Blue Nile Inc. in 2010: Will its Strategy to Remain Number One in Online Diamond Retailing Work?

1. How strong are the competitive forces confronting Blue Nile and other online retail jewelers? Do a five-forces analysis to support your answer.

Rivalry among competing sellers: Rivalry among competing sellers is very strong. For one, the firms in the industry have high fixed costs. Jewelry is meant to be expensive, its a luxury item. According to the text, the diamond and fine jewelry retail market was intensely competitive, with sales highly fragmented among locally owned jewelry stores and other retail stores. There are many ways to purchase jewelry. Second, competitors are numerous and are roughly equal size and competitive strength. There are 27,000 jewelry stores in the United States. With the top 40 jewelry chain stores operating about 6,405 stores. In this case, Blue Nile had to compete with online and offline traders. The recession hit the jewelry business real hard but Blue Niles business model kept them functioning through the hard times. In addition, many of the online retailers employed Blue Niles business model purchasing stones from suppliers only when an order for a specific stone was received and quick delivery when purchased.

Suppliers: Supplier bargaining power is weak in this industry. Blue Niles economical supply chain and comparatively low operating costs allowed it to sell comparable-quality jewelry at substantially lower prices than the leading competitor. Blue Nile found a way to exclusively make arrangements that allowed diamond and gem suppliers products on the website. These arrangements included multi-year agreements where only designated diamonds were offered only on their website. Second, they didnt purchase a diamond or gem from suppliers until a customer placed an order. In contrast, traditional jewelers had far bigger inventories relative to annual sales. There wasnt much competition among suppliers. Since Blue Nile had negotiated agreements with a variety of suppliers, thus limiting its dependence on particular suppliers. In addition, their effective business model made it convenient for suppliers to also make a profit and advertise their product. Providing them with real-time market intelligence about what items were selling,

potential of high sales volume through a single account, and a way to achieve more inventory turns and manage their own inventories effectively. Firms in other industries offering substitute products: It is very difficult to substitute such products since people are looking for the best quality of diamonds. Industries offering substitute products probably have a weak competitive force when confronting Blue Nile and other online retail jewelers. Buyer bargaining power: Buyer bargaining power is moderate since individuals dont mind paying the higher price to receive their perfect ring or customized jewelry. Buyers are well informed about the quality, prices, and costs of sellers. Blue Nile provided detailed product information that enabled the buyer to compare diamonds. In addition, they offered professionally prepared grading reports for a diamond/gemstone and through its facilitated comparison shopping Blue Niles also compared their product prices to other competitors. Buyers have the ability to postpone purchases and have a 30 day return policy if dissatisfied with their product. Buyers can be price-sensitive since they may earn low profit or income, in this recession. Yet, buyer costs of switching to competing brands or substitutes are relatively high. Then you run into those customers who are not pricesensitive and are willing to pay more to get the perfect diamond. Potential new entrants: Entry threats are weaker. There is already strong differentiation and brand loyalty. To begin, a new entrant must have high capital requirements. There are restrictive government policies against blood or conflict diamonds. Industry members are willing and able to contest new entries and the industry outlook is risky and uncertain with so many jewelry stores already competing, discouraging the new entrant. The most important barrier to new entrants is the significant cost advantages held by existing firms due to experience and learning curve effects. Potential new entrants will be faced with strong competition, since many websites already educate the buyer on what to look for and gives them information on the quality of their diamond. 2. What key factors will determine a companys success in the online jewelry business in the next 3-5 years?

One key factor is identifying the industries drivers of change, increasing globalization, and keeping track of the industrys long term growth rate. Other key factors that will determine a companys success in the online jewelry business is keeping up with the shifts in buyer demographics, new internet capabilities, product and marketing innovation, changing societal concerns on blood or conflict diamonds, attitudes and lifestyles in this recession. The most important key factor is developing a strategy that will prepare the company for any industry shifts. Blue Nile must continue to be reliable and maintain strong customer service. 3. What is Blue Niles strategy? Which of the five generic competitive strategies discussed in Chapter 5 most closely fit the competitive approach that Blue Nile is taking? What type of competitive advantage is Blue Nile trying to achieve?

Blue Niles strategy is to develop a brand based on trust, guidance and value. Blue Niles strategy consists of two core elements. One, offering high quality diamonds and fine jewelry at comparatively attractive prices. Two, providing customers with useful information and trusted guidance throughout their purchasing process. In addition, providing educational information, indepth product information, and grading reports, with wide product selection and attractive prices, are their key drivers to a successful strategy. Also, the companies supply arrangements and justin time inventory management was key to their success. This includes overnight or daily shipping and a strong customer service. Of the five generic competitive strategies discussed in Chapter 5 the most closely one that fits to the competitive approach that Blue Nile is taking is the best-cost provider strategy. Blue Nile is giving customers more value for the money by offering upscale product attributes at a lower cost than rivals. They are also blending elements of differentiation and lowcost strategies. This is the type of competitive advantage Blue Nile is trying to achieve with the addition of educating their customers on the best diamond they can purchase through the use of the five Cs (cut shape, cut, color, clarity, and carat weight) educating customers about what characteristics determine the quality and value of various stones. 4. What do you like and dislike about Blue Niles business model?

I like Blue Niles business model for the most part. Its business model educates the customer on why and how their product it priced. In addition, having a professionally prepared grading report is also something I like. Customer service not being pushy, fast delivery, customized jewelry, and 30-day return policy is all of the other things I like about Blue Nile business model. One thing I dislike about their business model is that everything is online. Yes, you can customize your jewelry but sometimes it is difficult to picture it in your head or seeing it through a screen. If Blue Nile had a couple of jewelry chains this would be perfect. Looking at wide selections online can get very boring.

5. What does a SWOT analysis of Blue Nile reveal about the overall attractiveness of its situation?

Strengths: Blue Nile has many distinctive competencies. Two main strengths are offering high-quality diamonds and fine jewelry at comparatively attractive prices and providing jewelry shoppers with useful information and trusted guidance throughout their purchasing process. This includes the use of two of the most respected laboratories in the diamond industry known for their consistency and unbiased diamond-grading systems.

Weaknesses: Blue Niles main weaknesses are convincing understandably skittish shoppers to purchase diamonds and fine jewelry online and then to purchase their specific diamonds since customers enjoy traditional ways of shopping and have already brand loyalty to their local jewelers.

Opportunities: Shifting market conditions are one of the many opportunities for Blue Nile. With everything going online its easy to purchase in the comfort of your own home or through your mobile device through applications already provided by Blue Nile. Expanding into new geographic markets is another opportunity for Blue Nile. A diamond someone wants how they want it is very important. Customizable jewelry is another opportunity for this company since many jewelers already have such high inventory.

Threats: Significant threats are leading competitors going online themselves as explained in the case. Also, other competitors using Blue Niles business model to their convenience and advantage. Since most of these leading competitors already have some brand loyalty providing their services online can only increase their profit.

The overall SWOT analysis of Blue Nile reveals and overall appealing attractiveness of its situation. Its the companys strengths the basis of its strategy in which they place heavy reliance. The first-movers strategy into online jewelry retail is what gives it the overall attractiveness of its situation. Opportunities of expanding globally will bring in more profits regardless whether competitors being to have online operations themselves. Blue Nile is already serving that niche. 6. What is your appraisal of Blue Niles financial performance based on the data in case Exhibit 4? How well is the company doing financially? Is there evidence that Blue Niles strategy is workingwhat is the story of the numbers in case Exhibit 4? Use the financial ratios in Table 4.1 of Chapter 4 as a guide in doing the calculations needed to arrive at an analysis-based answer to your assessment of Blue Niles recent financial performance. My appraisal of Blue Niles financial performance based on the data in case Exhibit 4 is moderate. There is a need for improvement but everyone was hit with the recession, obviously their not making as much of a high profit as in 2007 but they are still making higher revenues then how they initially started. There is evidence that Blue Niles strategy is working since sales are about the same pace as the market as a whole. In addition, as mentioned in the case, Blue Niles business model was self-funding because suppliers financed Blue Niles sale growth. With that said despite the recession Blue Niles business model allowed the company to continue generating cash 40 to 50 days ahead of the need to pay suppliers.

When calculating Blue Niles gross profit margin it showed the percentage of revenues available to cover operating expenses and yield a profit. It wasnt as high but the trend is upward. The following are the percentages I received: 2009, 21.63%; 2008, 20.31%; 2007, 20.42%; and 2006, 20.23%. Another calculation I used to arrive at an analysis-based answer is the firms current ratio. It shows the ability to pay current liabilities using assets that can be converted to cash in the near term. In conclusion, the ratio showed to be higher than 1.0 yet it wasnt higher than a 2.0 which was the current ratio back in 2005 (2.38). Every year its decreasing. The following are

the current ratios: 2009, 1.34; 2008, 1.11; 2007, 1.55; and 2006, 1.56. Its recent financial performance is good but overall can be moderate.

7. Does Blue Nile have adequate competitive strength to go head-to-head against its rivals? Do a weighted competitive strength assessment using the methodology presented in Table 4.4 on p. 123 of Chapter 4 to support your answer. Has Blue Nile built a sustainable competitive advantage in the online retail jewelry business? Why or why not?

Competitive Strength Assessment Table- (Rating scale: 1= very weak; 10 = very strong) Blue Nile Key Success Factor/Strength Measure 1 2 3 4
Sum of Importance Weights Overall Competitive strength rating

Importance Weight .30 .20 .20 .30 1.00

Strength Rating 10 7 5 7

Weighted score 3 1.4 1 2.1 7.5

Amazon .com Strength Weight Rating Score 5 6 8 7 1.5 1.2 1.6 2.1 6.4

Ice. com Strength Rating 4 5 8 5

Weight Score 1.2 1 1.6 1.5 5.3

1. Relative Cost Position

4. Customer Service Capabilities

2. Dealer Network/ Distribution Capability 3. Reputation/ Image

Blue Nile does have adequate competitive strength to go head-to-head against its rivals. Blue Nile has built a sustainable competitive advantage in the online retail jewelry business since it gives better quality diamonds at an affordable rate compared to its leading competitors. Secondly, they are concerned about their customer so they help them out through the process by educating and proving a pleasant customer service experience, without pushing the buyer into purchasing a product.

8. What strategic issues and problems does Blue Nile management need to address?

Strategic issues and problems Blue Nile management need to address is the problem of other leading competitors getting a hold of their business model and using it to their advantage. Management must continuously find different ways to better their strategy and stay on top of online competitors.

9. What does Blue Nile need to do to strengthen its competitive position and future strategic and financial performance?

To strengthen its competitive advantage Blue Nile should attempt to expand its services abroad and into new geographical areas. Another important thing they need to do is market their product elsewhere not only on online websites. Financially they need to keep track of their revenues and continue to make a bigger a profit to improve their gross profit margin and current ratio.