Bargaining Power of Buyers - Home Depot - Essay Example

? 3.3 – Task Environment 3.3 Threat Of New Entrants Threat of new entrants in the industry is low. Home Depot has an advantage over new entrants in this industry as it has maintained its brand name, a wide range of products and has established customer’s loyalty in the industry (Harrison and John). One of the major barriers in the home furnishing and decorating industry is the high capital requirement. The initial cost required to start a business is too high for the new entrants to afford (Harrison and John). Therefore, it is essential for the company in the industry to operate with contracts to establish credit with a financial institution in the long run. Home Depot operates with contracts, establishes credits with the bank, which provides it opportunities to work effectively in the long run (Magretta). In home improvement industry, it is prior for companies to anticipate with the changing market trends and knowledge (Harrison and John). Home Depot is effective to anticipate with the changing trends in the market and retains their customer. For the new entrant lack of knowledge and experience in the field makes it difficult to maintain its supply chains and customer retention. In addition; Home Depot has maintained an absolute cost advantage in the industry (Harrison and John). The pricing offered by the company is low cost pricing which makes the competition tough in the in the industry. Home Depot has maintained an exclusive control on the costing by developing strong relations with its exclusive sellers and suppliers. One of the major advantages Home Depot experience is the brand image, as customers are more inclined to approach companies having strong brand names (Harrison and John). Home Depot has served over years, it is known as for the best quality and service provider in the industry. This eventually declines the dilemma for the existing companies like Home Depot and Lowies from the new entrants. Constantly, it can be concluded that Home Depot has an edge in the market and has restrained others from entering as new threats. 3.3.2 – Bargaining Power of Suppliers The bargaining power of suppliers in the home improvement industry is a low force. Home Depot’s expense controls and cost initiatives are its core competencies. Prominent companies in the industry like Home Depot and Lowe’s are dependent on well recognized brand name suppliers (Harrison and John). These firms maintain strategic alliances and exclusive relationship with certain suppliers; they maintain their market image in the industry, which eventually secures the bargaining power of suppliers. Home Depot maintains exclusive relationship with its suppliers, as it is depend upon products that are well recognized and brand suppliers. This is because of the reason that if these firms are unable to maintain strong relationship with its suppliers the may lose their product variety and quality (Harrison and John). Furthermore Home Depot eliminates the reliance upon third parties and middle man; this is because of the reason that if these third parties run into financial or regulatory difficulties it may caste negative impacts on the company in the industry (Harrison and John). Therefore, home depot has centralized its purchases operations through making direct purchases (Harrison and John). The online centers of the company aid company to minimize the control of suppliers. Home Depot also maintains websites to maintain and to strengthening the relationship with its suppliers, these measures limits supplier’s bargaining power to a low force. 3.3.3 – Threat Of Substitute Products or Services The threat of substitution in the home retailing industry is relatively low, because the substitution for the home product like hammers, nails, and paint etc. can be the similar products bought within the industry which are also sold by the same vendors (Harrison and John). It is true that the demand of products, their supplies and prices are interrelated in a market, which may or may not give space to substitutes, but in the current scenario there are no true substitutes present for home improvement supplies (Harrison and John). The substitution for the services may be regarding the installation procedures of the same products and educating customers on the necessary procedures is also low (Harrison and John). This is because of the reason that these consumers will make purchases with in the industry. Hence, the threat of substitution for Home Depot is a low force. 3.3.4 – Bargaining Power of Buyers The bargaining power of buyers in the industry is relatively high. This is because of the reason that there are three types of consumers of home improvement retailing industry, ‘1- do-it yourself customers 2- buy-it yourself customers and 3- professional contractors’ (Harrison and John). The companies in the industry face high bargaining power of buyers due to changes in tastes and customers preferences (Harrison and John). Furthermore, demand for the product and services are influenced by the changing consumer’s expectation and growth in the home decor and construction industry (Harrison and John). As long as the company has the potential to anticipate with the consumer’s taste and respond properly it sustains the bargaining power of customers (Harrison and John). This is one of the major reason that the companies in the industry strongly emphasis on customer consultation, customer services, surveys, consumer’s experiences and strong consumer base (Harrison and John). The change in the trends and demands of the customers are dynamic, competitive institution in the industry may have an opportunity to overcome customer’s demand (Harrison and John). The other main factor that highly influence is the purchasing power of consumers that goes parallel with the economic sustainability. The companies in the industry shall be more intact with the changing economic conditions and trends to cope with fluctuating bargaining power of the buyers (Harrison and John). Therefore, it is essential for the home improvement companies to anticipate customers’ preferences and respond accordingly; this can overcome the bargaining power of buyers. 3.3.5 – Rivalry among Existing Firms The rivalry among the existing firms is a strong force. The variations in the consumers’ preference, high number of competitors, and a variety of products and services increase the rivalry among competitors (Harrison and John). The industry demand is predicted to increase when consumers increase their spending on the do-it-yourself home projects (Harrison and John). The other competitive companies have included various home improvement products and services stores like electrical, plumbing and building supply stores. The industry demands to include Y generation in the home improvement industry (Palepu, Peek and Bernard). Competitors in the industry like Wall Mart and Sears have included specialty design stores, discounted stores, independent building and supplying stores in the industry. It is also predicted that the demand in the home improvement industry is increasing because the housing market has once again speed up its spending on the home-improvements projects, which was set aside during the economic crisis due to the housing bubble (Harrison and John). It is perceived that the increasing demand should moderate the strength of competition in the industry, as the purchasing power of the buyers is expected to increase with improving economic conditions. In order to persist greater sales volume, the industry maintains high fixed cost for capital leases like building, land and employee salaries which further increases rivalry among the competitors (Harrison and John). Home Depot’s penetration in the market, which is becoming limited, has given its competitors an advantage. The competition in the Hardware and True value are one of the major rivalries between Lowe and Home Depot. The low costing, effective merchandising and competitive pricing drive the rivalry among the home improvement industry. Effective merchandising, range of products and services one of the major rivalry among its competitors. The change trends and tastes of the customers have created intense competition in the industry (Bragg). Home Depot faces challenges to decrease its costing to the lowest possible price as the other competitors are now offering low prices for the products and services in the industry. Any new outlet of a competitor quickly attains a significant market share (Harrison and John). Home Depot continues to struggle to generate more sales than its existing outlets. According to an industry analyst, Colin McGranahan, at present in the home supplies industry, “What we are seeing, are two companies in different life cycles”. Therefore, it can be easily determined that Home Depot is faced with problems like excess capacity with too many goods chasing too few buyers (Harrison and John). This demonstrates that the rivalry in the home improvement industry is a high force. Home Depot is striving hard to maintain its position in the market by focusing on its low costing and pricing strategies without compromising on its quality and brand image. 3.3.6 – The 6th Force The relative power of stakeholders, unions, governments, and other special interest groups is quite low. The reason to this is because the type of business Home Depot is conducting comes under the heading of retailing (Harrison and John). Therefore, it does not seem that the business may be influenced by the government interceptions or any trade unions. The only one point on which Home Depot is required to focus on its labor unions and their fair demands. Such problems can be addressed effective planning to deal with them is necessary. Moreover, this factor does not play an important role in Home Depot’s commercial operations. 3.4 – EFAS Table External Factors Weight Rating Weighted Score Comments Opportunities Symbol of Loyalty 0.10 2 0.20 Home Depot establishes strong customer’s loyalty and brand, which plays an essential role in retaining its customers. Cost control 0.20 5 1.0 Home depot offers lowest costs to its customers; it has increased profitability and customer’s retention of the firm in the industry. Online purchase centers 0.02 2 0.04 Home depot facilitates its customers with online centers, and helps to control bargaining power of supplier. Customer’s preference 0.18 4 0.72 Home depots prevail over other competitors with its wide range of products and services anticipating with the change in the demand of customers. Threats High fixed costs for capital leases 0.10 2 0.20 High fixed costs are required to provide lease to its customer; this withheld the investments. Industry analysis 0.14 5 0.70 To anticipate customer’s preference strong industry analysis shall be done. Rapid change in the trends and tastes 0.20 4 0.80 The rapid change in the trends and demands may outdate the existing stock. Increasing competition in the industry and may cause other competitors to increase their market price. Maintain sales volume 0.16 3 0.48 Sustaining economic conditions has decreased spending on home improvements influencing sales volume of the firm. Total 1.00 4.14 8.1.4 – LEARNING AND GROWTH 8.1.4.1 – Objectives The Home Depot aims to anticipate its customers’ preference and update its products and services to maintain its edge in the market (Harrison and John). The main emphasis of the company is to maintain a competitive advantage and increase profitability in home improvement industry (Harrison and John). Home Depot aims to provide competitive prices for commodities and services at the lowest possible price without compromising on its quality. Home Depot’s goal is to sustain its brand image and customer retention among its competitors in the industry. 8.1.4.2 – Measures Home Depot follows cost-leadership strategy, which allows the company to lower its costs and improve its operational performance (Harrison and John). The company is able to offer lowest prices in comparison to its competitors, which attract more buyers. Home Depot emphasizes to develop strong customer’s feedback and surveys in order to cope with the changing trends. Home depot also utilizes chaining strategy in order to attain cost advantage with its suppliers. It develops direct links and networks with its retailers and suppliers, which assess the company to control its costs (Harrison and John). Furthermore, the company develops strong relationships with its suppliers to control costing and quality of the products (Harrison and John). Low-costing strategies allow the company to lower its costs and improve its operating performance. It has increased sales volume of the company and yield higher profits than other competitors in the industry. Home Depot’s strategies are based on three strategies that concentrate on supply chain transformation, merchandise transformation, and customer services. To provides its customer product-mix stores and focus on smaller projects. According to Schwalm & Harding (2000), Home Depot has ‘destroyed brands and transform entire products into low-margin commodity markets’. 8.1.4.3 Targets Home depot aims to expand its online stores and induce technology advancement to attract more customers and lower its costs by $1 billion a year (Harrison and John). In addition, the company focuses to be prominent in leading Home improvement industry. 8.1.4.4 Initiatives The company is working with IT exporters and software engineers to develop its applications, websites, self-checkout with SAP platform and demonstration on YouTube. The company estimates that technology advancement shall lower its costs. In addition, the media promotion will attract buyers and increase sales volume (Harrison and John). Mobile application and online stores provides larger assortment of products for customers as compared to the physical stores. The company aims to provide online services and feedbacks from its customers rather than hiring surveyors and researches (Harrison and John). The company is also focusing on the product mix in order to provide more variety to its customers even on a smaller scale. Home Depot has developed online websites and application to develop simple and direct relation with its customers. The company shall be more effective to cope with the customer services and simplify its store operations (Harrison and John). Home Depot aims to expand its business, in order to intensify its international concentrations by customizing its products to meet the local needs of other countries. Home Depot has included more product lines for its renewable energy products. Work Cited Bragg, Steven M. Accounting Reference Desktop. New York: John Wiley & Sons, 2002 Harrison, Jeffrey S Harrison and Caron H St John. Foundations in strategic management. Mason: South-Western Cengage Learning, 2010. Magretta, Joan. Understanding Michael Porter: The Essential Guide to Competition and Strategy. Massachusetts: Harvard Business Press, 2012. Palepu, Krishan G, Erik Peek and Victor Lewis Bernard. Business Analysis and Valuation: Text and Cases. London: Cengage Learning, 2007. Read More