ENHANCING SECTORAL COMPETITIVENESS –
A UK CASE STUDY AND IMPLICATIONS FOR TURKEY
ZEYNEP SANIGOK
M.Sc.
UNIVERSITY OF BIRMINGHAM
2012
Contents
ÖZET ................................................................................................................................ 2
SUMMARY ...................................................................................................................... 3
PART I – INTRODUCTION, METHODOLOGY AND LITERATURE REVIEW ....... 4
1. INTRODUCTION ........................................................................................................ 4
1.1 Methodology ........................................................................................................... 6
1.2 Limitations and Suggestion for Further Studies...................................................... 7
2. LITERATURE REVIEW ............................................................................................. 9
PART II - STRATEGIC ANALYSIS ............................................................................ 19
3. EXTERNAL ANALYSIS – MARKET BASED VIEW ............................................ 19
3.1 Macro-environment Analysis ................................................................................ 20
3.1.1 Industry Dominant Economic Features .............................................................. 20
3.1.2 PESTEL Analysis............................................................................................... 21
3.2 Global Environment Analysis (Globalisation Drivers) ......................................... 22
3.3. Analysis of Industry Dynamics (Evolutionary Processes) ................................... 23
3.4 Industry Structure (Five Forces) Analysis ............................................................ 24
3.5 Competitive Landscape and Competitor Analysis ................................................ 26
3.5.1 Strategic Group Analysis ................................................................................... 27
3.5.2 Individual Competitor Analysis ......................................................................... 29
3.6 Customers and Market Segmentation ................................................................... 32
3.6.1 Market Segmentation Analysis .......................................................................... 32
3.7 Key Success Factors .............................................................................................. 35
4. INTERNAL ANALYSIS – RESOURCE BASED VIEW ......................................... 37
4.1 Industry Value Chain Analysis ............................................................................. 38
4.2. Key Resources and Capabilities ........................................................................... 39
5. KEY STRATEGIC ISSUES BASED ON STRATEGIC ANALYSIS ...................... 41
5.1 Prioritization and Classification of Key Strategic Issues ...................................... 41
PART III – STRATEGY AND RECOMMENDATIONS ............................................. 43
6. STRATEGY GENERATION, EVALUATION AND SELECTION ........................ 43
6.1 Future Strategic Options for the UK Apparel Retail Industry .............................. 43
6.2 Strategy Evaluation and Selection for the UK Apparel Retail Industry ............... 45
I would like to thank
Jean Monnet Scholarship Programme
for their support and contribution.
1
ÖZET
(Başlık: Sektörel Rekabet Edebilirliğin Artırılması - İngiltere’de bir Vaka Analizi ve
Türkiye’ye Etkileri)
Rekabet edebilirliğin giderek daha çok vurgulanmasına rağmen birçok sektör küresel
ekonomik kriz sonrası hızla değişen ve birbirine ekonomik olarak bağlı bir ortamdaki
rekabette zorlanmakta. Değişen tüketici eğilimleri, zorlayıcı ticari koşulları ve iflas eden
bazı büyük zincir mağazalarıyla İngiltere’deki parekende sektörünün en önemli
kategorilerinden parekende giyim sektörü yavaş bir iyileşme göstermekte. Parekende
sektörünün azalan gücü başarısız olan işletmelerin karar verici mercilerinin yeni
parekende sektörünü sınırlı derecede kavradıklarına işaret etmekte. Bu nedenle hem
uzun dönemdeki yapısal değişimleri hem de ticari ortamın mevcut zorluklarını
göstermesi açısından vaka analizi olarak İngiltere’deki parekende giyim sektörü
seçilmiştir. Stratejik yönetim teori, araç ve çerçeveleri ile ilgili literatür taramasına
dayanan bu çalışma, İngiltere’deki giyim sektörünün analizine katkı sağlamakta ve
parekendeciler için startejik konular ve zorluklara işaret etmek ve rekabet edebilirliği
artırmak için potansiyel stratejileri değerlendirmektedir. Ayrıca bu çalışmanın
Türkiye’deki mevcut parekende giyim sektörü için de hem edinilen dersler hem de
potansiyel risk ve fırsatların tanımlanması açısından etkilerine değinilmiştir.
2
SUMMARY
(Title: Enhancing Sectoral Competitiveness - a UK Case Study and Implications for
Turkey)
Despite the incresing emphasis on competitiveness, many sectors struggle with
competition in a fast changing and economically interconnected environment after the
global economic crisis. As one of the most important categories of retailing, apparel
retail in the UK has shown slow recovery with shifting consumer trends, challenging
trading conditions and some large high street chains that have gone into administration.
Decreasing strength of the retail industry shows that, from a practical point of view,
there is a limited level of understanding of the new retail landscape among the decision
makers of failing businesses. Thus, apparel retail in the UK has been selected as the
case study which demonstrates the long term structural changes as well as the current
challenges in the trading environment. Based on the relevant literature review on
strategic management theories, tools and frameworks, this study offers a contribution to
the analysis of the UK apparel industry, evaluates potential strategies for retailers to
address the key issues and challenges and to enhance competitiveness. Also this study
has implications for the current apparel retailing industry in Turkey in terms of lessons
learned and identification of potential risks and opportunities.
3
PART I – INTRODUCTION, METHODOLOGY AND
LITERATURE REVIEW
1. INTRODUCTION
The challenging trading conditions as a result of the economic recession and the
decrease in the consumer confidence create a dynamic and complex retail environment
in the UK. Moreover, the retail health in the UK is in its lowest level according to the
UK Retail Health Index (KMPG/Ipsos Retail Think Tank-RTT, 2012). Under the
current conditions many independent retailers struggle (Donnell et al., 2012) and some
large chains go into administration while others grow with high profits (Keynote, 2012).
Decreasing strength of the retail industry shows that, from a practical point of view,
there is a limited level of understanding of the new retail landscape among the decision
makers of failing businesses. Theoretical and empirical research that addresses the
challenges and effective responses to the new retail landscape are mostly missing and
there is a need to fill the gap (Sorescu et al., 2012). Although there has been a vast
amount of study on various topics of retailing from consumer behaviour to supply chain
management, the past research has seldom focused on a holistic framework to assess a
complete set of features. This study was established on ground of this gap between the
required practical research and the existing research which do not holistically address
the current issues and potential solutions in this challenging retail environment.
As one of the most dynamic and important categories of the retail in the UK, apparel
sector has been selected as the case study which demonstrates the long term structural
changes as well as the current challenges in the trading environment. The apparel retail
is affected by the erratic demand because of the fashion and season changes and because
of a sophisticated demand structure due to the extensive diversity of style preferences
(Jin, 2004). Therefore the retail landscape has been described as volatile and dynamic in
which retailers constantly adjust their offerings and image to fulfill the expectations of
the market (Lewis and Hawksley, 1990). Indeed, the apparel sector in the UK is
currently defined by rapid changes in consumer trends and particularly widespread
discounting (Donnell et al., 2012).
4
This study aims to provide an analysis of the UK apparel industry, to evaluate strategies
and to come up with recommendations for retailers to address the profitability and
performance issues and key challenges. Particularly, to what extent do structural
changes, negative economic outlook and reduced consumer confidence in the UK
impact retail health and strategy? What are the primary strategic issues that need to be
addressed? In such a challenging environment, how can the retailers maintain their
position and even gain competitive advantage?
The specific objectives of this study are;
•
to carry out a relevant literature review on strategic management theories, tools
and frameworks that are applicable to the strategic audit of the retail industry;
•
to investigate and explore the issues that impact the competitiveness of apparel
retailers on the basis of external and internal analysis of the UK apparel industry
built on the literature reviewed;
•
to isolate the key strategic issues that need to be considered and generate
strategic options that address these critical issues;
•
to perform strategy evaluation and recommendations to improve performance of
the retailers in the apparel retail industry; and
•
to outline and apply the strategic audit to the apparel retailing industry in order
to explore a broad approach towards current issues in retailing and a way to
combine practical and theoretical study.
This study offers a contribution to the analysis of the current apparel retailing industry
in the UK based on tools and frameworks of strategic management and aims to provide
a comprehensive set of recommendations following a detailed analysis. By doing so, it
will provide a path forward for the possible strategies to be adopted by retailers in order
to cope with the abovementioned conditions. Also the strategic options generated,
evaluated and recommended are mainly for the clothing specialists since they comprise
the majority among the retailers. Additionally, the luxury apparel retail is not within the
scope of this study.
This study has implications both from theoretical and practical perspectives. It
supplements the present studies on the retailing industry in the UK. Also it outlines the
5
strategic audit approach to extend the understanding of such a complex environment
and to support strategy formulation and implementation for retailers. From a practical
viewpoint, retailers in the UK could benefit from the insights of this study to customize
the strategic audit to their needs in order to analyse the environment, design their retail
propositions and formats. So, this study could guide retailers to choose appropriate
strategies.
Moreover, another part covers the implications of this case study for apparel retailing in
Turkey which is emerging and has positive growth prospects. It is aimed to gather
findings and conclusions of the strategic analysis of the apparel retailing in the UK and
examine some of the lessons learned, opportunities, risks and current challenges of a
mature and highly competitive retail sector and their the applicability to an emerging
retail market in Turkey.
This dissertation is organized as follows: Section I provides the rationale of the
dissertation with the introduction and methodology; followed by the literature review on
strategic management and audit tools and frameworks. Section II looks at the UK
apparel retail industry in terms of external and internal analysis and identification of key
strategic issues. Section III focuses on generation of strategic options and undertakes
strategy evaluation, selection; and recommends strategies and presents the conclusions.
This section also examines the implications of this case study for the apparel retail in
Turkey.
1.1 Methodology
The apparel retailing in the UK was examined in depth using the strategic audit
methodology in order to have a systematic approach for the assessment of the industry
and evaluation of strategies. This strategic audit built heavily on the strategic audit and
formulation framework by Oktemgil (2011) along with some particular frameworks and
formats developed by Oktemgil (2011) for the application of the strategic management
and analysis (See figure-1). This formulation provided a classification for the analysis
and a direction for strategy generation, evaluation and selection. Following a literature
6
review of the extensive theories, concepts, frameworks and tools of the strategic
management, the external and internal analyses were carried out respectively. Most of
the strategic management frameworks and tools of external analysis and a few relevant
tools of internal analysis were used and key strategic issues were identified, prioritized
and assessed based on the urgency-impact and long-short term effects. Next, strategic
options to address these key strategic issues were generated, evaluated and selected
based on an evaluation of feasibility, suitability, acceptability criteria. Finally, the
recommendations and the conclusions are presented.
A secondary data was used for the strategic analysis of the UK apparel retail industry.
Data from multiple sources including various existing market research on the UK retail
(Mintel, Keynote, Datamonitor and MarketLine), white papers of business advisory
organizations and think tanks, academic and newspaper articles (such as the Journal of
Retailing; the Journal of Fashion Marketing and Management; and the International
Journal of Retail & Distribution Management), and other publicly available data have
created the background of the analysis.
1.2 Limitations and Suggestion for Further Studies
The study fundamentally relies on secondary research and hence the available data on
the UK retail industry. So, it heavily built on the industry research by Mintel (2012) and
Keynote (2012). Due to this fact, there is a notable limitation of the analysis undertaken
based on the available secondary data. Another notable limitation is the generalization
of recommendations for the whole industry. Still, the intent of this study was to
demonstrate the potential of an industry level strategic audit approach to further the
understanding of the complex landscape of retailing. The recommended strategies are
expected to be customized based on the particular needs of the clothing specialists.
7
Figure-1: Strategic Audit and Formulation Framework
The below illustration outlines the strategic audit framework used in this study based on
the strategic audit and formulation framework by Oktemgil (2011).
1. External Analysis
• Macro environment Analysis (Industry Dominant Economic
Features, PESTEL Analysis)
• Industry Dynamics (Evolutionary Forces and Globalisation Drivers)
• Industry Structure (Porter's Five Forces Analysis)
• Consumer and Market Segmentation
• Competitor Analysis (Strategic group analysis, Individual
competitor analysis)
• Key Success Factors Analysis
2. International Analysis
• Industrial Value Chain
• Resources and Capabilities, VRIO
3. Identification of Key Strategic Issues
• Key Issue Prioritization and Assessment
4.Strategy Generation, Evaluation and Selection
• Strategy option generation
• Evaluation criteria
• Selection and recommendation
8
2. LITERATURE REVIEW
Strategy, arguably the most important aspect of business studies, has been defined in
various ways without any one complete and commonly agreed-upon definition
(Mintzberg et al., 1988). One of the early definitions of strategy by Chandler is “the
determination of the long-run goals and objectives of an enterprise and the adoption of
course of action and the location of resource necessary for carrying out these goals”
(Johnson et al., 2011:3-4; citing Chandler,1963). Also considerable attention was given
to outline how an organization can achieve success. Competitive advantage, as an
indispensible concept of strategy, is, in its broadest sense, regarded as the path to the
absolute purpose of profitability; and as Porter (1985) describes, is concerned with the
ability to generate more economic value than rivals. Accordingly, it is assessed in terms
of the difference between the economic cost and the value or benefit to the customer.
Based on this view of strategy, generating more value than rivals requires more than
improving the efficiency of operations and it is the deliberate decision of carrying out
activities not just in an effective way but also in a different way than competitors
(Porter,1996:61-64). Johnson et al. (2011:4) on the other hand, describe strategy as a
“long-term direction of an organization” and suggest that this definition encompasses
strategies that refer to both competition and difference (e.g. Porter’s definition) and to
other elements in various definitions (e.g. patterns rather than deliberate choices such as
Mintzberg’s definition). In brief, strategy typically was described in the literature as
consistent, integrated or cohesive; as the instrument to reach particular objectives and to
take crucial decision and actions (Grant, 2010:17).
In a similar manner, there is diversity among strategic management concepts, models
and definitions along with the absence of coherence and integration among them
(Ketchen et al., 2008). While strategic management has developed with a variety of
models and concepts, the direction of emphasis within the strategic management field
has changed in time as well (Grant, 2010). Before 1990s, the point of view, referred to
as market-based view (MBV), put relative significance on the external factors, the
industry, and is rooted in the industrial organizational economics (Caves and Porter,
1978; Porter, 1980). In this view, “relating the organization to the environment”
(Porter, 1980:3) is the central idea and this perspective focused on superior market
9
position - usually based on cost or differentiation advantage- to explain higher
profitability and better performance. Barney (2002) argued that Porter’s approach to
strategic management has aligned the practice and research on strategic management
field and has been very influential. Porter (1980) applied economic theory to understand
the strategy and industry profitability and emphasized that industry should be the
building block of the analysis based on the structure, conduct and performance
framework; and also presented an influential framework for industry structure analysis.
In sharp contrast, the resource-based view, which has emerged afterwards, focuses on
the internal elements; resources and capabilities of a firm for competition and strategy
formulation (Wernerfelt,1984; Barney,1991; Grant1991; Peteraf,1993; Prehalad and
Hamel, 1990). Accordingly, resource endowments and strategic capabilities are primary
determinants of competitive advantage and survival rather than the efforts for adequate
environmental fit through strategic moves and positioning of firms. Hence, the
foundations of competitive advantage derive from differences in endowments of
resources and capabilities and the critical aspect of this view is to protect these
resources and capabilities (Barney, 1991; Grant 1991) and develop and stretch them by
‘concentrating, accumulating, complementing, conserving and recovering’ (Hammel
and Prahalad, 1993:78). Eventually, identifying, generating, protecting and exploiting
resources and capabilities that are “inimitable (not transparent), durable, appropriable,
not transferable and not replicable” are essential components of this view (Grant,
1991:124-131) and “deliberate, path-dependent organizational structures” need to be
formed to achieve sustained competitive advantage (Lengnick-Hall and Wolff,
1999:1111). However the main criticism within resource based perspective is that it
depends more on concepts and abstract definitions which limit the practical implications
as it is difficult to identify, apply and measure concepts of resources and capabilities,
particularly intangible strategic assets (Connor, 2002).
The market-based view and resource based view can be compared with regards to their
objectives, as described by Oktemgil: While the market-based view seeks to neutralize
industry forces, to access attractive markets, to meet customer needs and to respond to
rivals; resource-based view aims for the identification, development and use of firm
specific
resources
and
capabilities
as
the
primary
objective
10
(Oktemgil,2011[Session1]:2). So, the source of competitive advantage is dependent on
the industry structure in the market-based view (Porter, 1980); in contrast, it is
determined by internal resources and capabilities of firms that are unique and inimitable
in the resource based perspective (Barney, 1991; Peteraf, 1993; Roquebert et al., 1996).
Moreover, it has been argued that a more complete understanding of the strategic issues
will be provided when these views are integrated and applied together to guide
strategies (Spanos and Lioukas, 2001; Peteraf and Bergen, 2003).
What these strategic management perspectives have in common is the strategic analysis.
They provide concepts, frameworks, theories, tools and methods that serve for the
strategic analysis; namely to scan the internal and external environment; organize and
process information with a structured and consistent approach. Strategic analysis is as
an essential input to support decisions (Grant, 2010); to explain trends, patterns and
associations on the basis of facts (Parnell and Donald, 2003); to present sophisticated
issues in a more refined way (Hussey, 1997); to promote critical thinking and
understanding rather than pure description; and to underpin a well-organized and
detailed approach (Webster et al., 1989:12-13). However there are certain limitations;
first, strategic analysis does not provide straightforward solutions due to the
sophisticated nature of issues and can only aid in revealing insights by displaying
information in various ways (Hussey, 1992; 1997; Grant, 2010). The second challenge
is to decide on the tool or approach and in contradiction with this challenge, strategic
analysis is usually needed when the situation is complex and lacks clarity (LengnickHall and Wolff, 1999 citing Rummelt, 1979).
After the strategic analysis and identification and justification of key issues; strategic
decision making and management process involves generating strategic options in terms
of strategy direction and methods, evaluating strategic options supported by a decision
criteria and finally selecting strategies (Johnson et al., 2011:17-18). One decision
criteria, called suitability, acceptability and feasibility (SAF) criteria, incorporates three
elements to guide systematic decision making and to evaluate strategic alternatives
based on a structured approach (Johnson et al., 2011). Accordingly, suitability is about
whether the options address the key issues; acceptability is based on whether the
11
expectation of stakeholders are met; and finally, feasibility is concerned with basically
whether the firm has internal resources and capabilities to undertake the option
(Johnson et al., 2011:363-367).
The three level strategies that need to be considered for strategy formulation are
corporate, business and functional strategies (Jemison 1981 citing Hofer and Schendel,
1971; Johnson et al., 2011). Generally, corporate level strategies refer to strategies of
the general organization to augment all businesses; business level strategies are
concerned with particular businesses while functional level or operational strategies are
about how these above strategies can be implemented based on the physical and human
resources, processes and other elements (Johnson et al., 2011, p.7).
The formal process of analysis, generation, evaluation and selection of strategy can be
referred to as the process of strategic audit (Shubik, 1983; Wheelen and Hunger, 1987;
Rovizzi and Thompson, 1992; Donaldson, 1995; Gordon, 1997). In its broad terms,
strategic audit is described by Wheelen and Hunger as follows:
“In contrast to the more specialized management audit, the strategic audit
considers external as well as internal diagnostic factors, including the
prognostic steps of alternative selection, implementation, and evaluation and
control. It covers the key aspects of the strategic management process and
places them within a decision-making framework. So, the strategic decisionmaking process….is made operational through a strategic audit.” (Wheelen and
Hunger, 1987:6).
In other words, the strategic audit is actually the systematic implementation of strategic
analysis and strategy formulation processes and realizes the abovementioned advantages
of the strategic management.
12
Strategic Audit Tools and Techniques
The strategic audit framework incorporates several tools for the external and internal
analysis (the situational analysis) and relevant tools and techniques realized in the case
study are discussed below.
Environmental assessment tools
As the initial stage in the situational analysis, a variety of environmental assessment
tools can be used to detect the trends in the external environment (Hussey, 1992; 1997).
To prevent overlooking the key issues, Johnson et al. (2011:50) suggest arranging the
tools and frameworks to analyse the environment in terms of ‘layers’ (from broad layer
of macro environment analysis and intermediate layer of industry analysis to narrow
level of competitor-, customer- and critical success factor analyses).
Global and macro environment analysis: In order to characterize the macro
environment at the broad level, economic elements of the industry can be identified
under the analysis of industry dominant economic features involving market size and
scope; scope of competition and features of competitors; product types, channels and
buyers; technological change; possibilities of vertical integration, capacity utilization,
economies of scale and learning; entry and exit barriers; and industry profitability
(Thompson and Strickland, 1995). Additionally, macro factors -the political, economic,
social, technological, environmental and legal factors- can be assessed and formulated
in the PESTEL framework (Johnson et al., 2011). Globalization analysis is a useful
framework for understanding global strategies and how the globalisation impacts an
industry. It is based on Yip’s assessment of industry conditions for globalization and
consists of “market drivers, cost drivers, governmental drivers and competitive drivers”
(Yip, 1989:35-39). Accordingly, market globalisation drivers are affected by the extent
of standardized customer needs and the presence of global customers, channels and
marketing, whereas competition globalisation drivers are driven by the existence of
global rivals and the share of activities across countries to create interdependencies
(Yip, 1989).
13
As for cost drivers; prevalence of scale and scope economies, learning curve, sourcing
and distribution advantages, cross country variations in skills, wages and costs including
high product development are important dimensions. For government drivers; positive
policies (trade, competition etc.),regulations and standards impact these drivers (Yip,
1989).
Analysis of the industry drivers of change (Evolutionary Processes): Examination of the
industry evolution is critical to picture the structural analysis of the industry in a
complete and accurate way. Porter (1980:162) presents a framework to forecast the
industry evolution in terms of the several forces he described as “evolutionary
processes… (that) are in motion and create incentives or pressure for change (the
industry structure)”. Accordingly, some of these forces can be predicted and include:
“long-run changes in growth, changes in buyer segments served; buyer’s learning;
reduction of uncertainty; diffusion of proprietary knowledge; accumulation of
experience; expansion (or contraction) in scale; changes in input and currency costs;
product innovation; marketing innovation; process innovation; structural change in
adjacent industries; government policy change; entries and exits” (1980:164-188).
Industry analysis (Porter’s Five Forces model): Porter’s Five Forces (1979a; 1980;
2008) analysis is essential since it provides a complete industry assessment framework
and has set the foundation for industry analysis (Hussey,1997;Grant,2010). The model
demonstrates that in an industry there is an ‘extended rivalry’ as a consequence of five
forces and these are exerted by the existing competitors, customers, suppliers, new
entrants and substitutes (Porter, 1979a;1980;2008). Accordingly, the threat of new
entrants depends on expected retaliation of incumbents and barriers to entry whereas
high barriers deter entrants and protect incumbents from intensified competition. High
threat of substitutes restricts the profitability with a downward pressure on prices
although powerful buyers can push prices down or costs up by demanding lower price,
higher quality/service products. Also if the bargaining power of suppliers is high they
can increase input costs, reduce quality or shift costs to competitors.
14
This extended rivalry, or in other words, the combination of these five forces
characterizes the industry structure and shapes the competition, profitability and
available strategic moves of competitors (Porter, 1979a; 2008). Furthermore, Porter
distinguishes the industry structure from short term features that do not have any
enduring influence on competition and profitability (Porter, 1980:3-5).
This structure analysis is especially valuable to aid in the formulation of strategy and to
study the constraints of profitability along with the competitive forces in general
although there is a need to further understand the industry by breaking up the industry
intro smaller segments and strategic competitor groups (Grant, 2010).
Competitor Analysis: At the narrow level, competitor analysis consists of a set of
techniques to develop competitive intelligence to assess competitors (Fuld, 1995); to
profile competitors by their future goals, current strategy, assumption and capabilities
(Porter, 1980:49) and to understand competitor’s strengths, weaknesses and future
strategies (Hussey, 1997).
Also instead of looking at individual competitors, strategic group mapping is a
technique of grouping competitors by certain strategic dimensions (Porter,
1979;1980;Hussey,1997; Grant, 2010; Johnson et al.,2011). The concept of strategic
groups was first identified by Hunt (McGee and Thomas, 1986; citing Hunt, 1972). It
defines gatherings of firms as elements of industry structure with similar systems and
strategies (Prescott and Grant, 1988). Firms are grouped based on two strategic
dimensions including product, range and depth, geographical coverage, channels,
quality and price dimensions, degree of forward or backward integration, use of
technology etc. (Grant, 2010). This type of grouping enables a holistic and refined
assessment of certain competitors using similar strategic dimensions and creates a
simplified visual -matrix view- of the competitive situation. Strategic group analysis
provides the right amount of information which is not as detailed as individual analysis
yet not as concise as industry level analysis – it is in balance (Porter, 1980:132). This
method also serves a practical purpose of providing a comprehensive understanding in a
very fragmented industry in which modest understanding would be reached by assessing
competitors in isolation (Hussey, 1997).
15
Strategic groups exist mainly due to organizational differences in strengths and
weaknesses, market entry times and historical reasons; and firms in the same group tend
to share similar strategies, market shares and respond similarly to external influences
(Porter, 1980). However, contradictory empirical results exist on similarity in
profitability within strategic groups (Cool and Dierickx, 1993) and therefore it is
suggested to see strategic group analysis as an effective method to demonstrate strategic
positioning and industry niches rather than as an assessment of profitability variations
(Smith et al., 1998; Grant, 2010).
Market segmentation analysis: This analysis has been defined as a systematic approach
to analytically describe markets and segments of markets with products and related
costs and attractiveness features to detect market niches or gaps to serve (Porter, 1985;
Webster et al., 1989:48). Markets, by simplest definition, encompass every customer
and business with a likely interest in or purchasing behaviour of a product or service
and segmentation of markets into comparatively homogenous customer groups with
similar behaviours, needs and features enables to identify and address particular
attractive segments among the rest (Bovée and Thill, 2005). According to Grant
(2010:109); first, the basis of segmentation, that is, the key segmentation variables are
determined and attractive segments are distinguished with key success factors based on
the Five Forces analysis. The decision on the scope is assessed in terms of the
comparison of attractiveness between niche and broad market segments (Grant,
2010:109). The dimensions considered for segmenting typically consists of product
features and usage of products, demographic and psychographic characteristics of
customers, geographic or geo-demographics, behavioural segmentation and distribution
channels (Prescott and Grant, 1988:11; Bovée and Thill, 2005). Segmentation analysis
can help relate products with customers and identify opportunities for appealing product
options and generation of strategic alternatives to current marketing plans (Johnson,
1971).
16
Key or Critical Success Factor Analysis: Critical success factors create essential
customer value or substantial cost advantages (Johnson et al., 2011: 73). The analysis of
critical success factors is about finding and examining a few areas of significant
importance and excelling in these areas in order to gain profitable and favourable
position vis–à–vis rivals (Prescott and Grant, 1988:11; Webster et al., 1989:48).
An approach to identify the key success factors looks at the analysis of demand
(‘customer’s wants’) and the analysis of competition (‘scope of competition’) (Grant,
2010:87-89). Accordingly, the analysis of demand simply questions the characteristics
of customers and their needs whereas the analysis of competition addresses the drivers,
main dimensions and intensity and the ways to superior competitive position (Grant,
2010:88).
Additionally, examining key success factors intensifies the effectiveness of strengths
and weaknesses analysis because the critical issues are discovered and addressed; and
also because it gives a competitive benchmark (Hussey, 1997).
Value Chain Analysis: As part of the internal analysis, the value chain approach is a
diagnostic technique for discovering and analysing activities which add value to product
or service (Webster et al., 1989) and for identifying ‘costs, operating characteristics, and
interrelationships’ of a business's activities (Prescott and Grant, 1988:14) This tool is a
way to break up all the activities an organization performs and examine how they
interact to isolate the underlying sources of competitive advantage (Porter, 1985). The
primary activities encompass the physical creation and related processes and
categorized as inbound logistics, operations, outbound logistics, marketing and sales,
and services; while firm infrastructure, human resource management, technological
development, procurement support the primary activities and hence referred to as
support activities (Porter, 1985:36-38). The activities are first broken up into broad
categories and then subcategories within each activity to examine the associated cost
and value drivers and decide on ways to undertake activities differently to gain
competitive advantage (Porter, 1985).
Analysis of key resources and capabilities: Simply, resources are ‘the productive assets’
and capabilities are ‘what the firm can do’ (Grant, 2010:136). However, the main
17
problem with the resource-based view in general and with the examination of resources
and capabilities in particular is the ambiguity with measurement as already discussed
previously (Connor, 2002). Still, Grant proposes a simplified technique for application
of resources and capabilities analysis and with this technique; all relevant resources and
capabilities are listed and prioritized based on importance and firm’s relative strength to
assess key resources and capabilities and to develop appropriate strategies (Grant,
2010).
Moreover, Grant proposes criteria to examine the strategic importance of the resources
and capabilities, based on scarcity, relevance, durability, transferability, replicability,
and appropriability (Grant, 1991:124-131;2010:136). Similarly, Barney and Hesterly
(2008:76-94) developed the VRIO criteria to assess the importance of resources and
capabilities based on how valuable they are; how rare they are; how inimitable they are;
and finally whether the firm is organized to exploit them. So, the extent to which
resources and capabilities are costly to imitate depends on the prevalence of “historical
conditions (path-dependency), causal ambiguity or socially complex organizational
structures” (Barney and Hesterly,2008:86-89).
18
PART II - STRATEGIC ANALYSIS
3. EXTERNAL ANALYSIS – MARKET BASED VIEW
Overview of the UK Apparel Retail Industry
With a value of £43 billion, apparel retail accounts for twelve per cent of the overall UK
retail market (Keynote,2012). The apparel retailing industry comprises organizations
engaged in the retail of garments and clothing accessories for men, women and children.
Apparel industry description used in this study involves clothing and related items and
can be categorised in terms of functionality to encompass essential clothing, casual
clothing, active or sportswear, formal dress, occasional wear, outerwear, and
accessories. Luxury goods are not covered within this study due to the substantial
differences in strategies.
Figure-2: Total UK apparel market value at current selling prices (in billions)
£43,095
£41,736
£40,679
£40,089
3.3%
£39,645
5.4%
1.5%
year on year %
change
-2.5%
2007
2008
2009
2010
Total Apparel
Market Value
2011
Source: Author’s own calculations based on data from Keynote, 2012
Based on this industry classification, external analysis of the UK apparel retail industry
encompasses macro-environmental, industry level and more detailed level analyses. The
tools and techniques used within this section are;
1. Macro environment analysis: industry dominant economic features, PESTEL
analysis
2. Global environment analysis
3. Analysis of industry dynamics (evolutionary forces)
19
4. Industry structure analysis (Porter’s Five Forces model)
5. Competitor analysis
6. Customer segmentation analysis
7. Analysis of key success factors
Summary findings based on each of these tools and techniques have been presented in
the following subsections and complete analyses are included in the appendices.
3.1 Macro-environment Analysis
Industry dominant economic features and PESTEL analyses are performed for the
assessment of the macro environment and presented in the Appendix-1 and 2
respectively. The findings and key strategic issues are summarized below.
3.1.1 Industry Dominant Economic Features
Summary findings regarding industry dominant economic features:
The UK apparel retail is the third largest industry within Europe (Marketline, 2012b).
Despite being a mature industry with a slow growth rate, its performance has been
comparatively better in comparison to Europe (Marketline, 2012a-b). This also fosters
new domestic and international entries. Indeed, the UK apparel retail is fairly
fragmented (see table-1) (Keynote, 2012). The major reasons for fragmentation are the
low start up costs for small retailers, diverse fashion preferences (heterogeneity in taste)
and erratic sales fluctuations mainly because of rapidly changing fashion seasons as
well as changing weather conditions. Also diseconomies of scale do exist in terms of
flexibility and market responsiveness and this challenges large retailers.
The most distinctive feature of apparel retail is that the apparel loses its value extremely
fast due to short product lifecycles and therefore fast market responsiveness is required.
In a mature and highly competitive industry, retaining repeat customers is critical. So,
differentiated apparel products aim to neutralize buyer power and create loyalty.
20
In this regard, differentiation is possible but difficult due to the existence of a vast
diversity of options offered. Nevertheless, the prevalence of economies of scale for
particular functions enables cost advantages and encourages growing in scale.
Strategic Issues Identified:
•
Challenging retail environment due to mature and fragmented industry structure
and repeat customers
•
Competition intensified due to low entry barriers, outsourcing capabilities
•
Difficulties in differentiating offers
•
Multiple channel sales driven by advances in new technologies
Table 1 – Enterprises in the UK Clothing Retail in terms of Turnover and
Employment
Enterprises
0-49
based on
Turnover
(in thousand £)
Number of
1200
enterprises
Proportion
10.2%
50-99
100-249
250-499
500-999
10004999
More than Total
5000
2755
4405
1770
875
580
215
11800
23.3%
37.3%
15.0%
7.4%
4.9%
1.8%
100%
Enterprises in
terms of
number of
Employees
Number of
enterprises
Proportion
0-4
5-9
10-19
20-49
50-99
100249
More
than 250
Total
8490
2165
660
255
75
70
85
11800
71.9%
18.3%
5.6%
2.2%
0.6%
0.6%
0.7%
100%
Source: Keynote, 2012
3.1.2 PESTEL Analysis
Summary findings regarding PESTEL analysis:
Economic, social and technological factors affect the UK apparel retailing the most.
Pessimistic economic outlook, rise in unemployment (especially young unemployment),
reduction of disposable incomes and consumer confidence put substantial downward
pressure on retail sales (Keynote, 2012; Datamonitor, 2011). The demographic shift of
21
the UK population points out the contraction of the younger and expansion of the older
age group (Datamonitor, 2011). In terms of technological advances, new retail
technologies (contactless payments; in-store technologies etc.) might provide significant
opportunities. Also, new technologies are more user-friendly and thus broaden the upper
age range and increase the likelihood to access wider and new customer base. Finally,
rising awareness in environmentally responsible sourcing, sustainable production, and
waste management are particularly affecting the sector as well as ethical trading
initiatives and transparency of global supply chain operations to prevent labour rights
violations (Keynote, 2012).
Strategic Issues Identified:
•
Economic recession puts a pressure on household budgets and negatively affects
the apparel revenue growth; also it seems to have a long term effect on the
consumer purchasing habits
•
Increases in input prices, VAT, oil prices
•
Near field communication and contactless payments and the consumer facing
store technologies are new advances driving opportunities in retail
•
Compliance with ethical sourcing and fair trade; environmental and
sustainability issues
•
Demographic shift and changing proportions of young and old age segments
3.2 Global Environment Analysis (Globalisation Drivers)
Apparel retail industry developed great globalisation potential over time and many large
multinational retailers expanded their markets globally. These drivers for the apparel
retail in the UK are discussed in the Appendix-3 in detail and are summarized below.
Summary findings regarding globalisation drivers:
The existence of globalisation drivers in the apparel industry enables expansion with a
relatively easy-to-implement global strategy in the apparel retail industries (without
much localization efforts and related costs).
22
First, many international apparel chains have an incentive to enter the UK market
(especially considering the comparatively higher market growth rate of the UK in
comparison to Europe). Second, large UK retailers have an incentive, in the same way,
to expand internationally into growing markets, for instance into Asia, in order to
benefit from fast growth in those apparel markets.
Strategic Issues Identified:
•
Intensified rivalry with the threat of international chains’ entry into the UK
apparel retail
•
Opportunity for UK retailer to expand internationally to benefit from cost
advantages of a global strategy and growth in other parts of the world
3.3. Analysis of Industry Dynamics (Evolutionary Processes)
Macro-environmental and global factors are discussed above. The major evolutionary
forces and their impact on the apparel industry structure are discussed next (see
Appendix-4 for detail).
Summary findings regarding evolutionary processes and their effect on industry
structure:
The key evolutionary forces with regards to the apparel retail can be summarized as
follows;
•
fluctuating and slow but steady growth
•
structural change in customer base
•
well informed customers; repeat buyers
•
overcapacity with intense rivalry
•
input, oil and currency costs intensify supply side pressure and reflect a rise in
prices
•
limited product innovations and more marketing innovations
•
VAT increases translates itself into higher prices for clothes
•
frequent entries and exits
23
These evolutionary processes all intensify the rivalry in the apparel retail in various
ways. Fluctuating growth and marketing innovations regarding the online, mobile and
social media increases the threat of entry. Moreover, this frequent entries and exits and
overcapacity contribute to intensified rivalry as well.
The customer base is changing and this change can be described in terms of three
dimensions; demographic change, change of purchasing habits and change of attitudes
and lifestyles. Consequently this shifts the power in favour of the consumers and
particularly some segments are becoming more powerful (e.g. ‘grey consumers’).
Additionally, rising cotton prices, transportation costs, VAT increases and exchange
rate risks, as discussed earlier, require operational efficiency to diminish costs and
intensify the existing rivalry among retailers.
Strategic Issues Identified:
•
Change of customer purchasing habits: less discretionary and impulse; and more
planned purchases; limited budget spending on fewer items with less frequency
and price sensitivity
•
Change of customer attitudes and lifestyles: Consumer demand is diverse and
there is heterogeneity in taste
•
Change of demographics: Importance of mature and older consumers (55plus)
and contraction of young customer segments
•
Coping with rising cost and the resulting pressure on margins (associated with
inputs, transportation, VAT and exchange rate risks)
•
Increased rivalry both from new firms and incumbents
•
Technological advances; especially role of marketing innovations both to reduce
and to raise entry barriers
3.4 Industry Structure (Five Forces) Analysis
The relative power positions of buyers, suppliers, substitutes, new entrants as well as
the level of rivalry in the UK apparel provide a broad perspective of the industry
structure. The complete analysis was applied in the Appendix-5 and the summary
findings are presented below.
24
Figure-3: Retail Industry Forces
Power of buyers
5
4
Threat of new
entrants
3
2
1
Degree of
rivalry
0
Threat of
substitutes
Power of
suppliers
Source: Based on Five Forces Analysis by Marketline (2012a) and author’s adjustments.
Summary findings regarding Five Forces and their effect on industry structure:
The strongest competitive forces that determine the profitability in the UK apparel
industry are the threat of entry (strongest) and intense rivalry among retailers. Low
entry barriers, online retailing and volatility in growth rates encourage new entrants and
create a fairly fragmented industry structure. Difficulty in differentiation due to
availiability of vast array of options, low cost switching and similarity among retailers
are the factors contributing to the intensity of competition. Moreover, bargaining power
of buyers has been increasing. Buying behaviour is strongly influenced by fashion, self
image and changing trends. In this regard, they are susceptible to branding and
advertising (Marketline, 2012a). But the consumers have relative advantage due to the
availability of extensive choices and low customer switching costs. They are wellinformed, ‘connected’ and selective. This reduces consumer loyalty in the mass market
despite the importance of brand awareness. On the other hand, the impact of suppliers
and substitutes is less effective. Bargaining power of suppliers is low to moderate as
there are internationalisation of global supply chains, intensified competition and low
cost rivals. Threat of substitutes for apparel is rather low since apparel in its broadest
sense is an essential purchase. In summary, the intense rivalry, very strong new entry
threat and increasing buyer power make profitability and gaining and maintaining
market share a key challenge.
25
Strategic Issues Identified:
•
High threat of entry and intense competition due to several factors including low
entry barriers, difficulty in differentiation due to availability of vast array of
options, low cost switching
•
Increasing bargaining power of buyers
3.5 Competitive Landscape and Competitor Analysis
After the macro level and industry level analyses, apparel retailers in the UK are
assessed in detail within this subsection of competitor analysis. There are two aspects to
consider for understanding this competitive landscape. The first one is the variety of
players and the fairly fragmented nature of the UK apparel industry (see table-1). It
mostly consists of clothing specialist (see figure-4) and became crowded after the entry
of international retail chains, the emergence of online retailers and supermarket retailers
(Pretious and Love, 2006). Second, apparel has been sold exclusively or predominantly
under retailer’s own branded products and this is an important characteristic of the UK
retail industry (McColl & Moore, 2011; Goworek, 2010). Accordingly this helps
retailers to increase their control of positioning, flexibility and growth opportunities.
Based on this outlook, the following sections will provide further analysis on the
competitive landscape by carrying out strategic group analysis and individual
competitor analysis of the leading players.
Figure-4: Market share by retailer type
Supermarkets
8%
Department
stores
9%
Sports goods
and other
specialists
7%
Non-store
retailer
7%
Clothing
specialists
69%
Source: Author’s own calculations and illustration based on results by Mintel, 2012.
26
3.5.1 Strategic Group Analysis
The strategic group analysis was undertaken to group major competitors based on their
brand assortment and the extent to which they are regarded as value for money. As seen
in figure-5, the vertical line represents the brand assortment in terms of available brands
and the horizontal line shows the value for money dimension in terms of considerations
of price-efficiency of purchase. Majority of the retailers were clothing specialists with
relatively diverse positions on the map implied by the number of brands they offer and
by the extent to which they are perceived value for money.
Supermarkets and
department stores on the other hand had very distinct positions on these strategic
dimensions.
General characteristics of these strategic groups are;
•
Group D (blue group), consists of department stores with comparably wider
assortment that appealed to customers as expected. The dimension on value for
money is almost the same as the clothing specialists and the higher score on the
degree of available brands enables this group to differentiate their offer. This
implies that department stores or retailers with wide assortments can have a
competitive advantage over clothing specialists with their differentiated offer.
•
Group G (red group), is composed of supermarkets and has limited amount of
available brands but the group is perceived slightly more value for money as
their bases of competition is cost.
•
Groups S1, S2 and S3 (green groups) are all clothing specialist and demonstrate
more diversity in both strategic dimensions. Group S1, typically represents
‘upper segment specialists’ and tends to use focus differentiation with relatively
higher prices and therefore scored comparatively poor in the value for money
dimension.
•
Group S3 is more of a ‘value segment specialist’, discounter, such as Primark
and performed comparatively strong in the degree of perceived value for money
and exploits the potential of a strategy on cost bases.
27
•
Group S2, consists of the ‘mid-range specialists’ that have more balanced
propositions and resulting proportional satisfaction levels in the value for money
and the brand assortment as they are in the middle of the strategic map. This
group mostly follows a combination of cost and differentiation (hybrid) strategy
and can be considered as predominantly serving to middle to upper middle
segment with average amount of differentiation such as Marks & Spencer.
•
In terms of intergroup competition, some retailer groups have positioned
themselves quite distant from each other; while some have more competition
with overlapping retail propositions. One such example is the value specialist’
and supermarkets’ conveniently priced, ‘value’ apparel proposition. Another
example is the intersection between the supermarkets and mid-range specialists
which compete on value offers as well. These intersections on strategic
dimensions intensify inter-group competition in addition to within group
competition.
Figure-5: Strategic Group Mapping
Source: Author’s own calculations and illustration based on the UK customer
satisfaction survey results by Mintel, 2012.
28
The strategic group map also helps to explain the recent developments with regards to
these groups as forecasted;
•
Department stores have increased their share to 9.2% overall in 2011 because
they appealed to relatively resilient middle and upper-middle segments; invested
and improved their retail propositions (Mintel, 2012).
•
Performance of supermarkets points out overall contraction (Mintel, 2012) as
can be expected from intense competition in this value segment area. This is
despite the fact that customers appreciate both the convenience of apparel and
grocery shopping together and the approach of supermarkets to create their
original designs rather than imitating other retailers (Bruce and Hines, 2006;
Kervenoael et al., 2011).
•
The improvement of performance of department stores and the decrease in
supermarket share implies that consumers tend to remain in their preferred
categories rather than trade down towards value categories (Mintel, 2012). This
contrasts with the overall belief of consumer’s switch to value products (Mintel,
2012).
Summary findings regarding the strategic group maps:
Eventually, the positioning of the strategic groups shows that there tend to be a
concentration on the value end most likely as a consequence of contracted consumer
spending and ongoing appeal of value range. The strategic gap might be on the opposite
end (middle to upper-middle end) of the current value proposition trend. Targeting these
relatively resilient segments or providing larger brand availability can allow retailers to
differentiate themselves from the rest of the groups.
3.5.2 Individual Competitor Analysis
Summary findings regarding the individual competitor analysis:
Individual performance and profitability varies substantially but often independent from
the market share (see figure-6 and 7) (Mintel, 2012; Keynote, 2012).This stresses the
point that there were opportunities for some large chains to capitalize on and to thrive in
29
this challenging retail environment. In this regard, the above average margins of Inditex,
H&M are attributable to their key capabilities of fast-cycle apparel development with
strong propositions based on high-street fashionabilitiy (Mintel, 2012). In the case of
Primark, it was the ability to combine fast fashion with low end, value segment and
disposable and fashionable products with quick turnaround times. In contrast, Next’s
profits were mainly driven by its online and non-store channel sales (Mintel, 2012).
Strategic Issues identified regarding the strategic group mapping and individual
analysis:
•
Intensified competition due to overlapping value propositions
•
Value segment is crowded
•
Widespread discounting and demand for value items coexist with the fact that
consumers tend to remain in their preferred segment rather than trade down as
well (Mintel, 2012)
•
Some competitors are growing stronger despite the challenging conditions
30
Figure-6: Overall market share of the large retailers
Source: Author’s own calculations and illustration based on Mintel, 2012
Figure-7: Large retailers in terms of market share and operating margins
20
Operating Margins %
15
10
5
0
Market Share
M&S
Next
Arcadia
Primark
Asda
Debenhams
TKMaxx
Matalan
New Look
Tesco
H&M
InditexUK
Source: Author’s own calculations and illustration based on Mintel, 2012
31
3.6 Customers and Market Segmentation
The customer base of the apparel retail is undergoing structural changes which can be
categorized under three aspects; demographic shift, shift in customer purchasing habits
and change in customer attitude and lifestyle. The following subsections focus on the
market segmentation analysis.
(Millions)
Figure -8: Demographic Change in the UK population, 2007 - 2017
10
9
8
7
6
5
4
3
2
1
0
2007
2012
2017
Source: Author’s own calculations and illustration based on Mintel, 2012 and Datamonitor,2011
3.6.1 Market Segmentation Analysis
The segmentation analysis based on segmentation variables of socio-economic status,
gender and age is presented in Appendix-6 and the findings are summarized below.
Summary findings of the segmentation analysis:
Extending segments and re-focusing current segments to include both women and men
of different age groups and of different income levels are the most sensible
segmentation strategies to capture larger overall market share from the shifting
customer base. Considerations of extending segments and re-focusing segments require
32
assessing relative attractiveness of changes in segments and key success factors for
serving these segments. One of the most important key success factors for all these
segments is incorporating fashionability into the retail proposition based on the market
served. For low end, value market, this need to be combined with affordable prices (e.g.
Primark) whereas for mid-market it is the ‘pitch-perfect blend of midmarket
fashionability and range segmentation’ (e.g. Debenhams) (Mintel, 2012;10). The
second key success factor is the cost efficiency. Except the premium high fashion end,
every segment in the apparel market became more or less price conscious and even with
differentiation bases; retailers need to justify their price points in comparison to their
rivals with similar propositions. Actually, differentiation advantage combined with cost
is termed hybrid strategy and is very common. Finally, the third factor is the extensive
use of internet and mobile channels, particularly social media, to integrate and support
retail experience.
Key issues identified:
•
Incorporating a fashion/style element into the offer, cost efficiency and use of
new channels are key success factors for almost all segments
•
Changing customer base, especially in terms of age and disposable income seems
very unfavourable. Also the contraction of younger age segments both in terms of
purchasing power and number of young people creates a further challenge for the
retail environment
•
Consumers are demanding and sophisticated, time-compressed (convenienceseeking); expect more social interactions; switch between retail channels much
more regularly; and have high expectations of consistency of proposition in these
channels
•
Consumers are discerning (are knowledgeable and well informed about quality,
comparative prices etc.), selective and price conscious
•
Purchase patterns are shifting towards planned purchases (reduction of impulse
or discretionary purchases)
33
Table-2: UK Apparel Retail Market Segments at Current Retail Selling Prices
(in billion £)
Women’s Segment Value
annual change
Men’s Segment Value
annual change
Accessories Segment Value
annual change
Children’s Segment Value
annual change
Source: Keynote, 2012
2008
19.719
2.1 %
11.394
1%
2.316
-1.9%
7.250
1.7%
2009
19.365
-1.8%
11.130
-2.3%
2.044
-11.9%
7.106
-2.0%
2010
20.356
5.1%
11.722
5.3%
2.133
4.4%
7.525
5.9%
2011
21.028
3.3%
12.150
3.7%
2.185
2.4%
7.732
2.8%
34
3.7 Key Success Factors
Eventually, the following key success factors are identified for the overall apparel retail
in general:
Table-3: Framework of key success factors for the apparel retail in the UK
Analysis of UK apparel demand:
•
Contraction of the young segment of
expansion of older age segments with
industry with large retail chains
•
Intensified competition due to
Mostly repeat buyers, heterogeneity in
overlapping value propositions and
taste, increased expectations, low
crowded value segment with
brand loyalty and overall price
supermarkets and discounters
•
Considerable variations in
profitability and performance
Less discretionary and impulse; and
more planned and well-informed
•
Low entry and exit barriers, fairly
fragmented and highly competitive
sensitivity
•
•
dominant clothing shoppers and
more stable purchasing power
•
Analysis of competition among retailers:
•
Widespread discounting coexist
purchases
with the customers unlikely to trade
Needs: Convenience, fashion and
down
style, diversity, connectedness (social
media, mobile technology), multiple
channels with consistency among them
Resulting Key Success Factors
•
Combining differentiation with low cost (Grant, 2010: 89) and augmenting retail
offer with line extensions and appropriate product mix. Using multiple channels,
developing fashionable proposition, considering customer service, qualityand price
perceptions
•
Differentiation requires speed of response to changing fashion, style, reputation, and
quality (Grant, 2010: 89) and ability to offer consistent and satisfactory multichannel
experience
•
Cost efficiency requires manufacture in low wage countries (Grant, 2010: 89) and
substantial operational efficiency
35
•
Maximizing profitability is needed by increasing return on revenues and capital
productivity.
•
Development of an appropriate sales mix and strict inventory control to eliminate
mark down will boost return on sales;
•
Maximizing sales per store space; maximizing inventory turnover through tight
inventory control via EDI systems; and close collaboration with supply chain to
ensure fast apparel delivery and turnover; and finally outsourcing production to
reduce capital investments will lead to higher sales per capital employed (Grant,
2010: 90)
36
4. INTERNAL ANALYSIS – RESOURCE BASED VIEW
The challenging external environment puts great pressure on apparel retailers to gain
and sustain competitive advantage. In this respect, undertaking internal analysis and
considering firm-specific resources and capabilities become critical. However, the
internal analysis performed here is only limited since it is at the industry level.
Therefore this section aims to provide a general understanding of the industry value
chain and point out some examples of key resources and capabilities which may create
competitive advantage for retailers.
Figure-9: Global Apparel Value Chain
Textile Companies
Apparel Manufacturers
Garment
factories:
Natural
fibres:
cotton,
wool, silk
Yarn:
spinning
Fabric :
Weaving
knitting,
finishing
Designing,
cutting,
sewing,
buttonholing
ironing
Retail Outlets
All retail outlets
Brandnamed
apparel
companie
s
Specialty
stores
Mass
merchandise
chains
Subcontractor
Synthetic
fibres:
Oil,
Petrochemical
Synthetic
fibres
natural
gas
RAW
MATERIAL
NETWORKS
Garment
contractors
Subcontractor
COMPONENT
NETWORKS
PRODUCTION
NETWORKS
Departmen
t stores
Overseas
buying
offices
Discount
chains
Trading
companies
All retail
outlets
EXPORT
NETWORKS
Off-price,
factory
outlet,
mail
order,
MARKETING
NETWORKS
Source: Adopted from Gereffi and Memedovic (2003:6;citing Gereffi and Appelbaum, 1994)
37
4.1 Industry Value Chain Analysis
Retailers are situated at the end of the globally dispersed apparel value chains and are
the main point of contact for the end-customers (see figure-9). Within these value
chains, retailers occupy the high-value activities of marketing, consumer services but
also design and logistics (Gereffi et al., 2003; 2010). In terms of the scope of backward
integration, Gereffi and Frederick (2010) categorizes apparel retailers into ‘private label
brand retailers’, ‘brand manufacturers’ and ‘brand marketer-virtual manufacturers’.
Accordingly, private label retailers are purely outsourcing production; while the others
integrate backward and coordinate supply and production networks at different levels
(Gereffi and Frederick, 2010).
Based on this categorization, the basic functions of a private label brand retailer (as the
most common category in the UK as discussed before) is illustrated below:
Figure-10: Simplified illustration of a retailer value chain
design &
collaboration
with vendors
buying
warehousing
& distribution
store
operations,
marketing &
sales
Obviously, there are three main roles of retailers that outsource production;
•
buying finished apparel merchandise for sale (includes design and collaborations
with vendors as well),
•
operating warehouses and delivery, storage and distribution of apparel items to
stores (channels),
•
store (channel) operations, demand management and sales.
Some of the key generic activities and their associated cost and value drivers are
examined in Appendix-7 and summarized below.
38
Summary findings regarding the analysis of value chain:
Retailers can either reconfigure their retail value chain or identify the key value
activities and manage their respective cost and value drivers to gain competitive
advantage. Some of the value-driving activities in the value chain are new apparel
design and development (within the primary activity of operations) and brand
management and multi-channel retailing (within the primary activity of marketing and
sales). On the other hand, production and inventory related activities (outsourcing,
warehousing, distribution and stock replenishments etc. (mainly within the primary
activities operations and outbound logistics) are main sources of cost and therefore
managing cost drivers in these activities are critical. Moreover, support activities such
as retail organization/retail business model can be the main value driver in its
supporting role of primary and other support activities. The best example would be
Zara, which has a unique infrastructure that organizes various tasks in a way that
exploits vertical linkages with the supply chain as well as linkages within its own value
chain. Managing both cost and value drivers in selected activities will develop either a
value advantage or cost advantage to help neutralize rivalry and tackle issues and
therefore it is very essential for retailers to assess their own value chains to identify
these drivers.
4.2. Key Resources and Capabilities
Some examples of the key resources and capabilities for apparel retailers can be
summarized below. Assessment is made on the basis of VRIO criteria; “Valuable, Rare,
Inimitable and Organized
to exploit” (Barney and Hesterly,
2008:76-94). (See
Appendix-8 for detail.)
Summary findings regarding the analysis of key resources and capabilities:
Some valuable capabilities include: Superior design capability; merchandising expertise
and managerial know-how; advanced technology infrastructure and superior
multichannel retailing capabilities; cost management capabilities; and sound financial
structure and resources.
39
Most of the above examples of resources and capabilities are valuable for retailers as
they support retailers to exploit opportunities and neutralize threats; and therefore are
useful for the success of retailers. If not many of the competitors possess these resources
and capabilities then these can be the sources of competitive advantage. But still, these
potential sources can only provide temporary competitive advantage as they are imitable
sooner or later. Contrarily, building of a strong global brand name and reputation or
development of a unique architecture based on social embeddedness or causal
ambiguity that is very hard to copy (e.g. Inditex’s business architecture combining
various capabilities and resources) can be extremely important to sustain competitive
advantage. But overall, in mature and extremely competitive retailing industry,
maintaining competitive advantage is difficult (Grant, 2010:333). Also sources of
competitive advantage tend to be more firm specific and assessed individually.
Issues Identified:
•
Maintaining competitive advantage is difficult in mature and very competitive
retailing industry (Grant, 2010:333).
•
Developing capabilities that are socially embedded in culture or in
interrelationships; or that have complex explanations are harder to imitate and
can provide sustainable competitive advantage. However, this is not common
among retailers and there are not many examples.
•
Design, brand management, store operations and effective supply chain
coordination are important value chain areas that should be addressed. (See
Appendix-7).
40
5. KEY STRATEGIC ISSUES BASED ON STRATEGIC ANALYSIS
5.1 Prioritization and Classification of Key Strategic Issues
Based on the analysis undertaken to examine the retail landscape, many strategic issues
are detected in the previous sections. Among these issues, the key strategic issues that
most of the retailers struggle with are summarized and presented in a table format
below. The key strategic issues are assessed within the dimensions of high urgency,
impact and short and long term effects.
Table-4: Strategic Issue Prioritization and Classification *
Short Term Issues
Long term Issues
High
Urgency
1.Weak retail health and weak
4.Change in customer base and
and
Profits(Losses)
heterogeneity in taste
Impact
Erosion of revenue base: fall in sales
Change of customer purchasing
revenues both in volume and unit price
patterns:
•
•
due to reduced disposable incomes,
•
less discretionary and impulse;
fall in consumer confidence as a
and more planned purchases;
result of ongoing recession, high
limited budget spending on fewer
unemployment and negative
items with less frequency and
economic outlook
price sensitivity
industry wide discounting and
Change of customer attitudes and
popularity of value range
lifestyles:
long term effects of change in
•
Consumers becoming powerful
customer base in spending patterns,
and their demand is diverse and
segment purchasing power and overall
complex
diversity of demand (heterogeneity in
Change of demographics:
taste)
•
Importance of more mature
consumers and contraction of
young consumer segments
41
1.Weak retail health and weak
5. Structural change in retail
Profits(Losses) -Continued.
landscape
Increased cost base
•
multi-channel retail opportunities
•
new technologies in retailing
•
•
the rise in commodity and input
prices, transportation costs, exchange
(consumer facing technologies,
rate risk
contactless payment
inability to translate the rise in costs
technologies, etc.)
into the final prices due to intense
competition and price sensitivity
2.Liquidity issues and operational
efficiency
Managing working capital, and cost
efficiencies in the supply chain and
own value chain
3.Intensified rivalry and threat of
new entrants
Within and between different types
(strategic groups) of retailer
•
due to changes in industry structure
•
increasing threat of new entrants
Exchange rate risk
Low
Urgency
Counterfeit and imitation products in
and
the apparel retail
Impact
Compliance with sustainability,
labour rights and ethics (global
supply chains) and environment
friendly initiatives
Source: *Strategic issue prioritization and classification framework by Oktemgil(2011)
42
PART III – STRATEGY AND RECOMMENDATIONS
6. STRATEGY GENERATION, EVALUATION AND SELECTION
6.1 Future Strategic Options for the UK Apparel Retail Industry
Strategic options generated for retailers (clothing specialists) are listed below from
broad focus to narrow focus strategies.
Table-5: Generation of Future Strategic Options for the UK Apparel Retail
Industry
Business Level Strategy
1. Strategic Option 1 : Cost Leadership (Short term)
This strategic option at the business level involves offering relatively lower quality
clothing assortments at competitive prices.
2. Strategic Option 2 : Hybrid Strategy (Short term)
The second strategic option is about balancing the differentiation advantage with cost
advantage and is called hybrid strategy. Within this strategy, costs are kept down while
there is differentiation in proposition (in terms of higher quality, distinctiveness,
fashionability, superior customer service, and intense marketing and brand
management). It should be also noted that the basic distinction between cost and
differentiation strategies was used throughout the analysis for the ease of reference. But
except the premium segment, retailers need to always consider costs and always balance
differentiation with cost advantage if they are not following cost leadership strategy in
such a competitive and mature industry with repeat buyers.
Specific Level 1 Strategy (Strategic Direction)
3. Strategic Option 3: Turnaround (Short term); Market penetration
term); Market development (Long term)
(Short
The third strategic option is concerned either with growth (market penetration, market
development) or disinvestment (turnaround) based on the particular retailer and
therefore examined together. Turnaround strategy option is suggested for financially
instable retailers with declining sales and profitability, while market penetration and/or
development option is concerned with retailers which have a sound financial and cash
43
position and can focus on growth opportunities in the UK and if possible overseas.
Turnaround strategy on the other hand is a disinvestment strategy for survival. It
requires aggressive cost and asset reduction; and reallocation and investment of freed
resources into more productive endeavours (e.g. optimization of value chain activities,
cost savings in the supply chain, followed by aggressive strategies to gain market share)
4. Strategic Option 4 : Product Development
The forth strategic option is concerned with extension of current apparel lines. Variety
in assortment is a way to attract more customers and increase sales as a growth
opportunity.
Functional Level Strategy
It might be suggested that the functional level strategic options are the most critical
elements of the overall strategy as they tend to determine the difference in performances
of various retailers with similar business level strategies. Two of the most critical
functional strategic options are listed below.
5. Strategic Option 5: Multichannel retailing - New business model (Long term)
The fifth strategic option is the multichannel retailing with a new business model
approach and requires detailed adjustments in retailing strategy.
6. Strategic Option 6 : Cost Management and Operational efficiency (Long term)
The sixth strategic option is cost management and operational efficiency and this
functional level strategy is of great significance for the retailer’s health and overall
survival as well as flexibility.
44
6.2 Strategy Evaluation and Selection for the UK Apparel Retail
Industry
Strategic options developed for retailers are evaluated and selected based on the
sustainability, acceptability and feasibility (SAF) criteria and are shown in the table
below.
Table-6: Strategy Evaluation and Selection for the Clothing Specialist Retailers
in the UK
Options
Suitability
Acceptability
Feasibility
Strategic
Choice 1Business
Level Strategy
:
Cost leadership is a suitable
Risks with respect to cost
If the cost base is high
option from market based
leadership option is the
financial feasibility may
perspective because it
uncertainty about the
be problematic due to
addresses the needs of price
volume sales to break even
low profit margins.
conscious customers; is a
which depend on costs and
Value chain may need to
way to grow in the mass
uncertainty on demand. In
be reconfigured to
market and addresses key
the currently challenging
manage cost drivers.
success factors (See
retail environment, the risk
section3.7). From resource
is to have further reduced
based perspective, cost
margins. Risk of retaliation
leadership requires superior
of other value retailers or
management of cost drivers
supermarkets is high since
in the value chain and very
this value retail segment is
cost efficient operations,
crowded (See section3.5).
superior supply chain
Return may be delayed as
management capabilities etc.
volume and market share
in order to compete with
is driving profitability in
value retailers such as
this strategy.
Cost
Leadership
Primark or supermarkets.
Strategic
Choice 2Business
Level Strategy
:
Hybrid
strategy
Hybrid strategic option is
Inappropriate marketing
Feasibility might be
suitable as the customers
mix, especially overpricing
challenged due to
still tend to trade up and
can lead to loss of
financing brand
expect superior retail
customer base as overall
management and
offerings but are extremely
brand loyalty is low and
advertisement expenses
price conscious. So, this
customer switching is
and the initial
option is a way to provide
common. But foremost,
investments needed for
customer switching costs to
being stuck-in-the-middle
improving quality,
neutralize their high power
is the risk of
design and additional
45
Strategic
Choice 3 Strategic
Direction:
Turn-around,
Market
penetration,
Market
development
to a certain extent. This
simultaneously performing
services (e.g.
option tackles the intensified
differentiation and low
technological
rivalry and profit problem
cost strategies. Another
infrastructure
with the decreasing retail
risk can arise from failure
investments).
health as well. In terms of
in market segmentation
resource based view, this
and inability to match the
strategic option supports the
product features to the
development of distinctive
sophisticated customer
capabilities and resources
needs. However, return
(such as brand name and
would be positive if the
ability to design)
retail proposition is strong.
Based on the situation of the
Cutting costs and releasing
Adequate
retailer, turnaround strategic
resources from the
implementation of
option is suitable as it
appropriate areas and not
turnaround strategy
addresses the critical
from the core retail
would generate financial
financial and competitive
business is a delicate task
resources and therefore
position of those retailers
and a major risk of
the amount of capital
which have liquidity issues
turnaround strategy. Still,
investment required will
and suffer from operational
returns can be realized in
be limited. This would
inefficiencies under the
the long term and a
increase the financial
challenging retail
successful turnaround can
feasibility of the option.
environment. A turnaround
strengthen the competitive
strategy, simply focuses on
position of a retailer
the core strengths and cuts
substantially.
Based on the selected
method market
back excess and inefficient
Market penetration has the
penetration may require
risk of retaliation (e.g.price
high cash injections due
On the other hand, market
wars) and penetration
to offensive strategies
penetration strategic option
pricing will reduce
with aggressive cost
is suitable as it addresses the
margins further.
cutting, advertising and
areas.
demand issue and offers
promotions.
growth opportunities. But
Geographic expansion is
from resource based view, it
very risky due to the
is not suitable for many
uncertainty and
Overseas expansion for
retailers without strong
unfamiliarity with the host
market development may
financials to cope with
market. Still, this risk for
require substantial
further reduction in margins.
large chains is
capital investment in
46
comparatively lower due
terms of the selected
Market development
to the likely expertise in
method of growth. For
overseas is a suitable option
global operations and
overseas acquisitions or
for large retailers and chains
global brand building.
green field investments,
since many overseas markets
Also, returns might be
initial capital
in the Asia-Pacific are
high due to growth
requirement will be high
emerging markets with high
capacity.
while it will be a
growth rates
comparatively lower
(Marketline,2011c). This
investment for joint
option provides an
ventures. The national or
opportunity to support the
global brands have
financial performance in the
leverage in terms of
UK. The highly global
feasibility.
nature of apparel value
chains is appropriate for this
Financial feasibility for
strategy.
both growth options
depends on the financial
strength of the retailer
while the latter requires
sensibly more resource
deployment.
Strategic
Choice 4Strategic
Direction:
From market based
Risk is the limited revenue
Financial feasibility for
perspective, this strategy
and demand for the new
product development
addresses the key success
line of products, market
requires cash injections,
Product
Development
factors as it strengthens the
cannibalization of own
especially for brand
total retail offer and
brands, and risk of reduced
building, advertising and
therefore is a way to
differentiation among
design functions. The
neutralize buyer power and
brands.
costs and the need for
rivalry in the market up to a
resource utilization may
certain point. Also this
Returns are likely to be
increase if the retailer
process may hopefully
high with strong and
has adopted a more ‘fast
utilize the interrelationships
distinct retail propositions
fashion’ approach, or
and vertical value chain
as customers value variety.
aims for faster time-to-
linkages from resource
market and require agile
based perspective.
supply chains.
47
Strategic
Choice 5Functional
Level:
Multi-channel retailing is
The greatest risk is the
Financial feasibility for
suitable to the current retail
failure to formulate and
multichannel retailing
purchase patterns with
adopt an adequate business
requires substantial
Multi-channel
retailing
sophisticated and
model for multi-channel
investment in technology
convenience-seeking
retailing.
to support online and
customer base and aims to
Risk of failure in
mobile channels as well
neutralize the power of
coordination of multiple
as investment in
buyer to some degree.
channels and multiple
infrastructure and in-
Intensified rivalry, weak
operations exists. Risk of
front areas of the
retail health and profit
failure to understand the
business (store
problem and ongoing
target segment needs and
refurbishments etc.) and
structural changes in the
preferred channels, failure
therefore strong cash or
retail environment are
to develop a strong retail
credit position may be
addressed within this option.
proposition are other risks.
needed. Furthermore
It also fosters the
Appropriate
improvement of the retail
development of capabilities
implementation of a multi-
model will require skills
to integrate various
channel business model
in change management.
functions and exploit value
may drive growth even at a
Integrating resources for
chain linkages.
challenging retail
aligning retail
Heterogeneity in tastes can
environment. The returns
proposition in various
be tackled by creating multi-
are likely to be higher
channels might be
brand offerings and brand
profitability and revenues
difficult.
management to create brand
in the medium to long
loyalty to a certain extent.
term. Yet, shareholder
reaction (employees, store
managers, and suppliers)
in this strategic option
might be controversial as
this option might require
substantial change in
organizational structures
and internal
communication channels.
48
Strategic
Choice 6Functional
Level
Cost
management
and
operational
efficiency
This strategic option is
Excessive cost cutting
Application of some cost
especially suitable to the
from core areas may
management tools and
current retail environment.
undermine core
systems may require
Downward pressure on
capabilities. Return is
some initial investments.
profit margins due to both
likely to be fast.
However, in the long
increased costs and
term cash requirements
decreasing revenues impacts
tend to be low. However,
the survival of the firm.
integrating resources
Therefore, effective cost
may require technology
management and operational
capabilities for close
efficiency is critical for
monitoring of costs.
every retailer. From market
based view, this option
addresses the changing and
unfavourable industry
structure and increased
competition and from
resource based view it
focuses on managing cost
drivers on the value chain to
gain cost advantage.
6.3 Recommended Strategies for the UK Apparel Retail Industry
The key strategic issues of the UK apparel retail industry are considerably challenging
and multi-faceted. In this regard, every retailer needs customized strategies to cope with
the situation. Yet, each retailer has to select a few strategies among the pool of
relatively limited strategic options at broad levels. It seems that the differences in
success are determined often by functional strategies. The amount of required
customization and selection of strategies will depend mostly on the individual retailer.
Therefore the recommended strategies can only guide retailers.
Also as noted earlier, these recommendations are generated and selected for the clothing
specialists since the majority of the retailers in the apparel retail are specialists.
49
Eventually, the recommended strategies are listed from broad to narrow scope and also
same level strategies are organized together to create a balanced and comprehensive
understanding of the recommendations. These recommendations are broad and show
different possibilities within the same level strategy. The table below provides a list of
possible recommended strategies to tackle the challenges of the UK apparel retail. The
following recommendations generalize the possible actions that retailers might choose
under three main headings as follows:
Table-7: Future Strategic Recommendations
Recommended Strategy
Time Frame
Short term
Recommendation 1 - Business Level Strategy: Cost Leadership versus
Hybrid
Having a clear direction of either cost leadership or hybrid strategy is
needed in a mature and highly competitive retail industry to achieve
competitive advantage. Cost leadership seems to address the broader price
sensitive mass market and if the retailer has the required resources and
skills of tight supply chain management and very efficient operations, it
can be sensible to compete on cost bases. For this strategy, effective cost
optimization is the key for success. But also other innovative ways may
be needed than just pure operational efficiency. As such, Primark is able
to innovatively combine inexpensive clothing with an appropriate amount
of fashionability element and fast market lead times (fast fashion) for the
value end of the market. On the other hand, hybrid strategy is
comparatively easier to implement and has higher acceptability and
feasibility in contrast to cost based competitive strategies. The
combination of cost and differentiation advantage will serve to the needs
of the changing customer base if appropriately applied. Therefore, it is the
recommended option at the business level strategy. Differentiation, as
discussed previously, is a way to create customer switching costs and
loyalty but the vast diversity of competitors’ offers as well as shifting
customer base undermines some of these advantages. Thus, it is
recommended to carry out appropriate segmentation and positioning by
50
balancing price and quality, distinctiveness, fashionability and superior
service. Improving store operations and store refurbishments; retail
demand management in terms of assortment, space and product
developments should accompany the differentiation dimension. Being
very consumer-centric, flexible and responsive along with strong brand
management, advertising and social media strategies are very important.
Here, having an appealing retailing offer such as multichannel offerings,
integrating in-store technology with shopping experience and providing
convenience; fashion focus and appealing designs, consumer-centric
brand image, fast product turnover and fast inventory replenishments,
renewal of ranges, increasing the assortment depth with sub-brands are
key elements. On top of that, most of the customers in the mass market
(from upper-middle to low end; excluding the premium segment) are still
price sensitive; and a retailer even targeting the upper middle and middle
segments should be able to justify its price in comparison to similar
competitors with similar offers. Therefore cost efficiency and appropriate
pricing strategies are important as well.
Short and
Long term
Recommendation 2 – Specific Level Growth Strategy: Market
Development and Product Development
Growing in the highly competitive and mature apparel market is very
critical for all retailers. After successful turnaround (if need be), growth
strategies
need
to
be
considered.
Overseas
expansion
(market
development) option is recommended to those with strong financial
position to back up operations.
In this mature and highly competitive retail industry, market penetration
mostly occurs in terms of capturing market share from rivals.
Consequently, discounts and promotions based on competitive prices are
most significant methods for penetration along with aggressive
advertising and distribution. But the retaliation risks and further pressure
51
on margins makes this option mostly unattractive except the effective use
of the internet to increase sales. Online shopping can be a cost effective
way for penetration and therefore recommended.
Eventually, product development in terms of line extensions is the main
recommendation for growth in the apparel retail. Extending current
segments and re-focusing segments are needed for line extensions. These
can include a combination of sub-brands targeted at both genders and
different age groups to capture an overall larger market share from the
heterogeneous and shifting apparel customer base. Also line stretching to
up-market or down-market is another option. Considerations of extending
segments and re-segmentation need to assess relative attractiveness,
changing demand and key success factors for serving these segments.
Alternatively for larger retailers, diversification by brand extensions into
categories of cosmetics, personal care or even home-wares to develop a
lifestyle brand (adopt a department store format with widening product
lines in the long term) are among possible actions.
Long term
Recommendation 3 – Functional Level: Multi-channel retailing, Cost
Management and Optimization, Operational Efficiency
Development of an appropriate sales mix, maximizing per store sales, fast
inventory turnover via automated systems and close supply chain
collaborations are essentials for retailers and need to be addressed. In this
regard, operational efficiency gains more importance with the intense
competition and negative retail outlook in general. This can be addressed
by streamlining sourcing and inventory management operations; by
developing appropriate and cost efficient store atmosphere –considering
‘optimal store layouts, merchandise displays, allocations of shelf space’ to
foster fast and cost efficient purchasing behaviour; and by applying
automated in-store service processes to streamline in-store and
warehousing, logistics and supply chain options (Sorescu et al.,2011:S7).
52
Moreover, another need is an appropriate mix of technology solutions
such as quick response (QR), efficient consumer response (ECR), EDI,
EPOS technologies. Also closely monitoring cash expenditures,
streamlining staff and mastering strategic and operational planning
intelligence are important in general.
On the other hand, multi-channel retail is one of the most important
options for retailers to address the changing customer base and tackle the
weak retail health related issues and therefore highly recommended. In
this strategy, traditional store format and proposition is combined with
available other channels; mostly the internet and mobile channels. It is
recommended to redefine the retail proposition to reflect the brand and
multichannel experience.
First, investment in these new channels (technologies) and augmentation
of available virtual services are needed. Second, the extension of the
marketing mix to the store is important. So, the retailer should focus
especially on the ‘controllable factors of the purchase’ which are the
customer service interface, retail atmosphere, assortment decisions and
pricing (Verhoef et al., 2009) and provide consistency and integration
among these factors within channels. Some possible options include:
promotions across channels, innovative design and consumer-centric instore atmosphere, provide online navigation and utilization of consumer
facing technologies (Shankar et al.,2011:S33-S35). Finally, optimizing
physical stores and locations is recommended.
53
7. IMPLICATIONS FOR TURKEY
The retail industry of most of the developed countries recovered slowly from the global
economic crisis while the retail environment remained strong in some emerging markets
such as Turkey (Marketline,2012c; Deloitte, 2012; Euromonitor 2012d). In strong
contrast with Turkey’s emerging retail market, UK has a much larger, developed and
mature retail industry with a highly competitive environment populated by local and
international chains. Moreover, as covered in previous sections, the retail health in the
UK, particularly the apparel sector, is in its lowest level and the weak performance of
the UK retail industry was not anticipated before despite the negative indicators.
Although retail health is highly affected by economic conditions, credit availability,
consumer confidence, and disposable income levels etc.; strategic choices of retailers
affect the overall sectoral outlook as it is highly dynamic and continuous adjustment and
fine-tuning of strategy is needed.
From this point of view, some aspects of the strategic audit of the UK apparel retail can
be applicable to Turkey’s apparel retail sector. So, some of the findings can be seen as
lessons learned for other emerging markets such as Turkey to enhance competitiveness
of the industry and to be proactive towards similar future challenges. The implications
for Turkey section outlines the available information on Turkish apparel retail mostly
based on various market reports by Euromonitor International and then tries to examine
some similarities, lessons learned, opportunities and risks based on the findings and
recommendations of the UK retail case study.
Apparel retailing in Turkey is one of the dynamic and growing categories of specialist
retailing. With 25 per cent growth rate in 2011 and a seven point increase with respect
to the previous year, the retail growth was stimulated with the entry of new brands in
2011 (Euromonitor, 2012d). After the economic crisis, the apparel retail category
reached TL34.792 billion value sales (almost £12 billion) in 2011 (Euromonitor, 2012b)
as a result of relative improvement of economic indicators in comparison to European
countries and purchasing power of customers, new stores openings and new entrants
(Euromonitor, 2012d).
54
This growth was mainly driven by the performance of apparel specialist chains which
took advantage of the changing shopping habits and improvement of the retail
environment with increasing levels of investments (Euromonitor, 2012d).
Figure-10: Total Turkish apparel market value at current selling prices (in billion
TL)
TL34,792
TL33,197
TL31,717 TL31,621
TL31,411
4.8%
5.6%
Total Apparel
Market Value
(in bill. TL)
-0.3% -0.6%
2007
2008
2009
2010
2011
Source: Retailing in Turkey by Euromonitor International, 2012b
Overall, the apparel retail sector in Turkey has seen value growth with an annual
average growth rate of 5.5% over the five year period until 2011 (see figure-10)
(Euromonitor, 2012b). Especially, fast economic recovery and favourable economic
indicators, urbanisation trend with the increasing number of households, increasing
number of shopping centres in large cities contribute to the market growth in retailing
(Euromonitor, 2012d). In other words, this growth was driven both by supply and
demand side factors. Enhanced consumer confidence and increased spending were
encouraged by the investment on new store openings and promotions and attractive
payment offers by retailers.
In general, the apparel retail in Turkey represents the dominant growth category under
non-grocery retailing and mostly consists of independent local companies
(Euromonitor, 2012d). The key characteristic of Turkish apparel retail industry is the
high level of fragmentation and as such, it can be categorized under organised and
unorganised retailing where the latter is represented by a large number of small and
medium-size retailers with poorly or non branded apparel.
55
Although organised retailing has weak presence in comparison to developed markets,
ongoing rise in consumer spending for branded apparel increasingly benefit the
transition to organised formats (Euromonitor, 2012a-e). So, opportunities exists for
consolidation within this fragmented and unorganized apparel market in Turkey as it
slowly matures and evolves into a more organized format such as the UK apparel sector.
One more structural difference between the apparel retail in Turkey and in the UK is
that the apparel and textile manufacturing is still a key industry of strategic importance
for Turkey, particularly with the USD 25billion value of exports which made up 19% of
the total exports of Turkey in 2011 (Euromonitor, 2012e). Despite the intense
competition from low cost Asian rivals, Turkey has two important competitive
advantages; its ability of fast delivery for quick turnover times and its high quality
manufacturing ability at considerable costs. Turkey’s central location particularly for
Western European countries enables very fast market lead times which are of
indispensible importance in fast changing fashion retail environment, especially with
the prevalence of fast fashion and the need to erase stocks and replenish shelves.
In addition to rise in export performance, also another key development is that quite a
few of the domestic manufacturers were able to move up in the apparel industry value
chain towards more value adding functions and prospered by building up strong brands
based on their interactions with international retailers and local knowledge and expertise
as suppliers of manufactured apparel and textile to these international retailers
(Euromonitor, 2012b). Indeed, expansion of available skills and engaging in learning
with respect to brand development and favourable retail practices enable upgrading at
the apparel value chain and hence enhance competitiveness. This transition of
progressively moving up from assembly to more sophisticated processes of
manufacturing to combinations of design, branding or marketing and coordination
functions has given as an example of upgrading as a consequent of learning from
international brands and ‘organizational succession’ in the value chain literature
(Gereffi, 1999).
Another matter that will have industry wide consequences is the regulations. In order to
foster the apparel industry and cut down trade deficit, Turkish government introduced
new measures in 2011 and expanded them in 2012.
56
These include raised tariff for raw materials and other inputs for apparel production and
new subsidies to support local manufacturers of textile, yarn and apparel (Euromonitor,
2012e). These have two important potential consequences. First, the tax will raise the
price of imported low cost apparel and inputs and therefore potentially lead to increase
the attractiveness of locally produced yarns, textile and finished goods. Simultaneously,
the new investment subsidies are anticipated to encourage domestic apparel chains to
bring back production to Turkey. So the new measures are aimed to safeguard local
manufacturing in the long run, particularly in less developed Eastern areas of Turkey.
But contrarily, the other consequence is that it may have reverse effects in the short run.
The textile manufacturers are better off with these new measures even in the short run.
The apparel manufacturers (industrialists) on the other hand, are likely to be challenged
at the beginning. While the local textile manufacturers may need time to enhance their
capacity to supply the whole input demand for apparel, the difference need to be
imported and this adds to the cost of local apparel manufacturers. Consequently, the
domestic prices of apparel, in particular the domestic branded apparel may potentially
increase. Many international brands will have more flexibility to absorb this rise of
domestic manufacturing cost and maintain their price levels due to advantages of scale
economies and also their considerable influence to negotiate lucrative deals in global
apparel value chains. In contrast, this rise is considerably likely to be reflected to the
prices of domestic branded apparel in the short term. Furthermore, the parallel rise in
prices of exports may translate into reduction of demand from international brands that
are likely to move their production from Turkey to low cost apparel manufacturing
countries. So, new measures are anticipated to create substantial restructuring
throughout the industry.
The most critical development at the consumer side is the shift towards branded apparel.
The reasons of this transformation are mainly due to the change of consumer
preferences and the shift from traditional purchasing to the new consumption culture
promoted by the spread of shopping centres (Euromonitor, 2012b). The urban
restructuring of large cities and establishment of new residential areas were
accompanied with the growth in the numbers of shopping centres built in these new
neighbourhoods beginning from 2000s.
57
With 21 more centres opened in 2012, the number of shopping centres in Turkey
reached 299, of which approximately one third are located in Istanbul (Turkish Council
of Shopping Centres – AYD, 2012). The frequent exposure of consumers to branded
apparel in these shopping centres drives their demand towards branded goods and hence
assists the organised retailing channels through which these branded goods are sold.
Moreover, the changing lifestyles of consumers, particularly in terms of the increasing
prominence of single households and smart outward appearance with the rise in
disposable incomes ( in particular the mid-market segment) intensify the interest in
branded apparel (Euromonitor, 2012a). But notwithstanding the rising brand orientation,
the ongoing value consciousness of consumers who enjoy discounts and flexible
payment options in terms of the convenience of payment in instalments were met by the
intense discount and promotion strategies of the organised retailing channels
(Euromonitor, 2012a). The discount strategies of large retailers fostered the process of
consumers trading up from unorganized retailer’s non-branded products to domestic
branded apparel at low cost. From this point of view, consumer base in Turkey is
evolving (favourable consumer demographics and increasing per capita spending of
especially the middle class) but unlike the UK it is much favourable and poses
opportunities for the sector to enhance its competitiveness.
Figure-11: Market share by retailer type
Department
Stores
3%
Other retailers
15%
Supermarkets
4%
Apparel
specialists
78%
Source: Apparel Research in Turkey by Euromonitor International, 2012b.
58
The fundamental features of the apparel retailing in Turkey that shape the competitive
landscape to a large extent are the unorganized retailing and the organizational
succession of domestic manufacturers which became private brand retailers. As a result,
the competitive landscape is mainly dominated by specialist retailers of domestic origin
(see figure-11). In fact, there are only three major international retailers among the top
ten retailers with the highest market shares in Turkey. The share of apparel specialists
accounts for approximately 78% of the market in Turkey while supermarkets and
department stores only make up a small portion of the market with 4% and 3% market
shares respectively (see figure-12). (Euromonitor,2012a-b).
Figure-12: Overall market share of the large retailers in Turkey
8,0%
6,0%
4,0%
2,0%
0,0%
Source: Apparel Specialist Retailers in Turkey by Euromonitor International, 2012a.
Also very high levels of fragmentation is translated in the market shares so that,
excluding the top five best performing companies, the rest of large retailers can not
exceed one per cent of the entire apparel retail market. Additionally, top five retailers
only account for less than 15% of the market with the obvious leadership of one
domestic retailer.
59
The competitive landscape is likely to change due to new developments on the
consumer side and on the new regulations but very high levels of fragmentation along
with the appeal towards branded products pose opportunities for local firms to grow and
enhance competitiveness.
Unlike the UK apparel retailing, retail channels in Turkey are more traditional with
comparatively weaker presence of department stores, grocery retailers and internet
retailers. Particularly, internet retailers managed to account only 0.3% market share
despite the very fast growth over the past two years (Euromonitor,2012b).
Consequently, the competition within the apparel retailing is mostly among apparel
specialists who dominate the industry. Overall, many local chain stores within the
apparel specialists boosted their sales, particularly in large cities as they capitalised on
their ability to have favourable price promotions, popular high footfall outlet locations,
positive perceptions of quality, brand recognition and consequently a larger number of
customers (Euromonitor, 2012a). Opening new outlets in every new shopping centre has
been the growth strategy to achieve competitiveness for both international and domestic
chain stores to reach the target consumer segments. This fact along with the shift of
purchasing patterns away from traditional shopping locations further challenged the
access of local individual companies. Instead individual firms demonstrated strong
presence in rural locations and smaller cities where large chain stores have limited
access (Euromonitor, 2012a-b-e).
In general, the outlook of the apparel retail in Turkey seems promising for growth
because of the relative consolidation opportunities in a highly fragmented market where
consumers seek branded apparel. But still, there are some developments that can alter
the structure of the industry. First and foremost, the competition is very likely to
intensify with new domestic and international entrants which will put pressure on
retailers to remain profitable and competitive at the same time in the coming years.
Especially new regulations are likely to affect the domestic branded apparel retailers
and challenge their flexibility to absorb these short term price increases. Also own
brand development and further growth for domestic retailers mean careful consideration
of retailing strategy and business model.
60
On the consumer side, the ongoing urban restructuring and expansion of store locations
with extensive number of new shopping malls, and the increasing interest in branded
apparel represent opportunities that are not present in mature markets. Consumers seek
exposure to brands and organised formats.
But the market reports suggest that there might be a fine balance between brand
orientation of consumers and their value consciousness. In that sense, reconsideration of
retail proposition becomes important.
In brief, future risk of intense rivalry, risk of reduced profitability, need for operational
efficiency, and structural changes towards more organized formats are important aspects
that might need to be tackled by the apparel retailers in Turkey in the near future.
Despite the differences of industry dominant features and structure, these issues are
more or less similar to the challenges of the UK apparel retailing and actions and
strategies to these strategic issues can be examined for Turkish retailers as well.
The analysis of the UK apparel sector has shown that the consumers in the UK were
less likely to trade down towards value categories and rather remain in their preferred
categories even if their disposable income has shrunken (Mintel,2012). This might be
another noteworthy aspect of consumer behaviour for retailers in Turkey to inspect
when developing retail propositions. Another important consideration and success
factors for the UK market regardless of being in the value segment or mid/up-market
segment was to provide an appealing retail offer which combines fast market lead times,
quick renewal of apparel ranges and fashion orientation.
It has been suggested by research that although branded offerings attract Turkish
consumers the appeal of the value range is still important for Turkish consumers. At the
same time, the risk of widespread discounting and overlapping value propositions and
being caught in a crowded value segment might exist as in the case of UK apparel retail
(See 3.5.1 Strategic Group Analysis). Meanwhile, there are increasingly more resilient
segments within Turkish consumers susceptible to branding and advertising. Finetuning the retail offering on bases of competitive pricing, quality and augmenting
product lines requires careful consideration.
61
Also there is the risk of consumers’ gaining more power by becoming discerning,
selective and more convenience seeking in the future as in other developed markets.
Substantial marketing and launches of new consumer facing technologies, contactless
payment technologies and multiple channel strategies can provide advantage over
competitors in more mid/up-market segment strategies.
Early consideration of these strategies and investment in appropriate combination of
new technologies can provide the retailers in Turkey with the first-mover advantage and
ways to tackle future challenges of increased competition and consumer power.
Apparel retailers in Turkey are trying out various strategies to strengthen their branding
and create brand-loyal customer base to take advantage of the heightened consumer
preference for branded apparel and thus, penetrate the market. Private label
development of many domestic apparel manufacturers has been successful so far. There
are a wide range of opportunities. In addition to line extensions into other segments
(through sub-brands, up/down market stretch etc.); apparel specialists can take
advantage of their strong single brands through brand extensions into categories of
cosmetics, personal care and home-wares.
Also within this growth perspective, the drive to eagerly open stores in every new
shopping centre should be assessed carefully. Obtaining attractive retail locations in an
emerging retail sector becomes more challenging. Diminishing returns of rate of store
expansion, potential footfall and popularity of these new shopping destinations should
be compared to other alternatives such as strengthening virtual stores (online/ mobile
channels) or launching hub stores or small store formats with limited range of products.
Lessons learned from the UK apparel retailers has shown that even very large chain
stores suffered from reduced sales per store space, could not improve store operations
and went into administration.
As for functional strategies, development of operational efficiency will create
advantages over competitors when the rivalry intensifies and the market becomes
mature in the future. Some considerations involve sourcing and inventory management,
cost efficient and optimal store layouts and shelf space, maximizing per store sales and
ensuring fast renewal of ranges.
62
Strong brand management and multi channel retail proposition can be considered to
accompany functional strategies. Also online and non-store channel sales were other
sources of success for some firms in the developed and highly competitive UK market.
So, there can be an opportunity to invest in multiple channel retailing (in particular,
extensive use of internet and mobile channels) and create consistency of proposition
among these channels. To that end, augmentation and investment of virtual channels
and concentrating on the consistency of offerings and promotions across channels and
new technologies might be significant for apparel retailers in Turkey as well.
Particularly, Internet sales are expected to continue its fast growth and as a response,
store based chains can augment their store format with virtual sales and retail
experience to take advantage of the fast growing internet purchases.
Partial availability of in-depth data and research reports on the apparel retail sector in
Turkey limits direct analyses and comparisons with the UK market. But despite these
existing limitations of implications and applicability, some general strategies and issues
were covered which can contribute to the understanding of further research and provide
guidance on sectoral competitiveness of Turkish apparel retail. Eventually, from a
sectoral point of view, the abovementioned points of the apparel retail case study of the
UK can be considered for Turkey’s apparel market as lessons learned and as a guide for
potential risks and opportunities for retailer strategies.
63
8. CONCLUSION
The strategic audit of the UK apparel retail tackled the competitiveness of the retail
industry from a strategic management point of view and stressed the role of individual
retailers’ strategies. This strategic analysis of the UK apparel retail revealed the critical
issues that the retailers faced. This was done based on the relevant literature review on
strategic management and analysis tools. Furthermore, the current complex set of
challenges in the apparel retail industry (mostly applicable to the rest of the retail
sectors) were analysed in a systematic way. Finally recommended strategies were
outlined among business level, growth level and functional level strategies to provide a
holistic approach. Additionally, another section covered the implications of this retail
case study in terms of lessons learned and guidance for the emerging retail sector in
Turkey.
The recommendations for the UK apparel retailers mainly starts with a clear direction
for business level strategy; preferably hybrid strategy with strong customer-centric
proposition in terms of convenience, fashion and style, diversity, connectedness (social
media, mobile technology)and multiple channels; and considerations of key success
factors. International expansion and line extensions by extending segments or refocusing on current segments served are other important strategies recommended for
growth. Finally, multichannel retailing and cost management and optimization strategies
were recommended as supportive functional strategies. The growing significance of
multichannel retailing is particularly promising to tackle the challenges of the retail
environment effectively.
This strategic audit has generally addressed the market based analysis and tried to shed
light on the issues mostly caused by the external environment. It has outlined and
applied the key tools in analysing the retail environment to identify and prioritize issues
of primary importance that need to be tackled. In that sense, it shed light to the potential
implementation of strategic audit tools to the entire industry and provided a practical
example.
64
However for generating strategies, the match between the strategy and firm’s resources
and capabilities; value chain; mission, vision and objectives as well as organizational
considerations; stakeholders etc. need to be examined as well. So, equally significant is
the analysis of internal environment and understanding the retailer-specific issues.
Also internal analysis has two drawbacks. First, as already discussed in the literature
review, application of internal analysis and its tools are difficult and ambiguous. This
challenge has intensified when it was applied industry wide. The second reason is that
for an industry wide case study, the effectiveness of this analysis is restricted and it
cannot point out specific areas. Therefore this section only provided general insights in
terms of available information and was concerned with some of the potential areas for
development of resources and capabilities or areas for value chain reconfiguration.
Eventually, this study created directions for future research that can focus on particular
strategic audit case studies. Firm level case studies can further fill the gap between the
practical and theoretical applications of strategic analysis and can provide more
practical and theoretical insights on best cases and particularly on the internal analysis.
Systematic approach and strategic analysis are particularly important for much needed
understanding of changing and challenging business conditions and generate and select
strategies to tackle these complex problems.
65
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APPENDICES
Appendix-1: Industry Dominant Economic Features
Table-8: UK apparel retail industry dominant economic features
Dominant Features of the UK Apparel
Strategic implications for UK apparel
Industry
retailers
Market Size and Growth Rate
Although UK’s growth rates were lower than
£43 billion in 2011 and expected to be £51billion in
global average, UK has performed comparatively
2016 (Keynote, 2012). With 13.2% share, UK
well within Europe and thus attracts new entrants,
rd
market is 3 in the EU after Germany and Italy
particularly large international chains. This
(Marketline, 2012a-c).
implies that increased competition will develop in
2010-2011 market growth in the UK: 2.6%
a way which will stress either cost or superior
;in the world: 2.7% and in the EU: 3.4%
service/other ways of differentiation.
2007-2011 CAGR in the UK: 2.2%
;in the world: 2.7% and in the EU: 1.39%
The number of buyers and their relative sizes:
In a mature and highly competitive industry re-
Individual consumers in the UK are mostly repeat
segmenting the market and finding segment gaps
buyers reflected by the population (growth by 0.7%
and customizing offers are the key to success.
to 62 million in 2010- Keynote, 2012).
“ Slow but steady” sales growth (Keynote, 2012).
Types of distribution channels used
Reconsideration of channel operations in terms of
Physical store sales are falling but are still main
type, geographic scope or catchment area;
channels of revenue. In contrast, online sales are
monitor the cost, performance and footfall per
rising(Mintel, 2012). Another important trend is the
store very closely to decide on an optimal mix.
use of various channels interchangeably and
emergence of ‘out of town outlets’(Mintel, 2012).
Vertical integration
The strategic decision of outsourcing creates
High labour cost of production in the UK fosters
flexibility, reduces entry barriers by decreasing
outsourcing. Outsourcing is common also due to the
capital investments and costs of production
prevalence of highly global apparel value chains and
substantially. But it slows down turnover times
variety of outsourcing options.
and market responsiveness and creates
coordination costs.
The pace of technological change
Online retailing is an option for both small and
Technological change in terms of raw material and
large retailers. Online retailing allows new
process innovations is fairly slow. However,
entrants to access a wider customer base. For
technologies at the retail front, both
large retailers, this implies the opportunity to
electronic/mobile commerce and in-store
combine a technology and multichannel strategy
technologies transform retail business.
for differentiation.
72
Economies of scale advantages
Strategic implications involve building capacity;
Economies of scale advantages are prevalent to a
heavily focusing more on brand building; opening
certain extent for marketing and sales, warehousing
stores in multiple locations; and becoming a large
and distribution, procurement and dealing with
retailer. However demand fluctuations and
suppliers and international operations. Demand side
uncertainty undermine the flexibility of large
benefits include raising awareness and building well
scale retailers.
known brands.
Capital requirements and entry and exit barriers
Very easy of entry and exit and fairly fragmented
are building inventories of apparel, warehousing and
industry. To cope with intense rivalry,
store opening and are relatively low for small
incumbency advantages may raise the entry
independent retailers. Online retailing further
barriers by pre-empting favourable store
reduced these. Exit costs are very low due to
locations, especially in primary high street with
recoverable capital and lack of specialized
high footfall and by established brand image and
investments.
awareness.
Industry profitability
All retailers need to focus on operational
Intensified competition puts a downward pressure on
efficiency, cost optimization, strong working
profitability. However, the performances of large
capital management in addition to their intended
retailers show variance. For instance, while M&S as
business level strategies. Profitability can be
the market leader has considerably low amounts of
increased through the rise in return on revenues
profit margins, there have been companies such as
and capital productivity.
Next, Debenhams, Zara or H&M with much higher
profits (Mintel, 2012).
Type of products
Fast apparel lifecycles and the uncertainty on
Most distinctive feature of apparel is that it loses its
demand for ‘new season’ products require
value remarkably fast and becomes obsolete. This
substantial communication and coordination
means that replenishing stocks, frequently freeing up
across the supply chain. The lack of appropriate
and preparing retail space for the new arrivals are
demand management and inventory control might
critical. There is a large scope for differentiation but
cause mark downs and promotions and thus
also vast amount of apparel styles and choices.
reduction of profits.
Extent of competition and the number of rivals
Higher flexibility of smaller retailers enables
and their relative size: UK apparel retail market
focus differentiation by serving to niche segments
consists of large and many small retailers and is still
with highly personalized service. For larger
fairly fragmented despite a fall due to difficulties in
retailers, particular size advantages in terms of
trading (Keynote, 2012). (See table-1 and figure-2).
economies of scale in marketing, sales and
supplier relations exist.
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Appendix-2: PESTEL Analysis
Table-9: PESTEL Analysis
Political Factors
•
Government policy to raise VAT from 17.5 to 20 had negative impact on consumer spending,
increased prices and reduced industry profitability (Datamonitor, 2011)
•
Stable political landscape and strong institutional context including British Fashion Council
which organizes London Fashion Weak each year
Economic Factors
•
Ongoing recession of the UK economy and unfavourable economic conditions: rise in
commodity and input (cotton) prices, reduction in disposable incomes, high overall and youth
unemployment, fluctuations in consumer price inflation and consequently reduced consumer
confidence (Keynote, 2012; Datamonitor, 2011).
Social Factors
•
Demographic shift towards ageing population: The relative proportion of the under-25 age
group to overall population is shrinking. (Datamonitor, 2011).
•
Change in lifestyles and attitudes: time-compressed, busy and convenience-seeking,
connected and well informed consumers
Technological Factors
•
Retail technologies: New payment systems (near field communication and contactless
payments, in addition to older technologies such as electronic point of sale) and consumer
facing store technologies (e.g. browse and order points, mobile applications, in-store display
screens, use of tablets etc.)
•
These new technologies are more user friendly and thus broaden the upper age range and
increase the likelihood to access wider and new customer base
•
Product and process innovations in raw materials and manufacturing garments (e.g. easy-care
fabrics etc.) are rather slow in apparel industry (Keynote, 2011)
Environmental Factors
•
Strict environmental protection legislations of the UK and EU
•
Rising awareness in environmentally responsible sourcing, sustainable production, waste
management are particularly affecting the sector (Keynote, 2012)
Legal Factors
•
Legal obligations of retailers do not cover international labour standards and exploitation of
labour in global supply chains (child labour, bad working conditions, unethical trading
standards etc.). Still, there has been voluntarily commitment of large retailers to comply with
international labour standards (international framework agreements (IFAs), voluntary ethical
codes, etc.) (Keynote, 2012).
•
Global public pressure and consumer awareness campaigns require more transparency of
global supply chain operations.
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Appendix-3: Global Environment Analysis (Globalisation Drivers)
Table-10: Globalisation Drivers for the Apparel Retail Industry
Global market convergence
One of the most important drivers for the development of global apparel retail industry is the global
market convergence through homogenization of consumer needs and perceptions for global fashion;
and transferability of marketing practices which facilitates global brand names and advertising.
Cost Advantages
Likewise, cost advantages push globalisation of industries especially because of scale and scope
economies. Country differences in the availability of low wage production and outsourcing efficiencies
has driven internationalization of apparel value chains by concentrating production activities in low
wage, less developed countries. Not only production but also retailing gains from global coverage
based on economies of scale in fashion marketing and economies of scope in sharing other valueadding activities along with favourable logistics due to the non-perishability feature of apparel to a
great extent.
Global Competition
Competition became globalised in the apparel retail industry particularly because of the
interdependency of competitive positions in various countries and the need to act against globalized
competitors in terms of pre-emptive moves or response to competitive pressures.
Global Influence
Global apparel value chains were induced by favourable liberal policies towards international trade and
investment. Favourable trade policies, competition and marketing regulations, and ease of tariff and
non-tariff barriers facilitate globalisation of apparel retailing as well.
Source: Based on the globalisation drivers by Yip (1989).
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Appendix-4: Analysis of Industry Dynamics (Evolutionary Processes)
Table-11: Evolutionary Processes / Forces and their impact on industry structure
•
Long-run changes in growth: Fluctuating and slow but steady growth
The industry growth has been slow and steady. However, the growth has fluctuated a lot over the past
five years, particularly in the recent years (see figure-2). These fluctuations in growth rates attract new
entrants when the pace of growth accelerates and intensify the rivalry in the industry.
•
Changes in buyer segments served: Structural change in customer base
Overall, the customer base in the UK is changing in three ways; first, there is a demographic shift
towards older customers; second, there is a change in overall purchasing patterns (more planned, price
conscious, well informed and connected customers);and third, consumers become ever-demanding,
sophisticated and have a variety of expectations. Some consumer segments (particularly older groups)
are gaining more bargaining power as a result of this shift.
•
Buyer’s learning: Well informed customers; repeat buyers
The pace of learning of consumers has accelerated with the increased availability of information (e.g.
online and mobile shopping, social media, fashion blogs, extensive interest and media coverage on
celebrity styles and fashion icons etc.) as well as with the changing role of consumers as fashion trendsetters thorough interaction, fashion blogs, individual styles etc. Consequently, consumers are becoming
more powerful.
•
Expansion (or contraction) in scale: Overcapacity with intense rivalry
Other than the fluctuations in growth and change in price inflation/deflation, the ongoing overcapacity
due to intense rivalry together with the effect of economic recession and weak retail health in the UK
fostered exits of small and large retailers in the recent years and contraction of the industry to a certain
extent (Keynote, 2012). This can reduce the competitive pressure up to a point temporarily before the
fluctuations in growth take effect.
•
Changes in input and currency costs: Input, commodity and currency costs intensify supply side
pressure and reflect a rise in prices
Extensive pressure from supply side in apparel retailing is three-fold. First, there is an ongoing and
accelerating rise in cotton prices at a global scale due to destroyed cotton crops and continued strong
internal consumption by China (Keynote, 2012). Second, commodity prices are on the rise and drive up
the energy, utility and transportation costs. Third, the British Pound Sterling lost value approximately by
20 per cent against the US Dollar over the period from 2008 to 2012 (Bank of England, 2012) and this
weakening of Pound Sterling caused a rise in cost of imports for retailers. Rising cotton prices, and also
transportation costs and exchange rates consequently reflect a rise in prices, and reduce industry
profitability for retailers, especially for discount retailers.
•
Product and marketing innovation: social media, online and mobile shopping
Product innovations in apparel retail are slow paced and limited (see PESTEL framework) but marketing
innovations have extensively changed the industry by mostly reducing entry barriers. The use of social
media, online and mobile shopping attract new entrants. Incumbents try to raise the entry barriers by
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realizing fast fashion and marketing, and substantial advertising (including hidden advertising and
featuring celebrities and bloggers); and also by investing massively in infrastructure and technology to
augment multi-channel experience and consumer facing store technologies.
•
Government policy change: VAT increases translates itself into higher prices for clothes
The rise in value added tax (VAT) rise in 2011 translated itself into higher prices for clothes (Keynote,
2012) and heightened the competitive pressures on retailers.
•
Entries and exits: frequent entries and exits
Fluctuating growth fosters entries and exists in the fairly fragmented apparel retail industry in the UK.
Recent weakening of the retail health has fostered more exits. A few large chains have gone into
administration but the overall threat of entry remains severe.
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Appendix-5: Industry (Five Forces) Analysis
Table-12: Industry (Five Forces) Analysis
Bargaining Power of Buyers
Since apparel reflects both features of an essential need to dress and also features related to fashion, self
image, life style and social status it generates various paths for differentiation that tend to weaken buyer
power. In this regard, they are susceptible to branding and advertising (Marketline, 2011). However, this
fact does not neutralize the buyer power as they enjoy a wide variety of choice and are well-informed,
‘connected’ and selective (Mintel, 2012). Also independence of customers and acceptability of their own
individual styles is strengthening (Vieira, 2009). Furthermore, there are considerably low switching costs
in general with the extensive number of retailers and wide variety of options. This reduces consumer
loyalty in the mass market despite the importance of brand awareness. These features increase the overall
buyer power to moderate to high level.
Threat of Substitute Products
Substitutes for apparel are absent since apparel is essential for all individuals. However, there can be
various alternatives to the traditional in-store retailing of ready-made clothing including online sales and
forward integration of apparel manufacturers, niche options such as home-made and custom made
clothing, counterfeits, second-hand clothes (Marketline, 2011). Yet overall, the threat of substitutes is
rather low.
Bargaining Power of Suppliers
Suppliers involve both the manufacturers of apparel and textile as well as wholesalers. There is supplier
fragmentation with a multiplicity of manufacturers and wholesalers in the UK and abroad which
intensifies the downward pressure on suppliers. Manufacturing has shifted to low cost locations in Asia
and in this regard, majority (approximately 90 per cent) of the apparel in the UK is imported
(Marketline, 2011). Differentiated inputs in terms of developing and maintaining certain standards of
quality, cost, consistency, fast delivery and service provide a certain degree of power to suppliers.
Overall, the strength of supplier power is regarded as low to moderate.
Threat of Entry
Fluctuating growth rates of the UK apparel market attracted many new entrants especially to the
women’s apparel as the largest segment (Marketline, 2012). Low initial investment and capital
requirement and e-commerce strengthen entry into the industry and the threat of new entrants remains
very strong.
Rivalry among existing competitors
UK apparel retailing involves high level of rivalry among a variety of retailers. Although most of the
retailers are small scale enterprises, the largest 20 retailers account for 70% of the market (Mintel, 2012)
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as they utilize scale advantages. In addition to the fairly fragmented nature of the industry and changing
growth rates, the growing number of forward integration among textile and apparel manufacturers and
pure play online fashion retailers increases the rivalry in the industry. While some retailers have
specialized on certain segments such as accessories, the majority of retailers usually target broad
segments such as women wear and men wear. Difficulty in differentiation, low cost switching and
similarity among retailers are the factor contributing to the intensity of competition. The level of rivalry
in the overall industry is high in that sense.
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Appendix-6: Market Segmentation Analysis
Table-13: UK Apparel Segmentation Analysis
Possible Segments
Strategic implication
Womens are the dominant segment with the largest market
Extending segmentation to include apparel
(51%) and value £21 billion and make ‘more discretionary
of both women and men, to compensate
purchases’ (Weekes, 2004). But men’s segment reached
for volatility or reduction in revenues due
£12 billion and surpassed slightly women’s segment
to intense rivalry.
growth due to heightened fashion consciousness.
Despite the slow growth in accessories, they often replaced
Same as above. Category expansion into
the demand for clothing purchases particularly among
accessories to grow profits.
women and potential profitability options in accessories
sub-categories exist especially for men and women
(Mintel, 2012).
Reduced attractiveness of young age group (below 25) due
Extending segmentation and sub-
to reduced purchasing power and job insecurity. Potential
segmentation. Also, line-stretching with
gap for serving more mature, especially 65 plus age group.
sub-brands to include lower price ranges or
Although they are less likely to spend, key success factors
more mature lines for grey consumers.
to reach ‘grey consumers’ could be to persuade them to
Augment offer based on segments needs
spend on their family and children rather than on their own
and differentiate (on the basis of
(Mintel, 2012).
convenience etc.).
In terms of affluence; mid-market and upper-middle
Opportunities to target middle- and upper-
market remained more resilient and customers in general
middle segments with appropriate balance
did not substantially traded down towards value segments
of price and fashionable proposal.
(Mintel,2012).
New user friendly internet and mobile technologies play a
Use of new technologies to gather data on
critical role in reaching all segments, including the more
customers and to augment customer
mature age groups (Mintel,2012).
experience of all age groups.
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Appendix-7: Value Chain Analysis
Table-14: Value chain analysis
Some key activities and ways to managing cost and value
drivers
Value
Key Activities Strategies in managing value/cost
Chain
and Key
driver
Compon Drivers
ent
Resulting
Resources and
Capabilities and
Advantages
Operations
New apparel
Continuously collaborating with design
Design capabilities
design and
teams and technical teams of suppliers
and fashion-driven
development :
enable smooth flow of production
brand image to attract
outsourcing and finalization of collections
customers, can create
Vertical linkages
faster and result in faster apparel lead times.
brand loyalty and
(Value Driver)
Linkages within the retailer value chain
customer switching
allow transfer of information on best selling
costs if implemented
Linkages within
items and reduce uncertainty about new
with a proper pricing
the value chain
designs, provide better demand prediction,
and positioning
(Value driver)
better pricing and stock replenishment
strategy.
capabilities and market responsiveness.
Policy Choice
Having fashion-driven proposition and
(Value Driver)
employing a strong creative design team,
building cross functional communication
and collaboration platforms and structures
within the organization and across the
supply chain, establishing programmes to
observe market trends and collect customer
feedback are some policy choices that drive
value.
Operations
Sourcing
Outsourcing production of assortment ranges
Improved flexibility
to multiple suppliers to reduce risk. Dual
allows efficient
De-integration
sourcing strategies for the optimization of
allocation of freed
(Cost driver)
speed to market and costs. For instance,
resources to other
sourcing fast fashion stock from Eastern
value chain
European suppliers for quick replenishment
components and
and less urgent/more predictable stocks from
generates cost
Asian suppliers. Yet, there are coordination
advantages.
&
(Value driver)
costs that should be considered.
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Marketing
& Sales
Field and store
Managing store portfolio costs: Optimize the
Efficient cost
operations
quantity and quality of stores based on
management and
catchment area and performance levels and
channel optimisation
Capacity
costs (optimize fixed overheads and variable
experience to manage
utilization (Cost
overheads: lower space/higher sales
cost drivers
Driver)
proportion per store, variable costs: optimize
number of sales staff per store etc.)
Economies of
Improve planning, fast response for stock
scale (Cost
replenishments and reduce stock keeping
Driver)
units.
Optimize store numbers based on total retail
capacity or retail floor space per sales, and
potential virtual sales capacity.
HR
Training of the
Improving in-store customer experience by
Superior service and
sales team
providing superior customer service as a
consistency among
result of training sales team. Training based
multiple channels for
Policy choice
on new technologies and their in-store
brand loyalty and
(Value driver)
applications creates value through superior
customer switching
customer services as well as consistency
costs
among multichannel offerings.
Source: This framework is adapted from Oktemgil (2011) Session Notes 4a, page 2, autumn,
unpublished
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Appendix-8: Key Resources and Capabilities
Table-15: Assessment of key resources and capabilities
Key resources and
Assessment of strategic importance based on VRIO
capabilities
Criteria
Design capability,
Temporary competitive advantage
merchandising expertise
and managerial know-
Valuable and rare: essential for success in various key activities
how, advanced
Not costly to imitate: not due to ‘unique historical conditions’; ‘causal
technology
ambiguity’, or ‘social complexity’ (Barney&Hesterly,2008:87).
infrastructure, cost
(Sustainable competitive advantage through finding distinctive ways to
management capabilities
combine activities to create socially complex, embedded interrelationships
and culture -e.g. Zara)
Sound financial structure
Temporary competitive advantage
and resources
Valuable and rare: increases the flexibility, investment for growth (e.g.
new channels or geographies) or business restructuring; rare during
economic recession.
Location/real estate
Sustainable competitive advantage with proper policies to exploit it
Valuable and rare: attractive, primary locations in high street that drive
substantial footfall. Costly to imitate: ‘unique historical conditions’ as a
result of first-mover advantage of pre-empting attractive locations.
Brand name and
Sustainable competitive advantage with proper policies to exploit it
reputation with global
recognition
Valuable, rare & costly to imitate: recognition, exclusivity and customer
loyalty.
83