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I.       Industry Boundary Identify the industry you are analyzing

II.      External environment Analysis

A. Identify and briefly describe three segments of the general environment and each of their

      impact on the industry

1. Demographic: The youth specialty apparel industry focus on students from the ages of seven

      through twenty-two as their target demographics. These students have disposable income

      and/or affluent parents. The demographics impact the industry by determining how to market

      to the target audience.

2. Sociocultural: The industry is focused on the changing attitudes of the general environment.

      The sociocultural values impact the industry because clothing design has to be relatively fast

      to match the constantly changing social attitudes.

3. Economic: The youth market is resistant to recession because youth have multiple sources of

      income and do not have as many expenses as adults. The industry does not have to discount

      its products aggressively to attract new customers.

B. Evaluate the five forces of competition for the industry

1. Threat of entry of new competitors is (high, moderate, low) low, because specialty apparel

      industry relies on brand recognition to attract new customers. The barriers to entry include

      capital requirements, economies of scale, product differentiation.

2. Suppliers to the industry provide (identify the products/services provided by suppliers)

      clothing and clothing accessories. They are (strong, moderate, weak) weak, because industry

      members have a low switching cost of suppliers, the items being supplied is readily available.

3. Those who buy the product of the industry are (identify the specific buyers of the industry’s

      products/services) youth from ages seven to twenty-two with disposable income. They are

   (strong, moderate, weak) moderate, because buyers purchase items in small quantities, but

   buyer switching costs to competing brands are low.

4. The substitute products are (identify specific substitute products/services) no substitute exists

   because discount clothing does not convey the same “cool factor” that specialty apparel does.

   They are (strong, moderate, weak) weak, because good substitutes do not exist.

5. Competition in the industry is strong (strong, moderate, weak) because department stores like

   JCPenney are actively making fresh moves to improve their market standing, and buyer

   demand is growing slowly as the babyboom generation ages.

6. Based on 1 to 5 above, the current profitability potential of the industry is strong (strong,

   moderate, weak) because low threats of new entry, suppliers have weak bargaining power,

   and there is no substitute for specialty apparel.

C. Draw a strategic group map of the industry (can be hand drawn and labeled)

D. Prepare an anticipated response profile for the top two competitors (not including the subject

   firm) in the industry. Be sure to include the future objectives, current strategy, assumptions,

   strengths and weaknesses, and the anticipated responses of each of the two competitors (see

   Figure 2.3).

American Eagle Outfitters:

       Future Objectives: AEOS has a more narrow demographics from 15-25, but are trying

new store concepts like Martin + Osa which are aimed at men and women from 24-40.

       Current Strategy: AEOS currently targets the same age group as its competitors; however

AEOS only has 900 stores compared to its closest competitor with 944 stores. AEOS also sells

cheaper clothing compared to its closest competitor.

       Assumptions: Even though same stores sales fell by seven percent in 2007, consumers

will get more disposable income because of the improving economy and will spend it more on

clothing rather than essentials such as food and gasoline.

       Capabilities: Aerie is a sub-brand of AEOS that has been performing well, which is a

strength. However the other new store concepts for the 24-40 segment have underperformed.

       Strengths: Lower price than some competitors.

       Weakness: Not as many store locations as some competitors.

       Response: One of AEOS’ advantages is that they appeal to youth that are on a budget but

still want specialty apparel as well as youth that will pay full price for specialty apparel.


       Future Objectives: Gap is not looking to expand in as a result of over expanding in 2000

that lead to excessive debt. Gap will emphasize on debt reduction.

       Current Strategy: Gap is the largest competitor in the industry with 3,000 stores with a

high end brand, Banana Republic, a medium priced brand, Gap and a lower priced fashion brand,

Old Navy.

       Assumptions: Gap is operating under the same assumptions as its competitors that the

economy will become heather giving consumers more disposable income to spend on fashion


       Capabilities: The Gap’s strength is its wide array of brands, which appeal to a broad

market. Gap’s other strength is the large number of stores. A weakness is the debt assumed from

over expanding.

       Strength: 3,000 stores

       Weakness: Excessive debt.

       Response: Gap has economies of scale advantage over its competitors because of its

3,000 stores.

E. Based on your analyses in A-D above, is the industry attractive? What are its prospects for

   above-average profitability? Support your answer.

   The youth specialty apparel industry is attractive. The capital requirements are high in order

to compete on a national level with the top three companies, but startups can build regional

customer loyalty as a means to enter the industry. Customers have very low switching cost.

Therefore new brands have an opportunity to attract customers away from the existing firms. The

industry is also attractive because suppliers have weak bargaining power. Suppliers supply

readily available materials and there is a low supplier switching cost. Above-average profitability

requires innovative cost saving strategies as well as brand recognition and customer loyalty. A

new entrant will not be able to charge higher prices than established brands. Therefore new

entrants have to rely on innovative operation strategies to cut costs in order to earn above

average earnings.

III.    Internal organization analysis

               A. Perform a core competence analysis of the firm (see Table 3.5).

Resource or    Is the       Is the       Is the       Is the           Competitive     Performance

Capability     resource     resource     resource     resource or      consequences implications

               or           or           or           capability

               capability   capability   capability   non-

               valuable?    rare?        costly to    substitutable?


Location       yes          no           yes          no               Competitive     Average

                                                                       parity          returns

Human          yes          no           Yes/no       yes              Competitive     Average

Resource                                                               parity          returns


Reputation /   yes          yes          yes          yes              Sustainable     Above-

brand image                                                            competitive     average

                                                                       advantage       returns

The firm’s reputation and brand image gives it a sustainable competitive advantage.

                 B. Draw a value chain of the firm (see Figure 3.3) and describe the primary and

                     support activities of the firm (be as specific to the firm as possible).

     Supply Chain                                                            Sales &
                             Operations            Distribution                               Service
     Management                                                             Marketing

Purchase              Checks quality          Delivery A&F            Have young         Remove overly

clothing and          and packages            merchandise to          attractive         offensive t-shirts

clothing              merchandise in          stores in the           greeters outside

accessories           distribution            United States           retailers to

mainly from           center in New                                   promote A&F

Southeast Asia        Albany, Ohio                                    merchandise

and Central

South American

 Product R&D
   •Visiting Colleges to find out what students like and want on clothing

 Human Resources
   •Hire attractive young people that have the "all American" look to represent A&F

 General Administration
   •Deal with lawsuits regarding discrimination against minorities

C. Identify the company’s resource strengths and weaknesses and its external opportunities and

   threats (at least two of each):

1. What are the company’s strengths and resource capabilities?

       A&F’s strengths include their reputation and brand recognition. A&F has a reputation of

   being casual and stylish. They also have high brand recognition with their target market.

2. What are the company’s weaknesses and resource deficiencies?

       A&F has low market presence for the 22-35 demographics with only 14 Ruehl stores as

   of 2007. Another resource deficiency is A&F’s lack of diverse employees.

3. What are the company’s market opportunities?

       The improving economy will gives A&F opportunities to open more Ruehl stores to gain

   a greater market present in the 22-35 demographics. Another market opportunity is the

   growing number of teenagers, estimated to reach 35 million by 2010.

4. What are the company’s external threats?

       Department store chains such as JCPenney and Kohl’s carrying more fashionable

   clothing brands. Another external threat is increased competition from new entrants like


5. What does a SWOT analysis reveal about the current situation of the firm?

       A&F are in a strong position. If consumers gain more disposable income, they will spend

   more on specialty apparel. Since A&F has a good brand image, and a loyal customer base,

   they will continue to see growing profits. A&F should not ignore department stores because

   they can become major competitors.

D. Obtain the firm’s income statement and balance sheet data for 2002-2006 from its website.

Table 1: A&F experienced steady growth in there net income from 2002-2003 with a 5.2%

increase. There was a spike in operating expenses from 2003-2004, increasing 157.6%. The

sudden increase in operating expenses can be attributed to the increasing number of retailers

around the country. Net income increased 54.4% from 2004-2005 the dramatic increase is the

result of more retailers. Net Income continues to increase but at a lowered rate in 2005-2006

because the operating expenses did not increase as much as the previous years. The lowered

operating expense increase indicates a lower increase in spending on stores compared to previous


Table 2: All the items in the income statement from 2002-2003 remained relatively unchanged.

Operating expenses was 22.6% of net sales in 2003, but increased 26.6% to 49.2% of net sales in

2004. Increased marketing as well as increased spending on retail stores are responsible for the

high operating expense relative to net sales. Both 2005 and 2006 saw increases in net income

relative to net sales. Net income was 10.7% of net sales in 2004 and increased to 12% in 2005.

The increased profits can be attributed to lower operating expenses in 2005 and 2006.

Table 3: Good ratios. A&F has greater returns on assets than AOES and GAP, except in 2004

when A&F’s ROA dropped to 18%. GAP’s highest ROA was 11.5% in 2005 compared to

A&F’s 24.1% in 2005, showing that A&F nets a greater return on investments. Net profit

margins started to decline from 2002 to 2004, but have gone back up in 2005 and 2006. Margins

are higher in 2006 than 2002 indicating A&F is earning higher profit margins than it did in 2002.

Bad ratios. A&F’s current ratios are not as high as AEOS from 2002 through 2006, meaning

AEOS is more able to cover its current liabilities with only current assets. The inventory turnover

show a slower turnover period. A&F is holding inventory longer in 2006 than in 2002.

E. Based on your analysis in A-D above, does the firm have a competitive advantage relative to

   the other firms in its industry? If yes, on which core competence (ies) is (are) the advantage

   (s) based? If no, why not?

Yes, the firm has a competitive advantage over its competitors. Their reputation and brand image

is a core competence that meets all four criteria to give A&F a sustainable competitive

advantage. The reputation and brand image is valuable, rare, costly to imitate, and non-

substitutable. The firm’s dramatic increase in net income from 2004 to 2005 demonstrates its

competitive advantage over its top two competitors, AEOS and GAP. AEOS’ net income

increased 31% from 2004 to 2005, GAP’s net income decreased from 2004 to 2005, but A&F’s

net income increased 54%.

IV.      Strategy Analysis

A. Identify and briefly describe the firm’s corporate-level strategy (ies)

      A&F’s corporate-level strategy is related diversification. The firm has a new unknown

clothing brand coming out in the near future. The related diversification will give A&F increased

economies of scope reducing investor risk.

B. Identify and briefly describe the firm’s business-level strategy (ies)

      A&F’s business-level strategy is differentiation. A&F clothing has a perceived high quality.

Controversial t-shirts are another unique differentiator.

C. Identify and briefly describe the strategy for each functional area

      Marketing: A&F uses controversy as free marketing. They produce controversial

merchandise in order to get free media attention.

      Production: A&F has many different suppliers to keep supplier’s bargaining powers low.

A&F acquires merchandise from 246 factories primarily in Southeast Asian and Central/South

American to keep production costs low.

          Human Resource Management: A&F hires associates and greeters that have an “all

American” look. They want their employees to wear A&F and represent the A&F brand image.

The headquarters also provide healthy meals and a gym to help employees stay in shape.

V.           Strategic Issuea Analysis (you need to analyze two strategic issues)

A. Strategic Issue 1

1. State the strategic issue (make sure to use a question format).

How will A&F expand overseas?

CEO Jeffries plans to enter the European and Asian markets with the A&F brand. This is a

strategic issue because there are many ways A&F can enter these new markets. Spending a large

sum of money and acquiring additional debt to expand into new markets can be detrimental to

the bottom line if done unsuccessfully.

2. Generate and evaluate at least two possible strategic alternative actions (see chapters 4, 6, 7

          and 9 for alternative actions)

     i.      A&F can enter a joint venture with a European or Asian company in order to expand into

             new markets. Having a joint venture can speed up new market entry. Working with a

             local firm will also give A&F insights on the sociocultural values of the new market. The

             joint venture will also gain market power in the new market by not over saturating the

             industry. A disadvantage would be A&F will not have full control over the overseas


  ii.        A&F can acquire a European or Asian company in order to use their local resources to

             expand. Acquisition gives A&F retailer stores in the new market to turn into A&F

             retailers. Furthermore, A&F can take advantage of the local distribution channels. Some

        disadvantages of acquisition are that it has high capital requirements and firms may take

        steps like taking a poison pill to resist acquisition.

3. Make a recommendation by selecting the best alternative action(s) from those above.

     I recommend a joint venture with a European or Asian firm. A joint venture will not be as

capital intensive as acquiring an existing firm. A&F will share the costs of R&D with the

overseas firm to ensure the designs suit the target market’s taste.

4. Implementation Issues

     One implementation issue with a joint venture is conflicting management styles. American

managers may not agree with how European or Asian managers handle different situations.

Another issue will be hiring new employees in Europe and Asian that represents the A&F look.

B.   Strategic Issue 2

1. State the strategic issue (make sure to use a question format).

How will A&F deal with increased competition?

A&F’s top competitors are GAP and AEOS, however there are new competitors entering the

market. JCPenny and Kohl’s for example are now competitors as well. Another newcomer is

Metropark who targets the 20 to 35 age groups. A&F needs new strategies to deal with

increasing competition.

2. Generate and evaluate at least two possible strategic alternative actions (see chapters 4 and 6

        for alternative actions)

   i.      A&F can change its business level strategy from differentiation to integrated cost

           leadership/differentiation strategy. The integrated strategy will increase profit margins

           giving A&F above average returns. An integrated strategy can be difficult to achieve.

  ii.      A&F can differentiate different facades of itself. It currently differentiates based on its

           brand image of causal stylish apparel. For example, A&F can differentiate by having

           great customer service from an attractive sales staff. However, increased differentiation

           does not always transfer to increased profitability.

3. Make a recommendation by selecting the best alternative action(s) from those above. Be sure

        to discuss how your selected alternative(s) will resolve the issue.

I recommend the integrated strategy because it will increase profit margins if implemented

correctly. Reducing major cost drivers will give A&F a competitive advantage over the new


4. Implementation Issues

        The integrated strategy requires A&F to develop a new business strategy. Laying off

employees to become a cost leader could hurt A&F’s reputation.

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