Blue Niles Business Level Strategy - Essay Example

Blue Nile Introduction Founded in 1999, Blue Nile has grown by leaps and bounds to become the world’s biggest online retailer of certified diamonds and fine jewelry. The company generated revenue of $302 million from its operations in 2009. The present paper is a case study on strategy formulation and execution at Blue Nile. The company’s situation has been diagnosed with the help of SWOT analysis. The paper elaborates the business-level strategy of Blue Nile and also delineates the course of action that the company should adopt to maintain its leadership position in the online diamond and fine jewelry retailing industry. SWOT Analysis SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis deals with examining the internal and external factors impacting the actions and performance of the organization. While strengths and weaknesses can be identified by scrutinizing the internal factors, opportunities and threats are revealed by investigating the various macro environmental aspects like political, social, economic, legal and environmental forces. Strengths The biggest strength of Blue Nile is its ability to keep its costs under control. The company has a vast array of products in its repertoire and thus provides its customers a wide choice. It has an economical supply chain, a lean hierarchy and does not give any mark up to the wholesalers and retailers. All these aspects help Blue Nile to keep its operating costs low. The online retailer boasts of exceptional customer service. Blue Nile provides grading reports on its website that enables customers to purchase just the ‘right kind’ of jewelry. Every diamond marketed by Blue Nile is graded either by the Gemological Institute of America (GIA) or by the American Gem Society Laboratories (AGSL). Blue Nile also maintains favorable relations with its suppliers. The company has managed to ink pacts with numerous suppliers and therefore is not dependent on one particular supplier for the purchase of diamonds. Weaknesses Blue Nile offers its customers more than 60, 000 diamonds and hundreds of settings. However, the company derives majority of its revenue from the sale of engagement rings. The company has not been able to chalk out a strategy to increase the percentage of consumers to buy jewelry items online. Another weakness is that the company’s net profit margin at 4.2 percent is very low especially when compared to the net profit margin of 9.8 percent at Tiffany. Blue Nile provides ‘trust, guidance and value’ to its customers. These features are now being provided by its competitors as well. If the jewelry market is considered as a whole, Blue Nile has a merely .6 percent market share and is the 19th largest player in the United States. Wal-Mart (4.8 percent market share), Sterling Jewelers (4.3 percent market share), Zale Corporation (4.8 percent market share) and Tiffany & Co (4.3 percent market share) dominate the otherwise highly fragmented market. Opportunities The online sales of jewelry items, pegged at $2.7 billion in United States in 2009, increased at 10.7 percent over the 2008 levels. The rate of growth in online sales of such items is much higher than the 5.5 percent rate of growth registered by the overall jewelry market in the United States since 1980. In addition to its home market, Blue Nile can pursue business operations in other countries as well. Blue Nile’s operations do not warrant a huge capital expenditure .The company’s capital expenditure in 2009 was only $2.3 million. The online retailer has a success rate of 99.96 percent on-time order delivery due to its alliance with FedEx. It can replicate its success in foreign markets by inking a pact with FedEx for its global operations. Blue Nile’s business model is highly scalable. The company had a cash balance of $93.1 million and an asset base of $130.4 million in 2009. Blue Nile can use its financial prowess to good effect and expand its operations easily. Threats The diamond and fine jewelry retail market in the United States is highly competitive. There were more than 22, 000 specialty jewelry outlets in the country in 2009. Blue Nile faces stiff competition not only from other online retailers but also from brick and mortar jewelry stores. Since jewelry and diamonds are discretionary purchases, recessionary forces in the economy can pose a huge threat to Blue Nile’s business. Blue Nile’s Business Level Strategy Blue Nile is a cost leader in the online diamond retailing industry. In 2009, the company’s selling, general and administrative (SG&A) expenses were only 15.2 percent of annual sales. On the other hand, Tiffany &Co incurred SG&A expenses of 40.2 percent while similar expenses at rival Zale Corporation were 57.4 percent of annual sales. Furthermore, Blue Nile’s cost of inventory at $19.4 million was much lower than its competitors. Blue Nile has managed to pass on this cost advantage to the customers by way of lower prices. In addition to providing high quality diamonds at attractive prices, Blue Nile also follows the strategy of differentiation. It allows customers to order customized jewelry items with the ‘Build Your Own’ feature. A combination of differentiation and low prices has enabled Blue Nile to maintain a leadership position in the online jewelry retailing industry. Issues and Recommendations Blue Nile is operating in a fiercely competitive market. It has not been able to eat into the market share of brick and mortar jewelry stores. The customers still trust such stores more than they trust Blue Nile. It is recommended that Blue Nile should add a testimonial section on its website. Comments from satisfied consumers should be uploaded on this section. This will enable the company gain positive word-of-mouth. Many other online retailers like Diamonds.com, Whiteflash.com, Ice.com and JamesAllen.com have set up shop and are vying with Blue Nile for market share. These competitors offer many features and services that are similar to Blue Nile’s offerings. It is suggested that Blue Nile should continuously incorporate new features so that it can further differentiate itself. Starting a ‘Trade-Up’ program as offered by Whiteflash.com or giving a monthly payment option to customers as given by Ice.com are some of the features that Blue Nile can adopt. Blue Nile is already present in 40 markets outside its home country. The company generated revenue of $33.2 million from its international operations in 2009. That represents merely 11 percent of its total revenue of $302 million for the year. Blue Nile should thus tap the international markets and increase its revenue considerably. Read More