Porters Five Forces

A competitive strategy must meet the opportunities and threats inherent in the external environment; it should
be based on an understanding of industry and economic change.
Porter identifies five forces that shape every industry and which determine the intensity and direction of
competition and therefore the profitability of an industry. The objective of strategic planning is to modify
these competitive forces such that the organizations position is improved. Management can then decide, based
on the information given by the Five Forces model, how to influence or to exploit industry characteristics.
Bargaining Power of Suppliers

The term suppliers comprises all sources for inputs necessary to provide products. And supplier power
refers to their relative bargaining power, which, when high, allows significant influence on the industry and
expropriation of profits.
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 further reduce the power of its suppliers. That the primary source
of both planned and actual efficiencies in this area, however, derive largely from cost initiatives and financial
policy, points to the firms emphasis on cost leadership.
But Lowes has already established centralized logistics systems based not so much on economies of scale or
rigid accounting an on logistical flexibility. To determine the most efficient way to purchase inventory, Lowes
looks at every product of every vendor individually.
This method should decrease cost per product via four methods of distribution: flowing goods through regional
centers, shipping by commodity focused consolidation, reloading distribution centers, and direct shipment to
stores. 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

The bargaining power of customers their influence over price -- is reduced via efficient supply chain
management. Other factors -- brand loyalty, threat of backward integration, and marketing based on factors
other than price influence buyer power. Naturally, reduction in the number of competing firms is the
preferred method of addressing this influence.

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
women 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. For example, 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. A strong influence over
suppliers and distributors, moreover, as well as price-cutting, for which both Lowes and Home Depot are well
positioned for, can also create barriers to entry.
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.) Conversely, a high concentration indicates less competition; a small number
of large firms hold most of the market share. 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. While Lowes grows, HD struggles to increase sales
at existing outlets or to maintain current levels. 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
shake-out phase problems: excess capacity with too many goods chasing too few buyers.
The definition of what constitutes the market is important here. The industry, despite the dominance of
Lowes and Home Depot, is fragmented. Competition for the same customers and resources is spread among
a relatively large number of firms. The industry in general, then, is fragmented, a partial result of the varied
merchandise that each store sells. Appliances, for example, are carried by both Home Depot and Lowes and
represent a significant component of their revenue, but appliances are not part of the home improvement
industry.
Conclusions

Strategy is formulated on three levels: corporate, business, and functional. The primary context of industry
rivalry is the business level, and Porter defined three generic strategies that can be 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 transcends and is not dependent on temporary economic anomalies.

Works Cited
Tillman, Bob. Lowes looks to logistics for growth. Home Textiles Today 23.49 (2002): 10+
McGranahan, Colin. Lowes grows, HD slows. Usenet Posting. 10 Nov. 2002.
<alt.accounting.>