Staples

A Case Study Prepared By

Strategic Management & Policy

Introduction:

Staples is the largest office supply retailer in the United States. Founded in 1985 in Brighton Massachusetts, Staples has grown to operate 1,575 stores and 58 distribution centers in the US with and an additional 387 stores and 66 distributions centers across the globe.

Current Mission Goals and Strategy:

Staples mission is “to make it easy to buy office products”.¹ By utilizing its “Staples Soul” program, the company aims to provide exceptional value, selection and customer service.

INTERNAL ANALYSIS:

Staples is a strong company with an IFEM score of 2.64

Finance
Staples has a weak financial rating despite its overall strong IFEM rating. In looking at valuation ratios, Staples does look pretty good if you were looking to invest in this industry. Although Staples is performing well below the industry in P/E Ratio (9.11 vs. 14.5) they do have a lower price to cash, price to book and price to sales ratios and they are paying higher dividends (3.45 vs. 1.80) when compared to the industry. These indicators do paint a more favorable picture for investors.
This fact does not offset some of the weaker financial indicators. Even though their 5 year growth rate is nearly double the industry (6.82 vs. 3.86), recent growth rates are very alarming as they measuring far below the industry average (-1.10 vs. 5.11). This is especially concerning because it shows growth in the industry but a retraction for Staples. Total debt to equity looks okay when measured against the industry (28.70 vs. 41.35) but margins are just over half if the industry average (26.91 vs. 49.85). Add to these weak indicators the excessive amount of goodwill ($4 billion) and Staples must be evaluated as a weak financial company.
A shrinking retail market along with a shift to digital are major factors in Staples weakened financial status. Staples should look to adapt their model to focus on more profitable areas of their business in an attempt to spur growth. Steps should also be taken to reduce the exorbitant amount of goodwill the company is carrying on the balance sheet.

Management
There are some positives regarding the management at Staples but there are also several areas of concern, one of the most glaring being the compensation of the high level executives. For a company that is overall underperforming when compared to the industry, one could question whether bonuses are justified. It can be argued that bonuses are intended to reward people for doing a good job and slow growth coupled with declining revenues do not meet the criteria of a good job. Another issue of management is the very large amount of goodwill on the balance sheet which can have a crippling effect on a company. A few positives regarding management are that they do have a good understanding of where the industry is heading and are taking the necessary steps to remain ahead of the curve. Staples recognizes the need to scale back retail operations and focus more on in demand services while actively seeking partnerships to create new revenues streams. In an effort to grow, it is also essential that Staples explores emerging international markets where competition is not as strong.

Services
With very little price and product differentiation it is crucial that Staples finds other ways to set itself apart from their competitors. Providing services can accomplish this goal and it is the key to success in the office supply industry moving forward, especially in the U.S. As the use of paper based products and traditional office supplies continues to decline it is imperative that Staples offer the services that fit the needs of both home based and traditional businesses.
Staples already offers printing/copy and shipping centers at some of their retail locations but they should continue to seek out other opportunities. It is also important that they do not lose sight of the fact that their North American Delivery program has performed more consistently than the North American Retail operations and every effort should be made to grow this part of the company.

Information Systems
Staples’ owns and maintains an excellent website which is essential in their future success. As the size and inventory of the retail stores is reduced the majority of product sold will be expedited through their website. By having a user friendly website along with the technological systems necessary to coordinate and guarantee fast delivery, Staples can thrive in the online sales market. It is important the Staples remains up to date on new technologies that will allow potential customers greater access to their website while continuously seeking new and more efficient ways to directly distribute their products to them.

Marketing
Marketing is an area in which Staples excels. With the creation of catchy ads and catch phrases Staples has developed tremendous name recognition. One of the most impressive marketing feats was their “easy button”. This is an item they were able to sell in their stores that had no value whatsoever to any company other than Staples. It was pure propaganda for Staples and one of the more impressive marketing ideas I have seen. This product not only made them money but worked as a visual and audible advertising tool. When you pressed the button the phrase “that was easy” was played.
Having a line of products labeled under the Staples name also serves as an effective marketing tool. When products branded with the Staples’ name are used in home or office settings, the Staples name remains fresh in people’s minds. In addition, Staples has also utilized product placement strategies in TV shows and movies. Overall, Staples is doing an excellent job in regard to marketing and should continue using the strategies currently in place.

Production of Product
Staples’ has a unique advantage over their competitors in that they offer their own brand of products. Although production of these products is outsourced, Staples still has control over the product specifications and has more negotiating power over costs. By utilizing this leverage Staples can sell these products at a lower cost then name brands and often meet or exceed the profit margins of the national brands. Staples should look to expand this product line whenever possible to take advantage of this competitive advantage.

Internal Analysis Summary In conclusion, Staples is still a strong company overall but they are weakening financially. They still hold the top spot of office supply companies but they are at a point in time where changes need to be made if they want to remain there. There are many issues that need to be evaluated and some tough decisions will need to be made. Management compensation should be looked at closely and new guidelines on compensation should be established. They have wisely begun to shift focus to services in an effort to differentiate themselves from a growing number of competitors and create some domestic growth potential. Although domestic growth is slow to stagnant, Staples is making efforts toward continued international expansion where there appears to be significant growth potential.

EXTERNAL ANALYSIS:

Staples EFEM score of 2.55 is about average and suggests they are operating in a moderate business environment.

Competitive When examining the competition against Staples there are two major areas of concern, first, there are a tremendous number of competitors and second, it is an industry that offers ease of entry to new ones. As far as existing competitors, Staples not only has to contend with their primary rivals like Office Max and Office Depot, but they are also feeling pressure from secondary, wholesalers and box stores such as Wal-Mart / Target/ W.B. Mason / & BJ’s, to name just a few. To take it even a step further, online marketplaces such as Amazon also pose a major threat as they offer a huge selection, at low prices and often with free delivery. Amazon, and sites that are similar create another problem for Staples beyond the massive product selection and low prices. They create and easy avenue for new competitors to emerge. These new online competitors will have very little overhead therefore they often have ability to offer products at reduced prices. To combat these threats and remain competitive, Staples must seek ways to offers customers services that their competitors cannot.

Demographic
There is a changing demographic in the U.S. that offers some potential. With the sharp rise of home based businesses, there is a growing niche of new customers. By creating incentive programs and offering the services that help save these small businesses money, there is an opportunity here for Staples.

Geographic
Although Staples is primarily located throughout the United States, there are many domestic competitors and the competition is fierce. It is because of this that the real opportunity for growth lies within the emerging international markets. It is in these markets that Staples needs to focus on and therefore a geographic shift is necessary. By locating and establishing a strong foothold in developing regions with little competition, Staples can take advantage of the increasing demand for office products. This creates a tremendous opportunity for growth.

Economic
As I have mentioned several times throughout this study, I think this needs to be looked at in two separate categories. Domestically, the office supply industry is going to remain on a tough economic road for the foreseeable future. Staples is sort of dealing with a triple whammy here. The combination of primary, secondary, wholesale and online competitors coupled with a decreasing demand for traditional office based products does not paint a rosy picture. Add to that a struggling economy and the result is likely going to be a reduction in sales and lower profit margins for some time to come. There is a glimmer of hope in that there is good reason to assume that economic growth is possible in the service sectors.
It is not a totally bleak future however as excellent growth potential exists in the internationally markets. In these markets Staples can utilize their traditional business model and a much brighter economic forecast can be envisioned in these regions.

Technological The most obvious technological threat to Staples is digital media replacing the need for paper based products. As the business sector shifts more toward a paperless/digital society in an effort to cut costs and for environmental reasons also, Staples will likely see a continued decline in paper based office supplies and equipment being purchased. This is clearly an issue that must be realized and dealt with proactively. This fact does create some opportunity though, by recognizing and understanding the shifting trends toward new technology, Staples can use its leverage and name recognition to adapt their business model to sell new products and services that are in demand by both residential and business customers. Another technological threat is the online “sell everything” sites such as Amazon. Amazon’s online marketplace presents a major problem for companies such as Staples as it is not only difficult to be competitive pricewise but Amazon offers a tremendous selection and very fast and often free shipping options. As mentioned earlier, Amazon also creates an opportunity for other low overhead competitors to enter the market.

External Analysis Summary
This is an uneasy time for the office supply industry. The combination of fierce competition and new technologies are allowing a more paperless business environment and this poses some difficult challenges for Staples. In order for Staples to remain number one, it is crucial they seek and explore new products and services in an effort to stay ahead of the curve. Domestically a shift in focus more toward services should create an opportunity to set themselves apart from the secondary and wholesale competitors. Staples should also look for opportunities to partner with other companies in an effort to carry more in demand products in their stores. Staples can use there already established distribution centers and retail locations to attract partnerships and begin offering these new products.
Internationally Staples can implement a more traditional strategy as the foreign markets are emerging and less competitive.

Strategic Option Analysis: the I&E Matrix
The I&E Matrix places Staples almost dead center which would signify a hold and maintain strategy. I agree with this assessment regarding the domestic market which to date is still the bulk of their business. The domestic office supply industry is not only extremely competitive but has seen a slowing growth rate as well. Because of this I think that Staples should not aggressively try to expand domestically but instead try to adapt their business plan to focus on more services treat meet the current needs of businesses.
I disagree with the I&E Matrix regarding international markets. In these markets I think Staples should be very aggressive in identifying and establishing their presence in emerging markets. There is a huge opportunity for growth in these markets and it should be a priority for Staples to take advantage of it.

Recommended Strategic Thrust
I believe that Staples has to develop two strategies, one for domestic and one for international. The domestic strategy should be a modified diversification strategy. They do not need to completely diversify but they simply need to make some changes in an effort to open up some new revenue streams. By adding more services and partnering with other companies in an effort to offer in demand product, Staple should be able to accomplish this.
Internationally Staples should adopt both a market penetration and horizontal integration strategy. Staples should look to identify and penetrate emerging international markets while utilizing horizontal integration to acquire smaller but already established businesses. Ultimately it is in these emerging markets that hold the greatest potential for growth.

Sources:
¹ David, Fred R “Strategic Management Concepts and Cases” 14th Edition. New Jersey. Pearson Prentice Hall, 2011

²http://www.reuters.com/finance/stocks/financialHighlights?symbol=SPLS.O