Questions:

1. How strong are the competitive forces confronting J. Crew in the market for specialty retail? [Michael Porter] five-forces analysis to support your answer. (see chapter 3 in the textfor assistance]

2. What does your strategic group map of the specialty retail industry look like? Is J. Crew well positioned? Why or why not? [See example of strategic group map on page 69 and via google search; an explanation of the concepts is on pages 67 - 70.

3. What do you see as the key success factors in the market for speciality retailers? [see chapter 72-73 for details on "key success factors"]

4. What does a SWOT analysis reveal about the overall attractiveness of J. Crew's situation? [see chapter 4 , page 93 in the text book for details on this concept]

5. What are the primary components of J. Crew's value chain? [see chapter 4, pages 95-99 in the text book]

6. What are the key elements of J. Crew's strategy? 7. Which one of the five generic competitive strategies discussed in chapter 5 most closely matches the competitive approach that J. Crew is employing. [See Table 5.1 on page 139 in the text book].

CASE STUDY: J. CREWD

PAGE NO:67-74

TABLE 3.3 The Most Common Drivers of Industry Change

Changes in the long-term industry growth rate

Increasing globalization

Emerging new Internet capabilities and applications

Shifts in buyer demographics

Technological change and manufacturing process innovation

Product and marketing innovation

Entry or exit of major fi rms

Diffusion of technical know-how across companies and countries

Changes in cost and efficiency

Reductions in uncertainty and business risk

Regulatory infl uences and government policy changes

Changing societal concerns, attitudes, and lifestyles

Adjusting the Strategy to Prepare for the Impacts of Driving Forces

The third step in the strategic analysis of industry dynamicswhere the real payoff for strategy making comesis for managers to draw some conclusions about what strategy adjustments will be needed to deal with the impacts of the driving forces. But taking the "right" kinds of actions to prepare for the industry and competitive changes being wrought by the driving forces first requires accurate diagnosis of the forces driving industry change and the impacts these forces will have on both the industry environment and the company's business. To the extent that managers are unclear about the drivers of industry change and their impacts, or if their views are off-base, the chances of making astute and timely strategy adjustments are slim. So drivingforces analysis is not something to take lightly; it has practical value and is basic to the task of thinking strategically about where the industry is headed and how to prepare for the changes ahead.

STRATEGIC GROUP ANALYSIS

Within an industry, companies commonly sell in different price/quality ranges, appeal to different types of buyers, have different geographic coverage, and so on. Some are more attractively positioned than others. Understanding which companies are strongly positioned and which are weakly positioned is an integral part of analyzing an industry's competitive structure. The best technique for revealing the market positions of industry competitors is strategic group mapping.

Using Strategic Group Maps to Assess the Market Positions of Key Competitors

A strategic group consists of those industry members with similar competitive approaches and positions in the market. Companies in the same strategic group can resemble one another in a variety of ways. For example, they may have comparable product-line breadth, emphasize the same distribution channels, depend on identical technological approaches, or offer buyers essentially the same product attributes or similar services and technical assistance. Evaluating strategy options entails examining what strategic groups exist, identifying the companies within each group, and determining if a competitive "white space" exists where industry competitors are able to complete and capture altogether new demand. As part of this process, the number of strategic groups in an industry and their respective market positions can be displayed on a strategic group map.

The procedure for constructing a strategic group map is straightforward:

Identify the competitive characteristics that delineate strategic approaches used in the industry. Typical variables used in creating strategic group maps are price/quality range (high, medium, low), geographic coverage (local, regional, national, global), product-line breadth (wide, narrow), degree of service offered (no frills, limited, full), use of distribution channels (retail, wholesale, Internet, multiple), degree of vertical integration (none, partial, full), and degree of diversification into other industries (none, some, considerable).

Plot the firms on a two-variable map using pairs of these variables.

Assign firms occupying about the same map location to the same strategic group.

Draw circles around each strategic group, making the circles proportional to the size of the group's share of total industry sales revenues.

This produces a two-dimensional diagram like the one for the U.S. beer industry in Illustration Capsule 3.1. Several guidelines need to be observed in creating strategic group maps. First, the two variables selected as axes for the map should not be highly correlated; if they are, the circles on the map will fall along a diagonal and reveal nothing more about the relative positions of competitors than would be revealed by comparing the rivals on just one of the variables. For instance, if companies with broad product lines use multiple distribution channels while companies with narrow lines use a single distribution channel, then looking at the differences in distribution-channel approaches adds no new information about positioning.

Second, the variables chosen as axes for the map should reflect important differences among rival approacheswhen rivals differ on both variables, the locations of the rivals will be scattered, thus showing how they are positioned differently. Third, the variables used as axes don't have to be either quantitative or continuous; rather, they can be discrete variables, defined in terms of distinct classes and combinations.

Fourth, drawing the sizes of the circles on the map proportional to the combined sales of the firms in each strategic group allows the map to reflect the relative sizes of each strategic group. Fifth, if more than two good variables can be used as axes for the map, then it is wise to draw several maps to give different exposures to the competitive positioning relationships present in the industry's structurethere is not necessarily one best map for portraying how competing firms are positioned.

The Value of Strategic Group Maps

Strategic group maps are revealing in several respects. The most important has to do with identifying which industry members are close rivals and which are distant rivals.Firms in the same strategic group are the closest rivals; the next closest rivals are in the immediately adjacent groups. Often, firms in strategic groups that are far apart on the map hardly compete at all. For instance, Walmart's clientele, merchandise selection, and pricing points are much too different to justify calling Walmart a close competitor of Neiman Marcus or Saks Fifth Avenue. For the same reason, the beers produced by Yuengling & Son are really not in competition with the beers produced by Pabst.

The second thing to be gleaned from strategic group mapping is that not all positions on the map are equally attractive. Two reasons account for why some positions can be more attractive than others:

1. Prevailing competitive pressures from the industry's five forces may cause the profit potential of different strategic groups to vary. The profit prospects of firms in different strategic groups can vary from good to poor because of differing degrees of competitive rivalry within strategic groups, differing pressures from potential entrants to each group, differing degrees of exposure to competition from substitute products outside the industry, and differing degrees of supplier or customer bargaining power from group to group. For instance, in the ready-to-eat cereal industry, there are significantly higher entry barriers (capital requirements, brand loyalty, etc.) for the strategic group comprising the large branded-cereal makers than for the group of generic-cereal makers or the group of small naturalcereal producers. Differences in differentiation among the branded rivals versus the generic cereal makers make rivalry stronger within the generic strategic group. In the retail chain industry, the competitive battle between Walmart and Target is more intense (with consequently smaller profit margins) than the rivalry among Versace, Chanel, Fendi, and other high-end fashion retailers.

2. Industry driving forces may favor some strategic groups and hurt others. Like-wise, industry driving forces can boost the business outlook for some strategic groups and adversely impact the business prospects of others. In the news industry, for example, Internet news services and cable news networks are gaining ground at the expense of newspapers and networks due to changes in technology and changing social lifestyles. Firms in strategic groups that are being adversely impacted by driving forces may try to shift to a more favorably situated position. If certain firms are known to be trying to change their competitive positions on the map, then attaching arrows to the circles showing the targeted direction helps clarify the picture of competitive maneuvering among rivals. Thus, part of strategic group map analysis always entails drawing conclusions about where on the map is the "best" place to be and why. Which companies/strategic groups are destined to prosper because of their positions? Which companies/strategic groups seem destined to struggle? What accounts for why some parts of the map are better than others?

COMPETITOR ANALYSIS

Unless a company pays attention to the strategies and situations of competitors and has some inkling of what moves they will be making, it ends up flying blind into competitive battle. As in sports, scouting the opposition is an essential part of game plan development. Having good information about the strategic direction and likely moves of key competitors allows a company to prepare defensive countermoves, to craft its own strategic moves with some confidence about what market maneuvers to expect from rivals in response, and to exploit any openings that arise from competitors' missteps. The question is where to look for such information, since rivals rarely reveal their strategic intentions openly. If information is not directly available, what are the best indicators?

KEY SUCCESS FACTORS

An industry's key success factors (KSFs) are those competitive factors that most affect industry members' ability to survive and prosper in the marketplace: the particular strategy elements, product attributes, operational approaches, resources, and competitive capabilities that spell the difference between being a strong competitor and a weak competitorand between profit and loss. KSFs by their very nature are so important to competitive success that all firms in the industry must pay close attention to them or risk becoming an industry laggard or failure. To indicate the significance of KSFs another way, how well the elements of a company's strategy measure up against an industry's KSFs determines whether the company can meet the basic criteria for surviving and thriving in the industry. Identifying KSFs, in light of the prevailing and anticipated industry and competitive conditions, is therefore always a top priority in analytic and strategy-making considerations. Company strategists need to understand the industry landscape well enough to separate the factors most important to competitive success from those that are less important.

Key success factors vary from industry to industry, and even from time to time within the same industry, as drivers of change and competitive conditions change. But regardless of the circumstances, an industry's key success factors can always be deduced by asking the same three questions:

1. On what basis do buyers of the industry's product choose between the competing brands of sellers? That is, what product attributes and service characteristics are crucial?

2. Given the nature of competitive rivalry prevailing in the marketplace, what resources and competitive capabilities must a company have to be competitively successful?

3. What shortcomings are almost certain to put a company at a significant competitive disadvantage?Only rarely are there more than five key factors for competitive success. And even among these, two or three usually outrank the others in importance. Managers should therefore bear in mind the purpose of identifying key success factorsto determine which factors are most important to competitive successand resist the temptation to label a factor that has only minor importance as a KSF.

In the beer industry, for example, although there are many types of buyers (whole-sale, retail, end consumer), it is most important to understand the preferences and buying behavior of the beer drinkers. Their purchase decisions are driven by price, taste, convenient access, and marketing. Thus the KSFs include a strong network of wholesale distributors (to get the company's brand stocked and favorably displayed in retail outlets, bars, restaurants, and stadiums, where beer is sold) and clever advertising (to induce beer drinkers to buy the company's brand and thereby pull beer sales through the established wholesale and retail channels). Because there is a potential for strong buyer power on the part of large distributors and retail chains, competitive success depends on some mechanism to offset that power, of which advertising (to create demand pull) is one. Thus the KSFs also include superior product differentiation (as in microbrews) or superior firm size and branding capabilities (as in national brands). The KSFs also include full utilization of brewing capacity (to keep manufacturing costs low and offset the high advertising, branding, and product differentiation costs). Correctly diagnosing an industry's KSFs raises a company's chances of crafting a sound strategy. The key success factors of an industry point to those things that every firm in the industry needs to attend to in order to retain customers and weather the competition. If the company's strategy cannot deliver on the key success factors of its industry, it is unlikely to earn enough profits to remain a viable business.

THE INDUSTRY OUTLOOK FOR PROFITABILITY

Each of the frameworks presented in this chapterPESTEL, five forces analysis, driving forces, strategy groups, competitor analysis, and key success factors provides a useful perspective on an industry's outlook for future profitability. Putting them all together provides an even richer and more nuanced picture. Thus, the final step in evaluating the industry and competitive environment is to use the results of each of the analyses performed to determine whether the industry presents the company with strong prospects for competitive success and attractive profits. The important factors on which to base a conclusion include:

How the company is being impacted by the state of the macro-environment.

Whether strong competitive forces are squeezing industry profitability to subpar levels.

Whether the presence of complementors and the possibility of cooperative actions improve the company's prospects.

Whether industry profitability will be favorably or unfavorably affected by the prevailing driving forces.

Whether the company occupies a stronger market position than rivals.

Whether this is likely to change in the course of competitive interactions.

How well the company's strategy delivers on the industry key success factors.

PAGE NO: 93-99

Identifying the Threats to a Company's Future Profitability

Often, certain factors in a company's external environment pose threats to its profitability and competitive well-being. Threats can stem from such factors as the emergence of cheaper or better technologies, the entry of lower-cost foreign competitors into a company's market stronghold, new regulations that are more burdensome to a company than to its competitors, unfavorable demographic shifts, and political upheaval in a foreign country where the company has facilities. Table 4.3 shows a representative list of potential threats.

External threats may pose no more than a moderate degree of adversity (all companies confront some threatening elements in the course of doing business), or they may be imposing enough to make a company's situation look tenuous. On rare occasions, market shocks can give birth to a sudden-death threat that throws a company into an immediate crisis and a battle to survive. Many of the world's major financial institutions were plunged into unprecedented crisis in 2008-2009 by the aftereffects of high-risk mortgage lending, inflated credit ratings on subprime mortgage securities, the collapse of housing prices, and a market flooded with mortgage-related investments (collateralized debt obligations) whose values suddenly evaporated. It is management's job to identify the threats to the company's future prospects and to evaluate what strategic actions can be taken to neutralize or lessen their impact.

What Do the SWOT Listings Reveal?

SWOT analysis involves more than making four lists. The two most important parts of SWOT analysis are drawing conclusions from the SWOT listings about the company's overall situation and translating these conclusions into strategic actions to better match the company's strategy to its internal strengths and market opportunities, to correct important weaknesses, and to defend against external threats. Figure 4.2 shows the steps involved in gleaning insights from SWOT analysis.

The final piece of SWOT analysis is to translate the diagnosis of the company's situation into actions for improving the company's strategy and business prospects. A company's internal strengths should always serve as the basis of its strategyplacing heavy reliance on a company's best competitive assets is the soundest route to attracting customers and competing successfully against rivals.11 As a rule, strategies that place heavy demands on areas where the company is weakest or has unproven competencies should be avoided. Plainly, managers must look toward correcting competitive weaknesses that make the company vulnerable, hold down profitability, or disqualify it from pursuing an attractive opportunity. Furthermore, a company's strategy should be aimed squarely at capturing attractive market opportunities that are suited to the company's collection of capabilities. How much attention to devote to defending against external threats to the company's future performance hinges on how vulnerable the company is, whether defensive moves can be taken to lessen their impact, and whether the costs of undertaking such moves represent the best use of company resources.

The Concept of a Company Value Chain

Every company's business consists of a collection of activities undertaken in the course of producing, marketing, delivering, and supporting its product or service. All the various activities that a company performs internally combine to form a value chain so called because the underlying intent of a company's activities is ultimately to create value for buyers.

As shown in Figure 4.3 , a company's value chain consists of two broad categories of activities: the primary activities foremost in creating value for customers and the requisite support activities that facilitate and enhance the performance of the primary activities. 12 The exact natures of the primary and secondary activities that make up a company's value chain vary according to the specifics of a company's business; hence, the listing of the primary and support activities in Figure 4.3 is illustrative rather than definitive. For example, the primary activities at a hotel operatorlike Starwood Hotels and Resorts mainly consist of site selection and construction, reservations, and hotel operations (check-in and check-out, maintenance and housekeeping, dining and room service, and conventions and meetings); principal support activities that drive costs and impact customer value include hiring and training hotel staff and handling general administration. Supply chain management is a crucial activity for Nissan and Amazon.com but is not a value chain component of Facebook or Twitter. Sales and marketing are dominant activities at Procter & Gamble and Sony but have only minor roles at CBS and Bain Capital. With its focus on value-creating activities, the value chain is an ideal tool for examining the workings of a company's customer value proposition and business model. It permits a deep look at the company's cost structure and ability to offer low prices. It reveals the emphasis that a company places on activities that enhance differentiation and support higher prices, such as service and marketing. It also includes a profit margin component, since profits are necessary to compensate the company's owners and investors, who bear risks and provide capital. Tracking the profit margin along with the value-creating activities is critical because unless an enterprise succeeds in delivering customer value profitably (with a sufficient return on invested capital), it can't survive for long. Attention to a company's profit formula.

Comparing the Value Chains of Rival Companies

Value chain analysis facilitates a comparison of how rivals, activity by activity, deliver value to customers. Even rivals in the same industry may differ significantly in terms of the activities they perform. For instance, the "operations" component of the value chain for a manufacturer that makes all of its own parts and components and assembles them into a finished product differs from the "operations" of a rival producer that buys the needed parts and components from outside suppliers and performs only assembly operations. How each activity is performed may affect a company's relative cost position as well as its capacity for differentiation. Thus, even a simple comparison of how the activities of rivals' value chains differ can reveal competitive differences.

A Company's Primary and Secondary Activities Identify the Major Components of Its Internal Cost Structure

The combined costs of all the various primary and support activities constituting a company's value chain define its internal cost structure. Further, the cost of each activity contributes to whether the company's overall cost position relative to rivals is favorable or unfavorable. Key purposes of value chain analysis and benchmarking are to develop the data for comparing a company's costs activity by activity against the costs of key rivals and to learn which internal activities are a source of cost advantage or disadvantage.

Evaluating a company's cost competitiveness involves using what accountants call activity-based costing to determine the costs of performing each value chain activity. 13 The degree to which a company's total costs should be broken down into costs for specific activities depends on how valuable it is to know the costs of specific activities versus broadly defined activities. At the very least, cost estimates are needed for each broad category of primary and support activities, but cost estimates for more specific activities within each broad category may be needed if a company discovers that it has a cost disadvantage vis--vis rivals and wants to pin down the exact source or activity causing the cost disadvantage. However, a company's own internal costs may be insufficient to assess whether its product offering and customer value proposition are competitive with those of rivals. Cost and price differences among competing companies can have their origins in activities suppliers perform or through distribution allies involved in getting the product to the final customer or end user, in which case the company's entire value chain system becomes relevant.

The Value Chain System

A company's value chain is embedded in a larger system of activities that includes the suppliers' value chains and the value chains of whatever wholesale distributors and retailers it uses in getting its product or service to end users. This value chain system has implications that extend far beyond the company's costs. It can affect attributes like product quality that enhance differentiation and have importance for the company's customer value proposition, as well as its profitability. 14 Suppliers' value chains are relevant because suppliers perform activities and incur costs in creating and delivering the purchased inputs utilized in a company's own value-creating activities. The costs, performance features, and quality of these inputs influence a company's own costs and product differentiation capabilities. Anything a company can do to help its suppliers drive down the costs of their value chain activities or improve the quality and performance of the items being supplied can enhance its own competitivenessa powerful reason for working collaboratively with suppliers in managing supply chain activities.

Similarly, the value chains of a company's distribution-channel partners are relevant because (1) the costs and margins of a company's distributors and retail dealers are part of the price the ultimate consumer pays and (2) the activities that distribution allies perform affect sales volumes and customer satisfaction. For these reasons, companies normally work closely with their distribution allies (who are their direct customers) to perform value chain activities in mutually beneficial ways. For instance, motor vehicle manufacturers have a competitive interest in working closely with their automobile dealers to promote higher sales volumes and better customer satisfaction with dealers' repair and maintenance services. Producers of kitchen cabinets are heavily dependent on the sales and promotional activities of their distributors and building supply retailers and on whether distributors and retailers operate cost-effectively enough to be able to sell at prices that lead to attractive sales volumes.

As a consequence, accurately assessing a company's competitiveness entails scrutinizing the nature and costs of value chain activities throughout the entire value chain system for delivering its products or services to end-use customers. A typical value chain system that incorporates the value chains of suppliers and forward-channel allies (if any) is shown in Figure 4.4 . As was the case with company value chains, the specific activities constituting value chain systems vary significantly from industry to industry. The primary value chain system activities in the pulp and paper industry (timber farming, logging, pulp mills, and papermaking) differ from the primary value chain system activities in the home appliance industry (parts and components manufacture, assembly, wholesale distribution, retail sales) and yet again from the computer software industry (programming, disk loading, marketing, distribution).

PAGE NO:139

TABLE 5.1 Distinguishing Features of the Five Generic Competitive Strategies

Low-Cost Provider Broad Differentiation

Focused Low-Cost

Provider Focused Differentiation Best-Cost Provider

Strategic

target

A broad cross-section of A broad cross-section of the market.

A broad cross-section of the market.

A narrow market niche where buyer needs and preferences are distinctively different.

A narrow market niche where buyer needs and preferences are distinctively different.

Value-conscious buyers.

A middle-market range.

Basis of

competitive

strategy

Lower overall costs than competitors.

Ability to offer buyers something attractively different from competitors' offerings.

Lower overall cost than rivals in serving niche members.

Attributes that appeal specifi cally to niche members.

Ability to offer better

goods at attractive

prices.

Product line

A good basic product with few frills (acceptable quality and limited selection).

Many product variations, wide selection; emphasis on differentiating features.

Features and attributes tailored to the tastes and requirements of niche members.

Features and attributes tailored to the tastes and requirements of niche members.

Items with appealing attributes and assorted features; better quality, not best.

Production

emphasis

A continuous search for cost reduction without sacrifi cing acceptable quality and essential features.

Build in whatever differentiating features buyers are willing to pay for; strive for product superiority.

A continuous search for cost reduction for products that meet basic needs of niche members.

Small-scale production

or custommade products that match the tastes and requirements of niche members.

Build in appealing features and better quality at lower cost than rivals.

Marketing

emphasis

Low prices, good value.

Try to make a virtue out of product features that lead to low cost.

Tout differentiating

features.

Charge a premium priceto cover the extra costs ofdifferentiating features.

Communicate attractivefeatures of a budget-priced product offering that fi ts niche buyers' expectations.

Communicate how product offering does the best job of meeting niche buyers'expectations.

Emphasize delivery of best value for the money.

Keys to

maintaining

the strategy

Economical prices, good value.

Strive to manage costs down, year after year, in every area of the business.

Stress constant innovation to stay ahead of imitative competitors.

Concentrate on a few key differentiating features.

Stay committed to serving the niche at the lowest overall cost; don't blur the fi rm's image by entering other market segments or adding other products to widen market appeal.

Stay committed toserving the niche better than rivals; don't blur the fi rm's image by entering other market segments or adding other products to widen market appeal.

Unique expertise in simultaneously managing costs down while incorporating upscale features and attributes.

Resources

and

capabilities

required

Capabilities for driving costs out of the value chain system.

Examples: large-scale automated plants, an efficiency-oriented culture, bargaining power.

Capabilities concerning quality, design, intangibles, and innovation.

Examples: marketing capabilities, R&D teams, technology.

Capabilities to lower costs on niche goods.

Examples: lower input costs for the specific product desired by the niche, batch production capabilities.

Capabilities to meet the highly specifi c needs of niche members.

Examples: custom production, close customer relations.

Capabilities to simultaneously deliver lower cost and higher- quality/ differentiated features.

Examples: TQM practices, mass customization.

Case study J Crew

In early 2014, Mickey Drexler, CEO of J.Crew Group, Inc., had some important decisions to make. In 2012, after J.Crew customers complained that the company's latest product offerings consisted of far too many funky patterns with a younger-looking styleas opposed to consisting of a wide and fashionable selection of preppy button downs and classic khakis Drexler decided that J.Crew's 2013 fall line should, once again, feature conservative, but fashionably appealing, button-down shirts, classic blouses, sweaters, skirts, and trousers. However, fall sales were lackluster, producing an alarming 42 percent drop in profits from the fourth quarter of 2012. Drexler was perplexed, feeling that he and the company's designers had tried their best to listen to customers' feedback and respond to their complaints and dislikes. As he prepared for a meeting with Jenna Lyons, creative director, he wanted to consider a range of economic, cultural, and financial factors in deciding on the company's approach to its fall 2014 lineup of offerings. It was important for the company to arrive at the best strategy to rejuvenate sales and rekindle consumer interest in shopping at J.Crew. If it did not, J.Crew risked losing the sales boost that came from news reports that such high-profile personalities as First Lady Michelle Obama and Britain's Prince William and Kate Middleton shopped at J.Crew. Most important, of course, was developing a strategy to reverse the company's recent decline and achieve the following objectives:

Attract consumers to J.Crew's stores in much greater numbers.

Boost the company's revenue, profitability, and overall brand strength.

Position the company for profitable long-term growth.

COMPANY HISTORY AND BACKGROUND

J.Crew was founded in 1947 under the name Popular Sales Club. It was a startup company that specialized in door-to-door sales of women's clothing. Over the years, the firm grew, and in the 1980s, its executives saw a new opportunity. Catalog sales for companies such as L.L.Bean and Lands' End were booming, and the executives wanted their company to share in the boom. In 1983, Popular Sales Club mailed out its first catalog, filled with models wearing the latest fashions. As sales began to grow, the company changed its name to J.Crew in hopes of catching the preppy, affluent consumer's attention. Over the following years, J.Crew developed a loyal following by having a distinct image that the younger generations found appealing. By 1992, J.Crew had reached $70 million in sales. In 1989, J.Crew opened its first retail store at South Street Seaport in Manhattan. However, during the early 90s annual sales from the catalog business started to stagnate, and J.Crew realized it was time to make a change in its strategy.

A new CEO was named in 2003, Mickey Drexler, and he was ready to watch J.Crew expand into the fashion-forward company he dreamed it could be. Drexler is better known as the man who grew The Gap from a $400 million company to a $14 billion competitor. After he became CEO of J.Crew, the company rolled out an expansion plan. The store opened entirely new lines, such as Crewcuts, for children, and Weddings, for the entire bridal party. Crewcuts had almost 100 shopping locations throughout the United States in 2014, while the Weddings line had nine retail stores. In 2008, Drexler hired Jenna Lyons to be the new creative director. Lyons, known for her fashion forward thinking, quickly decided that J.Crew needed to revamp its classic image. At the company website, instead of finding pages and pages of classic button downs and nautical sweaters, now the consumer found edgy vests, bold patterns, and even stiletto heels.

Not all of J.Crew's loyal followers were impressed with the new change, with many disappointed that the company had abandoned its loyal customers who had been attracted to its traditional styles. Drexler responded by admitting that the styling might have gone too far and that changes should be made in the upcoming collection. The company's strategic changes had produced hoped-for revenue gains, but its net income and liquidity had steadily declined since 2009. On March7, 2011, J.Crew Group, Inc., was acquired by TPG Capital, LP, and Leonard Green & Partners for approximately $3.1 billion, including the incurrence of $1.6 billion of debt. A summary of the company's financial and operating performance for fiscal 2009 through fiscal 2013 is presented in Exhibit 1 . The company's complete consolidated balance sheets for fiscal 2012 and fiscal 2013 are presented in Exhibit 2 .

OVERVIEW OF THE U.S. APPAREL INDUSTRY

The U.S. women's apparel industry was a $42 billionindustry made up of over 29,000 different businesses, with a projected growth rate of 3.6 percentfrom 2013 to 2018. This would result in its becoming a $50 billion industry annually. Because of the recession, the industry took a large hit in 2008 and its profitability fell by 3.1 percent. The recession, coupled with the rising price of cotton, caused less demand for discretionary products, such as women's clothing. However, it was expected that as the economy picked up, women would begin to purchase all the clothing they postponed purchasing during the recession.

The projected compound growth of cotton prices between 2009 and 2014 was 7.3 percent due to an increased demand for cotton. China had been slowly building a stockpile of cotton, and this was causing a global shortage of cotton, which in turn was causing a spike in the price. The global price of cotton drastically jumped from 62.75 cents per pound to 103.55 cents per pound in the year 2010.

The increase in the price of cotton caused the retailers' overhead costs to increase as well. Because of the increased price of cotton, it became essential for the retailers to manage their purchases and overhead costs. The U.S. apparel industry was highly driven by imports. It was projected that by 2018, 78.6 percent of the products in the market would be imported from countries such as China and Vietnam. Despite the negative downturn, the industry continued to grow, and the number of stores was expected to continue to increase at a rate of 2.3 percent annually to roughly 61,200 by 2018. As consumer spending continued to increase, it would entice more companies to enter the industry. Although the industry was in the mature stage, the forecast growth potential and the increasing consumer attitude would keep the industry fully functional. Demand inside this industry was highly dependent on women aged 20 to 64 but, more specifically, on those aged 20 to 39 due to their larger amount of disposable income. The number of women in this age demographic was predicted to increase slowly through 2018. Almost one-third of the revenues inside the industry came from purchases of tops and blouses. Pants, denims, and shorts made up 24 percent of the total sales, followed closely by dresses and outerwear, with 18 and 17 percent, respectively. The remaining 9 percent was from sportswear and other garments, including custom-made items. Demand in the apparel industry was also driven by factors such as brand name, disposable income, and fashion trends. Companies had to be on the forefront of the new fashion trends and had to anticipate what consumers' demands would be for the next fashion season.

J.Crew's Strategy in 2014

J.Crew delivered its products to customers through two main channels: retail stores and direct, which included websites and catalogs. J.Crew's U.S. retail stores accounted for over 60 percent of the company's overall revenue. The percentage of sales accounted for by women's clothing had declined from 58 percent in 2011 to 55 percent in 2013. Accessories approximated 13 percent each year between 2011 and 2013. Children's clothing accounted for 6 percent of sales for all three years. Sales of men's clothing had increased from 23 percent of sales in 2011 to 25 percent in 2013. In 2013, the company sourced its merchandise from buying agents, as well as by purchasing directly from trading companies and manufacturers. The buying agents received commissions for placing orders with vendors, ensuring on-time deliveries, inspecting finished merchandise, and obtaining samples of the products during production. The top-10 vendors supplied 46 percent of J.Crew's merchandise.

The company focused on projecting a consistent brand image by placing creative messages throughout its stores, websites, and catalogs that were designed to capture the attention of its shoppers. J.Crew perfected its consistency by keeping control over the pricing, production, and design of all its products.

Senior management was highly involved in all phases of production, from early design to the display of the final products throughout the stores. To promote its brand, J.Crew relied heavily on its catalog for advertising. In fiscal 2013, total catalog costs were around $45 million, while the company's other advertising expenditures were about $39 million for the year. As of early 2014, J.Crew operated 265 J.Crew retail stores, 121 J.Crew Factory stores, and 65 Madewell stores, as well as its e-commerce websites.

In 2014, J.Crew opened a third store in London and its first two stores in Hong Kong. Introduced in 2006, Madewell offered products exclusively for women, including perfect-fitting, heritage-inspired jeans, vintage-influenced tees, cardigans and blazers, boots, and jewelry and other accessories. Madewell products were sold through Madewell retail stores and the Madewell website. Exhibit 3 presents J.Crew Group's revenues by retail brand for fiscal 2011 through fiscal 2013. The company's revenue by distribution channel for 2011 through 2013 is presented in Exhibit 4 .

EXPANSION

J.Crew worked hard to stay at the forefront of fashion and deliver exactly what consumers desired. In 1989, J.Crew opened its first retail store in downtown Manhattan. It was there that J.Crew developed its classic style and gained a loyal following. The store focused on upper-middle-class customers and aimed to provide them with leisurewear at a price point between Ralph Lauren and The Limited.

Originally, the store offered products such as blouses, pants, and jackets. Over the years, J.Crew increased its product offerings exponentially, and the store offered products such as swimwear, lounge wear, sweaters, tees, suits, and accessories. A typical shirt cost between $65 and $350 and pants cost $75 to $750 depending on fabrics and collections. J.Crew extended not only its product depth but also its product breadth. The company engaged in major expansion and added lines for children, men, and even the wedding party.

In 1988, J.Crew Factory was launched. While many people assumed this store was a typical outlet store that just offered last season's leftovers, it was actually a different line created with slightly different fabrics or designs that enabled a lower price point. All products were created on the basis of other popular designs. J.Crew Factory offered products such as tops, jackets, pants, swimwear, and dresses. A typical shirt cost between $25 and $100, depending on the fabric used. The Factory stores were often located in strip malls and focused on selling styles that had already been proved successful.

In 2006, Madewell, a subsidiary of J.Crew, was opened to exclusively target the younger female generation by offering more trendy clothing at a lower price point. Madewell offered products such as denims, dresses, shoes, and tops. The cost of shirts ranged from $25 to $150, while jeans cost, on average, $130 a pair. Crewcuts offered products for boys and girls between the ages of 2 and 12, thus serving parents who wanted to dress their kids in trendy clothes. Crewcuts featured products such as shirts, skirts, dresses, sweaters, pants, and swimwear. Shirt prices ranged from about $25 to $50, and pants cost around $50 to $80. J.Crew Wedding provided styles for the entire wedding party. The bride could pick out her dream gown while also selecting a new suit for her groom.

The store also offered over 50 different styles and colors for bridesmaid's dresses. In the suiting department, groomsmen could choose from a wide selection of suits and tuxedos, as well as ties, shoes, and belts. The Weddings line also offered choices for ring bearers and flower girls.

In the early 2000s, J.Crew began to think about global expansion, and it opened its first store in Canada in 2011. In 2013, it was reported that London's Regent Street would be J.Crew's first European location and that locations would soon be announced for cities such as Tokyo and Hong Kong. The company was already shipping to over 100 countries world wide as a result of sales on its e-commerce website. As the company expanded, there were important factors to consider. Drexler had mentioned that with expansion comes unfamiliar territory. One major factor that had to be considered was sizing. J.Crew was known for its consistent sizing; however, in some areas of the world, people had smaller body frames than Americans. Also, less tangible factors needed to be considered, such as culture. Did all cultures dress as conservatively as the American loyal followers of J.Crew?

J.CREW'S RIVALS IN THE SPECIALTY RETAILING INDUSTRY

The women's apparel industry was a competitive market with many factors that could determine success. Companies had to compete with other women's clothing stores on factors such as marketing, product availability, designs, price, quality, service, shipping prices, and brand image. The retail industry also had to compete with one-stop shops such as Walmart and Costco. These stores often offered lower prices, and they were very successful during the recession. The continued growth of e-commerce companies was another factor that retail stores had to consider, because e-commerce competitors often offered lower prices, free shipping, and promotional offers.

The Mid-Atlantic region had the highest-level concentration of revenues, at 25 percent. The concentration was highly dependent on population as well as per capita income. The higher the income and the larger the population in an area, the more concentrated the retail stores were in that area. In a close second place was the Southeast region, which accounted for 23.2 percent of all revenues in the industry. While the national income level was $62,900, the average income in the Mid-Atlantic region was higher, at $72,800. The average income in the Southeast was considerably lower, at $55,000 annually. These statistics showed that the Southeast population had less disposable income to spend on women's clothing.

Firms had to work hard to establish their brand name. While the barriers to entry in this market were low, there was a high level of competition among successful brands. Concentration inside the industry was low, and the top-four major players held about 20 percent of the revenues in 2013. The four largest players were Ascena Retail Group Inc., Ann Inc., Forever 21, and Hennes & Mauritz (H&M) AB. The major players had several retail stores scattered throughout the country, while the independent retailers had fewer stores, typically operated on a local scale. The apparel industry was highly fragmented, with no one chain holding above 8 percent total market share. This was because of the high number of independent retailers and the vast availability of clothing and accessories. Between 2008 and 2013, concentration increased, and it was predicted to continue increasing over the coming years.

Ascena Retail Group, Inc.

Ascena was one of the largest specialty retailers in the United States in the women's apparel industry, with 7.1 percent of the total market share. Ascena operated approximately 3,900 stores throughout the United States, Puerto Rico, and Canada. Some of its more popular stores were Justice, Dress Barn, Lane Bryant, and Catherines. In 2012, Ascena purchased the Charming Shoppes, which helped diversify its portfolio. The company focused on offering women comfortable, trendy clothes at a moderate price. Its diversified portfolio allowed the company to target girls and women from age 7 to age 50 in both regular and plus-sized attire. Lane Bryant offered items such as casual clothing and lingerie in women's sizes 12 to 32. The Justice line was focused on young girls aged 7 to 14 and offered trendy skirts and tops.

Ascena's moderately priced clothing allowed the company to be very successful during the recession and enabled it to gain a loyal following. The appeal of Ascena's brands, product lines, and pricing allowed the company's annual revenues to increase from approximately $1.7 billion in 2009 to more than $3.3 billion in 2013see Exhibit 5 .

Ann Inc.

Ann Inc. had the second-largest market share inside the U.S. women's apparel industry, with 5.6 percent of the market. In 2013, it operated approximately 1,000 stores in the United States, Puerto Rico, and Canada. Ann's approach was to target women aged 25 to 55 who were willing to spend a little more income in order to wear more fashionable clothes. A financial summary for Ann Inc. for 2009 through 2013 is provided in Exhibit 6 . The company focused on offering a wide selection of merchandise, such as tops, dresses, loungewear, pants, suits, skirts, accessories, and shoes. Ann Inc. operated Ann Taylor, Ann Taylor Loft, and Ann Taylor Factory. In 2000, the company launched its website to compete on the e-commerce platform. Ann Inc. was projected to grow by 3 percent annually through

2014, making it a $2.5-billion-a-year company. The company claimed its success was based on its new product lines as well as its new locations, with over 60 additional stores opened recently. Because Ann Inc. competed at the "upper moderate" price point, sales numbers were affected due to the recession and profits dropped $371.1 million in 2009.

THE STATE OF THE TURNAROUND IN MID-2014

As the recession of the late 2000s hit, the industry experienced a decrease in demand for women's apparel. Consequently, many retailers had to offer large discounts on clothing between 2008 and 2009. Because many consumers did not have large amounts of disposable income, a trend emerged: Rather than being concerned about the brand of their clothing as they had been in the past, consumers instead focused on the price and quality of merchandise. Some consumers changed their shopping preferences altogether and became more loyal to stores that offered trendy clothes at a lower price point.

While J.Crew's top management was at a crossroads of many different dilemmas, there was no clear path ahead. As the economy recovered, would consumers return to their previous habits of spending? Or would they be more conservative with their purchases in fear of another recession hitting? In addition, the increasing price sensitivity among consumers had put considerable pressure on J.Crew's margins, and its recent acquisition by investment groups had added more than $1.5 billion in debt. As Mickey Drexler and the company's chief managers prepared to meet to discuss the future of the company, they had many factors to consider. The most important questions were, What was the best strategy moving forward, and what changes would be necessary to provide attractive returns to the company's shareholders?