The Home Depot’s success as the leading home improvement retail store chain is linked to its ability to address the Five Forces of external factors in the industry environment. Michael Porter introduced the Five Forces analysis model to identify the primary external factors that affect businesses. Home Depot’s strategies are directly related to the issues shown in this Five Forces analysis. The company implements reforms over the years to improve leadership and management to address such issues. Thus, Home Depot’s case shows that the firm’s current condition is the outcome of effectively addressing the issues outlined in this Five Forces analysis.
This Five Forces analysis of Home Depot identifies the strengths or intensities of the external factors in the home improvement retail industry environment. The contributors to these five forces are also analyzed based on Home Depot’s performance and market situation.
Overview: Home Depot’s Five Forces Analysis
Investors, employees, and other stakeholders can gain insights regarding the business position of Home Depot based on the Five Forces analysis model. The following are the intensities or strengths of the five forces representing the external factors in Home Depot’s industry:
- Competitive rivalry or competition (strong force)
- Bargaining power of buyers or customers (strong force)
- Bargaining power of suppliers (weak force)
- Threat of substitutes or substitution (strong force)
- Threat of new entrants or new entry (moderate force)
The results of this Five Forces analysis indicate that Home Depot’s most important concerns are competition, the bargaining power of customers, and the threat of substitution. Thus, Home Depot must innovate its strategies to effectively address these external factors. The force of suppliers and new entrants are less significant, although they also influence Home Depot’s market position.
Competitive Rivalry or Competition with Home Depot (Strong Force)
Home Depot is subject to the strong force of competitive rivalry. This part of the Five Forces analysis determines the effect of competitors. In the case of Home Depot, the following external factors are the most notable in contributing to the strong force of competition:
- High number of firms (strong force)
- Low switching costs (strong force)
- Moderate exit barriers (moderate force)
Home Depot competes against many firms in the home improvement retail market. The company’s biggest competitor is Lowe’s. Also, the low switching costs make it easy for customers to move from Home Depot to other firms that sell similar home improvement products. In addition, the moderate exit barriers mean that competitors are unlikely to readily exit the market and would rather continue competing against Home Depot. In this part of the Five Forces analysis, Home Depot must ensure competitive advantage to address the strong force of competition in the home improvement retail industry.
Bargaining Power of Home Depot’s Customers/Buyers (Strong Force)
Home Depot also faces the strong force or bargaining power of buyers. This part of the Five Forces analysis shows the effect of customers on business. In the case of Home Depot, the following external factors are the most important contributors to the strong force or bargaining power of customers:
- Low switching costs (strong force)
- High availability of substitutes (strong force)
- Large population of buyers (weak force)
The low switching costs or ease of transferring to other home improvement retailers give customers an edge in influencing firms like Home Depot. Also, buyers can choose from many substitutes, such as home improvement contractors and general merchandise retailers like Walmart, which also sells some home improvement products. However, because of the large population of customers, Home Depot expects high demand even when some buyers shift to other firms. Nonetheless, this part of the Five Forces analysis indicates that customers have a significant influence on Home Depot’s business.
Bargaining Power of Home Depot’s Suppliers (Weak Force)
Home Depot’s suppliers can affect the company, although this influence is weak. This part of the Five Forces analysis determines how suppliers impose their demands. In the case of Home Depot, the following external factors are the most notable contributors to the weak force or bargaining power of suppliers:
- Large population of suppliers (weak force)
- Exclusivity with retailers (weak force)
- Moderate size of individual suppliers (moderate force)
Because of their large population, suppliers have a weak individual effect on Home Depot. Also, Home Depot and firms like Lowe’s maintain exclusive and semi-exclusive business relationships with suppliers. As a result, some suppliers do business with Home Depot but not with Lowe’s, and vice versa. This situation weakens the impact of suppliers on Home Depot and the home improvement retail industry. This condition also holds true even though most of Home Depot’s suppliers are of moderate size. In this part of the Five Forces analysis of Home Depot, suppliers’ bargaining power is minimally significant.
Threat of Substitutes or Substitution (Strong Force)
Substitutes impose a considerable threat against Home Depot. This part of the Five Forces analysis shows the potential of substitution of business outputs. In the case of Home Depot, the following notable external factors contribute to the strong threat of substitution:
- High availability of substitutes (strong force)
- Low switching costs (strong force)
- High performance-to-price ratio of substitutes (strong force)
There are many substitutes to Home Depot’s home improvement retail goods and services. For example, general merchandise stores like Walmart also offer similar goods. Home improvement contractors are also a substitute to Home Depot’s products and expert advice. The ease of using substitutes (low switching costs) and the satisfactory performance of these substitutes lead to the strong threat of substitution against Home Depot’s products. Thus, this part of the Five Forces analysis shows that the threat of substitution is among the most important issues facing Home Depot.
Threat of New Entrants or New Entry (Moderate Force)
New entrants can have a significant impact on Home Depot. This part of the Five Forces analysis determines the potential impact of new firms. In the case of Home Depot, the following external factors contribute to the moderate force or threat of new entry:
- Low switching costs (strong force)
- Moderate cost of doing business (moderate force)
- High cost of brand development (weak force)
The cost of doing business in the home improvement retail market is moderate, as even small firms can compete against Home Depot. The low switching costs (ease of moving from Home Depot to other providers) strengthen the threat of new entrants. However, the high costs of brand development weaken the effects of new entry on Home Depot. In this part of the Five Forces analysis of Home Depot, new entrants are a moderate threat and a significant consideration in the company’s strategic formulation process.
References
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- Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), 32-45.
- Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change, 15(5), 213-229.
- Roy, D. (2011). Strategic Foresight and Porter’s Five Forces. GRIN Verlag.
- The Home Depot (2015). Message from Supplier Diversity Leadership.
- The Home Depot (2015). Stores, Products, and Services.
- The Home Depot, Inc. Form 10-K 2015.