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Sears' Business Model Issue

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In every firm you will have contracts that bind managers, employees, and customers. Within every firm there are people who need to make important decisions to direct the business in an efficient matter. The problem in this case is that Sears has put more value on short-term profit maximization instead of maximizing consumer utility. Conflicts often arise between an owner and a manager. In regards to the Sears case, there was clearly a differential of horizons. The manager thought it was great that he was pushing sales in the short term, but couldn’t see that in the future this could lead to less customers and a potential lawsuit. This is a classic buyer vs. supplier conflict because what suppliers do is provide inexpensive inputs at high prices. What this conflict led to was the supplier shirking on quality while charging top dollar for their batched services. This occurred because most contracts are implicit, and the sales personnel have no legal guidelines to operate under besides doing their job and making money. There was nothing in the contract that said they couldn’t give recommendations for services that customers may or may not need. The owners probably expected all employees to act morally but not many people are willing to sacrifice their utility and are more concerned about short-term business performance.

The initial contract given to employees didn’t have control of incentive conflicts because employees were being awarded for pushing extra services whether the customer needed it or not. With a commission being offered on the sales they produce, this could only lead to disaster. Another factor that was present in the Sears shop was that there was a lot of asymmetric information, meaning that the sales people and mechanics knew what the customers actually needed but knew they could sell them on other services because the consumer sees them as a

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