Masters Home Improvement - Case Study Example

MASTERS HOME IMPROVEMENT Name Name of Class Name of Professor Institution Affiliation City and State Date Masters Home Improvement Introduction Masters Home Improvement (MHI) is the trading name of a hardware chain in Australia. MHI is operated by a joint venture between Woolworths Limited and Lowe’s. Woolworths Limited is based in Australia while Lowe’s is based in Mooresville, North Carolina. Woolworths created Masters as a way to venture into the hardware retail space (Woolworthslimited.com.au, 2016). The hardware retail space in Australia was mainly dominated by Bunnings Warehouse, which is owned by the rival Wesfarmers. Wesfarmers and Woolworths compete with one another on other product lines such as groceries, fuel, liquor and general merchandise (Woolworthslimited.com.au, 2016). The first Masters outlet was opened in Victoria in September 2011, but by January 2016, Woolworths announced plans to exit the hardware business (Low, 2015). The failure of Masters to perform is attributed to poor strategic planning and vision conceptualization. Masters underestimated the strength of Bunnings and the consumer tastes of the Australian home improvement market (Low, 2015). In the end, they could no longer generate the necessary incomes that could sustain the business model. This paper espouses a discussion that Masters’ failure is a direct result of lack of awareness of the Australian home improvement market regarding consumers and competitors. Poor Understanding of Market Forces – Customer Culture and Competition Firstly, Masters’ biggest failure was that they underestimated Bunnings. The project to enter and dominate the Australian hardware market was dubbed Project Oxygen (Knight, 2016). From the very beginning of this project, it is clear that Masters were heading after the main competitor, Bunnings. Bunnings has been ahead of other players in the market because they entered into this market early enough. As such, they had a virtual monopoly in the market, and that would mean that new entrants in the market would have to contend with high barriers to entry and a steep learning curve as is the case with most monopoly markets. However, it is clear that this strategy did not work as seen in the annual losses. The first assumption they made was that they would use the same method they had used to outmuscle fierce rival Coles in their supermarkets (Knight, 2016). The opposite effect occurred as Bunnings moved to consolidate its market share and dominance in the hardware retail sector (Huang et al., 2015). Masters clearly went against the cannons of investment strategy by ignoring Porter’s five forces. It is a strategy that is used to analyse the capability of a firm to perform in a particular industry. In a capitalistic society, it is guaranteed that there will always exist various competitors looking to take a slice of the profits in the industry (Chea, 2009). However, even in the best performing industries, it is not guaranteed that a business will enter the market and begin to gain profits (Brownlie, 1994). Porter’s five market forces reveal the fundamental elements that should enable an organization to determine its market position and thus formulate a way forward towards sustainable competitive advantage (Huang et al., 2015). Lack of Sustainable Competitive Advantage The root of competitive advantage is based on the distinctive competencies of a firm which are mainly classified as either resources or capabilities (Ghamari, 2008). Masters is an organization that was backed by Woolworths’ giant organizational infrastructure (Evans, 2016). As such, on a theoretical framework, Masters should have been able to obtain a huge competitive advantage over Bunnings from this front. Although Woolworths was feeling the effects of a disrupted retail industry, the organization was still performing well in its supermarket chains. Wesfarmers were clearly the underdogs regarding market capitalization as well as revenue figures. Masters was thus able to expand aggressively in the Australian market as it was financially backed by a strong company (Evans, 2016). Woolworths was a company that had a relatively good reputation and its proprietary know-how would mean that they had the resources to start a new venture in the retail industry. Capability refers to the ability of a firm to utilize its resources effectively (Brookfield, 2003). As the story of Bunnings versus Masters continues to unfold, it is emerging that the former had a greater capability than the latter regarding efficiency, quality and customer responsiveness (Mitchell, 2015). It would be difficult for Masters to attain a competitive advantage in the Australian hardware market since the industry had a high concentration ratio (Dror and Barad, 2006). A concentration ratio is a measure that identifies the players in an industry and their corresponding share of the market (Ghamari, 2008). A high concentration ratio means that a large share of the market is held by the largest firms. It is a situation that is similar to that of a monopoly. Bunnings operated in such an environment since they had a few competitors who could outmuscle them (Heffernan, 2015). Bunnings’ Market Leader Position In this market, Bunnings had created a vast network of professional relationships with consumer groups, suppliers, and traders. It meant that Bunnings could have access to information that new entrants would struggle to achieve despite the level of resources that they had in the first place (Mitchell, 2015). Masters entered into this market with the understanding that they had the expertise and financial backing of Woolworths to go head to head with Bunnings (Heffernan, 2015). They pumped much money over a short period on areas that they were not of utmost importance to their growth. Masters’ marketing campaign was effective in creating the perfect image and brand of the company. They hired the best people in the market to work on the company’s branding and presence in the media. By all means, Masters came into the market with a bang (Mitchell, 2015). The problem with marketing campaigns is that if they are not backed with clear and accurate data, they only bank on hope for them the strategy to work (Dominici, 2009). In the case of Masters, they did not understand the ability of Bunnings to adapt to their market invasion strategy (Evans, 2016). Beforehand, Bunnings had already attained a competitive position in the market by purchasing all areas of prime land, thus ensuring that new entrants would have a hard time taking a firm foothold in market share (Mitchell, 2015). By the time Masters was being rolled out in Victoria, there was very little land that they could consider as prime and thus attract a high number of consumers (Pascoe, 2016). In the end, they had to settle for areas that were the second rate. However, they did not settle there as they embarked on an aggressive business strategy of building many stores in many areas that were not considered as lucrative. Masters went too big, too fast, and it finally came back to hurt Woolworths in after a very short while. It is another instance that shows the way in which the lack of a coherent understanding of the market can lead to difficulties (Haig, 2003). Woolworth’s stock price tumbled down in a matter of months the moment figures did not begin to add up. Masters chose to go with a big box store format that commanded about 13,500 square meters of retail space (Ferguson, 2016). In the hardware market, this is a huge retail space in consideration with the fact that not many people were flowing through the chain’s doors. Poor Marketing Strategy Masters did not appreciate that the hardware market is a different segment of the supermarket business. As mentioned before, Woolworths went into this market with the intention of outfoxing Coles at their own game (Mitchell, 2015). The leadership at Woolworth’s did not segment their marketing strategy and consider the hardware market to be a different entity altogether. There is a particular arrogant nature of the strategy in the way in which it was named – Project Oxygen (Ferguson, 2016). In the management structure of Masters, the prevalent philosophy was that the Bunnings identity would be weakened as fast as possible by the sheer presence of their brand. However, Bunnings showed remarkable resilience by depending on the highest profile hardware brands that were specifically sold at its stores. In this instance, brand loyalty reigned supreme (Garbelli, 2005). A prevalent culture of the Australian people is a Do-It-Yourself (DIY) one. It is a strange decision that Masters chose to partner in this business venture with an organization that was based in the United States as they had no prior knowledge of the foreign market (Fahey, 2007). Lowe’s held a 33.3% stake in the joint venture at Masters (Mitchell, 2015). One of the things is that Masters ended up stocking too many products that the Australian people did not want to buy from hardware stores. These products included things like vacuum cleaners and washing machines. In the end, the company accrued losses that amounted to more than $600, million which included an annual loss of $245 million in the year 2015 (Pascoe, 2016). The product differentiation strategy did not generate value for many of the tradesmen that had long been critical to the growth of the hardware market (Pascoe, 2016). Firstly, the early marketing efforts portrayed the image that Masters was a place for the women. The features of the stores, including the colouring, were female-friendly (Pascoe, 2016). From the very beginning, many of the tradesmen were alienated from Masters and as such turnover was negatively affected. In addition to this, the product promotion processes further alienated Australian consumers as it was perceived that Masters were pushing their unwanted products to the consumers. On the other Bunnings created intuitive product promotion strategies that resonated well with the consumers (Akroush, 2012). The operations at Bunnings had been fortified by their ability to adjust their network costs and improve service delivery in a flexible manner. In Porter’s five forces of market analysis, supplier power is needed to enhance a competitive advantage (Porter, 1980). Supplier concentration in the Australian market is limited, and as mentioned before, the situation is worsened by the fact that the hardware outlets are dominated by one major store in the market (Warren, 2002). Since Masters chose to partner with a foreign entity, it failed to get the necessary industry knowledge and secrets that would enable it to gain a significant and sustainable share of the hardware market (Porter, 1980). The concept of supplier power is magnified if customers are powerful (Grundy, 2006). Customers in the hardware market in Australia have a considerable sway in the development of marketing strategies. In a survey that was conducted, customers were asked as to mention the reason behind their failure to purchase goods at Masters (Mitchell, 2016). A unanimous decision was that many of these people found the location of the Masters’ hardware stores to be too far away from their residential areas. Others said that the products sold at Masters were too alternative for their liking. Customers generally clenched their muscles and forced the leadership at Masters to consider their approach to product diversification (Mitchell, 2016). Conclusion and Recommendations The irony of the situation is shown in the way Bunnings amped its operations in the market by opening new stores in the Australian market. In 2015, Bunnings counterattacked Masters by deciding to squeeze it out of the market share. Since it had purchased a lot of the prime property in Australia, Bunnings began to increase the concentration of stores all to its advantage (Mitchell, 2016). In 2015, Australia had 48 home improvement and hardware stores per one million people as compared with 33 per million in the U.S. In the UK, that number falls to 27 per million (Mitchell, 2016). According to Citigroup, Bunnings has 38 per cent more floor space in Australia as compared to Home Depot in the US. The home improvement market is tipped to reach about $50 billion in ten years. The Australian population forecast is expected to hit 40 million by 2055 and while Bunnings is expected to invest 3 billion over the next five years, Masters is rapidly fading (Mitchell, 2015). These results show that Masters did not understand the hardware market in terms of the consumer preference tastes as well as the ability of Bunnings to strengthen its support base and retaliate effectively. The Masters’ Project Oxygen finally turned to be a massive failure in exercise. The lack of intuitive understanding of the market in addition to the competitor’s strengths means that Masters could not create a strategy that would generate revenues and growth. Their strategy did not create a sustainable competitive advantage (Haig, 2003). Since the Australian home improvement industry is set to increase, Masters should take care of this opportunity and develop a different strategy. Woolworth has decided to sell the subsidiary or to shut the business down altogether. Master’s does have the ability to create a new trajectory. It should first of all reach to a domestic player and seek to find ways in which it can attract customers (Garbelli, 2005). The biggest impediment to its growth is their location. These locations only serve to increase the operational costs of the organizations and it is only prudent that they should decrease their market participation (Ching, 2013). A major streamlining initiative should take centre stage in these operations (Warren, 2002). Masters should drop all dead weight so as to enhance flexibility (Grundy, 2006). It is recommended that these efforts should take place as quickly as possible since Bunnings are set to increase their presence in the market. They should no longer ignore the major product distributors selling products. This will serve to increase the range of products sold at the hardware store (Grundy, 2006). 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