In this segment S&W competes with Beretta from Italy, Heckler & Koch from Germany and Fabrique Nationale from Belgium. The most dominant competitor in this segment is Glock of Austria, which sold 50,000 Glock Model 19 pistols to Iraqi Security Forces without the consent and approval of U.S.-based collation command or the U.S. Congress. Glock, in refusing to cooperate with the U.S. military, has opened up a significant opportunity for S&W in government markets based on the conflict Glock has created and the preference of Congressional members to buy from domestic suppliers.
Available Substitute Products
There is an abundance of substitute products as the handgun marketplace is fragmented with nine different manufacturers, each with between 5% to 14% market shares. Glock and their innovation in polymer pistols and firearms revolutionized the industry in the 1980s, yet S&W was able to regain their market share by working with distributors, dealers and key channel partners to understand unmet needs and design pistols that were more closely aligned with what buyers were looking for according to Smith & Wesson (2005).
As of April 30th 2006, S&W had a backlog worth $42.1M in orders, the majority of which is for the M&P pistol orders from the Afghan Army. In addition the successful launch of the M&P15 rifle. This is a firm backlog based on purchase orders already received, and puts pressure on S&W to manage their key suppliers for inventory positions to fulfill these orders on time, as Glock is now considered by many the U.S. Government to be an unreliable supplier.
In the Form 8-K filed by S&W with the Securities and Exchange Commission on September 19, 2006 Michael Golden, President and CEO, and John Kelly, CFO discussed the implications of managing suppliers in light of the major turn-around in manufacturing process efficiencies. In the Form 8-K the impressive performance of manufacturing is discussed, with guns per day output going up 40% year over year, on-time delivery of orders increased from 60% of all orders to 85%, machine uptimes increased from 60% to 80% and inventory turns up 3 times over the previous fiscal year.
With production efficiencies being a major part of S&W's turnaround, there is the need to closely integrate all these activities with suppliers and build comprehensive supplier relationship management (SRM) strategies so manufacturing operations can have visibility multiple layers deep into the supply chain. Competitive pressures aren't simply on a given supply of raw materials it's on which manufacturers can get a specific level of supply chain visibility and be able to synchronize their production efforts with the incoming series of materials from suppliers according to Wainwright (2006). This integration between suppliers and manufacturers is defined by strategic partnerships between S&W and selected materials suppliers, and as a result S&W has been able to attain its production efficiency goals. Suppliers in the firearms marketplace are more integrated with manufacturers than many other industries, and as a result exert a much greater influence on profitability of manufacturers they choose to partner with. With many of the sales being made today based on project-by-product sales, both suppliers and manufacturers have realized that having a stable and integrated Supplier Relationship Management (SRM) strategy. As a result of all these factors, the balance of power is shifting to suppliers and their ability to provide visibility into their supply chains as well, making it possible for manufacturers to quote accurate delivery dates for large orders, as is the case with S&W today.
S&W customers and the broader buyer population of rifle, revolver, and pistol purchasers across all served segments have a broad selection of manufacturers to choose from, including several dominant international brands. As the firearms market is very fragmented and there has been single-digit growth in terms of sales over the last three years as defined by Cowen & Company (2006), buyers are in the position to choose from multiple manufacturers. Cowen & Company (2006) also has estimated the total U.S. Gun Industry to have a market size of $2B in 2006, with no single manufacturer dominating all segments. While S&W does have a 40% share of revolvers and the market leadership position in pistols, their entrance into the rifle market, aimed primarily at the sporting goods channel, is one of the most competitive segments to participate in. The buyer exerts high levels of influence across all segments, and most notably in the sporting goods market where there are many competitors and alternatives. The difference for S&W has been their strong focus on building channels and markets instead of merely trying to participate in them. This is evident in the 19.4% revenue growth in the sporting goods channel and a 250% increase in the engraving and performance center and commemoratives market, where aggressive pull-oriented growth strategies including a NASCAR sponsorship, Shooting events in Hawaii, and an aggressive PR ad campaign all lead to buyers in this specific segment becoming much more aware of and considering S&W for their recreational and collecting firearm needs. The effort the company has made specifically in this segment has been world-class and exemplifies the level of effort required to gain new customers in a slow-growth market according to DataMonitor (2006). The bottom line is that the pressure buyers exert across all segments is very significant and given the brand loyalty to S&W the company has still had to work harder than every before to attract buyers in the sporting goods or retail segment. Awareness hasn't instantly translated into sales; buyers across all segments are being much more discerning and price-sensitive.
Threat of New Entry
S&W has over the last three years developed stronger barriers to entry in their core markets through relationships, lobbying and strong selling organizations developed by market segment served, in addition to greater production efficiencies and accuracy of manufacturing. The combination of stronger relationships in the government market, better sales teams in the sporting goods, law enforcement, military and federal, international and licensing market segments bring synchronization to S&W's marketing and selling efforts according to DataMonitor (2006). In many of their competitors, this is not the case. As S&W continues to gain market share and brand momentum, all these factors in addition to the dominance of their brand will become significant barriers to entry. Production efficiencies in the form of shorter order-to-ship, quote-to-order, and guns manufactured per day due to just-in-time inventory are also significant barriers to entry for any new entrant into the firearms market. Creating these levels of efficiency requires seeking out process re-engineering expertise and making the commitment internally to change production processes for greater efficiency, and that is a very difficult task for many firearms manufacturers to undertake.
Five Forces Analysis Competitive Summary
S&W faces different competitive dynamics in each of the key markets served, some requiring a predominately brand-centric response while others are more focused on product development and relationship-building, as is the case in the Military & Federal market. The aggressive product development plans and product introductions S&W has completed however have been the best competitive strategy the company could have undertaken to initiate a turn-around, in conjunction with bringing in key sales personnel with expertise in each segment.
This combination of selling expertise and unique and new pistols and revolvers gave the sporting goods market a major increase in sales throughout FY2006 to date, and has also significantly increased sales into the Law Enforcement market as well. The combination of relationship-building, lobbying and unique product designs that align with customers' unique needs has also come out in the Federal & Military market as well, where'd&W has won four contracts to date worth $20M. International sales have also been increased using the same strategy.
From a five forces perspective, the ability of S&W to generate and then capitalize on customer demand across all sectors has also influenced both supplier and buyer power, making both more manageable due to the voice of the customer defining the need for cooperation. In terms of threat of new entry and threat of substitution, the production efficiencies gained by S&W and their brand dominance will make it difficult for new competitors to enter their markets and for existing ones to replace them in larger accounts and with loyal sporting goods customers.
References for Assignment #2:
Cowen & Company (2006) - Smith & Wesson. Initiating to Outperform. May 26, 2006. Analyst Cai von Rumohr. Published in Boston, MA by Cowen and Company.
DataMonitor (2006) - Smith & Wesson Holding Corporation Company profile. Number 16191, June, 2006. London, England.
Form 8K, Securities & Exchange Commission (2006) - Filed by Smith & Wesson Holding Corporation on September 19, 2006 pursuant to Section 13 or 15(d) of the SEC Act of 1934. Accessed from www.freeedgar.comon November 23, 2006.
Smith & Wesson (2005) - Smith & Wesson Corporate Presentation accessed from the Internet on November 20, 2006 from http://media.corporate-ir.net/media_files/irol/90/90977/mfcosept2006.pdf
Wainwright (2006) - Initiate Smith & Wesson With Buy Rating: Plenty of Bang for the Buck. Michael Rindos, Analyst.…