Strategic Management and Business Policy - Case Study Example

Strategic Management Case Study Name Name of Institution Strategic Management Case Study Introduction According to Kazmi (2008, p. 19), strategic management is the systematic process of creating, implementing, evaluating, and controlling strategies in a way that allows an organisation to achieve its goals. From this definition, it is evident that strategic management is a continuous process and that an organisation needs to evolve its strategy on a constant basis to remain competitive. This report examines American Apparel to evaluate its performance in the area of creating, implementing, and controlling its overall strategy. The company was started in 1998, and it experienced steady growth to the point that it was the leading garment manufacturer in the US by 2005 (Grant 2012, p. 658). However, there was a quick reversal in the fortunes of the company by 2010 as the company had to restructure its financial system and reduce costs. The paper will begin by identifying the strategic issues that led to this rapid decline. This will be followed by the use of strategic management tools to evaluate the reasons behind the problems at America Apparel. Finally, the paper will provide recommendations that should facilitate the attainment of American Apparel’s objectives. Strategic Issues and Problems According to Grant (2012, p. 656), $20 billion worth of T-shirts is sold in the US on a yearly basis. At first, this might seem like a large market that can be cornered by a single business. However, the segment is served by a wide variety of suppliers at both the retail and wholesale levels. As such, American Apparel’s decision to focus on T-shirt can be considered as a problem due to exposure to excessive levels of competition. Statistics from 2011 indicates that American Apparel’s sales amounted to 550 million, a figure that is minuscule when compared to Gap’s $14.55 billion and VF’s $9.46 billion in sales. This level of competition had the effect of forcing the company to be very innovative in product designs and to face the issue of imitation from both local and international players in the market. The other strategic issue comes from the vertical integration strategy. In this case, vertical integration defines the acquisition of separate and sequentially related economic activities by a single firm (Wu 2014, p. 5). Vertical integration can be backwards where a firm acquires businesses that supply critical inputs or forward where a company owns the fabrication, distribution, and finishing activities (Wu 2014, p. 5). American Apparel’s vertical integration included both forward and backwards integration as it engaged in production, design, marketing, retailing, and advertising. While vertical integration created advantages like speed and flexibility for the domestic market, the strategy was not effective for a firm that established over 200 retail stores in international markets. Therefore, a significant issue at American Apparel comes from the choice of strategy for the international market. The organisation’s decline can also be traced to the manner in which it implemented its vertical integration strategy. Dov Charney, the CEO and founder, was responsible for the poor implementation of the adopted strategy. The CEO had a controversial persona that was bound to taint the image of the organisation and limit the company’s attractiveness to a broad section of customers. For example, the CEO and the company faced sexual assault charges because of a culture that gave undue attention to sexuality. Apart from these controversies, the company also suffered from the tight control of the CEO. It is surprising to note that the CEO of such a large company controlled virtually all aspects of the company’s strategy. This extended from individual product designs to disagreeing with expert consultants on a corporate turnaround strategy that would rescue the business from its decline. Analysis and Evaluation Businesses like American Apparel have an operating environment that experiences constant change. By definition, this operating environment includes the macro environment, the industry environment, and the internal environment (Analoui & Karami 2003, p. 73). It is worth noting that strategic management looks at how a business obtains competitive advantages from both its internal and external environment. This means that to be successful, a business has to select the right industry, have responsible management and operate in the right macro-environment (Laasch & Conaway 2014, p. 163). Therefore, an analysis of American Apparel’s performance should include factors related to the macro, industry, and internal environments. Laasch and Conaway (2014, p. 163 notes that the external environment is defined by factors like technological, cultural, economic, and political influences. The PESTEL analysis is a measurement framework that was created to assist in analysing the macro-environment (Thompson & Martin 2005, p. 86). In American Apparel’s case, most factors in the macro environment were favourable. For example, America’s political environment is extremely favourable to large corporations, a factor that is further enhanced by American Apparel’s decision to keep all aspects of production in the country. When it comes to technology, the company benefited from the rise of the internet which facilitated easier access to customers and cheaper advertising. The sociocultural environment was also favourable since American buyers were able to change their tastes and embrace the T-shirt as a fashion symbol instead of its traditional role as an undergarment. On the other hand, the legal and economic factors were unfavourable to the company. This can be seen in America’s litigious culture where the company faced numerous legal challenges. The was also the legal problem of employing illegal immigrants (Grant 2012, p. 659). When it comes to the economy, it is apparent that American Apparel’s decline coincided with the global financial crisis. Under periods of recession, consumers typically shift to cheaper alternatives, a factor that must have a massive impact on a high-end brand like American Apparel (West, Ford, & Ibrahim 2010, p. 76). While the economic conditions affected performance, factors in the industry and internal environment must have also contributed to the decline of American Apparel. The five forces model is a tool that enables an analysis of the degree of competition and profitability in an industry. An understanding of these five forces is critical to business success as it aids in the development of business-level strategy where a firm can protect itself or take advantage of the five forces (Ahlstrom & Bruton 2009, p. 131). In the area of competitive rivalry, the sales data provided by Grant (2012, p. 657) shows that American Apparel faced direct competition from companies Gap, VF, Ross Stores, and Hanesbrands. The high bargaining power of buyers who are price sensitive and can switch to competitors without incurring any costs also creates problems. In contrast, the bargaining power of suppliers is low as a result of the vertical integration and the fact that American Apparel can obtain inputs from many suppliers. The threat of substitutes is also low because people have to wear clothes. However, the availability of numerous options limits the beneficial impact of a low threat of substitutes. Finally, the case study shows that American Apparel has to deal with a high threat of new entrants. This is because most businesses in the industry outsourced production to keep costs at very low levels. In turn, the low costs free up capital leading to rapid expansion into foreign markets. As such, the high levels of competitive rivalry, strong bargaining power of buyers, and high threat of new entrants can partly explain the decline of American Apparel. Having evaluated the macro and industry environment, it is essential to look within American Apparel to find the causes of its quick decline. In this case, the focus will be on determining whether the firm-specific conditions have an impact on the firm’s ability to create value and undertake strategic actions (Andersen 2013, p. 57). In this evaluation of American Apparel’s internal environment, the McKinsey 7S framework will be appropriate. This is because the tool can describe how an organisation operates and assist in the development of strategies for change. According to Osman (2013, p. 20), the tool was developed in the 1980’s with its focus being on ‘hard’ factors like structure, strategy, and systems. Additionally, the framework looks at soft elements that include skills, shared values, staff, and style. The model is founded on the premise that if a business aligns these elements, it will be able to obtain satisfactory performance. Strategy is an element in the 7S model which looks at how a business wants to get a competitive advantage that is sustainable (Kaplan 2005, p. 41). At American Apparel, the adopted strategy was a high-level vertical integration in Los Angeles. Grant notes that the business sought to gain a competitive advantage by creating new and innovative trends and by having the capability to respond rapidly to demand. The vertical integration also yielded competitive advantages in the firm’s wholesale operations as it could fulfil large orders before competitors that outsourced production to other countries. It is, therefore, apparent that the company had adopted a strategy that gave it a sustainable competitive advantage. When it comes to structure, the element focuses on how divisions and units are organised, authority distributed, and people specialised (Kaplan 2005, p. 41). An evaluation of American Apparel shows significant weaknesses in the structure of the business. This is due to factors such as the centralisation of decision making where the CEO micro managed all aspects of the business. For instance, the CEO often took the role of a photographer as part of an internal marketing division. The CEO also hired each member of the design team and was the person who approved all designs. This indicates a lack of a clear hierarchy, a factor that must have hindered the application of the company’s vertical integration strategy. Similar weaknesses can be found in the company’s systems. In this case, the systems define the processes and procedures that are used in day to day decision making (Rothwell 2015). Examples of these weaknesses can be found in the poor financial control which was identified by the company’s auditor. An additional weakness can be found in the reward system where the company offered wages and benefits that exceeded the prevailing rates. In most listed firms, the CEO is answerable to a board, and he/she has to adhere to strict corporate governance rules. At American Apparel, there was a lack of such controls as the CEO managed the business as if it was a private company. An evaluation of American Apparel also shows significant weaknesses in the ‘soft’ elements like skills, staff, shared values, and style. For example, the company had an ineffective leadership style that can be considered as autocratic. The influence of the founder also meant that the company lacked real teams that could contribute to the attainment of organisational goals. When it comes to shared values, the influence of the leader was such that the entire organisation developed a culture based on sexuality. As stated, this culture led to legal problems that harmed the American Apparel brand. Regarding staff, the case study shows that the CEO hired friends in areas like marketing, and store selection and design (Grant 2012, p. 662). The subsequent closure of over 30 stores is sufficient proof that the organisation lacked qualified personnel to implement its strategy. In summary, the 7S model shows that the company selected a vertical integration strategy that gave it a sustainable competitive advantage. However, the company failed spectacularly when it came to aligning its capabilities to implement the adopted strategy. Recommendations The analysis of the macro-environment shows that American Apparel faced issues related to the legal and economic environments. From the definition of the macro environment, these factors are outside the control of the business. As such, the recommendations will focus on the industry and internal environments. First, the five forces analysis shows that the business faces intense competitive rivalry. It is recommended that the company continually update its products while balancing price and quality. This recommendation will also assist the business to deal with the threat of substitutes and new entrants in the market. When it comes to the internal environment, American Apparel adopted a vertical integration strategy that gives it a sustainable competitive advantage. However, the firm’s structure, systems, skills, style, shared values, and staff had significant weaknesses that affected the implementation of the vertical integration strategy. It is recommended that the business replaces its CEO and top management to resolve these issues. This will facilitate a better implementation of the vertical integration strategy while eliminating problems like the sexualised culture. A new leadership will also allow the company to take advantage of technology when serving international markets. It is also recommended that the firm considers alternative strategies like outsourcing to serve the international market. Conclusion In conclusion, this paper focuses on American Apparels rapid decline. The paper identifies the choice of the vertical integration strategy, the implementation of the strategy, and the choice of industry to be the major problems. An evaluation of the macro environment shows that American Apparel’s decline coincided with the global financial crisis. The industry analysis also shows that the company’s profitability was limited by strong bargaining power of buyers, high competitive rivalry, and significant threat of new entrants. However, the key finding in the paper comes from the internal analysis which shows significant weaknesses in the organisational structure, systems, style, shared values, skills, and staff. The major recommendation is a change in the management team to address these internal weaknesses that limited the company’s ability to implement its strategy and respond to changes in the industry and macro environment. References Ahlstrom, D & Bruton, GD, 2009, International management: strategy and culture in the emerging world, Cengage Learning. Analoui, F & Karami, A, 2003, Strategic management in small and medium enterprises, Thomson Learning Andersen, TJ, 2013, Short introduction to strategic management, Cambridge University Press. Grant RM, 2012, Contemporary strategy analysis, John Wiley & Sons. Kaplan, RS, 2005, How the balanced scorecard complements the McKinsey 7-S model, Strategy & Leadership, 33(3), pp.41-46. Kazmi, A, 2008, Strategic management and business policy, Tata-McGraw Hill. Laasch, O, & Conaway, RN, 2014, Principles of responsible management: global sustainability, responsibility, and ethics, Cengage Learning Osman, IH ed., 2013, Handbook of research on strategic performance management and measurement using data envelopment analysis. IGI Global. Rothwell, WJ, 2015. Organization development fundamentals. ATD Press. Thompson, JL, & Martin, F, 2005, Strategic management: awareness and change, South-Western Cengage. West, D, Ford, J. & Ibrahim, E, 2010, Strategic marketing: creating competitive advantage. Oxford University Press. Wu, C, 2014, Strategic aspects of oligopolistic vertical integration, Elsevier Science Publishers Read More