Sizing Up The Active Wear Market Marketing Essay

Sizing Up The Active Wear Market Marketing Essay In the wake of falling sales and decreasing profit margins, Harrington Collection is evaluating the opportunity to expand into the high-growth active-wear market. The idea of expanding into lower priced fashion product lines was not new to the company (Tedlow Beckham 2008) which was renowned for its sophisticated high class roots. However, after three years of consecutive lacklustre sales and margins Sara Huey, Vice President of Strategic Planning and her team have to take a critical look at the active-wear product line option as a possible solution to reverse the companys negative performance trend. To come up with sound decision Harrington Collection executives would have to analyze the financial implications of the opportunity, assess trade and competitor reactions, consider the risks, and determine whether they have the capacity to successfully launch and manage the new product line. This basically means that they will have to assess consumer behaviour, product introduction and financial implications. Consumer behaviour Consumer buying behavior refers to the buying behavior of final consumers (individuals households) who buy goods and services for personal consumption. This is generally affected by consumer culture, social, personal and psychological characteristics. Consumer products are designed to be attractive to consumers, so that they feel encouraged to buy. This makes it mandatory for any organization to understand and manipulate product attributes so as to positively influence consumers to buy. However, buying behavior is also a function of the competing products in the marketplace and the brand marketing strategy applied by that given firm. In order to design the best product, it is necessary to understand not just the physical and chemical nature of the product, but also the psychology of consumers and the sociology of consumer groups. Harrington Collection is a company with decades of expertise (Tedlow Beckham 2008) that has an excellent relationship with its retail trade (Tedlow Beckham 2008) therefore their knowledge of consumer behaviour is high. Moreover we are told that the company also commissioned surveys and focus groups which revealed that their target customers showed considerable interest in buying active-wear clothing (Tedlow Beckham 2008). The push for introduction of a new product line is also supported by three factors that determine consumer behaviour i.e. loyalty, sociology and psychology. Loyalty is defined as that tendency for consumers to stick to the same products. Loyalty is also manifested through what is referred to as the memory effect, which represents that tendency of consumers in returning to products they had previously used, after trying something new they then did not like. The focus groups commissioned by Harrington Collection showed that a subset of Harrington customers who had been loyal throughout their careers were interested in something fresh and comfortable that would fit their active lifestyles (Tedlow Beckham 2008). On the other hand the sociology factor was heightened by the popularity of active-wear among Hollywood celebrities. Sociology in this context implies how one persons buying is influenced by that of others. We are told that this trend toward more contemporary athletic fashions resulted in rapid growth for firms that offered these lines. Harrington Collection estimated that over seven and a half million active-wear units were sold in 2007 with the projection that this would grow to 15 million by 2009 (Tedlow Beckham 2008). Moreover by 2009 it was expected that 40% of the 15 million buyers would prefer the better category which is what Harringtons Vigor division specialized in. Vigors market expertise could come in handy in deploying the active-wear better product line. Psychology covers what, and how, aspects of the actual items on the shelves influence people to make their choices, possibly buying something different from previously. Most firms would use advertising to influence consumer psychology. Harrington on the other hand we are told was known for its top in-house design staff, extensive national advertising campaigns and its exceptional quality and styling (Tedlow Beckham 2008). Plus, after analyzing the better sets of active -wear that were in the market Harrington knew that the standards they had could not allow them to produce such poor quality products. Therefore a launch of a product line in active-wear could provide Harrington with an opportunity to display their superior products to the low end consumer market and thus rapidly increase their market share and probably pull though a customer lock-in. Also we cannot ignore the fact that introduction of a new product onto the market by as renowned a fashion company as Harrington has the ability to change the way consumers, or at least some of them, view the other established active-wear brands. Harringtons quality and styling might draw attention to some quality which was not previously much regarded by consumers in this category, or it might make people give different weightings to the established products when making their decisions. If Harrington Collection decides to go ahead with the idea to add an active-wear product line to its existing business then they would have to model their target consumers behavior. They will need to look at the external stimuli that assist the consumer to make the decision to buy their product. An external stimulus that Harrington Collection has direct influence over is the marketing mix: product, place, price, promotion, people, process and physical evidence. Product is the active-wear itself and here decisions regarding the features of the product, quality level, product lines and branding will be addressed. Place caters for decisions on channel type, service levels, managing the channels, transporting and delivering, market exposure, intermediaries, locations and stores. Pricing in this case is vital considering that the target market is price sensitive and there are other large competitors such as Liz Clairbornes Juicy Couture. Decisions regarding the discounts to be allowed, allowances and whether pricing will change with product life cycle will also depend on the breakeven analysis that we shall be looking at later in this paper. Promotion decisions regard the communications mix, the type, qualifications and number of salespeople needed the required media, sales promotion, and publicity. People decisions regard the type of customers, the customer care personnel and their knowledge, qualifications and motivations for participating during the service encounter. The process factor looks at the length of the process, the activities that can be done during the process and technologies that will facilitate the process and finally, physical evidence is concerned with decisions on the types of tangible evidence available to customers. In spite of all the theories and models made with respect to consumers it is still acknowledged that the buyers decision process is a black box that even with knowledge of characteristics that affect consumer behaviour. Product Introduction The introduction process of a new product into any market is highly complex. It requires ability to coordinate work of numerous teams within an organization, as well as with the extended network of partners and suppliers. The new product in here would be the active-wear apparel (hoodies, tee-shirts and pants). One aspect of the complexity is derived from the use of several different new parts, each of which may need unique design, specifications, development, and other specialized conditions. This complexity is compounded further by the myriad of tools used during the new product introduction (NPI) process e.g. computer aided design (CAD) applications, project management tools and enterprise resource planning (ERP) systems. A typical new product development and introduction process would consist of three core phases: 1) product definition, 2) product development, prototyping, and testing, and 3) product build and ramp to production. Each of these phases requires effective project management to ensure that at the end we have optimized productivity and results. In modern best-in-class NPI processes, a collaborative approach is encouraged, that is, where manufacturing integrates into the design phase early, ramping up the manufacturing effort as the design progresses to production. Engineering continues to participate even in the production phase to ensure the design is correctly built (Arena 2007). This joint approach shortens new product introduction time to market and enhances product quality. However, it also necessitates greater levels of communication and coordination amongst the project teams. The first phase in the new active-wear apparel introduction would be product definition. At this stage the design and marketing teams come up with new ideas either from market research. The NPI team for Harrington Collection would then perform technical feasibility studies and business case analysis (which we shall look at later in this paper using the breakeven analysis). This is duly followed by the creation of initial market and product requirements. These initial planning documents outline the objectives and goals for the new product introduction (NPI). The real challenge at this stage is in the selection of the right ideas and managing them to commercial success. It is advisable for organizations to develop a disciplined portfolio management process that they shall be using to aid them in consistently choosing the better product ideas and NPI processes to bring better products to market, before their competitors do so. After product definition we proceed with the product development phase. How this phase is managed generally determines how quickly the innovative idea reaches the market. New product development is complex partly due to the huge number of participating groups required to collaborate e.g. the design team, sourcing, quality control and others. These teams carry out hundreds of activities, such as design, prototyping, sourcing, quoting, testing, manufacturing and planning. This situation could be worse for global outsourced players because of the geographical distance and the extension of the teams beyond the boundaries of a single company. To deal with such a complex team environment the organization would need to set up a centralized and shared project and data management infrastructure, so that cross functional and cross enterprise teams are able to access the latest design files, work instructions, change orders, task list, and project plans as and when they are revised. The idea that Harrington Collection should pursue this product development under its Vigor division is heavily supported by this point. Being a division that is already running we would expect most of the infrastructure required for data management and information sharing to be in place in contrast to having to set up everything a new in the case where a new division is formed to handle this new product line. Also, with the increasing environmental and regulatory compliance pressures from different countries where the active-wear would eventually be sold, an organization at this product development phase must seek cost-effective solutions to meet product and process compliance requirements such as Restriction of Hazardous Substances (RoHS), Global Best Practices for Clothing Manufacturers and ISO standards. Harringtons is advantaged here since it has not outsourced its manufacturing. In an outsourced environment, companies need to assess compliance risks of all outsourced activities, implement necessary controls, and create documentation to establish an audit trail. This adds to complexity and has high cost effects too. The final key phase for NPI is the production phase. To ensure that manufacturing is efficient and cost-effective all teams (operations, manufacturing, testing, component manufacturing and design engineering etc.) must work together to ensure that a given design is manufactured to correct specifications. The earlier teams begin to collaborate the better equipped they will be for a rapid production ramp. According to Arena to facilitate efficient and accurate communication of product bills of materials (BOM), companies must ensure that the product record is available to all involved in the production and change implementation, including internal groups, contract manufacturers, and suppliers. Providing contract manufacturers and suppliers with selected visibility to centralized product record allows them direct access to the most recent changes. It removes the data communication bottlenecks that result from relying upon individuals and reduces the potential costly revision errors (Arena, 2007, p5). It is our opinion that having the product line run under Vigor division would be more efficient and effective than establishing a new division to do it because it has a seasoned team, supportive infrastructure in place and Harrington Collection could more easily develop a cross-functional product development process which is important to ensure the success of the new product introduction (NPI). From the shared project and data management infrastructure within Vigor division teams involved in the NPI would be able to access the latest project plans and tasks that are related to parts, sub-assemblies, and assemblies. It is also easier to ensure that project revisions are accessible to everyone involved. Demand and Profitability Analysis Template Table 1: Start up costs table Start Up Costs: Amount ($) Start-up Costs Pants Plant 1,200,000.00 Start-up Costs Hoodie and Tee-shirt Plant 2,500,000.00 Equipment Pants Plant 2,000,000.00 Equipment Hoodie and Tee-shirt Plant 2,500,000.00 Launch PR, Advertising 2,000,000.00 Fixtures for Company Stores* 2,500,000.00 Total Start-up Costs 12,700,000.00 Annual Depreciated Start-up Costs** 2,540,000.00 *For Fixtures for Company Stores we assumed that only the exclusive Vigor stores would be stocked with active-wear apparel. The company owned stores are 120 in total but exclusive Vigor stores are 50 (Tedlow Beckham 2008). Fixtures for each Company Store would cost $50,000.00 (Tedlow Beckham 2008). The figure obtained above was therefore obtained by multiplying $50,000 by 50 stores. **We are told that all launch fixture, plant start-up, and equipment costs would be depreciated over a five year period (Tedlow Beckham 2008). We used the straight-line depreciation method: Table 2: total fixed operating costs Annual Ongoing Operating Costs Fixed Overhead Pants Plant 3,000,000.00 Overhead Hoodie and Tee-shirt Plant 3,500,000.00 Rent Pants Plant 500,000.00 Rent Hoodie and Tee-shirt Plant 500,000.00 Management / Support 1,000,000.00 Advertising 3,000,000.00 Total Fixed Operating Costs 11,500,000.00 Table 3: total direct variable costs Direct Variable Costs Hoodie ($) Tee-shirt ($) Pants ($) Sew and Press 3.25 2.00 2.85 Cut 1.15 0.40 0.70 Other Variable Labor 3.20 2.40 3.05 Fabric 9.10 2.20 7.50 Findings 3.85 0.50 2.30 Total Direct Variable Costs 20.55 7.50 16.40 Table 4: total unit direct variable cost Direct variable costs translated into unit cost Hoodie ($) Tee-shirt ($) Pants ($) 20.55 7.50 16.40 multiply by 0.50 1.50 1.00 10.28 11.25 16.40 37.93 Table 5: Vigor unit Retail Price Suggested Retail Unit price Hoodie ($) Tee-shirt ($) Pants ($) 100.00 40.00 80.00 220.00 Wholesale unit price = 50% of Retail unit price = $110 Table 6: total variable costs as % of Wholesale Price Total variable costs as % of wholesale price working capital requirements 3.00 sales commissions 4.00 inventory costs 1.00 bad debt 0.70 transportation 0.24 miscellaneous 0.15 9.09 Table 7: total variable costs per unit Indirect variable costs Wholesale unit price 110.00 Total variable costs as % of wholesale price 9.09 Indirect variable costs per unit 10.00 Direct variable costs per unit 37.93 Indirect variable costs per unit 10.00 Total variable costs per unit 47.92 Table 8: contribution per unit Contribution Wholesale price per unit 110.00 less total variable costs per unit 47.92 Contribution per unit 62.08 Table 9: Breakeven units Breakeven Fixed annual costs (operating and depreciated start-up) 14,040,000.00 Ã · Contribution per unit 62.08 Breakeven Units 226,174.37 Table 10: Vigor active-wear approximate revenue Vigor active-wear approximate revenue Total units sold in 2007 7,500,000.00 Vigor Market share % 7.00 Vigor total unit sales for 2007 525,000.00 Vigor retail unit price 220.00 Approximate Vigor revenue for 2007 115,500,000.00 Table 11: Profit Margin Profit Margin Revenue 115,500,000.00 less fixed annual costs 14,040,000.00 less total variable costs (Vigor total unit sales for 2007 x total variable costs per unit) 25,160,100.00 Profit before tax 76,299,900.00 Profit margin before tax % 66.06 Making the Decision Based on the breakeven analysis we see it would be prudent for Sara Huey to approach the board and advise them to embark on the new active-wear product line because within a year Harrington Collection would have been able to not only breakeven but make a pre-tax profit of $76.3 million. Secondly we believe that the new product line of active-wear should be folded within the Vigor division so that it can benefit from the already existing infrastructure and sales channels. Moreover, like Myers suggested, the active-wear line would be a perfect addition to the Vigor division because it also focused on better wear plus fewer than 2% of respondents in their customer research survey felt that a less-expensive active-wear line would cheapen the brand (Tedlow Beckham 2008). This is a big thumb up from the most important public for the Harrington Collection, i.e. the consumer. We have also seen from the consumer behavior analysis that Harington Collection has got a lot more to gain from intr oducing the active-wear line for example we are told that the aging baby boomer population wanted clothes that would not make them feel old. In addition to that, another survey showed that 10% of customers purchasing apparel in the $100 $200 price range would buy an active-wear set if they could get one with superior styling, fabric and fit, which is what Harrington Collection was intending to manufacture and sell.