Competitive Environment Abercrombie and Fitch and Recommendation of a Strategy - Coursework Example

Analysis of the company Abercombie and Fitch and its competitive Environment, and Recommendation of a Strategy Introduction The company AbercombieCo. was founded by David Abercombie in Manhattan in 1892. The company sold fishing and hunting equipment. However, in 1907 Fitch has purchased Abercombie’s share and expanded the store’s general-retail products/items. In 1988 the company has been sold to Limited Brands, who refocused the brand on apparel (Business Insider, 2014). Since its acquisition, A&F has grown to a well-known brand, especially popular among the youth. Today, Abercombie and Fitch (A&F) is a specialty retailer, selling clothes, personal care products, and accessories. The company has established its reputation as a “one-stop” place for shopping of the whole family (MarketLine Advantage, 2014). During the period of management by the CEO Mike Jeffries the company also has gained some negative reputation, for being racist, discriminative and has been involved in several lawsuits. In FY 2013 the company has reported same-store sales decline by 10%, indicating on the worsening financial position of A&F (Business Insider, 2014). A&F being a large diversified corporation is made up of multiple Strategic Business Units. For the current analysis the SBU of A&F has been identified by geographical criteria. The aim of this report is to suggest a number of strategies for A&F. This report will critically investigate and evaluate A&F current & future strategies. 2. The current internal environment 2.1 Resources and Competences This analysis identifies A&F’s core and distinctive resources. Threshold Resources: Leader among specialist retailers (compound annual growth in revenues during 2009-2013 was 67.2%) (see Figure 1) National and international presence (Stores: 1006 in total, U.S. – 843; International-163) Brand reputation and international recognition Threshold Competences Casual sportwear apparel, personal care products, accessories for men, women, and kids; bras, sleepwear and underwear for girls (Abercombie & Fitch Annual Report, 2013) Partnership with 175 vendors across the globe Distinctive Resources: - Companys total customer relationship management database of over ten million contacts, including mobile phone numbers and email addresses (Abercombie & Fitch Annual Report, 2013). Distinctive Competences Focus on producing cool clothes for cool people; Use of cologne in store (unique shopping experience) (Chloehalley.com, 2014). Table 1. A& Resources and Competences Figure 1. Leading 20 specialist retailers: compound annual growth in revenues, 2009-2013 (Source: Mintel) 2.2 Value, Rarity, Inimitability, Organisational support Analysis (VRIO) Value: A&F’s capabilities are valued by the customers (mainly in the US market) and enable the organization to respond to current environmental opportunities and threats (competitive advantage); Rarity: A&F partially has capabilities that no (or few) competitors possess (partnership with 175 vendors across the world) (competitive parity); Inimitability: capabilities are not as difficult and costly for competitors to obtain or imitate as the company has no manufacturing, and its business is built around the brand, which is weakening (competitive disadvantage); Organizational Support: for now the organization is appropriately organized to exploit it capabilities, however, this might not be enough if the company pursues more aggressive international business expansion (Temporary competitive advantage). 2.3. Strengths and Weaknesses Analysis Analysis of the company’s strengths and weaknesses is a helpful tool in analyzing its current internal environment. Strengths One of the major strengths of A&F is referred to the well-diversified brand portfolio comprised of the following brands: Abercombie & Fitch, Hollister, Abercombie kids, and Gilly Hicks. These brands offer sportswear apparel, personal care and accessories for a broad category of customers, including men, women, youth and kids. Due to brand portfolio diversification the company has managed to position itself in the minds of the customers as “one-stop” store. Also, the company operates a large number of stores in North America, Asia, and Europe, which helps it to reach greater number of customers and thus to generate greater sales. As of 2014, A & F operated more than 1000 stores (MarketLine Advantage, 2014). In addition to significant expansion of retail stores, A & F has a strong presence in the e-commerce market, whereas each brand has its own website (MarketLine Advantage, 2014). Taking into consideration the recent shift from traditional shopping to interactive online shopping, this strength plays an important role in the A & F performance. By operating the online-stores the company is enabled to reach greater number of customers despite their geographical location and time factor. With the introduction of websites, the total net merchandise sales through e-commerce channel have reached $777 million in FY 2014 (MarketLine Advantage, 2014). Interactive online shopping also enables the company to develop its databases of customers, and make its marketing strategies more effective. Weaknesses One of the major weaknesses of the company is the company’s dependence on independent third party manufacturers (MarketLine Advantage, 2014). Even though the company operates the stores in Europe and Asia, it is still heavily dependent on the US market. The total number of the A&F stores is 1006, 843 of which are located in the US (MarketLine Advantage, 2014). Another significant factor that weakens company’s position is its overdependence on the US market (MarketLine Advantage, 2014). The company doesn’t operate or own any manufacturing facilities and thus is heavily dependent on the vendors who manufacture the products for A&F. The company’s business is heavily dependent on the performance (timely receipt of order, quality, sourcing costs, etc.) of its 175 vendors scattered across the globe (MarketLine Advantage, 2014). Moreover, the company sells its product online, but performs these online operations via third-party computer software/hardware providers and thus is extremely vulnerable to hacker attacks and credit card frauds. Another weakness of the company is its black spotted reputation for being discriminatory towards both its employees and potential customers. Even though this strategy was effective in the 1990s, nowadays, in the era of global liberalization, empowerment of human rights organizations and social awareness, such positioning of the brand can be fatal for the A&F (Business Insider, 2014). 3. The current competitive environment As it has been identified in the introductory part of the essay, analysis of the SBU on A&F is limited two major criteria: product and geography. Thus, section of analysis of current competitive environment will be based on the analysis of cloth retailing industry in the United Kingdom. PESTEL Analysis Political factors No specific factors have been identified Economic factors GDP GDP at current prices has grown by 4.8% in 2010, with consecutively steadying rates in the next years (Tutt, 2014). Inflation rates Inflation rates in the UK have undergone some fluctuations throughout the period from 2009 to 2013. In 2013, inflation was fixed at rate of 3%, displaying economic stability in the country (Tutt, 2014). UK population The UK population has increased by 3.2% between 2009 and 2013. An average rate of population growth in the UK is 0.8% annually. Moreover, the female population in the UK is consistently larger than the male population, 50.7% and 49.3%, respectively (Tutt, 2014). Socio-cultural factors Fast Fashion Cheap clothes and availability of broad rand of clothes at cheap price facilitated with increased consumption trend has lead to fast fashion phenomenon. Clothing retailers introduce new products to retail stores in increasingly rapid timescales in order to meet the consumer demand for the latest trends (Tutt, 2014: 4). Rise in Men’s Fashion Traditionally, womenswear has been the major share in fashion industry while male fashion had a much less brand offering and diversification of products. However, there has occurred a shift in consumer’s behavior as more and more men are increasingly involved in the fashion industry (Tutt, 2014). This might be a great opportunity for retailers, as demand for a casual wear, and underwear for man tends to grow. Youth Fashionwear Collections Younger generation becomes increasingly fashion-focused and thus, there is a huge opportunity for the development of niche for youth specific fashionwear ranges in the UK (Tutt, 2014). Technological factors E-commerce and mobile shopping Rapid growth of technology use has contributed to increased integration of IT to the e-retailing. Growing numbers of smartphone users who prefer to do purchase online have encouraged many companies to develop applications for web-enabled mobile devices (Scotton, 2014). Such a digital revolution enables retailers to cut the costs associated with rent fee and thus helps to compete more aggressively on price. On the other hand, with the development of tech-based methods of shopping and payment the number and potential of cybercrime and e-crime also is more likely to grow. This might pose a threat of increased costs associated with protecting retailer’s websites (Scotton, 2014). Environmental factors Water scarcity Increased awareness of global warming and scarcity of water resources might threaten the A&F business as for growing cotton significant amount of water is required. As the company’s products are made of cotton, it might rise the cost of raw materials substantially. Legal factors The legislation related to discriminatory HR and business practices is well-developed in the UK. It means that the company might be suited for unethical or discriminatory behavior in relation to its employees, customers, and other stakeholders ( Industry Life Cycle The clothing retailing industry in the UK is in mature stage of its industry life cycle (Scotton, 2014). Market growth pace is slightly slower than the pace of economy growth, compound annual rate of 1.5% versus 2.2 %. The market faces a challenge of increased competition on behalf of pure-play online retailers and supermarkets (Scotton, 2014). Online retailing has gained great popularity and demand among the UK consumers, and many companies have focused their investment and development efforts in e-commerce and online advertising (Scotton, 2014). All these factors contribute to market saturation and result in maturity of industry life cycle. Figure 2. Industry Life cycle (Scotton, 2014). Porter’s Five Forces Threat of New entries: HIGH In order to enter the retail industry in the UK the firm does not need to invest significant capital or adhere to strict legislation. The barriers for entry are low and the threat of new entries – high (Scotton, 2014). Threat of Substitutes: LOW Threat of substitutes is low as clothes can hardly be replaced by something else. Customer Power: MODERATE Customer Power is rated at moderate level, as customers tend to wait for discounts and sales, which make the company to reduce prices in order to sell collection. Supplier Power: LOW As for now the company is supplied by 175 vendors from different geographical locations, and there is a high number of potential suppliers. Competitive Rivalry: HIGH Competition is high in the industry, and is highly fragmented: local retailers, international brands, online apparel retailers and supermarkets (MarketLine Case study, 2014). Products and Market segmentation While analyzing clothing retail industry in the UK it might be very useful to understand the market segments and the weight of each segment on the market. As it is shown in the Figure 1, clothing retail industry in the UK is divided into four major categories, including the following: women’s clothing (almost 60% of the market), men’s clothing (20%), children’s and kid’s clothing (10%) and accessories (8.5%) (Scotton, 2014). Figure 3. Products and services segmentation: clothing retail industry (Source: Ibisworld, Scotton 2014). Furthermore, it is possible to segment market based on age criteria of key consumers groups. Below is presented Figure 2, which illustrates market segmentation in the UK. Figure 4. Major market segmentation: clothing retail industry (Source: Ibisworld, Scotton 2014). As it is illustrated in Figure 2, consumers aged 29 and under comprise almost 25% of the market share based on age criteria. Taking into consideration the fact that the A&F brand heavily focuses on youth and kids segment, there are opportunities for business growth. 4. Potential scenarios for the future competitive environment Stage 1 Existing strategies developed for 2020 to recover productivity and profitability in the U.S. stores to continue international expansion and growth to increase direct-to-consumer penetration to reduce expenses (Abercombie & Fitch Annual Report, 2013). Changes in the sector take 10-15 to have a full impact shift from high-street shopping to online shopping increased globalization of retail markets Stage 2 Factors of uncertainty for A&F Political 1. Fluctuations in tax obligations and effective tax rate 2. Political relationships between the US and the UK/Europe 3. Political stability of developing countries (might lead to interruption in the flow of merchandise from the A&F’s key vendors) 4. Increased costs for natural resources because of scarcity Social 5. changes fashion trends and consumer preferences in fashion items 6. accelerated fast fashion trend Economic 7. Disposable income in the UK 8. Unemployment rate in the UK 9. British pound value/fluctuations in foreign currency exchange rates 10. Fluctuations in the availability, cost, and quality of raw materials, and labor Technological 11. E-crime and cybercrime for online shopping and online payment activities 12. Robots will replace human beings, enabling thus retailers to reduce costs on employees in physical stores Stage 3 The most important and most uncertain factors 3. Political stability of developing countries 4. Changes fashion trends and consumer preferences in fashion items 6. Disposable income in the UK 9. Fluctuations in the availability, cost, and quality of raw materials, and labor 10. E-crime and cybercrime for online shopping and online payment activities Stage 4 Scenarios for 2030 1) European decline and the rise of developing countries The economy of European Union is in decline and it inevitably impacts the economy of UK. As a result there are strong fluctuations of the British pound and increase of unemployment rate which negatively impacts on consumers’ disposable income. 2) The Technology world Consumers perform shopping mainly through online platforms, as the number of stores has decreased dramatically. People order clothes from other countries, track their purchase and delivery. Hardly anyone does purchases offline. Robots will replace consultants in stores. 3) Scarcity of resources leads to increased prices for apparel Demand for clothes is more likely to decrease as the cost of manufacturing will increase significantly as a result of scarcity of natural resources (for example, water). Stage 5 Impact of scenarios in industry Today 2015 European decline and rise of developing economies The Technology world Scarcity of natural resources Threat of new entrants High High High Low Threat of substitutes Low Low Low High Power of suppliers Low High Medium High Competitive rivalry High High High Medium Table 2: Impact of scenarios in industry 5. Potential strategies for consideration Potential strategies for consideration for A&F are listed below. 1. Cost leadership strategy – to focus on providing low-cost products for certain category of customers. The company can offer less expensive apparel items for teenagers and youth who want to have branded clothes but do not have much money for buying expensive items. 2. Focus strategy – to focus on youth segment as this segment is forecasted to grow and the company has a capability to capture market share in the UK. 3. Market penetration – the company already is present on the UK market and sells the existing products. 4. Related diversification – extension on the distinctive competences, resources and capabilities of the company into new but related areas (shoes, hats, underwear, etc.). 5. Outsourcing – this strategy is already applied within a company, as A&F acquires inputs from outside vendors from developing markets. In such a way the company avoids the threat of excess capacity and the risk of being tied into an obsolete technology. 6. Selective growth – the company’s business strength is medium, while industry attractiveness is relatively high. Therefore, there is a potential for adopting this strategy for the UK market. 7. Local responsiveness – despite the global integration, and unification of consumer tastes there is a significant difference in approach to fashion in the USA and the UK. A&F should adapt its products to local consumer tastes and culture. 8. Multi-Domestic strategy – the company can customize its products and marketing activities in response to national differences, enabling thus its SBU in the UK be more competitive on the market. 9. Transnational strategy – the company has potential to grow to transnational company operating across the globe. This strategy will enable A&F to set up efficient operations and simultaneously adapt its products and marketing to local conditions. 10. Innovation strategy – innovative approach of engaging with customers via social media platforms and innovative approach of customer service might become a good strategy for the company. 11. M&A – this strategy is a potential strategy for the company as the apparel industry in the UK is Mature already, and consolidation of industry through acquisition will help the company to cut unnecessary costs, to grow its reputation and to harvest weaker activities. The company could acquire the company which manufactures the products itself and thus, could decrease its dependency on vendors. 6. Three strategies for implementation The dimension of the strategic decision making process used in this report is rationality (searching for relevant information, gathering and analyzing relevant information (Dean & Sharfman, 1996). There can be identified three major strategies for implementation by A&F in the UK market: 1. Focus strategy – target youth segment with a low quality-low price offering to increase market share; 2. M&A – acquire a local UK manufacturer/distributor of clothes; 3. Innovation strategy – product innovation (eco-friendly products, sustainable manufacturing). Strategic Choice from ‘traditional analysis’ (short and medium term strategies) Short and medium term strategies Feasibility Sustainability Acceptability Result Comment on implications Focus strategy 2 4 3 8 By targeting youth segment with a low quality-low price offering in the UK the company will be able to increase its market share in this specific segment. The company gains an opportunity to reinvigorate its reputation and popularity among teenagers. Trend of the growth of fashion focused younger generation in the UK is a great opportunity for A&F. M&A strategy 4 3 5 12 By acquiring one of the manufacturers/producers of cloth items, the company will be enabled to lower the risk associated with its dependency on external vendors. Also, the company gain other benefits from this deal (brand loyalty, increased recognition, positive PR, etc.) Strategic Choice from scenario planning Long- term strategy Product Innovation Comment on implications Feasibility Sustainability Acceptability Result Scenario 1 European decline and rise of developing economies 1 4 2 8 Product innovation (cloth tissue, longeavity of wearing, etc.) is more likely to have minor positive effect in case of decline of European countries, as demand for this products will fall with the downturn of EU economy Scenario 2 The Technology world 4 4 3 12 In the world of technology product innovation is a great strategy as it will fit strategically to the external environment. People will be eager to buy new and innovative clothes and accessories Scenario 3 Scarcity of natural resources 5 5 2 12 In case of natural resources scarcity, the company will be able to compete with other firms as it will focus on innovating clothes which do not need to be washed with water (dry cleaning), or manufacturing with no/little water consumption, etc. This feature will add to the A&F’s distinctive competencies. However, for this scenario, the company needs to invest significant capital in R&D, which might be problematic or even unrealistic for A&F References: Abercombie & Fitch (2013). Annual Report. Available at http://www.abercrombie.co.uk/anf/investors/investorrelations.html Business Insider (2014). The Rise And Fall Of Abercrombie & Fitch. Available at http://uk.businessinsider.com/abercrombie-and-fitch-history-2014-12?op=1 Chloehalley.com. (2014). Positioning strategy of Abercombie & Fitch. Chloe’s Portfolio. Available at: http://chloehalley.com/tag/positioning-strategy-of-abercrombie-and-fitch/ Dean, J. W. & Sharfman, M. P. (1996). Does decision process matter? A study of strategic decision making effectiveness. Academy of Management Journal, 39: 368 - 396. MarketLine Advantage (2014). Abercombie & Fitch Co. SWOT Analysis. MarketLine Case study, (2014). High Street Fashion Retailers. Survival of the fittest. MarketLine. Scotton R. (2014). Following the trends: Revenue is set to expand as operations develop their online operations. IBISWorld Indutstry Report G47.710, Clothing Retailing in the UK. Tutt, L. (2014). Cloting Retialing. Market Update 2014. KeyNote Report, 11th ed. Read More