Design Structure Of Fit Strategy

Problems

E. J. Korvette was not able to build management depth, decentralize decision-making and use empowerment effectively while it was trying to expand its business within hard goods merchandise as well as branch out into apparel, furniture, food, and other soft good and service.

Origins

E. J. Korvette's haphazard management based on shaky foundation and centralized decision-making management are the key factors that contribute to the problems within the E. J. Korvette.

E. J. Korvette was a New York City-based retailer founded by Eugene Ferkauf in 1948. Eugene Ferkauf began his discounting career in a 400-square-foot loft in mid-Manhattan, New York City with total capital of four thousand dollars. He began with a small luggage shop and a big idea Ð'- selling hard goods at prices 10 to 40 percent below those found in department stores.

The concept worked and Ferkauf began to add appliances and other items. Sales mushroomed in the 1950s rising from $55 million a year to $750 million a year over a ten-year period. At one point in the early 1960s Korvette was opening one huge new store every seven weeks. In 1956 Korvette's had 6 stores. By 1958 it had 12 stores. At its peak, it had 58 stores. These stores were westward to the Mississippi, from Hartford to St. Louis. Several store were opened simultaneously at same areas to help spread out the advertising cost.

All this Ferkauf has accomplished by pursuing a business philosophy: discard costly frills, use low prices to lure customers, and make up for low profit margins with high volume. And the "duke of discounting" discoursed about his career "It is adventure and I am going to stick with it and take it as far as it will go." E. J. Korvette was ever on its wheel of fast growth and breathless expansion. "As long as I have anything to do with this company, all the profits will go into expansion." By 1950, E. J. Korvette was turning out $2M a year, and Ferkauf was plowing back all the profit into new stores on leased sites.

But the Korvette story had a sad ending. By 1966 though Korvette's sales since 1962 have more than doubled to $720 million, its profits in that year's first fiscal half (ending in January) have dropped 14%, to $7.9 million, and its stock is down from 1955's high of 501 to low close of 221 at Jun 1966. Ferkauf himself is the first to assign the trouble to "a lack of communication among a very small management group Ð'--way up on top." In 1966 Korvette merged with Spartan Industries, a soft goods chain. Eugene Ferkauf was eased out of management and the Spartan management tried to turn things around. Five years later the firm was sold to Arlen Realty. Arlen later sold it to a French firm. And in 1980 the French firm basically closed down the once proud Korvette.

The problems were there at the beginning of the business, but not as fatal as they were when the business were grown into a fast-growing retailing empire, when the businesses were changed and gave Eugene Ferkauf less and less time to do what he really wants to do. He likes to play hooky from the office, go out to mind his stores. He fusses, fixes problems, scolds and cajoles salespeople. Ferkauf is personally charming, but is a hard man to please.

Eugene Ferkauf had started out by staffing his early operations with friends from the Brooklyn neighborhood where he grew up, as well as army buddies. Korvette's was run like a fraternity, or so outsiders would say. He gotten around to rewarding his old friends, the crowd he affectionately calls "The Boys", management positions within Korvette. When money was needed in the early days to keep stores stocked, Ferkauf passed the hat among The Boys.

Eugene Ferkauf has no office, no secretary, no personal files, or often records of his transactions. He did not even hold a title at Korvette's until 1955. He has never dictated a business letter or made a speech. He seldom makes a telephone call or negotiates a business deal personally. Ferkauf spent most of his working days in an endless trek form one store to another, sparking The Boys to do just a little bit better.

Eugene Ferkauf turned to the recruiting ground he knew best Brooklyn. Determined to keep himself free for decision making, he delegated to one old friend after another all the time-nibbling detail work. At Korvette's, in fact, it is imprudent of any executive to throw his rank around. One store manager who got too highhanded with his subordinates was conspicuously omitted from a stock bonus list. Says he: "I'm nothing but a nice guy now. I learned the hard way." Store managers were empowered less power, even in some extent, store managers were only a door keeper.

Korvette's centralized decision-making management structure and its simple organizational chart (see attachment 1) did not change as its businesses grew, especially for the middle and low level hierarchy management. Compare to the "relative stable" lower level management, Korvette's top management was shifted and changed more frequent. Korvette was swallowed up in three mergers, and it switched top management five times since the 1960's.

Ferkauf and his home office executives began to have trouble in administering the operation as it got larger. Mistakes were made and costs began to rise. When soft goods were added, Korvette's managers discovered that they didn't know how to handle the problems of obsolescence, and markdowns. Similar problems were encountered when Korvette added supermarkets. Korvette had to resort to bringing in outside top managers who produced fitful results to help to accomplish its goal. New senior management executives were brought in from such competitors as Abraham & Straus and Macy's to provide Korvette with the type of sophistication and systems that department stores had but Korvette didn't after it merged with Spartan Industries.

Research and Recommendation

When E. J. Korvette was a small business, the centralized and haphazard management was effective and could help Korvette made rapid growth and expansion. But When Korvetter gets larger, the centralize management was no more suitable to the fast-growing business, even on some points it is detrimental to the business. E. J. Korvette should adjust its structure to fit its strategy to build up management depth in organizational management hierarchy when its business gets larger. Donaldson (2004) states that as organizational size increases, the span of control increases for a manager until it becomes too wide. At this point a new intermediary level has to be introduced into the hierarchy between the manager and his or her erstwhile direct

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