Office Depot Inc. Strategic Case Study and Analysis

Introduction and Scope

This report presents a comprehensive analysis, insights, and recommendations on various issues that affect the operations of Office Depot Inc. The analysis begins with an examination of the environmental factors affecting the company, including a review of economic conditions and trends, cultural and social values and trends, political and legal issues, and a summary of environmental opportunities and threats along with their implications for strategy development.

The report then proceeds to an analysis of the industry, covering a classification and definition of the industry, analysis of existing competitors, potential new entrants, substitute products, suppliers, and buyers, followed by a summary of industry opportunities and threats and their implications for strategy development. Firm-level analysis addresses the objectives and constraints of the company, its financial condition, management philosophy, organizational structure, and organizational culture, together with a summary of the firm's strengths and weaknesses.

The marketing strategy section covers the objectives and constraints facing the firm's marketing aspirations, an analysis of sales, profits, and market share, an analysis of target markets and marketing mix variables, and a summary of marketing strategy strengths and weaknesses. The report concludes with an identification of primary problems drawn from the situational analysis, a presentation of strategic alternatives, and a selection of the best alternative with implementation guidance.

The housing and credit crisis that struck the United States had profound effects on American consumer behavior. Consumer borrowing and spending had been backed by rising home values, and disposable personal income is regarded as a major driver of personal consumption — the higher the level of disposable income, the greater spending on non-essential products and services. An analysis by the Bureau of Economic Analysis in 2008 indicated negative growth in the third and fourth quarters, signifying a considerable decrease in disposable income across the U.S. retail sector.

Environmental Analysis

More recent figures indicate a general recovery in retail sales, with an increase of 0.1% from July 2011 and approximately 7.5% above the prior year's figure (USCB, 2011). Econoday (2011) also reported a general improvement in retail sales, suggesting a brighter future for Office Depot.

Office Depot has been noted to be operating in an uncertain economic environment (Linzmeier, 2008). The company faced the closure of 112 stores and the shuttering of 33 distribution locations, resulting in approximately 2,200 job cuts — close to nine percent of the company's total facilities. As of December 2009, the company had 41,000 employees. It recorded total revenue of approximately $12,144.5 million in 2009, a reduction of 16.2% compared to 2008 (Research and Markets, 2010). The company posted an operating loss of $265 million in fiscal year 2009, compared to a loss of $1,545 million in fiscal year 2008. Office Depot attributed this revenue decline to the tough and unpredictable economic conditions in the U.S. in 2009.

Economic factors are of great importance to Office Depot since they directly affect customer buying behavior. Although the global economy — particularly the U.S. economy — was officially declared to be in recession, governments made substantial reductions in interest rates in places such as the U.K. in order to minimize unemployment in 2009 (Euromonitor, 2010). Office Depot reported $1.5 billion in net losses for its fourth quarter of 2008 (Rosenberg, 2010). Consumer spending power has since gradually improved as confidence in economic conditions recovered. There remains, however, considerable financial uncertainty due to high unemployment rates in both Europe and the United States. The BBC (2011) reported that the number of Americans living below the poverty line had risen to a record 46.2%, with nearly one in every six people classified as poor, and that the poverty rate rose to 15.1% from 14.3% in 2009. This trend clearly affects consumer spending and has obvious implications for Office Depot's profitability.

A study by the Office Depot Small Business Index indicated that in 2011 there was strong expectation for business growth, with both small and medium-sized businesses holding a positive view of the economy and expecting profits to improve by 67% (Office Depot, 2011). The ongoing currency crisis has, however, also affected interest rates, inflation rates, and exchange rates, leading to a general rise in the price of food and other essential commodities — reducing discretionary spending at retailers such as Office Depot.

An analysis of Office Depot's customers reveals that many of its consumers are not particularly young or internet-savvy. Although the rate of internet literacy has been shown to decline among those over the age of 65, it was predicted that elderly consumers may still find it convenient to place orders online (Turban et al., 2001). The company also participates in in-person email acquisition, collecting customer email addresses at the point of sale as part of its customer relationship efforts (Mullen, Daniels, and Gilmour, 2008).

The most significant political and legal issues affecting Office Depot's operations include the rules and regulations governing the establishment and operation of large retail establishments. A notable example of political and legal interference was the proposed Office Depot–Staples merger, which was opposed and subsequently rejected by the Federal Trade Commission (Boulton and Dalkin, 1998). Other relevant legal matters include international contract law and labor law, given that the company operates in several countries, each with its own distinct regulatory framework.

A review of environmental opportunities and threats reveals that the company is negatively affected by business regulations and other political factors. The company can, however, capitalize on the latest trends in consumer monitoring and e-commerce in order to boost its sales.

Office Depot should embrace e-commerce as well as an integrated marketing approach to ensure that its products are effectively marketed and sold across multiple channels.

The office supply industry is comprised of revenue generated from the retailing of various office supplies in stores that specialize primarily in these products. Items sold in the office supply market include paper, business forms, pens and pencils, general stationery, file storage equipment, computers and accessories, and other specialized forms of office equipment. The broader office services and supplies market sector also encompasses revenue from the manufacture and sale of storage equipment, paper, writing instruments, stationery, business forms, and services such as photocopying, scanning, printing, laminating, and binding. The global office services and supplies market generated revenue of $190.7 billion in 2010, representing a compound annual growth rate of 1.9% for the period from 2006 to 2010 (Market Research, 2011).

A competitor analysis reveals that Office Depot faces several significant rivals. Its main competitors are Staples Inc. and OfficeMax. Together, the three companies account for approximately 10% of the nearly $300 billion office supplies and services market (Shetty, 2011). The remaining market share is controlled by supermarkets, discount stores, wholesale retailers, and other independent companies. Office Depot's main advantage over its closest rival, Staples, lies in its international market sector, where it leads in both international sales and operating margins. Other competitors include Corporate Express, Inc., IKON Office Solutions, Inc., Wal-Mart Stores, Inc., and United Stationers Inc.

The threat of new entrants into this industry is considered very strong. Most of the supplies are commoditized products that benefit little from brand loyalty. This, combined with low end-user switching costs and easy access to suppliers and distribution channels, makes it relatively easy for new players to enter the market. The market is currently very stagnant, however, which reduces its attractiveness to potential new entrants (Datamonitor, 2007).

Industry Analysis

The threat of substitute products within this sector is moderate. Many modern companies pursue strategies to minimize costs and reduce the environmental impact of their operations, with the paperless office being a common approach. Switching costs are not prohibitive, since most companies have already implemented appropriate information technology systems. Revenue generated from paper-based office products is therefore threatened by this ongoing shift in operational strategies (Datamonitor, 2007).

Firms within the office equipment supplies and services sector deal in a diverse variety of products and services, requiring them to source materials from multiple suppliers. The main raw materials used in the manufacture of office supplies are plastic resins, pulp and paper, and metals. The general lack of raw material differentiation weakens supplier power to some extent; however, the importance of raw material quality and cost, coupled with the lack of industry-specific importance to suppliers, adds to existing supplier power. Key suppliers include paper mills, some of which integrate forward to supply paper-based office products directly. The supplier power within this industry is therefore moderate, as is the supplier power for technology-based solutions such as printers.

Buyer power in the office supplies and services market is moderate. The sector serves a highly diverse range of clients in the business community, which limits the purchasing power of individual clients. Low customer switching costs and low customer loyalty, however, give customers a meaningful degree of choice that enhances buyer power. The degree of buyer power also depends on the size of the customer: large organizations and businesses can drive high purchasing power through tendering processes, while smaller businesses often engage in group purchasing to secure bulk discounts.

Industry opportunities include investing in eco-friendly products, such as paperless office equipment and solutions, and developing marketing strategies that highlight the cost reduction and efficiency benefits of paperless operations. The primary threat the traditional office supplies and services industry faces is also associated with technology: the paperless trend is simultaneously a threat to traditional product lines and an opportunity for companies willing to transition toward office automation and digital services.

These industry dynamics have direct implications for current and future strategies. Office Depot must develop approaches to continue marketing its traditional products while facilitating a smooth transition toward paperless technologies and office automation.

Office Depot has several categories of objectives and constraints, including sales and marketing objectives, training objectives, and customer service objectives.

In regard to sales, the company aims to have all transactions processed in a timely and orderly manner. A smooth interaction between the sales function and the finance function is crucial, as any communication breakdown regarding payments results in an unpleasant customer experience. The company's financial department evaluates customer credit ratings to assess creditworthiness, and items must be prepared according to customer preferences. The overall sales aims are to manage all transactions in a customer-friendly manner, to increase the transaction success rate, and to use compatible payment methods. The stated objective is to increase sales by 8% within six months.

In regard to training objectives, the company aims to make customer service more efficient by training a sufficient number of employees to high standards, with a target of completing training within six months and creating a system that interfaces with the company's recruitment function on a daily basis.

In regard to customer service objectives, the company aims to use the customer service function to drive sales by increasing the number of repeat and satisfied customers, resolving customer problems quickly, and ensuring a friendly and professional experience. Specific objectives include distributing approximately 500 vouchers per day to dissatisfied customers, achieving an average of three calls per problem within six months, and running monthly customer satisfaction surveys.

The company recorded total revenue of approximately $12,144.5 million in 2009, a reduction of 16.2% compared to 2008 (Research and Markets, 2010). The company posted an operating loss of $265 million in fiscal year 2009, compared to a loss of $1,545 million in fiscal year 2008. Office Depot attributed this revenue decline to the tough and unpredictable economic conditions in the U.S. in 2009. The company's five-year growth rate for the North American retail segment from 2005 to 2010 was -5.3% (Shim, 2011).

Office Depot's management philosophy is guided by a commitment to embedding customer satisfaction in everything the company does (Cisco, 2001). Management fosters an environment in which recognition, communication, innovation, and the employee entrepreneurial spirit are encouraged and rewarded. The management team is also strongly committed to ethical leadership.

Organizational structure is defined as the patterns of relationships that exist between roles within an organization and its various parts (Mullins, 1993; Mabey, Salaman, and Storey, 2001). Its purpose is to facilitate the allocation of work and responsibilities so as to effectively direct activities and achieve organizational goals, enabling management to plan, direct, organize, and control all activities within the organization.