Porter’s Five Forces Essay Example

our distribution centers more often with one sku per shipment."

(Source: Home Textiles Today)

According to the article from 8/26/02 on page 10, Lowe's has the advantage. Efficient supply chain management reduces the bargaining power of customers, including their influence over price. Other factors that influence buyer power are brand loyalty, the threat of backward integration, and marketing based on non-price factors. The preferred method of addressing this influence is to reduce the number of competing firms.

Women, who make up a substantial portion of buyers and hold a significant market share, pose a threat to Home Depot as they favor Lowe’s. Lowe’s caters to this group and enhances the value of the products that women desire. On the other hand, Home Depot remains focused on retaining a strong customer base of professional contractors and discourages women, thereby preserving its traditional image associated with masculinity. The risk posed by new players entering the industry is influenced by the Minimum Efficient Scale (MES), which determines the market share required to enter the sector. The larger the disparity between MES and the costs associated with entering the market, the higher the barrier that exists.

Relative economies of scale provide an advantage for Home Depot and Lowe's, benefiting all existing companies. The presence of brand loyalty and proprietary brands, like John Deer lawn tractors sold exclusively at Home Depot and Jenn-Air grills available at Lowe's, also contribute to barriers to entry. However, the greatest value is not solely derived from these exclusive contracts, but rather from the brands themselves as they are crucial for differentiation and competitive advantage. Furthermore, both Home Depot and Lowe's have significant influence over suppliers and

distributors, along with the ability to implement price-cutting strategies, which further solidifies their position and creates barriers to entry.

Threat of Substitutes: This threat, if it exists, indicates marketing failures. Unless there are technological revolutions, innovative offerings and product development, and identification and response to consumer needs, this threat is minimized. However, if substitute products come from different industries, a threat arises when the price change of a substitute product affects the demand for a product. Nevertheless, home improvement supplies have no real substitutes, so this factor can be disregarded. Rivalry is determined and evaluated based on industry concentration.

A low concentration in the market indicates a competitive or "fragmented" market where there are many rivals, but none of them have a significant market share. Having a large number of firms increases rivalry among them. On the other hand, a high concentration in the market signifies less competition, with only a small number of large firms holding most of the market share. To combat rivalry, effective strategies include product differentiation, avoiding excessive production capacity, market segmentation, and industry-wide communication. Furthermore, mergers or acquisitions with competing firms can also be considered. The fact that Home Depot has saturated the market gives Lowe's an advantage because any new Lowe's (or OSH or ACE) outlet immediately captures a significant portion of the market share.

While Lowe’s experiences growth, Home Depot (HD) struggles to increase sales or maintain current levels at its existing outlets. This disparity in growth between Lowe’s and HD is attributed by industry analyst Colin McGranahan of Bernstein to the fact that the two companies are in different life cycles. Therefore, as Lowe’s continues to grow, HD faces problems

during a shake-out phase characterized by excess capacity and an imbalance of supply and demand. It is worth noting that the definition of the "market" is crucial in this context, as despite the dominance of Lowe’s and Home Depot, the industry remains fragmented.

Competition among numerous firms divides the same customers and resources, resulting in a fragmented industry. This fragmentation is due, in part, to the diverse range of merchandise offered by each store. For instance, both Home Depot and Lowe's sell appliances, which contribute significantly to their revenue, but appliances do not fall under the home improvement industry. Strategy formulation occurs across corporate, business, and functional levels.

Porter's three generic strategies for creating competitive advantage at the business level are cost leadership, differentiation, and focus. A firm can leverage these strategies to counter the adverse effects of industry rivalry. For instance, Home Depot doesn't change its overall market position in response to loss of market share. It acknowledges that Lowe's temporary advantage is due to current economic factors. Home Depot believes that when the real estate bubble bursts, Lowe's advantage will also disappear. Thus, Home Depot maintains its cost leadership approach and focuses on customer responsiveness as a factor of competitive advantage, which is not dependent on temporary economic anomalies.