Case Study: OfficeMax 1. Introduction This assignment focuses on case study analysis, where we were expected to analyse and provide executable strategy for a specific corporate retailer. The 1997 case relates to OfficeMax, a superstore that primarily carries office equipment and supplies to small business and consumer markets. However, the company is seeking diversification and market share growth, with the prospect of a merger between the industry’s number 1 and 2 office supply superstores, Office Depot and Staples.
The current merger process is under scrutiny from industry watchdogs, and the role of these entities relative to the competitive advantage of retailers is being questioned. This document hence deals with strategic direction for OfficeMax in light or in spite of the proposed merger, as well as general recommendations that it may use to become the dominant player in the US office supply market. 2. Analytical Strategic Analysis 2. 1 Selection of Tools Strategic management is a continuous process, run throughout a business’s existence.
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The process is set out with periodic milestones at which the planning, executing and measuring of Critical Success Factors (CSFs) and business objectives are set. It is used to ensure that the business is able to select, collect, assimilate and use appropriate information so that an organisation can specify and communicate its mission, vision, policies and plans, relative to the external forces that may help or stifle drive growth. Further, the strategic management process allows an organisation to set its competitive positioning, and encourage innovation.
Business Planning is concerned with how a business competes successfully in a particular market. The external environmental analysis (PESTLE) and industry analysis (including Porter’s Five Forces, competitor analysis and market performance analysis) models are applied by companies to identify opportunities and threats residing within the industry. A situation analysis is developed to culminate in a SWOT for internal positioning, relative to the strategic intent for growth for the company under analysis. This may be shaped more realistically with key success factors.
Figure 1: Strategic Management Process Thereafter, business planning concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc. During business planning, organisations tend to select either one or combination of Porter’s generic competitive strategies. This selection may be based on the particular market segment an organisation enters; hence, one organisation may have select different approaches if it plays in multiple segments.
This culminates in Critical Success Factors (CSF’s) required for a company to assume an effective competitive position within its industry. 2. 2 Environmental Analysis The environment analysis was conducted from Internet sources relating to mostly the United States for the period 1988? 2000. This information is summarised in Table 1. Table 1: PESTLE Analysis: Office Supply Industry Political 1988? 1992 Gulf War Panama / Cuban Conflict Bush Admin Increased Taxation Era of corporate reorg Unemployment rate unstable High inflation Decline in Specialist Stores HRM ?
Employee as person 1992? 1996 Stability ? Economic Growth Focus internally Clinton Admin Contemporary Era Growth dotcom era grows Warehouse Clubs Confidence in Government 1996? 2000 Global positioning Bilateral, Iraqi and EU neg Clinton Admin Globalisation starting up Door? to? door courier preferred Economic Social Technological Mature digital era Office automation prevalent Global warming legislated Employment rights legislated Carbon emissions awareness against greenhouse effects Legal Environmental ommence dotcom telephone shopping Commercialisation of equipment ? printers, etc Awareness of need for green mature Dotcom before burst online cataloguing Reusable cartridges, etc available Internet shopping legislated Anti? trust laws drafted Kyoto Protocol signed The most relevant information to OfficeMax will be drawn from this table when the company’s situation and growth strategy are considered. 2. 3 Industry Analysis During the late 1990s, the office supply industry was retailed by the following entities (as defined further in Appendix 1): 1.
SMME Speciality stores – who focussed on individual verticals in the industry. These stores were the dominant players prior to 1984, before losing the battle for cost leadership and scale of operations to superstores. Though the number of speciality stores have decreased, the strategy for survival of these stores has evolved to: a. Focus on goods that superstores would not carry, due to lack of supplier scale, low margins or focus on other product brands or contracts b. Joint buying power in the form of warehouse clubs c. Operation in areas not served by superstores d.
Niche market focus, such as enterprises or educational institutions, whose needs are generally specific e. Product differentiation, especially with furniture and office related services f. Addition of seasonal ranges, or consumer value adding services such as greeting cards, customised printing or local delivery 2. Superstores – together with wholesalers, remain the dominant player in the US office supply industry during the 1990s. However, one must keep in mind that the point of analysis for this case is the decision to permit merger of 2 out of 3 of the biggest superstores, or not.
Competitive analysis of both the “new” merged entrant and status quo industry makeup (whichever is permitted) needs to be conducted. 3. Retail Stores ? the FTC is seeking to protect all retailers from the merger; however, it is the existence of retail stores that threaten the business model of superstores the most, and vice? versa. Retail stores do not have the same focus and range as superstores; however, they can diversify their product range to ensure all year profitability.
This implies due attention to seasons, and significant contract power with suppliers across a wide range of industries. 4. Warehouse Clubs and Retails – These entities share equal market positioning to superstores; however, the business to business relationship make them suited to the enterprise market. As a consequence, if OfficeMax wishes to enter the specialised corporate market, a competitive threat exists that superstores need to monitor business serving warehouses.
The relative market sizing and dominance of each retail element listed above can be gauged from the case itself. One can assume that buying power equates to market share, and we note that superstore and warehouse combination does have significant dominance. Figure 2: Relative Market Share However, we need to relate this information to specific market segments, attributes of competitive differentiation, relative market presence and operational efficiency before suggesting which element is profitable. 2. 3. 1 Porter’s Five Forces
The retail types will now be classified based on their current positioning, with the exception of Office Depot and Staples, who will be discussed later both as a new entrant (merged company) and rivals to OfficeMax (but still a rival). Figure 3 shows all competitors in the office supply industry relative to their line of business uptake. One notes the market dominance of Superstores, and specialisation in industries by direct and speciality retail outlets. This information was processed from information throughout the case.
Figure 3: Relative Market Size and Product Blend Dominance On top of traditional competitors, gaps in the office supply market that have been included are season and niche market opportunities, a gap that OfficeMax is starting to take over, across different verticals. a. Substitute Products In the retail industry, the supply of substitute products reduces barriers to switch for customers since high elasticity of demand makes price competition strong, and gives wider range of choice to suit customer’s specific requirements.
In the office supply industry, substitute products are available from alternative retail outlets who do not necessarily share the same scale or buying power as superstores like OfficeMax. However, their focus on products that superstores choose not to carry is a threat, albeit small considering that superstores generally outprice these entities. Competition on differentiation layer is possible with items such as furniture and equipment. Loyalists to specialist entities may, however, be due to regional placement, once? ff quality driven purchases for particular small business customers, or unique requirements to suit specialist needs. b. Entry of new competitors A profitable market tends to attract new competitors, either in the form of prospecting entrepreneurs, horizontal growth from established corporates or arrival of global players wishing to expand. This will effectively decrease profitability, unless the entry of new firms can be blocked by incumbents. If this is not possible, the profit rate will fall towards a competitive level (perfect competition).
We will treat the merged entity can be treated as a new entrant, with the threat that it brings expertise and existing stores and supply contracts. However, the following factors will have to be considered while the merged entity, or even new entrants try to compete with OfficeMax. o the existence of barriers to entry – the company would need to convince the market to trust the new brand, even though a significant amount of it would be carried over from the parent companies – this should be well managed o conomies of product differences – consolidation of product portfolios must be seamless, though this is not an issue with commodity products, except with the management and support thereof o switching costs or sunk costs – certain liabilities and investments that are redundant need to be migrated or switched off in view of consolidated strategy o capital requirements – the merger requires significant funds to be raised in order to match expectations – this would come out from shareholders who would demand quick return and stable operations o access to distribution – the new company needs to rebrand and develop a common tactical approach in a much bigger distribution network o absolute cost advantages – consolidation of products implies suppliers need to be renegotiated, especially where backward integration is taken place o learning curve advantages – time to learn on the business’s new philosophy, as well as staff training is important to get past o In the mean time, OfficeMax could exploit the delay in uncertainty or learning, and grow its own strategy, even it trials and later executes. It would also have the advantage of undisturbed operations, continuation of an existing business model, and minimal staff training in order to compete. c. Competitive rivalry The major force of the competitiveness is rivalry, who relate to entrants on equal footing and core capabilities. Rivalry may be aggressive or in non? price dimensions such as innovation, marketing, etc, driving toward differentiation.
The following factors must be considered: government policies – the FTC policies must be adhered to o number of competitors – in the superstore category, there are three stores, each with a similar firmographic (as per Table 2). However, the industries number 1 and 2, Office Depot and Staples, seem to a significantly larger revenue, implying that OfficeMax is either operationally inefficient, not yielding the right product to market, or not enjoying adequate market coverage. These need to be explored during its growth strategy. Table 2: Competitive Data as at 1995 (note turnaround from 1996) Office Depot Staples OfficeMax Founded 1986 1986 1988 Products Furniture, Computing, Equipment, Supplies, P Market Position 1 2 3 No Stores 526 574 564 Revenue ($Bn) 5. 3 3. 1 2. 5 o o rate of industry growth – this seems to be consistent diversity of competitors – the product range is the same for superstores informational complexity and asymmetry – differing channels with advent of delivery, online and phone? in cataloguing, and serving specialised markets o o o o fixed cost allocation per value added – the margins are low – down to 15% in industry level of advertising expense – not known Economies of scale – similar operations, but negotiating power may be different Sustainable competitive advantage through improvisation – diversification of range, re? branding and new channels would be differentiators This implies that OfficeMax has significant repositioning, without waiting for the market to turn in its favour. d.
Customer Buying Power This relates to the ability of customers to pressurise the firm by renegotiating contracts or purchases from a company by eliciting sensitivity to price changes or switching to other companies. The office supply industry is diverse, but the trend from consumers is to seek lower cost. The advent of technology such as the cost? effective micro? computing and desktop publishing has boosted the market with new dimensions. The trend to go paperless and the advent of the Internet would later spark a decrease in paper communications, and electronics sales is now almost double market potential than traditional office supplies. Even the trend to buy online or via catalogue needs to be embraced. This is a customer led industry. e.
Supplier Buying Power The suppliers of goods and services to the firm can be a source of power over the firm. Unique buying power, distribution and stock availability are factors that influence retail product offerings. However, the more diverse the range and number of outlets, the more loyal supplies get to a retailer. Superstores have the tendency to be “category killers” (from Case), where loyalty to particular brands emanates from discounts and in? store promotions. Further, the scale of operations implies products are sold, and suppliers are forced to offer discounts to these companies rather than smaller operators and retailers.
Therefore, the FTC is concerned with the implications of merger. 2. 4 Situation Analysis The situation analysis is placed in Appendix B, relating information of OfficeMax’s market position, capabilities, competencies, collaboration, stakeholders, financial analysis and marketing mix. Significant highlights from this analysis, taken from the case together with information sourced from the Internet: a. The companies cost leadership competitive strategy has seen financial turnaround since 1993, with the company turning around significantly when acquired by Kmart, to year? on? year growth from 1994 to 1995 at 180% and 314% from 1995 to 1996. b.
The company has been able to diversify its product range, offering end? to? end value to the market who seek one supply fits all c. The company is keeping track of industry and environment trends, with investment in internet services and computing for internal automation, achieving a 1. 86% cost of admin – in? line with cost leadership model d. The company has turned its inventory significantly quicker with greater number of stores – hence stronger buying power e. Expansion into wider ranges, new geographical areas and internationally (in areas where its competitors are not – a wise decision) has helped boost y? on? y earnings f.
It is maintaining the superstore brand by growing such stores across its operations, but adding cataloguing and portfolio driven lines such as corporate markets to its suit of services – this will ensure longevity g. The company’s experimentation shows a lack of understanding of its customer needs h. Though the merger provides basis for testing market, a sound strategy for growth needs to be put into place, else it will not achieve objectives for no 1 spot i. Staff need to be focussed at regional level with exact direction of expansion, and ensure level of retention to remain loyal to company’s strict policies and work ethic j. Cognisance of the concerns from the regulator and competition bodies is important to prevent negative kick? backs to company – re? randing and customer awareness is important to gain their trust 2. 4. 1 SWOT Analysis Figure 4: SWOT Analysis 3. 3. 1 Strategic Direction Merger Scenarios 1. The merger takes place and OfficeMax becomes 2nd in the market to a chain twi ce its size in the domestic market The two scenarios that OfficeMax needs to take awareness and perform due risk planning are: 2. The merger is stopped and OfficeMax can use competing head? on with both entities to reach the number 1 spot it aspires toward OfficeMax’s corporate vision is summarised as “to be the cost leader and preferred superstore in office supplies for most of the American market”.
Its purpose may therefore be surmised as “OfficeMax is an operationally efficient chain of superstores retailing to the domestic market end? to? end office supplies and aims to be the market leader using geographical growth, line of business expansion and cost leadership. ” The company needs to consolidate itself so that it takes a non? specific approach no matter if the merger is allowed or not. The opportunity to experiment while other companies cannot invest or grow (while in closed period for due diligence and stakeholder negotiation) is apt; however, focus must be achieved soon. Capital must be spent wisely, and decisions around global positioning and market focus taken.
Technologies such as the Internet and Desktop computing are key enablers, and the company should expand its channels and skills base accordingly. Employee culture must be reinforced by regional accountability. 3. 2 Critical Success Factors Since we now understand the company from both its internal and external positioning, we need to set critical success factors before providing information going forward on implementation. These include: 1. Understand expectations of stakeholders, such as the regulator and competition commission during this merger period 2. Keep track of the ever changing needs of customers during this period of flux 3.
Be weary of counter moves by competitors – watch for contingencies if merger does not occur 4. Maintain level of operational cost saving, by ensuring automation across systems, maintaining cross? docking functionality and driving this to regions and staff 5. Be cautious on global expansion, and ensure relationship with partners maintained 6. Seek growth markets, or areas where cost leadership maintained by revenue available, such as corporate market – push digital as primary offering 7. Seek and maintain loyal and driven personnel 8. Seek contracts with supply chain and gain first? mover advantage rather than merged entity 9.
Grow brand equity by driving economy of scale of superstore over other entities 3. 3 Intrapreneurship and Innovation The company is currently driving experimentation while the merger negotiation takes place. It is the ideal opportunity to gain staff support to help reshape the organisation, and ensure that this gets implemented properly. For consumer retailers, innovation is inherently multidisciplinary and cross? functional (Roth, 2006). The author further suggests that: o o o o Innovation starts with existing business models and categories. Focus groups are at the heart of efforts to generate the insights companies need. Companies should rely on internal resources first for innovation.