When it comes to the switching costs of changing to a substitute there are not any. Consumers have no obligation to purchasing jewelry over other luxury goods therefore there are no costs to the consumers. If someone is going to spend a large sum of money on an item that is not a necessity they are going to spend it on what they please and most of the time if they can afford it they will spend it on multiple items. Luxury goods are a privilege and do not require any costs from switching from one substitute to another.
One of the factors that go into whether to spend the money on jewelry or on a substitute is the price and performance of the substitute compared to the jewelry the consumer is considering purchasing. Consumers may feel they would rather purchase a luxury vehicle for their spouse rather than buying a diamond necklace for them. Suppose the price of these two items is the same, then the consumer has a decision to make. Are they looking for a more practical good that will last five years or so, or would he or she rather purchase something with more sentimental value that will last a life time.
Buyer Power
There are many factors that go into determining the buyer’s power in a given industry. Some of the main factors that determine a buyer’s power are the volume, leverage, the brand identity, and product differentiation. Each of these aspects are important factors in determining the price of the good being sold in a given industry. In the Jewelry store industry there are many buyers. This means the buyers do not have the ability to dictate the prices in the industry. The power is not in the buyers it is in the suppliers. It is not like people have the ability to go out and make a diamond engagement ring so the suppliers can charge what they want for these items. The suppliers have all the control of the market when it comes to providing to consumers.
The buyer has the ability to dictate prices when they are in a market where there is a small amount of buyers and a large amount of suppliers. This is not the case in the jewelry store industry. There are many buyers in this market and many suppliers. Since the volume of buyers is so great the supplier has the ability to dictate the prices. However, the jewelry industry involves commodities and the price of these commodities fluctuates. Therefore, suppliers do not totally get to determine the price. They are only able to determine the markup on their goods. Buyers do not have much leverage or bargaining power over the suppliers. The price is often bargained by consumers in the jewelry store industry but not enough to give the consumers leverage over the suppliers.
The brand identity is a major factor in the determination of the price of a good. In the jewelry store industry brand identity plays a key role in the price. Most people are willing to pay more for name brand jewelry. Often goods will cost up to twice as much for name brand jewelry compared to off brand jewelry. Especially when it comes to engagement rings. Men are often more inclined to purchase designer brands for their future wives because of the sentimental value of something with a name backing it. Brand identity plays a key role in determining the buyer’s power.
Product differentiation is another determining factor in the power of the buyer. With jewelry stores offering many forms of jewelry there is a widespread differentiation which takes away the power from the buyer and puts it in the hands of the supplier. By having different products available, consumers have many different products to choose from. It portrays to a larger market, therefore it makes it harder for buyers to determine the prices.
Degree of Rivalry
The degree of the rivalry within an industry is the most important aspect of Porters Five Forces model. This is the part that determines if an industry is worth entering or if it is too competitive and there is no chance to make a profit. Rivalry will be more intense if there is small equally sized and no clear market leader. With one firm dominating the competition it doesn’t leave room for small firms to enter and turn a substantial profit. The degree of product differentiation is another decisive factor. Industries where the products are commodities create really competitive markets. Firms have to battle with each other to get the commodities to sell, and often commodities are limited. Along with these factors another important aspect is switching costs for buyers. If the buyer has a high switching cost, rivalry is reduced because they will have to pay to switch to a competitor, therefore they are more likely to stick with the company they are currently with. The strategic objectives are also keys in the degree of rivalry. If a firm is innovative and pushing the competition among firms is increased but, if they are simply milking revenue it will decrease competition. The final aspect in determining the degree of rivalry is the exit barriers. If it is easy to leave an industry then competition is reduced, but if it is hard then firms are more apt to stay and increase to competition. All of these aspects increase and decrease the rivalry within an industry.
The jewelry store industry is mature and highly competitive. There are many firms that exist in the industry and no real market leader. Along with all of the major firms that exist in the jewelry store industry there are many small firms and single shops that increase the overall competition within the industry. The key market players within the jewelry store industry are Blue Nile Inc., Tiffany and Co., Zales, and Signet Jewelers Limited. None of these companies has a significant hold of the market so it creates a huge rivalry within the industry.
The jewelry store industry revolves around commodities which increases the level of rivalry within the industry. Since the majority of jewelry involves highly priced commodities like diamonds, gold, and silver being able to get these precious commodities at the cheapest price possible is very important. This is the most important part of the rivalry within the jewelry store industry. If one company is able to get diamonds for a discounted price they will be able to mark their jewelry down and attract consumers with a cheaper price. Fluctuating commodity prices increases the rivalry as well. Knowing when and how much to purchase of a certain commodity can really increase a firm’s ability to set prices and do business.
Switching costs of buyers is another important aspect in determining rivalry of the industry. Since there are no costs for a consumer to switch from one firm’s products to another it increases the rivalry among the firms. There is nothing stopping a consumer from buying a ring from one company and a necklace from another so firms need to be able create relationships with customers to keep them coming back. Companies in the jewelry store industry really tend to focus on customer service to keep customers coming back to their stores.
The objectives of the company also dictate the rivalry within an industry. If companies feel they do not need to be innovative it takes away from the competition. Within the jewelry store industry all the firms are always looking for new ways to attract new customers and to keep old ones coming back. Once again, this is where customer service plays a major factor. If they are able to keep customers happy they will continue to come back. Also by coming up with new styles and forms of jewelry will keep customers intrigued and interested on what is new and trendy. Being lazy and just doing what works does not work in this highly competitive market. Firms are constantly trying new ways to innovate the jewelry store industry.
The exit barriers are the final determent of the degree of rivalry. Within the jewelry store industry it is hard for firms to exit therefore creating more rivalry. Companies cannot just decide to leave the industry and try something new.
Jewelry Supply Chain
Jewelry is something of personal ornamentation, such as rings, necklaces, bracelets and earrings, just to mention a few. Historically, jewelry is made of precious metals and gemstones, but may be from other materials as well. Jewelry is considered a luxury good and therefore it has a certain value. Jewelry made from glass and chemical manufactured materials are considered jewelry as well, but are not associated with the same value. Gemstones are stones cut and polished for one reason, and that is personal satisfaction.
The natural gemstones are derived from minerals, while the synthetic ones are grown in laboratories. They both look the same, but they differ in physical and chemical properties. Cubic zirconia is a replacement for diamond, and is widely used in the production of jewelry. The acceptance of synthetic gemstones has grown significantly since it was first introduced.
Formation
Precious metals and gemstones are valuable because of the scarcity, due to the high demand of these natural resources. People now seek to many methods in exploration, including sampling, drilling in the ground and satellite survey’s. The raw materials in the jewelry industry are formed when carbon is put under extreme pressure and high temperature deep in the earth. Some of these have also traveled some distance from their original source. It can be found at 250 miles or even greater than that. The different types of jewelry we are talking about are gold, silver, platinum, diamonds and gemstones. Some diamond producing countries include Botswana, Canada, Russia, South Africa, Australia, and Tanzania (World Diamonds Council, 2009). For the synthetic stones it is different. The cubic zirconia is mixed with high purity zirconium oxide powders, which is stabilized with magnesium and calcium. The amount has to be controlled in order to look similar to real diamonds. Three different methods can be used: Melt growth, solution growth or high temperature and pressure growth. When growing these types of gemstones, problems may occur. These problems arise mostly because the synthetic gemstones are so reactive that they will not melt, or they will only melt under higher temperatures. Another way of melting has to be used, and that is called the skull melting system (Business Network, 2009).
Mining
Before mining can take place, there are several things that need to be done. Surveys of the fauna, soil, vegetation, landforms and water systems in the mine path have to be conducted. The information a company gets from these surveys provides important information that is crucial for planning and monitoring environmental management and rehabilitation. In the end, the mine path takes into account the current mining methods, government regulations on environmental management and information collected by surveys. Most metals cannot be found in concentrated form, but in something called an ore. Similar to regular rocks, some ores contain only a fraction of metal. This means that a large amount of rock must be obtained from the ground for it to be useable. Because of this, mines are often big and can operate in extreme environments. Metals can be found deep under the surface. As a matter of fact, gold mines can be more than a mile below the surface. The method of extracting metals from the surface is the open-pit mining technique. These mines contain large holes in the ground where rock is blasted from the sides and the bottom with explosives. All the material is then put in trucks, before the process is repeated. Surface mines can be several miles wide and hundreds of feet deep. Underground mining is not as common as surface mining, and it only happens when a big ore is found or prices are so high that it can justify the expense (United States Department of Labor, 2009).
About half of the world’s diamonds and precious metals come from Africa. The largest mining companies in the world are located in South Africa, India, Australia, Russia and Canada. Companies including De Beers, Alrosa, Tahera Diamond, Tio Rinto and BHP Bilton are the major players in this industry. BHP Bilton for example, is a leading miner in almost every metal and mineral in the world, with operations stretching all the way from Mozambique to Peru.
Sorting
After the mining is done, diamonds and precious metals are distributed to people that specialize in the subject, who will sort the stones and give them a value. This is where the quality stones are separated from the bad ones. All the good quality stones are put in different categories based on their shape, color, quality and value, but most of the diamonds are categorized as standard. Even though most diamonds and metals are standard, they have some distinguished marks, which are what makes each stone unique (World Diamonds Council, 2009). Gold for example, can be refined, but it all depends on the quality and the form of the metal. The dominant sorting company is the Diamond Trading Center, which is located in Botswana, Africa. Needless to say, this is where De Beers have a lot of control, which is why they funded this project.
Cutting and Polishing
The next step after the diamonds have been sorted is to cut and polish them. Cutting diamonds is not for everyone. It requires a set of skills in order to have the diamond reflect light within itself, from one facet to another, and also through the top. After it has been cut, it gets polished and then categorized after its carat, cut, color and clarity. All stones are expressed in carats, which is the weight. The only thing that is controlled by hand is the cutting of the stones. To the untrained eye, the color of a diamond does not make much of a difference. However, for a specialist, the smallest variation can make huge difference. Diamonds can be found in many colors, but the colorless are the most popular ones. Similar to other stones, the more rare the color is, the more valuable it is. While in earth, stones develop certain inclusions. The size, weight, position and brightness can have an effect on the clarity of the diamond, but most of them are too small (World Diamonds Council, 2009). Like diamonds, precious metal including gold, silver and platinum go through the similar characteristics. For example, all jewelry is required by law to have the carats on the product so that customers know the quality of gold used.
There are several places throughout the world where stones are cut. Most of the cutting happens in Surat, Antwerp, London, New York, Tel Aviv and Amsterdam. Antwerp is where the Gemological Institute is located, while New York is where most of the world’s rough stones are sold.
Manufacturing
Diamonds and precious metal are sold through registered exchanges located throughout the world or directly to wholesalers or manufacturers. In many cases, manufacturers create jewelry in addition to selling to retailers, but as mentioned earlier, this requires great skill, both technically and creatively. Manufacturers use all stones and metals in creating different pieces of jewelry. Numerous designs can be found in retailers all over the world, but the most popular one is the solitaire, which is used for pendants, earrings and rings in particular (World Diamonds Council, 2009).
The biggest wholesalers include Costco, Wal Mart, eBay, Target, and Amazon. The World Federation of Diamond Bourses works as the mediator for wholesalers. It operates in 26 locations throughout the world and this is the final step before selling to retailers or wholesalers. The biggest synthetic diamond manufacturers are The Gemesis Corporation and Apollo Diamond. The Gemesis Corporartion is the world's premier producer of high quality, fancy color laboratory-grown diamonds.
Retail
It has been said that a diamond is a girl’s best friend. Diamonds are the expression of human emotions and no gemstone can fight with that. The reasons for that might be because they are rare, they are beautiful, or the fact that it is a symbol of status. Traditionally, diamonds have been used in engagements, weddings and anniversaries, but in recent times diamonds symbolizes independence and success. The different designs are many, and retailers across the world give customers the opportunity to choose the product that they want (World Diamonds Council, 2009). This is also the case with precious metal, where for example gold is extremely rare.
The biggest retailers of jewelry are Tiffany & Co, Blue Nile, Zale Corporation and Signet. These companies also operate online, which gives them an advantage over the department stores. Other big retailers include De Beers Diamond Jewelers and Cartier, but there are many small jewelry companies that are still making profits despite the power of companies like De Beers, Blue Nile and Tiffany & Co.
Industry Value Chain, Jewelry Retail
Primary Activities
Inbound and Outbound Logistics
Inbound logistics activities includes the following, receiving materials/goods from suppliers, storing these materials/goods before these inputs are developed into finished goods within the company. Inbound logistics also includes products sent in return or for exchange, to the company, from the customer. Outbound logistics involves activities concerning order processing, collections, storing, and movement of finished goods, to the company’s final customer.
For the diamond retail industry most of the inbound and outbound logistics operations are outsourced to independent companies that are specialized in logistics. Depending on the total value of the shipments, retail companies decide to use different providers of logistics support. The Brinks Company is one company that specializes in secure transportation cash or other valuables such as jewelry. UPS, Expeditors Internationally, DHL, and FedEx are some of the other third-party logistics companies.
Operations
Operations are the activities that are related to the production of the products. Different customers are always looking for different products and this is where the design comes in. The jewelry retailers create their own designs to differentiate their products from the competitors. Not only do they create the designs that they assume the market will accept, but they also create jewelry through customization. Customers have the ability to order the type of design they want on their jewelry which is a feature that many companies now have taken advantage of.
Many companies have expanded horizontally by investing or expanding their business. Companies have done that by, not only selling jewelry, but also taking it back in for repair or modification. Doing this, companies create long-term relationships with customers and provide excellent service. Certain licenses have to be obtained in order to trade diamonds and precious metals. All companies that are in the jewelry retail industry are obligated to have this license. Retailers may have agreements with designers who sell their designs through the company, as well as manufacturers to sell merchandise on consignment.
A lot of companies train their employees and managers so that they can become more knowledgeable and perform their duties in an effective and efficient manner. This has become a high priority for many companies because this is valuable to customers, and the company in the end. Training programs can also be found for buyers as well, such as training on product negotiation techniques.
Many, if not all the different jewelry retail companies use outsourcing because it makes it easier for companies to focus on different aspects of the business, such as customer relationships. Inventory control is a part of operations as well. Because these products are costly, companies need to make sure that everything is in place.
Marketing and Sales
These activities are important for all companies, and they use all kinds of mediums to attract customers. TV commercials, websites and catalogs are often made to reach out to customers. Other ways are through email and direct mail, but those alternatives are mostly for people who already are customers. Many companies have competitive advantages in this area because they have an established brand and consumers recognize it. A lot of companies do not rely on heavy marketing because their brands are well known and have been spread by word of mouth. Diamonds, for example are not advertised a whole lot. The slogan ”Diamonds Are Forever” actually makes sense now. This product does not need an introduction, or advertisement. Diamonds sell themselves.
Companies have realized that assisting consumers in all aspects of a purchase is very important. That is why online retailers and department stores have created informational guidance when it comes to buying jewelry. Consumers who do not know a whole lot about these types of products find it extremely helpful and educating. There are call centers that people can contact with questions, and there are online guides that will assist consumers in purchasing jewelry. These methods create value to customers, which is what companies want to create.
Service
The jewelry retail industry offers many services to customers after they purchase an item from any of their stores. Whether it is an extremely expensive necklace or a cheap ring the proper service is provided throughout the industry. Industry players such as Tiffany’s and Blue Nile offer tips on how to maintain the value of your jewelry. From how to clean it to how to store it, it can all be found online. Along with just simply offering tips of how to care for jewelry, companies also offer cleaning and maintenance in their retail shops. Customers can take the item back to where they bought it and trained employees will repair or clean dirty or damaged jewelry typically free of charge. If the jewelry is faulty it is replaced free of charge.
Since Jewelry can be very expensive most jewelers offer ways to finance customers purchases. If someone is purchasing a 10 thousand dollar engagement ring and cannot pay for the whole thing in full he can finance the ring typically through a bank that works with the jeweler. This allows the customer to make the purchase without having the money in full.
Often times the jewelry being purchased is extremely expensive and needs to be insured. By insuring the jewelry the customer can have it replaced if it is broken or stolen. This is a very convenient for customers who purchase expensive jewelry often costing more than a car. It could be very devastating to break or have an expensive piece of jewelry stolen and with the insurance it will be replaced.
The final service offered within the jewelry retail industry is customer support. Companies will offer phone lines that customers can call to answer questions about their jewelry. They also have an online support that does the same thing.
Supporting Activities
Firm Infrastructure
The firm infrastructure is about the culture of a company, organizational structure, and control systems. This can be viewed as the “back bone” of a company, because if this part is not in place, the company will not last very long. A lot of planning and measuring have to be done continually, in order for a company to stay in business. New technology is being created and businesses have to be able to keep up with the new. One cannot start up with a plan and believe that that is going to work for the rest of the company’s life. Plans change from day to day in this global economy, and being able to understand and adapt to the changes being made is a must. The importance of planning and staying on top of things cannot be stressed enough, and therefore strategies have to be made to stay ahead of the game. You cannot be a part of a game if you don’t understand how to play it. Companies that have the ability to predict or expect different situations and scenarios have a greater chance of surviving in the crucial world of business. Each and every company in the industry should be aware of opportunities and threats from competitors in order to grow.
Human Resource Management
Human resource management is the activity involved with recruiting, hiring, developing, training, and compensating personnel. When investing in new employees, companies should really think twice about whom they are hiring. Not everyone is worth investing in, but the ones that are should be taken care of and appreciated. Today, companies have policies for everything. All individuals should have the same opportunities to get a job and no one will be discriminated. Unfortunately, these things used to be a big problem, which is why these policies are in place.
Companies are investing substantial amounts of money to provide training for employees and managers so they can provide excellent customer service skills and create long-term customer relationships. Training works as an incentive for employees because it shows that the company wants you as an employee and that they are willing to pay for further education. Other incentives used for employees are commissions on sales in the form of money, but also vacations and other types are used.
Usually, companies have recruiters that travel around to promote the company and recruit new employees. Often they can be seen on campuses and job fairs. Human resource management is commonly used in order to increase productivity. Data will be collected for managers to see, and manual processes will decrease due to the human resource management system. This activity can also be outsourced just like the other activities, but often people are hired for the purpose of hiring new employees. This can be beneficial if the person has a lot of experience in the field of hiring, because companies are more likely to get people that are a good fit and can work for a long time.
Technology Development
Technological development is those activities managing information processing, research and development of new practices that could add “knowledge” to a firm. This innovative new “knowledge” could help improve a firm’s product or increase efficiency and effectiveness of the production and operating processes within a firm. Such developments could be improvements to ERP or POS systems, development of new features for online applications tools. Technology development can also improve existing products and develop new. An example in the jewelry industry is the new techniques for creating imitations of and “Man-made” diamonds.
Procurement
Procurement involves the activities in purchasing all materials and goods needed to produce the final goods, from raw materials, components for production, and fixed assets such as production equipment, buildings, and office equipment. In the jewelry retail industry, depending on company, a firm will either by goods assembled and produced by other manufactures, or the firm will by raw material, design, and produce/assemble the product itself. Some companies operate under a combination of these options.
Raw materials needed to produce jewelry includes; diamonds (rough or cut), precious metals, pearls, other gemstones, and substitute products such as synthetic diamonds. Cutting and polishing machinery is equipment needed for the production of jewelry. Some jewelry retail store sell merchandise not associated with the company’s brand name, these products are bought ready for sale from the manufacture. Examples of such items are finished jewelry or watches.
Retails of jewelry are also dependent on computer hardware, other office equipment, and buildings needed for the daily operations of its business.
Company Analysis
Tiffany & Co
Tiffany & Co is a holding company that operates through its subsidiary companies. The company's primary subsidiary, Tiffany and Company, is a jeweler and specialty retailer. Tiffany’s has a wide range of offerings that includes jewelry, sterling silverware, watches china, crystal, fragrances and accessories. Tiffany is also engaged in designing products, the manufacturing of jewelry, and retail. Tiffany & Co is headquartered in New York City, New York along with its original store on 5th avenue in New York City. They currently employ 8,800 people from their CEO to the employees working in the retail shops. The company recorded revenues of $2,938.8 million in the financial year which ended January 2008, which was an increase of 14.8% from 2007. The net profit was $303.7 million in 2008, which was an increase of 19.6% from 2007.
Tiffany & Co has many resources that allow the company to operate as smoothly as it does. It has tangible resources like financial, organizational, technological and physical resources. Along with the tangible resources that add value to the company they also have intangible resources like human, innovative, and reputational resources property.
Tangible Resources
Financial Resources
The financial resources of Tiffany’s concern the ability of the company to "finance" its chosen strategy. They recorded revenues of 2.938 billion dollars and a net profit of 303.7 million dollars in 2008. They have a return on assets of over 10% and a return on equity of almost 17%. This shows that they are able to generate internal funds and allows them to go in the financial direction they please. They continue to increase profits each year and expand their company.
Organizational Resources
Tiffany’s is organized like a typical firm filtering down from the CEO to the president and all the way down to the retail store employees. They utilize a standard pyramid reporting structure. Each division has a president and vice president and filters down to lower level management and their employees. Since Tiffany’s is a rather large company that has almost 9000 employees the monitoring of this structure is constant.
Physical Resources
The physical resources of a firm are everything that goes into making the product For Tiffany’s, since it is a jewelry retailer this includes the mines, the manufacturing plants, the distribution center, and all of its retail stores. Tiffany’s gets its precious metals and gems from various mines all over the world. The manufacturing of the jewelry is done in manufacturing plants in the United States. Merchandise offered for sale by the Company is supplied from Tiffany’s jewelry and silver goods manufacturing facilities in Cumberland and Cranston, Rhode Island; Pelham and Mount Vernon, New York; the hollowware manufacturing facility in Tiffany’s Retail Service Center and through purchases and consignments from others. All of equipment used in the manufacturing of Tiffany’s jewelry is state-of-the art and provides the best quality products.
The main aspect of Tiffany’s physical resources is their retail stores. Tiffany’s currently has 64 retail stores in the United States, 52 in Japan and 51 in all other countries.
Tiffany’s is able to access the raw materials needed to produce the jewelry very easily. They utilize a variety of mines to get the raw materials necessary to produce the jewelry.
Technological Resources
The technological resources of a company are its intellectual property such as copyrights, patents, and trademarks. Tiffany’s allows its designers to keep the copy rights to the jewelry that they design. So, Tiffany’s really only has its trademarks. Some of their trademarks consist of TIFFANY, TIFFANY & CO, and TIFFANY BLUE BOX. They have also trademarked the color they use for their jewelry boxes promptly named Tiffany Blue.
Intangible Resources
It is easy to ignore the intangible resources of a business when assessing how much a business is worth. Most of the time people ignore the intangible resources of a company but in fact intangible resources bring a great deal of value to a company. The intangible assets consist of human, innovation, and reputational resources.
Human Resources
The second aspect on tangible assets is human resources. This is the heart of the business meaning its where all of the skill involved with running a business is involved. Tiffany’s is full of highly trained highly educated people with experience in running a business. They currently employ 8,800 employees all of which have gone through extensive training. They employ 6000 in the United States and 2,800 worldwide.
Without the abilities that Tiffany’s employees provides Tiffany’s would not be what it is today. They are able to be the industry leader due to excellent management starting at the top with their CEO Michael Kawalski. They have a well integrate Board of Directors who span from different companies worldwide. With their excellent top level management and their training programs Tiffany’s will continue to run smoothly as an industry leader and continue to turn high profits.
Innovation Resources
Being innovative is what keeps a company ahead of its competitors and set trends rather than follow them. Tiffany’s currently employs some of the most famous jewelry designers who continue to set the bar for jewelry fashion. They know what is going to be the next big thing and year after year Tiffany’s sets the bar for designer jewelry.
Tiffany’s is able to do this because they have the capacity to innovate. If one of their jewelry lines turns out to be a flop it does not affect the company as bad as it would to another smaller jeweler. They have so many lines and styles they are able to reach out to everyone. Their designers consist of simple silver bracelets to extremely elaborate necklaces. And with famous designers creating these lines people are going to not just buy for the Tiffany’s name but for the name of the designer as well.
Reputational Resources
The reputational resources are the brand recognition. This is a very important aspect to intangible resources. By having brand recognition it gives the consumer more of an incentive to buy. This is what makes Tiffany’s what it is. Everyone knows about the blue box and white ribbon and what it symbolizes. Tiffany’s is well known and has an excellent reputation. Everyone who wears jewelry wants to own Tiffany’s jewelry. Their products are high quality, very durable, and easily recognized. Tiffany’s also makes it a point to be environmentally conscious and refrains from purchasing conflict diamonds which adds to the value of their product.
Capabilities Identification
The capabilities exist when all of the resources have been integrated together and achieve specific tasks or sets of tasks. There are many functional areas that go into the capabilities of a firm. These functional areas include: distribution, human resources, management information systems, marketing, management, manufacturing, and research & development. Tiffany & Co is the industry leader and utilizes its resources well to maximize the abilities of its capabilities.
Distribution
Tiffany’s has an extensive distribution strategy that utilizes different distribution centers and package handling companies. This is covered within the outbound logistics section.
Human Resources
By having well trained employees and excellent upper management Tiffany’s continues to operate as one of the industry leaders.
Management information systems
The management and information system is used to control inventories and monitor shipments. Since Tiffany’s deals with highly priced good if one shipment is lost it could result in a substantial loss for the company. They have great relations with logistics companies to ensure the safety of their packages. This allows the company to run smoothly and not have to worry about the loss of their goods.
Marketing
Tiffany’s marketing campaign is limited due to the fact that they are already so famous. They do not need to advertise their deals or new products because they know that people will always come to their stores. Marketing is more extensively covered in the marketing and sales section of the value chain.
Manufacturing
Tiffany’s jewelry is high quality and held to the highest standards in the industry. It is manufactured in plant across the United States. Their jewelry is designed by many well know designers. More on manufacturing is covered throughout the value chain.
Research and development
Tiffany’s research and development is what gets the next wave of jewelry started. They are constantly monitoring what will be the next big thing in the jewelry industry and how to get the goods to do so. They are always looking and trends in the fashion industry to get an idea of what is next. Along with this they are constantly updating their information technology to keep the company running smoothly and increasing their output and customer service.
Value Chain Analysis
Inbound Logistics
The first aspect of the primary value chain is the inbound logistics. Inbound logistics is any aspect of receiving and the warehousing of raw materials, and the distribution to manufacturing. This aspect of the value chain is the backbone to Tiffany’s & Co. Tiffany’s & Co have to receive their precious metals, gems, and diamonds from various mines all over the world. Tiffany’s facilities from diamond cutting to crafting and distribution are all operated at the highest standards within the industry. Tiffany’s also evaluates each of their venders and suppliers and holds them to the same standards.
The precious metals mining and manufacturing follows a three step process. Step one is the actual mining of the precious metals. The majority of the gold and silver used in their workshops are obtained from a single mine in the United States that meets the high standards of social and environmental responsibility. Tiffany & Co follow very strict environmental and social obligations to ensure that the environment is safe and to ensure the credibility of the company. The second step is that all the metals are taken to a central fabrication plant that is dedicated to responsibly sourced metals. The third and final step in the manufacturing of precious metals is that they are transferred to Tiffany’s various workshops or the workshops of their manufacturing partners.
The logistics incorporated with diamonds have been and continue to be a bit of a sticky situation. As most people know, the concept of “conflict diamonds” raises many concerns and affects the integrity of the supply chain. To help ensure the integrity of Tiffany’s supply chain, they created Laurelton Diamonds. Laurelton Diamonds, a wholly owned subsidiary that procures rough diamonds and manages their world wide supply chain that sources, cuts, polishes, and supplies finished stones to Tiffany’s. The Laurelton Diamonds supplies diamonds that come from all across the world, they mainly come from Africa, Canada, and Russia. The first major investment for Tiffany’s and Laurelton Diamonds was in Yellowknife, Canada in 2002 which is 12,000 square feet and houses up to 75 employees. The facilities there are equipped with state-of-the-art, custom-designed equipment. Tiffany’s has employee development and training programs are designed to equip the local workforce to meet Tiffany’s exact quality and standards. Since the development of Laurelton Diamonds and the creation of the facility in Yellowknife, they have invested and expanded into South Africa, Botswana, and Namibia.
Tiffany & Co has very high moral standards and ensures its customers that it does not purchase conflict diamonds. To ensure this they purchase diamonds only in those countries that are full participants of the Kimberly Process Certification Scheme (KPCS). The KPCS is an international cooperative monitoring system that was created to eliminate the flow of “conflict diamonds.” The KPCS requires the participating countries to tightly control the import and export of rough diamonds. The rough diamonds can only move among the participating countries in sealed containers with the proper documentation evidencing that the diamonds are in fact conflict-free. Tiffany’s is able to add value to its supply chain by participating with the KPCS and using conflict-free diamonds.
Tiffany’s purchases pieces of jewelry, precious metals, and specialty pieces from all other the world. With the purchases costing so much the proper precautions need to be taken. Tiffany’s has contracts set up with various logistics companies to ensure the safety of their incoming products. They take the same precautions and use the same methods with there outbound logistics so it is covered in the outbound logistics section.
Operations
The second aspect of the value chain is the operations. Operations are process of turning inputs into finished products and services. For Tiffany’s this is taking the diamonds, gems, and precious metals and turning them into the finished products that are sold in the retail stores to the customers. As mentioned in the previous section Tiffany’s created a subsidiary company, Laurelton Diamonds, which is where rough diamonds are cut, polished, and turned into final products. They use state-of-the-art custom-designed equipment that is used by highly trained employees who are held to the highest standards in the industry. The first investment by Laurelton Diamonds was the facility in Yellowknife, Canada and then later invested in sourcing and polishing operations in South Africa, Botswana, and Namibia. Merchandise offered for sale by the Company is supplied from Tiffany’s jewelry and silver goods manufacturing facilities in Cumberland and Cranston, Rhode Island; Pelham and Mount Vernon, New York; the hollowware manufacturing facility in Tiffany’s Retail Service Center and through purchases and consignments from others
Tiffany’s is known for their high standards and holding its suppliers to high standards as well. They established a multidimensional Social Accountability Program that includes comprehensive guidelines on the manufacture of the materials they use, all of it is designed to ensure that the suppliers are held to the same industry leading standards the Tiffany’s holds itself to.
When the diamonds and precious metals have gone through all of the mining, cutting, and polishing they are set into final products that are designed by their designers. Tiffany’s employs some of the best jewelry designers in the world including; Frank Gehry, Elsa Peretti, and Paloma Picasso. Frank Gehry is one of the most famous architect in the world and has designed many famous buildings including Seattle’s own Experience Music Project. Elsa Peretti is an Italian jewelry designer who designed some of Tiffany’s most popular pieces. Paloma Picasso is the youngest daughter of Pablo Picasso and has ben designing jewelry for Tiffany’s since 2000. After jewelry has been designed and the products are finished they are packaged and sent to venders all across the world.
Once an order is completed and ready to be sold in the retail shops they are sent to their central distribution center. The central distribution center is the Parsippany distribution center. The movement of the products is covered in the logistics section.
Outbound Logistics
The third step in the value chain is outbound logistics. This aspect of the value chain involves getting the finished goods from the distribution center to the retail stores where it is later sold to the customer. Since jewelry is very expensive the proper precautions need to be taken to ensure the safety of the products. Tiffany’s has contracts set up with various logistics companies that create a smooth safe transaction from their warehouses and manufacturing facilities to their retail shops. As mention earlier the merchandise offered for sale by the Company is supplied from Tiffany’s jewelry and silver goods manufacturing facilities in Cumberland and Cranston, Rhode Island; Pelham and Mount Vernon, New York; the hollowware manufacturing facility in Tiffany’s Retail Service Center and through purchases and consignments from others.
The main company Tiffany’s utilizes is Brinks Inc. Brinks is known primarily for its armored car services. Brinks Inc handles the majority of the jewelry shipments to the retail stores. They move the products from Parsippany which is the central distribution center. Brinks’ takes the consolidated shipments and delivers them to the retail stores. Along with handling the distribution to retail store Brinks also handles high-value international shipments as well. Brinks has an employee at the Parisppany DC as well to ensure that all logistics handled by Brink goes smoothly and efficiently.
For less valuable and smaller orders to residential addresses Tiffany’s uses other companies like UPS for domestic deliveries and DHL Worldwide Express for international residential shipments. Tiffany’s does a lot of via the internet and catalogues so this is where UPS and DHL come in. Tiffany’s does not send its catalogue and internet orders from the retail stores. They send the order directly from its distribution center.
For all of Tiffany’s international shipments they offer another service where associates can call with the SKU and destination and can obtain the total cost of freight, taxes and duties. This allows the customer to pay all of the charges which eliminates the need to collect any charges from the gift’s recipient. The transportation department is works with Tiffany's IT, sales, and customer-service and provides this information on the company's intranet.
After shipments are delivered to the retail shops Tiffany’s has to sell their products to the customers. This includes internet sales, catalogue sales, and retail sales in the shops. As mentioned before Tiffany’s has an efficient process of distributing the products sold from catalogues and the internet. So this leaves all retail sales. Tiffany’s has more than 150 retail shops serving the United States and international markets. Tiffany’s retail shops are located all across the world in cities like London, Paris, Sydney, and Tokyo.
The Company has different channels of distribution which consist of U.S. retail, international retail, direct marketing, and other. U.S. Retail consists of retail sales transacted in retail shops in the United States and sales of products through business-to-business direct selling operations in the United States. Another channel of distribution is International Retail that consists of sales in stores and department store boutiques outside the United States and, to a lesser extent, business-to-business, Internet and wholesale sales of products outside the United States. The third channel of distribution is direct marketing which consists of Internet and catalog sales of Tiffany’s products in the United States. The final channel is everything else which is categorized as other and consists of worldwide sales of businesses operated under trademarks or trade names other than Tiffany’s. (i.e., Little Switzerland and Iridesse). Other also includes wholesale sales of diamonds obtained through bulk purchases that are subsequently deemed not suitable for Tiffany's needs.
Marketing and Sales
The fourth aspect of the value chain is marketing and sales. This is the identification of customer’s needs and the generating of sales. For Tiffany’s, over the years it has done an excellent job identifying the needs of its customers and providing the products they desire. Tiffany’s is known for its high-priced high-quality jewelry but, they also offer lower priced jewelry that appeals to a younger group that may not be able to afford their products. They offer products that range from less than a hundred dollars to jewelry that is worth millions. Originally they were all about the high priced upper echelon jewelry but recently they have began to market to a younger less wealthy group. By marketing to lower incomes and offering cheaper products they are able to establish brand loyalty and allow people to obtain the status of owning Tiffany’s jewelry without paying the huge price. By marketing all aspects they are able to compete with all competitors in the jewelry industry.
T he blue box is the most important aspect of Tiffany’s and their marketing strategies. Tiffany’s knows the importance of the blue box and white ribbon so employees are forced to take a class on tying the ribbon perfectly on the box so that the box is still able to lay flat. They take this seriously because they want every Tiffany’s customer to feel important and that they are receiving exquisite service. The blue box, blue paper, and white ribbon symbolizes refinement, luxury, elegance, good taste, quality, and it confers status on both the person who gives it and the person who is wearing the jewelry.
As mentioned before tiffany’s offers lower priced jewelry so they can appeal to every income level and cover every aspect of the jewelry industry. So in efforts to increase its consumer base Tiffany’s offers a wide-range of less expensive items with products ranging from a less than a hundred dollars to over a million. Tiffany hopes to convince everyone that they can afford its luxury name, even it they cannot afford the luxury price tag. Tiffany wants its customers who buy the less expensive jewelry will remember the company and its service so the day they can afford more they will return to Tiffany’s. They believe that small purchases can lead to lifelong loyalty.
Tiffany’s is able to market to everyone searching for high quality jewelry even if it is not in the high price range. Their stores are very customer friendly. Their retail stores are quite and well decorated with extremely friendly and knowledgeable employees. Tiffany’s makes it a point not to give off the snobbish attitudes that are often associated with luxury goods. They do not have customers push a button to be admitted to their stores. Everyone is welcome even if they know they are not going to make a purchase. The accessibility and inviting environment lure customers and often creates returning customers by remembering their pleasant experience.
Service
The fifth and final aspect of the value chain is service. Service is the support customers receive from the company after the product or service is sold to them. Since jewelry is something that is generally held onto for a longtime and often becomes heirlooms to a family it is important to take care of it. Tiffany’s offers professional cleaning at all of its retail stores. All you have to do is bring the jewelry in and professionals will clean and service the jewelry and anytime. They recommend that after each use of the jewelry, it gets placed back in its original box and stored safely.
On Tiffany’s website they offer tips on cleaning and maintaining their jewelry. If you do not want to take the products into the store they tell you what to do at home. The website tells you how to clean and maintain all aspects of the jewelry from the precious metals to the stones. They also recommend that the prongs holding the stones in place be regularly monitored to ensure the safety of the stone.
Tiffany’s also offers a customer service line to answer any questions or concerns about their products. It is easy to use and can prove to be very helpful. Tiffany’s constantly monitors the quality of their products and ensures that they are all are up to par and will not break during usage. Depending on what happened to the jewelry Tiffany’s will replace any faulty products.
Zale Corporation
Zale Corporation is a retailer of fine jewelry in North America. It operates more than 2,200 retail locations in the U.S., Canada and Puerto Rico under names like Zales Outlets, Zales Jewelers, People’s Jewelers, Plumb Gold, Gordon’s Jewelers and Silver & Gold Connection. In addition, the company is also in the online retail business with websites like and . (Funding Universe, n.d.)
The company is organized into three different business segments: Kiosk Jewelry, Fine jewelry and all other. The Kiosk Jewelry runs under the names Plumb Gold and Silver & Gold Connection. These kiosks can be mostly found in malls and they mainly target teens and other fashion oriented customers who prefer entry-level prices. Bracelets, earrings and rings are only some of the jewelry that this segment offers. These kiosks are strategically placed in high traffic areas where they are visible and accessible for customers strolling the mall.
The fine jewelry segment includes Zales Outlets, Zales Jewelers and People’s Jewelers, just to mention three brands. These companies mostly focus on fine jewelry and watches, but they also emphasize diamonds. They target the middleclass consumer and products can be found online as well as in stores. Zales Jewelers is the company’s brand name, and through this brand, consumers can buy jewelry at moderate prices. Most of the jewelry sold at these stores are designed by Zale and is offered at different price points (Datamonitor, 2008). This segment generated about 88% of the revenue, while the remaining 12% represented sales from Kiosk’s. (Indeed, n.d.)
Through its website, customers can get information about various stones, maintenance advice and help on product purchases. The website also allows consumers to design their own jewelry, such as rings and wedding bands.
The all other segment offers insurance and reinsurances facilities to credit card customers. The credit insurance coverage gives protection to the cardholder and creditor for losses due to a disability, unemployment, or even death of the cardholder. Zale has a connection with Citibank USA, which provides customers with insurance and payments for insurance products (Datamonitor, 2008).
Company Internal Analysis
Resources, capabilities and core competencies are the building blocks of competitive advantage. Resources create capabilities within an organization and capabilities create a firm’s core competencies, which again lead to competitive advantages.
Tangible Resources-Value Chain
Tangible resources are the fundamental blocks for all retail operations. It is important for retailers to operate and use these as efficiently and effectively as possible in order to reach superior performance. Zale’s financial resources, its ability to generate internal funds and its borrowing capacity, has somewhat weakened the last couple of years. The company has a high debt to equity ratio, which means that it uses a lot of leverage and does not have a very strong equity position. However, since the company is well established in the industry it can push the liability component to higher percentages without getting into trouble (Debt Ratios, n.d.). Zale’s financial statements show that it has suffered from the financial crisis, because its numbers have declined from previous years. Even though, 2008 was a bad year, it is still able to generate enough capital to stay in business. From 2007 to 2008 their net income dropped from 59.25 million dollars to 10.80 million dollars (Aol, 2009). This is a significant amount, which makes the company more “vulnerable” in the sense that the company is not generating enough money itself, and will rely more on borrowing or from sales of stock. Through its many locations in the United States, Canada and Puerto Rico, Zale Corporation offers a wide range of jewelry to various customers. The headquarters is located in Irvin, Texas, where all purchases are done through its buying offices. The majority of the company’s products are bought in finished form from manufacturers and suppliers mainly from the U.S., but also from Asia and Italy. To coordinate the purchasing of products, diamonds in particular, the company has established a centralized product sourcing organization. This will benefit the company by enabling it to operate more effectively and more efficiently. Direct sourcing has proven to enhance gross margins and increase revenues, and with a center in Canada, production and distribution capacity has expanded. Also, the importing of finished goods increased the ratio of sourced products, which gives Zale an advantage when it comes to price and the latest fashion trends. It gives the company more flexibility in purchasing certain products. Since Zale buys most of its products in finished form, the access to raw materials is not needed as much. However, the company is depending on its vendors to have access to raw materials in order to keep its position in the market. Because most of the company’s purchases are U.S. dollar denominated, it is not affected by currency fluctuations. Currency exchange contracts have been made to minimize the market risk from currency rate exposure. Zale also made contracts on its gold to reduce the risks of fluctuating prices. The number one supplier can affect prices and supply of diamonds, and that company is the Diamond Trading Company. The availability of raw materials is dependent on the political situation in the countries that produce diamonds, and on the continuation of supply and marketing of these raw diamonds. Any interruption in the supply of diamonds can affect the company (Zale Corp, n.d.).
Zale has a very concentrated customer base. The locations of the company’s property, plant and equipment are limited to North America. This is a disadvantage, because Zale’s competitors are more geographically diversified. Even though, the company has expanded its business online, it has mostly expanded its business in North America. Competitors like Blue Nile and Tiffany now operate in countries in Europe and Asia through a web portal, which makes it easier to reach a broader specter of customers. By focusing mainly on regions in North America, the company increases its risk and limits growth at the same time. (Zale Corp, n.d.).
For Zale to be competing with the biggest jewelry companies in the industry, its technological resources need to be updated and able to store and send an enormous amount of data. The company’s systems provide information for management operating decisions, inventory control, monitoring profitability, sales management, expense control programs and customer care. Some data processing systems include merchandise planning and control, purchase order management and point-of-sale terminals. The point-of-sales terminals ensure accurate sales and data, by having bar codes on the products. These codes are also handy when providing inventory control monitoring. Information becomes timelier, which increases a company’s responsiveness to all changes in consumer behavior. Also, communication between stores and Zale’s headquarters will be more effective and efficient with higher speed of transmission. These systems provide the company with information on a daily, monthly and annual basis, which management can use to review and analyze activity. Zale does not deal with its data center operations, instead it outsource these operations to a third party, so that the company can focus on developing and improving its strategies. A continuation of upgrading its information systems need to happen in order to improve the business and its operations, as well as achieve future growth. As far as patents, licenses or franchises go, Zale does not have any. The company’s trademarks and trade names, however, are necessary to sustaining its competitive position in the jewelry industry. Stores are designed to create an environment that is attractive for customers and make it a convenient and enjoyable shopping experience. Everything from lighting to materials, are areas that Zale focus on. Products that are being displayed are changed from time to time to provide variety in the stores. Connecting with consumers has a strong focus through advertising and through stores, and the goal is to maintain this connection to further strengthen the brand name (Zale Corp, n.d.).
Intangible Resources-Value Chain
Even though tangible resources are fundamental for a company, they alone are not enough to reach a competitive advantage. Intangible resources are considered to be where much of a company gets its value, because they are more difficult to copy by competitors. Intangibles can also lead to a more sustainable competitive advantage. Firms rely more on intangible assets than they do on tangible assets. That is because most firms find these to be the foundation for the company’s capabilities and core competencies. The more intangible a resource is, the more sustainable it will be.
Zale makes sure that all employees go through training so that they are knowledgeable and reliable, as well as performing their duties fast and effectively. Training has been a high priority for the company. It has an arrangement with the Diamond Council of America with the intention of training key managers and sales employees to increase their knowledge in diamonds and colored stones. The company also has a training program for buyers to develop and train new buyers on product negotiation techniques. Through the use of technology, Zale continually improves its customer experience. By increasing transaction speed and access to product and customer information, the administrative responsibilities in the stores will be reduced. The investments in its employees include the improvement of a long-term human resource vision. This vision includes an integrated payroll and human resource management system, which is designed to eliminate manual processes, provide data to managers, and providing online access to employees. This is a great way for the company to improve its productivity. In addition, the centralization and streamlining of the organization across the brands reduce costs by eliminating redundancies and better teaming, which makes the company more effective in the long run.
Zale has a reputation of being a company that continues to have the highest standard of ethical business conduct and social responsibility, but also a company that treats customers with integrity and respect. The company makes every effort to encourage sustainable, stable and long-term relationships with all its suppliers and other involved partners, based on mutual trust and fair dealing. Among customers, it is known for its friendly customer service and extremely dedicated employees (Zale Corp, corporate).
Zale believes that brand recognition is the key to increasing its market share. Consumers rely on brand names to ensure quality end value when they feel that they lack the expertise to evaluate the quality and value of jewelry purchases. Since Zale is one of the industry leaders, it sets the standard for providing customers with innovative and creatively designed products.
The company has devoted resources to enhance the effectiveness of its marketing function, in order to increase its market share. Customer knowledge and their behavior have made the decision-making capabilities within the company and the messages delivered to customers a lot better. This knowledge is used to promote the company’s key brands even more, as well as meeting the needs of the market and the individual consumer. Zale uses different characteristics to give all brands an individual design, style and feel. This strategy is based on the fact that all people are different, with different preferences when it comes to purchasing jewelry. Marketing research is one thing the company focuses on. It will continue to use television as its most important medium, as well as targeted direct mail campaigns to promote its products and services. This way, its strategy of making a stronger brand with long-term customer relationships is more consistent. The goal here is to have access to enough information in order for the marketing efforts to be effectively maximized. The large amount of information, compared with new and developed capabilities, helps the company to translate the brand message into meaningful direct mail communication.
Zale offers credit card programs to help customers in buying its products. This option is for people who want to finance their purchase instead of spending cash. Almost half of its sales come from these private label credit cards. The company has an agreement with Citibank, where Citibank issues private label credit cards and provided customers with financing.
Zale has an innovative vision and many ideas. The problems with ideas are that not all are realistic or manageable for the company, nor do they guarantee improvement. As I mentioned earlier, with a more centralized and streamlined organization, operations can be improved. Zale is looking to increase the mall business and grow the Canadian brands, because this is where the company believes it can increase profits, as well as shareholder value. Zales Outlet has proven to be profitable for a long period of time, which is why Zale is determined to build on this success. Another important aspect of the company is the Internet. It will continue to improve its online feature in order to enhance the customer experience, as well as its multi-channel execution (Zale Corp, n.d.).
Capabilities
Global business leaders support the view that knowledge is the most important aspect of a company’s capabilities, and might be the reason for competitive advantages (Michael A. Hitt, R.Duane Ireland, Robert E. Hoskisson, 2009). This is also the case for Zale. It continually provides its employees with training so that their knowledge of the industry and its core business are maintained and developed. This knowledge helps employees in decision-making and in meeting customer needs and demands. The motivation and retaining of employees are important for employers, because they want their employees to perform their duties in an efficient and effective manner.
Another capability that can be recognized is the strong promotion of brand-name products. Because consumers put their trust in brand names, Zale has found that it can use its expertise and knowledge through its marketing segment to attract consumers. Customer service is also an area where the company spends a lot of time. In order to strengthen its brand name even further, an important factor for Zale is to make long-term term relationships with its customers (Zale Corp, n.d.).
One thing that also can help the promotion of the brand name is the participation of the company in a voluntary program of self-regulation to comply with the Kimberley Process Certification Scheme, which was brought to life to eliminate conflict diamonds from the diamond supply. A lot of customers are against conflict diamonds and therefore it is important for Zale to show that it has taken a stand against this problem. The company can also be found online. It believes that it can grow even further as a complement to its stores, and therefore they have become partners with a company called GSI. This company provides e-commerce and multi channel solutions to help with the online business (GSI). Through this partnership, Zale can establish e-commerce capabilities to its other brands, as well as enhancing the name brand and growing the business.
Direct importing of finished goods saves time and money. Without having to go through several steps before Zale is in physical possession of the products it is capable of giving customers what they want in an effective and efficient manner.
Core Competencies
Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals. They distinguish a company competitively and reflect its personality (Michael A. Hitt et al., 2009). The focus of the company is on supporting each brand’s product offerings and marketing position with its different customer segments to distinguish the brands. Zale does not have a whole lot of competencies besides their brand recognition. It believes that this is an advantage it needs to work hard to maintain in order to have a competitive advantage in the industry. The company differs from other companies in the way that it has the ability to capitalize on merchandise trends. There is one more factor where Zale has an advantage and that is in the online wedding market. Through a partnership with The Knot, Zale has the ability to market its brand on TheKnot.com, which is the world’s most visited wedding site. In addition, it will give the Zale brand a presence on The Knot TV, which is a streaming video network (Retailing Today, 2006). These core competencies are the ones that give Zale Corporation a competitive advantage. Whether these competencies are sustainable or not remains to see. Today, companies continually have to change its strategies.
VRIO
This is the primary tool for accomplishing internal analysis of an individual company. It aims to address four questions a firm must evaluate about a resource or capability to determine its competitive potential: value, rarity, costly to imitate and organized.
Resources and capabilities are considered of value when they are able to take advantage of external opportunities and neutralize threats. In order to assess the rarity of a company’s resources, the number of competing companies that also possess the same capabilities need to be measured. Costly to imitate determines if a company will face a cost disadvantage in acquiring new technology that is currently absent. A company is considered organized if their procedures are able to support the development and utilization of their value, rarity, and imitability resources.
Blue Nile Inc.
Blue Nile was founded in 1999 and is today one of the largest online retailers of diamonds. In addition to selling diamonds, it also offers platinum, gold, pearl, and sterling silver jewelry. It is headquartered in Seattle, Washington and offering its products to 35 countries, through its websites in United States, Canada and the United Kingdom (Blue Nile Inc, 2009). The company is publicly traded on the Nasdaq stock exchange and has received several awards for its educational websites and customer service.
Blue Nile obtains its revenues from its three websites: , , and . During the fiscal year of 2008, Blue Nile’s recorded net sales were $295.3million.
Through its operations, Blue Nile has been able to build a well respected brand name in the jewelry industry. Blue Nile has managed to build its brand name by empowering its customers through an informative sales process, while also offering superb jewelry at competitive prices. Blue Nile uses its websites to showcase the products it offers for sale. The product range includes: rings, necklaces, bracelets, wedding bands, earrings, pendants, and watches. The websites also offers a “build your own” feature that allows customers to build their own jewelry, based on the customers own preferences of: style, quality, and price. To ensure customer confidence through the purchasing process, Blue Nile provides information about diamonds, either by a separate education section on their websites, or by specially trained customer service personnel that answer phone inquiries from customers.
“Blue Nile objective is to maximize their revenue and profitability as well as increase market share both domestically and internationally by offering exceptional value to its customers through a high quality customer experience that leverages supply chain efficiencies and efficient cost structure” (Blue Nile Inc., 2009, p. 8).
In order to successfully achieve its business objective and create a competitive advantage, Blue Nile need build on its capabilities. Blue Niles capabilities are based on the resources Blue Nile has available and how well it uses them.
Tangible resources
A firm’s tangible resources are often related to the firm’s financial statements. Tangible resources are the cornerstones for any retail business. Financial resources are one of the elements of tangible resources. Blue Nile’s ability to generate internal funds and its borrowing capacity has decreased based on declining sales at the end of 2008, as financial instability has caused consumer spending on discretionary items to decline and uncertainty in the equity markets. Blue Nile relies on funding through its operations; cash generated from sales, sale of equity, credit facilities, and capital lease obligations. The major portion of Blue Nile’s working capital is liquid assets and inventory, less account payable and other accrued expenses. Blue Nile has some favorable characteristics for its working capital; Blue Nile has extended payment terms with its suppliers and it collect payment from sales from a third party customer financing (Blue Nile Inc., 2009). This let Blue Nile accrue interest on its cash on hand before the firm pays its vendors, a process that improves the firm’s working capital. Blue Niles gross profit for the fiscal year of 2008 was 20.32% compared to the benchmark for the jewelry industry at 43.49% (Yahoo Inc. , 2009). One of Blue Nile’s strategies to increase market share by providing its customers with the best prices possible, this policy will affect gross profits since Blue Nile charges less mark-up on its products, compared to its competitors. Fluctuations in prices of precious metals and diamonds due to supply and demand functions will also affect gross profit. Working capital is also dependent on seasonality, Blue Nile has experienced under its years of operations that sale are seasonal dependent, the fourth quarter sales are normally the strongest due to increased sales during the holiday season.
Being an e-commerce business Blue Nile’s capital needs are minimal compared to regular “brick and mortar” businesses; the need of capital is often associated with software and hardware needed to operate its websites, improvement to office and warehouse facilities, and furniture and equipment. As January 4, 2009, Blue Nile’s operational facilities consist of three independent buildings, a corporate headquarters and fulfillment center in Seattle, Washington and one fulfillment center in Dublin, Ireland. All buildings are leased; contracts are running to 2011, certain of the leases have renewal options. The current situation is considered adequate, as there are options for additional or substitute space if it should be needed (Blue Nile Inc., 2009).
Blue Nile’s merchandise is high quality diamonds and fine jewelry, with an especial concentration on engagement rings and settings. Blue Nile’s e-commerce model together with strong supplier relationships enables Blue Nile to offer diamond inventories of its suppliers online, without having any ownership stake in the inventory. Blue Nile uses several different jewelry polisher and manufacturer, and the company is dependent on these suppliers accessibility of diamonds and precious metals. Blue Nile’s contracts with its suppliers are on a multiyear basis, and have expiration dates ranging from 2009 to 2013. In addition to diamond jewelry, Blue Nile offers a wide range of fine jewelry. Blue Nile has not entered into special long-term agreements with suppliers of fine jewelry, but do have longstanding relationships with these suppliers. As of today Blue Nile consider its relationship with these suppliers sufficient for the products and quality Blue Nile want in its product portfolio.
In order to create superior customer service is Blue Nile dedicated to provide its customers with an easier and cheaper purchasing process. Another aspect Blue Nile focus on, to create good customer relationships, is the speed of the purchasing process. After an order is submitted online, the diamond is shipped from the wholesaler to Blue Nile’s jewelers or other independent third-party jewelers. Then it usually takes one day to make that diamond into a ring. After the diamond is matched with the custom setting, the ring is shipped overnight with FedEx or other third-party carrier, and normally is in the hands of the customer within three days (Bates, 2009).
Blue Nile also provides its customers with after sales services. Blue Nile offers its customers, through its websites easy and convenient insurance policies for jewelry. Blue Nile also offers financing options for its customers. One option is with CIT Bank, Salt Lake City, Utah. CIT Bank will front the payment of purchases made on Blue Nile’s websites, while the customers will pay CIT Bank. This option is directed to those who are not confident in online purchases and rather would pay by check or a wire transfer for added security. The other financing option is for customers that need help financing their purchase. For these customers Blue Nile accommodate financing through a partnership with Bank of America for sales up to $25,000.
Being an e-commerce business, Blue Nile is dependent on new technologies. Blue Nile uses a combination of proprietary and licensed technologies. Its website design and features are based on internal development. Administrative functions are supported by third-party information technology systems that is licensed, activities that are supported by such systems are: financial, inventory management, and order fulfillment. Blue Nile relies on protection based on property law and contractual restrictions, copyrights and restrictions. As of today, Blue Nile has filed U.S. patent applications relating to certain features of their websites. Blue Nile understands that protection from general intellectual property laws in some cases is not efficient, and it is still possible that third-parties can copy, recreate and otherwise use intellectual property obtain by Blue Nile. On a international level it is important to notice that there are different laws and regulations that is relevant for different countries Blue Nile chooses to conduct business in.
Intangible resources
Blue Nile employees 170 people as of January 4, 2009. Blue Nile relies on the knowledge, trust, and capabilities of these employers. Blue Nile understands the customer service and support is key factor for success. To provide excellent customer service and support functions, Blue Nile is dedicated to provide through its website and call center, highly trained and knowledgeable support staff. Blue Nile’s jewelry consultants provide support to customers throughout the entire purchasing process if so is desired by the customer. The consultants will support the customer with; the selection of an appropriate item, the purchase of a particular item, shipping services, and financing and payment alternatives. These customer consultants are not paid based on commission, Blue Nile believes this is an important factor in providing excellent customer service (Bates, 2009).
Blue Nile also emphasizes innovation of informational technology systems from internal sources. Designs of the Blue Nile websites and different features are done in house, meaning they are done by Blue Nile employees. Efficient and effective ERP systems and data warehousing systems are a key factor for maintaining the Blue Nile’s profitability. Blue Nile continuously works to improve these systems by hiring the top technical data engineers available by providing competitive compensation packages for all its employees.
Reputation in the marketplace is a highly valued resource to gain a competitive advantage. Blue Nile is a recognized brand name in the jewelry business, as it stands for high quality diamonds and fine jewelry sold at very competitive prices. Blue Nile has also gained recognition through its customer service and business model. Blue Nile has received many rewards for its business model and website, Forbes awarded Blue Nile to its- “Forbes Favorite” online jeweler, as one example (Forbes LLC, 2009).
Blue Nile has a good reputation with its suppliers, allowing them to offer its suppliers inventory of diamonds on the Blue Nile’s website, without Blue Nile actually carrying these diamonds in its own inventory holdings (Blue Nile Inc, 2009). This opportunity has been created by long-term relationship with its suppliers. Blue Nile is providing its suppliers with information on customer trends. This is both beneficial for Blue Nile as well as its suppliers, promoting a more efficient and effective trade of diamonds, that promotes profitability.
Capabilities
Blue Nile has managed to build up a successful “just in time” order and processing system for its diamond merchandising, without sacrificing high quality on the products it sells. Blue Nile has been able to create superb customer service through its call center and online education, lenient return policy and good guarantees has also promoted lasting customer relationships. By creating brand recognition for the Blue Nile brand name and the innovative purchasing experience provided by Blue Nile’s websites, Blue Nile focus on building a base of loyal, returning customers. In addition to the word of mouth principle of marketing, is Blue Nile efforts to create higher traffic to its website by on-line and off-line marketing. Blue Nile’s marketing campaign is primarily focused on online search engines, targeted website advertising, and direct online marketing. Blue Nile has a very lean organizational structure, with less than 200 employees, this decrease the amount of costs related to overhead. Blue Nile is dedicated to pass much of the savings associated with low overhead costs to its customers, by offer very competitive prices on its diamonds.
VRIO
VRIO is one helpful tool for performing a internal analysis of an individual company. A firm must evaluate its resources or capabilities to determine its competitive potential based on four criteria: value, rarity, costly to imitate, and if it is nonsubstitutable. Resources and capabilities are considered of value when they are able to take advantage of external opportunities and neutralize threats. To evaluate the rarity of a company’s resources and capabilities, the number of competitors that also possess the same resources and capabilities need to be measured. Imitability determines if a company will face a cost disadvantage in acquiring resources or capabilities that is currently absent. A company is considered organized if their procedures are able to support the development and utilization of their value, rarity, and imitability resources.
SWOT Analysis
A scan of the internal and external environment is an important part of the strategic planning process, Factors such as strengths or weaknesses, and opportunities and threats are the classifications used in this analysis. It provides helpful information that matches a company’s resources and capabilities to its competitive environment. () The primary purpose of the SWOT analysis is to identify the positive and negative factors, so that firms can take an objective look at its business. The analysis will be a useful tool in developing goals and marketing strategies ().
Strengths
Blue Nile has established a well-respected consumer brand using an informative sales process that gives its customers more power while offering a broad selection of high at competitive prices. This makes it the leading online retailer in the United States. The “Build your own” feature allows customers to customize their diamonds. Blue Nile has 60,000 stones and a global network of suppliers, which also makes the company the largest web retailer of engagement rings as well as a specialist in selling high-end jewelry online. Blue Nile generates about 6.3% of all online jewelry sales, which supports its leading position even further. This leading market position gives the company greater bargaining power with suppliers.
The business model that Blue Nile currently operates is unique. It only has inventory for its fine jewelry that it sells through its websites. The diamonds that are displayed are available with the suppliers, but Blue Nile is not holding them. When an order is placed, the company notifies the third party supplier who holds the inventory. The diamonds are then fixed into the buyer’s preferences and shipped to the customer. Blue Nile receives payments from the consumers within 5 business days, which is more than enough time to pay its suppliers. Normally, the suppliers are supposed to be paid in 60 days. Because diamonds are the company’s revenue generator, and it keeps them in inventory for 3-4 days, its inventory turnover ratio is higher than the competition. This model allows Blue Nile to have an advantage over its competitors and put a competitive price on its products. The strength and benefits of this unique business model allows it to navigate through today’s challenging conditions. For example, it operates profitably even in a situation where sales decline as was seen at the end of 2008. This means that the company can emerge even stronger when the economy begins to improve, while many competitors will have gone out of business.
Blue Nile offers excellent service through the Internet and its call centers, which is helpful for consumers in the purchasing process. Information and guidance is important to the customer since the cost of diamonds and jewelry is significant. The company provides detailed product information and education that permits the consumers to compare products and make better decisions. All steps in the process of buying are provided, including the selection, purchase, financing, and shipping services. Customers can also search the company’s website to find the products that meets their needs through a variety of diamonds and fine jewelry. These services enhance the purchasing experience and satisfaction, as well as increasing customer loyalty (Datamonitor Report).
Weaknesses
Although, declining operating margins have been a problem in the last decade, Blue Nile are still posting strong revenue growth considering the current economic situation. Tiffany’s recorded higher margins in the same period, which means that Blue Nile’s cost management is poor. This gives the company a competitive disadvantage. However, there is a difference in their reporting format. Blue Nile’s fiscal year ends in December, while Tiffany’s ends in January. When taking these differences into consideration, Blue Nile’s financials are comparable with Tiffany’s.
Blue Nile has a concentrated supplier base. The company’s top three suppliers accounted for about 70% of its total purchases during the 2004-2006 periods. The company relies on its suppliers to sell and ship products in a timely manner and the failure to do so will have an adverse effect on the company’s ability to fulfill consumer orders and harm the business. Also, the failure to deliver quality products to consumers in a timely manner or to serve its customers would damage Blue Nile’s reputation and brand name, and eventually harm the business.
In addition, infringement of intellectual property rights can result in high litigation costs, diversion of personnel, or product delays. This may mean that licensing agreements have to take place, but that might be unacceptable to the company. The company’s significant dependency on its brand name can have a negative effect if it cannot continue to promote it. A mass of customers are required to increase net sales, and the positioning of the Blue Nile brand is heavily dependent on marketing and merchandising and the ability to create high quality customer service. The concentrated supplier base makes Blue Nile vulnerable to top-line risks from external parties and can harm the company in the future.
Opportunities
Blue Nile is a young company and has room for expansion and taking on new opportunities. Since they are the online leader in jewelry retail they have a sense of accomplishment about them but it doesn’t mean that there is no room for improvement. Blue Nile has the ability to attack new opportunities and expand their business. The three main opportunities Blue Nile has is international expansion, expanding product portfolio, and increasing their online sales.
Increasing their online sales is the overall goal of the company all the time and they are constantly competing to do so. They offer a wide range of jewelry that is constantly expanding with a key focus on engagement rings. By offering all of their products on the internet and no retail stores they cut down their operating costs and allows them to expand their online sales without added cost.
One of the main opportunities Blue Nile has is getting into the foreign markets. The economy is becoming a globalized one and they should take advantage of that especially in the rapidly growing economies such as China, India, and Brazil. They have already made a European website that is depicted towards Great Britain and Canada. The European website also markets towards other countries in Europe. In order to continue expansion into other countries or more specifically towards individual countries in Europe they make websites specifically directed towards these markets. Specifically, India and China which have the two largest populations in the world and they could really capitalize on these markets.
Along with the opportunity to expand to foreign markets they have the ability to expand their product portfolio. Currently they offer just about every kind of jewelry imaginable but, there are specific items customers could want they currently do not sell. Colored diamonds are becoming more and more popular because they are rare and depict high status. Currently, Blue Nile offers 90 different shades of rare colored diamonds but there is room for more. They plan on selling over 1,000 different shades of extremely rare diamonds. They are planning on catering to a small but expensive market. In the end it will lead to retaining existing customers and attracting new ones.
Threats
The Blue Nile Corporation has been in operation for ten years now and the threats against the company are constantly changing as they change their business outlook. Since the jewelry industry is intensely competitive and constantly changing, the competition for selling diamonds and fine jewelry will continue to grow. The four main threats against Blue Nile are the intense competition, risk of declining demand for diamonds, counterfeit goods, and hacking and spoofing. Competition is expected to increase and most likely will result in price pressure, reduced gross margins and loss of market share, either of which could substantially harm Blue Nile and its operations. Other factors could result in falling customer confidence which will affect retail prices throughout the industry. Price reductions could cause liquidation and have a negative effect on sales. Other than industry threats and consumer confidence threats Blue Nile has to compete with various other competitors which include:
- Independent jewelry stores
- Retail jewelry store chains, such as Tiffany’s and Zale’s
- Other online retailers that sell jewelry such as Amazon.com
- Department stores, chain stores and mass retailers, such as Nordstrom’s
- Online auction sites, such as eBay
- Catalog and television shopping retailers, such as Home Shopping Network
- Discount superstores and wholesale clubs, such as Costco and Walmart.
Each of the listed above competitors is a threat to Blue Nile because they are all attempting to sell jewelry to the public. Each of the competitors appeals to different target markets most of which are the same as Blue Nile’s. Blue Nile appeals to most people because they offer a variety of prices from really low quality low price to extremely fine and expensive jewelry. Most of its competitors do not appeal to every market but just a couple. Take Tiffany’s for example which is the industry leader in jewelry sales, they typically appeal to the upper income market even though they have begun to deal in the lower end market. Also look at Walmart or Costco, they are selling lower end less expensive jewelry. Blue Nile is able to hit both ends of the spectrum and they have products for everybody.
Along with competitors in the jewelry industry Blue Nile also faces threats from other places. Another major threat to them is its suppliers. The suppliers have the ability to stop selling to them and sell their products elsewhere whether it is directly to the customer or to other competitors in the market. The suppliers have the ability to dictate where and when and to who the products are sold to and this can change at any point. Along with the suppliers being a threat Blue Nile also has to watch out for international competition. Since our world is getting away from doing business only in their country and is becoming globalized they need to be aware of international players entering the market. Some new company could easily start selling better products for cheaper and take away from Blue Niles market share. They need to be aware of all threats and be able to adapt to anything that is thrown their way.
Another major threat to the company is the possibility of a declining demand fro diamonds. Its not like diamonds are a necessary good that people need to survive, it is a luxury good that people can easily cut out of their typical spending. Since the economy we are in is currently struggling people are cutting luxury goods out of their lives and beginning to save their money. This hurts the demand for diamonds. Along with this the public has began to associate all diamonds with “conflict diamonds” and feel like they are supporting terrorism in African countries. This is not true, not all diamonds are conflict diamonds. In fact, there are various programs that ensure diamonds do not come from conflict regions. But, this negative association with diamonds can really hurt the demand for diamonds.
The final threat to Blue Nile is the creating and sales of counterfeit goods. Recently, Blue Niles biggest competitor Tiffany’s settled a lawsuit with eBay the involved people were selling counterfeit Tiffany’s goods over eBay. This really diminished Tiffany’s image and hurt their sales. Blue Nile does not want anything like this to happen to them. It is extremely common throughout the United States and other countries to make counterfeit luxury goods and sell them for cheaper. Blue Nile laser engraves all of their diamonds to insure they are from the company. This makes it much tougher for counterfeiters to sell Blue Niles products.
Financial Ratios
Profitability Ratios
Blue Nile had the highest ROA for 2008. The higher the ratio is the more efficient the company utilizes its assets. The company outperformed their competitors significantly, having a ratio of 13%. This is mostly due to the fact that it doesn’t hold a lot of inventory. The return on equity is even greater than the competition, having a ratio of 60%. That is about 45% greater than Tiffany”s. It is utilizing its equity efficient and creates better return to investors in the form of an increase in stock price, since it does not pay any dividends. Nile’s profit margins are low compared to the competition, having a ratio of 6% compared to Tiffany’s 13%. Blue Nile’s low margins can be explained by its low pricing of products and the fact that its fiscal year ends earlier than Tiffany’s.
Liquidity Ratios
Blue Nile’s numbers for liquidity ratios for 2008 are impressive. They outperform their competitors significantly, having a current ratio of 0.78 and a quick ratio of 3.64. These high numbers reflect how well the company repays its short-term debt. Also, the quick ratio indicates that the company has a lot of cash on hand.
Leverage ratios
The company has hardly any long-term debt to equity, having a ratio of 4%. Blue Nile has the lowest long-term debt to equity ratio of its competitors. Its debt to assets is 78%, which means they have a lot of debt obligations. However, most of its debt is current and it is able to pay off creditors in a timely manner. Creditors need not to worry about getting paid.
Activity Ratios
Blue Nile has an inventory turnover of 15.68, which is significantly higher than the competition. This can be explained by the company’s unique business model, where they only keep a limited amount of inventory on hand. The number of days it takes to get paid for a business can be very vulnerable. Blue Nile does not have to worry about that because the average collecting period is 2 days. This is due to the payment method customers take advantage off, such as financing through a third party.
Shareholder’s Return
Blue Nile’s Price/Earnings ratio is much greater than Tiffany’s and Zale, which indicate that investors are expecting higher earnings growth in the future compared to the overall market. Investors are paying more today in anticipation of future earnings growth. The higher the P/E ratio, the more attractive the stocks are.
Strategic Alternatives and Implementation
After evaluating the ability of Blue Nile to compete in the jewelry industry, we have come up with some strategies that can make the company even more successful in the future. Currently, Blue Nile is the leading online retailer of engagement rings, wedding bands, as well as other jewelry. Our analysis of the competitive environment shows how Blue Nile has outperformed and is in better shape than the competition. Their ROE and ROA have been significantly higher than Tiffany’s and Zale Corporation in the last couple of years. The firm’s ability to meet all interest payments is far beyond the competition. Also, the long-term debt to equity ratio is very low compared to the competitors and that is merely due to their ability to their lack of financing through long-term debt. However, these measures are not static. We have concluded that in order for Blue Nile to improve and grow, some changes have to be made.
Strategy 1
Weakness: Too much cash on hand
Recommendation: Merger and acquisitions
Blue Niles income statement shows that they have an excess of cash on hand. Simply having cash on hand that is not invested is not necessarily a bad thing especially in our current economic state. It will allow them to stay in business if their sales are down for multiple quarters in a row. However, they do need to do something even if it is not too drastic with this money. Blue Nile has the opportunity to acquire other online jewelers to expand their market share.
Acquisitions
Currently Blue Nile is has $54 million cash on hand simply just sitting in banks or in extremely liquid assets. They are taking on no new debt and have zero long term debt. Their debt to equity ratio and long term debt to equity ratio is 3.64 and .04 respectively. This shows that they have the ability to take on new debt possibly through acquisitions. There are many small online jewelers that operate and cut into their potential sales. Since they have the cash and no debt to pay off they should acquire a few of these small retailers. Along with retailers they could possibly buy out some of their suppliers to take better command of their supply chain. By doing so they will eliminate the costs associated with these suppliers and shorten their supply chain. Purchasing out a supplier seems to be not as feasible as buying out another company because the suppliers of diamonds are in a great position and not trying to exit their position. The acquisition of a fellow competitor seems to be more feasible.
Implementation
For implementing this strategy Blue Nile should look into acquiring ice.com. Ice.com is one of the largest and most respected online Jewelers. They have served over half a million customers since 1999. Today, they are a respected and well known online jeweler that offers , and . They pride themselves on staying ahead of Style and Fashion trends so that we can bring you the very latest in jewelry styles. This company has been around since Blue Nile but is not nearly as successful. If Blue Nile were to acquire this company they could take over more of the market share and have further insight to the market. This will give them more control of the market and put them in greater control.
Advantages
The advantage to acquiring another retailer is they will have a larger portion of the market share especially one that has been around for the same amount of time as Blue Nile. Ics.com already has brand recognition and would be an excellent acquisition for Blue Nile. If Blue Nile acquires this company and it proves to be as successful as predicted they would be in the position to purchase other companies and slowly taking over the online jewelry market. By purchasing more companies it shows the Blue Nile is a stable company and it will create news making their name more recognizable. Through acquisitions Blue Nile will become better known and own a larger part of the online jewelry market share.
Risks
Acquire another company and integrate this company into the Blue Nile organization could be difficult. Evaluation of the target company is misleading. New acquisitions could bring Blue Nile in an economic situation it cannot control. Mergers and acquisitions could also shift managers focus away from the company’s main operations, something that could lead to decreasing performance for Blue Nile.
Strategy 2
Weakness: The lack of international exposure
Recommendation: Increase exposure in foreign countries.
Currently Blue Nile is mainly operating within the United States, Canada, and the United Kingdom. The company operates through their websites bluenile.com and bluenile.co.uk. Several countries in Europe and Asia have access through these websites, but in order to be successful in e-commerce, companies need to reach out to more foreign markets and Blue Nile is lacking in this aspect. International exposure is the key for Internet stocks. The growth rates for online advertising and e-commerce outside of the United States are significantly higher, and the more international exposure Blue Nile has, the higher the overall growth rate will be. This scenario is if everything else is held constant. The percentage of sales derived from outside sales in 2008 was about 9.4 percent. This portion is small considering the possibilities Blue Nile has in the industry. The opportunities outside of the U.S. are there, and “the fruits are hanging low”, but it all depends on how fast the company moves. Our research has shown that the company’s operations are underdeveloped in the foreign countries that they operate.
Our recommendation is to increase the number of countries that they offer their services to. Countries such as Brazil, India and China are attractive because of their large populations. Considering that they are operating online they have the ability to enter foreign markets with few implications. In order to build closer relationships with customers outside of the U.S. the company can take their websites one step further and customize their websites to the country in which they operate. This means that they will translate the already existing websites into the different languages spoken so that customers with limited English skills also can take advantage of the products and services that Blue Nile has to offer. We know from experience that a lot of people don’t know English or are more comfortable with their native tongue, which is why a translation would seem like a good idea. Our generation is mostly exposed to the English language due to globalization. However, the former generations, especially our grandparents, have not been exposed as much. Customers would feel more comfortable and secure when the website is translated into their own language. This strategy would be outsourced to qualified external parties in the respective countries, and the responsibilities would be to keep the website up to date, as well as taking care of customer issues and requests.
Advantages
The importance of customizing websites will attract more customers globally and enhance their shopping experience. If potential customers have any questions regarding products or other services they will have no problems or fears when contacting a customer service representative. Blue Nile also has the benefit from the growing e-commerce and the increasing Internet use around the world. The costs of expanding online are low and its online structure is easily scalable to foreign markets. The company has a competitive advantage over retail stores, because the operating expenses are much lower and inventory management is better. This is due to the fact that it does not hold a lot of inventory on hand.
Risk factors
Being an exporter of fine jewelry and diamonds, Blue Nile would be vulnerable to fluctuations in exchange rates if Blue Nile was to sell its products in countries’ local currency. If the US Dollar were to increase in value compared to the local country’s currency Blue Nile’s overseas profit would decrease, and the other way around. When selling its products overseas in local currency Blue Nile needs to be prepared for constant change in exchange rates.
Strategy 3
Weakness: Concentrated Supplier Base
Recommendation: Implement new contracts with more suppliers.
Currently Blue Nile has a concentrated supplier base. The company’s top three suppliers accounted for approximately 21%, 21% and 25% of the company’s total purchases in the fiscal year 2007, 2006 and 2005 respectively (Data Monitor). A concentrates supplier base makes Blue Nile prone to top-line risks from external parties (Data Monitor). By having such a large percent of purchases come from one supplier it really puts pressure on the company because they rely so heavily on one supplier. It puts an emphasis on creating a good relationship with the supplier and any trouble with this supplier could result in major losses of Blue Nile. Too heavily relying on select suppliers gives the suppliers the advantage of dictating their prices. Since Blue Nile’s business plans relies on providing discounted prices this will cut into their profit margin.
Recommendation
Create new contracts with other suppliers to spread out the reliance on each company. Blue Nile has a unique relationship with its suppliers. The suppliers allow Blue Nile to purchase its diamonds after the customer has made its order. This allows Blue Nile to limit its operating costs because it does not have to have excess inventory on hand. The suppliers upload real time inventory on Blue Niles website which allows customers to choose from a large selection of diamonds without Blue Nile having to have it directly in its inventory. Blue Nile needs to create new contracts with these suppliers and spread out the distribution among suppliers. This will keep Blue Nile from relying too heavily on one supplier. They could possibly create long term contracts with suppliers with fixed prices so the suppliers will not have the ability to raise prices unexpectedly.
Advantages
Evenly distributing the reliance among suppliers will limit the risk of Blue Nile. This will allow Blue Nile to continue to have the ability to sell their high quality products at cheaper prices than their competitors without being prone to top-line risks for external parties. If Blue Nile is able to create long term contracts with its main suppliers with fixed prices it will lower the risk of having to rely on external parties.
Risk
If Blue Nile chooses to implement this strategy, it has to keep in mind that its existing suppliers might not accept this move. The suppliers will most likely feel degraded and will not wish to continue to work with Blue Nile in the future.
Strategy 4
Weakness: Lack of brand recognition in the marketplace.
Recommendation: Increase the use of marketing to attract more customers.
Blue Nile’s marketing strategy is to increase brand recognition and build loyal customers. Although, customers that know about Blue Nile have proven to be loyal, it has not fully taken advantage of the opportunities of a well-developed marketing campaign. Other companies such as Tiffany’s and Zale are more exposed in the marketplace through television, magazines and other media, which gives them an advantage when it comes to brand exposure. Tiffany’s “Blue Box” is a perfect example of how consumers associate products with companies. Another company that we have not talked much about, but who is one of Blue Nile’s competitors, is Kay Jewelers. Their slogan: “Every kiss begins with Kay” has been seen and exposed to millions of people. Their way of advertising is totally different from Blue Nile where word of mouth and returning customers are the main ways of making money. Pop-up advertisements and such are also common ways of attracting customers, but these alone are not effective.
Blue Nile can be accessed by millions of people through their websites, but our research has found that few actually know about their existence. It is great that they focus so much on the customer experience and building long-term relationships, but for future growth one cannot simply rely on those two things. To keep up with the present, and even stay ahead of the competition, Blue Nile has to come up with new strategies. When searching online for jewelry and diamonds in particular, the company has done well in establishing their address in the different search engines. However, even though these things have taken the company to where they are today, there is a need for developing and increasing the customer base.
Implementation
Our recommendation is to invest more in advertising in order to attract more customers and receive more publicity. The company is already known for their customer service and high quality products, but with a more aggressive marketing strategy still focusing on the customer experience, the company will increase its revenues and establish an even stronger brand in the industry. Online advertising is already present, but this feature can also be enhanced. Emails about sales, new offers and new products should be sent out to existing customers if this was something that they approved when they first purchased a product.
The target audience for Blue Nile is men between 25-35 years old. Therefore, magazines such as FHM, Maxim, Fortune, Men’s Health, Men’s Fitness, GQ, are the types that this group seem to read. Another option to increase the brand awareness could be TV commercials. Although, this is a costly option, the amount of men in this age who will be aware of the company will significantly increase. Till now, we have only mentioned the company’s target group, but the truth of the matter is that women are a part of the customer base as well. Increasing advertising in magazines such as Cosmopolitan, People, Elle, Vogue, Allure, Better Homes and Gardens, and O, will make female consumers more aware of the company. Another way of increasing the customer base is through customer referrals. Whenever a returning customer refers Blue Nile to a friend and this leads to a buy, the customer who referred Blue Nile gets a discount on their next purchase.
Advantages
Increasing the marketing segment of Blue Nile will increase consumer awareness and grow a larger customer base. Billboards and such representing a slogan or things that Blue Nile do best will work as a bait for people that do not know about the company. This is where BBDO comes in. Blue Nile will benefit from BBDO’s expertise and familiarity with the different cultures in which they operate. First, Blue Nile should try this strategy in the U.S., and if proven successful take on other countries as well. Our generation is more used to shopping online, because we grew up with the technology. The next generations are going to have it the same way, and therefore online retailing becomes even more valuable. The shopping experience is easy and user-friendly, which makes this type of business have an advantage over the regular retailers. One current slogan that we found was: “Smarter ways of buying a diamond”. A suggestion for an alternative slogan could be: “The special question for the special girl deserves a special ring! Build yours at Blue Nile.” The company has an advantage in the sense that U.S. customers outside of Washington State are exempt from sales tax. For purchases that amount to thousands of dollars, this means significant savings. Our research found that when men or women shop for jewelry, they often go online first to see if they can find products that they like. If more people knew about the features of Blue Nile, then they would have more visitors on their websites and that is what they can achieve if they increase their brand recognition.
Recommendation 1a: Create an exclusive Blue Nile collection.
The company should hire an outside designer to create an exclusive collection of jewelry. Blue Nile will not be the first company to do so. Tiffany’s and Kay Jewelers have had numerous designers create products for them in order to attract more customers. 70 percent of Blue Nile’s sales are from engagement rings. This means that the company should increase other jewelry sales without affecting the engagement rings sale. In order to do so, the company should look to hire the famous jeweler Theo Fennel. Theo Fennel is one of the leading designers of today. His jewelry is distinctive and inspirational and the unique style can be recognized instantly. He combines modern designs with classical tradition, which gives an elegant and stylish collection. He is extremely popular among the celebrities and has clients like Elton John and the Beckhams.
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Advantages
The experience of an outsider with a proven record of accomplishments is just the push Blue Nile needs. When promoting their products and brand name with a famous jewelry designer that has worked with celebrities many times before, informed consumers will recognize the company. In addition to increasing other jewelry sales this way, consumers will also experience the simplicity and the wide range of services that Blue Nile offers on its websites. The company will achieve hype around the brand, and if implemented correctly, they will notice an increase in sales and popularity.
Risk Factors
Improving the Blue Nile brand has its risks. As much as marketing is a great tool for enhancing customer awareness, it can also be extremely costly. This is something that it currently does not spend much money on, which means that net income will be affected in the beginning. The “campaign” also may not meet expectations in the form of an increased customer base as well as increased revenues. Since Blue Nile is known to sell high-end jewelry, this approach could dilute the Blue Nile brand name, and customers would no longer associate the company with fine jewelry.
Preferred strategy
The strategy Blue Nile should implement first is increased brand recognition of the Blue Nile brand name. Based on our valuation of the different strategies, this is the strategy that will give the highest returns to Blue Nile’s shareholders. Since this is a segment they do not have much experience in, the smartest thing would be to outsource this strategy.
The company that we found to be the best fit for Blue Nile is BBDO Worldwide. It has have offices all over the world, is represented in 79 countries worldwide and is the forth-largest global advertising agency. This year the agency won the most awards, including “Best of Show”, in the New York ADDY Awards. It’s the largest advertising competition in the world. By hiring this company we expect operating costs to increase from 14% to 19% of total annual revenue.
Currently Blue Nile has a market share of 6.3% of online sales of diamonds and fine jewelry. With an increase in marketing we believe that the company will increase its market share to 6.9% in the first year and to 7.6% the second year. The goal with this strategy is to have a market share of 10% by the end of the fifth year.
Based on consumer confidence indexes and the general economic environment, consumer spending is supposed to rebound with a slight increase. Online sales are also expected to grow by 10% annually, which is based on current trends. As a percentage of total retail sales, online sales increased to 3.2% from 2.7% in 2007, and accounted for 3.4% of sales in the third quarter of 2008. This is a clear indication of the growing e-commerce market. As a conservative estimate, we project that total online sales will increase by 1% in year one and 5% in year two.
Below is an estimated income statement forecasted for two years, the marked columns represent our projections of the effect of the implementation of the new advertising campaign.
EVA
A critical concept of evaluating performance of a business is economic value added. In difference to accounting profits, economic value added account for all resources used to create income for the company and its shareholders. Economic value added includes the cost of debt and equity in calculating how a company is retrieving its costs and creating profit. The benefit with calculating economic value added of a company is that it also account for the expected return in the market a company operates in and the general financial markets.
We have calculated the economic value added for Blue Nile’s operations as2009 based on our assumptions of implementing a strategy that will increased focus on the use of marketing to maintain growth. We have also calculated the value of Blue Nile ten years from now, based on Damodaran’s model for EVA and FCF (Damodaran). Besides from the company inputs of growth rate, increased cost financed by increased use of working capital, we have made some assumptions of the general market trends. We have forecasted that the long-term bond rate would be 4.07%, the market risk premium to be 5.01% (based on DJUSSR Index growth of 7.02% less the risk free rate of 2.01%, and a cost of borrowing money to be 9.50%.
Economic value added after first year of implementation
Firm valuation after ten years in present value
(All number in thousands)
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