backward integration and forward integration. Backward vertical integration occurs when the company controls the subsidiaries, that produce the inputs or materials used in the production of the products/services. When a company has control over its subsidiaries, it can create a stable supply of inputs, and can make sure a consistent quality in the final product (Barrella & Watson, 2016). Some examples can be taken from Ford, who integrated with the glass companies in 1920s to minimize their costs of producing car windows to be able to produce a perfect car. A forward integration means, when a company has control over its distribution and retail centers (Argyres & Mostafa, 2016). It helps in the product selling and increase in sales. When a company is observing forward vertical integration, its production is not outsourced and its retail outlets are more concerned to grow.
Looking into Sears, the company has been manufacturing its own products instead of getting a final product from the suppliers or other companies. It makes them less backward vertically integrated, and can be considered a positive aspect because there is always a risk of getting a whole new product in a manufacturing phase. As far as forward vertical integration in Sears is concered, Sears have opened their own outlets in the different areas of USA, and unlike other department stores they do not place their brands in the third party stores. The company is also less forward vertically integrated.
Increasing Vertical Integration
A company can benefit a lot from vertical integration, if it is implemented perfectly within the company. The foremost purpose of vertical integration is sometimes increasing profits, by accessing the potential of their departments and products (Argyres & Mostafa, 2016). Sears, being the 23rd largest department store chain in USA has a lot to offer to the customers and can make profits from vertical integration. At present, Sears is manufacturing its own brands with getting raw material from the suppliers and wholesellers. They have the potential of maintaining their brand, even though they get a finished product from the market. For example, Sears produce bicycles for kids, and they make each item included in the creation of bicycle by their own.
Instead of making tyres on their own, they can get it from the available market. It will directly increase the profit of the company, as the costs of producing the bicycles will be reduced. Sears also have the potential and resources, to give their brand name to the third party retailers. The company has built their name, and it will help them in increasing profits if the company is moving to get into giving their brands and products in the third party retailers instead of just putting them in their own retail outlets (Argyres & Mostafa, 2016).
Outsourcing
Outsourcing is the technique used by the companies where they give any third party company, to make productions or manufacturing of a product/service for the core benefit of the company (Schniederjans, Schniederjans & Schniederjans, 2015). It is considered as a cost effective and profit increase strategy. Companies might outsourse their sections of business to any third party, because the company might not have expertise in that area (Schniederjans, Schniederjans & Schniederjans, 2015). As discussed beforem Sears has been manufacturing its products in house and are not involved in outsourcing. The company should consider outsourcing its production of brands (in some sections) to third party companies, in order to focus on the core areas of the company. Considering production from outsourcing can help Sears in establishing a good customer base, because the company will have time to focus on core areas, which is the customer service. It can also result in increase of profits, as the costs of production will be decreased by outsourcing the manufacturing department. However, being an outsource company will not benefit as Sears is a department store chain, and producing sometime extra within the production phase will only increase its cost (Schniederjans, Schniederjans & Schniederjans, 2015).
Long term Cooperative Relationships
Being an old department store chain, Sears has a lot of long term supplier base. One world technologies and Techtronic industries are their basic suppliers, who provide the basic electronic equipment used in their product. But, these relations have been wicked in the recent years. Sears had contracts with these suppliers, but One world technologies threatened the company that they will take legal action against Sears as a result of changing suppliers terms which cannot be changed within an agreed contract (Peterson, n.d.). However, One world technologies is forcing to file a lawsuit against Sears with an intention of embarrassing Sears in media and urging Sears to finish the contract. Eddie Lampert said in response that the company has nothing to fear, as they are following the legal laws and standards.
In this case, Sears had started to built a bad relationship with the suppliers although the mistake in the situation was from One world technologies (Peterson, n.d.). Building long term relationships with the suppliers is essential and it adds value to the company because a good running company always has positive relations with the intermedries involved to the business. If a supplier is satisfied by the company, it will directly benefit the customer as they will be getting the best quality product. Stronger supplier relationships also increase the supplier base, and there is a long term benefit of relying on the suppliers from the company.
Work Cited
Argyres, N., & Mostafa, R. (2016). Knowledge inheritance, vertical integration, and entrant survival in the early US auto industry. Academy of Management Journal, 59(4), 1474-1492.
Barrella, E. M., & Watson, M. K. (2016). Comparing the outcomes of horizontal and vertical integration of sustainability content into engineering curricula using concept maps. In New developments in engineering education for sustainable development (pp. 1-13). Springer, Cham.
Boulay, J., Caemmerer, B., Evanschitzky, H., & Duniach, K. (2016). Growth, Uniformity, Local Responsiveness, and System‐Wide Adaptation in Multiunit Franchising. Journal of Small Business Management, 54(4), 1193-1205.
Chemmanur, T. J., Loutskina, E., & Tian, X. (2014). Corporate venture capital, value creation, and innovation. The Review of Financial Studies, 27(8), 2434-2473.
Dutta, S., & Folta, T. B. (2016). A comparison of the effect of angels and venture capitalists on innovation and value creation. Journal of business venturing, 31(1), 39-54.
Hong, G. H., & Li, N. (2017). Market structure and cost pass-through in retail. Review of Economics and Statistics, 99(1), 151-166.
Li, J., Qian, C., & Yao, F. K. (2015). Confidence in learning: Inter‐and intraorganizational learning in foreign market entry decisions. Strategic Management Journal, 36(6), 918-929.
Peterson, H. (n.d.). Sears tanks after CEO eviscerates top tool vendor he says is trying to cancel its contract. Retrieved from http://www.businessinsider.com/sears-ceo-feuds-with-one-world-tool-supplier-2017-5
Schniederjans, M. J., Schniederjans, A. M., & Schniederjans, D. G. (2015). Outsourcing and insourcing in an international context. Routledge.
