4–14–1Copyright © 2006 Thomson Business and Economics. All rights reserved. Agenda 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

4–24–2Copyright © 2006 Thomson Business and Economics. All rights reserved. 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

4–34–3Copyright © 2006 Thomson Business and Economics. All rights reserved. Group Decision-Making Techniques That Foster Creativity Exhibit 4–7

4–44–4Copyright © 2006 Thomson Business and Economics. All rights reserved. Generating 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.

4–54–5Copyright © 2006 Thomson Business and Economics. All rights reserved. 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.

4–64–6Copyright © 2006 Thomson Business and Economics. All rights reserved. Responses 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”

4–74–7Copyright © 2006 Thomson Business and Economics. All rights reserved. Kmart Acquires Sears Instructor Pull Up Web Q Responses

4–84–8Copyright © 2006 Thomson Business and Economics. All rights reserved. From 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.

4–94–9Copyright © 2006 Thomson Business and Economics. All rights reserved. Sears Holding Corp. 10/4/05 Announcement Kmart Names New Senior Vice President For Kmart Stores And Executive Vice President, Restructuring And Business Improvement Oct 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 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.

4–10Copyright © 2006 Thomson Business and Economics. All rights reserved. Example 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

4–11Copyright © 2006 Thomson Business and Economics. All rights reserved. Decision Tree Exhibit 4–8

4–12Copyright © 2006 Thomson Business and Economics. All rights reserved. Analyzing 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

4–13Copyright © 2006 Thomson Business and Economics. All rights reserved.

4–14Copyright © 2006 Thomson Business and Economics. All rights reserved. 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.

4–15Copyright © 2006 Thomson Business and Economics. All rights reserved. The Kepner-Tregoe Method for Analyzing Alternatives Exhibit 4–9

4–16Copyright © 2006 Thomson Business and Economics. All rights reserved. Cost-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

4–17Copyright © 2006 Thomson Business and Economics. All rights reserved. Plan, 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.

4–18Copyright © 2006 Thomson Business and Economics. All rights reserved. Time-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-DrivenDevelopment-Driven Value Orientation Focus Must Also Adhere to Leadership and Group Style

4–19Copyright © 2006 Thomson Business and Economics. All rights reserved. Balmer 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

4–20Copyright © 2006 Thomson Business and Economics. All rights reserved. Balmer Café – Objectives & Why 1.___________________________ 2.___________________________ 3.___________________________ 4.___________________________ 5.___________________________

4–21Copyright © 2006 Thomson Business and Economics. All rights reserved. Balmer Cafe - Decision Criteria & Why? 1.__________________________ 2.__________________________ 3.__________________________ 4.__________________________ 5.__________________________

4–22Copyright © 2006 Thomson Business and Economics. All rights reserved. The “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?

4–23Copyright © 2006 Thomson Business and Economics. All rights reserved. Financial 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?

4–24Copyright © 2006 Thomson Business and Economics. All rights reserved. Alternatives Decision Matrix Option Criteria Option 1 Hire Person Option 2 Buy Equipment Option 3 Reduce Menu

4–25Copyright © 2006 Thomson Business and Economics. All rights reserved. Financial Analysis – Net Present Value (NPV) 10% Discount, No Inflation)

4–26Copyright © 2006 Thomson Business and Economics. All rights reserved. Alternatives Decision Matrix Option Criteria Option 1 Hire Person Option 2 Buy Equipment Option 3 Reduce Menu BEST FINANCIAL NPV = $59K NPV = $34K IMPROVE CUSTOMER SATISFACTION HIGH LOW LOW RISK HIGH RISK $35k purchase MEDIUM More customers leave GOOD EMPLOYEE IMPACT HIGHMEDIUMLOW OTHERS?

4–27Copyright © 2006 Thomson Business and Economics. All rights reserved. Alternatives Decision Matrix Option Criteria Option 1 Hire Person Option 2 Buy Equipment Option 3 Reduce Menu

4–28Copyright © 2006 Thomson Business and Economics. All rights reserved. The Bottom Line – Our Recommendation: Solution: Benefits: Cost: Concerns/Risks: Implementation Plan: