Notes on the slides. Agenda – Our agenda follows exactly the guideline that was given to us in order to carry out this assignment.
The Company – Short overview of the firm. The Fashion Industry – It is based mainly on intangible assets, rather than capital or knowledge-intensive assets.Moreover, nowadays fashion companies are less affected by the problem of seasonality: indeed they experience sales that are pretty much stable over the year; in spite of this, PRL experiences different levels of sales in the different quarters, due mainly to wholesales shipments and in coincidence with holiday periods. Industry Analysis – We used the Five Forces Model to assess the characteristics of the industry in which PRL competes in.The fashion industry is a very competitive one, rivalry among firms is high: some competitors are bigger than PRL, so they also have more resources, but still PRL is a pretty strong name and the company has a large customer base. The threat of new entrants is low because there are strong incumbents, brand loyalty in the high-price segment is high and access to suppliers and distributors is limited.Even though PRL has a high brand recognition which makes end customers less price sensitive, the bargaining power of the buyers is high as the direct customers of the firm are mainly large department stores (and the gist of the company’s revenues comes from the wholesale sector).
The threat of substitutes is moderate as loyal customers tend to buy only from them but in general people may vary their purchases and also buy from the competitors.For what concerns the suppliers, it’s important to specify that PRL does not manufacture its products itself, but instead relies on licensees and other manufacturers to do so. Its suppliers are therefore manufacturers which supply the company with the finished goods. The bargaining power of suppliers is moderate: as the company doesn’t actually manufacture anything that it sells under his brand, it has to rely pretty much on manufacturers and licensees; high quality suppliers are few and there’s high competition among high-quality firms to find such reliable manufacturers.On the other hand though, PRL produces in many different countries, mainly outside the US, thus working with many different suppliers, and this lowers the suppliers’ strength in bargaining. In total they have 350 manufacturers, with none of them providing more than 8% of total production. Internal and External Factors – In order to get a better understanding of the competitive environment from the firm’s perspective as well as of firm-specific resources and capabilities, we conducted a SWOT analysis.
The company has successfully grown and expanded its range of product lines and brands, as well as his presence in the international market. One of its main strengths is the brand: it inspires a precise lifestyle and virtually everybody knows it: this high brand awareness and recognition, as stated above, make the end consumer less sensitive to the price. They decided to leverage on their strong brand in order to increase the profitability of the business and expand it by further diversifying the range of product offerings and apparel brands, which are divided into Polo brands and Collection brands (the most expensive).The firm manages to have high margins on its various brands, especially in the Collection brands. They also have no problem in accessing the end consumers as their presence is considerably high, thanks to what they call “multiple channel distribution”: this means that they have both their own stores and sell to third parties such as department stores, specialty stores and factory stores.Their major weakness is the high dependence on department stores: as stated above, their revenues depend highly on this form of retail store, especially in the US and Canada (their biggest market, we will see that from a pie chart later): they have little influence on what the department stores buy and offer to their customers, no influence on the way the merchandise is displayed and in general no creative control over the marketing.Department stores may exercise pressure on the firm to obtain merchandise at lower prices (in order to increase their own margin).
Moreover, fashion firms compete for the floor space in the department stores, and the company stated in its Annual Report of 2009 that there may be competitors with greater resources which could therefore represent a threat to them under this point of view.Other weaknesses are that PRL depends on manufacturers for what concerns the quality of its products (they have to implement strict quality checks) and they have no direct control over the licensing partners: they don’t get the full revenues from sales, they can’t manage the retail stores directly and a consequence of this is that they cannot get direct feedback from customers and cannot respond to market trends since they’re not the ones who actually sell the finished goods.They face many opportunities: the Asian market is growing, especially China’s; they may expand their presence in prestigious sport tournaments in order to further promote their brand; moreover, we think it’s of fundamental importance that they expand their e-commerce by selling online also in Europe and Asia, and not only in the United States as it is now: their web-site has the great potential to increase their sales. They could also expand their range of product offerings and develop private labels in collaboration with department stores, as the latter are creating private labels themselves and this threatens PRL’s shelf space.Thus this could be a good solution in order to decrease the likelihood of seeing their space reduced. As this document is supposed to be just an explanation of some points that might not be clearly explained in the slides, we won’t go through all of the weaknesses, but we cite the worrying fact that the major department stores in US are undergoing a wave of M&A, and the consequence of this will be a higher “customer” power (because the number of customers will be lower). We will add more to this subject when we will talk about one of the main organizational tensions: Reliance on department stores.
The 4 Ps of Strategy – Strategy as a Plan: unfortunately the company doesn’t provide any quantitative indicator of success or specific time frames for their main objectives. They only talk more specifically about their plan to transform their wholesale and retail businesses in Southeast Asia from a licensed to a wholly owned operation in January 1, 2010. Balancing Tensions – This slide describes the five major tensions every company needs to balance in order to implement a performance measurement and control system effectively.Revenue Sources – Assessing their revenue distribution among segments and geographical regions, we see that two tensions already emerge: their dependence on the wholesale segment (as mentioned before) and the fact that revenues are not evenly distributed among countries. Specifically, we see that Japan only makes up 8% of total revenues. Financial Data – This slide shows a comparison between PRL’s and PVH’s most important financial indicators of performance.We chose PVH because some of PVH’s fashion companies compete directly with PRL (like Calvin Klein) and also because it’s one of the few peers of PRL that has public financial statements.
Besides the fact that revenues are distributed unevenly among segments and regions, the financial data does not show any other indicators of tensions. Main Organizational Tensions – We have identified four tensions, which should be taken into consideration when implementing a performance measurement system.The first tension is Revenue goals for the Asia- Pacific region: when comparing PRL’s market share in Asia to the market share of its main competitors, we see that it has just 3% of the market share compared, for example, to the 60% market share of LVMH, a group that owns fashion brands such as Luis Vuitton and Marc Jacobs. The second chart shows that PRL generates small amount of its total revenue from Asia, while for example Hermes, which is a lot smaller than PRL comparing total revenues, manages to generate over 40% of their revenues in Asia.The high reliance on department store (second tension) is also negative because, as the chart shows, such retail stores are doing pretty badly, with their net income decreasing at a fast rate. If they have financial problems they would probably reduce their purchases and the likelihood of bad debt for PRL increases. The other two tensions are exhaustively addressed in the slides.
How PRL Should Address These Problems – PRL should create its own Balanced Scorecard, and here we explain why we think it’s the right performance measurement tool to use.The Balanced Scorecard – The Balanced Scorecard’s objectives address the main tensions that we identified in the company as well as provide guidance for future success. This strategic management tool anyways should be in line with the other performance measurement and control systems that the company implements. Control System – It is worth mentioning that we didn’t find any precise information about the performance measurement and control systems currently employed at PRL. Reading the Annual Report of 2009 we only found out that the company focuses on quality processes as well as licensee supervision.In addition, we believe that they should implement a control system for the wholesale segment (monitoring trends in consolidation and reacting to them, supervision of the department store’s financial situation etc. ) and for the Asia – Pacific market (benchmarking: how do competitors perform, adoption of best practice processes and strategies).
Conclusion – With our Balanced Scorecard and the new control systems in place, we believe that PRL will be able to achieve its main goals and operate successfully in the next years.