NEXT Case Study

 

 

Founded in 1982, the Next retail chain (Next) is a British retailer chain which offers exciting, beautifully designed, and excellent quality fashion and accessories for men, women and children. In addition, the company also provides a wide range of homewares (Next Plc., 2012). Despite the general economic downturn in the UK and the highly competitive industry in 2011, Next still achieved strong performances. Group revenue for the first half of 2011 was 3.6% higher than last year and profit before tax was up 8.5% on a continuing basis (Next Plc., 2012). The reason behind this is due to Next’s successful business strategies, which is the aim of this essay. First, the environment where Next is operating as well as the key external changes affecting the company will be discussed. In the following part, the essay will analyse about how the company competes strategically and adds value for customers respectively. Finally, as the conclusion of the analysis, whether the company can sustain its strategic position will be assessed.

 

The environment where Next is operating has become quite different from that ten or twenty years due to several key external. One of the drivers is globalization, which refers to ‘the absence of borders and barriers to trade between nations’ (Ohmae, 1995). Globalization has influenced the industry in different fields positively and negatively. From the positive side, modern technology allows online business and mass manufacturing. Economic integration throughout the world also helps the company to develop new markets in Eastern Europe and Asia, and outsource factories to countries where the labour and material costs are lower. However, globalization also leads to severer competition (Grant, 2005). To better analyse these changes, PEST Analysis, standing for ‘Political, Economic, Social, and Technological analysis’ is applied. From the political aspect of view, the British government is stable, providing a good environment for retailers. Nevertheless, the government launched several policies which are adverse to existing retailing industry, being barriers for retailers to develop business. For instance, the government is planning to cut the higher rate taxpayers’ child benefit from 2013 in order to cut the deficit. It will remove the child benefit from families which have at least one parent with more than £44,000 income per year, leading to huge losses for middle income families (BBC, 2010).

 

Secondly, though the economy of UK is the 6th largest economy in the world and the second largest in Europe, it has experienced sharp declines since the 2008 financial crisis. The unemployment rate remains high and the disposable income of household decreased (Central Intelligence Agency, 2009). Moreover, from January 2011 VAT rate rose from 17.5% to 20% (The Telegraph). For customers, it costs each household around £520 a year and VAT payments represents as much as 12.1% of the disposable income of the lowest household quintile. From the retailers’ aspect of view, the VAR rise would cut sales and slim down their labour force. Because of this, nearly 10,000 stores will be closed in 2011 and a further 5,000 will be closed in 2012 (Centre for Retail Research, 2011). Additionally, 98% of retailers would ultimately pass on the whole of the VAT increase to customers, making the situation even worse.

 

The third aspect is the social factors. British people are generally well educated and they seek for fashion. This provides Next with a good customer base. However, the country has entered the aging society. As the office for National Statistics (ONS, 2008) states, for the first time, UK has more people over 60 years old than children under 16 years old. Therefore, how to target the elderly customers properly becomes a key corporate strategy for all the retailers.  Furthermore, British customers are very concerned with company’s social responsibility. Thus, retailers should not only seek profitability, but also invest in social aspects to sustain their good reputation.

 

Finally, from the technological aspect, advanced information and communication technologies like Internet and E-commerce have developed very fast, which provided customers with more choices of buying patterns. It is stated by Harris (2010) that there are more than 40 million Internet users in the UK and the total sales of E-commerce in 2009 were £38 billion with an increase of £30 billion from 2006.  However, E-retailing in UK only accounts for less than 10% of the total retail sales,  revealing that a huge market potential exists for retailers, who should focus more on creating values for customers in terms of the easy and convenient purchasing formats.

 

After analysing the general environment of UK, the essay will focus on the transactional environment, which refers to the situation that the firm itself can influence and is unique to each individual firm (Johnson, Scholes and Whittington, 2010). Michael Porter’s Five Forces Framework (see Figure 1) will be applied to examine the transactional environment of the clothing retailing industry. These five forces determine the degree of competitiveness of the industry and guide the Next in its strategy.

 

 

Figure 1: Five Forces Analysis for Next

 

Source: Henry (2008)

 

First, Competitive rivalry refers to the hub of competition in the market (Porter, 1980). The clothing market is a declining market. The clothing industry is beset by competition from companies which have invested in hi-tech machinery leading to greater efficiency or have moved their production to factories in cheap labour cost countries to produce their products. Hence, most companies in this sector make only moderate profits. It is also a highly diverse industry. The retail sector ranges from low-cost and discounts retailers such as Tesco, Asda and Premark through to independent stores like Next, M&S, and Topshop/Topman to highly exclusive designer boutiques (Howe, 2011). For Next, the competitive rivalry is moderate as it holds a dominant position owing to its strong brand reputation and wide range of clothes with good quality and fashion (Next, 2012). Thus, though its price is slightly higher than M&S and other doscounts retailers, customers are still willing to pay a price premium for the perceived product differences. However, Next’s profitability is competed away to some extent through extensive promotions and advertising that are necessary in order to maintain its status as a differentiated clothing retailer.

 

Second, the threat of new entrants for Next is low as the company has possessed a distinct advantage of product differentiation and brand loyalty, which makes it difficult for new competitors to enter this strategic group. It also possesses industry knowledge which offers an absolute advantage and a network of known distribution outlets. Nevertheless, this only means that entry into the market would be difficult for new participants but no impossible.  For instance, those traditional grocery retailers like Tesco and Asda has added clothes in their stores, combined with large foreign retailer chains such as Zara and Gap.

 

Third, the bargaining power of buyers would be strong if there are a concentration of buyers, alternative sources of supply and low switching costs (Haberberg and Rieple, 2008). For Next, customers’ low switching costs are moderated by perceived product differences and brand loyalty. However, because of the economic downturn, a quantity of customers has shifted or is planning to shift to low-cost retailers. This is one of the potential threats for the company.

 

Moreover, from the perspective of suppliers, the company has established close working relationship with a few key suppliers who can replenish retailers’ merchandise rapidly and efficiently. Next enjoys a bargaining power to these suppliers because it is their main customer. Consequently, Next faces a moderate bargaining power of suppliers.

 

Finally, the forms of substitutes include product substitution, substitution of need and generic substitution (Henry, 2008). The threat of substitutes to Next is high because many other types of retailers are competing with Next in this market. Especially during the current economic recession, the low-cost discounters such as Tesco and Premark provide a substantial threat to Next. The existence of these substitutes means that customers will switch to low-cost retailers in response to price increases. Verdict Consulting (2011) argues that back in 2000, just 27.9% of all clothing consumers regularly shopped at the value players. By 2008 just before the recession hit, the figure increased to 53.7% and at the end of 2010, it stood at 57.3%.

 

From the five forces analysis it is evident to see that Next is facing a rather competitive situation. Nevertheless, the company is still able to keep profitable growth and maintain its market share. The reason behind this is Next’s successful business strategies and distinct positioning strategies.  The company distributes businesses through three main channels: Next Retail, a chain of more than 500 stores in the UK and Ireland; Next Directory, a home shopping catalogue and website with nearly 3 million active customers; and Next International with more than 180 franchise stores throughout continental Europe, Scandinavia, Russia, the Middle East, India and Japan (Next, 2012). In order to cope with the current difficult retailing environment, Next has developed different strategies for each of these approaches. On one hand, the company has tried to grow Next Retail sales by continuing to add profitable new space, with a particular focus on new large store format Home stores. Unlike other clothing chains that are reducing their high street presence, Next is expanding, with 300, 000 sq ft of space opening this year. Wolfson from Next said that although more and more customers are turning to Internet, high street stores are still very important as many customers go to stores to collect and return goods ordered online (Wood, 2011). On the other hand, Next grows its Directory sales through profitably maximizing the potential of its online, both in the UK and overseas. Next Directory was launched in 1998 and now it is a 1,400 page book offering extensive collections for men, women, children and homewares. This is the most profitable business for the company. Wood (2011) pointed out that the Directory sales jumped 17% in the three months to 29 October 2011. Although Next Directory generates less than a third of group sales, it contributed 40% of group profits last year. Finally, the company’s international sales also achieved strong performances in 2011. The total sales stood at £32m, much higher than £10m in 2010 (Next, 2012).

 

Thanks to these successful strategies, Next has possessed a strong position in the competitive UK clothes retailing industry. In the strategy clock, the company is regard to adopt a differentiation strategy, selling their stylish and good quality clothes at reasonable prices (see Figure 2). The success of Next is due to its strong reputation and its wide and varied range of stylish clothes. The company is able to charge higher than average prices because of its successful efforts to target relevant customers (Howe, 2011). Many scholars have developed the concept of ‘strategic group analysis’, which helps make sense of the competitive landscape and identify firms with similar strategic characteristics. Hence, strategic group analysis can help the company identify the most direct competitors (Porter, 1980; McGee and Thomas, 1986; Johnson, Scholes and Whittington, 2010).

 

Figure 2: The strategy clock: Bowman’s competitive strategy options

 

Source: Henry (2008)

In the Next’s point of view, its direct competitor is Marks and Spencer (M&S). The company is positioned in the same strategic group with Next, and the company enjoys the largest market share. Differentiation is important for M&S, but consumers do not perceive major differences in the quality between its products and those of low cost retailers. M&S was placed half-way between success likely and success uncertain because of the mixed performance of its clothing range (Figure 3). Its non-school children’s clothing range is perceived to be uncompetitive with low cost retailers and the outcome of its repositioning exercise is unknown, while the school range has continued to do well. The low cost retailers, represented by Tesco, Asda and Premark have become serious competitors to Next as they combine good quality products and at low prices. This approach has helped to gain this strategic group even further sales success during the economic recession as more consumers have become price-sensitive and seek value-for-money in these uncertain times (Figure 4). Finally, niche retailers have been positioned between the ‘success likely’ and ‘success highly uncertain’ regions. Niche retailers are positioned in this overlapping area because of variations in their performances.  That is, some niche retailers match customers’ expectations on price and quality, while others stock less desirable brands, attempt to serve too many segments and therefore struggle to create a clear identity and for that reason suffer poor sales.

 

Figure 3: Perceived price/differentiation matrix for the United Kingdom’s retail clothing market

 

Source: Howe (2011)

Figure 4: Percentage of market share for each retailer

 

Source: Verdict Consulting (2011)

 

Next is trying its best to add value for customers so that to sustain its competitive advantage. Porter’s value chain analysis is widely regarded as a useful tool to identify the key activities in the organisation and where can the organisations gains added value (Porter, 1985). Before explaining the concept of value chain in detail, the essay will first look at Next’s resources and competences. These two concepts have slight differences. As defined by Johnson, Scholes and Whittington (2010), resources are the tangible and intangibles asset of a company, including its plant and machinery, financial resources, human resources and intellectual capital, and the competences relate to the way in which resources are used. Though the tangible assets are still important, today it may be argued that the competitive advantage of a company lies more in intangible resources such as organisation structure, corporate culture and individual staff. In fact there are considerable evidences to suggest that the organisation structure of a business is a key dimension in the implementation of a strategy. Nevertheless, Barney (1991) claims that resources or competences can only meet the minimum requirements of the organization’s chosen customers.  It is the unique resources and core competences that are particularly appreciated by customers and that cannot easily be imitated by the organization’s competitors that contribute to the sustainable competitive advantage.

 

Porter takes the concepts of resources and competences and the goal of achieving sustainable competitive advantage and links these through the concept of value. In Porter’s terminology the value network is the set of value relationships across a whole industry that is necessary for the total creation of a product or service. Such a transformation will involve a series of vertically integrated production or distribution activities, normally undertaken by a number of separate organizations.  Within the entire value network each of these individual businesses will have its own value chain, as shown in Figure 5 (Henry, 2008). He further divides the value chain into primary activities and support activities. Primary activities comprise a sequence of inbound logistics, operations, outbound logistics, marketing and sales, and associated service.  Support activities such as infrastructure, human resource, technology and procurement relate to each of the primary activities and are designed to maintain or improve their efficiencies. One obvious advantage of the concept is that it identifies the linkages between two separate activities. Improvement in the former area may result in the increased efficiency or cost reduction in the latter. Thus, in some cases an increase in costs in one area may lead to a greater reduction in costs in others, or an increase in total costs may allow a firm to achieve a greater increase in prices so that to in pursue a differentiation strategy (Grant, 2005).

Figure 5: Value Chain Analysis

 

Source: Henry (2008)

 

With regard to Next, the company has tried to add value in the following ways. First, it invests heavily on advertising to keep its status as a differentiated clothing retailer. According to Howe (2011), the advertising expense of Next is £5.4 million, much higher than its main competitors. The increased cost on advertising does not affect Next negatively since its customers value the quality and fashion of its products and therefore are willing to pay prices that are higher than industry average. Second, the company keeps close relationship with a few key suppliers and because the company is their main customer, it enjoys significant bargaining power. Thus, Next is able to get the supplies at the lowest possible price. Though the supply chain environment experienced some challenges in 2011 due to volatility in raw material prices and labour costs, Next Sourcing still made around £23m profit because of its sound base and good geographic spread (Next, 2012). Third, Next pays much attention on after-sales. Unwanted items can be returned to store, by courier and by post within 8 days and refunds will be approved immediately. During the Christmas period the company even extends the return period as all the Christmas presents can be returned until mid-January (Next, 2012). Finally, Next has established comprehensive policies for recruitment, training and the development of employees and committed to invest heavily in order to make employees fell valued and want to stay with Next. It is the effective and committed employees that allow the company to continue delivering both excellent quality products and service to its customers.

 

In conclusion, the essay has analysed the business environment where Next is operating as well as the business strategies Next are applying in detail. The UK clothes retailing industry is mature and rather competitive. Because of the decrease of household disposable income and the rise of VAT rate, all the clothes retailers are facing a difficult situation, and many customers are shifting to choose low-cost retailers. Nevertheless, Next is still able to make profits and keep its market share due to its successful differentiation strategy. The company relies on its strong branding, good quality and fashionable products to charge customers higher than average prices. The strong growth in Next Dictionary and Next International offsets the slight decline of Next Retail. In addition, the company also make efforts to reduce cost and improve efficiency during its value chain. Consequently, the essay believes that Next is able to sustain its competitive advantage in the future.

 

References

Barney, J. (1991) ‘Firm Resources and Sustained Competitive Advantage’, Journal of Management, 17, 99-120.

 

BBC News (2010) Child benefit cuts for better off are fair – Cameron (online). Available: http://www.bbc.co.uk/news/uk-politics-11473609 (Accessed: 06th January 2012)

 

Centre for Retailer Research (2011) VAT Hike To 20%: Effects on Retailers and Consumers (online). Available at: <http://www.retailresearch.org/vatincrease.php> (Accessed: 06th January 2012)

 

Central Intelligence Agency (2009) Economic Overview (online). Available: https://www.cia.gov/library/publications/the-world-factbook/geos/uk.html# (Accessed: 06th January 2012)

 

Grant, R. M. (2005) Contemporary Strategic Analysis (5th edition). Oxford: Blackwell.

Haberberg, A. and Rieple, A. (2008) Strategic Management: Theory & Application. Oxford: Blackwell.

 

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Henry, A. (2008) Understanding Strategic Management. Oxford: Oxford University Press.

 

Howe, S. (2011) Next PLC and the UK Children’s Clothing Retail Market. Scotland: University of St Andrews PPT.

 

Johnson, G; Scholes, K. and Whittington, R. (2010) Exploring Corporate Strategy (text and cases, 9th edition).  London: Prentice Hall.

 

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Next (2012) About Next (online). Available at: <http://www.nextplc.co.uk/about-next.aspx> (Accessed: 04th January 2012)

 

Next (2012) Results for the Half Year Ended July 2011 (online). Available at: <http://www.nextplc.co.uk/~/media/Files/N/Next-PLC/pdfs/reports-and-results/2011/half-year-results-july-2011.pdf> (Accessed: 06th January 2012)

 

Next (2012) What is the Returns Policy? (online). Available at: <http://help.next.co.uk/Section.aspx?ItemId=10273> (Accessed: 06th January 2012)

 

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Porter, M. E. (1980) Competitive Strategy. Free Press.

 

The Guardian (2011) Business Next (online). Available at: <http://www.guardian.co.uk/business/next?INTCMP=SRCH> (Accessed: 04th January 2012)

 

The Telegraph (2011) VAT increase: shops could put up prices five to eight per cent (online). Available at: <http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8237338/VAT-increase-shops-could-put-up-prices-five-to-eight-per-cent.html> (Accessed: 06th January 2012)

 

Verdict Consulting (2011) Current trends and future opportunities for the UK Clothing Industry (online). Available at: < http://www.business.barclays.co.uk/BBB/A/Content/Files/UK_Clothing_Industry_Report.pdf> (Accessed: 06th January 2012)

 

Wood, Z. (2011) Next says home shopping gains offset high street squeeze (online). Available at: <http://www.guardian.co.uk/business/2011/nov/02/next-home-shopping-gains> (Accessed: 04th January 2012)

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