Industry of Home Repair and Maintenance Products - Research Paper Example

? Industry-Strategic Analysis Executive Summary This industry comprises of firms and other entities known as ‘Home Centers’ that retail home repair and maintenance products to consumers. The industry is attractive because of its large market share, low bargaining power of buyers and suppliers, moderate level of barriers to entry into the industry and competitiveness in the industry. The industry produces products such as plumbing, home decor, carpets, electronic goods etc. There is low threat of substitutes as well. An analysis of the industry has been conducted in the paper based on Porter’s Five Forces. Based on the analysis, it can be said that the industry is attractive to new entrepreneurs and there is potential in the industry for further growth. Industry-Strategic Analysis This industry comprises of a number of establishments known as ‘Home Centers’ that are primarily engaged in retailing of products relevant to the repair and maintenance of homes. Such goods include lumbers, plumbing, electrical goods, hardware, tools, and lawn and garden supplies. Home centers also provide building materials and other consumer goods relevant with the repair and maintenance (census.gov). These goods are either purchased from domestic or international manufacturers of suppliers. Operators then retail these goods to the ultimate consumers through their stores (IBISWorld, 2006). Industry’s Dominant Economic Features This industry has a vast market size which is the dominant economic factor of the industry. Other economic factors are significantly affected by the market size in the industry. The annual sales of the industry are estimated at $135.4 billion. As the products offered by home centers are utilized by consumers in all the segments of the market, therefore the market size is extended to all the levels of the market. The business conducted in the industry is comparatively easy to operate therefore the industry is growing at a very fast pace. This scenario has initiated a stiff competition within the industry and major home centers are increasing at an unprecedented rate at the expense of smaller entities in the industry (Sinderman, 1997). The number of rivals within the industry is high. Since the goods produced by the industry are not dependent upon technology therefore the abrupt technological changes do not affect the operations of the industry to a significant extent. This allows the industry sufficient time to acclimatize with the changing trends. The products in the industry are mostly of a generic nature therefore there is not much differentiation between the products. The segments within the industry include specialized home stores that retail specialized goods only such as stores specialized for plumbing, electronic goods etc. Such stores do not retail any other goods other than the specialized goods. Porter’s Five Forces Porter’s Five Forces analysis is conducted to determine whether an industry is attractive for entrepreneurs (Hitt, 2009). In order to analyze the home centers industry, the analysis is being conducted on Home Depot. Home Depot is an American retailer of home improvement products. Home Depot is the largest retailer of home repair and maintenance products in the US therefore it is one of the most important constituents of the industry (Form 10-K, 2010). Following is the Porter’s Five Forces analysis of Home Depot. Threat of Substitute Products Threat of substitute products outside the industry is low because there are no or less substitutes for the home repair and maintenance products. It was determined by the following facts. In case of plumbing, there is not other industry that produces such goods. Similarly, in case of goods like carpets, home decor goods, and other electronic goods for home maintenance, there are no substitute goods produced by any other industry. Therefore home depot has a low threat of substitute products. The main products produced by the company are tools, shelves, indoor and outdoor decor products, cleaners, paint etc. Rational consumers keep their houses maintained and this need does not fade away because there are a number of products that need periodic replacement. However the factors that can act like substitutes are the ability of people to deal with home repair problems, and purchasing of new homes instead of repairing the existing ones. Another factor that may increase this threat may be the retailing of home maintenance products by departmental stores outside the home centers industry such as Wal-Mart. Intensity of Competitive Rivalry in the Industry The intensity of competitive rivalry in the industry is significantly high. The tactics used by the firms in an industry that determine the intensity of competitive rivalry in an industry are price differentiation, advertising, extent of customer service, and such other strategic tactics such as offering extended warranty periods. Since the market size of the industry is huge and there are a large number of firms that operate within the industry, there is strong rivalry among the firms in the industry. Each firm tries to strengthen its position in the industry by implementing upon its marketing strategies. The competition increases with the number of firms in the industry but there are some firms that hold comparatively high share of the market therefore they are least affected by the competition within the industry. Companies like Home Depot are not significantly affected by the competition in the industry. The competition faced by the company is restricted to the specialized retail stores that offer a single category of products. On the other hand, Home Depot offers all the products that are covered under the home centers industry. The suppliers also provide discounts to companies like Home Depot because of the size of order. Such discounts enable bigger firms to spend more on advertising and other marketing strategies. In this manner, such firms keep the industrial competition from affecting their position in the industry. The intensity of competitive rivalry is strong in the industry overall. Threat of New Entrants Entry of new firms in home centers industry is easier, however it does not pose any significant threat to the position of the stable firms in the industry. The barriers to entry into the firm are a wide range of products in the industry, competent human resource, requirement of extensive start-up capital investments, strong recognition of the existing firms in the market and high customer loyalty. In order to enter into the industry, the new firm will have to choose from a wide range of products to retail to the customers. Since the industry includes a large number of products therefore this decision may make the entry of the new firm difficult. If the new entrant chooses to retail a limited number of products, it would be faced with a stiff competition from existing firms in the industry who retail a wide range of products therefore the new entrant will have to invest sufficient capital to retail all the relevant products. The existing firms in the industry possess competent human resource that include personnel with strong managerial capabilities and highly trained salespersons. Therefore, a new entrant will have to hire competent human resource in order to survive in the industry. Apart from these factors, the customers have strong loyalty for the existing firms in the industry for example Home Depot. Customers have been convinced to learn that all their needs regarding products relating to home maintenance are available at Home Depot therefore they do not consider visiting any new stores. Therefore from the analysis conducted, it can be inferred that the threat of new entrants in the industry is low (Gilliard, 2008). A new entrant would have to spend excessive capital over its marketing strategies and product choice in order to survive in the industry. The Power of Buyers The power of buyers to influence the decisions of the suppliers is important in every industry. The bargaining power of buyers determines the force of demand and thus the price of the product. Due to the lack of substitute products and relatively less differentiation in prices of the products, the power of buyers is low in the industry. There are three main categories of buyers in this industry. One is that of do-it-yourself buyers who purchase home maintenance products and install them themselves without any professional assistance. Second is that of buy-it-yourself buyers who purchase the home repair and maintenance products themselves but take professional assistance in order to install the products. Third is that of professional buyers such as contractors, plumbers etc. Professional buyers have the tendency to purchase products in bulk quantities therefore they may have power to influence the prices and terms of contracts but the other buyers do not have any power to change the prices (Gilliard, 2008). Therefore, the overall power of buyers in the industry is low. The Power of Suppliers There are a number of manufacturers and distributors in this industry that supply home repair and maintenance products to the operators. The suppliers cannot exert monopolistic influence because the number of suppliers is not limited. The operators can acquire products from a number of domestic manufacturers and distributors and if need be, operators can also acquire products from international manufacturers. In case of big firms such as Home Depot, suppliers also offer huge discounts due to the size of the orders by the company. Home Depot is able to acquire large discounts because it makes a significant part of the supplier’s sales. Suppliers provide the stock for more than 30,000 different products kept by Home Depot at its stores. Due to the large number of products, Home Depot is able to invite offers from a number of suppliers. Home Depot then accepts the lowest bid in order to keep its costs low and margins high. Similarly, the presence of large number of suppliers lowers the power of suppliers to influence the prices and empowers the operators of the industry to earn higher revenues. Lowe, another company operating in the industry, purchases products from 7,000 vendors (Gilliard, 2008). However for individual retail stores, supplier’s bargaining power would be higher because such entities do not order large amounts of inventory therefore suppliers do not provide any discounts or modify the terms of contracts. Thus it can be inferred that the power of suppliers in the industry as a whole is comparatively low with the exception of small specialized stores. Overall Analysis All the Porter’s Five Forces determine whether an industry is attractive or unattractive. Based on the analysis conducted above, it can be inferred that this industry is attractive. The substitute products range from low to moderate in the industry. The entry of new firms in the industry is also low because of the requirement for high initial capital. The competitive rivalry is high in this industry which can be tackled with marketing strategies. The bargaining power of both buyers and suppliers is also low. All these factors collectively make this industry attractive for potential firms to enter in the industry. In order to survive in the competitive environment, the companies should design effective marketing strategies. References Census.gov. NAICS 444110: Home Centers. Retrieved March 25, 2011 from http://www.census.gov/epcd/ec97/industry/E444110.HTM Gilliard, D. J. (2008). Lowe’s Companies Inc. and The Home Improvement Industry in 2007. Journal of Business Case Studies, Volume 4 (2), pages 39-58. Hitt, M. A.; Ireland R., Duane; Hoskisson, R. E. (2009). Strategic Management: Competitiveness and Globalization. Cengage Learning Home Depot Inc. (2010). Form 10-K. Retrieved March 26, 2011 from http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Mzc4MTV8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1 IBISWorld. (2006). Home Centers in the US: Industry Report. Retrieved March 25, 2011 from http://www.mindbranch.com/listing/product/R538-6714.html Sinerman, M. (1997). Competition Stiff in the Home Center Business. Retrieved March 25, 2011 from http://retailtrafficmag.com/mag/retail_competition_stiff_home/ Read More