You are on page 1of 8

Opportunity Matrix

1)

High Attractiveness/ High Success Probability

E-commerce is a very attractive area, which Home Depot can develop. The Company has been slow to develop the e-commerce venture. Initially, Home Depot wanted to sell only a limited number of items on the web site. However, it has now decided to sell all its items on the web site. This decision came after signing a with IXL Enterprises. IXL is a very good partner for Home Depot because it already has much experience with clients such as Budget-Rent-A-Car, Merrill Lynch and Chase Banks Merchant Services Group. IXL understands that Home Depot wants to make this web site a truly global one, in that it takes into consideration the issues that other countries have about on-line business, as well as what the on-line DIY markets are like. The combination of IXLs experience and success, IXLs understanding of Home Depots needs and the fact that the popularity of internet shopping is increasing, makes e-commerce an area of high attractiveness and success probability for the company.

Entreprenuerial expansion is a very attractive area with a high degree of success probability. In the summer of 1999, Home Depot started a test run with four Villager Hardware stores, one in New Jersey. It is a small-store concept that was created to be user-friendlier than the usual hardware store. It aims to be the neighborhood hardware store for everyday projects rather than for big comprehensive home improvement projects. This new concept of the neighborhood hardware store also recognizes that consumer needs are changing and that women are a growing, long-ignored consumer base in home improvement retailing. The Villager Hardware store has been a major success. The sales of products has exceeded expectations.

Home Depot has been so successful Villager that it has set a trend in the industry. Other hardware stores, such as Ace Hardware, have followed Home Depots example and have also created userfriendlier stores. Similar to the Villager Hardware store, the Expo Design Centers have been doing very well. It is an upscale type of Home Design store. These EXPO Centers have also become very popular, creating a demand for this type of store.

Vertical acquisition is a very attractive area. It can increase efficiency of product delivery to the stores as well as lower costs. Home Depot has acquired Apex Supply Co. to move into the market traditionally served by supply houses. Apex Supply Co. is a plumbing wholesaler that served professional plumbing contractors. This acquisition will enable Home Depot to two things. The first is that it will now become heavily involved with the professional contractor business, and the second is that it will learn the business of being a wholesaler. Another advantage of this acquisition is that Home Depot no longer has to deal with Apex as a middleman. In effect, the middleman has been eliminated. With this acquisition, there is a great opportunity for Home Depot to receive more business with professional contractors, because it can learn from Apex. In addition, the elimination of the middleman increases the efficiency to get the products in the stores.

Home Depot decided that it would sell home appliances in the US stores starting in 2000. It is now selling only GE and Whirlpool appliances in 15% of the stores in the United States. There is certainly a market for appliances, because Lowes already sells appliances at its stores. It would also be a good complement to the Villagers Hardware stores and the EXPO Design centers.

2)

High Attractiveness/ Low Success Probability

The expansion into the European market is a very attractive area for Home Depot. However, there may be a low success probability due to stricter government regulations and higher quality expectations in those regions. In addition, Home Depot would face competition with already popular home improvement stores, which the people are already familiar with. There is another question as to whether or not these

warehouse type of stores that Home Depot has would be well received by the European customers. They may prefer the Villagers stores. Expanding into Europe would extensive and thorough research on the prospective competitors and the consumers.

Threat Matrix

1)

High Seriousness/ High Probability of Occurrence

Although the area of e-commerce is very attractive to Home Depot, it has been very slow in moving in that direction. While it was thinking of going on-line, others were already there. One major threat is Amazon.com. It bought the catalog retailer Tool Crib of the North, allowing it to sell hardware on the web. The Sales of hardware has increased 9% from the previous year. Many project that sales of hardware on the web will also increase. Another is Sears. Sears has been selling products on-line since 1997. This already gives Sears a few years experience over Home Depot. Sears strategy has been to use the web site to build customer loyalty. There are also other companies such as Hardware.com, Buildscape.com, HomeWarehouse.com, HouseMart.com and 1stoptools.com. All of these companies have been gaining experience and improving their web sites for a few years now, which gives them all an edge over Home Depot. The threat of competition with these other companies is very highly due to their experience already. However, if Home Depot continues its efforts in this area, it should no longer be a threat.

2)

High Seriousness/ Low Probability of Occurrence

The possibility that Home Depots suppliers will sell directly on the web and begin their own e-tailing directly to the customers is a very real threat. However, the probability that this will occur is very low. This is due to the fact that approximately 95% of the sales for these suppliers goes to Home Depot. They are very dependent on Home Depot for their revenues.

There have been a few lawsuits that Home Depot has had to settle with employees. In August 1999, it settled out of court with an ex-employee who claimed that he was harassed and fired due to his religion. In addition, 12 employees in a Detroit store complained that the company discriminated against African-Americans. This has lead to the investigation of that store by Michigans Department of Civil Rights. These occurrences seriously threaten Home Depots image. However, the likelihood of its image being the best home improvement Store will probably not be destroyed by these occurrences. Home Depot is doing too well in other parts of the country for these occurrences to disturb sales in other stores.

Key Strategic Questions for the Company

E-commerce and the home improvement industry

Internet sales of home improvement items have increased dramatically over the latter half of 1999. According to Ernest and Young, total online holiday sales exceeded $10 billion. Although home improvements share is unknown, a new survey by the Home Improvement Research Institute shows that the use of the Internet to buy home improvement products grew by 118% between June 1999 and December 1999. The majority of home improvement items sold over the Internet were power tools. The obvious concern for Home Depot is that is has yet to tap into the E-tail home improvement market. Although its web site is due to launch in mid to late 2000, there is concern that online e-tailors such as Amazon.com, Wal-Mart, Homewarehouse.com, and HouseMart.com that have already established themselves will have an online advantage over Home Depot. Homewarehouse.com is already boasting excellent customer satisfaction due to their high number of holiday Internet order fulfillment rate of 98.7%. A recent survey by Leo J. Shapiro associates on consumer attitude had some interesting results regarding the future of Internet home improvement sales. While 26% of respondents believed that traditional home improvement stores such as Home Depot and Lowes will eventually wipe out smaller etailers, a surprising 20% of the respondents believed Amazon.com and other e-tailers have a big head start, and have a better understanding of the home improvement industry. It is important to note that Lowes; Home Depots largest competitor has yet to begin online sales as well.

Relations with manufacturers

Because of its sheer size and ability to sell large volumes of goods, Home Depot has been in a position to bully its suppliers. The recent threat barring suppliers from selling their wares online is an example of the muscle Home Depot can and will flex to insure its dominant status. The concern is with the long-term relations with suppliers and Home Depot. As the Internet sales grow, it will become more and more attractive for suppliers to sell their merchandise directly to consumers and DIY professionals. Home Depots competitors such as Lowes have no e-commerce mandate barring direct E-sales to customers. Will continued bullying by Home Depot eventually sour relations with suppliers and push them toward their competitors such as Lowes. The continuing rise in Internet sales will most likely make this more tempting as time goes on.

Over saturation

Is there a future problem of over saturation of the big box Home Depot? Although Home Depot has been opening up new directions with the introduction of Expo and Villagers hardware stores, samestore percentage sales growth has declined in the last few years from the low teen in the early 1990s to about 7%. Although this is still high by retail standards, there is the possibility that this figure will decline even further in the future. Although Expo and Villagers represent new directions for Home Depot, they also sell many of the same items such as tools, and may draw customers away from each other in effect cannibalizing each other.

Economic cycle

According to the U.S. Department of Commerce and the Building Materials Research Institute, the long trend in economic prosperity has given a bright outlook for the year 2000 with regards to the home improvement industry. Lumberyard sales are expected to rise 8.5%, hardware store sales are expected to rise 3.4%, pains store sales 4%, and lawn and garden sales are expected to rise 10%. This information bodes well for Home Depot and other retailers in the home improvement industry. Although year 2000 has a bright outlook, there have been small but growing concerns regarding future inflation. Interest rates are expected to rise a full basis point by mid 2000, which may lead to a

slowdown in the sales of new homes. The 5-year outlook is much less certain, cyclical data suggests an eventual slowdown in the economy.

Competition and Differentiation

Will competition from Lowes and other retailers eventually force down Home Depots profitability? For the most part Home Depots main competitor Lowes has found success by implementing similar practices as Home Depot. Both stores can be categorized as big box retailers, with an emphasis on service. As the home improvement industry becomes more saturated with an ever increasing number of retail outlets, will Home Depot be able to hold on to its dominant position? Or will competitions such as Lowes develop to the point of being no different or even better in the minds of consumers. If that is the case, then Home Depot will loose the advantage of its stated core competency, excellent customer service. The danger is that Home Depot and other big box retailers will only be distinguished by price, resulting in Home Depot loosing one of its main competitive advantages. Can Home Depot continue to differentiate itself from its competitors in the future, as a provider to outstanding service and customer value? What sort of innovations will be necessary to accomplish that?

SWOT Analysis
A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan: SWOT Analysis Framework Environmental Scan

/ Internal Analysis /\ Strengths Weaknesses

\ External Analysis /\ Opportunities Threats

| SWOT Matrix

Strengths A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include: patents strong brand names good reputation among customers cost advantages from proprietary know-how exclusive access to high grade natural resources favorable access to distribution networks

Weaknesses The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses: lack of patent protection a weak brand name poor reputation among customers high cost structure lack of access to the best natural resources lack of access to key distribution channels

In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment. Opportunities The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include: an unfulfilled customer need

arrival of new technologies loosening of regulations removal of international trade barriers

Threats Changes in the external environmental also may present threats to the firm. Some examples of such threats include: shifts in consumer tastes away from the firm's products emergence of substitute products new regulations increased trade barriers

The SWOT Matrix A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity. To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is shown below: SWOT / TOWS Matrix Strengths Weaknesses

Opportunities S-O strategies W-O strategies

Threats

S-T strategies W-T strategies

S-O strategies pursue opportunities that are a good fit to the company's strengths. W-O strategies overcome weaknesses to pursue opportunities. S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats. W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats.