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1. Orchard Supply Hardware, LLC. Strategy Plan 1
Orchard Supply Hardware, LLC Strategic Plan
By:
Christopher Marques
4/15/2016
Gary Radine
Business 290
San Jose State University
3. Orchard Supply Hardware, LLC. Strategy Plan 3
Abstract
Orchard Supply Hardware, LLC (OSH) operates in the home improvement retail
industry. OSH opened in 1931 in San Jose, CA where its headquarters still remains. OSH began
as a cooperative focused on selling to farmers who resided in Santa Clara, CA, and the company
maintained this focus for twenty years. In the mid 1950’s OSH shifted from the cooperative
model and began operating as a general home improvement retail store chain. As of 2013,
Lowe’s is OSH’s parent company and Lowe’s funds OSH to improve its market position.
This analysis determines the external and internal environment in which OSH operates.
Externally, political, economic, legal, and technological factors affect OSH. Additionally, OSH
operates in an industry in monopolistic competition. Internally, OSH has a valuable and hard to
imitate, though not uncommon, service. OSH also has several substitutes in an industry that has
substantial barriers to entry and high power of buyers.
OSH should try an array of customer service plans that align with its core competence. A
few of the recommendations include offering professional garden design and maintenance,
creating a handy man “I.T.” on OSH’s app, and holding live “how to” classes.
4. Orchard Supply Hardware, LLC. Strategy Plan 4
History
Orchard Supply Hardware, LLC (OSH) operates in the home improvement retail
industry. OSH opened in 1931 in San Jose, CA where its headquarters still remain. The oldest
currently operating OSH store opened in 1946 at 720 West San Carlos, San Jose, CA. In the
beginning, OSH started as a cooperative focused on selling to farmers who resided in Santa
Clara, CA; the firm maintained this focus for twenty years. In the mid 1950’s, OSH shifted from
the cooperative and began operating as a general home improvement retail store chain.
In 1987, after being acquired a few times, OSH experienced its strongest period of
growth due to Maynard Jenkins’s arrival to the firm. Jenkins served as part of OSH’s
management until 1989 when Jenkins and OSH management returned OSH to private ownership.
Through a limited partnership with a southern California investment firm, they completed their
goal. Maynard Jenkins was reassigned as president of OSH thereafter. OSH grew primarily
because Jenkins positioned the firm differently than competitors at the time that focused on
customers with big jobs and offered discount pricing.
OSH instead focused on customers with small jobs as well as top-of-the-line customer
service. Another distinction between OSH and its competition in the early 1990’s involved its
use of store floor space. Where the competition used large warehouses with empty space, OSH
stocked twice the amount of product in half the space. All of these factors gave OSH customers a
more intimate shopping experience. When Jenkins arrived at OSH, it was a 21 store operation
and by 1996, he had grown the firm to more than 60 stores.
Unfortunately for OSH, 1995 marked the last strong year of growth the company would
experience for a period. Sears purchased OSH in 1996 and Jenkins subsequently left the firm in
5. Orchard Supply Hardware, LLC. Strategy Plan 5
1997. OSH had fairy centralized organization, so Jenkins’s departure hurt the company’s
direction and drive. Additionally, Sears’s poor management hurt OSH. Through the years, both
OSH and Sears acquired massive debt and began to struggle; as a result Sears spun OSH off in
June 2013. This move allowed Sears to shed $340 million in debt that OSH owed from Sears’s
books. With no backing and experiencing a hard time competing in the market, OSH continued
to struggle.
Fortuitously for OSH, Lowe’s purchased 72 of the 91 OSH stores in 2013. The purchase
price, a relatively low $205 million, indicates Sears’s need for liquidity. OSH had filed for
Chapter 11 bankruptcy prior to the acquisition and as part of the purchase Lowe’s agreed to
assume responsibility for nearly all of the debts OSH owed. The Lowe’s management allowed
OSH to maintain employees, its brand name, and management as well as to operate as a
standalone business. In Lowe’s management’s view, OSH has room to grow and the massive
debt was the only barrier to growth. In an additional display of confidence, Lowe’s provided
OSH $200 million of funding spread over a five year period that started in 2013.
In 2014, the retail home improvement industry revenue reached $129 billion and grew to
$338.6 billion in 2015. This is a huge market with few major players to take advantage of it.
Home Depot is the largest of these, taking 24.5% of the industry’s 2015 annual revenue. Lowe’s
is the second largest with 16.6%, leaving 58.9% for other, smaller home improvement stores. It
is important to note that these are national numbers, whereas OSH only operates in California
and parts of Oregon.
While OSH’s financial numbers are not public, OSH seems to be growing with Lowe’s
support. In November of 2015, OSH held a customer appreciation weekend due to the year’s
large growth. Additionally, OSH intends to expand to 100 stores in 2016, presumably in
6. Orchard Supply Hardware, LLC. Strategy Plan 6
California and Oregon. While OSH is certainly not Lowe’s only investment, Lowe’s has seen an
increase in its ROI from 9.3% in its 2012 fiscal year to 11.5% and 13.9% in its 2013 and 2014
fiscal years respectfully. From all appearances, this arrangement has benefited both parties. OSH
is, however, on a clock to make some potentially bold changes to continue success after Lowe’s
funding has ended.
External
PESTLE
Political:
OSH and the industry to which it belongs are susceptible to government operations. For
OSH, this comes mostly in the form of regional political stability and government spending.
With the plans for expansion, OSH should look at states with relatively predictable local
governments. A potential expansion location would be unattractive if local government
frequently changes policies or has unpredictable spending patterns. Wild government spending
could represent additional local taxation that OSH could be subject to or it could cause business
to slow due to less disposable income for customers. Additionally, remaining up to date with
frequent government policy and regulation changes could burden OSH management.
Circumstantially, this rings true in current markets in which OSH operates. OSH should focus on
areas with moderately predictable governments.
Economic:
The retail sector is naturally susceptible to economic conditions. Currently, the gradual
recovery of the housing market is a large opportunity for OSH. More home owners means more
demand for home improvement products and services. The downside is that the economic
7. Orchard Supply Hardware, LLC. Strategy Plan 7
recovery also means that cost of capital becomes more expensive, slowing OSH’s attempted
expansion. Currently, the larger consumer base outweighs the cost of capital, though this market
could quickly and radically shift in the opposite direction.
Socio-cultural:
The rising wealth gap may affect OSH’s success since it targets the middle class for
home improvement projects. The low end of the wealth gap cannot afford, or have no need for,
OSH’s products; and the high end are more likely to hire a contractor than shop for themselves.
As a result, a diminishing middle class will hurt the company. Furthermore, the possibility
remains that customers could boycott products produced in different countries were products the
result of unfair conditions. Though not immediately intuitive, these factors could affect business.
Technological:
This factor could potentially have the largest impact on the home improvement industry,
and on OSH in particular. There has been a renaissance of mobile app usage that OSH joined
only recently in 2013. Its app provides “how to” videos, shows store locations, and provides
coupons to customers. The app creates another intractable touchpoint of which the company can
take advantage. Additionally, retail has become more automated in its customer touchpoints.
OSH took the increase in automation to an unexpected place October of 2014. As a supplemental
service to its live customer service, OSH introduced the OSHBot at the 377 Royal Avenue, San
Jose location.
The location hosted a total of four OSHBots that have seemingly been a positive
experiment. These OSHBots can scan items to identify what customers need; can navigate the
store autonomously; and have real-time stocking information, voice recognition, and inventory
8. Orchard Supply Hardware, LLC. Strategy Plan 8
management capabilities. OSH management maintains that these OSHBots are not meant to
replace human customer service, but this does illustrate how much technology can impact OSH
and the home improvement marketplace.
Legal:
This industry is fairly susceptible to law suits; primarily from employment laws. In
general, employers must be careful to protect themselves from litigation when dealing with
employees. For example, fair employment laws can be dicey to navigate if a minority individual
applies and does not receive a job. The individual could view that as a racist act and take the
company to court. Fortunately, companies can protect against this by filling the position and
providing valid reasons why the individual did not receive an offer. If a minority were to fill the
position, the company’s position would be strengthened. If these two conditions are met, the
individual would have no prima faci case on which to base his or her case. This example is only
one of several difficult employment laws that companies need to properly navigate.
Ecological:
At some point customers may desire “green” products for home improvement industry. This
could come in the form of farmed wood rather than forest cut wood or natural pest garden
repellents. These products must meet the expectations consumers have for longevity and
effectiveness, however. Other popular “green” products that affect the industry are solar panels.
OSH already offers solar panel installation, so ecological factors impact the industry, but perhaps
not to the level of the other external factors.
9. Orchard Supply Hardware, LLC. Strategy Plan 9
Structure-Conduct-Performance
Since Home Depot and Lowe’s dominated over 40% of the total industry revenue, the
home improvement industry appears to be in monopolistic competition. Smaller companies can
compete in the industry, but the two major players have brand equity that differentiates them
from the crowd. Products are not radically different from retailer to retailer, but consumers still
prefer Home Depot and Lowe’s because of the promise and familiarity that comes with the brand
names. This is true for smaller companies like OSH which has a reputation for excellent
customer service. Consequently, customers who seek good service will go to and likely return to
OSH. However, the two titans will likely remain unchallenged due to their brand equity.
Internal
Porter’s five forces
Threat of new entries:
The large companies that dominate the industry create some barriers to entry. Namely
brand loyalty, price-cutting, and influence over suppliers make it hard for new businesses to
compete. Additionally, the business requires a large monetary investment to enter, which can be
a deterring factor by itself. On the flip side, companies that started in other states can move fairly
easily. This could hurt OSH considering that it only operates in two states. Harbor Freight Tools,
for example, began in Los Angeles in 1977. Harbor Freight already has over 600 stores
nationwide with plans to expand further. In California alone it has 85 stores in operation, and this
rapid expansion illustrates how quickly a company can expand into other states easily and remain
under the radar.
10. Orchard Supply Hardware, LLC. Strategy Plan 10
Bargaining power of suppliers:
The industry experiences a low power of suppliers. For each individual product, a
company can purchase from many suppliers. Additionally, Home Depot and Lowe’s are so large
that they represent a significant percent of each supplier’s sales, meaning they have power over
the supplier’s prices. For OSH, this power likely does not exist, though it may piggy-back off
Lowe’s supplier pricings. Overall, suppliers should have a difficult time maintaining their prices
selling to this industry.
Bargaining power of buyers:
The bargaining power of buyers is surprisingly high. One would expect the buyer’s
power to be moderate at best due to retail stores’ tendency to set prices, and OSH is no different.
Additionally, there is a large population of buyers who should lower its power. The power comes
from the high availability of substitutes and the low switching costs. With no real hardship, a
customer can leave an OSH store and seek a better price from substitutes such as contractors or
general retailers. Despite the high buyer power, the high population should still generate a high
demand for OSH’s products and services.
Threat of substitutes:
As mentioned previously, OSH has to worry about available substitutes. General
contractors affect its “we do it for you” service while general retailers affect its product line. The
one thing that has no real substitute is OSH’s customer service. The other companies in its
industry cannot copy OSH’s customer service, so one can safely assume companies that are not
as specialized as OSH also will not offer the same quality service.
11. Orchard Supply Hardware, LLC. Strategy Plan 11
Rivalry among competitors:
The rivalry in this industry is tricky. Overall, the competition is generally considered
high, though not necessarily cut throat. Mainly this stems from how fragmented the industry is.
Not all businesses operate in all the same industries. So while OSH and Home Depot may
compete in the hand-tools market, they do not compete in the refrigerator market since OSH does
not offer appliances.
Strategic grouping
The home improvement industry is primarily segmented into two strategic groups:
customer service focused and discount stores. Lowe’s operates in the discount portion with the
hope of boosting sales over competitors. OSH operates in the customer service focused side and
has the best customer service in the markets in which it operates. Home depot resides somewhere
between the other two, though it operates more on the customer service side. Lowe’s purchase of
OSH seems to be an attempt at attacking Home Depot from both strategic grouping ends.
SWOT
Strengths:
OSH’s one major strength is its core competence of customer service. Other companies in
the industry have not been able to copy the level of service that OSH has created and maintained
over the years. This could indicate failure or a lack of capital investment, but either way no
company has matched OSH in its operating markets. Lowe’s found it easier to purchase OSH
and allow it to operate autonomously with no staff turnover to attack Home Depot rather than
internally develop high-level customer service.
12. Orchard Supply Hardware, LLC. Strategy Plan 12
Weaknesses:
OSH has a few weakness that have held it back. Strong customer service comes at the
cost of offering competitive prices on products in the store. Additionally, the company has not
expanded seriously since Maynard Jenkins left. The company’s formerly centralized structure
has hurt its ability to stay innovative and flexible enough to act on opportunities.
Opportunities:
Technology and leveraging its excellent customer service reputation are where OSH’s
opportunities lie. The company has already begun experimenting with technology, signaling that
its management understands that there is room to explore there. OSH’s management has yet to
begin leveraging the company reputation. Regardless of inactivity or recent experiments, much
room remains for OSH to explore these areas as no other competitors have yet to do. The
company can do this fairly unburdened thanks to Lowe’s investment in its growth.
Threats:
Threats to OSH come in a few forms. Firstly, Home Depot is a large competitor that has
the ability to copy any revolutionary technology OSH finds successful. Other threats OSH faces
include its substitutes; general retailers like Walmart are generally cheaper options, and
contractors may provide more reliable service than OSH. Lastly, other expanding firms in the
industry could take market share that OSH may otherwise have had an opportunity to take. The
longer OSH takes to expand, the more of an issue firms like Harbor Freight become.
13. Orchard Supply Hardware, LLC. Strategy Plan 13
VRIO
Value:
The service and products OSH offers are valuable since increased home ownership in
California has led to higher demand for home improvement projects. The unique customer
service that OSH offers is valuable to unknowledgeable “do-it-yourself” clients. The friendly and
useful service will help customers find what they need, be informed on how to do the task, and
create repeat business and new business from word of mouth marketing.
Rare:
OSH does not offer anything particularly rare outside of its level of customer service.
Several competitors in the industry offer relatively the same products and many substitutes also
do so, generally at lower prices. Home Depot also competes in the customer service strategic
grouping that could conceivably be more desirable than OSH’s.
Imitable:
OSH’s culture as well as any customer service based plans would be difficult for
competition to imitate. OSH has been in California for over 80 years and the one advantage of
not expanding much outside the state is that it has developed neighborly friendliness in most
communities in which it operates. Technological or product based plans would be significantly
easier for the competition to imitate barring a patent that OSH would be willing and able to
defend.
Organization:
The organization of OSH is primed for change. Lowe’s heavy investment indicates OSH
management will take risks and implement new strategies including robot service in one San
14. Orchard Supply Hardware, LLC. Strategy Plan 14
Jose store location. The management at OSH appears to realize that radical innovations for the
industry are what they need to keep the business afloat.
Strategic Planning
Possible array of plans
Invest in the creation of self-operating tools
Handyman "Geek Squad"—Home maintenance service on insured items
Handyman "I.T.” –In app real-time Q&A with OSH representative
Tool Rentals
Professional Room Designing and maintenance
Professional Garden Designing maintenance
Hold Live "How To" Classes in store
Publish Home Improvement Journals
Free Wi-Fi with store layouts available on the app for the store customer is
at
Expand by another 20 stores in California, Oregon, and Washington
Recommended plans
Plan 1: Begin a handyman “I.T.” aspect of the OSH app within 6 months to increase app usage
by 15%.
The handyman “I.T.” delivered through the OSH app will create a new customer
touchpoint. The user will instantly have a face to face conversation with an OSH representative
and receive information that he or she requires. Many other companies have a feature like this
for their products, but none in the home improvement market. The primary goal of this feature
involves attracting new users to the app and potential new business to OSH. OSH has the
customer service capabilities to leverage such a feature towards creating customer loyalty and
building long term business.
15. Orchard Supply Hardware, LLC. Strategy Plan 15
Plan 2: Begin holding live “how-to” classes on site to increase average store attendance by 5%.
Some OSH competitors have a service like this, but OSH has the ability to outperform
the competition. Once or twice a week, OSH could hold an in-store “how to” class on one of an
array of topics. The OSH experts could provide a quick demonstration on the topic and answer
questions. The topics could revolve around popular items are selling highly well each month and
reflect the time of year. Somewhat hand-in-hand with this service, OSH could publish weekly
journals on the OSH app and webpage to announce the next week’s class. This service would
manufacture a customer touchpoint with OSH’s largest strength, ultimately generating return
business.
Plan 3: Offer a professional garden design service beginning next spring.
OSH could offer to design and install gardens. This service would pull in the higher end
market to mitigate reliance on the middle class. OSH representatives would work with the
customer to create and install the customer’s ideal garden using consultative selling techniques.
Additionally if desired, OSH should offer to check on the progress of the garden’s growth for
free and also offer purchasable maintenance. The progress check would constitute a follow up
service that allows the OSH representative the ability to upsell maintenance should a customer
not purchase that service. OSH could potentially accelerate word of mouth marketing by offering
one free maintenance call per new client referral.
Plan 4: Expand by another 20 stores in California, Oregon, and Washington in 2017.
OSH needs to continue expanding to compete with the rapidly growing environment
around it. Competitors are growing nationally, and while OSH is not big enough to expand that
far yet, it is important to reach new states to build brand awareness. California and Oregon
16. Orchard Supply Hardware, LLC. Strategy Plan 16
already have OSH stores, so the next natural move would be a Washington expansion. The
Oregon locations are few and far between, so expanding in Oregon also accomplishes building
brand awareness. California is a particularly important market for OSH; as its home market and a
rapidly growing home improvement market, further California expansion would strengthen
OSH’s grasp in an area that already appreciates its strength. Twenty stores in 2017 are a modest
goal with the investment Lowe’s has provided, and should new stores exceed expectations, even
more may be feasible.
17. Orchard Supply Hardware, LLC. Strategy Plan 17
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18. Orchard Supply Hardware, LLC. Strategy Plan 18
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