Competition & StrategyJohn Molson
COMM 401School of Business
Table of Contents
1.0 Introduction
2.0 Industry Structure
3.0 General Environment
3.1 Demographic Segment
3.2 Economic Segment
3.3 Socio-Cultural Segment
3.4 Technological Segment
3.5 Global Segment
4.0 Porter’s Five Forces of Competition
4.1 Threat of New Entrants
4.2 Bargaining Power of Suppliers
4.3 Bargaining Power of Buyers
4.4 Threats of Substitute Products
4.5 Intensity of Rivalry Among Competitors
4.6 Strategic Implications
5.0 Competitor Analysis
5.1 Home Depot
5.2 Lowe’s
5.3 Amazon
5.4 Other
6.0 Internal Analysis
6.1 Resources
6.3 Capabilities
6.4 Core Competency
6.5 Attractive industry
6.6 Value Chain Analysis
6.7 VRIO Analysis
6.8 Strategic Implications
7.0 Business Level Strategy
8.0 Performance Measures
9.0 Strategic Implications
10.0 Alternatives
10.1 Alternative I – Sell and Exit the Industry
10.2 Alternative II – Purchase or develop a Distribution Channel
10.3 Alternative III- Move into the E-Business service industry
10.4 Alternative IV – Approach Lowe’s
11.0 Recommendations
12.0 Conclusion
13.0 Epilogue
14.0 Appendix - Articles
1.0 Introduction
Home Improvement was launched in late October of 1999 as an online home improvement retail outlet. Founded by Richard Shane, the company changed the Chief Executive Officer (CEO) after three months of operations. The new CEO Hal Smith had experience with Home Depot and helped his former employer Bass Pro Companies double its size partially through internet expansion. Home Improvement was primarily funded by an angel investor Mike Santullo and other venture capitalists. Home Improvement houses a strong technical team which designed and maintained its website, which allowed them to make rapid changes and save costs. The company’s goal is “…providing a customer experience second to none in the online DIY (Do-it-Yourself) category”(p.405)[1].
Home Improvement’s principle issue is high costs. Customer acquisition and shipping costs are presently so high that it jeopardizes the firm’s ability to continue, as stated in the case a going concern: “… our current customer acquisition cost is around $800. The lifetime value of the customer doesn’t support that cost” (p.413)[2]. During the holiday season Home Improvement offered a promotion in which orders over $50 received free second-day air shipping. This cost them approximately 28.3% of revenue; whereas, their mark-up was only 17.4%, meaning that for every dollar the company had in sales, they immediately lost nearly 11 cents in shipping. This does not include any other expenses such as payroll and marketing. Additionally, the introduction of new players in the online market such as Home Depot and Amazon, who had much stronger distribution channels, meant the competition was going to get even fiercer.
2.0 Industry Structure
The DIY home improvement market generated $172 Billion in 1999 and had an annual growth rate of 5 to 10% throughout the 1990’s. Home centres such as Home Depot made up 40% of the market with Home Depot capturing 23% and Lowe’s netting 10%. There were no other home centres that accounted for more than 3% of the market; however, Ace Hardware had over 5000 franchise stores located in suburban shopping areas. The owners had flexibility in product and service offerings and benefited from nationally coordinated purchasing and marketing campaigns.
In 1999 the 32 largest, publicly-held e-commerce corporations had revenues that amounted to $4 billion. However, the top five accounted for 75% of that number. While the internet market is booming, customer acquisition rates were extremely high and customer switching costs were significantly low because of the speed at which consumers could compare prices of generic products, with the competition being just a click away.
Out performance could only be achieved by price or service in order to retain customers. Being ‘in the middle’ would not be suitable in this industry. The key to cutting costs was having a superior distribution channel in place. Amazon was well known for having one of the best online retailer distribution channels. This allowed them to be competitive in terms of pricing. The alternative was to differentiate oneself from the competition. Successful online sites didn’t only provide a product they provided a customer service package, which may have included live chat support, advice from experts, product reviews from other professionals and/or other consumers etc/ The issue with differentiation was that while one site may have provided these services, it was simple enough to get the information you needed and then shop elsewhere for a better price.
While the industry looked attractive according to the industrial organization (I/O) model, in reality it was not so perfect. Individuals were more likely to make purchases by touching, feeling and holding the product to test its weight and grip. While a picture may be worth a thousand words for the eyes, it provided nothing for the other senses. Making a profit online was not impossible but it was extremely difficult at that time. Of the major internet companies only eBay managed to make a profit for the year ending September 1999. Proper distribution networks were a must and companies without them were be bogged down by shipping costs especially when considering products were big and heavy. While negotiation may have been difficult or impossible in person, buyers regained some of their lost power online by comparing prices. Many consumers were limited by slow dial-up connection speeds which prevented them from taking advantage of some of the more advanced features such as home project videos because it took too long to load on the websites. Security was still an issue. Many people used the internet for gathering information but they were reluctant to give their credit card numbers and other personal information online. Finally, the sellers and producers of products could eliminate the middle man and sell their products directly to consumers at low cost using the internet. For example, why buy a Black and Decker drill from Home Depot when you could buy it directly from them at a lower price.
To better understand the threats and opportunities facing Home Improvement an analysis of the external environment consistent with the I/O model is presented. Doing so required the analysis of the Porters’ five forces model. Finally, this section is concluded with the assessment of the competitors.
3.0 General Environment
The general environment was composed of six segments, which were: Demographic, Economic, Socio-Cultural, Politico-Legal, Technological, and finally the Global segment. Carefully analyzing the external environment allowed the firm to be aware of the potential threats and opportunities in its environment. Firms could then align their core competencies with the opportunities.
3.1 Demographic Segment
Baby boomers were becoming more and more interested in Do It Yourself (DIY) renovations. They were home owners and wished to renovate and redecorate them.
Home Improvement was targeting baby boomers; whereas, baby boomers were not proficient with internet usage and let alone make purchases online. They had the income, the drive and the house but they were simply not part of the internet shopper community, those who used the internet used it mainly for pre-shopping information gathering.
As it increased the value of their property and add to their real-estate investment. Arrival or departure of kids created a need to renovate and in most of the projects: women were the main decision driver, while men were the executants. Starting a new renovation project was relatively expensive; thus, required moderate disposable income. Geographically speaking, the trend of Do It Yourself renovations was mostly concentrated in the North American suburbs. As pride of owning a pleasant dwelling was deeply rooted in the North American culture. New house construction was on the rise and the growth trend was expected to continue for several years. This presented a strong opportunity in the industry.
3.2 Economic Segment
The Do It Yourself renovations industry was a $172 billion market which experienced a significant growth rate in the 90s. This market was dominated by 2 major players: Home Depot and Lowes. The emergence of the internet and the tech boom created a new marketplace and many entrepreneurs tried to make money by selling products on the internet. The dot.com craze created an IPO rush and attracted numerous angel investors and venture capitalists eager to invest, making it easier to raise the required capital to pay for new online businesses. This was a two-sided situation, as the market provided a good opportunity; the dominance of the two major players was a huge threat to smaller players
3.3 Socio-Cultural Segment
Do It Yourself renovations were becoming a trend in North America, ranging from gardening to bathroom renovation. According to projections almost all dwellings would have started a renovation product during the course of a year. This trend was partially due to the “snob” effect; if the neighbour had it, I had to have it to. Another cause of this trend was the media influence for home renovation, dedicated television shows and specialty magazines were also promoting renovations. A threat to the online marketplace came in the form that computers were still considered a luxury item and were not yet a commodity. Internet availability was low and only low connection speeds were affordable by home users. Consumers were reluctant to buy products online as security was a major concern. They used the internet primarily for some market research and educated themselves about the various options before make in a purchase in a brick & mortar store. This was a potential opportunity for the industry once the online security issues were to be addressed.
3.4 Technological Segment
This segment was the industry foundation. Internet adoption rate was on the rise and recent development in technology created more powerful scripting languages to develop better websites. New technologies were released in the market on a daily basis, rendering old technologies obsolete, by providing even more flexibility and features that created interactive websites. Content was king on the internet as it was the main communication vehicle, but at the same time its size must be kept as small as possible due to poor connection speed. Businesses were also starting to rely on EDI (electronic data interchange) to transact with their suppliers. However, both in the consumer and business sectors, security or lack thereof remained a key reason for not transacting online. This was definitely a major opportunity.
3.5 Global Segment
A website was open for business 24 hours a day, 7 days a week; this allowed service to a global market at the time judged most convenient by the consumers. This opened new markets and did not impose any restriction; in essence, creating an opportunity.Based on this analysis, it can be said that the general environment was favourable to the industry, as the threats greatly out balanced by the opportunities.
4.0 Porter’s Five Forces of Competition
With the general environment complete the DIY industry is the next focal point. This was done by addressing each of Michael Porter’s five forces of competition. Those five forces had a great impact on every firm in the industry; thus, having an influence over the strategy to choose to earn above-average returns.
4.1 Threat of New Entrants
This was a strong force in the industry, anyone could spin off a new e-commerce website, and knowledgeable developers were easily available. The required capital to start-up was low since little or no inventory was needed because the distributors shipped the products directly to the consumer. Moreover, the needed capital could be secured easily as venture capitalists or angel financers were eager to make their share in the rapid growth of the e-commerce industry. Access to distribution network was a key issue in this industry, since the products were shipped directly to the consumer from the distributor’s warehouse. This also removed the need to achieve economies of scale and reduced the advantage established players had in the industry. Therefore, failure to secure an efficient network could reduce one’s drive to launch a selling website. Customer service and shipping were the main point of product differentiation, copyright of website content was hard to enforce and could easily be copied; product differentiation was therefore extremely hard to establish. Moreover, firms already established within the industry were not quick to retaliate against new entrants; as can be seen by Lowe’s “wait and see” strategy. Hence, the threat of new entrants was a major force in the industry.
4.2 Bargaining Power of Suppliers
Not much was said in the case concerning the number or size of suppliers; however, it was doubtful that suppliers would integrate forward. As a result, the only thing that could be inferred was that suppliers would have had power depending on the size of the player they were dealing with. For example, a supplier would have no power when dealing with Home Depot, while the same supplier might have great power when dealing with smaller retailer, such as Home Improvement. To further confirm this point that suppliers had little power in regard to major players, Home Depot threatened to drop those suppliers if they did not lower their prices. However, that the mere fact of asking was not a guarantee that the suppliers would concede to lower prices. Verdict, this threat was a weak force in the industry.
4.3 Bargaining Power of Buyers
In the case, the buyers were the end-users and they had no power, as they bought an insignificant part of the industry’s total output, and the total purchase of the best consumer would have been a minute percentage of the seller’s annual revenue. Given the nature of the buyers, there was no chance of backward integration. However, the switching costs were nonexistent. As consumers could switch seller based on price and product availability. Another aspect of the buyer power was that the buyers could quickly compare prices amongst the different player. Verdict, this threat was a weak force in the industry.
4.4 Threats of Substitute Products
The only substitute of the DIY market was the contractors, as they carried out the renovation instead of the end-user. Contractor already had their tools and had access to all the appropriate material needed to complete a project. Verdict, this threat was a weak force in the industry.
4.5 Intensity of Rivalry Among Competitors
The online home improvement industry was still in its early days, the competition was not yet fully established and the market was still experiencing significant growth. As a result, it could be affirmed that the rivalry was low. The biggest threat came from the brick and mortar stores, whether they were mom and pop shops or the big players (Home Depot & Lowe’s) both of which offered complete solutions, i.e. they sold lumber and cement. These were two products that could not be sold online due to shipping costs. As previously mentioned, selling online required little to no inventory, meaning that funds were not tied up and the firms were not pressed to enter in a price war to free those funds. By providing interesting and valuable content on their website, offer proper customer services andshipping products in a timely manner,firms could retain customer, created customer loyalty, increased their conversion rate and avoided the most dangerous aspect of the internet; that the competition is one click away. Verdict, this threat was moderate to possibly strong force in the industry.
It was established that the industry had low entry barriers, low threats of substitute, low suppliers’ and buyers’ power and that rivalry was moderate. According to the I/O model the industry was attractive to a certain extent. There was potential, but it required a significant amount of time and effort to come up with a differentiation strategy, in order to achieve above-average returns.
4.6 Strategic Implications
The industry’s strongest forces were the threat of new entrants and the possible intense rivalry. To minimize those forces, a company could have either reduced its costs while providing value to its customers or it could have differentiated its offering from the competition. Any of the 5 business level strategies would have been efficient to expect above-average returns; however, the chosen strategy must fit with the company’s core competencies.
5.0 Competitor Analysis
Competitor analysis was based on two major aspects, Market commonality and Resource Similarity. In the case of Home Improvement and its competitors, the only aspect that could be considered was the market commonality. The companies that Home Improvement needed to worry about were Home Depot, Lowe’s, Amazon, Ourhouse.com, Cornerhardware.com and Hardware.com.