ࡱ> Y[XM Ibjbj== ,^WWElXXX842( "... 4*,,,,,,$ ^P  P..e ..**e*. @q4 X*<,qS:q* Group Project Home Depot v. Lowes by Jeff Fogel Jasmine Cindy Marina Shirley Management 497 Professor Hornbuckle December 8, 2002 Introduction Lowes and Home Depot are the two largest retailers in the home improvement industry. Lowes being the second largest in the industry, however, was originally called North Wilkesboro Hardware in North Wilkesboro, North Carolina. It became Lowes in 1946 when C. H. Buchan bought-out his partner and brother-in-law James Lowes share of the company. Lowes started to go public in October 10, 1961 and in 1989 Lowes transformed from a chain of conventionally sized stores into a chain of home improvement superstores. By 2001, Lowes had opened 806 stores with 110,000 associates and $22.1 billion in sales. With all of its expansion within the United States, Lowes will have 123 more stores by the end of 2002. Even though Home Depot has been around for only 24 years, Home Depot has out grown Lowes, becoming the largest retailer in the home improvement industry. Home Depot, originally MB Associates, was founded in 1978 by Bernard Marcus and Arthur Blank with the concept of warehouse store. In June 22, 1979, Home Depot opened its first two stores in Atlanta. In 1998, Home Depot expanded outside of North America and opened its first store in Santiago, Chile. Home Depot had 1,437 stores with 300,000 associates and $53.6 billion in sales. Industry Life-Cycle The home improvement industry started in the United States during the colonial period, and was composed mainly of small, Mom & Pop hardware stores. . Twenty-five years ago Home Depot transformed the home improvement industry by providing warehouse merchandising, contractor pricing, and knowledgeable service. During the growth stage of an industry, different companies enter the market because there is low competition. Rivalry tends to be relatively low because there is a high demand for the product. During this stage companies such as Home Club, Builders Emporium, ACE, and OSH were entering the market. Currently, the home improvement industry is in the shakeout stage, a phase characterized by slow increases in demand i and intense price and produce competition. . Companies like Home Depot and Lowes that are in a strong position have the resources to attract customers from companies in a weak position. For example, Builders Emporium went out of business and Home Base merged with Home Club but eventually lost the battle. Lowes continues to expand their business by opening 123 new stores in metropolitan cities (Annual Report, 2001). Also, theyve acquired Eagle Hardware & Garden Store, which has helped to accelerate their growth. . Home Depot is also trying to open new stores. They acquire acquired Your other Warehouse, a specialty plumbing fixtures company that supports the store in the special orders for plumbing and accessories. Home Depot has gone global acquiring del Norte home improvement chain to position them selves in the home improvement market in Mexico. They also have stores in Canada, and Puerto Rico. Home Depot is trying to maintain their market share. Generic Strategies At the business level, Lowes uses a focus strategy. . Their focus on women is a result of substantial marketing research. Lowes found out that, since 1950, the majority of the U.S, population has been female and 80% of home projects are initiated by women. In the late 1980s, only 13% of Lowes customers were women. Based on their strategic theories, Lowes has decided to target women. They have, therefore, made the store layout more attractive to women: the stores are painted in a soft, calm blue -- a color that appeals to women. The aisles are wide enough for two shopping carts to pass in comfort, and the displays are very neat and clean. They also carry more home dcor items than other stores. Today, half of Lowes customers are women. Lowes, therefore, uses a focused differentiation approach based on responsiveness to customers. As the Baby Boomers age, the trend of Do-It-Yourself is shifting to Buy-It-Yourself. Lowes research showed that 41% of their customers have limited time on their home improvement projects and need some professional assistance. Since 1998, Lowes has implemented several strategies to better satisfy customer needs. Their comprehensive Installed Sales program provides install services from flooring to countertops to garage doors. Their Special Order sales (SOS) program offers specialty products to customers who have unique tastes. Their Commercial Business Customer (CBC) program offers the brands and services the CBCs want. Lowes is also implementing merchandising differentiation. Their appliances sections offer far more varieties and models than that of Home Depot. Theyve been trying to offer products in exclusive national brands such as KitchenAid and Whirlpool appliances, Pella doors & windows, etc. Their new strategy Up The Continuum recognizes the customers demand in higher-end, better quality and unique products. They are shifting from opening-price-point merchandise to a more balanced mix within the middle and upper end of the lines. The stores now carry a larger selection of popular premium grade products. Home Depot was the first in the industry to introduce the big-box warehouse stores in major metro markets. They designed their logo in bold orange with the intention to attract professional contractors. With the strategies of low prices, best assortment and great service, Home Depot outperformed its competitors with an expansion rate of 21-22% annually. It is the youngest and largest home improvement retailer ever to reach $53.6 billion in annual sales. Since Lowes transformation into a big-box warehouse retailer in the early 1990s, and the opening of stores in major metro markets, Home Depot is under threat. Lowes is opening a new store on average every 3 days, and its growth in earnings has exceeded Home Depots since 2000. To counter the strategies of Lowes, Home Depot has shifted its strategies from cost leadership to differentiation, emphasizing more on customer responsiveness. They have implemented the Service Performance Improvement (SPI) program to reserve more time of their associates for customer service. The Home Depot University provided education program for their Do-It-Yourself customers. Theyve added specialized products and services to smaller professional customers. A broad assortment of major appliances have been introduced to compete with Lowes, which has the nations second largest sales in appliance, just below Sears. Theyve also recognized the need of the Do-It-For-Me population by investing in installation and service businesses. Their newest initiative is the DesignPlace, which is essentially a store within a Home Depot, a softer, neater place with more home dcor items, aiming at women. 4-Factors of CA Regarding superior quality, Lowes shifts to carry a larger selection of popular premium grade products, accentuating a range of price points. Store designs create a quality environment that is easier-to-shop, and better showcase the brands and products are carried. Lowes emphasis is on what they called Building blocks for success; it believes quality customer service starts with quality people. It strives to attract and retain talents by aggressive recruiting, strong mentoring and ongoing training. It provides incentives to employees that link personal benefit to corporate success. For example, if the before tax earnings grow beyond 30%, employees can get 350% performance match in their 401(k) plan. Home Depot emphasis is more technical; it applies the Six Sigma business process to improvement practices across the enterprise. Home Depot is a leader in hiring employees with a construction or building industry background to improve service. It typically hires away experienced employees, offering them training programs and more advancement opportunity. For efficiency, Lowes makes stores more productive through traffic-sensitive staffing schedules and improved systems for ordering and delivery. It recently refined inventory and distribution systems. It opened regional distribution centers close to metro areas to get products to customers faster while reducing costs. The distribution network provides efficient direct product distribution to its stores, eliminating the problems and expense of overstocking. Also, Contractor Pack savings are available for those buying in bulk, and business customers can get knowledgeable, professional assistance from Lowes Pros. Home Depots SPI program stores, receives and process inventory at night, making more hours available for employees to spend with customers during peak selling periods; this improves store appearance, in-stock position, and operating efficiency. SPI improves sales productivity and customer satisfaction. Another program, Merchandising Reorganization, centralized buying function, allowing Home Depot to drive purchasing efficiencies while stores increased their focus on sales and service. Lowes has innovative ideas with a vision of relocating its small, contractor-oriented stores into a family of modern home improvement warehouses. It evolves the way traditional hardware store operate the business and the image of warehouse stores. It changes the warehousey, macho image to more feminine image and comfortable environment. It promoted the do-it-for me market and transformed the buying process into complete customer experience. Home Depots warehouse concept sparked dramatic changes in the retail hardware industry in 1979. The concept was an overwhelming marketing success that actually expanded the do-it-yourself hardware market. Home Depot was an industry leader in innovations such as how-to clinics, bar code standards, employee training programs, and satellite communications between the chains mainframe computer and point-of-sale computers in its stores nationwide. Understanding what the customer wants and needs is Lowes top priority. It performs extensive research and demographic tracking about customers and their needs. Lowes is well aware of trends and concerns of consumers needs. The company intercepted customers to find out their evolving needs and desires and determined an efficient way to serve them better. Lowes Gold Advisory Board randomly invites Gold Card holders to join a dinner with district and top management. The goal is to build long-term relationship and to confirm and augment the research result. Relationship programs, including Lowes Garden Club, Lowes Woodworkers Club and Lowes Kids Clinics, provide customer with inspirations and solutions in order to build loyalty in the Lowes brand. Ready to Go fax and phone ordering, as well as delivery within 24 hours service are designed for CBC. While buying and logistics remain centralized, Lowes shifted additional responsibility from the headquarters to individual stores, empowering store management teams to adjust inventory quantity and selection based on local needs. Home Depot is adding new stores in a variety of formats and sizes, reflecting customer demographics, buying preferences, and geography. For example, Pro stores provide specialized products and services to smaller professional customers by dedicating trained staff to better serve them. At-Home Services invested in installation and service businesses for customer who seek a do-it-for-me solution to home projects. Home Depot Supply is designed for the business-to-business customers. To provide customers with more choices of quality products at value prices, it expanded product line of proprietary brands to include highly recognized names. Porters Five Forces Porter identifies five forces that shape every industry and which determine the intensity and direction of competition. The objective of strategic planning is to modify these competitive forces such that efficiency is improved. Management then decides, based on the information given by the Five Forces model, how to influence or to exploit industry characteristics. Bargaining Power of Suppliers Home Depots expense controls and cost initiatives its core competencies derive in part from efficient supply chain management. The company also plans to centralize purchasing operations and to decrease merchandise inventories, both of which will reduce suppliers power. Accordingly, Home Depot depends on a cost leadership strategy.But Lowes has already established centralized logistics, based not so much on economies of scale or cost standards, as on logistical flexibility. To determine the most efficient way to purchase inventory, Lowes looks at every product of every vendor individually a method that will decrease cost per product. Our goal, says Bob Tillman, chairman and CEO, is to be sending more trucks from our distribution centers more often with any one sku per shipment. (Home Textiles Today. 8/26/02. p. 10.) Hence, Lowes has the advantage. Bargaining Power of Customers Women, who represent a concentrated group of buyers and a significant market share, prefer Lowes and therefore threaten Home Depot. Lowes provides incentives to this group and adds value to the products they want. But Home Depot, in their effort to retain a strong market base of professional contractors, continues to dissuade women and maintains its traditional, masculine image. Threat of New Entrants The magnitude of this threat is inversely related to MES, which determines the amount of market share necessary to enter the industry. The greater the difference between industry MES and entry unit costs, the greater the barrier. Based on relative economies of scale, it can be inferred that Home Depot and Lowes have created an advantage extending to all incumbent firms. Barriers also result from brand loyalty, and this implies proprietary brands. Home Depot is the exclusive seller of John Deer lawn tractors; Lowes carries Jenn-Air grills. But it is not the barriers to entry represented by these proprietary contracts that confers the greatest value; the brands are a necessary component of differentiation strategy -- a primary source of competitive advantage. Threat of Substitutes This threat, in so much as it exists, points to marketing failures. Outside of technological revolutions, innovative offerings and product development, identification of and response to consumer needs, reduces this threat. In so much as substitute products consist of those in other industries, however, a threat exists when a products demand is affected by the price change of a substitute product. But there are no true substitutes for home improvement supplies; and therefore we may discount this factor. Rivalry Rivalry is identified and measured according to industry concentration. A low concentration indicates a competitive or fragmented market composed of many rivals, none having significant market share. (A large number of firms increase rivalry.) Product differentiation, avoiding excess productive capacity, segmentation, and industry-wide communication are effective means of combating rivalry. Ultimately, mergers or acquisitions with or of competing firms can be invoked. That Home Depot has saturated the market gives Lowes an advantage: any new Lowes (or OSH or ACE) outlet immediately appropriates significant market share. This, according to industry analyst Colin McGranahan of Bernstein, accounts for a disparity between Lowes and HD in terms of growth. What we are seeing, says McGranahan, are two companies in different life cycles. Hence, while Lowes grows, HD is faced with shakeout phase problems: excess capacity with too many goods chasing too few buyers. Conclusions Strategy is formulated on three levels: corporate, business, and functional. The primary context of industry rivalry is the business level. Porter defines three generic strategies that implemented at this level to create competitive advantage: cost leadership, differentiation, and focus. The correct generic strategy will position a firm to leverage its strengths and counter the adverse affects of the five forces. Home Depots response to loss of market share, for example, is not one of changing overall market position; for Home Depot recognizes that Lowes benefits from current economic factors that are temporary. When the real estate bubble bursts, so will Lowes advantage. Therefore, Home Depot maintains its cost leadership approach and implements increased emphasis on customer responsiveness a factor of competitive advantage which is not dependent on temporary economic anomalies. References Dymski, Gary. Doing it herself; the female renovator has become the key customer for warehouse retailing, The Record, Sep 19, 2002. Dymski, Gary. Its All About Women, Newsday, Inc. July 25, 2002. Home Depot Inc., Annual Report, 1995. Home Depot Inc., Annual Report, 1997-2001. Louis, Brian. Heads or Tails? Lowes and Home Depot, often neighbors, struggle to develop some individuality, Wiston-Salem Journal, September 16, 2002. Lowes Companies Inc., Annual Report, 1997-2001. Nowell, Paul. Lowes Success Hurting Home Depot, Associated Press, June 5, 2002. Pascual, Aixa M. 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