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57 Seiten, Note: A+
2. Conspicuous consumption and the need for agility
3. The agility loop: a systemic approach to strategy
> Making sense of a situation
> Making choices
> Making things happen
> Making revisions
4. Company overviews: business models and growth strategies
> Ind itex (Industria de D iserio Textil, S.A.)
> HEM (Hennes E Mauritz A.B.)
> Benetton Group S.p.A.
> The Gap Inc.
5. Comparing Financial Performance
> Total revenue
> Market capitalisation
6. The drivers of agility
> Retail lead time
> Directly managed retail operations
> Cross functional design teams
> Coexisting supply chains
> Extra capacity
Markdowns as a percentage of sales
The Strategic Agility Loop
Activity map of Zara
Activity map of HE M
Activity map of Benetton
Comparison of main international peers
Agility / absorption assessment
Retail lead time
Inventory as a percentage of sales
Cross functional teams translate new trends into inexpensive products
Different products require different supply chains
Responsiveness as a function of capacity utilisation and variability
Working capital as a percentage of sales
On the fast track to superior performance
In the latest data available, the World Trade Organization reports that international trade in apparel totalled US$276 billion during 2005, or about 2.7% of all world merchandise trade. O n the retail end, consumers are enjoying wide selections and moderate prices in Europe, the US and, increasingly, elsewhere in the world. American apparel and accessories combined form a retail market of approximately US$450 b illion—an amount equal to about 80% of the food and grocery sectorLs retail sales.1
Retail fashion merchandising presents an enormous challenge. It has always been a tough, highly competitive and fast-changing business where many chains have risen dramatically and then fallen just as quickly. Today, as many firms are struggling to compete while simultaneously managing their costs and delivering adequate returns, others are thriving in the face of shifting circumstances.
In the past decade, a relatively new phenomenon called fast fashion2 has commanded the attention of the consumers, managers and investors. Fast fashion retail pioneers like Zara and H EtM , with their super-responsive supply chains and efficient decision-making processes, are able to produce and distribute affordable high-end fashion at breakneck speeds. They relentlessly offer customers the cheap-chic products they want, where they want, avoiding any unnecessary faux pas. As a result, they enjoy higher profit margins than their com pet itors—an average of 16-plus percent versus a modest 7 percent for typical apparel or specialty-apparel retailers. And in European countries, where the concept began, this business represents anywhere from 5 to 18 percent of the total apparel market.
The phenomenon is being fuelled by younger, more demanding and more arbitrary customers who are plugged in to global trends. Fast fashion has developed along with the increase in individual disposable income, and an upsurge in international travel, intercultural exposure and artistic exchange. These hot new consumers enjoy ubiquitous opportunities to access and share information as well as favourable consumer credit and payment options. The trend has also been shaped in part by the effects of immigration and mass m ovem ent—a globalisat ion of fashion tastes.
Fast fashion companies tend to share several traits. First, they move products from the design table to store shelves much faster than their competitors. The lead time for a fast fashion retailer is 2 to 3 weeks versus an industry average of 6 months. Second, they turn over their inventory much faster than their com pet itors—9 to 10 times a year on average versus 4 to 5 times for a traditional competitor. Third, they offer fewer markdowns than their competitors, just 15% versus the industry average of about 50%.
With new merchandise arriving at stores multiple times a week, fast fashion retailers have encouraged their customers to shop more frequently to check out the latest items. Customers visit these shops 12 to 17 times per year versus an average of only 4 for traditional retailers. Unlike the old guard, the idea of fast fashion is to prevent overstocking, even on bestsellers, almost completely avoiding clearance sales.
A deeper scrutiny of a set of fashion retailers has revealed some of the critical ingredients of success and distinguished such factors from incidental ones. Particularly, we found that:
> Fast fashion retailers directly manage their retail operation. They collect frequent and granular information (both hard data and anecdotal information) directly from store managers and sales reports to understand what their customers want. This minimises the risk of oversupply and pre-season inventory commitment, allowing them to quickly discover and replenish bestselling items during the season.
> Instead of setting the trends, fast fashion retailers follow them. To keep their merchandise always fresh, they rely on a combination of customer data and fashion d iscernm ent—spott ing trends everywhere from on the street to movies to couture fashion shows. Teams of designers, market specialists and buyers transform emerging trends into new cheap-chic products.
> Fast fashion companies meticulously synchronise production (whether in-house or outsourced) and distribution. They know the right lead time for each item, which proves critical to ensuring that all items are being produced at the right quality and price, and delivered on time. Whereas high-volume fashion basics can be scheduled far in advance (and normally outsourced to suppliers in lower-wage countries), the trendiest garments are ordered in smaller volumes and produced with considerably shorter lead times.
> Fast fashion companies leverage their capital expenditure to increase supply chain flexibility. They understand that having extra capacity on hand for their factories and distribution centres allows them to limit uncertainty, maximise responsiveness and reduce the need for working capital. The cash freed up by these processes helps offset investments in extra capacity.
Although each of these factors has the potential to improve speed and flexibility, when linked together they become a suite of mutually reinforcing drivers that dramatically enhance the overall agility of a company. This explains why attempts from older mainstream companies to simply rethink their supply chains or, worse, to borrow elements from fast fashion retailers, have produced only limited results.
In essence what sets fast fashion companies apart from all other competitors is that they conceive strategy and its implementation as an iterative rather than a linear process. They intuitively yet consistently move through the agility loop, placing less emphasis on hierarchy and more on feedback, dialogue, group processes, understanding organisational complexity and dynamics, and limiting uncertainty. By moving through the iterative cycle of translating understanding into action, they are able to fashion superior strategies and performance.
Nearly four decades ago, prOt -a- port e r (ready-to-wear) fashion was aimed primarily at consumers in their thirties. In the 1960s, prices were too high for most younger buyers, and the designs were not aimed at their tastes. The advent of clothing retailers like B iba and Habitat changed the game. Their goal was to bring trendy, affordable fashion items to a much wider and younger market. Marks E Spencer and Mothercare joined the fray with rising popularity in the seventies, followed by Next in the eighties, which proved the model to be incredibly lucrative.
Meanwhile, the major Italian player Benetton continued its march on high streets, offering colourful designer clothing for the entire family. Benetton's strategy, supported by its provocative magazine and billboard advertisements, resulted in outstanding financial performance. While enjoying a long-standing presence in the UK market, Benetton has more recently failed to keep pace with accelerated pressure from newer European competitors such as HE M and Zara.
One of the chief reasons for Benetton's decline was the failure to recognize new consumer trends. More specifically: a new kind of consumer. Consumers in the 1990s and into the present century have shown a more flexible approach to the traditional ideas of fashion. They are very influenced by and interested in fashion trends and continually in pursuit of the latest styles. However, they change their opinions rapidly and, with a view to renew their wardrobe each season, demand affordable prices. In short, a new class of fashion consumer has emerged wherein everyone is able to dress in the latest trends of the m om ent—and at little cost. This has led to a worldwide phenomenon known as 'the democratisation of fash ion'.
This new consumer profile has been encouraged by nimble competitors like HE M and Zara, who understood and took advantage of the strong shift in international markets and consumer habits. Often termed f ast f ashion3 retailers, these agile firms fine-tuned their supply chains and decision-making processes to produce the right products at breakneck speeds. Globalisat ion similarly helped them lower prices and expand markets. In only a matter of years, such retailers have systematically outperformed their 'old-guard' competitors and redefined the rules of the game.
What is the essence of fast fashion? What management processes and organisational culture underlies it? Which factors are critical and which are incidental?
In this paper, we examine the fashion retail industry, analysing market dynamics and sources of uncertainty. We present the Strategic Agility framework which we employ to analyse how four major fashion reta ilers—Span ish Ind itex, Swedish Hennes E Mauritz (HE M ), Italian Benetton Group and US Gap Inc.—have derived different degrees of agility and performance by configuring their supply chains and management processes. Finally, we devise a series of simple, actionable rules for established and new retailers to compete successfully in the fast moving business of modern fashion.
The personality and expectations of the fashion consumer are shaped by several factors in the consumer market and general society. Fashion retailers need to understand who their customers are, where to find them, and which key factors drive their behaviour. This is important, not only to monitor current consumer behaviour, but more importantly to help predict future behaviour.
The following factors are known to have influenced consumer behaviour in recent years:
> The increase in individual consumer wealth-creation opportunities and disposable income. At the beginning of the century, fashion consumers were a small segment of the global population. In the last four decades, however, an immense amount of wealth has been accumulated by individuals due to several economic, social and technological breakthroughs. A mass class of wealthy people has emerged all over the world. Consumers are making money at younger ages, and they are also spending their money in different ways. They have demonstrated a ravenous penchant for fashion items because, as people get richer, they tend to spend proportionately less upon necessities and more upon luxuries. These newly wealthy consumers have replaced the traditional aristocratic consumers of fashion and luxury goods.
> The increasing spending power of women. Women have become the major consumers of fashion and luxury goods. This is in large part due to increased education, career orientation and decreased financial responsibilities. They are marrying later, divorcing more and having fewer children, which has led to an increase in their disposable income. Women today possess a greater amount of wealth and exercise more control over spending. Importantly, they spend significantly more than men on fashion products and, at the same time, help influence the purchase decisions of men. Four out of every five fashion and luxury purchases are either made by women or are affected by women. Their impact on the current and future fashion and fashion retail market is increasingly important.
> The ubiquitous opportunity to access and share information. The Internet has changed consumerism forever. It has also greatly altered business practices. Consumers now have uniform and instant information at their fingertips from anywhere in the world. This has led to a desire and expectation of immediate solutions in terms of products and services. It has also contributed considerably to the 'brand-hopping' attitude and 'shopping-on-the-go' expectations of consumers.
> An increase in international travel, intercultural exposure and artistic exchange. Consumers are travelling far more than in the past and gaining insight and interest in new practices and ways of life. Tourists around the world are responsible for approximately 25% of the world's luxury goods purchases.4 Increased travel and cultural interactions lead to more varied material cravings. Also, the exposure to new ideas and products gained through travel has increased consumer expectations of originality and substance in fashion brands.
> Media saturation and information overload in the marketplace. Society is now congested with information screaming for the attention of the same consumers. It seems there is an advertisement in every conceivable, visible public space. As a result, consumers are constantly processing the multiple advertising messages channelled towards them on a daily basis. It has led to mental fatigue, causing consumers to prefer the messages and brands that have some personal meaning to them.
> The increase in consumer credit and payment options. This includes credit cards, store cards, fidelity cards and affinity cards. The use of consumer credit for fashion purchases has increased significantly in the last decade, which not only buoys the retail market and economic environments, but also provides consumers with independence and higher spending power.
> The effect of immigration and mass movement of consumers. Across Europe, America and in other parts of the world, the increase in immigration has diversified the ethnic make-up of local populations. This is especially evident in the United Kingdom, where immigrants from India, Pakistan and the Caribbean have helped shape the national culture and identity. Their influences have affected fashion styles, tastes and product preferences for the entire country. It has created new expectations and success opportunities for new fashion brands, and has also led to globalisation of fashion tastes.
> The lowering of the entry barrier to the luxury goods sector. The highly protective luxury goods industry has opened up. New brands such as Jimmy Choo, Andre' Ross and Paul E Joe have emerged, creating more competition in the market and more choices and variety for consumers. These brands have proved the feasibility of launching a new fashion luxury brand in the twenty-first century, and caught the attention of up-and-coming designers.
> The increase in outsourcing in the manufacture of fashion products. Several fashion brands manufacture their products in Asia, Eastern Europe and South America where labour costs are substantially lower than in their home countries. While this has created cost-saving opportunities, comparative advantage does not depend exclusively on labour costs. The European and US apparel, accessories and luxury goods industry has some advantages by staying close to home: lower transportation costs, faster supply times, greater proximity to centres of fashion and design, and a greater ability to respond quickly to changing market demands.
In an era of heightened fashion awareness, fashion clothing retailers have been obliged to reconceive their offerings, which has resulted in greater variety and more frequent assortment changes. In particular, the assortment of fashion items has increased rapidly over the last twenty years. A fashion item is a style of clothes or accessories that is very popular at a particular (brief) m om ent—as long as one season or as little as a few days.
Amongst others, the characteristics of fashion items are: short product life cycle, high variety, high demand volatility, low demand predictability, low volume and high level of impulse purchases. Due to the unpredictability and short life cycle of fashion items, they are subject to high risks of shortage (lost sales) and excess stock, which inevitably result in price markdowns.
There is empirical evidence that, during the last twenty years, markdown ratio has increased dramatically. This implies that too many of the wrong products are being held in stock. Markdowns have become one of the largest measurable costs for fashion reta ilers.5
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Lost sales have proven difficult to quantify for companies and researchers, but cost implications of these lost sales have been approximated. It can be argued that these numbers are even higher than markdowns due to the risk of losing customer loyalty. Just such a thing happened to Laura Ashley in 1990 when it nearly went bankrupt after failing to read and react to the market for a number of successive seasons.
The key to today's fashion market is to monitor and react quickly to customer demand. Fashion retailers are required to provide greater degrees of innovation and faster response times to keep and win customers. The companies with this ability will experience lower markdowns and wider margins. Few companies have thus far been able to cut their fashion lead times to a few months or even weeks; generally, long lead times up to 12 months are still the norm.
Strategic agility can be defined as the ability of a firm to identify changes in the marketplace consistently and exploit them to create value more quickly than rivals. According to this view, every strategy is a work in progress that is subject to revision in light of ongoing interactions between the organisation and its shifting environment.
This ability to thrive in the face of shifting circumstances lies in how a company moves through the iterative cycle of translating understanding into action. In this cycle, managers sense the overall situation (make sense), anticipate emerging opportunities and threats, prioritise actions (make choices), execute on these priorities in a timely and effective manner (make it happen), and close the loop by revisiting their original assumptions (make revisions).
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These steps are embedded within formal processes, such as strategic planning, budgeting, resource allocation or performance management, but they should also be contained within the myriad of informal conversations that fill out the typical manager's day. Ideally, these discussions should take place at every level of the organisation. Strategy will remain stranded in the executive suites unless teams throughout the organisation can effectively translate broad corporate objectives into concrete action by making sense of their local circumstances, making choices on how best to proceed, making things happen on the ground and making revisions in light of recent events.
The fundamental advantage of strategy loops is the ability to incorporate new information and translate it into effective action, closing the gap between strategy formulation and execution. They also explicitly call for ongoing revision as new information emerges, mitigating the tendency to escalate commitment to a failed course of action. Finally by breaking time into discrete chunks (defined by each iteration) and by building in an explicit step for revision, they increase the odds that managers will spot changes in context that open a window of opportunity and will act before the window closes.6
1 "Introduction to the Apparel a Textiles Industry", Plunkett's Apparel Et Textiles Industry Almanac 2007, April 2007.
2 Fast Fashion (from the French: d e pOche mode) is the term created to denote, among other things, the strategies that retailers adopt in order to reflect current and emerging trends quickly and effectively in current merchandise assortments.
3 Fast Fashion (from the French: d e pOch e mod e) is the term created to denote, among other things, the strategies that retailers adopt in order to reflect current and emerging trends quickly and effectively in current merchandise assortments.
4 Uche O konkwo, Luxury Fashion Branding: Trends, Tactics, Techniques, Palgrave MacMillan, 2007.
5 N. Smith, "Suppliers need to focus on design and flexibility to win new business", Drapers Record, April 1999, p.6.
6 Don N. Sull, " Closing the Gap between Strategy and Execution", MIT Sloan Management Review (48:4, summer 2007): p. 30-38.
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