The report is presenting as follow. In the first part, the current challenges as well as the key changes in the general business environment and the industry landscape that affect CLE’s operations will be discussed. Later, the discussion will shift from the macro-environmental analysis to the micro-environmental or firm-specific analysis. In the last part, the formulation of strategic directions for the firm will be presented.
PESTEL model is the selected tool for analyzing macro environment. It is widely used and it is a popular concept in strategic and competitive analysis. Perhaps the concept of environmental analysis was already understood since the first merchant. It is commonly agreed that the concept of PESTEL comes from PEST Analysis Model; it is a method of analyzing the macro environment by strategists, which involves all factors that influenced in the industry and organization. Basically, the PEST framework encompasses four factors as follow: Political, Economic, Social and Technological. PESTEL Framework even goes even further to consider the Environmental and Legal factors. In the section below, all the six factors will be discussed, with the analysis concentrate on CLE.
Political. The political factors are relatively less relevant to CLE.
Economic. There are several economic factors that may influence CLE. Firstly, CLE is growing fast in the recent years but it is also noted that there wasn’t much room for real estate growth, where available mall space in short supply, and worst, it was possible the core stores had reached market saturation. However, apparently the business nature of CLE does not have much to do with economic times, as the target customers are of a specifically segmented market.
Social. Perhaps demographics changes are the worst environmental factors that will affect CLE in the near future. According to researchers, there were 38 million young people between the ages of 11 and 19 in United States at the beginning of 2006, and it is expected there is a smaller generation behind it – only about 27.6 million 6-12 year olds in the United States in 2006. By the year 2010, those ages from 12 to 18 are forecasted to fall by 3.3 percent. Thus, CLE is facing a shrinking market size in the near future.
Technological. The rise of globalization, knowledge era and economy as well as the increasingly application of technology products to achieve competitive advantages should not be ignored by the company. Specifically, the utilization of Management Information System for business process streamlining and effectiveness is a topic deserves management attentions.
The origin of Porter’s five forces model was developed in early 80s by Michael Porter. Since then, this framework becomes increasingly popular and is widely used in business strategy planning till today. It is used primarily for the analysis of competitive strategy as well as the competitive environment of industry. Apart from that, it is also argued that the tool is useful to research whether a new products, services or businesses have the potential to be profitable. In some context, the model is also a frequently used model to understand the balance of power between industry players.
Porter suggested that there are five important forces that should be considered in the strategic and competitive analysis of a company. The five forces are bargaining power of suppliers, bargaining power of buyers, threat of new entrants, threats of substitutes and rivalry among existing companies. All of these forces are illustrated in the figure below. Besides, these forces will also be discussed in greater details in the paragraphs beneath.
Bargaining power of suppliers. Apparently, the suppliers have some degree of power to influence CLE decision making and operations. As the company is dealing with only a single category of supplier, the concentration of supplier is high. However, from another perspectives, historical evidences suggest that CLE able to press the price of supplier down as their business volume increases. This implies that CLE does have some influence power to control the pricing of the suppliers. Overall, the bargaining power of supplier for CLE is moderate.
Bargaining power of buyers. The bargaining power of buyer is relatively low. As long they want the products, the buyer will buy, although the parents are responsible for paying the money. Secondly, as the teens are relatively inexperienced in working life (i.e., to realize how hard is to earn money), they are more willing to buy something when they are capable of doing so.
Threat of new entrants. The threat of new entry is hard to be estimated and forecasted.
Threats of substitutes. The threats of substitutes are averagely high for CLE business. Potentially substitute products for the teens are nice and trendy shirts, make-up products, apparels and etc. Besides, those accessories and jewelry products targeting customers aged 17 to 27 are also threatening the company profitability. The management admittedly that they felt the stealth competition coming from all sides for the business.
Rivalry among existing companies. As CLE is operating in unique niche market, targeting teen shoppers (from age 7 to 17), the rivalry among existing competitors are moderately low. The three main competitors are Tween Brands, The Wet Seal and Forever 21. CLE is still the market leader in this niche industry judging from the size of market capitalization, net income and revenue. Although the direct competitors are few for CLE, indirect competitors are emerging. For example, discounters such as Wal-Mart and Target are devoting increasingly more square footage to accessories, and are debuting celebrity merchandise by Mary Kate and Ashley Olsen and etc, where the products promoted are appealing to the similar market segment currently targeted by CLE.
It cannot be denied that all firms have strengths and weaknesses in the various functional areas of the organization. An internal resources audit will gather and investigate a particular firm’s various departments and functional areas, such as management, marketing, finance, operations, research and development, and applications of information technology. A review of these various departments will enable us to understand the critical success factors for a firm. Apart from that, from such an analysis, the strategic management process can identify potential areas of improvement in terms of better coordination and mutually supportive functional areas. A well-managed coordination between functional areas is highly important to ensure internal competencies, efficiencies and successful delivery of value to the marketplace. The various dimensions of internal audits will be presented as follow.
Management. The management of CLE is prudent, where they understand the true business objective is to keep the business healthy and moving forward steadily, instead of managing the business to meet short term Wall Street expectations. Besides, the management is also highly experience, and able to anticipate and create trends, by keeping inventories fluid, updated and well priced.
Marketing. The market for CLE is pretty large and looks favorable. Firstly, they have a demographic with disposable income that love shopping. Secondly, the company has enormous brand name recognition.
Human resources. Human resources management is one of the weaknesses for CLE. Due to the scarcity of retail talent in the company, the growth prospect of CLE is being challenged. Besides, the issue of succession planning also deserves much attention. As the management seems to have resistance against outsider, the training of internal people may need much time. In order for the company to grow larger and expand into the international context, the basic requirement is to have a large pool of talented and committed personnel in the organization.
Finance. Financial position for CLE is highly favorable. Various superior financial positions can be observed. Firstly, CLE has low overhead and high margins structure. The company has a healthy balance sheet, where it able to generate a large amount of cash. The firm is a steady growing company with a positive profitability track record for the past 30 years. Overall, the company management is famous for the astute money management principles and philosophy for the firm.
Operations. CLE is an effective merchandising business, with an efficient distribution system. As the company is dealing with only a single category of products, the cost of distribution is greatly reduced.
Research and development and applications of information technology. The company acknowledge that it need upgrading and enhancement of operational and information technology, more reliance on data mining for market research and management decision making.
Value chain analysis is an approach used to investigate the potential sources of economic advantage for a firm from the analysis on how a firm’s internal core competencies can be integrated with the external competitive environment. This framework disaggregates the firm into the strategically relevant value-creating activities within a holistic industry context. The model aims to direct optimal resources allocation for a firm. Under the model, the various activities in a firm can be classified into two main categories, namely, primary activities, and support activities. The details of this classification are presented graphically in the figure below.
Under the Value Chain model, the interlinked activities within a firm can be analyzed. Although competitive analysis can be achieved by the individual activities themselves, a more sustainable source of competitive advantage can be derived from the higher order of linkages among the elements identified in the value chain. Apart from that, value chain analysis may also pin point opportunities to radically reconfigure industry value systems by eliminating or bypassing entire value chains within an industry’s value system. This may come out with an innovative business model.
It is also understood that the core competencies of the firm is the ability to anticipate the fashion trend and being able to respond to changes and switch out merchandize without having to take inventory loss. The capability of CLE is further enhance by investment in management information systems, which enable the firm for better decision making process and effective management of inventory turnover. As such, the value chain in the company can be further streamlined by the utilization of new technology.
Porter Five Forces model is useful for people to analyze its competitive challenges, and the actions plans that follow after the industry-level strategic analysis requires the application of generic strategic framework. Generic strategic framework is useful because it can be used in a wide array of industry, and through the application of this model, Porter enable us to capture the three major strategies in a matrix of functional and business strategic possibilities. The three generic strategies are presented in the following table as follow.
by the Customer
|Low Cost Position|
|Differentiation||Overall Low Cost Leadership|
|Particular Segment Only||Focus/ Niche Market|
From the case, it is evident that one of the key success factors for CLE is due to the company ability to target a very niche market. As such, considering the framework, the best general strategic direction for CLE is to continue its market leader position in the niche market. To pursue a low cost leadership is not relevant as they able to command price premium from the market segment, and the competitors in the market segment is relatively less.
One of the simplest and popular strategic diagrams is the Ansoff matrix. The model is useful as it provides a clear way to classify routes for business expansion. In the framework, the two dimensions determining the strategy classification is the (a) newness of the product to the company and (b) the firm’s experience with the intended (but unfamiliar) market. Under the model, the company in analysis always has a menu of expansion options, but the key point is that the company must have sufficient financial resources and time to expand the business. The Ansoff matrix is presented graphically as follow.
|MARKET||Old||Market Penetration||Related Diversification
|New||Expansion (Market Development)||Unrelated Diversification|
An analysis of the CLE situation informs us that market penetration strategy is no longer relevant. As the company has strong presence in United States and Europe, the first most logical strategic actions to be taken are the related diversifications strategies. Under this direction, the company should undertake brand expansion strategies to tackle the other market segment in the similar industry. Although CLE had been facing issues in expanding to other market segments, this is not an excuse for not pursuing a product diversification strategy. The product portfolio should be further enhanced, and this perhaps can be best fulfilled by recruiting experienced talents from other firms in other market segments.
International expansion is profitable and offers much growth opportunities for the company. Historical evidences indicate that the profitability in Europe is highly, and that could also be the case for new venture to other countries or region around the world. Besides, brand expansion strategies, CLE should also consider seriously expanding to many other part of the world, such as to the high growing BRIC countries. The disposable incomes in these emerging countries are growing fast and the market size is tremendously huge.
There are many other common sense growth strategies applicable for CLE. First of all, the company can also choose to growth by acquisition as the company has large pile of cash.
The use of Management Information System in the company should also be brought to a larger context to include the program of Customer Relationship Management. Currently, the technology is used only for better operation and decision making process in the company, but is not being fully utilized to be applied in the marketing concept in order to further enlarge market shares and penetrate new markets, while keeping the current customers happy by attending to their feedback. Not only that, the website of the company is not handling any e-commerce activities, and this is a waste of opportunity costs. The website should be turned into an online selling portal with great discount to entice people from all over the world to buy online from the company. This will be a low cost but high reward investment for CLE.
Succession planning and the family-oriented culture in the firm should also be changed. To resist against outsiders will only stifle growth and in the long run, may cause a business to start losing out to the competition. A more effective and professionally managed human resources system should be implemented and considered by the management.
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