Corporate level strategy: This is concerned with the overall purpose and scope of an organisation and how value can be created or added to different parts of the business (Jhonson et al 2006). This includes decisions of geographical coverage, mergers and acquisitions, and how resources are allocated to different parts of an organisation. In contrast with Burberry, Bravo adopted the strategy of International expansion to bring success in Burberry. New stores were opened including flagship stores in London, New York and Barcelona. Besides USA and Spain, Bravo also targeted Japan since it was an enormous market for company already. The results were profits soaring to £162 million by 2005, a six times increase since she took over (Jobber 2010). In regime of Ahrendts, Burberry opened stores in emerging markets such as India, China, Russia and Middle East. In 2010, the company acquires 50 stores across 30 cities, which was owned by its Hongs Kong based franchisee. The company continues to expand in emerging markets like India, Sao Paulo and Dubai either by opening new stores or establishment of regional offices. And recently, through franchise partners Burberry opened new stores in Armenia, Egypt, Israel and Mongolia (Burberry.com).
Business level strategy: This is about how to compete successfully in particular markets. This level of strategy deals with which products should be developed in which market and how to gain advantage over the competitors (Johnson et al 2006). Burberry having a single product line of fashion it has to concentrate more on this level strategy. Strategies like leveraging the franchise, intensifying non apparel development and accelerating retail-led growth can be seen as business level strategies. Ahrendts’s digital strategy made Burberry the first luxury brand to live-stream a fashion show in 3D, to allow the customers to order products directly from the catwalk. She introduced social networking site to deepen the relation between customers and attract new devotees. Ahrendts, in a video interview claims that word-0f-mouthspreads through social networking and continues to be a positive conversation and its very powerful (Edgar 2009). As a result of all these Burberry overcame the recession and reported a profit of more than £5 billion in 2009.
Organisational strategies: This level is concerned with how different parts of organisations deliver effective corporate and business level strategies by proper allocation of resources, people and processes (Johnson et al 2006). Pursuing operational excellence can be seen as organisational strategy. This level includes steps like introducing new IT systems like SAP, where a single SAP HR database can hold information of 6500 employees in 25 countries and replacing 21 scattered distribution centres with three regional hubs in the USA (Jobber 2010).
The Strategic Position
This part of the report is concerned with the impact of external environment, Organisation’s resources, capabilities and core competences on the strategy of an organisation. According to John Kay, “The subject of the strategy analyses the firm’s relationship with its environment, and a business-strategy is a scheme for handling these relationships” (Dransfield 2001).
Macro-Environment
Organisation needs to be in tune with the environment. Therefore there is a need of market scanning to make appropriate strategic responses, which can be done by Pestle analysis. Pestle analysis looks at political, economic, social, technology, legal and environmental factors which affect the organisation (Dransfield 2001).
Political: Political factors include Government stability, taxation policy, foreign trade regulation and social welfare policies. Burberry needs to consider the trade regulations and taxation policy when sourcing or marketing products to parts outside Europe. Burberry, sources 60% of its raw materials from Europe, which makes the group strongly unaffected by Chinese imports impacts of Yuan/dollar de-pegging (Zekaria 2010).
Economic: This may contains factors like Inflation, unemployment, interest rates and money supply. Economic deceleration, in UK, began in 2008 when GDP contracted by 0.1% and the economy contracted by 4.9% by 2009 because of the slowdown in the global economy. Though the economy recovered in 2010, this slowdown has adversely affected the creation of jobs in the country. Nearly 2.5 million were unemployed in 2010 (UK Country profile 2011). Burberry needs to monitor the inflation rates as it may directly effect on the buying capacity. For example, when recession hit UK, stocks stumbled to £1.60, and pressurised Ahrendts to cut costs by £50m and staff by about 10 percent (Friedman 2011).
Socio cultural: Factors like population demographics, income distribution, lifestyle, consumerism and social mobility comes under Socio-cultural factors. The brand is defined by: Britishness, Democratic luxury positioning, Authentic outwear heritage and historic icons, which makes it so popular among the people. As we saw before investing in under-penetrated markets is one of the strategies of Burberry. So, it has to explore the socio-cultural factors of the emerging markets. As said by Christopher Bailey about India, “it’s a country we are so excited by. They have huge appreciation for luxury and Britishness”. This implicates that Indians have appreciation towards British lifestyle, which brings success to Burberry in India.
Technological: This includes factors like new discoveries/developments, speed of technology transfer and rates of obsolescence. As we saw before Burberry was the first luxury brand to live stream a fashion show in 3D, where consumers could buy products directly from the catwalk. And introduction of social networking sites and websites like artofthetrench.com where customers like customize their products are few examples of the technologic usage in Burberry.
Environmental: Any organisation should consider these factors like environmental protection laws, waste disposal and energy consumption. Burberry renewed focus on diverting waste from landfill. Burberry’s recycling partner has converted over 130 tonnes of samples and raw material waste into car door insulation (Burberry.com).
Legal: Legal laws like competition law, employment law and product safety should be considered by an organisation to develop or protect the strategy. Burberry faced a problem of copycats, which infringed its trademark. Burberry claimed to spend £2 million a year to fight these counterfeits. It uses an Internet-monitoring service to help pick up the discussion and it also works with custom officials and local police to seize and sue fakes (Jobber 2010).
Industry and market structure and competitive conditions
The industry structure defines the levels and roles in an organisation. There are number of discrete structural forms like: entrepreneur, functional, divisional, holding company and matrix structures. According to Roy Watts, Chairman, Thames Water, “Autonomy is what you take, not what you are given” (Thompson 1997). Burberry’s industry structure can be seen as entrepreneurial structure or functional structure. Entrepreneurial structure as the organisation is organised wholly around the chief executive, Ahrendts. Functional structure, like all the functions such as production, finance, marketing and HR is controlled by chief executive. And, Christopher Bailey as creative head responsible for the production. Advantages of these structures are: they are centralised, relatively less overheads and simple lines of control (Thompson 1997).
As we saw before, Burberry sells its products to its end customers through retail, wholesale to different parts of the world. Let us see the revenue from different markets and different channels (Burberry.com):
Americas: constitutes to 27% of the total revenue which includes business in US, Canada, Central and South America.
Europe: this includes the operation in Europe excluding the Spanish operation and accounts for 34% of total revenue.
Asia-Pacific: including operations in China and Japan this market is growing rapidly constituting for 33% of the revenue for Burberry.
Rest of world: this includes operations in India and Middle East which constitutes for 6% for its total revenue.
Retail: This channel accounted for 64% of its total revenue including 174 stores, 199 concessions with departmental stores and 44 outlets, as well as digital commerce across the world.
Wholesale: 29% of revenue for Burberry comes from this channel. This includes sales to departmental stores and its franchises mainly in emerging markets.
Licensing: Remaining 7 % of revenue comes from licensing, including royalty income received from licenses in Japan, its global licenses for fragrance, eyewear and timepieces, and a small European childrenswear license.
Competitive conditions can be analysed by porter’s five forces framework which helps in identifying the sources of competition (Johnson et al 2006).
The threat of substitutes
There are lot of luxury brands which have established their names in the fashion industry.
The threat of new entrants
Fashion industry is ever growing and there may be threat of new and cheaper brands entering the market.
The power of suppliers
Need to have good relation with the raw material suppliers and need to have many suppliers. Relying on one supplier may be a risk if supplier fails to deliver at time.
The power of buyers
The inflation or economic downturn affects the buying power of the customers. More customers are likely to become price sensitive.
Competitive rivalry
There is danger of intense competition from the rivalries like Mulberry and Gucci as one they attempt to gain competition over other.
Strategic capability, Resources and Competences
The resource-based view of strategy: The competitive advantage of an organisation is explained by an organisation is explained by the distinctiveness of its capabilities.
Strategic capability
The ability to perform at the level required to survive and prosper. It is underpinned by the resources and competences of the organisation (Johnson et al 2006). Its well reputed brand name, britishness, democratic luxury positioning and its appeal to customers make it able to survive and prosper rapidly. Burberry’s capability can be measured by facts like; Kate Middleton wore a Burberry trenchcoat during her coming out phase of Princess-to-be (Friedman 2011).
Resources
Resources can be of two types- tangible and intangible resources. Tangible assets consists of physical assets of an organisation such as plant, labour and finance, whereas, non-physical assets such as information, reputation and knowledge forms the intangible assets of an organisation (Johnson et al 2006). Burberry has a list of rich intangible resources from its 154 years past history. At present Burberry is one of the leading British luxury brands. Going to the history, Burberry was awarded Royal warrant two times in 1955 by Queen Elizabeth and Prince of Wales in 1989. And Burberry won many awards for its design and innovation like 2010 British Fashion awards (Friedman 2010) which builds up their reputation.
Competences
These are the activities and processes through which an organisation deploys its resources effectively (Johnson et al 2006). Burberry’s new and core competence is the digital innovation. This is driven by the desire to “connect customers directly to the brand”. It can be either the live-stream of fashion show in 3D or the artoftrech.com website where customers can customize their own design. Other competence was to endorse the brand through advertisements featuring celebrities such as Beckhams, Elizabeth Jagger and Nicole Appleton.
Financial situation of Burberry
In this section let us see the current financial situation, as a result of strategies deployed as discussed before. This is done by few ratios derived from the balance sheet and income statement of the company. Ratios are used for measurement of the organisation’s performance, comparison of one year with another for detecting improving or deteriorating trends, for forecasting cash flows and efficiency of resource usage. Let us briefly see some key ratios which explain the present financial situation of Burberry.
Table1: Ratios calculated. (See Appendix)
ROE: This measures the return from profit after interest and tax have been deducted to shareholders capital. As calculated it is 28.2%, which means for every £100 investment you will get back £28.2 which is very good.
Gross profit: This measures the profit after direct unit costs as %sales. As seen in the above table gross profit for 2011 is 67% which is a good sign for Burberry and its shareholders.
Current ratio: This measures the cash position of an organisation. If the ratio is more than one, it means company can pay its liabilities from its assets. Current ratio of Burberry is 1.63 which means they can not only clear the liabilities, they can even invest for new diversifications.
Some other ratios like ROCE, ROS and Gross gearing ratios can also be calculated for determination of a company’s situation.
Strategic choice
Strategic choice involves understanding the underlying bases for future strategy at both the business and corporate level and the options for developing strategy in terms of both the directions and methods of development (Johnson et al 2006).
The variables for determining strategic choice are: Economic or technological sector choices, value network position choices, product/market sector choices, resource and capability choices, generic strategies and development routes.
Business level strategic choice
As discussed before this strategy is about how business units compete successfully in markets to meet the needs of their customers. This is considered by examining the generic choices of the bases of competitive strategies know as the ‘strategy clock’ (Johnson et al 2006). The options in the strategy clock are: no frills, low price, hybrid, differentiation, focused differentiation, increased price/standard value, increased price/low value, low value/standard price. Precisely, these options can also be seen as:
Price based strategies- seeks to achieve lower price than competitors with same quality of products,
Differentiation strategies- seeks to provide products different from those of competitors and that are widely valued by buyers,
Hybrid strategy- seeks to achieve both price and differentiation strategy,
Focused differentiation strategy-seeks to provide high perceived product, justifying a substantial price premium, failure strategy- does not provide value for money nor perceived products.
Corporate level strategic choice
In this level, developing strategy for future comes with an option of diversification. It is a strategy that takes an organisation into both new markets and new products. Diversification can be of two types
Related diversification- involves in strategy development beyond the current products and market but within the capabilities and values of an organisation. Related diversification takes different forms like: Vertical integration- is forward or backwards integration into adjacent activities in value network, horizontal integration- is development into activities which are complimentary to value network.
Unrelated diversification-means strategy development beyond current capabilities and value of the organisation.
Direction and methods
For better understanding of development of strategic options for growth can be analysed by Igor Ansoff’s matrix of strategic options (Johnson et al 2006). This matrix compares the alternative of developing new products and markets.
Fig 1. Ansoff’s matrix
Market penetration- This involves in selling of same products to same customers or market segment using excellent marketing skills or by increasing the market share or by developing competitive advantage or by growing the total market size.
Product development- This option involves in developing new products for the existing customers in order to satisfy their changing lifestyle.
Market development- This involves in creation of new customers which is more difficult than creating new products. But for brand like Burberry with global approach it is not difficult to create a new market.
Diversification-This involves in developing both in terms of product and markets. This is often done through acquisitions, because of the difficulty of developing both new products and market.
The above section showed the direction for the development and now let us sees the available methods for this development and their advantages and disadvantages in brief. The methods include:
Organic or internal development- where strategies are developed by developing organisation’s own capabilities. These have advantages of enhancing knowledge and learning and no need of searching suitable conditions available for mergers or acquisitions.
Mergers and acquisition- strategies are developed by taking over ownership of another organisation.
Equity Alliance- two or more organisations share resources to develop a strategy. These have advantages of financial risk which is shared with partners and combination of resources which may helps in development of unique product. This method also has difficulties in identifying the appropriate partner and maintaining proper relationship with the partners.
Franchise- a contractual relationship with some businesses operating under the organisation name and guidance with an exchange of fee. This is a form of non-equity alliance.
Licensing- permission to engage in certain activity by authority of an organisation. This is also a form of non equity alliance.
According to Claudio Aspesi and Dev Vardhan, “The best strategy for any company is a strategy it can implement. Before you choose one, think about what your company already does well” (Dransfield 2001).Having the strategic options, direction and methods it’s necessary and important to analyse the success criteria of the planned options. There are three main success criteria:
Suitability: These concerns whether the strategies planned fit the situation. Tools such as Pestle analysis give a clear picture about the relationship between the internal organisation and external environment. And, it needs to look at whether that strategic option provides a suitable use of resources in given environment.
Accessibility: This is concerned with whether that strategy is acceptable by the organisation and its stakeholders. These depend on three main types: return, risk and shareholders reaction.
Feasibility: this is about whether the strategy planned can be implemented in real practise. These criteria can be accessed by analysing the organisation’s strategic capabilities.
Recommendations
Having studied all the options, directions and methods of strategy development let us recommend and discuss some strategic choice for Burberry.
In business level, Burberry cannot adopt price-based strategy because of disadvantages like margin reduction and inability to reinvest. And, Burberry has developed its brand name as a Royal luxury brand which will be affected if it follows price-based strategy and will lose high class customers. Burberry can adopt focus differentiation by providing high perceived goods with superior quality and new designs, which justifies the premium price. Market penetration and product development discussed in Ansoff matrix comes under this level. Market penetration can be done by increasing the market share or by developing competitive advantage or by growing the total market size. This can be done organic method of development by increasing the number of retail shops in the existing markets. Product development can be done by appointing new young designers and adding value to the new products by famous celebrity endorsements. Product development can be done by organic method or licensing for new accessories.
In corporate level, as we saw before strategic choice is diversification. The two strategic directions: market development and diversification in Ansoff matrix comes under this level. The vertical integration can be done by acquisition of the textile industries supplying raw materials or by acquisition of rival companies like Gucci. The acquisition again should be done after analysing the criteria seen before. Methods of Joint venture/ Alliance can be used for horizontal integration by contractual relationship with high end sports car brand for the production of its merchandises. For example, Puma produces clothing and other merchandise like bags, wallets for Ferrari and Ducati.
Conclusion
Burberry, a must-have fashion brand in Britain started in 1856 produced coats for army officials. In just few years it lost its old cultural status and developed new cutting-edge trends to become a modern luxury brand. With a key strategy of brand extension and it’s very British image it soon became popular in US and Asian markets. As we saw in the report, the leadership skills of Bravo and Ahrendts played an important role in developing and execution of strategies for the development of its unique resources and core competences. Burberry’s adoption of related diversification had led to its success. It operates in only one value network of fashion which makes it to concentrate more on it and grow radically through franchises and licensing. The studies also shows the strategy should be adopted in proper times by a lot of analysis like PESTLE and the success criteria needs to be analysed before executing any strategy. It is also seen that strategies deployed by Burberry have resulted in good financial situation. In simple words, “All is well in Burberry” because of its past and present strategies.
Appendix
Return on Equity(ROE) = (Net profit after tax/ Shareholder’s Equity)*100
ROE of Burberry: (212.5/733.3)*100 = 28.2%
Current ratio = Current assets / Current liabilities
Current ratio of Burberry: 870.1/534.3 = 1.63
Gross profit margin = Gross profit/ Sales revenue
Gross profit margin of Burberry: 1009.7/1501.3 = 67%
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