Staples

STAPLES

In 1985, before Staples was established, a retail office supply industry did not exist. Office supplies could either be purchased at large retail stores that sold an assortment of other goods or through wholesalers and dealers. Through the establishment of Staples, consumers realized that they could purchase office supplies at half the price. During this time period companies were consolidating and making retail stores that focused on one industry like Toys R Us. After Tom Stemberg, the founder of Staples, was fired from his job, he saw the need for cheaper office supplies. Leo Kahn, an associate of Stemberg, believed in Stemberg's vision and became his mentor and invested $500,000 into his business idea. Initially, Stemberg thought about going into the supermarket grocery retailing industry, but rejected the idea because of the extreme competition. Stemberg began investigating the need for an office supply industry through conducting interviews on how much money people spent on supplies. He knew that through his vision, he could help consumers save money. Stemberg decided that Staples's target market would be small businesses because he was aware that small businesses did not get the same type of discounts that larger corporations did.

Through Stemberg's compelling arguments and strong belief that Staples was going to become a success, he was able to collect $4 million from Bain Venture Capital in exchange for 50 percent of the company. Stemberg was able to convince the investors that Staples was going to create a new retailing industry. He also showed investors that Staples was a way for consumers to save money. In order to ensure the success of Staples, Stemberg needed a strong management team and the most effective information system. Stemberg hired experienced professionals that were very successful in their previous positions in other companies. He was able to convince the management team to leave their jobs and high paying salaries by promising them a large portion in the company. It was also important that the information system Staples adopted was able to calculate the gross profit margin Staples made on each item sold (Hill et al, p.C192). The information system also needed to trace transactions, track inventory, and ensure that inventory turned over.

After the first Staples store became a success, it was time to establish other stores. In order to acquire more capital, Stemberg used his visionary pitch to attract more venture capitalists. He raised $15 million, but got a valuation for $22 million, therefore he wanted to raise more money. He received an additional $14 million by finding institutional investors who were willing to invest on a valuation of $22 million. He then went back to the original VCs and told them that the deal was closing fast which persuaded them to commit. (Hill et al p, C193)

Soon after Staples was established, there were several companies that replicated the store's concept. However, Staples was able to become a leader in the industry by maintaining low costs and providing its customers need. Staples is able to maintain low prices through renting smaller spaces for its stores while still providing a wide range of office supply products. Staples grew by focusing on key urban areas and achieving a critical mass of stores served by a central distribution system. (Hill et al p.C194)

PORTER'S FIVE FORCES MODEL

The Michael E. Porter Five Forces Model analyzes a company by focusing on five forces that shape competition with an industry. (Hill, et al 46) The model focuses on potential competitors, rivalry among established companies, bargaining power of buyers and suppliers and substitute products.

Risk of entry by potential competitors

There is a weak threat of entry by a potential competitor. It is fairly easy to get into the office supply industry, but the risk is high. A new company would have risk competing with three large companies that possess the majority of the market share. In the early 1990s there were numerous companies entered the industry soon after Staples was established, many of those businesses simply could not exist. (Hill et al p.C194) The brand names of Staples and the other two large competitors are barriers to entry for a potential competitor. Customers show loyalty to the three companies. In order to compete, the new company needs to establish lower costs than the leading companies in the industry, but it is very difficult to achieve it as a new company.

Intensity of rivalry among established firms

There is rivalry among established firms in the office supply industry. Staples's two major rivals are Office Depot and Office Max. However, the three companies do not compete as intensely as before. When the companies used lower pricing strategies it led to price wars and as a result it caused a decline in profit margins. Office Depot is Staples' largest competitor with sales almost comparable to Staples. Once Office Depot entered into the market, it grew quickly. Most of Office Depot stores are located in less dense areas compared to Staples's stores. Office Depot is able to maintain low prices like Staples because of its positioning of its stores and is dominant in the southern states. Also, Office Depot's suppliers ship products to its facilities and store its inventory. Office Max, the second largest competitor of Staples is very prominent in the Midwest. In addition, Office Max was bought in 2003 by Boise Cascade, a wood and paper manufacturer. The merger nearly doubled its sales and is becoming an even bigger threat to Staples.

Bargaining power of buyers

The bargaining power of Staples' buyers is a weak threat to the company. Staples offers customers prices that they were not accustomed to before Staples entered into the market. Staples has a strong force over its consumers because it offers low prices for office supplies. Staples' target market is small businesses. Before the company was established, small businesses were paying double for supplies and were not getting the same respect and discounts as larger firms did. Because Staples created a niche for lower prices, smaller businesses are able to save money and become more efficient. Staples established incentives to maintain its customers and to attract new ones. The company offers coupons, discounts, and promotions for products. In addition, Staples has a close relationship with its customers by offering products the customers want. One method that Staples keeps connected to its customers is through its membership cards. With a membership card, a customer can receive additional discounts on selected items. Also, the membership card contains