Case Study: OfficeMax
1. Introduction
This assignment centers around the analysis of a case study, in which we are required to analyze and develop an actionable strategy for a particular corporate retailer. The case study, from 1997, focuses on OfficeMax, a superstore that specializes in offering office equipment and supplies to both small businesses and consumers. However, the company is aiming for diversification and expansion of market share, potentially through a merger between the top two office supply superstores in the industry: Office Depot and Staples.
The current merger process is being closely examined by industry watchdogs, who are questioning the impact of these entities on retailers’ competitive advantage. This document focuses on OfficeMax’s strategic direction in light or regardless of the proposed merger, and provides general recommendations for OfficeMax to become the leading player in the US office supply market. 2. Analytical Strategic Analysis 2. 1 Selection of Tools Strategic management is an ongoing process that is carried out throughout the lifespan of a business.
The strategic management process involves setting periodic milestones to plan, execute, and measure Critical Success Factors (CSFs) and business objectives. This ensures that the business can effectively obtain and utilize relevant information to define and communicate its mission, vision, policies, and plans in relation to external factors that may impact growth. Additionally, it enables the organization to establish its competitive position and foster innovation.
Business Planning focuses on how a business can compete effectively in a specific market. Companies utilize models such as external environmental analysis (PESTLE) and industry analysis (including Porter’s Five Forces, competitor analysis, and market performance analysis) to identify potential opportunities and threats within the industry. A situation analysis is created to generate a SWOT analysis for internal positioning, aligning with the strategic intent for company growth. Key success factors may further shape this analysis for a more realistic outlook.
Figure 1: Strategic Management Process After that, business planning focuses on strategic decisions involving product choice, customer satisfaction, competitive advantage, and seizing opportunities. When planning, organizations typically choose one or a combination of Porter’s generic competitive strategies. This choice may depend on the specific market segment that the organization enters, meaning that different approaches may be selected if the organization operates in multiple segments.
This paragraph discusses the Critical Success Factors (CSF’s) needed for a company to have a competitive position in its industry. Additionally, an environmental analysis was done using Internet sources primarily focusing on the United States from 1988 to 2000. The findings of this analysis are summarized in Table 1, which presents a PESTLE analysis of the Office Supply Industry during this time period. The analysis includes political factors such as the Gulf War, Panama/Cuban Conflict, and the Bush Administration, as well as economic factors like increased taxation, corporate reorganization, and unstable unemployment and inflation rates. The decline in specialist stores and the impact on HRM are also highlighted.
During the period from 1992 to 1996, the focus internally for the Clinton Administration was on stability and economic growth. This was also a contemporary era marked by the growth of dotcom companies and warehouse clubs. During this time, there was confidence in the government, and there were negotiations with Iraq and the European Union. Globalization was starting to gain traction, and door-to-door courier services were preferred for economic and social reasons. Additionally, there was a shift towards office automation in the mature digital era, and there was legislation addressing global warming and employment rights. There was also increased awareness of carbon emissions and their impact on the environment. The dotcom bubble burst, but there was still a focus on online cataloguing and the availability of reusable cartridges for printers. Internet shopping was legislated, and anti-trust laws were being drafted. The Kyoto Protocol was signed as a commitment to addressing greenhouse effects. This information will be relevant to OfficeMax when considering their situation and growth strategy. In the late 1990s, the office supply industry was dominated by various entities, as described in Appendix 1.
Before 1984, there were dominant SMME specialty stores that specialized in specific verticals in the industry. However, they lost to superstores in terms of cost leadership and scale of operations. Although the number of specialty stores has decreased, their survival strategy has evolved. This includes focusing on products that superstores do not carry due to reasons such as lack of supplier scale, low margins, or focus on different product brands or contracts. They also use joint buying power through warehouse clubs and operate in areas that are not covered by superstores.
Niche markets, such as enterprises or educational institutions, have specific needs. Product differentiation is especially important for furniture and office related services. Additionally, adding seasonal ranges or consumer value adding services like greeting cards, customised printing, or local delivery can be beneficial. Superstores and wholesalers were the dominant players in the US office supply industry in the 1990s. However, the main focus of analysis in this case is whether to allow the merger of two out of three of the largest superstores or not.
It is important to conduct a competitive analysis of the “new” merged entrant and the current industry makeup (if allowed). The FTC aims to protect all retailers from the merger, but the existence of retail stores poses the biggest threat to the business model of superstores, and vice-versa. While retail stores lack the same focus and range as superstores, they can enhance their product range to ensure profitability throughout the year.
This suggests the importance of considering seasons and establishing strong contracting power with suppliers in various industries. Warehouse clubs and retail stores hold the same market position as superstores, but their focus on business-to-business relationships makes them suitable for the corporate market. Therefore, if OfficeMax wants to tap into the specialized corporate market, superstores should be vigilant of the competitive threat posed by these business-serving warehouses.
The relative market sizes and dominance of each retail element listed above can be assessed from the case. It can be assumed that buying power corresponds to market share, and it is observed that superstore and warehouse combination holds significant dominance. Figure 2: Relative Market Share Nonetheless, in order to determine which element is profitable, we must consider specific market segments, attributes of competitive differentiation, relative market presence, and operational efficiency. 2.3.1 Porter’s Five Forces
The classification of retail types will be based on their current positioning, except for Office Depot and Staples. They will be referred to as a new entrant (merged company) and rivals to OfficeMax. Figure 3 displays the competitors in the office supply industry and their line of business uptake. The dominance of Superstores and specialization in industries by direct and specialty retail outlets can be observed. This information was gathered from the case.
Figure 3: Relative Market Size and Product Blend Dominance
Aside from traditional competitors, the office supply market has also included opportunities in seasonal and niche markets. OfficeMax is beginning to take advantage of these opportunities across various verticals.
a. Substitute Products
In the retail industry, the availability of substitute products lowers barriers for customers to switch. This is because the high elasticity of demand leads to strong price competition and offers customers a wider range of choices to meet their specific requirements.
Substitute products in the office supply industry can be found from alternative retail outlets that may not have the same scale or buying power as superstores like OfficeMax. Despite this, their focus on products not carried by superstores can be seen as a small threat, considering that superstores generally offer lower prices. One area of competition based on differentiation is furniture and equipment. However, some customers may remain loyal to specialist entities due to regional placement, quality-driven purchases for small businesses, or unique requirements for specialist needs.
A profitable market often attracts new competitors, including aspiring entrepreneurs, horizontal growth from established corporations, and global players looking to expand. Unless incumbents can block the entry of new firms, the profitability will decrease, potentially moving towards a competitive level (perfect competition).
While the merged entity, as well as other new entrants, attempt to compete with OfficeMax, it is important to consider certain factors. This includes recognizing that the merged entity possesses expertise, existing stores, and supply contracts, which poses a threat to OfficeMax.The existence of barriers to entry must be well managed by the company, as it would need to convince the market to trust the new brand despite carrying over a significant amount from the parent companies. Economies of product differences need to be seamlessly consolidated, except for commodity products in terms of management and support. Certain redundant liabilities and investments must be migrated or switched off due to switching costs or sunk costs in view of the consolidated strategy. The merger requires significant capital requirements to match expectations, which would come from shareholders who demand a quick return and stable operations. The new company needs to rebrand and develop a common tactical approach within a larger distribution network for access to distribution. The consolidation of products implies that suppliers need to be renegotiated, particularly in cases of backward integration. Learning the business’s new philosophy and staff training are important advantages in terms of learning curve advantages. Meanwhile, OfficeMax could take advantage of the delay in uncertainty or learning, and implement its own growth strategy through trials and execution. This would provide the advantage of undisturbed operations, continuation of an existing business model, and minimal staff training in order to compete.The primary factor driving competitiveness is rivalry, which involves entrants competing on an equal playing field based on their core capabilities. Rivalry can take the form of aggressive competition or non-price dimensions, such as innovation and marketing, which aim to create differentiation.
The following factors must be considered in the analysis: government policies, such as adhering to FTC policies; the number of competitors in the superstore category, with three similar stores (Office Depot, Staples, and OfficeMax); the significantly larger revenue of Office Depot and Staples compared to OfficeMax, indicating potential operational inefficiency, product-market fit issues, or insufficient market coverage which need to be further explored in the growth strategy; industry growth rate that appears consistent; diversity of competitors with the same product range offered in superstores, along with the complexity and asymmetry of information due to different channels like delivery, online, phone cataloguing, and serving specialized markets; fixed cost allocation per value added which results in low margins at industry level; unknown level of advertising expense; similar operations suggesting economies of scale but potential differences in negotiating power; and the potential for sustainable competitive advantage through improvisation and diversification of range.It can be inferred from the text that OfficeMax’s repositioning includes significant changes in branding and the introduction of new channels. This repositioning is not contingent on the market conditions improving.
Customer Buying Power refers to the influence customers have on a company’s contracts and purchases. Customers can exert this pressure by being sensitive to price changes and by potentially switching to other companies. In the diverse office supply industry, there is a growing demand for lower-cost options. The introduction of cost-effective micro-computing and desktop publishing has expanded the market. The shift towards digital communication and the rise of the Internet have led to a decrease in paper communications, resulting in electronics sales surpassing traditional office supplies. Additionally, businesses must adapt to the trend of customers buying online or through catalogs. Ultimately, the industry is driven by customer preferences.
Supplier buying power is an important factor that can affect a firm. The suppliers who provide goods and services to the firm have the ability to wield power over them. Factors such as unique buying power, distribution, and stock availability can influence the product offerings of retailers. However, when retailers have a diverse range of outlets, suppliers tend to be more loyal. This is because superstores, in particular, have the ability to dominate certain product categories and attract customers through discounts and in-store promotions. Additionally, the size of these operations means that suppliers are more likely to offer discounts to these larger companies rather than smaller operators and retailers.
The FTC is concerned about the consequences of the merger. The situation analysis, found in Appendix B, provides details concerning OfficeMax’s market position, capabilities, competencies, collaboration, stakeholders, financial analysis, and marketing mix. Notable points from this analysis include the company’s successful cost leadership competitive strategy, which led to a significant financial turnaround since 1993. The company experienced substantial growth from 1994 to 1996 after being acquired by Kmart, with a year-on-year increase of 180% from 1994 to 1995 and 314% from 1995 to 1996.
The company has diversified its product range to offer end-to-end value to customers who are seeking a one-stop solution. It is closely monitoring industry and environmental trends and has invested in internet services and computing for internal automation, resulting in a 1.86% administrative cost, aligning with the cost leadership model. The company has improved inventory turnover with the addition of more stores, which has increased its buying power. Furthermore, the company’s expansion into new geographical areas and international markets, where its competitors are not present, has contributed to a significant increase in year-on-year earnings.
The company is maintaining its superstore brand by expanding stores and adding cataloguing and portfolio-driven lines. This strategy is aimed at ensuring longevity. However, the company’s experimentation shows a lack of understanding of customer needs. The merger provides an opportunity to test the market, but a solid growth strategy is necessary to achieve the objective of becoming the number one player. At the regional level, staff need clear direction for expansion and retention in order to remain loyal to the company’s policies and work ethic. It’s important to be mindful of concerns from regulators and competition bodies to prevent negative consequences. Rebranding and building customer awareness are essential for gaining trust.
The SWOT Analysis shown in Figure 4 reveals the strengths, weaknesses, opportunities, and threats that OfficeMax faces. In terms of strategic direction, there are two merger scenarios that OfficeMax needs to consider and plan for potential risks. The first scenario involves the merger taking place, making OfficeMax the second largest chain in the domestic market. The second scenario involves the merger being stopped, allowing OfficeMax to compete directly with both entities in order to reach its goal of becoming the number one player.
OfficeMax’s corporate vision is summarized as wanting to be the cost leader and preferred superstore in office supplies for most of the American market.
The purpose of OfficeMax is to become the market leader in retailing office supplies to the domestic market. This will be achieved through geographical growth, line of business expansion, and cost leadership. The company needs to consolidate itself regardless of whether the merger is allowed or not. It has an opportunity to experiment while other companies cannot invest or grow due to closed periods for due diligence and stakeholder negotiation. However, focus needs to be achieved quickly. It is important to spend capital wisely and make decisions regarding global positioning and market focus.
Technologies like the Internet and Desktop computing play a crucial role in enabling the company to expand its channels and skills base. It is important to reinforce employee culture through regional accountability. To ensure successful implementation, we need to establish critical success factors. These factors include understanding the expectations of stakeholders, such as the regulator and competition commission, during the merger period, and staying updated on the evolving needs of customers during this period of change.
Be cautious of counter strategies from competitors – be prepared for possible outcomes if the merger does not happen.
Maintain cost savings by automating processes, utilizing cross-docking functionality, and implementing these practices in different regions and among staff.
Exercise caution when expanding globally and keep strong relationships with partners intact.
Look for growth markets and areas where cost leadership can be maintained through available revenue sources, such as the corporate market – prioritize digital solutions as the main offering.
Strive to attract and retain motivated and loyal employees.
Pursue contracts with supply chain partners to gain an advantage as a first-mover rather than relying on the merged entity.
The company is currently promoting experimentation and innovation while negotiating a merger. This presents a great chance to gather staff support and effectively reshape the organization. For consumer retailers, innovation is diverse and involves multiple functions (Roth, 2006). The author also recommends that innovation begins with existing business models and categories, and that focus groups are crucial for generating the necessary insights. Companies should prioritize internal resources for innovation.
