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The CASE Journal Volume 5, Issue 2 (Spring 2009)
• The decline in Inventory Turns in 2007 indicates that Krill’s attempts at improving the
promotions aimed at encouraging customers to take advantage of sale prices).
• EBITDA margin has decreased in 2007, which indicates potential for cost inflation for
control.
• Despite lower inventory turns, ANN was able to generate more sales per dollar in assets
Equity could have been much worse if ANN had not repurchased its own stock. This can
be observed from the increase in Treasury Stock account on the Balance Sheet.
leverage is dictated by the business the firm is in and may not be very easy to change.
• Clearly, things are not all rosy for ANN, but the company continues to be profitable.
2. Identify key changes in the general environment. How will these trends affect retailers in
general and ANN in particular?
The instructor should note which factors in the general environment students identify as having
a significant impact on the apparel industry. There may be external factors that could
substantially help or hinder women's apparel retailers in their quest for competitive advantage.
POSSIBLE INTRODUCTORY EXERCISE: Have students reflect on their own recent
Responses to these categories can easily come from the students’ varying experiences. Some of
the students’ responses regarding the general environment (using the PEST framework) might
include:
Political-Legal: Political-legal issues, especially potential trade regulations and supplier
disruptions, have had a potential effect not only on ANN but also on the apparel industry as
textile manufacturing is done outside of the U.S. Note in Case Section 5: ANN Operational
Information, merchandise for ANN is sourced from over 15 countries.
Economic: Macro-economic changes are always important. Beyond the generic issues (e.g.,
currency shifts, inflation, interest rates, national income, and unemployment), there appears to be
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The CASE Journal Volume 5, Issue 2 (Spring 2009)
little here that is specific to retailing, except for a possible reduction in discretionary spending
due to the economic uncertainty.
Sociocultura/Demographic: Several issues stand out in this general environment segment. First,
targeted at slightly younger and lower income women than AT.
A primary issue here includes the trend towards more casual work environments. Students can
respond with insights from their own experience. For instance, TV series like “Sex and the City”
are less likely to “dress their age”, yet still want clothes that are comfortable. This trend is
problematic to ANN given their focus. AT stores may have difficulty keeping in touch with these
older women.
shoppers.
The summary discussion on the general environment should help students to think about how
these factors were differentially affecting ANN’s two primary businesses , i.e., LOFT and AT. In
Average students will be able to help in the brainstorming of different trends occurring in the
general environment. However, better students will be distinctly more capable of placing those
trends into their appropriate categories. In particular, they will recognize more easily the
difference between the demographic and the sociocultural segments. For instance, there has been
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For use in conjunction with Strategic Management 13E, Pearce & Robinson. Expiry date 2015.
The CASE Journal Volume 5, Issue 2 (Spring 2009)
influence of Latino celebrities such as Jennifer Lopez can have an effect on sociocultural trends,
3. What industry is ANN in?
Before the students can begin to address the specifics of the industry environment, they need to
be clear on how they are defining the industry. ANN operated AT and LOFT. In the past the
company had also experimented with a make-up line, children’s clothes and shoes. Are all of
these different businesses competing in distinct industry environments or can we just
characterize ANN as a retailer that competed in the overall retailing industry?
AS AN INTRODUCTORY EXERCISE, have students list all the variations or types of retail
environments that they might have encountered. In section 2, the case lists discount mass
merchandisers, multi-tier department stores, and specialty retail stores. Other environments
include online, catalog, TV infomercial, mall and main street pedestrian locations. Ask students
if they think these types of stores and various shopping environments are all part of the same
“industry”? Does it matter what products are offered? Do shoe stores and sporting goods stores
compete with each other? The answers to these questions are discussed below.
According to the strategic management textbook by Hitt, Ireland and Hoskisson’s (Strategic
Management: Competitiveness and Globalization, 2007), an industry is defined as a group of
firms that are producing products that are close substitutes. Porter (2008) uses a definition that
incorporates more of an “extended competition” concept. He points out that an industry is
defined by the scope of its products or services – if products have the same buyers, suppliers,
barriers to entry, etc., then these products should be considered as being part of the same
industry. Entities that compete for the same industry profit pool (i.e., buyers and suppliers), or
any new entrants or substitute entities that dampen the profit potential can also be considered
competitors for the profit available in a given “industry” space. Other definitions can be used.
However, all definitions incorporate the idea of firms producing similar products for similar
customers. Section 2 of the case identifies three major clothing sectors, and one could argue that
each sector is just a more broadly or narrowly defined grouping of firms with similar products. In
other words, each sector is a different representation of “industry.”
In the context of a business strategy class, our goal is to find a grouping that helps us to most
effectively analyze the situation facing the firm. By defining the boundaries of the industry and
determining its members, we are able to move forward in doing the competitive analysis.
categorized as substitutes with some substitutes being more viable than others
This case is particularly good at helping students confront the issues involved in establishing the
boundaries that define the parameters of the “industry” under analysis. Essentially, students need
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For use in conjunction with Strategic Management 13E, Pearce & Robinson. Expiry date 2015.
The CASE Journal Volume 5, Issue 2 (Spring 2009)
the industry. A company's “industry” is ultimately defined by the bounded rationality of the
knowledge. In that sense, there is no universally correct way to define the competitive
environment except to say that it must be able to pass a test of reason: the definition must be an
acceptable representation of the industry as seen through the eyes of primary competitors.
the overall situation in specialty retail.
Students are provided with a breakdown of the retailing industry into its sub-categories: discount
mass merchandisers, multi-tier department stores, and specialty retail stores. However, the
Case Sections 2, 3, and 4, students should have a better awareness of just how important industry
context can be in defining internal environment organizational tendencies and changes.
Through analysis, students can recognize that make-up and shoes are clearly not the same
diversification.
The reality of ANN’s remaining two primary businesses at the end of the case (i.e., AT and
LOFT) is that both businesses were clothing retailers – specifically, women’s clothing. By the
Most students will start the discussion a little bit uneasy with the fact that they need to define the
industry they are analyzing. In most of their experience, they are able to take the industry
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The CASE Journal Volume 5, Issue 2 (Spring 2009)
definition as given. However, given that the earlier discussion primed students for this question,
better students will quickly recognize the dilemma and move towards resolution. Further, better
students will be able to quickly refer back to the section in the case where the different categories
were identified. All students should be able to participate in the discussion that attempts to
conclusion of women’s retail clothing.
The previous discussion may lead to a question about how different firms might compete within
the clothing retailer industry space. This question gets students to think about whether a specialty
retailer competes with department stores. Hitt, Ireland and Hoskisson (Strategic Management:
“focus” strategy in terms of Porter’s (1980) generic strategies.
Finally, there is a question here as to whether the competitive environment should be broken
down one more time to distinguish between high-end and low-end retailers. The instructor could
direct competitors. This breakdown into high and low end probably makes the most sense for
Ann Taylor (AT) stores who were especially unlikely to view a retailer such as Wal-Mart as
primary competition.
fashion, therefore signaling a specialty retail designation.
This discussion should not be too difficult even for an average student, as so much has already
been established in earlier class discussion. Better students will be able to remember examples
from the case and talk about other firms mentioned within the case. Better students will also find
question of industry-wide or focus strategy.
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4. Using Porter’s Five Forces model, identify the key issues in the competitive environment
that affect ANN and its rivals. Identify and evaluate the competitive forces that shape the
industry structure. How much opportunity exists for industry players?
If the industry is women’s clothing, some suggestions for a Porter’s Five Forces analysis are
given below. ADDITIONAL READING can be assigned here to augment the assigned
textbook. The 2008 HBR article by Michael Porter “The five forces that shape strategy” is a
good overview of his Five Forces model, providing an update to his classic 1980 book on
Competitive Strategy. AN ADDITIONAL EXERCISE to uncover the current degree of rivalry
between competitors is to have students use Handout A to identify the differences between ANN
and its direct competitors, Coldwater Creek, Chico’s, and Talbot’s. Students should be
encouraged to visit the Yahoo! Finance link to see what the current numbers say, and also to visit
the ANN Investor’s website to see the current press releases and SEC filings.
There is no threat from viable substitutes, and both retail buyers and suppliers lack power.
However, there is high rivalry, and threat of new entrants. As the analysis suggests, the
environment is challenging. Given students are personally familiar with retailing, even average
students will intuitively be able to identify the relative levels of each of the five forces. However,
better students will be able to provide rationale for their assessments. Help students apply the
five forces by drawing a diagram as below, and having students fill in the details. (This diagram
is also available for instructors to provide directly to students, as an Exhibit B at the end of this
Teaching Note):
High
Threat of
Substitutes
Low
Buyers’
Bargaining
Power
Low
Threat of
New Entrants
Med-High
Suppliers’
Bargaining
Low
Suggested: There are no real substitutes
for a woman’s career wardrobe.
Suggested: The industry has low
concentration with many rivals
competing for market share. Some
p
roduct differentiation exists, but
a lack of switching costs means
firms will compete to steal
customers.
Suggested: Retail Buyers have many
choices of retailers and clothing lines.
However, many women’s specialty
stores design their own private label
other retailers. Therefore buyers have
little power.
Suggested: At the regional level, entry
is not difficult as a retailer can enter as
small scale with little capital and be
able to find raw materials/suppliers
and target consumers. Likely entry is
from expansion of existing
competitors (similar to what ANN did
with LOFT). However, at a national
level entry is more difficult.
Suggested: Given that there are
many supplier firms and that there
is a lack of differentiation between
them, their power is lowered. Some
switching costs may exist if the
clothing buyer changes suppliers,
but the costs are manageable. Lots
of capacity exists in Asia and
suppliers have few alternative
markets in which to sell their
p
roducts, reducing their power.
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5. Does the industry structure make one generic competitive strategy more attractive and
attainable for ANN than another?
Porter’s (1985) original model of generic strategies listed only three possible strategies -
and differentiation strategies without worrying about the focus question. We suggest the
following talking points:
Cost Leadership: This strategy relies on successful procurement activities focused on working
for technology use include the creation of customer databases to streamline marketing efforts.
Differentiation: This strategy relies on dynamic leadership with a strong fashion sense and
marketing skills. It is critical to identify the target market and sell effectively to the buyers in that
If the above options are the only two available, it is clear that ANN has a differentiation strategy.
In the model that allows for the existence of a focused differentiation strategy, our previous
discussion questions have already established for students that if the industry is defined broadly
as clothing retailers, then ANN uses a focused differentiation strategy. It focuses on both
strategy.
The average student will have little problem distinguishing between the differentiation and cost
leadership strategies and drawing the conclusion that ANN is pursuing a differentiation strategy.
Better students will be able to more easily talk about whether ANN is pursuing an industry-wide
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or focused strategy and, given the context of previous discussion, will be able to see that the
conclusion they draw depends upon the industry definition that they utilize.
6. To what degree do ANN”S internal resources and capabilities provide an advantage not
available to potential or current rivals? On which of these resources and capabilities should
ANN concentrate?
There is not a lot of detailed or specific information about ANN’s internal resources in the case.
Still, the instructor can spend some time here to more clearly focus students on internal issues.
Below we outline some ideas for a discussion about resources using the RBV perspective - see
both Barney (1991), and Grant (1991), as well as a short practical article by O’Riordan (2006) on
how to use the VRIO framework - the value chain model (in Porter’s 1985 Competitive
Advantage), and a VRIN analysis (Barney, 1991). Students might find discussion of ANN’s
value chain easier to use than RBV and should be able to identify the specific types of
capabilities needed in the different value chain areas.
POSSIBLE ADDITIONAL READING: To further define some of these concepts, for more
advanced students, the instructor could assign the source articles by Barney (1991), Grant
(1991), O’Riordan (2006), and Prahalad & Hamel (1990), as well as a review of Porter’s 1985
text. (See the references list for article citations.)
Evaluating Resources – RBV Perspective: Using the Resource-Based View (RBV) categories of
tangible (financial, physical, technological, organizational) and intangible (human, innovation,
reputation) resources, per Barney (1991), Grant (1991), or other popular strategic management
texts, the following is reasonable to expect students to identify in their analyses:
Financial: Even with the company’s capital expansion plans, ANN appears to have sufficient
assets available to handle cash flow needs going into 2009. The company had no debt, and
appeared to have enough cash on hand to deal with the difficult economic conditions (see Case
Exhibits 1-5). However, there was some concern about real estate investments possibly
increasing the cost of capital beyond the company’s ability to recoup. The cost savings program,
part of the restructuring plan (see Case Section 5, and Case Exhibit 3), appears to be an attempt
to safeguard financial assets. See the financial ratio analysis in Exhibit A & B at the end of this
teaching note. Further discussion about ANN’s financial status was provided in Question 1,
above.
Physical: ANN evidences a consistent strategy of real estate expansion based on continual
assessment of future needs and active refurbishing program. The active refurbishing activities
suggest that the company’s physical resources should stay viable (see Case Section 5). In
addition, flagship locations, especially in New York, appear to be in high visibility and high
status areas (see Case Section 1).
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For use in conjunction with Strategic Management 13E, Pearce & Robinson. Expiry date 2015.
The CASE Journal Volume 5, Issue 2 (Spring 2009)
divisions.
Human: Krill’s focus on restructuring may have been able to revitalize the relationships between
upper management. New blood could bring needed capabilities, however the “revolving door”
that seemed to be present in the overall retailing environment has prevented stability in the past,
ANN environment (see Case Sections 7 & 8).
Innovation and creativity: Unfocused in the past, this area still needed development. One
problem might be that ANN was trying to copy competitors rather than develop any truly
innovative products or marketing strategies (see Case Sections 4, 6 & 8).
Value Chain Activities and Capabilities: The case, of course, is obviously focused on ANN.
However, it may be fruitful for the instructor to talk more generally about value chain activities
as they relate in general to specialty retailers pursuing a focused differentiation strategy. Here is
a synopsis of some key points:
chain?
Primary:
regarding warehouse capacity constraints. Simple calculation
of the number of stores ANN has been adding each year
suggests that the company’s distribution center may run out
of space in about three years. In other words, there should
Operations (efficient in-
store work flow design,
High-end specialty stores have limited space and
merchandise. The shopping experience in the store is critical
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Outbound logistics
Specialty retailers have one logistics location, appropriately
outbound logistics – efficient store layout can encourage
customers to interact with merchandise as they enter, browse,
and leave the retail store.
customer segments &
distribution channels)
Service (ability to solicit
customer feedback,
Throughout the modern economy, all companies in all
industries are increasingly recognizing the value of this
Secondary (or support):
Procurement (win-win
relationships with suppliers,
Relying on international partners for international production
reduces dependence on centralized structure. Department
the right suppliers for those items.
However, ANN cannot neglect the efficiency gained through
effective utilization of corporate-wide computer systems to
manage inventory and distribution. Companies that use a
differentiation strategy must maintain some level of parity
designer fashions).
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