Staples Case Analysis

1. How would you characterize the office supplies industry in 1985? What was the approach of large distributors and wholesalers to the small business segment? Why? Who served large accounts? (10)

The office supplies industry in 1985 is highly fragmented and the market scope is broad. On the manufacturer level, there are various groups of companies that provide different categories of office supplies. On the wholesaler level, wholesalers, who are mostly large in size while few smaller ones exist, are the main distributors to big business clients and small retailers who buy in bulks either through direct channel or a network of dealers. Dealers, who vary in size, also sell directly to businesses while some dealers have retail presence. On the retail level, the market is even more fragmented, where there are many small retailers while having few big participants in the market. The small retailers have high-cost structure in comparison to discount merchandisers such as Wal-Mart since they buy in smaller lots and have lower sales volume; however, they have more varieties of product offerings. In contrast, the big retailers have less product varieties. In sum, most sellers concentrate on selling products to general customer rather than filling a specific need.

Small businesses are generally ignored by distributors and wholesalers because they are perceived as insignificant in the market share and low in purchasing ability by the distributors and wholesalers. Therefore, small businesses primarily have to buy through dealers. Big businesses are taken care of by the manufacturers through catalogs or by dealers through a direct sale channel such as take order periodically in their offices.

2. What changes were taking place in the retail industry at this time? (10)

A big change in the retailing industry is the consolidation of the fragmented market. Instead of becoming a general retailer, new retail entrant concentrates on a specific product category and creates differentiation through fulfilling a specific need. The rise of the stores such as Toys “R” Us, Office Depot, and Staples are examples of a movement toward market consolidation due to higher margin in these areas. There is also a decrease in entrance of potential competitors in the retail market of grocery due to high barrier to entry from intensive competition. In the retail industry, there are huge wholesalers such as Wal-Mart that focuses on low-cost strategy who provides various merchandise and midsize retailers such as Staples that focus on both low-cost and differentiated strategy who provides merchandises that are tailor to specific market. In a sense, Staples is a strong substitute to Wal-Mart’s office supplies category.

3. What was Staples’ target market? Who else was supplying this market? What was the unmet need here? (10)

Staples’ target market is the small businesses that wish to save money on office supplies while having more product choices in particular. As stated previously, small businesses have to buy through dealers most of the time since wholesalers and distributors do not sell to small businesses because the volume they purchase is small. Even though small businesses may also acquire from big merchandise discounters or local office supply retailers, but the product variety is limited from the merchandise discounters while products are pricy from the local retailers. There is also a big misapprehension where the office supply dealers believe that the small business customers would like better services while the small business customers would like better deals. Therefore, the unmet need here is that small businesses want lower prices with more product varieties on office supplies but the dealers and wholesalers do not offer.

4. What was the basic value proposition and business model of the Staples startup? What was required to turn that value proposition into a reality? What was the potential source of economic returns that exceeded the cost of capital? (15)

The basic value proposition came up by Stemberg was to create a brand name store that offers a wide selection of merchandise in a supermarket setting with much lower price compared to general retailers for small business owners. Moreover, there will be trained staffs to service customers who need advice or assistance. Therefore, consumers are able to self-serve when
shopping for office supplies and seek for advices when required.

In order to make this concept real, Staples has to build competitive advantage through finding the right management team who are experienced in this area, looking for the right location to open their stores in order to be close to the target customers, deciding on how many staffs needed in a store to be effective, establishing a distribution channel where suppliers will cooperate according to their operations, choosing the selection of the product required and the amount inventory to keep, managing costs and be efficient all the time, and communicating their value to the target customers.

A key organizational capability that Staples realizes instantly is to have an information system that can help them to manage the process better in place, which greatly contributes to increase Staples’ efficiency. Such system is able to help Staples to get the right merchandise mix in order to be profitable through monitoring customers’ needs, and attain low cost structure by making sure that the inventories turnover accordingly. In sum, Staples is successful in building most of its intangible and tangible asset and develop organizational capability correctly early in the development stage that deliver Staples with the necessary competitive advantage. Moreover, the same competitive advantage can be easily replicated to every store opened.

The potential source of economic return that exceeds the cost of capital is the construction of distribution center. When this idea is proposed, most investors believe that Staples should build more stores to gain market share but Stemberg is thinking differently. Instead, he believes that the distribution center will keep the inventory flow faster than before while lowering the costs even more. In the end, the distribution centers do help each store to save costs such as rent, labor, inventory offering, and storage while still offering the same value to the customer, and the distribution centers also speed up the pace for Staples to restock its supplies in different stores.

5. Why was Staples able to raise significant venture capital funds for what was, after all, nothing more than a concept? (10)

Rather than having a chain of retail stores, Staples propose a different value and concept that is totally different from most other retailers. The inefficiency in the current office supply distribution channel, the potential market growth of such retail category, and the applicability of the value proposition are all compelling arguments that indicate the existence of a certain need in the office supply market. Thus, the venture capitalists are willing to provide the fund because they believe that Staples will be something big. As praised by Matt Romney, the manager at Bain Venture Capital that “Stemberg wasn’t proposing just a chain of stores, but an entirely new retailing category.”

Staples presents a revolutionary idea that is special to the retailing industry. Moreover, Staples has validated its concept through extensive market research and analysis where small businesses do appreciate the kind of products and services that Staples offers. Most importantly, Staples, as the first mover, is creating a new market full of opportunity for growth. Yet, the demand for Staples’ product and service is solid since the unfulfilled need is apparent.

6. What were the managerial and organizational challenges facing the startup? How were these challenges dealt with? (15)

On the managerial level, the challenges are to design the right operating process that align to Staples’ core value and thus create competitive advantage, which is to lower cost and achieve high efficiency. This issue is related to many other operating decisions such as providing the right merchandise mixes and keeping just enough inventories to lower cost on storage, the location to open the store, and the amount of staffs required. As a result, the managers need to plan their executions carefully in order to ensure that operating requirements such as inventory turnover rate are met and how those requirements will be met.

In order to accomplish the required operating requirement, Staples begins by creating a team of experienced managers who design the business process and ensure that it is property implemented. Through detail analysis, the top management realizes that the solution is to reap the benefit of technology and create an information system that tracks information with respect of its sales, inventory, and customer information. The information system is able to assist the managers to make decision on the right merchandise mixes through the amount of sales. Consequently, storage cost and rent expenses are decreased due to less cost incurred. Staples’ stores are actually smaller than other close competitors. Furthermore, by getting the right products to the customers, Staples is able to reduce working capital through faster cash collection and inventory turnover period.

On the organizational level, the main challenges are to defend from imitators through growth management and communicate with target customers. Due to the initial success of Staples’ first store, many competitors imitate the concept and move into the market. In order to expand the company promptly to lock in territories and to create barrier to entry before the market is overcrowded, Staples needs fund to fuel its growth. Luckily, Staples was able to convince the investors that it has more value than it seen and acquired the fund it needs.

When Staples first starts out, target customers do not know the kind of value that Staples offer to them or even do not realize Staples’ existence thus few respond. Desperately, Staples had to carry out direct marketing to the target customers by providing them with free money. Luckily, few responded and the words pass on as people begin to notice Staples. Another problem that Staples faces is to institute agreement with suppliers who are willing to cooperate with Staples’ process when Staples do not have any market power and the ability to back up their promises. In the end, the suppliers are convinced with Staples’ vision and gambled on it.

7. How important were the information systems to the successful execution of the Staples concept? (10)

The information system is the key linkage that make Staples’ concept feasible. Staples’ competitive advantage is built around their information system. The information system allows Staples to deliver the right products to the right customers, monitors the changing customer needs, tracks its inventory, ensures the right product mix, and measures profit margin and sales level on individual items. Such system puts Staples ahead of other retail competitors as it can be used for both daily operation purpose and for marketing purpose. In addition, the information system greatly facilitates Staples’ effort to lower its cost through reducing the need to carry excess inventory.

With the information system in place, Staples is able to track what the customers want closely and eliminate the unwanted products off the shelves and replace with more popular ones rapidly. A key quality that information system also brings to retailers that operate in different location is the ability to move the inventory among stores according to the local needs. When the managers see that a specific product is selling well in one area in contrast to another, they can move the inventory and increase profit.

8. The Staples concept was quickly imitated, but ultimately, the company emerged from the pack of competitors to become an industry leader. Why? (10)

Being the first mover, Staples is granted with the opportunity to scope out the market and create a thought-out business plan for its business concept unlike other imitators who simply just duplicate the superficial idea. During the fierce competition period, most imitators are not able to keep up with the cost-leadership strategy due to quick replication and lack of vigilant implementation. As Stemberg mentioned, “…the winners in the competitive race would not necessarily be those that grew the fastest but those that executed best.” The concept may be imitated; however, intangible assets such as the established competitive advantage, perceived value, well-formulated plans and vision, and the right management team are not easily imitated. In other words, Staples creates competitive edge through careful execution right from the beginning and is able to sustain its competitiveness through having the right people in the management team.

9. Does the expansion of Staples into the delivery business make strategic and economic sense? (10)

The action of moving into the delivery business did not make economic and strategic sense in the beginning. In economic sense, delivery service will result in reduced store sales while increase costs are the perceived undesirable outcome. Such undesirable outcome will induce goal incongruence because store managers are measured by individual store sales. Staples’ key competitive advantage is to create a supermarket atmosphere that provides low price office supplies; therefore, by coming into the store, customers will be influenced by the atmosphere and purchase more in return. Having a delivery service is a departure from Staples’ original values. Moreover, delivery service is a feature that other competitors can achieve easily, thus not much room for differentiation. In strategic sense, Staples believes that delivering service will incur more costs to the business, which contradicts to its strategic objective.