Introduction
The company
was created in 1989. The story starts in North Carolina as a small wholesale
business who had a commitment to deliver the best American-made t-shirt at an
affordable price.
In 1997,
American Apparel arrived in Los Angeles. In 2003 it opened its first retail
store in Los Angeles. Within 14 months, it was operating 34 stores in North
American and three in the UK.
American
Apparel broke the walls of conventional standards by directly controlling
production, using diverse natural models, amateur photography, rejecting the
use of photo retouching, giving a chance to young individuals who push limits.
Not only
did American Apparel bring quality basics to consumers, but also provided
clothing that was both comfortable to wear and acted as the foundation for your
personal style.
Charney´s
key fashion innovation was in turning T-shirts into garments that enhanced the
physical attractiveness of the wearer. Sexuality also played a wider role in
the marketing and culture of American Apparel.
American
Apparel also reflected Charney´s social and political beliefs as his support
for inmigration. However, in 2009 the company was found to be employing illegal
immigrants and was forced to dismiss 1500 workers.
2010 came
and with it a decline. Mounting losses during this year resulted in the company
breaching its loan covenants, forcing American Apparel to issue a bankruptcy
warning. The financial weakness of the company was reflected in its cost of the
debt: an interest rate of 15% on its senior secured notes and 17% on its loan
from the hedge fund Standard General. In
June 2014 Charney was replaced as the CEO and Paula Scheider came.
The textile/clothing
sector is vertically de-integrated: design, textile manufacture, clothing
manufacture, distribution are undertaken by specialist firms. Why ?
Being
vertically integrated means that they own and operate the factory that produces
the majority of the products they sell. This direct control from raw materials
to finished products, allows them to ensure that responsible and sustainable
practices are deployed throughout the company.
Having
direct control on their supply chain gives them the ability to influence almost
every aspect of the process. That means, minimizing their impact on the
environment, offering their fair wages and benefits such as access to free
onsite medical clinics, free transportation to and from work, subsidized meals,
and access to financial aid programs.
On
occasions, where they don’t have the right equipment or enough capacity, they
use contractors and suppliers for certain tasks or certain products. When a
decision is made to outsource, they apply a comprehensive selection process to
assess the contractor’s ability to comply with their quality standards, their
labour and environmental standards, and with their Code of Conduct[1].
What are the principal
stages in the value chain for a T-shirt?
The first
stage in the value chain for a T-shirt is the product development and design. It
goes without saying that the company should pay attention to fit, texture,
shape-retention and color. When designing, this company is trying to bring
fashion to the commodity setting. The main objective of the company at this
point is feminizing the blank T-shirt industry. In order to achieve this, the
company developed updated version of timeless, iconic styles and took
inspiration from classic styles of the past, as well as the latest emerging
fashion trends.
The second
stage is the manufacturing process. American Apparel`s main manufacturing
facility comprised 800.000 square feet of flor in Downtown Los Angeles. Storage
capacity in Los Angeles facility resulted in American Apparel expanding
production to nearby locations.
The third
step is retail and Wholesale Distribution. The company operates 252 retail
stores in 20 countries with approximately 2500-300 square feet of selling
space. At this point we should take into consideration tree facts:
· Communication between the different
stores is key.
· The stores are located in large
metropolitan areas, emerging neighborhoods and university communities, away
from traditional main streets.
· They offer online retail through the
website.
The
principal target is young adults aged 20 to 32 for both, men and women, as well
as apparel for children. The company has established a reputation with
customers who are culturally sophisticated, creative and independent minded,
so, they located their stores in areas that are populated by artists and
musicians, and for the hangouts of young adults. It authorizes distributors and
over 10.000 screens printers.
The next
step is the relation the company has with their employees. The company sees
their employees as a long term investment, providing them good working
conditions in a technological environment which allows them to improve their
efficiency while promoting employee loyalty. That is why even the workers that
have the lowest salary earn double of the minimum wage. Moreover, workers are
offered healthcare, yoga classes, English lessons, training, among other
activities, in order to improve their job and much more facilities and
entertainment. The goal is having really qualified and happy workers.
Marketing
and Social Responsibility: The AA company make the marketing completely different
from most fashion clothing companies. The company AA develops all of its
marketing and advertising in-house. The photographs used in advertising and
promotion are taken by Charney and other amateur photographers. Models are all
amateurs -employees, customers and friends- who posed without makeup for the
photographs of the company. AA ads depicted young men and women sitting down or
lying on a bed, the advertisements have a “flashbulb-lighted, lo-fi sultriness
to them”. The company had to face several problems due to the exceeded sexual
suggestion of its advertisements.
What firms (or what types
of firms) are positioned along this value chain?
In the
first stage of the value chain, which is the product development and
design, they employed an in-house team
of designers. These designers go quite often to other clothing stores so as to
find inspiration for new designs. There are no more firms included in this
stage of the value chain, but the stores that the team visit.
In the
second stage, American Apparel manufactures every product in its factories and
no other company works in this stage. The company expands its production to
nearby locations, but it manufactures all by itself. However, the major US
producers are Gildan Activewear, Hanesbrands and Delta Apparel, supply the US
from plants in South America and Caribbean.
In the
retail and Wholesale Distribution stage, American Apparel sends its production
to its main retailers, which are Gap, Urban Outfitters, H&M, and American
Eagle.
In the case
of the employee relations, the company guarantees that the workers have good
work conditions. In order to do so, there are yoga classes and training classes
available. Apart from these activities, workers also have learning classes, not
only classes related with their job but also language classes. Moreover, even
the workers who earn the lowest salaries, earn around the double of the minimum
wage. In this case, the company works all by itself again and there are no
other firms around this stage.
Finally,
about the marketing and Social Responsibility, American Apparel develops all of
its marketing and advertising in house. The photographs used in advertising and
promotion are all amateurs -employees, customers and friends- who posed without
makeup for the photographs of the company.Then they published the photographs,
advertising and promotions in Village
Voice, LA Weekly, and The Oinion.
Draw a chart with the main
characters in each stage of this T-shirt (clothing in general) industry.
The first
part of the process is to have an idea of what garment you want to create. This
idea is going to be captured in a sketch which will saw the colour, the shape
of the cloth, its texture, etc in order to design a garment. The in-house team of designers sometimes
visit other competitors’ stores in order to be inspired and create new designs.
In addition, designers normally are concerned about the new trends, and they
use to go to fashion catwalks.
Once the
designers group have design the garment, the team creates a pattern which will
be used in the cloth that is being created. Once is created the pattern, they
will use it as a base for the rest of the garments. In this way, a pattern is
created for act as the first cloth which is going to be copied by the rest of
the clothes that the manufacturer produce.
Onces the
designer has done his work, the team will start to manufacture it, starting by
cutting it. Then, they will sew the fabric, and continue with the manufacturing
procedure until they have finish their garment.
The next
step is to examine the garment in a quality control personnel inspect. In this
way, the team will find any mistake in the cloth, and will be able to fix it in
the correct time. After the quality control, the garment will have its final touch,
and so they will continue to the next step, which is to photograph the garment
on a model. Once they have the photo, which in the case of American Apparel
will be kind of a home-made photo, they will mail it to the CEO looking for his
approval.
But the
procedure is not finish, as they have to make a marketing test to know if the
new cloth is going to be purchase by the audience. It would be a lost of time
if they launch onto the market a cloth that nobody wants to buy. This is why
they prove the market before starting to sell any new product.
Once the
garment is in the market, the specialists of the company are going to track the
customers´ behaviour, in order to analyze the purchases that they make.
When the
garment has passed successfully all this steps, the company will make a full
production of it, and they will start to manufacture a hole collection for the
garment, and finally, American Apparel will ship it to the rest of the company
retail locations.
Explore the factors which
explain the predominance of vertical specialists in most stages of the value
chain.
The main
factors that explain the predominance of vertical specialists in most stages of
the value chain are:
Bankruptcy
warning drived the firm to change its strategy.
The
distinctive feature of American Apparel was its high level of vertical
integration: not only did it undertake most stages of production at its LA
headquarters, but also it performed its own design marketing and advertising
and owned and operated all its retail stores.
Marketing
and advertising: The phrase “Made in USA” appeared in many ads and set the
company apart from the competitors.
Eficiency:
In a 2012 interview with CNBC, the head of the company (Dov Charney) said that
it was more efficient to manufacture in the US, closer to a company’s
headquarters and that it was “the right thing to do”. Moreover, the quality
that this company seeks is obtained thanks to the coordination effectiveness.
The company has to choose the option that involves less costs for the company.
As we have
seen, the market is too risky and unreliable, so it is a safe option to be
vertically integrated, so that the market does not influence you that much
always.
Integration
would create or exploit market power by raising barriers to entry and this is
always good for the company, because the less competitors, the more benefits
the company will have. Furthermore, this allows price discrimination across
customer segments or raising prices a bit with no reason at all.
Because of
all the problems that the company has faced related to inappropriate sexual
behavior and advertisements, the vertical integration can also be an advantage
to the company. Private information may be leaked when an activity is performed
by an independent market firm.
The company
may be able to obtain relevant information for its business and can reduce its
transactional costs, because there are going to be less contracts to sign.
What is causing AA´s
performance to deteriorate?
Despite its
numerous high points, American Apparel’s affordable fashion empire has come
crumbling down. In retrospect, we know American Apparel started experiencing
financial difficulty prior to 2009, but that is when the retailer’s business
started to go downhill in a very public manner.
The brand
became the subject of an U.S. Immigration and Customs Enforcement
investigation, which found that about 1,600 of its Los Angeles factory
employees were not authorized to work in the U.S. The company would go on to
fire roughly 1,500 employees thereafter.
Dov Charney
was ultimately fired in December 2014 after an investigation found him to have
engaged in inappropriate sexual behavior with employees and to have misused
company funds. A clean break from Charney (or as clean as possible a break)
would allow the brand to begin to build itself back up.
But
American Apparel’s problem, the one that caused it to find itself in this less
than favorable position, is not limited to Charney. In fact, it is quite
multi-faceted.The brand has expanded its product offerings, but not
significantly enough to truly rival the fast fashion giants that dominate the
market.
After
Charney’s ouster, the company tapped Paula Schneider, formerly of Warnaco and
BCBG Max Azria, to replace him in January 2015. The company also notably filed
for Chapter 11 bankruptcy, revealing that it had not made a profit since 2009.
The company
was in an awful situation because of the bankruptcy and the whole management of
it. Because of this, bankruptcy protection was implemented in order to search
for a financial restructuration. The existing stock was wiped out and creditors
swap their debt for new equity. The company has a competitive advantage and it
has to be used.
Under the
direction of Schneider, the brand worked to right some of these wrongs. For
instance, it toned down its ads. In April, it ran a “pro-women” ad on the back
page of Vice magazine. The ad, which reads “Hello Ladies,” depicts various
smiling employees who are fully dressed and identified by name and their start
date at the company. Additionally, the ad reads: “Women have always been in
charge at American Apparel. In fact, women make up 55 percent of our global
workforce (sorry, guys) and an even higher percentage of our leadership and
executive roles. This structure is incredibly (and unfortunately) rare in the
corporate world.”[2]
Advise the board on what
American Apparel should do next.
AA has to
externalise some of the stages of the value chain in order to cut some costs. A
good idea could be the creation of an alliance with another company in order to
share information, inputs, etc.
When they
create an alliance with another company means an agreement between businesses,
usually motivated by cost reduction and improved service for the customer.
Alliances are often bounded by a single agreement with equitable risk and
opportunity share for all parties involved and are typically managed by an
integrated project team.
In order to
make a good alliance AA company should first of all identify the need by
understanding where the greatest market potential is and determine what you
need to compete successfully. Secondly, they need to evaluate the potential
partners, evaluating the management styles, work ethics and values. In third position, they should establish
joint objectives and goals that reflect what you both want to gain from the
relationship. After that, they have to define their roles and responsibilities
on who does what best. Be specific about how many people will be. Also they
have to develop a good communication process, that is key in order to create an
enduring relationship. And develop conflict-resolution systems with the aim of
preparing for the inevitable misunderstanding, compromise and disagreement, and
resolve them as quickly as possible, being honest and loyal. That is why they
should build on trust and this requires building respect and good personal relationships
among them. Moreover, they should demonstrate commitment; both partners must be
willing to nurture and care for the relationship. Finally they need to be
patient because it will take time to develop and maintain, and be all ears,
listening to the potential partners for clues for their needs.
You and your team made a very good job in this group assignment.
ReplyDelete