Retail Market in 1985
The retail market was not well established as it was composed of few dealers, who mostly concentrated with the well-to-do firms where they expected to make substantial sales. It was made up of a couple of wholesalers who would determine the price they wanted to offer to various customers. Price discrimination was rampant as big firms with higher bargaining power were able to access a discount of up to 80% in some cases, while smaller firms would often meet the full cost of the product.
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The already established channels of distribution of either using dealers, wholesalers, or buying directly from manufacturers slowed down the entry and performance of small retail shops, which usually served the low-end customers. There were relatively high capital requirements to start up a business, which reduced access. There was no established retail store with a recognized brand name, and the available retail shops lacked a variety of products for customers to choose from. Office stationeries also did not have close substitutes, which would pose a threat to existing retail stores; hence buyers were left with no option than to buy what was there at the going price.
The small business segment did not receive much attention from huge distributors and whole sellers since they were taught to be economically unviable and were left to the dealers to accommodate them. These firms were also not given a chance to bargain for the stationeries’ price, and one would be lucky if a discount of 10% were offered. This was because these firms mostly spent little money on office stationeries than the large ones, and the wholesalers and existing distributors were making their profit without including the small firms. Small firms were also coming up, and the ones hitherto existing were few.
Large firms with more than one hundred employees formed the bulky of the customers of office stationeries, hence were the target of everybody involved in the supply of the stationeries at that time.
Changes that were taking place at the time
The United States was recovering from the economic recession of the late 1970s, which had forced many firms to pursue cost reduction measures leading to many people being laid off from their jobs. Most of these people started their businesses, notably small employing from one employee to roughly 50 employees. The economic growth was also on its verge of rising as many companies were recovering from the recession’s effects, therefore slowly increasing their employees’ numbers. All these meant that the demand for office stationeries from the retail sector would grow in a short period.
The technology was also taking its toll on US businesses. Therefore many firms required new advanced equipment, including personal computers, printers, fax machines, and small copiers. These machines would also not be used alone as they required other stationeries like paper, ink, and toner; these helped in pushing up of demand for office stationeries. The service sector, which made a higher percentage of customers for the office stationeries, was expanding rapidly, accounting for most job increases in the economy, pushing the demand even higher.
Staples target market Other Suppliers and Unmet need
Staples targeted the small firms and individuals who were stating their businesses at that time and who, until then, had nobody who cared about them. The established distribution channels exploited these small firms by paying exorbitant prices for products they would have acquired at lower prices.
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The research revealed that if small firms were given equal bargaining power as the large firms and advised to calculate how much they spend on stationeries per year, they would realize how much they can save hence becoming Staples’ faithful customers. These firms were also not given enough consideration by the wholesalers, who did not even bother to send a catalog when they were called and realized the firm did not have many employees.
The market was hitherto being served by the dealers and some small and fragmented retailers who stocked less than the demand in the area. Dealers also attended to them as substitutes after satisfying the large clients.
When the research was done, it became evident that the existing people serving the small and medium firms were not considering the customer needs. Therefore, customers remained unsatisfied. Customers wanted a way to reduce the amount they were spending on office stationeries by getting lower prices. The suppliers we’re working just on providing the service. On top of that, due to the increasing numbers of small firms that were coming up, and the small number of suppliers present, demand was way higher than supply for this given market.
The local retailers also lacked variety in their stock; when Stemberg went to look for a printer ribbon, he could not get the type he wanted; hence small firms did not have a choice when it came to the kind of stationery they wished to purchase. In conjunction with that, small and medium firms were not recognized as important; therefore, if they got somebody who would give them the necessary attention and feel treasured, they were bound to stick to the person.
Value Proposition for Staples, Business Model, Requirement to turn Value Proposition into Reality and Potential Source of Economic Returns
The principal value proposition that Staples had for its set up was to reduce the small firms’ price, who was spending much more than they could be spending if they were given competitive prices. On top of that, they wanted to offer a wide variety of goods that would provide the customers with the opportunity to make choices during their shopping in a warehouse setting different from the retailers that were existing.
The business model that Staples applied was fast to make customers aware that what they were paying currently was by far much higher than what they were supposed to pay for the same products. Customer satisfaction was also important, and this was to be met by training staff about office stationery so that they can offer advice to customers in incase they were asked. Efficiency and reduction of operation costs were important if Staples were to go far since this would help in increasing the profit margin and help in the decrease in prices. Since the competition was imminent, if pins rolled out their plan, rapid expansion was essential to ensure that Staples started enjoying the economies of scale before competitors gained foot.
As far as lowering costs was concerned, a highly advanced information system was paramount to ensure high efficiency was attained, and every move was tracked in detail. They also needed a direct supply channel from either the manufacturers or the wholesalers without causing conflict on the existing channels of distribution. Furthermore, inventory turnover required to be increased if they had to reduce the working capital hence cutting down on capital requirements. Individual items also needed to be tracked to ensure that all information about sales was recorded correctly to provide information about the performance of Staples.
The potential returns lied on the fact that there was a vast untapped market of small firms, which did not give attention hitherto and the many businesses that were emerging at that period of time. The existing small firms were also paying more than they were supposed to pay, while the available retail stores were not adequately stocked.
Why Staples Was Able to Raise Capital for Its Concept
A lot of retail stores that were coming up at that time were simply mutated cases of the old ideas which had failed or were not performing as was expected. Stemberg, on the other hand, was not presenting just another case of a notion doomed for failure, but a new perspective in retailing that was aimed at taking chain stores to another level. Staples’s idea was big, and enough research had been done before presenting the image to the venture capitalists. When Romney’s firm members carried out a survey to establish whether the market was big enough to allow for Staples’ idea to materialize, they were shocked to find that even their firm had been paying a lot more.
The clarity of the availability of a ready market for the Staples’ products and the potentiality of the idea were enough to pull venture capitalists to buy Stemberg’s image and hence invest in it. Other than Stemberg’s concept being viable and promising, he also exhibited zeal and commitment to ensure that the idea is put into practice, and it succeeds, which is what many venture capitalists want to see in an entrepreneur. Stemberg and his group of managers were also people with an excellent reputation in a retail business, who had, on several occasions, helped in running various successful retail chain stores.
Managerial and organizational challenges and the approach Used.
The information system that the managers wanted to involve the inclusion of very many aspects, which they thought would help them very much, but it proved that including every element that they wanted was not very possible. The managers wanted the information system to keep track of every item that was to be sold, but manufacturers at that time were not including bar codes on their items, making the idea difficult. The existing packages of software were not able to accommodate the wishes that Staples management wanted for the information system, while the time frame that was available would not allow for the implementation of everything.
To solve these problems, Staples dropped some of the features from the required information system, while at the same time, they contracted consultants to customize the existing software to include what they wanted. To keep track of the inventory, Staples designed a six-digit look-up code for each item, which though it made the process of entering the codes slow, allowed for each item to be recorded.
Getting the first supply direct from the suppliers was not an easy task since every supplier was not ready to risk for a firm which they did not have confidence in whether it would succeed in business. The existing channels of distribution were also another factor that suppliers were not ready to betray. Stemberg told the suppliers that only those who were prepared to help in the start would be considered when Staples grew, which helped to win the suppliers to his side.
Connections through various parties, including venture capitalists backers, also helped in getting the first supplies. Securing a place for the first shop was also another nightmare for Staples since it had no track records, and landlords wanted high rents for the kind of apartment that pins needed. In the beginning, nails had to cope with the site in Brighton, which, though it had failed for many retailers, was in the middle of many small firms.
Reducing working capital for a start was also another challenge as Staples had to increase its revenue in the new market. Working capital was strategized in a way that inventory would be turned about twelve times a year and delay payment to the vendors by thirty days, where the vendors will essentially fund the list of the Staples.
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Importance of Information Systems to the Staples Concept
Staples needed to keep track of every item they sold so as to be able to calculate their gross profit per item, hence being able to track their performance in every step they were taking. Staples was also entering the market where they did not have enough information on how the reception of their idea would be by the customers. Therefore they needed to collect data at the point of sale from customers to enable them to conduct market research, which would allow them to know what to improve and also Know the customer requirements.
Stemberg’s condition was that the customers were made aware of the list price, lower staple prices, and even lower prices for Staples member customers. This needed an elaborate information system that would include both the three items in the register receipts, hence making customers aware of how cheap Staples were compared to other retailers.
Another thing that the Staples’ manager wanted was to reduce the queues at the point of sales while at the same time keeping track of all sales. This called for a state-of-the-art information system with easy to operate cash registers, which would then increase the speed with which customers were served at points of payment. Inventory turnover was also another point of worrying if the working capital requirements were to be minimized.
Turning over inventory twelve times or more a year while delaying the vendors’ payment for thirty days was the only option feasible to put working capital under control, and this was also possible only if there was a robust information system. Staples also wanted to keep all the demographic information about the customers who visited them so as to enable in getting back to them, and encourage them about being their members and information system was an important component.
Competition and how Staples Tackled it
Competitors joined the market on learning the idea of Staples and how it was working out well, but they did not do enough research to warrant success. Staples, first of all, sort for additional capital from the venture capitalists again to expand their business by opening more stores. This was to help them gain an economic advantage over its competitors by enjoying economies of scale. The idea of opening distribution centers in various areas enabled Staples to operate in smaller stores, which meant lower rent than most of its competitors while maintaining proper stock. This not only served in giving pins a better competitive advantage over its customers in terms of having what the customers wanted all the time but also helped in reducing operation costs tremendously.
On top of that, while its enemies were concentrating on price wars, Staples chose to focus on their customers, who were the key business drivers and ensured their satisfaction, a thing their enemies did not do. Pins also aimed at key urban areas where they clustered stores together to reduce the advertising cost, which was higher, while at the same time making Staples the dominant supplier.
During the negotiations for a merge with its main rival, Office deports, Staples kept its expansion strategy running while Office deports stalled down on the expansion and dwelled on the merge. This placed pins in a better position than Office deported when the merge was terminated by the law, and both firms had to go on with their business. Stemberg had been aware that competition was inevitable from the onset, and Staples had taken this into consideration, insisting on their philosophy to be the best executing firm if they had to push true the competition and emerge the winners. Staples also focused on smaller towns where the cost of operation was relatively cheaper, since the rent was affordable, while labor and advertising costs were also lower compared to bigger cities, hence marginal cost was smaller while marginal revenues were huge.
Strategic and Economic Sense of Expansion into Delivery Business
There was bound to be a conflict between the stores and the direct sales department over sales made, but a change in the compensation plan eliminated this and brought about strategic sense. Though Staples were reluctant to venture into the delivery business, they realized after trying that the customers who ordered for products to be delivered to them were not the same customers who came to buy from the stores, which meant that the client base was widening.
On the same note, the large companies which were not willing to physically send somebody to the stores to purchase items found it worthwhile to order for items through the delivery system. The volume of sales also increased due to the starting of the direct sales department and hit almost $1 billion in 1996. Due to increased sales, efficiency was also increased, and the cost was pushed down hence increasing the profitability of the firm. Therefore, the expansion idea into the delivery business real paid off economically for Staples, and they were forced to even acquire some firms to meet customer demands.
Designing of web-based sales into the direct sales system increased the sales of Staples to the extent that 13 000 stock keeping units were shipped directly from manufacturers to clients with the help of pins. These enabled Staples to earn revenue without having to incur holding costs for these items.