What went wrong at Kmart? Its bankruptcy protection filing last month did not stem from dodgy bets or years of product paralysis. Rather, Kmart passed the test of business failure on fertile, well-tilled, consumer terrain. It failed while innovating formats, services, and product lines (think Martha Stewart). It failed where competitors such as Wal-Mart and Target found profitable growth in a discount retail sector that expanded 58 percent in 10 years.
So what's to blame? The board pointed to Kmart's head, firing president Mark Schwartz Jan. 17 and demoting chief executive Charles Conaway from chairman. Analysts point to its limbs, calling for amputation of hundreds of underperforming stores. But both groups should also look to its heart. Kmart lost its way not in recent years, but in the '60s, when its parent, S.S. Kresge Co., expanded from a discount retail chain that promised ''Everything Under a Dollar'' to a department store format that offered anything and everything with no clear differentiation. To make matters worse, about the same time competitor Wal-Mart came on the scene with a clear, steady promise: ''Low prices, every day.''
Such phrases may sound like simple slogans, but they actually encapsulate strategies at the heart of competitive differentiation. I call them ''strategic principles'': memorable directions that distill a company's corporate strategy to its unique essence. And they can be observed at a clutch of companies. They imply trade-offs in allocating scarce resources, boundaries for experimentation, and a litmus test for action. They help empower employees to act in the best interest of the company and inform customers of what to expect. For example, at S.S. Kresge, if an item couldn't be sold profitably for under a dollar, stores didn't stock it and shoppers didn't come looking for it. At Wal-Mart, maintaining low prices meant investing in state-of-the-art supply chain infrastructure.
In economic turbulence, it's paramount that front-line operators act quickly and decisively in line with strategic objectives. No surprise, perhaps, that we're seeing companies with strategic principles not just staying their course today, but pulling ahead of competitors. Besides Wal-Mart, the list includes Southwest Airlines, Dell, Vanguard, eBay, GE, and Nestle.
Indeed, during the recessions of 1987 and 1991, when consumers' concept of a low price was even lower than usual, Wal-Mart stuck to its principle and achieved 2 to 4 percent in comparable-store gains over its competitors. It achieved most gains through aggressive price rollbacks, which happened store by store as each front-line manager established the redefinition of ''low'' for his territory.
So strategic principles make a difference. To his credit, Conaway has tried to instill principle of sorts. But he hasn't taken into account the underlying dynamics of Kmart's current marketplace. He's merely copied Wal-Mart. Instead of ''Low prices, every day,'' Conaway launched ''BlueLight Always,'' playing on the store's famous BlueLight Specials, which promoted instant markdown of a particular item.
Conaway tried to reign in costs to support everyday low prices. But he was always behind. He improved inventory control, cut advertising inserts, and lowered prices to match Wal-Mart on basic items. But Wal-Mart store managers—empowered for years to define ''low'' for their territories—dropped prices further. Kmart managers, for whom ''BlueLight Always'' was just a phrase, lacked the empowerment to retaliate.
Strategic principles derive their power from grounding in a company's unique economic reality. As Kmart works out its restructuring, it had best lay aside aims to out-Wal-Mart Wal-Mart.
Kmart's new chairman, turnaround specialist James Adamson, should look at the competitors Kmart currently faces and its resources at hand, and craft a marching order that gives the front line a clear sense of which hills to take. Above all, those hills need be attainable and defensible.