Porters Five Forces Analysis: Levi Strauss & Company - Case Study Example

Levi Strauss & Company Industry Competitiveness - Porter’s Five Forces Analysis Threat of New Entrants: The threat of new entrants to the market is best described as moderate-to-high, because it is growing in strength. The potential for new entrants depends upon natural and legal barriers. Monopolies, high capital intensity, high switching costs, alliances, economies of scale are some natural barriers which reduce threat of new entrants. Legal barriers are in place for industries where licenses are required. In the case of jeans industry, these barriers are significant but are gradually being reduced as time passes. For example, setting up manufacturing facilities is highly capital intensive, but the possibility of outsourcing and having contracted supply from established factories elsewhere, thanks to globalization, reduces these costs. Therefore, this barrier is not as significant as it once was. Economies of scales are a key in this industry, meaning the key players hold large market shares making it almost an oligopolistic market. This acts as a high entry barrier but with access to new global markets in developing countries, particularly in Asian countries like China and India where growing economies increase demands for fashionable goods, there is room for more market players, so this factor also is diminishing in strength. Globalization gives an opportunity for many competitors to enter the blue jeans market, as well as giving existing companies opportunities to reach new customers. There are no legal barriers in place to prevent a new entrant in the industry. Therefore, it can be assessed that this force is presently of moderate strength in the particular industry: the threat of new entrants was once very low, but is becoming greater as more opportunities emerge, and will probably be very high in the near future. Rivalry among Competitors: Rivalry among the existing competition is high. The market share of Levi’s is being taken up by newer, trendier brands such as Tommy Hilfiger and Polo as well as competitively priced brands such as JC Penney, Sears, Gap, and Old Navy. Wrangler and Lee too continue to be very strong in the market. In a market where all the competitors are selling essentially the same product, price and style differences play key roles in influencing purchases within different customer segments, but these factors are of varying levels of importance to different customers. Teenagers and young adults who make up the biggest segment of the blue jeans market are, for example, likely more influenced by style than price; thus for this segment, the competition is a race to see which company can either create or satisfy the newest fashion before all the others. In this view this industry force is high in strength. Bargaining Power of Customers: The bargaining power of customers of blue jeans is actually quite strong. Levi’s relies on a strong brand image and an extensive distribution network to hold a large market share, and at first this would seem to limit customers’ bargaining power. Competition in the market, however, is quite strong, and is driven by customer demand for fashionable products at a reasonable price, meaning a price at which the customer perceives value for the product. The impact of the bargaining power of customers might not be felt first in prices, but in costs: customers are willing to pay a somewhat higher cost for Levi’s jeans because of the brand perception associated with them, but in order to maintain that, Levi’s must spend more to grow the brand and to produce a high-quality product to accompany it. And eventually, since the usefulness of a pair of jeans is not much different whether they are from Levi’s or from some other manufacturer, the price to the end user does have a limit. Thus, because customers have a large number of choices in jeans, their bargaining power is very strong. Bargaining Power of Suppliers: The bargaining power of suppliers is rather weak in the jeans industry in general, but strong with respect to Levi’s. There are likely a large number of potential suppliers of raw materials for jeans – specifically, textile manufacturers capable of producing denim cloth, mostly in blue – but because Levi’s has very challenging standards for the quality and quantity of the materials, plus ethical demands of good working conditions and pay for the employees of its suppliers, the number of suppliers that can meet Levi’s requirements is limited, giving them stronger bargaining power. Levi’s offsets the bargaining power of its suppliers by keeping a few on a contractual basis, offering better prices and terms as well as demanding better labor conditions and pay for the workers in the supply chain, but in doing so sacrifices some of its bargaining power as a customer. Threat of Substitutes: The threat of substitutes in the jeans industry is very strong. Threat of substitutes affects how attractive an industry is for both existing and potential players. The substitutes can be direct or indirect and therefore the scanning of the environment for threat of substitutes should not be restrictive. In the case of blue jeans industry there are many substitutes in the form of other materials as khaki and cotton pants as well as dress pants. In addition, the sheer diversity of styles among blue jeans means that there are constantly internal substitutes within the market. The popularity of the classic Levi’s 501 blue jeans has grew and declined over the years as new styles temporarily overwhelmed the market and consumers’ tastes; obvious examples are bell-bottom jeans in the 1970’s, and the stone-washed or acid-washed jeans popular during the 1980’s. Thus, the threat of substitutes is very strong, and must constantly be watched. SWOT Analysis The usual method of a SWOT Analysis is in a table form, with the internal strengths and weaknesses listed on one side and the external opportunities and threats on the other, as is shown below: Strengths Opportunities Experience; long company history. Reputation for quality. Strong brand image; the name “Levi’s” is synonymous with blue jeans. Clear company vision & objectives. Corporate responsibility. Strong relationships with supply-chain partners. Strong relationship with workforce. Stable organization. Diversified product line. Extensive global supply & distribution networks. Globalization provides a virtually limitless number of potential customers. Globalization increases the potential number of suppliers. Increasing public awareness of social and environmental issues. Increasing public social and environmental awareness can be used to promote value over price. Exposure to different cultures in global markets can lead to new designs and styles. Weaknesses Threats Higher costs associated with corporate responsibility programs. Higher costs associated with employee compensation. Higher costs equal smaller margins; greater risks associated with declines in sales. Consensus management style can be slow and inefficient. Brand strength built on tradition may delay innovation. Brand strength built on tradition may be perceived as old, out-of-style. Increasing number of competitors. Increasing number of customers can put demand pressures on the company. Economic conditions make customers more price-conscious. Economic conditions might limit global expansion due to protectionism in other countries. Political tensions and issues like piracy can interrupt the supply chain. Key Problems Faced by the Company As explained by the case study, Levi’s has suffered periods of sharply declining market share, first in the 1980’s before the promotion of Robert Haas to CEO, and again in the late 1990’s. The decline in market share was a result of two critical problems within the company, which developed over time. These are significant, because many of the same conditions that led to these problems still exist within the company and in the blue jeans market. The Economic Problem – The Real Results of Levi’s Key Problems: The manifestation of the key problems affecting Levi’s after 1997 was a sharp drop in sales, profits, and market share. In 1997, Levi’s total sales were $6.9 billion, but that had dropped 13% to $6.0 billion by 1998. Levi’s market share in blue jeans had also dropped to 14.8% in 1999; about half of what it had been in 1990. What made that loss even more troubling is that the blue jeans market overall had actually grown in the latter half of the 1990’s. Levi’s competitors by contrast increased their market share significantly; Gap, for example, increased its market value from $7 billion to $40 billion during the same time Levi’s was declining. (Case study, pp. C-613 & C-614) Key Problem One – Failure to match the demand of age 15 to 24 years old market: Because this age group represents the largest part of the blue jeans market, attracting these customers should be a priority, but was not for Levi’s. The company instead was focusing on its other brands such as Dockers and Slates, rather than blue jeans. The evidence of this wrong focus was the results of a 1998 survey in which only 7% of teens described Levi’s as “cool”. Since “cool” is an important and desired of a young person’s clothing, having only 7% of the biggest market segment saying that is a management disaster. One marketing researcher described Levi’s management as “insular, paternalistic, and a little smug”. That’s mean Levi’s did not simply miss the best target market by focusing on other products, but that they actually ignored it. Key Problem Two – Inefficient and ineffective management and decision-making processes: The consensus-style management of Levi’s is wonderful for building strong teams within the company, and building stable and equally beneficial relationships within the supply chain, but in my opinion does not seem to be the best way to make decisions. The case study represent comments from former Levi’s managers which shows two weaknesses in the management team that prevented it from effectively meeting the demands of the important 15-24 year-old market. First, decisions required consensus among the managers and if that was not achieved, decisions were often not made. Fashion styles and tastes develop and change rapidly and require a rapid response; by the time a management decision worked its way through Levi’s consensus process, the decision might already be old-fashioned. Second, Levi’s management was led by a man who according to the case study did not have any experience of being a retail merchant. If Robert Haas did have experience, the company could be managed and might have been more familiar with the trends of the market to which Levi’s competitors were better able to respond. Core Competencies Workforce Management (Efficiency and Quality): Levi’s adopts a very generous and sympathetic attitude towards workforce management, not only in the way the company treats its own employees, but also in how it demands its supply-chain partners treat theirs. This supports all Levi’s competitive advantages for the one simple reason that it achieves maximum productivity. Happy employees who feel they are well treated and appreciated are productive employees who stay on the job. Without a stable, productive workforce, Levi’s simply cannot develop, manufacture, and distribute the products its needs to stay competitive and profitable; recognizing this, Levi’s management applies considerable effort and resources to its workforce, and has done it for so long that the company has become expert at it. Supply-Chain Management (Innovation and Responsiveness to Customers): Levi’s management of its supply chain is based on equal parts of ethics and efficiency. Levi’s “Terms of Engagement” applied to its supplies and contractors places firm demands on those partners’ business practices and operations, but in turn promises them a fair and profitable relationship with Levi’s. On the other end of the supply chain, Levi’s has built an efficient retail distribution network aimed at bringing its products to the largest possible number of customers. Even less than first-rate products are handled in an efficient manner to take advantage of the discount and “outlet” market, through a centralized facility called RISE (short for Returns, Irregular products, Samples, and Exit-strategy products) located in Georgia. Levi’s supply-chain management competency supports its competitive advantage of global reach by ensuring a stable source of supply insulated to some degree from competitive and price pressures, and by maintaining an efficient and extensive distribution network; in other words, ensuring that Levi’s products make the complete end-to-end journey through the supply chain. Competitive Advantages Brand Strength: Levi’s brand is instantly recognizable almost anywhere in the world, and is instantly associated with blue jeans. The strength of the brand means that a large part of the marketing effort is already done; Levi’s need only concentrate on educating customers on what the brand represents, rather than having to educate customers as to the existence of Levi’s and the general association of the brand with blue jeans. The brand strength is a competitive advantage, because it forces any potential competitors to compare their products with Levi’s; in other words, Levi’s is the benchmark for the entire blue jeans market. Sometimes, of course, competitors can compare very favorably, as was explained in the case study about Levi’s declining market share, but because of Levi’s brand strength they have to work much harder to gain market share than Levi’s has to work to retain it. Global Market Reach: According to Levi’s website, their products are distributed in 110 countries and their trademark is registered in over 160 countries. Just by simple math this gives Levi’s a competitive advantage; the more potential customers the company can reach with its products, the more it will sell. The global reach plays into Levi’s advantages with its brand strength; competitors will likely not be able to find any worthwhile market in which they can avoid competing with Levi’s. Declining Market Share The decline in Levi’s market share, and along with it the company’s sales and earnings, is described by the case study as being almost entirely due to Levi’s failure to appeal to the key 15- to 24-year-old market. While Levi’s competitors were developing more appealing styles for this market, Levi’s was instead concentrating on building its newer Dockers and Slates brands. Ordinarily diversifying the product line is a good idea, but it must be balanced with proper attention to the core products and market, and this is what Levi’s failed to do. The case study paints a picture of Levi’s management as being too conservative and out-of-touch with consumers, and unable to recognize a deteriorating situation until it resulted in serious financial problems. Solutions to the Crisis The case study is a little odd in that it does not discuss in great detail how Levi’s set about solving the actual problem, which was their lack of products that appealed to the core market. The case study does mention that Levi’s hired new managers from outside company, hired a new advertising agency, and created new styles and labels of jeans, but does not give details on how all those were used to solve the problem. Instead, the case study does explain at length the steps Levi’s took to cut costs between 1997 and 1999 by closing plants in the U.S., Canada, and Europe and eliminating jobs. Undoubtedly, this led to a leaner and more efficient organization better able to operate with the reduced financial resources that Levi’s was earning, but it is difficult to make the argument that the restructuring – in reality, contraction – of the company actually helped to solve the basic problem of better meeting market demands. On the Levi’s company website financial information is available dating back to 2004, and can give a general sense of whether Levi’s has successfully recovered from its late-1990’s decline or is still in the process. From 2003 to 2004, for example, the company’s profits increased but sales declined by about $19 million. (Press release, 17 February 2005 at http://www.levistrauss.com/Financials/PressReleaseDetail.aspx?pid=720) The implication is that Levi’s at that point had developed ways to manage the company more efficiently, which certainly helped the bottom line, but had not yet solved the problem of declining sales. Between 2004 and 2005, the company’s net sales increased by $53 million, so it seems that by then the real problem may have been solved. (Press release, 14 February 2006 at http://www.levistrauss.com/Financials/ PressReleaseDetail.aspx? pid=767) But interestingly, after the 2005 report sales figures are not highlighted in the company’s press releases, so one might suspect the 2005 performance was not the beginning of a positive trend. Mission, Vision, Aspirations, and Values The Mission, Vision, Aspirations, and Values Statement is not only a respectable-sounding statement of the company’s attitude, it is also a very practical guide for the people of Levi’s, because it includes a heading at the end called “Behaviors”. Unlike a lot of other company mission statements one sees, Levi’s has thought the whole thing through and not just said “This is what we believe,” but rather “This is what we believe, and these are the things we do to show it.” Analyzing the Mission Statement, one can see that there are definite priorities for Levi’s. First, to be a commercial success; second, to be the leader in the casual clothing market; third, to work toward those goals by conducting business with integrity; and fourth, to value the workforce, and treat the people with compassion and respect. In other words, there is no point to anything else Levi’s does if the company is not a commercial success. The rest is an expression of the company’s conviction of the best way, for all concerned, to achieve that. Levi’s social responsibility and generous treatment of its employees is good business practice. Certainly, employee bonuses, generous compensation and assistance packages for workers who are laid off, assistance to the communities where Levi’s has closed factories, and involvement in many charitable activities all increase the company’s costs. If the company did not do all those things, it might have recovered much faster from the decline in 1997-1999, and that is perhaps the one practical criticism that can be made of Levi’s policies. But there is a longer-term value to be gained from them. As discussed in previous questions, Levi’s policies lead to stability, productivity, and goodwill. If Levi’s is to be a commercial success, it needs a stable and productive workforce to make quality goods; if it is to continue to expand, it needs the goodwill of communities and consumers to be able to build factories and stores, engage new suppliers, and hire new workers. And Levi’s policy gives the company more positive associations with the brand that others must compete against. All in all, even though the philosophy in the Mission, Vision, Aspirations, and Values Statement may sometimes cost Levi’s in the short term, in the long term it is a very good business strategy. Appeal to Target Market Levi’s has very strong abilities to appeal to its target markets. There are two ways to look at the effectiveness of Levi’s market appeal. First, there is the 15- to 24-year-old ‘core’ market described by the case study, which is the primary market defined by the industry and business analysts and commentators. As the case study explained, Levi’s did not manage this important market segment very well in the years 1997 to 1999. Second, there is the target market as defined by Levi’s. That certainly includes the core market – otherwise Levi’s would not have taken a number of steps to address the problem – but also includes different segments of the apparel market as well. Judging from Levi’s efforts to diversify their product line, the point of view of the company is that there is not simply one target market, but many. Nonetheless, no matter how smart diversifying the product line might be, there is no getting around the importance of the core market, and as has been discussed, Levi’s failure to make it a priority had serious negative consequences. The steps Levi’s took to correct the problem included hiring new managers, presumably people with expertise in marketing to the core customers, from outside the company, hiring a new advertising agency, and developing a number of new products. How effective these steps were in recovering Levi’s market share is not discussed by the case study, but they do give a clue to the company’s ability to remain attractive to all its target markets. For starters, these were exactly the steps that Levi’s needed to take to recover their share of the core market. That indicates that the company is able to recognize the fundamental problem and address it directly; perhaps not as quickly as they should have in the late 1990’s, but presumably they would have learned from that experience. The company has also made responsiveness to customers a more plainly-stated part of its Values and Vision, an updated version of the 1999-vintage Mission, Vision, Aspirations, and Values Statement discussed in the case study. (http://www.levistrauss.com/Company/ ValuesAndVision.aspx) In addition to paying better attention to the core market for blue jeans, Levi’s also has demonstrated skill in identifying and serving other target markets. The success of their Dockers and Slates lines, bestsellers in their segments, is a testament to that. Levi’s has also branched out into even more specific market segments, ones that are perhaps not well-covered, or covered at all, by their competitors. A very good example of this is described in the company’s website: A new Levi’s label (developed in 2006) called eco, featuring jeans made from recycled denim and shirts made from organic cotton. Levi’s describes the brand as environmentally-conscious and socially-responsible, which it certainly is; but it also happens to tap a hot topic of public concern and intense media attention, which undoubtedly builds instant appeal for the brand among certain consumers. The final analysis is that Levi’s has very strong abilities to remain attractive to its target markets. They provide something for nearly every clothing need of the consumer, and when Levi’s has discovered it is not appealing to a particular group of consumers, the company has taken appropriate steps to address the problem. Alternatives and Recommendations Levi’s has a very strong brand, an excellent corporate reputation, and a sensible, albeit somewhat conventional, approach to maintaining the company’s financial health. It is easy to see where the company has made mistakes in the past, but it is also easy to see the steps Levi’s has taken to correct those mistakes. It is difficult to point out anything that Levi’s is doing exactly wrong; nevertheless, there are a number of alternative approaches that can be recommended that might work better: Concentrate on the Asian market: Not only does Asia have the biggest concentration of potential customers in the world, it is also the biggest source of potential competition for Levi’s. It also seems to be the part of the world which has been affected the least by the global economic crisis. Levi’s should focus very strongly on establishing a solid market position in Asia, especially among the key 15- to 24-year-old customer segment, since it is the people in this age group who will benefit the most from the expanding economies in the Asian countries. Shift more of the brand identity from “heritage” to “cool”: This is critical to appealing to the core market segment in any country. Levi’s is proud of the company’s long history and rightly so, but it does not seem to work as well with younger customers as Levi’s might hope. The association a 15- to 24-year-old person is most likely to make with words like “heritage” and “tradition” is “old”. “Old” is not cool or stylish (although most older people would probably disagree). And for non-American customers, Levi’s long history is not likely to evoke any association at all. In Asia and Europe, things that have a 100- or 150-year history are not so impressive, and in many places would not even be considered old – except, of course by teenagers and young adults who want to wear the latest popular styles just like their North American counterparts. Levi’s is already taking some steps in this direction – their website describes a marketing tie-in with NASCAR, to better reach that sport’s massive fan base – but these kinds of efforts should be greatly intensified. Relate corporate responsibility more closely to the target markets: It has already been shown that Levi’s corporate responsibility brings long-term, fundamental value benefits to the company, and strengthens its brands and ultimately its commercial success. But in many ways, Levi’s activities seem detached from their target markets, and too narrow in focus to take full advantage of their marketing value. For example, the case study described the setting up of AIDS workshops for prostitutes, and providing funding for a Japanese Gay and Lesbian Association to expand their counseling and awareness programs. These are noble causes and very respectable efforts, but as long as Levi’s is doing charitable work anyway, why not do more of it to benefit the people who are most likely to be Levi’s customers? Educational assistance for low-income students who want to attend college would be a possible idea; funding jobs programs for youth is another, one that might be particularly relevant in the current economic climate. Levi’s would still have the opportunity to provide real social benefits to people, but would be doing it in a way that more people within its biggest customer segments could relate to. Not only would the social message be more effective, Levi’s would be building an even stronger brand perception among those in the biggest and most profitable market. Diversify ownership of the company: The case study describes how the ownership structure of Levi’s has remained firmly in the grasp of the descendants and relatives of Levi Strauss, and this is apparently still the case. Since the 1997-1999 crisis, Levi’s has diversified its management significantly, but whatever new ideas these people have brought to the company, they still answer to the family that got its start making work pants for miners a century-and-a-half ago. Taking the company public, or at least allowing some outside objectivity and influence into the ownership group could provide the company with some valuable new ideas and directions. Read More