TEXTILE INSTITUTE OF PAKISTAN

STRATEGIC MANAGEMENT

AMM4+FDM4 ASSIGNMENT

MARKS: 10

Q1. Under what environmental conditions are price wars most likely to occur in an industry? What are
the implications of price wars for a company? How should a company try to deal with the threat of a
price war?

Ans: The environmental conditions in which price wars are most likely to occur in an industry are the
fragmented industry structure and consolidated industries (interdependent companies). The
implications for a price war are intense rivalry which occurs when one company makes a move and the
others react, this rivalry continues to increase as each company tries to undercut the others price and
offer more valuable products, finally resulting in decreased industry profits

Main reasons behind price wars:

 To penetrate market:

If a company wants to establish itself in a market, it may offer its products and services at lower
rates.

 Product differentiation:

Sometimes when there is no differentiation between products, a company may reduce rates of
its products to excel in competition.

 Bankruptcy:

Companies nearing bankruptcy may sell their products at a lower price to generate some
revenue to survive.

 Predatory pricing

A company with a heavy bank balance may deliberately sells its products at a lower price to
topple existing companies in the market.

 Competition:
 When one competitor reduces the price of products, the company might do the same to remain
in competition.

The most common way to try and deal with the threat of a price war by seeking to consolidate the
industry following the price of the dominant company, however, price-fixing and collusion needs to be
avoided (the idea cannot be communicated between companies).

Questions:

Q1. Table 3-7 provides a list of 15 conditions that cause high rivalry among competing firms in an
industry. In the women's handbag business, what, in your opinion, are the top 5 (among the 15)
conditions contributing to Coach's demise?

Ans: the top 5 conditions contributing to Coach’s demise in my opinion are:

> When the number of competing firms is high

>When rivals sell similar products/services

> When rivals have excess inventory

> When consumers can switch brands easily

> When competing firms have similar capabilities

Q2. Figure 3-4 reveals Porter's Five Forces Model. Rank order the five forces from 1 = most impact to 5
= least impact to reveal your opinion regarding which forces are contributing most to Coach's demise.

Ans: Forces Ranked

1.Rivalry among competing Firms #1

2. Threat of new substitutions #2

3. Buying power f consumers #3

4. Buying power of suppliers #4

5. Potential Threat of new entrants #5

Rivalry among competing firms:

High level of rivalry means aggressive competition between industry’s players and hostile pricing.
Therefore, the costs rise rapidly to all players. Factors that determine the high intensity to rivalry are the
number of companies in the industry, the slow rate of industry growth, the high fixed costs and the
equality of all players (Porter, 1980). Alternatively, if brand integrity is significant and customers
switching costs, the rivalry will not be intense, such as the affordable luxury apparel and accessories
industry. Currently there are many competitors for Coach Inc. and some competitors of their size
including MK, Kate Spade and Tory Bruch that outperformed Coach’s growth by 65%, 48% and 55%
respectively in 2013 (Tervis, 2013). From the market point of view Coach is in negative position as it is
running out of ideas. The past year Coach built a strong consumer by focusing on female division, but
now hopes to increase sales by focusing on men. It seems that the accessible model that endorsed
Coach to expand its sales by 92% in six years from 2006 to 2012, is starting to be the most warning signal
for the future. After the financial crisis and with the rise of middle class, the affordable brands came
stronger enough to provide head-to-head competition with higher-end luxury brands. Affordable brands
focus on price rather than exclusivity (Lisa Wang, 2013). For Coach the competition is increasing as an
overriding problem, analysts said. Now, Coach is on a transformational stage of its history in order to
evolve into a global brand from just an accessories brand, but this will take a long time to be completed.

Threat of new substitutions:

The threat of substitutes is the availability of one alternative product instead of the sector’s product. If
there are close substitutes, the industry becomes more competitive with decreasing ability to be
profitable. The main factors that affect the threat of substitutes: the switching cost of consumers and
the quality and price of substitutes (Porter, 1980). In luxury apparel and accessories the switching cost
for buyers is low, meaning that there are no barriers for consumers to acquire a substitute. However,
the target of Coach is upper middle-class income segment. As customers in this income group prefer
luxury brands, they will not like to buy lower quality products without brand. It can be argued that there
are practically no substitutes for luxury products due to the uniqueness and the integrity of each brand.
Hence, the only weak form of substitution for luxury products is the no-branded goods.

Additionally, a great challenge for luxury industry is the counterfeit products from emerging countries
like China and Vietnam. Some counterfeit from developing countries are doubtfully almost identical to
the genuine products and frequently many experts made the mistake to understand the difference
among a fake and an official product. Consumers, who cannot afford the price of genuine, acquire
counterfeit products with similarity in quality but higher difference in price. As the quality of counterfeit
products improving in emerging markets the last decade, it is a grave threat for Coach that might
weaken the company’s value.

Buying power of consumers:

The power of buyer refers to the consumer’s pressure to business in order to provide high quality
products with excellent customer service and low prices. The power of buyers grows then there are few
buyers and many sellers and when the switching costs are low (Porter, 1980). Affordable luxury tends to
have inelastic demand, as the prices are quite high even during an economic crisis. Even though having
an economic slowdown in European zone the last 6 years, accessible luxury apparel and accessories has
continued to prosper.

A price reduction in luxury goods lead to a false view of low quality and an analogous decline in demand.
Of course, this is in contrast to the elastic-normal goods (Bagwell and Bergheim, 1996). Therefore,
Coach’s customers have the power to switch to whatever brand they wish due to the inexistence of
switching costs, as they count the 89% of its total sales. Since the wholesalers counts only 10% of sales,
their power is quite limited.

If Coach set a significant price difference, consumers will identify it easily. For example, high-class luxury
brands like Louis Vuitton have neither promotions nor discounts on their products. Alternatively, Coach
and MK have occasionally reductions on price through discounts. Considering the victory of Coach
motivated other companies to apply related tactics such as MK and Kate Spade overshadows the
growth of Coach with 614% in 2012. The bargain power is moderate as Coach is losing its exclusivity
compare to the upcoming brands.

Buying power of suppliers:

Any company creates relationships with suppliers, as they need raw materials for the production. In
other words, is the market of inputs. Suppliers are strong when there is the risk of forward integration,
which affect the buyer’s capability to reach profitability (Porter, 1980). The suppliers in apparel and
accessories industry are factories or vendors that either produce the/part of goods or converts the
goods on behalf of each apparel company. Also, suppliers in personal accessories are responsible for the
distribution of products

Mostly in Asia Pacific, this industry is characterized by high consistency of suppliers that operating
autonomously on small scale. This structure eliminates the power of suppliers due to the inability to
achieve economies of scale, which might challenge new entrants Many luxury brands in the past
acquired their suppliers in order to have the power of control over suppliers and to void future rise in
supply costs. Concerning that the supplier for luxury market are few and the level of craftsmanship is
really high for this industry, the switching costs are high and very risky regarding the quality of new
supplier.
In the case of Coach, there is no manufacturing process as they outsource their products in Asia Pacific,
in Italy and in US. Coach has one large vendor in China, which counts the 12% of company’s total units
in 2013.

This supplier holds some power, as the switching costs are high for Coach. For the rest of Coach’s
vendors, the bargaining power is limited. Quality is major power tool for suppliers in luxury products.
An additional reason for the Coach sourcing of raw materials from various markets is the increased
costs of raw materials and labor in order to reduce the risk of inflationary pressure

Entry of new Entrants:

According to Porter (1980) new or emerging companies often have access to new resource and can
reduce the price of products very low and to drive down the industry’s profitability. Hence, existing
firms in the industry try to increase the barriers for new players by achieving economies of scales,
providing limited access to distribution channels, and increasing the switching costs (Porter, 2008).

In case of Coach, it has stores internationally with big market share in affordable luxury market, but
there are markets that Coach does not have any presence such as Latin America or Eastern Europe.
From one perspective, Coach is benefited from large economies of scales due to the number of stores in
North America, but this itself does not guarantee barrier against to a new entrant. Coach, also, has
relations with the largest retailers in American and Chinese market, offering a wide range of products to
consumers, while the growth of malls in large cities in the world with high real estate costs (Halepete et
al., 2008).
Additionally, according to Porter (1980) switching costs are the cost of buyer in changing from one
supplier to another. High switching costs create difficulties to new entrants. When a company switches
supplier, this change might require adjusting specification, information systems, training of employees
with new processes which results in high cost (Porter, 2008). The apparel- accessories industry,
however, does not need high investment, as it is labor intensive with specialized automated equipment
driving to low switching cost. Coach outsources its handbags from China, where the cost of production
is almost the half of competitors leading to the same conclusion.

Another point of concern is that the sale of affordable luxury is brand integrity. Strong brand name
creates consumer loyalty. Although Coach was the first mover to this market, the loss of integrity for
Coach caused a secured decline in sales in handbags in 2014 (EI, 2014). The challenge of securing brand
loyalty and integrity for accessible luxury brands is increasingly related due to the fact that super luxury
producers try to set their rules and prestige in the new market era. As such, barriers to entry in the
affordable luxury industry are moderate because it seems that the accessible model that endorsed
Coach to expand its sales by 92% in six years from 2006 to 2012, is starting to be the most warning
signal for the future. Moreover, it should be noted that brands like MK and Coach that are listed in stock
exchange markets have a tendency to gain easier financing than newly entered brands. In terms of
Internet retailing, the barriers are definitely lower and new players selling apparel and accessories can
grow rapidly.
Q3. In your opinion (ladies), what are the key differentiating features that you look for in handbags, and
what could Coach do to re-eam your business? Rank COH. KORS, and KATE in terms of price, style,
youthfulness, and quality. Develop a 3 x 4 matrix to reveal your positioning of these rival firms along
these dimensions.

Ans: Kors increased its market share among 18-24-year-old women. According to a Cowen Consumer
Tracking Survey, among women 18 to 34 years old, 30% preferred Michael Kors to Coach (COH) in
December 2013, up from 24% in November 2013 and 20% in December 2012. For women who buy two
to three handbags per year, the preference for Michael Kors hit a new high of 27% in December 2013 vs.
23% in November and 16% in December 2012.

Kors is a more mature brand than Kate Spade (KATE) and, like Coach, has learned, older, established
brands that don't always do better. In a report last month, Citi said Kors has four times the share of the
global handbag market vs. Kate.

MK is the market leader now with great sustainability of the brand for very long. If the company that
focus on affordable luxury strategies, two are the probable scenarios that may emerge in the future. In
the first scenario, there are candidates to take place in the accessible luxury and to fetter its growth like
Kate Spade. In the second scenario, the market will shrink significantly with many customers going back
to the absolute luxury like Louis Vuitton, Gucci and Kering. At this point, American consumers may not
see any more affordable luxury products as premium compare to aspirational ones. High-end luxury
companies kept their prices high before the economic recession to secure themselves. From one
perspective there is a huge damage in sales volume and they gave the space to affordable companies
like Coach and MK to enter and grow rapidly. But this movement secured the brand integrity of super
luxury companies

Kate’s best gain in several years, on a 54% jump in its namesake Kate Spade brand as the company sheds
its underperforming brands like Juicy Couture and Lucky Brand.  The flagship of Kate Spade success is
the omni-channel retailing by offering whenever and wherever the consumers want to buy via mobile
phones or department stores. The online retailing strategy counts the 20% of company sales given its
presence in stores (EI, 2014).

Next, Japan is one of the biggest markets for Kate Spade where the company opened first its store after
the launch of the new lifestyle brand “Saturday” in 2013. While the Japanese consumption tax rose at
8% in 2014 with a fall in handbags sales by 1% to 7,6 billion dollars and the Chinese emerging economic
slowdown, the sales of Kate Spade increased by almost 48% to 214 million dollars in 2014 in Japan and
Southeast Asia (Annual Report Kate Spade, 2014). Also, the company sees expansion in emerging
economies like Brazil, Russia and in Asia Pacific.

Kate is known for its handbags with bright colors and bold stripes. The brand also makes home
accessories, an area Coach and Kors don't have a large presence in.

The brutal winter and tough economic conditions for consumers hit retailers overall, but luxury brands
still seemed to do well during the holidays as shoppers splurged on the it bag of the season.

Michael Kors shares edged higher in the stock market today. Kate Spade and Coach fell less than 1%.
Q4. Does Coach like to see the value of the dollar increase or decrease versus the euro, and versus the
yen? Why?

Ans: