Home Depot Porter’s Five Forces analysis

Home Depot Five Forces Analysis

Home Depot is the largest home improvement retailer brand in US. Having started from just two- stores in Atlanta, today it has grown to more than 2200 stores across three countries. Today the brand has grown into a well-known and popular brand with a large customer base. Moreover, changing consumer demographics and market trends have also fostered faster growth of the brand in US and overseas. Here is a Porter’s Five Forces analysis of the home Depot brand. The Five forces model developed by Michael E porter is an important model that discusses the Five forces that affect the state of competition and attractiveness of any industry. These forces are there in every market industry and market. How well, Home Depot has managed its position against these forces affects its ability to compete effectively and its profitability.

Bargaining power of the suppliers: Weak

The influence of the suppliers on the home improvement brand is weak which is because of the large number of suppliers and their small or moderate size. None of these suppliers is large or influential enough to affect Home Depot. Moreover, it is the large size and financial might of the home Depot brand that gives it higher control over the suppliers. While for Home Depot it might be easier to switch from one supplier to another, for the supplier such a step may mean a major loss. Moreover, the big brands in the home improvement industry like to maintain long term relationships with their trusted suppliers. This gives the suppliers some security but still the control is always in the hands of the brand because of its financial clout. So, the bargaining power of the suppliers against Home Depot is quite weak overall.

Bargaining power of buyers/customers: Strong

21st century has shifted the control in the hands of the customers. They have grown more and more powerful. It is because they have all the information they require to make a purchase decision within easy reach. Moreover, they can switch from one brand to another without any difficulty. While the number of competitors has grown over time, substitutes are also available in larger numbers. So, the customers have several options before them and they want best prices and best quality both. Each customer has enough information to make a decision without any pressure. Brands are working hard to attract and retain customers. The brand image of Home Depot gives it some bargaining power but still the customers’ bargaining power is quite strong overall.

Threat of substitutes: Strong

The threat of substitutes in the case of Home Depot is strong. It is because while there are several substitutes available, the switching costs for any customer are very low. Apart from the competing home improvement brands that sell similar items, several of the home improvement items can also be found at retailers like Walmart at low prices. Most of these substitutes are similar in quality and as such price becomes an important determinant of sales. Now, most competing brands and retailers offer the products at nearly the same process. These increase the pressure from substitute products. Overall, the threat of substitutes is a strong force for Home Depot.

Threat of new entrants: Moderate

The costs of entry into the home improvement industry may not be very big. A brand can start at a small level. Even the smaller retailers can be a threat because of the low switching costs for the customers. If a small brand sells a product that is equally good in quality and is located closer to the buyer’s home, the buyer would like to buy from the smaller retailer. At the entry level, the operating costs are also low. However, to match the brand image of the big brands would be difficult for any smaller business that has invested less capital. The only factor that moderates the threat from the new entrants is the strong brand image. To develop a brand image requires a lot of capital investment. Apart from operating costs there are costs of marketing and labor costs. So, the overall threat from new entrants is moderate.

Level of competitive rivalry in the industry:

The level of competitive rivalry in the home improvement industry has grown highly intense. It is because the number of firms competing for market share has increased over time. Lowe’s is the closest competitor of Home Depot. However, there are other brands too whose significance has grown like Ace Hardware, Menards, True Value and Sears. All these brands are competing for market share and provide similar quality products. Moreover, the exit barriers are not too low if they are not too large. The moderate exit barriers ensure that the brands remain in the battle and fight rather than exit the industry. The level of customer satisfaction and quality of customer service become important determinants of a brand’s popularity. Overall, the competitive rivalry in the home improvement industry is strong.

Sources:

1. https://corporate.homedepot.com/about/history 2. https://www.statista.com/statistics/240470/leading-home-improvement-store-chains-in-the-us-by-customer-satisfaction/