You are on page 1of 3

Problem Statement | How can Lowes become the leader in the domestic home improvement retail industry in

terms of market share and profitability?



Analysis | Lowes Companies Inc., the second largest U.S. home improvement retailer, controls 9% of the
overall domestic market and has been actively striving for expansion to augment its current industry position. To
aid in the companys strategic decision-making process, we used the TOWS matrix and Porters Four Corners
Analysis to generate strategies that would help catapult Lowes into market leadership.
TOWS Matrix

Internal Factors




External Factors
Strengths
1. Strong financial position
2. One of the two largest players in the
industry
3. Wide and diverse product selection
4. Visually appealing store design and layout
5. Value-added services
6. Highly automated distribution facilities
Weaknesses
1. Lesser number of stores
relative to Home Depot
2. Limited regional
distribution centers
(RDCs) in western half
of USA
3. No international presence
Opportunities
1. Significant growth opportunities
in installed sales, special order
sales, and commercial customers
2. Strong sales growth in 6 product
categories
3. Opportunity to establish a stronger
presence in West and Southwest
USA
4. Highly fragmented industry
Strategic Growth
Increase range of products and services
offered to commercial customers
Engage in strategic alliances for high-
growth products
Establish more stores in untapped and
high-growth markets
Acquire smaller competitors
Provide outstanding customer service
Self-improvement
Establish international
presence
Increase number of stores
and RDCs
Threats
1. Myriad of direct competitors in
various product categories
2. Rising prices of inputs
3. Weakening economy
Competitive Defense
Develop centralized purchasing division to
achieve greater economies of scale
Backward integration
Risk Control
Divest stores in locations
with strong
competition/Home Depot
presence

Porters Four Corners Analysis on Home Depot (Current Market Leader)
Based on the TOWS matrix, it
can be seen that Lowes
possesses a lot of capabilities
which it can maximize in
pursuing market leadership.
With favorable internal and
external factors, it is best for
Lowes to pursue strategic
growth strategies, especially
through horizontal growth.
Based on our Four Corners
Analysis, Home Depot is likely
to fend off competition by
further solidifying its cost
leadership and being first-mover
in international locations. Home Depot can only do so much in preventing Lowes from setting up a store in a
particular location. The most that Home Depot can do is to discourage Lowes from entering a particular market,
perhaps because Home Depot already has an established or saturated presence in a particular vicinity. From
Lowes perspective, the barriers to entry from establishing additional stores are low, especially since Lowes has
the financial capacity to expand and is of considerable size as well.


Corporate Strategy - Lowes should pursue horizontal growth by expanding its operations geographically,
particularly to the Western half of the country, given its less-established presence in those areas as compared to
the Eastern region. This will be done primarily through further acquisitions of established smaller players
operating in those regions. By acquiring currently operational stores, Lowes will benefit from capturing an
already existing customer base and also lessen the competition. To further strengthen its competitive position,
Lowes should continue to put up new stores in high-growth markets and untapped domestic locations. This
would allow the company to have greater command of its current market and improve accessibility to its stores.
Lowes is well equipped financially in pursuing this strategy given its healthy current ratio of 1.21 and debt to
total assets of 17% as of 2004. With its financial flexibility, the company can borrow more funds in financing its
expansion plans.

Business Unit Strategy - Growth in number of stores is not enough. On a business level, a differentiation
strategy should be pursued to distinguish itself from Home Depot. As a retailer, Lowes has little room for
product differentiation; products are standardized by suppliers, who also sell to Lowes competitors. We believe
that this is an inherent characteristic in the industry and will not change in the near future. Thus, Lowes should
differentiate itself through offering superior customer service, which will maximize a customers in-store
experience. Customer service is an area in which Lowes is already organized to exploit and develop; Lowe's can
be said to be more customer-friendly compared to Home Depot with its brighter lighting, helpful signs, and up-
the-continuum initiative. Moreover, Lowes has recently improved its ordering and credit programs, as well as its
delivery options. Lowes service differentiation can be a source of competitive advantage. Although superior
customer service is not exactly rare and inimitable, Lowes will have the advantage of being the first-mover in
offering a heightened level of service. Home Depot can offer the same level of service, but it will take time to
change. By that time, customers will have already equated a delightful in-store experience with Lowes.

Functional Strategy - On a functional level, its marketing strategy should focus more on commercial customers
given the expected higher growth in sales in this particular customer segment as compared to retail customers. It
should also respond to the growing demand for certain product categories such as lumber, building materials,
outdoor power equipment, etc. by offering higher quality products and by increasing in-stock quantities.
Purchasing costs can be reduced through strategic alliances with suppliers. For advertising and promotion,
pursuing a pull strategy would serve to complement its differentiated service proposition. The company must
focus on advertising that builds brand awareness to generate demand for its products. The company should also
maximize use of its Web site to enhance customer service. In addition, for its logistics strategy, Lowes must set
up additional RDCs to be able to efficiently distribute to its new stores. RDCs would be situated nearer to high
volume sales areas where inventory turnover is fast. For areas with slow moving inventory, regional distribution
centers would be established in strategic locations where it would be handling distributions to multiple areas.

Courses of Action | Below are the courses of action Lowes should take, numbered based on priority.
1. Aggressive Domestic Expansion through Acquisitions and New Stores. Lowes expansion would be based
on a number of factors such as market size, consumer profile, economic growth, number of commercial
establishments, and presence and profile of existing competitors. One would expect that the bigger the market
size and the faster the economic growth, the greater the demand for home improvements. Existing competitors
should also be factored in since a highly competitive area with a small market might prove to be unprofitable.
Consumer profile such as demographics could also affect demand. People with families are more likely to spend
on home improvements than young professionals. Based on these criteria, our group recommends aggressive
expansion in 4 key states (see table below) over the next two years (2005-2006). Beyond possessing the criteria
laid out earlier, expansion in these states will help Lowes strengthen its presence in the Western half of USA.
Competitors presence in these states vary city per city, however, based on the other criteria, these markets are
attractive enough even if competitors already have a strong presence in these states. We believe that Lowes
plan to open 300 stores in two years is optimal to maintain its current capital structure. As such, we will stick
with its current expansion plan. The presence of RDCs in California and Texas would lead us to posit that
Lowes already has a presence in those states. However, given that Lowes has only recently expanded into these
territories, we believe that Lowes presence in those states is not as strong as its presence in the Eastern half of
USA. We therefore recommend a more aggressive expansion in California and Texas given the sheer number of
commercial establishments and huge market size. Moreover, we recommend opening at least 15 stores each year

in Washington and Arizona. The rest of the expansion should be focused on strengthening it current presence
where it has a prominent position, as well as expanding in a limited way in Colorado, Oregon, Utah, Nevada,
and New Mexico (probably 1 to 2 stores in each state per year). Expansion from 2007 onwards will follow the
same pattern of dominating the Western half of USA, establishing foothold in untapped markets, and improving
stronghold in the East, although at less aggressive rates.

State
July 2004
Population
Consumer
Profile
Economic Growth
Commercial
Establishments
Annual No. of
New Stores
California Big (35.9M) 44.00% MA High (4.2) 861- CE 20
Texas Big (22.5M) 22.40% MA Slow (0.4%) 498- CE 20
Washington Medium (6.2M) 43.47% MA High (5%) 176- CE 15
Arizona Medium (5.7M) 42.47% MA High (7.4%) 132- CE 15
*MA- belonging to the marrying age ** CE- commercial establishments in thousands ***source: bea.gov and census.gov
Metrics: Double market share in the West and Southwest USA

2. Strategic Investment in RDCs. Transportation cost, volume, and fixed cost investments are the three main
factors that will be considered when choosing location for the new RDCs. The higher the transportation cost and
volume, the more reason there is for the company to invest in new RDC facilities. Given our previous analysis,
we highly recommend for Lowes to establish new RDCs in Washington and Arizona. The group expects high
turnover in these states, which justifies fixed cost investments.
Metrics: Decrease inventory cost through volume discounts by 3%; decrease transportation cost by 5%

3. Pursue Service Differentiation. Lowes will set itself apart from competition by improving its professional
services - especially in the installed sales segment - and by equipping itself with knowledgeable and helpful
store employees. Employees will be trained to actively cater to customer needs and maintain a positive
disposition while in the store. For example, Lowes can designate employees to assist customers once they enter
the store, instead of waiting for the customer to approach them. Superior customer service, coupled with a first-
mover advantage, will allow customers to easily think of Lowes as their choice destination of home
improvement items.
Metrics: Customer satisfaction surveys; increase in market share and foot traffic per store; sales growth

4. Early Adoption of Industry Trends. Another strategy to cope with industry fragmentation is the early
adoption of emerging trends in the industry. Strategic alliances should be formed with suppliers of the latest
high-ticket, high growth items in order to outmaneuver the competition and keep abreast of changing consumer
preferences. Lowes must also invest further in its entry into the commercial segment due to the non-cyclical
nature of its customers and their spending patterns, along with the high profit potential from this segment. It can
also develop accounts with key commercial customers, allowing for more flexible credit terms and tailor-fitted
service arrangement. This commitment to quality customer service, in conjunction with its strategy to invest in
additional RDCs, will serve as an additional differentiator for Lowes.
Metrics: Develop at least 10 new key accounts; 10% increase in commercial customer sales within the quarter

Timeline | The following is set based on the courses of action recommended above, color coded accordingly.
2
0
0
4

05 JFM 05 AMJ 05 JAS 05 OND 06 JFM 06 AMJ 06 JAS 06 OND 07 JFM 07 AMJ 07 JAS 07 OND
Establish 150 new Lowes stores Open 150 more stores
Open 2-3 more RDCs
Full-blown service-oriented culture in all stores
Strategic alliances and investing in commercial customers

Conclusion | Through increased sales brought about by additional stores, a heightened level of customer service,
and a focus on high growth segments, and at the same time, reduced costs, brought about by additional
strategically placed RDCs and greater economies of scale, we expect Lowes to be the leader in terms of
profitability by year end 2011. At that point, we expect Lowes to have around 2,100 stores throughout USA,
capturing market share from Home Depot and other smaller players, and thereby seizing 24% of the domestic
market, while current market leader Home Depot is expected to hold 22% of the domestic market.