Such external forces affect companies strategic

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range of operating activities. Such external forces affect companies' strategic planning and expected short-term and long-term profits. A company's relative strength within its industry, and vis-a-vis its suppliers and customers, can determine both profitability and its asset base. As competition intensifies, profitability likely declines, and the level of assets needed to compete likely increases. These changes in the income statement and the balance sheet can adversely impact operating performance and cash flow and the company's ability to repay its debts. There are several ways to systematically consider broader business forces. We discuss one such framework: Porter's Five Forces (Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1980 and 1998); and we assess each force for Home Depot.
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Module 4 I Credit Risk Analysis and Interpretation 4-10 Buyer power Buyers, the customers, with strong bargaining power can extract price conces- and demand a higher level of service and delayed payment terms; further, a company that strong customers has decreased profits and operating cash flows. Home Depot's buyer 'er is low. Home Depot has three types of customers: do-it-yourself (DIY) customers, buy-it- elf customers (those who like to pick out materials and appliances but want a professional to them), and the professional customer (contractors, plumbers, landscapers). None of these mers has strong bargaining power with Home Depot, although the company does now offer == -quantity purchases and separate staff to assist professional customers. Supplier power Suppliers with strong bargaining power can demand higher prices and ier payments; a company that faces strong suppliers has decreased profits and operating cash -5. Home Depot's supplier power is low. A typical Home Depot store has 40,000 different cts purchased from many suppliers. It often accounts for a large portion of a supplier's sales. ~"- decreases the supplier's power and Home Depot can command lower prices and longer pay- t terms. These sorts of concessions increase Home Depot's margins. Threat of substitution As the number of product substitutes increases, sellers have less er to raise prices and/or pass on costs to buyers; accordingly, threat of substitution places ward pressure on sellers' profits. At Home Depot, the threat of substitution is low to medi- There are few substitutes for home improvement and the nesting instinct is timeless. Home t offers in-store "How To" classes that customers can substitute with online instructions do-it-yourself videos. In times of economic growth, new-home purchases are a substitute but ent a minimal threat because even new home owners want to decorate, landscape, and make improvements. Threat of entry New market entrants increase competition; to mitigate that threat, compa- expend monies on activities such as new technologies, promotion, and human development erect barriers to entry and to create economies of scale. Home Depot faces a weak threat of in the form of big-box retailers. New market entrants would find it difficult to compete tly with Home Depot and Lowes. Both companies enjoy economies of scale and are pro-
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