Sears Case study CASE SEARS, ROEBUCK, AND CO.: THE AUTO CENTER SCANDAL Sears, Roebuck, and Co. began in the late 1800s as a mail-order company that sold farm supplies and other consumer items. Its first retail store opened in the mid-1920s. Responding to changes in American society, such as the move from farms to factories and the presence of the automobile in many homes, hundreds of retail stores opened over the years. The company expanded rapidly, and eventually it diversified to include other businesses: insurance (Allstate Insurance), real estate (Coldwell Banker), securities (Dean Witter Reynolds), and credit cards (Discover). Each of these other businesses became its own division, in addition to the merchandising group that included retail stores, appliances, and auto service centers. By the early 1990s, the company was reporting revenues and earnings in the billions of dollars. 51 Despite its long history of high earnings and its penetration into the U.S. market, the Sears retail business began to experience serious financial difficulties in the 1980s. Discount retailers such as Wal-Mart were pulling ahead in market share, leaving Sears lagging. Sears responded by adding non-Sears name brands and an “everyday low price” policy. But despite these efforts, in 1990 Sears reported a 40 percent decline in earnings, and its merchandising group dropped a whopping 60 percent! Cost-cutting measures were planned, including the elimination of jobs and a focus on profits at every level. 52 In 1991, Sears unveiled a productivity incentive plan to increase profits in its auto centers nationwide. Auto mechanics had traditionally been paid an hourly wage and were expected to meet production quotas. In 1991, the compensation plan was changed to include a commission component. Mechanics were paid a base salary plus a fixed dollar amount for meeting hourly production quotas. Auto service advisors (the counter people who take orders, consult with mechanics, and advise customers) had traditionally been paid a salary. To increase sales, however, commissions and product-specific sales quotas were introduced for them as well. For example, a service advisor might be given the goal of selling a certain number of front-end alignments or brake repairs during each shift. 53 In June 1992, the California Department of Consumer Affairs accused Sears, Roebuck, and Co. of violating the state’s Auto Repair Act and sought to revoke the licenses of all Sears auto centers in California. The allegation resulted from an increasing number of consumer complaints and an undercover investigation of brake repairs. Other states quickly followed suit. Essentially, the charges alleged that Sears Auto Centers had been systematically misleading customers and charging them for unnecessary repairs. The California investigation attributed the problems to Sears Auto Centers’ compensation system. 54 In response to the charges, Sears CEO and Chairman Edward A. Brennan called a news confere.

1. Sears Case study
CASE SEARS, ROEBUCK, AND CO.: THE AUTO CENTER
SCANDAL Sears, Roebuck, and Co. began in the late 1800s as a
mail-order company that sold farm supplies and other consumer
items. Its first retail store opened in the mid-1920s. Responding
to changes in American society, such as the move from farms to
factories and the presence of the automobile in many homes,
hundreds of retail stores opened over the years. The company
expanded rapidly, and eventually it diversified to include other
businesses: insurance (Allstate Insurance), real estate (Coldwell
Banker), securities (Dean Witter Reynolds), and credit cards
(Discover). Each of these other businesses became its own
division, in addition to the merchandising group that included
retail stores, appliances, and auto service centers. By the early
1990s, the company was reporting revenues and earnings in the
billions of dollars. 51 Despite its long history of high earnings
and its penetration into the U.S. market, the Sears retail
business began to experience serious financial difficulties in the
1980s. Discount retailers such as Wal-Mart were pulling ahead
in market share, leaving Sears lagging. Sears responded by
adding non-Sears name brands and an “everyday low price”
policy. But despite these efforts, in 1990 Sears reported a 40
percent decline in earnings, and its merchandising group
dropped a whopping 60 percent! Cost-cutting measures were
planned, including the elimination of jobs and a focus on profits
at every level. 52 In 1991, Sears unveiled a productivity
incentive plan to increase profits in its auto centers nationwide.
Auto mechanics had traditionally been paid an hourly wage and
were expected to meet production quotas. In 1991, the
compensation plan was changed to include a commission
component. Mechanics were paid a base salary plus a fixed
dollar amount for meeting hourly production quotas. Auto
service advisors (the counter people who take orders, consult

2. with mechanics, and advise customers) had traditionally been
paid a salary. To increase sales, however, commissions and
product-specific sales quotas were introduced for them as well.
For example, a service advisor might be given the goal of
selling a certain number of front-end alignments or brake
repairs during each shift. 53 In June 1992, the California
Department of Consumer Affairs accused Sears, Roebuck, and
Co. of violating the state’s Auto Repair Act and sought to
revoke the licenses of all Sears auto centers in California. The
allegation resulted from an increasing number of consumer
complaints and an undercover investigation of brake repairs.
Other states quickly followed suit. Essentially, the charges
alleged that Sears Auto Centers had been systematically
misleading customers and charging them for unnecessary
repairs. The California investigation attributed the problems to
Sears Auto Centers’ compensation system. 54 In response to the
charges, Sears CEO and Chairman Edward A. Brennan called a
news conference to deny that any fraud had occurred, and he
defended Sears’ focus on preventive maintenance for older cars.
He admitted to isolated errors, accepted personal responsibility
for creating an environment where “mistakes” had occurred, and
outlined the actions the company planned to take to resolve the
issue. These included & Eliminating the incentive compensation
program for service advisors & Substituting commissions based
on customer satisfaction & Eliminating sales quotas for specific
parts and repairs & Substituting sales volume quotas According
to Brennan, “We have to have some way to measure
performance.” 55 Sears also introduced “shopping audits” of its
auto centers, during which employees would pose as customers,
and Brennan published a letter of explanation to the company’s
customers in the Wall Street Journal and USA Today on June
25, 1992. Note that the compensation system for mechanics,
based on the number of tasks performed and parts replaced, was
maintained. In the summer of 1992, Chuck Fabbri, a Sears
mechanic from California, sent a letter about Sears’s wage
policy for mechanics to U.S. Senator Richard Bryan. Fabbri

3. said: It is my understanding that Sears is attempting to convince
your committee that all inspections in their auto centers are now
performed by employees who are paid hourly and not on
commission. This is not the case. The truth is that the majority
of employees performing inspections are still on commission . .
. The Service Advisors . . . sell the repair work to the customer .
. . The repairs that they sell are not only based on their
inspections, but to a larger degree based on the
recommendations of mechanics who are on commission . . . On
January 1, 1991, the mechanics, installers and tire changers had
their hourly wages cut to what Sears termed a fixed dollar
amount, or FDA per hour which varied depending on the
classification. At present the mechanic’s FDA amount is $3.25
which, based on current Sears minimum production quotas, is
17% of my earnings. What this means is that for every hour of
work, as defined by Sears, that I complete, I receive $3.25 plus
my hourly base pay. If I do two hours’ worth of work in one
hour I receive an additional $3.25 therefore increasing my
earnings. Sears calls this type of compensation incentive pay or
piecework; however, a rose by any other name is still a rose.
This is commission plain and simple. The faster I get the work
done the more money I make, and as intended, Sears’ profits
increase. It is therefore obvious to increase his earnings, a
mechanic might cut corners on, or eliminate altogether,
procedures required to complete the repair correction. In
addition to this, since the mechanic often inspects or performs
the diagnosis, he has the ideal opportunity to oversell or
recommend more repair work than is needed. This would be
especially tempting if it has been a slow day or week. In part
greed may create this less than ethical situation, but high
pressure to meet quotas by Sears’ management also presents a
significant contribution. I have recently been threatened with
termination if my production didn’t at least equal Sears’
minimum quotas. I might add that prior to this new wage policy,
management had only positive responses to my production, and
my record proves this. There is no doubt in my mind that

4. before their auto center employees were put on commission
Sears enjoyed the trust of its customers. Today presents a
different story. The solution is obvious not only for Sears, but
for the industry. 56 Sears agreed to a multimillion-dollar
settlement with the state of California and the 41 other states
that had filed similar charges. The company was placed on
three-year probation in California. It also settled a number of
consumer class-action suits. In July 1992, the U.S. Congress
held hearings on fraud in the auto repair industry. The long-
term impact of the scandal is unclear. Sears has now sold off its
securities firm, the Discover card, most of its real estate and
mortgage business, and 20 percent of Allstate Insurance. At the
end of 1992, auto center sales lagged behind prior levels. 57
Also in 1992, Business Week reported that employees in other
areas of Sears’s business, such as insurance and appliance sales,
were feeling the same kinds of pressures from sales quotas.
Case Questions 1. Identify the ethical issues involved in the
case from a consequentialist and deontological perspective
(refer to Chapter 2).
2. Identify the management issues involved in the case. For
example, think about the case in terms of multiple ethical
selves, norms, reward systems, diffusion of responsibility,
obedience to authority. What factors contributed the most to the
alleged unethical conduct on the part of service advisors and
mechanics?
3. How would you evaluate Sears’s response to the allegations
and the changes the company made? Has Sears resolved its
problem? Why or why not?
4. What do you think is the impact of the scandal on Sears’s
reputation for quality and service?
5. Respond to Brennan’s comment, “We have to have some way
to measure performance.” What can management do to prevent

5. employees from overselling? Propose a management plan
(including a compensation system) that allows management to
measure performance and encourages auto center employees to
behave ethically. Be specific.
6. Should anyone be disciplined? If so, who, and when? What
should the discipline be?
7. Think more generally about Sears management’s response to
the firm’s financial problems. How else could they have
increased auto center sales without providing incentives to
employees to sell specific products?
Level of Achievement
General Presentation
Reasoning, Argumentation
Exemplary
(10 pts)
· Provides a clear and thorough introduction
· Addresses the questions
· Presents information in a logical order
· Uses acceptable communication style and grammar (no errors)
· Demonstrates an accurate and complete understanding of the
questions
· Uses appropriate information and examples to support
answers
1. Review the various jobs in the marketing organization. What
areas appeal to you and

6. why?
2. Many firms use automated marketing performance systems.
Describe the value of deploying
a marketing performance system. What are some of the key
marketing metrics applied?
Go online and review a few of the commercially available
marketing systems. Name a few
identified and the advantages they state they provide. Do you
agree
3. What are some of the ethical dilemmas faced by marketers in
emerging markets? Name a
few of these markets with examples of such dilemmas.
4. Pick a consumer focused brand (for example, Nestle) and one
of its "new product
offerings." What are some of the key metrics marketing will
apply to measure/track the
product performance throughout its life cycle. Why? How
might these metrics be unique for
the online sale/marketing of the product?
5. You state, "In the most common form of marketing
organization, functional
specialists report to a marketing vice president who coordinates
their
activities. Others might include a customer service manager, a
marketing planning
manager, a market logistics manager, a direct marketing
manager, and a digital
marketing manager." How has the digital environment impacted
this view of a
functional marketing organization? Today we have the CMO
closely aligned with the

7. other C-level executives in creating a holistic marketing
environment. Thoughts on
this?
6. You state, " ...interact with the various teams within
the department regularly however, I think that to be
more effective as a marketer you can't work in a
silo." Insightful discussion and feedback on this
area. The idea behind a holistic marketing approach
is to integrate both within and externally with all
stakeholders marketing is involve with. Most
organization today apply such an approach. This
includes, demand generation, promotion, product
development, etc. What are some of the challenges
with this approach for marketing? Further thoughts?
7. You state, "Customer loyalty really extremely important if
companies want to
continue being successful..."Please elaborate on customer
loyalty from a
marketing perspective, that is why important for marketing?
How is the
leverage in demand generation, promotion efforts, etc. What
are some
challenges with managing and applying customer loyalty in
marketing
campaigns? Further thoughts?
8. When does metric use matter less?
This electronic reserve reading focused on whether or not
marketing mix
decisions based on statistical metrics were valid to drive
management
decisions. “Results suggest that the impact of metric use on
marketing mix
performance is lower in firms which are more market oriented,

8. larger and with
worse recent business performance and for marketing and
higher-level
managers, while organizational involvement has a lesser
nuanced effect”
(Mintz & Currim, 2015, p.1). This is an interesting point that
the company
needs to focus on the marketing metrics that really matter to
their business
goals or that particular product. With the Internet and many
automated
marketing performance systems options, companies can obtain
huge
amounts of data. So what is important to meet the company’s
goals? The
company has to choose the right metrics that are useful,
understandable, and
consistent/replicated to measure their needs. The electronic
reserve reading
added that “studying the moderation effects allows individual
firms and
managers to identify the settings in which metric use matters
less to
marketing mix performance, so they can design targeted metric
compensation
and training programs to increase metric use and improve
performance in the
settings identified” (Mintz & Currim, 2015, p.4).
Reference:
Mintz, O., & Currim, I. S. (2015). "When does metric use
matter less?: How firm

9. and managerial characteristics moderate the relationship
between metric use
and marketing mix performance.” European Journal of
Marketing, 49(11/12),
1809-1856.