Nordstrom Case Study

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Level of Rivalry

The Specialty Retail Department Store industry is highly competitive due to the size and power of the competitors, the low level of product differentiation and switching costs and the fact that capacity is grown in large increments. First, there are a number of one-off local competitors throughout the nation that still exist (albeit this population is rapidly declining). Additionally, the major competitors are roughly similar in size and power (Nordstrom, R.H. Macy, Bloomingdales and Neiman Marcus). Secondly, as previously discussed, the industry offers a product set that lacks significant differentiation or switching cost. Consumers can easily purchase from multiple competitors within the same day or week as they prefer. Finally, in order to compete well, a firm will typically add stores with over 100,000 square feet of space each. The size of these additional stores can lend to periods of oversupply and price pressure within the industry.

External Analysis Summary

The industry is a fairly solid industry in which to compete – if you are already in the industry and performing well. The threat of new entrants is very low given the industry’s large economies of scale and startup capital requirements. The suppliers and customers have a fairly low level of power primarily due to the tight concentration of large competitors. However, the threat of luxury and economical substitutes, as well as fierce competitive rivalry makes the industry fairly challenging. This environment has proven to be too difficult for smaller firms. However, the larger firms have seen significant growth and prosperity over the same time period. Given these external factors, Nordstrom is positioned well as an established leader in an overall strong industry.

Internal Analysis

Key Resources

Nordstrom’s competitive advantage is derived from two valuable resources. First, they have arguably the strongest sales force in the industry. Second, they are leaders in the industry for customer loyalty. Two financial metrics, net income percentage and sales-per-square foot, are indicators of the success driven from these company resources. Nordstrom nearly doubles the industry averages in both of these metrics.

Value of Key Resources

The value of the firm’s key resources can be derived by analyzing the scarcity, appropriability and demand for each resource. This analysis follows.

Customer Loyalty:

First, the customer loyalty is appropriable. Nordstrom cannot expect its customers to move with it each time it enters a new geography. However, it has shown repeatedly that it can generate a consistently loyal customer base wherever it operates.

Second, there is significant demand within the industry for this customer loyalty. Nordstrom’s high level of service creates a growth effect where customers are treated very well, they become loyal, and they refer others who become loyal and so on. This directly correlates to the company’s industry leading sales-per-square foot metrics.

Finally, Nordstrom’s customer loyalty is scarce through relative inimitability. The company has achieved this inimitability through path dependency. The level of service that is associated with the Nordstrom name would be difficult to establish by its competitors. The brand loyalty has been built by consistently offering the highest service in the industry for nearly a century. Although the rest of the industry is working to imitate this, it will be difficult to ever catch up with the strength the Nordstrom brand has achieved.

Strong Sales Force:

The strong sales force has also proven to be appropriable. The company has used a consistent methodology in compensating and developing its sales team in each of its stores. These stores have found success regardless of general location.

Similar to the customer loyalty, it is understandable that there is great demand for Nordstrom’s sales team. They are the most sought after by the company’s rivals. Other firms continually attempt to mimic the success that Nordstrom’s sales force has demonstrated.

Most importantly, the company’s strong sales force is largely inimitable. This is due to causal ambiguity. It is well known that the company pays its sales force nearly double the industry average. Additionally, the company has an established managerial group that it has promoted from within. They represent a decentralized management structure that fosters an environment of competition, praise for customer service and market-responsive inventory management. While these factors are known, it is not clear how much each factor contributes to the company’s industry-leading sales success. With very low average net income margins, the industry as a whole does not have much room to invest in, or experiment with, these initiatives. As such, it is very difficult for competitors to effectively imitate Nordstrom’s success.

Strategic Challenges

Accusations that Nordstrom has underpaid its sales force threaten both of its key competitive advantages. First of all, any bad press has the potential to damage customer perception and loyalty. Additionally, the sales force makes up the people who establish and reinforce the company’s customer loyalty every day. If the company were to lose sales team members or damage the morale of the sales team, sales could plummet in the short term while customer loyalty (and the related sales) could suffer in the long-term. Nordstrom must resolve this challenge while maintaining its competitive advantage and its goals of “service, profitability and middle managerial autonomy”.

Alternative Courses of Action

Do Nothing

It is possible that this issue is not as significant as the unions and competitors would have everyone believe. Out of 50,000 current and former employees, only around 1,000 have filed back-pay claims. Additionally, they already have the highest paid sales force in the industry. With $15 million of back pay charges already reserved, the company potentially could have already recognized on their income statement the full extent of the damage.

However, this direction runs the risk of severely compromising its key resources. The DLI has already found Nordstrom to be in violation of numerous regulations. Given the company’s past of intimidation and coercion