Nordstrom Case Study

Management 589

Individual Case Analysis

Nordstrom

April 16, 2007

Recommendation:

In order to maintain its key competitive advantages, Nordstrom should first proactively address/settle the current claims over unpaid labor.  Second, the company needs to abandon its sales-per-hour metric in order to reduce the pressure on its employees to underreport hours worked.  The new metric would focus on total sales goals per week or per month.

External Analysis:

Overview

Nordstrom operates in the Specialty Retail Department Store industry (hereafter, the industry).  The industry targets upscale affluent customers who are looking for distinctive products and high levels of service.  The following analysis evaluates this industry’s level of attractiveness in regards to the Threat of New Entrants, the Power of Suppliers, the Power of Buyers (customers), the Threat of Substitute Products and the Level of Rivalry among Existing firms.  While the industry does have some significant challenges, based on the analysis below, it is a strong industry in which to operate.

Threat of New Entrants

The Specialty Retail Department Store industry is dominated by a few competitors nationally.  Historically, each city or town had a particular retailer which was well-known and dominated the local market.  However, these have been progressively overrun by the stronger national chains.  

Additionally, the threat of new national competitors is very low.  One reason for this comes from the combination of economies of scale and capital investment.  The industry averages net margins that are less than 3%.  With margins this low only competitors who produce the largest volume survive.  High levels of volume require heavy capital commitments (store leases, apparel inventory and human resources).  These economies of scale and capital requirements make it very difficult for new entrants to achieve the size necessary to compete.

In addition to the capital required to achieve scale in this industry, successful specialty retailers must have a loyal customer base.  This loyalty comes from an association of a superior level of customer service and experience to the retailer’s name.  This quality association takes years of consistent service levels, solid marketing and word-of-mouth referrals.  Any new entrant would be hard pressed to create a brand differentiation for themselves that would set them above the dominant retailers.  

There are a couple of factors that seem to be in favor of new entrants.  Given the relative abundance of commercial space available nationally, with the right funding a new entrant is able to lease space and create its own distribution channel.  Additionally, there are generally no governmental restrictions to entering into the industry.  However, these two factors pale in comparison to the challenges posed to new entrants by the economies of scale, capital requirements and product differentiation within the industry.

Power of Suppliers

The suppliers for the industry have a fairly low level of power.  The industry is fueled by numerous suppliers offering a wide variety of products.  However, the suppliers do wield some power in proportion to their brand value.  The customers of the industry expect to purchase products from established high-end brands.  Given that the specialty retailers are limited to brands that command a premium to others, the companies in this industry to face a more limited number of suppliers than other retailers who cater to a more price-conscious customer base.  

Even limiting the suppliers to those with brand name appeal, the number of specialty retailers is still far more concentrated by contrast.  The limited number of successful retailers in this industry further dilutes the suppliers’ bargaining power.  Additionally, the suppliers have not had much success in the past with forward integrating.  The successful retailers have created a customer base that is not easily swayed by factory direct offerings.  This is in large part due to the level of customer service that those in the industry provide.  

Finally, the suppliers’ power is limited by the fact that the industry is an important customer.  For some of the suppliers, the retailers in this industry may be their only customers.  Therefore, it is in the suppliers’ best interests to protect the industry through joint advertising and reasonable pricing.

Power of Buyers (customers)

The industry’s customers have a low level of power.  As noted before, the specialty retailers focus on offering superior brand names to their customers.  This offering may be similar across retailers within the industry but it is unique in the eyes of their consumers.  In addition to differentiation, factors such as affordability, product quality and service quality further limit the customers’ power.  While the products offered are priced higher than at other department stores, these prices tend to be relatively inexpensive in comparison to the annual income of the industry’s customer base.  For these customers, the products are relatively affordable.  Given this affordability, the customers generally do not shop retailers for the best price.  Instead, they look for a high level of customer service and product quality.  All of these factors lend to a low level of customer power in this industry.

Threat of Substitute Products

The threat of substitute products is moderate-to-high within the industry.  Essentially, the industry’s products are apparel that is high priced but typically high quality.  With their brand names, these products carry with them a perceived value.  Thus, the true price-performance relationship is to some degree inflated by the customers’ perceptions.  Since the industry offers products that are a luxury, it faces particularly high risk during times where the economy suffers.  In those times, consumers have myriad opportunities to purchase apparel of comparable quality at much lower prices.  In those times, the buyers may place a higher value on price than on the level of customer service that the industry offers.

In addition to substitute apparel, most other luxury items could be classified as substitutes for this industry’s product offerings.  Affluent buyers may decide to use their buying capacity on luxury items such as vehicles, vacations, club memberships or expensive hobbies.  Any or all of these may create a higher perceived value in the consumers’ minds than that of high-end apparel.  Fortunately for the industry, it is common that these other luxury items are purchased with excess funds after high-end apparel is acquired.