Levis Strategy and Marketing - Case Study Example

Table of contents Introduction. 2 2. International marketing principles 3 2 Overview of the apparel industry and removal of trade barriers 3 2.2 Levi’s worldwide operations 4 2.3 Standardization versus adaptation 4 3. Levi’s strategy 3.1 Foreign Market selection 8 3.2 Mode of entry 8 3.3 Market expansion strategies 9 3.4 Market portfolio strategies 10 3.5 Legal factors 12 3.6 Political factors 13 3.7 Cultural factors 13 3.8 Technological factors 14 3.9 Marketing mix strategies for individual country markets 14 4. Conclusion 15 References 16 1. Introduction Levi Strauss & Co. (Levis) is engaged in designing and marketing products that include jeans and jeans-related pants, casual and dress pants, tops, jackets, and related accessories for men, women and children. Incorporated in the United States in 1893, Levi Strauss is one the most recognized trademarks in the world and is registered in more than 160 countries (Mistler, 2001). It is a Fortune 500 company and has an expansive global presence. It is the world’s largest manufacturer of blue denim jeans (Vrontis & Vronti, 2004). The company has three flagship brands namely Levi’s, Dockers, and Levis Strauss Signature suitable for a variety of consumers and have a strong global appeal (Just-Style, 2006). The corporation is organized into three geographic divisions – the Americas with San Francisco as the headquarters, Europe, Middle East and Africa (LSEMA), based in Brussels and the Asia Pacific Division (APD) based in Singapore. As of November 2005, the company sold through 55,000 retail locations across 100 countries. It has 107 own retail stores (those operated by self, independent franchisees and licensees) while in Europe and Asia it has 348 and 492 stores respectively (Just-Style). The company grew through acquisition and also licensed its name to be used on other products like shoes and socks. When the company ran into difficulties in early 1980s it entered into agreements with mass merchandisers to market its products (Mistler, 2001). By mid 1990s the company was back on track and started expanding in Eastern Europe and India as well. This report would look into the factors that led it to adopt a different approach in marketing its products in different regions and countries. 2. International marketing principles Due to trade liberalization and enhanced communication, international trading has become a necessity in many sectors, one of them being the apparel sector. The internationalization process involves strategic and tactical decisions (GEB, 2006). The strategic decisions include foreign market selection, mode of entry decision, product portfolio strategies and market expansion strategies. The tactical decisions include the marketing mix strategy for individual country markets. 2.1 Overview of the apparel industry and removal of trade barriers Massive changes have come in after the apparel industry was freed from quota restrictions on 1st January 2005 after over forty years (Saheed, 2006). The enormous garment production capacity of many countries, so far locked due to quota has become available now. This has resulted in increased imports by US and Japan but lower imports in EU market due to decline in spending. While China continues to dominate in the apparel trade South East Asia is emerging as an alternative to China as a favored sourcing destination. Exports have also increased from Bangladesh, Sri Lanka and Cambodia. Buyers are now looking to work on long term with vendors than on pure transactional basis. Since the industry is now a buyer-driven market, the garment industry is now working more as a service industry. Liberalization of apparel trade has created uncertainty among producing countries, workers and enterprises worldwide. Globalization and the availability of cheap labor forced many companies to shift production overseas. Trade liberalization has induced rapid structural change. After removal of the quota restrictions when the Multi Fiber Arrangement (MFA) was phased out, intense competition forced the companies to operate against their own codes of conduct (Colwell, 2002). Levis too forced to do so as its sales forty percent in early 2000. As the textile industry requires unskilled labor, Levis could concentrate on increasing profits through design and marketing. 2.2 Levi’s worldwide operations Levi Strauss Europe, Middle East and North Africa (LSEMA) is responsible for designing, manufacturing and marketing of jeans under the Levis and Docker brands in this region (Company website). In this region, Levis has three production facilities, nine sales offices and six distribution centers. The company has franchised partners through out Europe to reach their products to the end consumers. In the Asia Pacific Division the strategy is slightly different as they have wholly owned subsidiaries, licensees and distributors. In this region the company sources, manufactures and markets the products through affiliates. 2.3 Standardization versus adaptation International marketing widely differs from domestic marketing especially in the internationalization and the globalization of products, businesses and services. Companies debate between a globalised and a localized approach to international marketing and some even try to find an integrated marketing approach. Differences in culture, behavior, the political stability, government regulations, demographics and customer needs across boundaries creates new challenges and provides new opportunities in international marketing. There can be shifts within the industry which alter the marketing strategies. There are various strategies being used by firms wanting to expand overseas. A global strategy treats the world as a single market whereas localized approach takes into account the local opportunities in forming the strategy. Standardization of the marketing strategy would mean that the same marketing strategy is applied in all markets without taking into account the local factors (Zou, Andrus, Norvell, 1997). This implies that markets and consumer behavior is homogenous. Hence standardization would mean identical product lines at identical prices through identical distribution systems with identical promotional programmes. The benefits of standardizing the international marketing would include cost savings, improved planning and distribution, and greater control across borders. Advanced technology in information, communication and transportation are supposed to have homogenized the markets and this has led to the production of high quality products at lower costs. The adaptation strategy or the localized strategy is based on four major differences across nations – buyer behavior characteristics, socioeconomic condition, marketing infrastructure, and competitive environment (Smith, 2007). Even though Levis is considered to be a product which is mostly bought by young consumers, who regardless of their cultural upbringing, consider themselves to be citizens of the “global village” (MKE, 2003), the company had to adopt a different approach in different countries based on varied factors. Levi’s strategy demonstrates that its approach is a blend of standardization and local adaptation. This chart demonstrates the reasons why a company would decide on standardization or adaptation: Source: Vrontis & Vronti (2004). 3. Levi’s strategy 3.1 Foreign Market selection Geographical and cultural similarities are the drivers of the decision on initial expansion (Waarts & Everdingen, 2006). Based on the cultural research by Hofstede, the countries were divided into three clusters. Research suggests that all US and UK retailers started their expansion in a country belonging to their own cultural cluster. Levis started in a country belonging to another cultural cluster, namely Belgium but situated in the West coast of Europe. 3.2 Mode of entry The mode of entry overseas can be either through wholly owned subsidiaries (WOS), contractual agreements, licensing or joint ventures. In the fashion and apparel industry contractual agreements are common in addition to WOS. Levis operate wholly owned businesses in most European countries, in South Africa, Australia, Japan, Hong Kong, India, The Philippines, Malaysia, New Zealand, South Korea, Taiwan, Brazil and Argentina, in many other countries they operate through joint ventures and licensing agreements (Just-Style, 2006). Because of the low labor costs, Levis operated through contractors in most of the Asian countries but in mid 1990s they had their own wholly owned plant in Philippines (Business Asia, 1994). They became leaders in the domestic market there and Philippines also became a key part of Levi’s international operations. They promoted a culture of high quality and production standards and through this they managed to capture 27% share of the jeans category. In South Korea, Malaysia and Indonesia they operate through contractors but they found that their wholly owned subsidiary performed better than contractors for several reasons. They could maintain a clean work environment along raising the standards of work and moral through regular training. Because Philippines has high education standards and English language skills, they are able to transfer skills from America, which is not possible in other Asian countries. Strategic alliances based on trust result in high level of innovation, dependability and quality. When Levis faced price war from countries with lower labor costs, it too developed relationships with manufacturers in low wage countries like Latin America and South East Asia (Preece et al., 1995). Levis avoided relationships with firms which would affect their reputation. Systematic auditing was undertaken which led the company to take some difficult decisions. Situation demanded that they undertake phased withdrawal from People’s Republic of China and end relationships with contractors in Burma due to human rights problems. 3.3 Market expansion strategies After the initial entry Levis followed the “stepwise cluster-by-cluster approach” which means they first entered two three countries within the same cluster before entering a new cluster (Waarts & Everdingen, 2006). This implies that Levis grew based on its past success. It helped the company to understand the differences and similarities between the different European countries. Levis was uncertain of the demand for jeans in the Mexico market and they were also not sure whether the local tailors could produce the right product. Hence instead of undertaking the production itself, Levis initially subcontracted the production to a local firm and stitching to the local tailors (Mascarenhas, 1982). They did not invest in fixed plant and equipment and kept its resources fluid. This stepwise entry allowed the firm flexibility to withdraw from the market or penetrate further depending upon the response it received. 3.4 Market portfolio strategies The market is determined by demand uncertainty. The highest spending age group in the jeans market is between 15 and 24. Jeans are now even worn to work. Broader assortment of jeans is now available to suit different occasions. In the apparel industry demand is uncertain because it is difficult to foresee the fashion trends in advance for a certain season and product failure rates can be as high as 10 percent (Diaz, 2005). Demand can also be volatile because demand can change suddenly due to a variety of external factors. Because of this demand uncertainty, shorter product life cycles and to combat the reducing prices in the jeans sector, sourcing decisions has to be altered. Language, customs and communications barriers forced the US companies including Levis to change its approach in sourcing. While some established their own sourcing offices overseas, others appointed sourcing agents. Levis tied up with Li & Fung (Trading) Ltd. of Hong Kong who are one of the largest sourcing agents (Abernathy, Volpe & Weil, 2005). They act as a link between the customer base (retail and apparel companies) and the international network. Under licensing agreement, Li & Fung designs, manufactures and markets Levi’s jeans and tops under Levis and Signature brands for the US mass market. Bangladeshi exporters have build strong relations with large buyers like Levis because of the cheapest labour availability, good quality products and sound business relations. Earlier, most apparel manufacturers had used China for sourcing and manufacturing but having realized that it is not wise to rely on one source, Levi would not dissociate with Bangladesh overnight. Ranah George Abraham are the buyers for Levis in Bangladesh (Grumiau, 2004). Levis is not looking for just cheapest producers but for partners that could provide one-stop solution. Bangladesh has now adopted a service-oriented approach and the firms are well organized and invested in latest machines. Levis ensures that they get the right product in time and delivered to their warehouses. The distribution channels have to be adjusted according to local needs and conditions. The choices and number of retail outlets in developing countries are limited and hence the range of selling patterns cannot be deployed in poorer states. In China for instance, only 20 percent of the market is covered by the departmental stores and hence the company has to rely on traditional channels. When the consumers became price conscious and strategy had to be adjusted according to the demands of the market, Levis adjusted to its supply chain. When approached by Wal-Mart and other mass retailers to offer quality products at lower prices, Levis reconfigured its design-sales-distribution value chain (Pitta, Franzak & Little, 2004). This helped the company t reduce the excess stocks but in the process they also had to reduce the role of its factories and company owned distribution centers. Manufacturing was outsourced to other companies and utilized Wal-Mart distribution centers for delivery of jeans to its own stores. The company demonstrated its response to the changing customer needs. Previously Levis used to consider themselves to be manufacturers who designed and produced as per the retailers’ instructions and provided some advertising support to the retailers. With the changed market condition, their strategy has undergone change. Today they are more a marketer than a manufacturer (Roddick, 1996). They spend huge sum of money on retailer support and continuous franchise development. They employ technology to collect point-of-sale information which helps them to understand the fast moving products and replenish stocks immediately. This ensures that major customers are able to maximize sales. 3.5 Legal factors The fashion industry today is marked by short life-cycles, high volatility, low predictability and high impulse purchasing (Christopher, Lowson & Peck, 2004). The abolition of the quotas in the textile industry has pushed down the prices of clothes in general, making the market very competitive. The cheap chic revolution has turned the European fashion market upside down (Mesure, 2007). Jeans in the market are trying to differentiate themselves with cult connotations, lifestyle images, and distinctive details. The weakening of the US dollar has caused a shift in the location of production. When Levis found it cheaper to produce jeans in Asia, Mexico and Mozambique, they closed half of the US plants, cut nearly 6000 jobs and moved its production offshore (Shoulberg, 1999). When Levis faced pressures to cut prices and reduce costs of production, it changed its strategy of procuring locally. 3.6 Political factors Threats from the low-priced jeans market exists and constantly pushes the prices down. Besides, the emergence of the European Union (EU) or the emergence of a single market has prompted the marketers to re-think their marketing strategy. The phenomenon of disposable fashion rules – “buy it, wear it, and chuck it” is the mantra that the fashion conscious follow in the 21st century. Consumers expect low prices, and increasing incomes are the key to increased economic activity (Mesure, 2007). The supermarkets however, have shifted away from selling the discounted brands and concentrate on building their own labels. Prices in the mass market have fallen due to cheaper imports especially from China, and because other retail brands like Marks & Spencer, Next, and Burtons have reduced their prices. Since the EU sector is adversely affected, Levis had to cut down its prices and introduce cheaper brands. 3.7 Cultural factors The distribution channels and strategy are influenced by the cultural norms of a country (Vrontis & Vronti, 2004). When setting up its own direct sales force, Levis found that to penetrate the Japanese market they would have to accept that the debt collection period would be six months compared to the US. Pricing has also to be taken into account before finalizing because in many countries like Africa haggling over price is common. 3.8 Technological factors The developed countries are technologically advanced and hence online shopping facilities can be offered to them which is not possible in African and many Asian countries (Vrontis & Vronti, 2004). Adaptation is required in this case where more of traditional methods of distribution have to be used. In the developed countries Levis can use the EDI or the electronic data interchange system in order to order and monitor stock levels with their customers who are usually the major department stores. This facility ensures that the stores do not experience stock-out conditions. 3.9 Marketing mix strategies for individual country markets Various factors affect the decision on international market penetration and Levis achieved success because it could have a global strategy that did not stifle local initiative. Levis recognized that a mix of two approaches – standardization and adaptation is essential for success in international markets. In the process they were able to find transnational segmentation within regions. Studies suggest that Islamic countries do not like women wearing tight-fitting clothes and the entire Far East Asian market demands much shorter inside leg measurements (SD, 2005). The Japanese on the other hand prefer tighter jeans. Europeans are happy with standard white denims but warmer climate require lighter weight material in brighter colours. The commercial that Levis ran in Europe was censored in South East Asia. This forced them to develop another promotional strategy in this region. While transnational segmentation was possible product positioning has to differ across regions. In the USA and Europe jeans are considered to be casual and rebellious wear while in Russia they are considered to be sophisticated. In Spain, because of the high price, it is a fashion item. Product positioning has to be done keeping in mind the target audience. The high priced segment is a sensitive one and cannot be combined with the low-priced segment. Since nations differ on their perception of jeans, the positioning in each region would have to differ. Levi’s had to brand their products differently in different regions as keeping the same brand image could affect their customer segment in other regions. 4. Conclusion Levis introduced the blue jeans to the world and continues to serve its consumers across nations. The company has been very adaptive to the changing market conditions and the demands of the consumers. Strategic decisions were taken in entering new markets based on different factors. The changed economic environment in the US forced it to outsource or contract out its production to countries where labor was cheap. The company maintained a balanced sourcing approach from different countries and withdrew from countries where it sensed problems. The company also ensured it followed the trends in different countries so that it could adjust its market mix according to the need and demand in that region. They did not follow the standardized approach but wherever necessary, adapted the local requirement and integrated their strategy accordingly. The company has always taken into account the cultural, legal, political and social factors before venturing into a new market. References: Abernathy, F. H. Volpe, A. & Weil, D. (2005). 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