Generic Strategies



Group Project

Home Depot v. Lowe’s

by

Jeff Fogel

Jasmine

Cindy

Marina

Shirley

Management 497

Professor Hornbuckle

December 8, 2002

Introduction

Lowe’s and Home Depot are the two largest retailers in the home improvement industry. Lowe’s being the second largest in the industry, however, was originally called “North Wilkesboro Hardware” in North Wilkesboro, North Carolina. It became Lowe’s in 1946 when C. H. Buchan bought-out his partner and brother-in-law James Lowe’s share of the company. Lowe’s started to go public in October 10, 1961 and in 1989 Lowe’s transformed from a chain of conventionally sized stores into a chain of home improvement superstores. By 2001, Lowe’s had opened 806 stores with 110,000 associates and $22.1 billion in sales. With all of its expansion within the United States, Lowe’s 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 Lowe’s, 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 Lowe’s 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.

Lowe’s continues to expand their business by opening 123 new stores in metropolitan cities (Annual Report, 2001). Also, they’ve 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, Lowe’s uses a focus strategy. . Their focus on women is a result of substantial marketing research. Lowe’s 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 Lowe’s customers were women. Based on their strategic theories, Lowe’s 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 décor items than other stores. Today, half of Lowe’s customers are women.

Lowe’s, 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.” Lowe’s research showed that 41% of their customers have limited time on their home improvement projects and need some professional assistance. Since 1998, Lowe’s 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. Lowe’s is also implementing merchandising differentiation. Their appliances sections offer far more varieties and models than that of Home Depot. They’ve 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 Lowe’s 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. Lowe’s is opening a new store on average every 3 days, and its growth in earnings has exceeded Home Depot’s since 2000. To counter the strategies of Lowe’s, 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. They’ve added specialized products and services to smaller professional customers. A broad assortment of major appliances have been introduced to compete with Lowe’s, which has the nation’s second largest sales in appliance, just below Sears. They’ve 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 décor items, aiming at women.

4-Factors of CA

Regarding superior quality, Lowe’s 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. Lowe’s 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, Lowe’s 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 Lowe’s Pros. Home Depot’s 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.

Lowe’s 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 Depot’s 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 chain’s mainframe computer and point-of-sale computers in its stores nationwide.

Understanding what the customer wants and needs is Lowe’s top priority. It performs extensive research and demographic tracking about customers and their needs. Lowe’s 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. Lowe’s 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 Lowe’s Garden Club, Lowe’s Woodworker’s Club and Lowe’s Kids Clinics, provide customer with inspirations and solutions in order to build loyalty in the Lowe’s 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, Lowe’s 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.

Porter’s 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 Depot’s 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 supplier’s power. Accordingly, Home Depot depends on a cost leadership strategy.But Lowe’s 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, Lowe’s 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, Lowe’s has the advantage.

Bargaining Power of Customers

Women, who represent a concentrated group of buyers and a significant market share, prefer Lowe’s and therefore threaten Home Depot. Lowe’s 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 Lowe’s 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; Lowe’s 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 product’s 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 Lowe’s an advantage: any new Lowe’s (or OSH or ACE) outlet immediately appropriates significant market share. This, according to industry analyst Colin McGranahan of Bernstein, accounts for a disparity between Lowe’s and HD in terms of growth. “What we are seeing,” says McGranahan, “ are two companies in different life cycles.” Hence, while Lowe’s 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 Depot’s response to loss of market share, for example, is not one of changing overall market position; for Home Depot recognizes that Lowe’s benefits from current economic factors that are temporary. When the real estate bubble bursts, so will Lowe’s 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. “It’s 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? Lowe’s and Home Depot, often neighbors, struggle to

develop some individuality,” Wiston-Salem Journal, September 16, 2002.

Lowe’s Companies Inc., Annual Report, 1997-2001.

Nowell, Paul. “Lowe’s Success Hurting Home Depot,” Associated Press, June 5, 2002.

Pascual, Aixa M. “Lowe’s is sprucing up its house,” Business Week, June 3, 2002

History. 15 November 2002.

Timeline. 15 November 2002.

Lowe’s Home Improvement Warehouse. 15 November 2002.

 

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