HomeImprovement is an Internet pure play retailer of home improvement products and solutions. Recently, traditional brick-and-mortar retailers in the same markets have been muscling into the electronic retail scene. Can Homeimprovement. com survive, or thrive, in the face of such strong and established competition? The home improvement market, worth an estimated $172 billion in 1999, with annual growth rates of 5-10% in the 1990s, was dominated by Home Depot and Lowe’s, with other competition being marginal. What follows is a brief analysis of the home improvement market then, utilizing Porter’s 5 forces model:
1. Rivalry – at the time of Homeimprovement. com conception, there was no major home improvement e-retailer, and the only significant competition came in the form of home centers by giant established retailers such as Home Depot. Therefore a significant level of rivalry exists, although homeimprovement. com competitive advantage stemming from its business model helped to alleviate this rivalry to a degree. 2. Threat of substitutes – High, as products sold are universally available and can be considered a semi-commodity. 3. Buyer power – Homeimprovement.
com would start out with low buyer power due to the leverage its competitors such as Home Depot could exercise on suppliers. In fact this happened later on, when Home Depot threatened to drop over 1,000 of its suppliers if they began to sell their products online (a veiled threat to Homeimprovement. com arrangement with suppliers for direct delivery for orders from supplier warehouses) 4. Supplier power – weak, as suppliers face intense competition for commodity-like products. The only exception would be suppliers of higher end, exclusive and unique products. 5. Barriers to entry – Low for Homeimprovement.
com, as at the time of it’s inception, there was virtually no major e-retailing competitor in the same market. Homeimprovement. com business model is highly sustainable, as it has chosen to distinguish itself in areas with exploitable opportunities where they are able to compete effectively. Understanding that cost is one area in which they are unable to compete effectively with their main competitors due to their highly efficient supply chain and distribution centres, Homeimprovement. com instead focus on providing solutions and value added service, rather than simply pushing products.
It created a unique shopping experience that could rival those found in traditional retail stores or home centres, with professional support and advice available with impressive response times. As such, it has achieved product definition and high added value (which is attractive, functional and relevant) to customers, and is a key factor(s) towards its success and sustainability. However, Homeimprovement. com has two major stumbling blocks which it has to deal with coherently and efficiently to ensure long term viability and profitability. These shall be detailed below. Supply Chain
Supply chain efficiency and reliability is critical for all retailers, but even more so for e-retailers, where turnover times, procurement and order fulfilment are all areas that can make or break a retailers. Homeimprovement. com should open an integrated distribution centre together with a suitable supply chain management system and focus on turnover time, keeping inventory stocks as low as possible to reduce inefficiency and stocking costs. An example of such a successful attempt would be Dell’s business model. Such an attempt would be costly and risky – but essential for Homeimprovement.
com to secure a competitive advantage in the face of increased e-competition. Ideally, Homeimprovement. com should attempt to nurture long term relationships with suppliers willing to deliver directly to customers as soon as orders are received and sent out, but this would require a strict criterion for selecting appropriate suppliers, as reliability would be outsourced together with order fulfilment! This would be a cheaper alternative, but more time intensive and risky with respect to external pressure from other competitors and market forces.
Customer Relationship Management Michael Hutchinson, Director of Finance, quantified current customer acquisition costs at roughly $800, which is significantly more than the average lifetime value of a customer. My recommendation then would be for Homeimprovement. com to focus on keeping existing customers first and acquiring new customers second. It should work on its customer relationship management, to create, maintain and enhance long term relationships with customers, in order to attract and keep economically valuable customers, and eliminate economically invaluable ones.
The foundation for this is already in place, with an existing support system which is responsive and efficient, as well as many value added services. The ideal way for Homeimprovement. com is to make use of various off-the-shelf CRM systems from vendors such as Siebel, suitably integrated with its current end system. Such a system would maintain customer profiles with product and usage summary data, demographic and psychographic data, profitability measures, contact history and marketing and sales promotion history. The initial acquisition and integration of such a system might be costly depending on the complexity involved.