978-0078029295 Case Ann_Taylor Part 2

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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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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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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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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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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

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

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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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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