Nordstrom is a luxury chain store with its headquarters in Seattle, Washington. The company operates in America and Canada. Since 1901, when the company was started, it has managed to achieve tremendous growth in its market niche and create its presence in the whole of the USA and Canada. Its initial business model dealt with products such as clothes, fragrances, jewelry handbags, and cosmetics. For the past century, the company has included other services such as wedding stores, in-house cafes, restaurants, and espresso bars. Currently, the company has over 379 stores in USA and Canada, which include full-line store, Nordstrom Rack stores, jewelry shops, boutique, local stores, clubhouses, and clearance store. In 2015, the company tallied 15 billion dollars in sale. This article seeks to examine the current business model adopted by the company and its influence on its performance over the past few decades. Understanding the market models adopted by the company, as well as its corresponding market aspects will help identify the proposed future models and their possibility of success. This article examines all aspects of the business as they relate to Nordstrom.
Currently, Nordstrom adopts a mixed approach to its growth strategies. This means that the company does not follow a specific strategy but rather combine various strategies into one umbrella which ensure growth and sustainability of the company. The first notable growth strategy is initial market segmentation and later diversification. Through its brand, the company has established it’s self as a dealer in luxury products and services. Its organizational culture, which focuses on the needs of the client and their ultimate satisfaction, creates a feeling that the company is doing more than its competitors in the same line of business. After identifying and creating this clientele, the company then segmented and diversified the luxury market to meet the specific needs of the clients.
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Secondly, the company uses acquisition and expansion based on natural and authentic market growth. While companies can adopt inorganic market growth models, Nordstrom seems more focused on a smaller market that grows generically. Lorenczik, Malischek, and Trüby (2017) observe that this approach to the market is useful in the long run and can easily promote the dominance of a company based on its social authenticity. Moreover, when a company allows generic market growth, it is capable of exploiting the opportunities that present themselves at low risk. By adopting acquisitions and mergers, the company protects itself than the logistics involved in entering a new market thus allowing easier acquisition of new markets for its products.
The company has also adopted line branding as one of its key strengths. Although the company outsources the production of its products, it rebrands them and gives them a price that shapes the perception about quality. Through its right branding, Nordstrom has successfully opened more than 220 stores without acquiring the physical premises. Other dealers in the USA and Canada like the affiliation with the company, especially if they are dealing with luxury products. The company’s market strength and brand recognition have helped it to infiltrate and maintain new market without much capital input.
Generally, Nordstrom uses strategic approaches that work for its advantage. Ghemawat (2016) argues that, in current market strategies, a company can adopt a static model and harness all the resources until the model work. On the other hand, a company can adopt disintegrated models towards the market that allow flexibility during implementation. In this form of market approach, a company readjusts its investment models depending on the nature of the confounding aspects in the market. Nordstrom indicates a history of flexibility, fast approach to new markets, and quick withdrawal to harmful markets.
External Environment
The external environment in which a company operates determines its success. Often the environments determine the level of success achieved by the strategies adopted. In strategic planning, institutions view these environments as either micro or macro. Micron-environments are the smaller factors often based on a small group of shareholders and require group-specific approaches. On the other hand, macro-environments are the major aspects that determine the entire model of a business. In strategic planning, macro-environments are more critical especially for large companies such as Nordstrom.
Firstly, macro-environments determine the size of the business. If the environments confound together to create a hostile environment for business, then a company needs to have a model that addresses these risks and come up with mitigation models. For instance, politics and social perception of a company are critical determinants of how well a new business does in a region. If a country has political instabilities, a company might require having flexible capital that would be easier to move if the environments fail to support the business. Nordstrom has managed to identify these macro-environment risks and create a business model that minimizes risks and promotes its growth.
Other macro-environment aspects necessary for strategic planning include economy, social-cultural, demographics, and legal aspects. The economy denotes the nature of financial interactions between the various players in the industry and support industry. The economic index of a country or population controls business aspects such as their ability to afford the products, their willingness to spend on the products, as well as the quality demanded. The support economic industries such as banks determine the availability of capital as well as other financial aspects of the business. Understanding these market aspects and integrating them into a business strategy increases the overall possibility of success.
When it comes to social-cultural aspects, they determine specific aspects such as availability of labor, corporate social responsibilities, and overall legitimacy of business as perceptive by the local consumers. De Mooij (2018) offers MacDonald’s entry in India and Germany as specific case studies of how social-cultural aspects can affect a business. Nordstrom has balanced its business models to focus on similar market. A report by Calmès and Théoret (2015) highlighted the USA and Canadian markets as the most homogeneous when it comes to the developed countries. By internationalizing on a country like Canada, which has a similar social-cultural pattern, Nordstrom is able to adopt its growth models from the USA, which is the lead market, and adapt them to Canada, which acts as a replica of the USA local market.
The demographics of external market denote the various aspects that define a market. These include the characteristics of the consumers, the nature of the banking system and other support industries, general perception to business, religion, and gender rights among other social issues. For instance, if a market has more people that make higher than average wages, and higher standards of living, the market is likely to be quality oriented rather than price oriented, which is seen in low-class markets. Understanding these aspects at a macro-level helps companies plan and execute their business models.
PESTLE Analysis
PESTLE Analysis is strategic planning too often adopted to define the macro-environments in which a company operates. As highlighted above, understanding these aspects and their impacts on the business increases the success index of business. The tool, as applied in management examines six core environments as they pertain to business. These aspects include Political, Environmental, Social, Technological, Legal, and Economic Environments. Each of these aspects examines specific environments and makes projections by considering the subjective nature of the business. The correlation is useful in designing, implementing, and evaluating strategic plans.
Political
Nordstrom operates in different countries, which have different governance models. These governance models have different impacts on business. It is thus the duty of the company’s management to remain flexible and exploit opportunities created by these differences while mitigating the consequences. The specific political aspects include political stability, bureaucracy interferences, wage laws, intellectual property protection, and controlled competition among others. This means that as the company seeks to expand its business, it has to undertake case-specific research to determine the best model to adopt in the local markets.
Environmental
The environment has become a key consideration when it comes to business operations. Following the widespread degradation of environments, countries have come up with different laws that regulate people-nature relationship. Even without government interference, the environment still controls the efficiency of a business model based on the aspects of natural environments. For instance, natural occurrences such as earthquakes, floods, and winds can determine the economic growth of a region. Each natural phenomenon has associated consequences that control people’s willingness to invest in a region due to associated risks. In the long run, these aspects determine the entire business demographic of a region. Nordstrom also considers the current laws on dumping and recycling. These laws affect companies packaging and disposing of models in different countries.
Social
Society and Culture are key considerations in strategic planning. In business, social environments denote the way of doing things as adopted by a certain group of people. Although the social environments do not have a formal guide on the expected conduct of a business and its employees, it greatly affects how society perceptive the business. Although Nordstrom operates in more than a dozen countries, USA and Canada are its largest markets and operates as trials for the new expansion. The USA and Canada markets are more flexible based on capitalism and free competition. The social aspects also promote the growth of the Nordstrom brand, where USA and Canada citizens are more likely to purchase a brand based on its past success in other markets. The general upper-class mentality, which equates the popularity of a product to its quality, promotes the growth of the company.
Technological
Technological environments denote the trend in the technological development that affects the operations of a business. A change in the technological orientations, either for the business or for the consumers changes the nature of interactions as well as the models of payments and delivery. Nordstrom operates in dynamic technological environments that allow new entrants to join and command huge market coverage without using extensive resources as the established companies. This trend forces the company to adopt innovative trends in technology to maintain its competitive edge. For instance, in 2013 Nordstrom opened its online sales where consumers can view, order, and pay for their products depending on their location. The model is integrated with a local brick and mortar store that controls the deliveries.
Economic
The economy is a macro-environment that controls aspects such as income, disposable income, taxes, savings, and interests on the capital acquired through external funding. These aspects confound together to determine the nature of the business that would survive in a certain market. Over the years, Nordstrom has shown consistency in selecting and investing in stable markets that guarantee returns. The economic analysis conducted by the company before investment must yield a desirable economic value at low risks.
Legal
Legal aspects are the laws and policies that govern the operations of the business in specific countries. As observed by Whaley (2017) due to the growing capitalism, legal aspects favor companies with large economies of scale. Nordstrom must abide by the laws of a country to void legal cases that increase the operational budget. For instance, in 2017, a former employee of the company filed a case in over unlawful dismissal from employment. The Central District of California court dismissed the case based on the fact that the company had used its internal policies for the dismissal. This is just one case of many cases where the company has proven its abilities to harmonize its internal business policies with federal laws.
Porter’s Five Forces
Porter’s Five Forces is an excellent tool for strategic management. The tool helps the companies to understand their competitive positions by examining aspects that control competition. In the apparel industry, where Nordstrom operates, there is huge competition based on the value of the industry and different consumer preferences. Using Porter’s Five Forces, the company can comprehend the five forces namely threats of new entrants, bargaining power of consumers, bargaining power of suppliers, rivalry among players, and the risk of substitutes.
Risk of New Entrants
Nordstrom risk of new entrants is minimal considering the market share of the company. Over the years, Nordstrom has maintained its position as the supplier of high-quality products. With the current rise of entrants in the industry and use of e-commerce, there have been cases of fraud and quality issues. This puts Nordstrom at an advantage where the new entrants cannot prove their legitimacy to wage any significant competition wars.
Bargaining Power of Suppliers
Due to its large size, and reputation, Nordstrom only selects the best and high-quality products for its store lines. Owing to the large size of supply demanded by the company for its stores, the suppliers have lower bargaining power leaving the company to actively engage in pricing and distribution models. This allows it to come up with a business model that favors its brands. Moreover, the association of Nordstrom with products is an added advantage to the brand. This makes the suppliers more willing to collaborate reducing their bargaining power even further.
Bargaining Power of Suppliers
Again, the size of the company gives it an advantage over the bargaining power of the consumers. The brand of the company sells by affiliation rather than a comparison between the price and the quality. A study by Medina(2017) indicated that 73% of the luxury good consumers consider the brand as well as the store they are shopping more than the price of the product. Due to its huge name in luxury markets, the company sets the market prices and the consumers take it.
Rivalry
There is a rising rivalry in the apparel industry and especially in luxury brands. ** observes that in the past, the design came from western countries. However, in the current market, and following integrated consumerisms, design for luxury demands are coming from all across the world. New entrants, as well as established competitors such as Macy (M), are exploiting this new trend thus increasing rivalry in the market. Nordstrom adjusts by changing its retail products and promoting its in-house brands to act as landmarks of the quality demanded by the luxury chain.
Substitutes
There is a huge possibility of substitutes in the industry following global integration and the rise of local business partnership. Unlike in the past, now individual companies can manage to share their resources easily creating a better competitive advantage. Moreover, with the rising adoption of technology, other substitutes are able to exploit new markets just as well as large companies such as Nordstrom.
Value Net Concept
Value Net Concept examines the position of a company base on five key aspects. These aspects include consumers, competitors, suppliers, and partners. By understanding these four aspects, a company understands its business position and the underlying opportunities. Complementors is an often overlooked aspect by critical to a company’s success. The concept denotes industries, systems, or individuals that offer products and services that complement a company’s business model. Nordstrom has manufacturers, marketers, and distribution companies are their key partners. Without outsourcing for products and services, the company does not have enough in-house human capital or in-house brands to meet the demand. In the future, the company should focus on communication companies, which will be determinant on how information is shared across the markets.
Industry Dynamic and Forces Driving Change
The company has marinated its business model and focus on quality for more than a century. However, in the recent past, Nordstrom and similar companies in the apparel market has been faced with dynamism and need for change. The most dominant driver for change in the company’s business model is technology and global integration. As people come together, they create a new mentality about products, society, and the general world they operate in. This leads to changes in consumer preferences and demands. As a dealer in a luxury product, Nordstrom adjusts to meet the emerging demands.
On the other hand, technology changes the technical way of doing things. Its increased adoption has led to a massive increase in quality as well as consumers awareness about the product’s value. This has also allowed consumers to compare the products sold by Nordstrom with other products thus opening them to multiple options. Additionally, technology affects the mode of business. Recently, most people prefer to shop online instead of visiting the brick and mortar stores. When integrated, these technological changes and their impacts on consumers drive change across the apparel industry compelling companies to adjust.
Group Mapping
Group mapping is a technique to gauge a company’s competitive position in a market. This model analyzes the strategies used by companies and groups them to further understand the competition in the market. Even if these companies might be dealing with the same product or service, their grouping depends on the strategies adopted to reach the final goal. For the Nordstrom, most of its competitors use the same model where they have several in-house brands and compliment them through outsourcing. The companies that have proven to have similar strategies with Nordstrom include Macy's (M), Dillard's (DDS), Neiman Marcus and Saks. Although they have different market share, these companies have enough economies of scale to challenge the position of Nordstrom in the industry. As a response, Nordstrom comes up with innovative and internal aspects to enhance its competitive advantage.
Macy’s Competition using Porter’s Five Forces
In 2018, the first quarter, Macy reported that its sales had gone up 3.3% while Nordstrom sales had gone up only 0.4% (CSI Markets, 2019). A similar trend was witnessed at the end of the financial year where Macy recorded triple growth in sales compared to Nordstrom. However, as observed by Medina (2017) the difference in the growth is not based on major external competition factors but rather on business models adopted by the companies when it comes to macro-levels. These include the culture maintained by the company, the selection of products, and after sale services. When it comes to Porter’s Five Forces, these companies face the same challenges and opportunities.
The similarity of these companies indicates that the Five Forces highlighted above for Nordstrom are also applicable to Macy. The two companies thus create a competitive advantage using other internal and external aspects. For instance, the study by Chernev (2017) indicated that although the two companies served marginally the same market, Macy had a more decentralized price that could accommodate a wide range of shoppers. On the contrary, Nordstrom had high prices and little selection for low-priced, yet luxury products.
Key Success Factors
In this industry, and based on the findings on Nordstrom and its competitors, there are seven key determinants of success
Marketing
Brand Recognition
Pricing Models
Quality of Products
Accuracy of Market Segmentation
Predictability of Economic Trends
Adoption and Application of Technology
Company Resources, Capabilities, and Competitiveness
Current Strategy
The company’s current strategy seems to work in ensuring increased growth and competitiveness. This growth is reflected in the constant growth of the company’s presence as well as the growth of its revenues over the years. Forbes named Nordstrom as the best performing industry in the apparel industry with an annual growth of 4.1% in sales for the year 2018. Although other companies such as Macy had surpassed his mark, the company had shown consistency thus attracting more investors.
The company has also indicated high accuracy in its sales prediction with actual sales deviating with less than 1% of the projected sales. This shows that the company has effective research and development models to facilitate the development and implementation of strategies.
Resources and Capabilities
Bargaining power, economies of scale, and brand recognition are the most important competitive powers held by Nordstrom (Loeb, 2018). For over a century, the company has dominated the USA and Canadian markets. This makes it legitimate to consumers, suppliers, and competitors. Its recognition in the market and association of its brand with high quality enables the company to bring new products into the market and receive a positive reception. Any strategic plan aiming at increasing the company’s sustainability and competitiveness must build from these three resources.
Lasting Competition over Rivals
The current competitive position held by Nordstrom is enough to ensure its continued dominance in the market. However, it is important for the management of the company to come up with market-specific approaches to ensure that these aspects remain relevant in the market. As observed by Medina (2018) competitive advantage is short-lived; however, a review of the current position and strategic adjustments can help maintain the advantage for centuries. Therefore, even if Nordstrom holds the advantage today based on its capabilities, it must continuously evolve to maintain the applicability of these resources.
Value Chain and Cost Structure
The company gets raw materials for its in-house brands and finished products for the retail line. Due to its size and its economies of scale, the company has a wide margin to set the pricing depending on the demographics of the consumer population. In the attempts to maintain its name as a luxury brand, the company, alongside its competitors has exaggerated the price to their advantages. In the end, the company gains from the consumer, without necessarily increasing the cost of products received from the suppliers.
Comparison with Rivals
When compared with its rivals, Nordstrom has a huge competitive advantage. To begin with, the company shares in the Forex have grown consistently apart from 2016. The company has also shown consistent growth in its shares thus attracting more investor through public shares. However, the company faces a price and location challenge where most of its stores are not accessible to new consumers.
Management Issues
Despite the growth of the company, analysts have warned its management of its tremendous growth. While growth is a good thing for any business, it often brings about challenges when the markets change (Levine-Weinberg, 2017). These have been identified with large companies such as Nokia, which expanded their physical presence without corresponding growth in internal capacities. The company later failed due to a lack of competitive products. Nordstrom’s growth raises an alarm due to the increased risks involved. The recommendations made seek to promote the current growth, while ensuring sustainability.
Strategic Recommendation
The current growth of Nordstrom indicates that the current strategies are working. However, the company faces a critical challenge in its pricing model. To date, the company has relied on maintaining premium pricing while ensuring the growth of its off-prices using its rack-storage in apparel stores. This growth of rack store challenges the company’s position as a luxury store. Considering the fact that the company had relied on branding itself as a luxury brand for over a century, such a shift in brand might affect its dominance in the end. Moreover, the company faces a challenge from the fast-growing and combined fashion brands such as Zara and H&M, which have both luxury and regular products. If Nordstrom eventually enters into this market, it will have a lower competitive advantage when compared to other companies.
It is thus recommendable for the company to segment its market. By applying its huge economies of scale, Nordstrom should segment luxury and rack products to avoid confusion in the future. Additionally, the company should promote its cash-cows, which have been the regular lines for luxury products. These cash-cows are at a threat following the introduction of rack products. Despite the company’s growth, failure to promote its reliable source of income will lead to lower revenue in the future.
References
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Chernev, A. (2017). The business model: how to develop new products, create market value and
make the competition irrelevant . Cerebellum Press.
CSI Markets. (2019). Nordstrom (JWN) Growth Rates Comparisons to Retail Apparel Industry, Sector, Market. Sales, Income, EPS. Retrieved from https://csimarket.com/stocks/growthrates.php?code=JWN
De Mooij, M. (2018). Global marketing and advertising: Understanding cultural paradoxes . SAGE Publications Limited.
Ghemawat, P. (2016). Evolving ideas about business strategy. Business History Review , 90 (4), 727-749.
Levine-Weinberg, A. (2017, May 15). Nordstrom Is Obsessed With Growth -- and That May Not Be a Good Thing. Retrieved from https://www.fool.com/investing/2017/05/15/nordstrom-is-obsessed-with-growth-and-that-may-not.aspx
Loeb, W. (2018, August 20). Nordstrom's Digital Growth Is Enormous And Should Continue To Improve. Retrieved from https://www.forbes.com/sites/walterloeb/2018/08/20/nordstrom-digital-growth-is-enormous-and-will-grow-further/#5182070a5d0b
Lorenczik, S., Malischek, R., & Trüby, J. (2017). Modeling strategic investment decisions in spatial markets. European Journal of Operational Research , 256 (2), 605-618.
Medina, P. (2017). Import competition, quality upgrading and exporting: Evidence from the Peruvian apparel industry. University of Toronto mimeo .
Whaley, K. (2017, August 14). Nordstrom employees' failed lawsuit refines 'day of rest' law. Retrieved from https://norcalrecord.com/stories/511183158-nordstrom-employees-failed-lawsuit-refines-day-of-rest-law
