Business Model of Next Retail - Essay Example

The corporate strategy of Next Retail Ltd BY YOU YOUR SCHOOL INFO HERE HERE THE CORPORATE STRATEGY OF NEXT RETAIL LTD Background and business model Next Retail Ltd. is a leading retailer catering to a younger market. Next operates a total of 700 stores, 500 of these in the United Kingdom and Ireland. The additional 200 stores are spread throughout key operating regions in Asia, the Mid-East and Europe. In 2012, Next outperformed even a major brand, Marks and Spencer, achieving a market capitalisation of £5.28 billion which is £62 million over the market cap of M&S, one of the firm’s largest competitive rivals (Shannon 2012). Next provides consumers with a variety of merchandise, both larger brand names and private label brands under the Next name, including a variety of menswear, womenswear, child-focused clothing and accessories, and limited houseware products. Next has captured the attention of its target market, which is generally the 18 to 40 year old markets, by providing moderately-priced, contemporary clothing and accessory products that are comparable to the higher quality and higher priced merchandise offered by many High Street stores in the United Kingdom. Next has, since 1999, focused strongly on its online sales division, NextDirect, which recently provided the business 44 percent of its total operating revenues (Next Plc 2012). The business is strategically positioned in terms of service quality excellence, which is supported by considerable capital investments into improving convenience and the home delivery service processes (Next Plc 2012). The business utilises a focused low-cost strategy which allows the organisation to dedicate its service and product-centric resources to specific markets drawn to the trendy and fashionable merchandise offerings that cater to the younger, contemporary target markets. In a hyper-competitive retail environment, Next is able to outperform even High Street stores and long-standing retailer brands, such as Marks and Spencer, by effectively meeting the needs of a narrower market segment. 2. How Next competes Many of Next’s competitors, which include Zara, Marks and Spencer, Debenhams, New Look and Matalan (to name only a few), operate in highly competitive retail environments and seek to utilise broad differentiation strategies to create an effective market position in the minds of desired target consumers. The difficulty that many competitors face in this differentiation strategy is that many marketing tactics under this strategy are easy to replicate, with product quality and pricing no longer being viable methods of differentiation (Bennet and Rundle-Thiele 2004; Nandan 2005). However, many of these competitors cater to broader and more diverse target markets, thus positioning under quality and pricing are the selected methodologies to gain target market attention. With no method of creating barriers for competition to utilise these differentiation practices, it is difficult for Next’s competitors to establish long-term brand loyalty with all of their target consumers. This is why Next has selected the focused low-cost strategy, one of the five Generic Strategies proposed by Michael Porter that explain corporate strategy. This strategy works best when there is considerable price competition between rivals (Murray 1988), where differentiation methods generally have little value to price-sensitive buyers (Wright 1987), and where products and services offered are largely identical in the market (Thompson 2008). Next recognises that pricing and quality positioning are easily achievable by its main competitors and has decided, instead, to focus on a niche market of consumers (which in this case is quite large) in order to build brand loyalty and thus long-run brand equity that can be translated into a variety of product extensions or new business opportunities under the Next brand name. The focused low-cost strategy is achievable for Next because the business is able to procure products at a lower cost than competitors, which translates into more perceived value by the youth target markets. Next sources from many different countries where labour payments are lesser than in developed countries (such as China) which, in turn, provides the ability for the firm to offer lower prices than other higher end competition offering similar merchandise offerings. This is critical in the contemporary economic environment in the United Kingdom that is still attempting a national recovery from the lingering impacts of the 2008/2009 recession and a variety of austerity packages that are being implemented across Europe and domestically. Being able to provide top quality and fashion-forward products whilst offering a low cost pricing model is what attracts the trend-focused youth market between 18 and 40. 3. The foundation of growth strategies Next, as related to Ansoff’s Growth Matrix, attempts to improve its market share and competitive position by focusing on existing markets. Using a blended approach for new product development and market penetration, Next is able to build loyalty with this highly profitable niche market. Figure 1 illustrates Next’s position amid Ansoff’s Matrix. Figure 1: Ansoff Matrix and Next’s growth strategies Source: Bhasin, H. (2011). Ansoff Matrix. [online] Available at: http://www.marketing91.com/ansoff-matrix/ (accessed 3 March 2013). Next finds success with its split market penetration strategies (coupled with product development) as market penetration imposes the least risk (Porter 2011). Due to economic and resource conditions, many competitors have reached their capacity limits, which gives Next the opportunity to continue to find growth and improved market share by providing more brand value to the existing 18 to 40 year old target market. Product development at Next is apparent in the recent high capital investments in new brands that are exclusive to the Next retail store. Next recently spent £17 million on the Lipsy brand. This is a famous High Street fashion brand consisting of moderately higher-priced miniskirts and fashionable ruffled shirts catering to the female youth consumer (Finch 2008). Lipsy achieved considerable attention through its affiliation with celebrities in the UK including Kate Middleton and the fashion model Katie Price (Finch 2008). This tends to illustrate the purchasing prowess of Next in understanding what acquisitions would provide the most value to consumers that value celebrity involvement with fashion brands. When celebrities are considered attractive and trustworthy, consumers are drawn to the products they endorse or are affiliated with (Pornpitakpan 2003). Next appears to understand the psychological connections that consumers have with brands, especially the youth market, who often find personal identity with fashion products. Muniz and O’Guinn (2001) describe that when a brand is able to provide consumers with perceptions of providing personal self-expansion, they build attachments to the brand. This is why the market penetration strategy is so vital to the brand reputation of Next, as the business understands how to make appropriate social and psychological appeals to the motivations and needs of its target market. By creating a variety of strategies, such as the acquisition of Lipsy, that are aligned with market characteristics, Next is able to build the necessary loyalty that increases purchase volumes and improves word-of-mouth with important revenue-building markets. The decline stage along the product life cycle, for fashion products, is relatively short. Dooley (2005) describes that when a product reaches the decline, cash management and inventory control becomes quite difficult. By further blending product development with the existing market penetration strategy, Next is able to avoid the high costs of recurring product abandonment that is found in many competing fashion retail models and, in the process, ensure that the business maintains its lower-cost pricing structures. Working to consistently improve product selection and engaging research and development to recognise trends in the fashion world that are relevant to the youth markets, Next achieves brand loyalty that is difficult to achieve in this saturated competitive market environment. Product developments are also evident to the consumer market through the production of the Next sales catalogue, a comprehensive book illustrating the entire range of products available year on year. It consists of a whopping 1300 pages and is available on request to all interest consumers on Next’s online sales website (Next 2013). The business devotes considerable investment into the marketing function, outside of the catalogue, which includes telemarketing, direct mailings, and even magazine inserts (Next Plc 2006). This is how Next engages with consumers in order to drive traffic to its online sales website, which provides opportunities for Next to reduce operating overhead. This, again, gives Next opportunities to ensure that it remains price-competitive by establishing systems that reduce the tangible, in-store operating costs that often plague competitors that do not have such a well-developed online sales model. 4. Improving Next’s corporate strategies There is more than enough evidence, especially observable in the ability to outperform even Marks and Spencer, that Next has achieved the desired brand loyalty necessary to build long-term brand equity. When brand loyalty exists, consumers are more willing to increase their expenditures and engage more effectively with the brand as a trusted resource for self-expansion. Even though Next remains in a top position with its niche market, there are never any guarantees that a business will retain this leadership position among competition that are constantly seeking new strategies to improve their market share. Next may wish to explore market development, as illustrated in Ansoff’s Matrix, in order to gain attention from new target markets. Next is beginning to expand its brand into new markets, such as Asia and developing European countries, therefore there are opportunities to reposition the business to meet the cultural and social characteristics of new international markets. Research did not identify any evidence that Next is attempting to create strategic alliances or joint ventures for improving brand position in new foreign markets, which often provide extensive opportunities for corporate improvement. Next has opportunities to begin offering products in-store in these new markets that include such footwear brands as Nike or Reebok which, in Middle Eastern countries are established and respected brands. By diversifying the product lines available outside of the UK sales environment, Next can increase its foreign pricing structures whilst still providing products that already have brand recognition and demand. When entering a new market, there are considerable costs for attempting to build brand recognition, which include heavy investment in advertising and establishing new supply distribution methodologies (Heizer and Render 2004). Allying with brands that are not private label would avoid the costs of this new market entry strategy and allow the business to build recognition of Next and its sales strategies. This would also be an excellent strategy to avoid the market entry costs associated with developing new supply chain strategies to create clothing that is appropriate for a foreign market and its associated culture. Many Western brands are in high demand in developing nations, thus Next can achieve immediate brand recall by being a leading provider of these products in new markets. Additionally, most Middle Eastern countries are collectivist nations, meaning that there is considerable need for group affiliation. Socially, many people in collectivist nations build their sense of self-identity around group opinion (Cheung et al. 2008). Next maintains many marketing-based opportunities for changing its individualistic promotional focus utilised in the United Kingdom to take a collectivist view. It was identified by Muniz and O’Guinn (2001) that when a brand is able to extend perceptions of self-expansion, consumers grow attached to the brand. Next can serve as a facilitator of collectivist values, especially in Asia and the Middle East, using strategies that are aligned with these cultures to give the Next brand a powerful reputation in foreign markets. Why is a collectivist promotional strategy relevant? There are emerging competitors in the United Kingdom that continue to create the hyper-competitive environment in a saturated market. Next, as well as many other competitors, are unable to establish barriers to their market entry which consistently imposes risks that there are going to be wide availabilities of substitute products in the UK. When this occurs, the switching costs for buyers are reduced and they have opportunities to easily defect to another brand that provides better pricing, selection, or other perceived benefits. Growth in the UK is going to be increasingly difficult for Next with emerging competition and new strategy developments with competitive rivals to gain new market attention or seize loyal markets from existing retailers. Market development in Asia and the Middle East (as well as some European markets) would give Next a foothold in these countries in the event that competitive marketing is able to, in the future, outperform the current strategy being utilised by Next. This would require ample market research to identify foreign market characteristics regarding their knowledge of Next, their needs both social and psychological, and their impressions of established Western brands. However, it would be recommended that Next develop an appropriate contingency plan in the event of competitive growth in performance in gaining market share. Next could also seek out a different generic strategy, in this case differentiation, as a means of improving its business image with new markets. With minor adjustments to the corporate structure, the business can utilise such concepts as talent development, illustrating a new dimension of service excellence not present in the marketing concept. With more emphasis on training and development, Next can develop a new service model (in-store) that provides more opportunities for the necessary self-expansion perceptions needed to gain further loyalty (Muniz and O’Guinn 2001). Relevant in-store sales personnel can be utilised as a promotional tool, providing more interpersonal relationship development with customers under a branded Service First concept in which fashion consulting (or other relevant activities) can be part of the motivation to visit the Next outlets. Being able to focus on new dimensions of service could gain new market attention from those who value service as a primary need when making purchasing decisions. It would also prevent Next from being proverbially held hostage by a large niche market and allow the company to ensure higher revenue production. Technologies are improving for competition to improve their customer relationship management programs and also improve convenience in service which poses competitive threats and risks to Next. Seeking new methods of differentiating whilst other rivals seek these strategies would be of considerable benefit for long-term corporate positioning for the retailer. 5. Conclusion Next clearly is a leader in understanding its target market which is translating into higher sales revenues and also being able to outperform the rival actions of other UK retailers operating in this sector. Next uses its focused low-cost strategy to remain relevant with price-sensitive youth buyers and also its well-developed supply chain to provide products that are aligned with the social and psychological needs of younger buyers. However, with a recent effort to seek international expansion, Next will not be able to simply transfer the strategies that work with UK customers to those in broader Europe, Asia and the Middle East. By simply changing strategic positioning, such as using foreign collectivist-centric marketing and improving differentiation through service developments, Next will be better positioned for long-term sustainability in this highly saturated and competitive retail environment. In an environment where rivalry determines the level of switching costs for consumers to other brands, Next should be developing contingencies in the event of sales losses into the future. References Bhasin, H. (2011). Ansoff Matrix. [online] Available at: http://www.marketing91.com/ansoff-matrix/ (accessed 3 March 2013). Bennet, R. and Rundle-Thiele, S. (2004). Customer satisfaction should not be the only goal, Journal of Service Marketing, 18(7), pp.514-523. 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