Since Michael E. Porter first published his groundbreaking work on the five competitive forces that shape strategies, the field of IS has became a dominant integrant of modern strategic management.
In fact, no serious discussion on the strategic position and operations of a company from any industry can ignore the role of IS in the company’s efforts to be as effective and efficient as possible.
One of the classical examples for this development is the means in which IS-based logistics transformed more than a few retailers, most notably Wal-Mart, to a highly efficient and profitable organizations, whose business strategies are largely based on extracting the most from their IT capabilities (Friedman, 2007).
This research paper examines one of Wal-Mart’s major competitors in several US markets, namely the 1985-established 99 Cents Only Stores. Similarly to its competitors, 99 Cents Only Stores makes extensive use of IS to support its strategies. However, as discussed below, the company’s operations demand a careful consideration of the ways in which IS can and should be implemented in the business.
In order to provide a thorough strategic analysis of the company and the role of IS within its operations, the scope of this paper is twofold. First, it uses the Porter’s classical models of competitive forces and value chain to analyze 99 Cents Only Stores’ current strategic position. Second, it examines the critical strategic issues for which IS play a decisive role and asses the current and prospective contribution of IS for further growth in volumes and profitability.
2. Strategic Analysis for 99 Cents Only Stores
2.1 Value Chain Analysis
99 Cents Only Stores, whose profit margins are among the highest in the retail industry and has yet to report a negative financial year (Oz, 2008) is a strong competitor in the deep-discount retailing industry. This position is the result of the chain’s ability to provide superb value to consumers over competitors, through proper management of the value chain (Koter & Keller, 2006). Porter (1985) defines the value chain as the sequence of internal and external processes, which bring about value creation and their performance is later translated to business success or failure. The author defines nine basic activities in two groups (primary and support activities) through which the company delivers value, as can be demonstrated in 99 Cents Only Stores’ Operations:
- Inbound logistics: the processes required to acquire the goods into the logistic centers
- Operations: the internal processes that aim to prepare the goods to distribution
- Outbound logistics: shipping goods to the shops
- Marketing and sales: providing the goods to the customers (principally POS activities)
- Service: maximizing customers’ satisfaction (and thus POS sales volumes) through pre- and post-purchase activities and purchasing behavior in the shops.
- Procurement: handling external suppliers of merchandize, services and locations
- Technology development: maintaining IS and other supporting technologies to ensure effective and efficient operations at all organizational levels
- Human resource management: handling internal suppliers, principally the workforce
- Firm infrastructure: adjusting the company’s capacities to current and prospective operations
Although 99 Cents Only Stores’ current strong financial performance may indicate a well-functioning value chain, a sound strategic analysis must take changes as primary consideration. In light of the rapidly changing internal and external forces, it is imperative to refine at least three aspects of the current value chain:
First, whereas Wal-Mart and other retailers are engaged in backward integration (i.e. the acquisition of suppliers) to reduce costs (Kotler & Keller, 2006), about 40% of 99 Cents Stores’ supply is based on close-out items and a great variety of sources. Therefore, the company’s primary activities are rather volatile and subject to constant uncertainty. One possible result is the inability to insure that a customer can find what she is looking for, which leads to a sense of scarcity.
Second, the company’s ability to draw its IS to the suppliers (e.g. by reporting buffer shortages in one of the regional distribution centers). The implications are many, and may include, besides inventory shortages, inefficient outbound logistics, impaired service and volatility of workloads for both human and capital.
Third, the company’s founding family, which still holds 35% of the shares, allows a rater flat and effective firm infrastructure (Oz, 2008). Nevertheless, it is questionable whether the company’s expansion programs, principally in Texas, may not create a sense of overleveraging. The advantages of tight control can be used for other expansions, such as electronic retailing.
2.2 Competitive Forces Analysis
One of Porter’s (1985) major arguments, which has been even since known as the “five forces analysis,” is the idea that competition in dynamic markets is built upon more forces than merely the competing parties. Given that the fundamentals of the theory are known enough to avoid redundant descriptions, it is possible to examine the five forces as reflected in 99 Cents Only Stores’ current strategic environment, focusing on deep-discount retailing:
- Intensity of competitive rivalry: high. Despite some differences in focus and economies of scale, the relatively large number of retail chains in the market and the low margins (usually 3-8 percent, according to Oz, 2008) make the direct competition a serious threat to the company.
- Bargaining power of customers: very high. Customers have a lot of choice and the means (e.g. cars, Internet access) to get informed about competitors’ market propositions and switch to other shops.
- The bargaining power of suppliers: moderate. Suppliers depend on retail chains as the major distribution channel for all types of products and price categories. However, suppliers with strong market position and/or unique products (e.g. duopolies) might have relatively higher bargaining power. In addition, suppliers of close-out merchandize have a unique advantage, as their extremely low prices makes them attractive enough to become though negotiators.
- Threat of substitute products: low. The economies of scale and scope of retail chains make them practically immune to substitutes such as local supermarkets, especially when 99 Cents Only Shops penetrates small communities. Nevertheless, the potential market share of online retails may pose a significant threat in the medium- and long-run.
- Threat of entry of new competitors: moderate. Small- and medium-sized retail chains may use available technologies to expand and compete nationally. However, given the state of competition, small retailers’ ability to generate enough capital for a major expansion is questionable.
3. The Role of IS in 99 Cent Only Stores’ Strategic Management
99 Cent Only Stores’ Response to the strategic state of affairs can be largely linked to its IS-based logistics, as they are provide the company with the ability to retain its price competitiveness with a rather low risk. This balance can be best demonstrated by looking at the way the company organized it snew logistical center in Katy, TX.
When planning this center, which aims to facilitate the company’s operations in South Central US, the company executives had to find the technologies that fit the company’s needs while keeping a strict budget. As the company must allow flexible inventory management and should avoid rigidity that may complicate further growth, the IS model is was mainly based on purchased technologies and proved itself as 99% accurate (Oz, 2008). The impotence of accuracy is even higher than its competitors, as the company must face non-reoccurring patterns of inventory flow, as well as discrepancies between expectation and order fulfillment in its inbound logistics and procurement activities.
Finally, the company avoids overinvestment in state-of-the-art technologies, which often provide rather low returns (Carr, 2003). The main strength of the company is price advantages, whereas volatility in supply is tolerable to some extent. However, in order to facilitate better service, in particular electronic retailing (which can create further differentiation in the deep-discount market), some IT-based activities should be refined (or outsourced), in such manner that the expenditure on IS will be symmetric to the volumes they support.
Carr, N. G. (2003). IT doesn’t matter. Harvard Business Review, May 2003.
Friedman, T. L. (2007). The world is flat: A Brief History of the Twenty-first century. New York: Picador.
Kotler, P. & Keller, K. L. (2006). Marketing Management (12th Ed.). Upper Saddle River, NJ: Prentice Hall.
Oz, E. (2008). Management information systems (6th Ed.). Florence, KY: Cengage Learning.
Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance. New York: Free Press.
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