Prior to attending your tutorial, read the case study printed on the following pages. In your tutorial, your group will be asked to discuss all of the statements listed below and to select the statement you agree with most strongly. You must be able to justify your selected statement by drawing on theory from the online module and applying it to the case study. Your group can choose one statement only (either A, B, C, or D) and you must be able to defend your choice to other groups.

A.To support its long-term growth and development, Wesfarmers should retain its product divisional structure.

B.To support its long-term growth and development, Wesfarmers should adopt a matrix structure.

C.To support its long-term growth and development, Wesfarmers should increase the degree of formalisation.

D.To support its long-term growth and development, Wesfarmers should decentralise.

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Case study

Wesfarmers restructures Target and Kmart

Wesfarmers was founded in 1914 as a Western Australian farmers' cooperative. Since then, Wesfarmers has grown into one of Australia's largest listed companies. With headquarters in Perth, its diversified business operations cover the following divisions: (1) supermarkets, liquor, hotels and convenience stores; (2) home improvement; (3) office supplies; (4) department stores; and (5) an industrials division with businesses in chemicals, energy and fertilisers, industrial and safety products and coal.

The department stores division was created in February 2016, when Wesfarmers announced it would create a single division to house its Kmart and Target businesses. Wesfarmers managing director Richard Goyder said the restructuring of Kmart and Target to sit within a single division would enable both retail chains to maximise and share opportunities where appropriate. Wesfarmers stressed that both "iconic" brands will be maintained and grown. This is the right time to draw together some functions of the individual businesses to ensure we get maximum reward from the strong work that has been undertaken in both, Goyder said. The newly-formed division will allow streamlined coordination of functions, where it makes sense to do so, such as in property, finance, and corporate affairs and sustainability." The department stores division is expected to become all the more important as Wesfarmers coal, resources and industrials businesses suffer from collapsing earnings.

The restructuring created a new role for a CEO of the department stores division. Kmarts Managing Director Guy Russo was promoted into the role. Formerly the CEO of fast food chain McDonalds Greater China division, Russo was hired by Wesfarmers in 2008 to initiate and lead the turnaround of their struggling Kmart business. Wesfarmers Managing Director Richard Goyder stated, Individually, both Kmart and Target have been through challenging times since we acquired them in 2007. Kmart was in very poor shape when we took ownership, but Guy Russo and his team have done an outstanding job and the business has been trading very strongly for several years." Under Russos leadership of the change management process, Kmart became the star of the discount department store category in Australia where it competes with Target and Big W. When Russo arrived at Kmart, the business was in decline and staff wanted to be successful but had no direction, no leadership, no one up the top committed to them. Russo handpicked an executive management team to ensure he had the right people to drive the changes needed, accepted the resignations of 150 Kmart head office staff who admitted they couldnt commit to the effort of a turnaround, and replaced 20% of the chains store managers. The turnaround hinged on strategic re-positioning to provide customers with quality goods at affordable prices and required close management of costs, continued investment in the network of stores, and strong leadership to support more satisfied and engaged employees. Russo and his team slashed Kmarts product range and established an ethical international sourcing model.

Russos successful turnaround of Kmart occurred as Target struggled over the same period under three different CEOs. Target suffered from excess inventory after changes in strategy left warehouses full of stock and purchasing managers made decisions that did not resonate with customers. Poor management decisions and lack of leadership meant Target failed to

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deliver a mid-tier value proposition between Kmart which had excelled at the bottom end and Myer and David Jones competing in the premium space. Notably, when Guy Russo took over Kmart in 2008 its first-half profit was $75 million, only a third of Target's $215 million. Seven years on, those results were reversed. Kmart's first-half earnings in the 2015-2016 financial year were $319 million, while Target reported earnings of only $74 million.

However, when Russo took over as CEO of the department stores division and examined Targets business, he discovered that Targets performance was even worse than reported. Target executives had tried to hide sliding profitability using improper payments from suppliers. Normally, rebates paid by suppliers to Target are included in inventory for accounting purposes. They are not put through the profit and loss statement. But in this case, the 31 foreign clothing suppliers who were approached to pay cash rebates to Target had supplied stock that had already been marked down and sold. The suppliers were asked to make the cash payments as part of a deliberate strategy to boost the company's profit margin and make the results for the half year look good. The key twist in the deal was that letters were exchanged guaranteeing the money paid in rebates would be recovered in the second half of the financial year through higher prices.

Without the deals, Targets earnings before interest and tax for the first half would have slumped about 15 per cent instead of rising 5.7 per cent. The reported results were the best half-yearly profit performance at Target for three years. They were presented to the market as proof that Targets transformation program was progressing well. Taking the rebates to profit boosted Target's December-half earnings for the 2015-2016 financial year by about $21 million. Target's earnings before interest and tax would have been $53 million in the December half compared with the $74 million reported, and Wesfarmers' group net profit would have been $15 million, or 1.1 per cent, lower than reported. Wesfarmers said the arrangements had no cash flow implications, as the rebates were not collected but treated as receivables, and would have a negligible impact on full-year results as any benefit would have been unwound in the following half.

Four senior Target executives either resigned or were sacked over the supplier rebates as Wesfarmers managing director Richard Goyder sought to reassure investors and regulators that the collusion was an isolated event and not a sign of deeper cultural and compliance problems at Australia's largest retailer. "There is no excuse for this conduct. Those who know Wesfarmers know we hold our reputation and values highly. We set very clear direction and expectations at Wesfarmers crystallised in our code of conduct, and supported by detailed group policies, divisionally specific accounting policies, and regular staff training," Mr Goyder said. "We encourage and expect adherence to a strong culture of managing for long term sustainable growth over short term gain."

Mr Goyder lamented the damage the scandal has done to the corporate reputation of Wesfarmers. "We've taken this very, very seriously because, while the amount is not material, the actions and the reputational damage are," he said. When asked whether the Target staff who were involved (which could be as many as 10 Target staff) might have done it because they felt pressure at a divisional level, Mr Goyder acknowledged that the poor financial performance of the business might have contributed to some desperation. "What's so

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disappointing about this is that people have made a decision, probably through an implied pressure that they felt, to do something that's mind-blowingly stupid," he said.

Target's former managing director, Stuart Machin, has said he was not aware of the accounting issues but has accepted his share of the responsibility, given his leadership role, and resigned from Wesfarmers. Target's director of merchandise trading, Richard Jones, also announced his resignation. "We're still going through a process of talking to people there will be further actions against these people," Mr Goyder said.

Wesfarmers said Target's new management team, led by Guy Russo, was working with suppliers to unwind the arrangements, while Wesfarmers was taking action to reinforce the importance of complying with accounting rules and Wesfarmers' own policies and governance practices. Mr Goyder said there was nothing to suggest that the problem at Target had occurred elsewhere in the group, and defended the company's oversight of Target. "It's not fair to expect the board to be across the detail to that degree," Mr Goyder said. "We have to reinforce the behaviour we want from people," he said. "It's work in progress."

In addition to managing the restructure of the department stores division and resolving the accounting scandal at Target, Wesfarmers recently confirmed it will acquire UK Do-it- yourself chain Homebase for $340m, expanding its Bunnings proposition into international territories for the first time. Wesfarmers continues to evolve as a business, Mr Goyder said. Bunnings recent expansion into the United Kingdom and Ireland and the restructuring of our industrial businesses into a single new Industrials Division, reinforces our performance and development culture and underlines the groups focus on growth opportunities.