Levi

Project Title: Levi Strauss Co.

By Jason Lee Jin M Kim John Glenn Tom Matson Yong Kim

BUSA 499-01 Strategic Management Spring 2008 Chung-Shing Lee, Ph.D.

Table of Contents Intrepid International Executive Summary Strategy Identification Segmentation Graph Strategic Evaluation Industry Defined Porter’s Five Forces Threat of Entry Threat of Rivalry Threat of Substitutes Threat of Suppliers Threat of Buyers Competitor Analysis Customer/Marketplace Trends & Environment Forecast VRIO Value Rarity Imitability Organization VRIO Table SWOT Analysis Strengths Weaknesses Opportunities Threats 21 Strategic Option Development New Premium Denim Line Fast Fashion Strategic Option Evaluation Trade-Off Table Strategic Selection Strategy Implementation Measuring Competitive Advantage

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3 4 5 6 6 7 8 10 11 12 13 13 15 16 17 17 17 18 18 19 20 20

21 22 22 24 24 25 26

To Whom This May Concern:

Intrepid International is an external consulting agency founded in 2007, located in Tacoma, Washington. The company consistently performs consulting audits for the surrounding community and both private and publicly traded firms across the United States. At Intrepid International, we take pride in excellence in both external and internal audit reports. The excellence committed to at Intrepid International merits admiration and respect amid all peers of commerce.

Intrepid International executed this external consulting audit report with a high degree of responsibility, due care, and accuracy independent of the company audited. This consulting audit is a qualified audit report because the information contained in this report is of ‘true and fair view’ of the state of the company’s affairs. This audit also investigates the fact that analysis conducted has limitations. Some of the limitations consist of, but not limited to: financial information not presented, current economic conditions, and/or company data not released as a result of the distinctive nature of the industry.

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Executive Summary

Levi Strauss and Co. is a privately held company owned by the family of its founder, Levi Strauss. The company was created about 130 years ago and currently is one of the leading apparel companies in the world. The company produces and sells a range of men's, women's and children's jeans and casual wear including cotton and cotton blend casual and dress casual pants, tops and seasonal pants and shirts, denim jackets, accessories, and footwear.1 The company has three major brands Levi’s, Dockers, and Levi Strauss Signature. Even though Levi’s brand image is very strong, it cannot maintain its brand image anymore as a result of missed fashion trends. Levi has to come up with new strategies to overcome its competitors that have brought new fashion trends and low price products to the apparel industry. Its competitors including VF Corporation, Gap, Abercrombie & Fitch, and Tommy Hilfiger have also gained strong brand images by producing their products at low cost and continue to gain perceived value in the industry. The apparel industry is considered a mature industry with numerous competitors. The competitors offer similar products and services that Levi can produce. Therefore, product differentiation will be the key issue in order to increase the perceived value of the new product. Intrepid International recommends that Levi Strauss should create a n ew premium denim brand. The new premium denim brand must be cheaper, high quality and a trendy design clothes. To produce cheaper, high quality and a trendy design clothes, the company must begin with a Cost Leadership Strategy. The company needs to implement a low-cost manufacturing process to increase margins. We believe there is still a lot of room for improvement. Once the company decreases its average total cost by adapting a Cost Leadership Strategy, it will be able to maximize its profit and increase market share.

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Data monitor. Retrieved March 26, 2008, http://web.ebscohost.com/bsi/pdf? vid=11&hid=106&sid=fb3ed91a-cfb9-4a4d-abc1-473c2bdd5ac6%40sessionmgr106

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Strategy Identification

Levi Strauss states, “our values are fundamental to our success,” and identifies these values as “Empathy, Originality, Integrity and Courage.” The vision of Levi is to be a company where people love their clothes and trust their company. Levi intends to market and distribute the most appealing and widely worn apparel brands that define quality, style and function. Levi Strauss proclaims, “We will clothe the world.”2 Levi Strauss operates within the top ten apparel industry companies. Fortune Magazine ranked the company 510th but they were listed as number five in the industry. Additionally, Fortune identifies a revenue difference of two and three less than it leading competitors, which is a sign of trouble for Levi.3 Levi’s lawsuits of competitors caused them to be identified as a leader in legal actions and not apparel competition. Levi states that it is compelled to file the lawsuits to safeguard the “defining features” of its products and removing copycats from stores. Levi competitors characterized the lawsuits as a “last resort of a poo r loser.”4 “Executives at Levi's concede that they missed important fashion trends as the denim industry exploded over the past several years, but they deny the lawsuits are connected to any downturn in their business.”5

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Levis Strauss & Co. (2006). Retrieved March 25, 2008, http://www.levistrauss.com/Company/ValuesAndVision.aspx 3 http://money.cnn.com/magazines/fortune/fortune500/2007/snapshots/785.html 4 Barbaro, M., Creswell, J. (2007). Levi Strauss sues competitors over pocket design. Retrieved March 25, 2008, http://www.iht.com/articles/2007/01/29/business/levis.php?page=1 5 Barbaro, M., Creswell, J. (2007). Levi Strauss sues competitors over pocket design. R etrieved March 25, 2008, http://www.iht.com/articles/2007/01/29/business/levis.php?page=2

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Levi Strauss, while defending current patents, has rested o n its historical value and missed fashion trends. Levi has lost market share and jeopardized future sustainability in an increasing and growing market.

Strategic Evaluation

Characteristics and the nature of the apparel industry are conducive and allow described strategies to be implemented. The ways the strategy shows signs of successful implementation is from cost leadership, the learning curve, a nd business level strategies. In the apparel industry, every firm is sensitive to costs. The most important cost is labor. Levi Strauss is capable within the industry of “very tight cost-control systems; frequent

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and detailed cost-control reports; and an emphasis on quantitative cost goals and targets.”6 Levi is capable of implementing a cost leadership strategy within the company and the environment, therefore, resulting in a competitive advantage. Levi Strauss Co. benefits from the learning curve because it “successfully moved down the learning curve” obtaining “a cost advantage over rivals.”7 Since Levi moved down the learning curve in the apparel industry, the company has accumulated knowledge and productive inputs.8 These benefits of the learning curve promote conduciveness within the environment and the firm. One of the common business-level strategies is product differentiation.9 Levi Strauss has the wherewithal to differentiate products through forecasting fashions (timing), innovative products (product complexity), and consumer marketing.10 Industry defined

The apparel industry consists of menswear, womenswear, and infantswear. The menswear sector consists of clothing garments intended for boys through adult men. This sector includes all outerwear and under garments.11 The womenswear sector consists of clothing garments intended for girls through adult women. The infantswear sector consists of apparel specifically made for ages 0-2. Some common apparel products are,

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Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.138. 7 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.122 8 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.122. 9 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.10. 10 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.150. 11 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=28&hid=16&sid=5494ce93-2f54-46bd-9c27-14e11e107676%40sessionmgr2

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but not limited to; dresses, suits, coats, jackets, tops, shirts, skirts, blouses, pants, sweatshirts, sweaters, underwear, capris, and bags.12 Threat of Entry

In the apparel industry, the threat of entry is “moderate” g iven a variety of increasing factors. However, the low growth statistics “makes it less attractive to new entrants.”13 Increasing technological advances including the internet and the production process enable entry with very little capital. This makes the barriers to entry low. Often times because there are small amounts of capital needed to enter, it becomes very attractive for individuals and partnerships to form. According to statistics, about “10% of apparel retailers” operate as a sole proprietor.14 Another increasing factor is the economies of scale. Since the apparel industry is comprised of very large manufacturers and retailers it increases the economies of scale since the larger manufacturers and retailers are able to cross continents and build grand brand loyalty and image, thus adding value to its apparel. Included in the apparel industry are manufacturers and retailers as a result of technological advances. Many manufacturers of apparel harness the power of the internet which also creates an avenue for the manufacturer to double as a retailer, bypassing the distributor. Sole proprietors and smaller entrants have a tougher time entering the apparel industry because the large players have authority and are able to bid down its costs from suppliers. Since the apparel industry is mature, the early firms have benefited from the learning curve. The greatest advantage the mature firms have is the ability to patent designs, logos, and locations of 12

Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=28&hid=16&sid=5494ce93-2f54-46bd-9c27-14e11e107676%40sessionmgr2 13 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=28&hid=16&sid=5494ce93-2f54-46bd-9c27-14e11e107676%40sessionmgr2 14 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=28&hid=16&sid=5494ce93-2f54-46bd-9c27-14e11e107676%40sessionmgr2

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features. The advantage to patent early ideas helps apparel firms protect product differentiation. Mature firms also benefit from learning curve advantages “associated with any business function, from purchasing raw materials to distribution and service.”15 One advantage that mature firms benefit from is key relationships with suppliers and people within in the apparel industry. Since apparel is highly dependent on fashion, managerial know-how is an advantage for early firms and a disadvantage for late firms. The mature firms have key employees that can forecast trends and can add great value to the company. This type of managerial know-how includes “information that it has taken years, sometimes decades, for a firm to accumulate.” The cost of managerial know-how and experience in a trend based industry “can act as a barrier to entry.”16 A barrier that a potential entrant faces is government policy and organized bodies. Aside from government policies, the World Trade Organization (WTO) creates a barrier of entry in the apparel industry, since the majority of labor production is performed overseas. The WTO creates a barrier of entry by setting “regulations, standards, testing, and certification procedures.”17

Threat of Rivalry

In the apparel industry, rivalry is moderate to high. The apparel industry is comprised of several main rivals of equal size. When consumers establish brand loyalty, 15

Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.122. 16 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=28&hid=16&sid=5494ce93-2f54-46bd-9c27-14e11e107676%40sessionmgr2 17 World Trade Organization. Retrieved March 26, 2008, http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm4_e.htm#TRS

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it is typically the designer (specific brand or line of apparel) rather than the retailer.18 This shows that the small number of large apparel firms that compete on a grand scale show signs of rivalry. When rival firms threaten existing firms it reduces their economic profits. Examples of rivalry among existing apparel firms are “frequent price cutting”, “intense advertising campaigns”, and “frequent introductions of new products.”19 Often times in the apparel industry, celebrities and models are used to influence customers to purchase products. According to Data Monitor, the apparel industry is a slow growth industry. When there is a slow growth industry “rivalry tends to be high.”20 In 2005 and 2006, the United States apparel industry grew 2.3% and 2.4% respectively.21 The compound annual growth rate (CAGR) is similar to that of the United States apparel industry rates at 1.9% for 2002-2006. The United States is similar to that of competing apparel industries fore example Europe, 1.2% and Asia-Pacific, 4.4%.22 Since the apparel industry is slow growth, “firms seeking to increase their sales must acquire market share from established competitors.”23 The apparel industry is mainly comprised of large apparel groups that have intense rivalry against each other. The reason for the large-scaled rivalry is related to the previously mentioned consolidations that must take place to gain market share in a slow growth industry. An example of a consolidated apparel group is the VF Corporation. 18

Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=28&hid=16&sid=5494ce93-2f54-46bd-9c27-14e11e107676%40sessionmgr2 19 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.46. 20 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.46. 21 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=28&hid=16&sid=5494ce93-2f54-46bd-9c27-14e11e107676%40sessionmgr2 22 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=28&hid=16&sid=5494ce93-2f54-46bd-9c27-14e11e107676%40sessionmgr2 23 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.46.

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As a result of a mature apparel industry, there is a lack of drastically new innovative products such as a jackets or pants. This creates rivalry when firms are unable to differentiate their products in the industry.”24 The products have been accepted by societies and preferences have been created given the customers reasons. Therefore, jackets, pants, and other standardized products lack product differentiation. Once a customer accepts that a jacket typically has two outside pockets and one inside pocket, it becomes standardized, thus leaving the apparel industry to be creative with fashion, cost based measures, and marketing campaigns for example. The apparel industry is highly competitive and has large-scaled competitors that are global and publicly traded. When the firms are large they have a high production capacity. According to Barney and Hesterly, “rivalry tends to be high when production capacity is added in large increments” therefore, the ability for an apparel firm to be o f high production capacity creates economies of scale.25 Threat of Substitutes

Essentially there is no substitute for apparel or clothing. However, there are substitutes for garments. Examples of substitutes for garments would be a short instead o f a pant given the relativity of the situation, similar price point, and comfort. The short would “meet approximately the same customer needs, but do so in different ways.”26 In some cases the short would not satisfy the pants characteristics if the climate was cold, but if the customer’s needs were to have pockets, it would satisfy them.

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Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.46. 25 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.47. 26 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.47.

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Another form of a substitute of apparel is consumer preference. Not every customer is the same; some might prefer pants in the summer over shorts. Customers also might substitute brand for their preference such as fit, color, design, and price point. As long as the approximate needs of the customer are met, substitutes play “an increasingly important role in reducing profit potential in a variety of industries.”27 Threat of Suppliers

Two raw materials that are crucial to the success of the apparel industry is the dependence on cotton and labor. The apparel industry’s demand for cotton “is unlikely to keep pace with consumption” and the price of cotton in highly likely to rise in the future, which would “increase the raw material cost” for the apparel industry.28 Since the apparel industry is a global process, obtaining the highest quality labor at the lowest price possible is difficult. It is difficult because of technological advances such as the internet. Customers and potential customers are able to blog and research the company to find out company practices. One topic customers desire to know is by whom it was made by, such as a child worker in a sweat shop. Consumers are able to find out this information and pictures on the internet. These intimate views on the supplier “can threaten the performance” of the firm.29 Threat of Buyers

The apparel industry buyer’s are as limitless as the population. Every reasonable consumer is a buyer of the apparel industry. Primarily the buyer dictates the type of product sold, often times fashion trends in the apparel industry. Given the industry, 27

Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.47. 28 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=6&hid=8&sid=2ef6abac-798e-4d9a-876d-838a58f6fe80%40sessionmgr3 29 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.47.

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apparel products have little differentiation. Because there is little differentiation, “the threat of buyers can be greater.”30 Buyers have small to none switching costs between brands or retailers. This also poses a threat to the apparel industry and increases buyer power. The large firms in the apparel industry shouldn’t concern themselves with vertical integration, as buyers don’t pose a successful or equal threat to a large apparel firm, given the barriers of entry. Competitor Analysis

There are a several large firms competing against Levi Strauss Co. in the apparel industry. The closest competitor to Levi Strauss is the VF Corporation. The VF Corporation was founded and incorporated in 1899 in Pennsylvania.31 Currently the company has “45,500” employees, compared to Levi Strauss with “about 9,600.”32 Today, the VF Corporation consists of five major divisions, “jeanswear”, “imagewear”, “outdoor”, “sportswear”, and “contemporary brands.”33 Many of the brands that the VF Corporation owns, has exceptional brand recognition, such as The North Face. This allows The North Face “to command premium pricing for its products and allows easy expansion into new lines.”34 The VF Corporation was first founded under the name “Reading Glove and Mitten Manufacturing Company.”35 In 1986, the VF Corporation became “the world’s largest publicly traded apparel company.” The most significant consolidations happened

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Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.50. 31 VF Corporation. (2004). Retrieved March 26, 2008, http://www.vfc.com/sub_pages/our_history.php 32 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=28&hid=16&sid=5494ce93-2f54-46bd-9c27-14e11e107676%40sessionmgr2 33 VF Corporation. (2004). Retrieved March 26, 2008, http://www.vfc.com/sub_pages/our_brands.php 34 Data monitor. Retrieved March 25, 2008. http://web.ebscohost.com/bsi/pdf? vid=6&hid=8&sid=2ef6abac-798e-4d9a-876d-838a58f6fe80%40sessionmgr3 35 VF Corporation. (2004). Retrieved March 26, 2008, http://www.vfc.com/sub_pages/our_history.php

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in 2000, when the company acquired The North Face, Chic, Gitano Jeans, H.I.S., and The Eastpak.36 The VF Corporation holds an advantage in the apparel industry because the company holds the exclusive rights for “The Collegiate Licensing Company”, “Major League Baseball”, “the National Hockey League”, “the National Football League”, “the Big Ten Conference”, and “top NASCAR Winston Cup Series Drivers.” (Winston was later replaced by Nextel for title sponsorship)37 Other notable brands that the VFC owns are Reef and the Harley-Davidson apparel license. The VF Corporation increases product differentiation with its “linkages with other firms”, such the company’s links with “famous names and cars in NASCAR.”38 The biggest strength that the VF Corporation has it its very “diverse portfolio” compared to Levi Strauss.39 The VF Corporation’s diverse portfolio ranges from exclusive licenses to brands in competitive markets such as Majestic Athletic that help balance the company. Besides the Wrangler Brand, the VFC has an excellent brand in the premium jean market with Seven for All Mankind.40 The VF Corporation is an excellent company in the apparel industry and proves to be a vital competitor currently and in foreseeable future. Customer/ Marketplace trends and environmental forecast

Since 1853 when Levi’s invented the first blue jeans, many clothing brands have established their own denim product lines. Regardless of the authenticity of over 150

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VF Corporation. (2004). Retrieved March 26, 2008, http://www.vfc.com/sub_pages/our_history.php VF Corporation. (2004). Retrieved March 26, 2008, http://www.vfc.com/sub_pages/our_history.php 38 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.151. 39 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=6&hid=8&sid=2ef6abac-798e-4d9a-876d-838a58f6fe80%40sessionmgr3 40 VF Corporation. (2004). Retrieved March 26, 2008, http://www.vfc.com/sub_pages/our_history.php 37

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years of Levi’s denim expertise, it is no longer its specialty. Today, it is said more than 300 denim jeans brands exist. In the recent jeans market, premium denim has been trendy. “In 2006, total sales of jeans were $15.8 billion according to research firm NDP Group. 4.3% or $680 million of that was the market share for premium denim.”41 Share of the premium denim is still small, but numbers of clothing brands are entering to the premium denim market. Especially, imports of European brands are dynamic. Diesel, an Italian casual clothing brand, is operating business with over 5000 points of sales in 80 countries. There is an independent Diesel store in downtown Seattle as well. Diesel is known as the first brand to penetrate the premium denim jeans market. “Just a few years after Diesel’s previously inconceivable hundred-dollar breakthrough, $200 jeans were suddenly run-of-the-mill.”42 As mentioned, jeans with $200 pricing could be easily found everywhere. “A spring 2005 visit to the men’s Denim Bar at Barneys New York found almost all of the jeans prices well past the-two-hundred-dollar mark.”43 Regarding this market trend, VF Corporation, one of Levi’s main competitors, decided to acquire a luxurious jeans brand named “Seven For All Mankind” in July 2007.44 Jeans have been around for a hundred and fifty years and are in every closet in the world. Now, customers are getting tired of its usualness. Tim Kaeding, a member of founders of Seven For All mankind, says “Seven was one of the first jeans over a hundred dollars. People were willing to pay that because you look so 41

Ashworth, W. (2008). Premium Denim Still Has Legs. Retrieved March 26, 2008, http://web.ebscohost.com/bsi/detail?vid=3&hid=108&sid=ae6352d4-1a51-4f44-8d37aa7889caa6a4%40sessionmgr104 42

Sullivan, J. (2006). Jeans. New York: Penguin Group Inc, pp. 252. Sullivan, J. (2006). Jeans. New York: Penguin Group Inc, pp. 252. 44 Ashworth, W. (2008). Premium Denim Still Has Legs. Retrieved March 26, 2008, http://web.ebscohost.com/bsi/detail?vid=3&hid=108&sid=ae6352d4-1a51-4f44-8d37aa7889caa6a4%40sessionmgr104 43

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good in them. In five years, those customers are not going to decide that they’d rather look “just OK” in a twenty-dollar par of jeans.” 45

VRIO Analysis Value Since they were first founded back in 1853, Levi’s carries a long company legacy.

This legacy allows Levi’s to promote the image of quality and value to their brand reputation.46 The brand image Levi’s encompasses results in them having a higher price tags compared to other brands. Consumers are willing to justify the higher price because of the brand name. However, the higher price tag does not automatically mean higher revenues for the company. With the increasing price of cotton, Levi’s was forced to increase their prices in order to neutralize the price increase. The company also started to start outsourcing their labor over seas to lower their cost of manufacturing.47 Despite these changes, Levi’s still produce the classic quality apparel they’ve made since 1853. Rarity

The apparel industry is a growing industry since the popularity of fashion is constantly increasing, because of this popularity; there is an increase of competitors. The reason of the increase of competitors is because the majority of raw materials being available at such a low cost and the labor wages overseas are low as well. Regardless of the increasing competitors, Levi’s carries a brand name with heritage which is a rarity in itself. Since Levi’s most notable product is denim jeans, the company has protected the

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Sullivan, J. (2006). Jeans. New York: Penguin Group Inc, pp. 257. Levis Strauss & Co. (2006). Retrieved on March 26, 2008, http://www.levistrauss.com/Downloads/SupplierOwnershipGuidebook.pdf 47 Vivek, N. (2004). Levi Strauss sews up plan to source more. Retrieved March 26, 2008, http://www.telegraphindia.com/1040503/asp/business/story_3199798.asp 46

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design and processes with patents. This includes the stitching designs on the back pockets, metal rivets on the pockets, and red tag on the pocketing stitching.48 These design differences added rarity to their product lines and also gives them a competitive advantage which differentiates them from other companies. Imitability

The imitability in the apparel industry is quite high. Competitors can copy the styles of clothing that Levi produces to a certain extent. Majority of the competitors’ use the same manufacturer, same raw materials, and they are all distributed through the same channels.49 This is not favorable for Levi’s since there products are easily replicated. Levi must rely on their brand image, marketing, and industry experience to continue their growth. Organization:

Currently Levi is a privately help company by the family descendants. Shares of the company stock are not publicly trades, however Levi Strauss Japan are publicly traded. Levi staffs an approximate 10,000 people world wide which includes the 1,010 staff members in their San Francisco Headquarters. To manage all these employees, Levi uses what they simply call “The Management Systems Framework.” This system consists of five sections, Policy, Planning, Implementation/Operations, Monitoring/Corrective Action, and Management Review/Follow-up. Policy institutes and communicates the company’s position and dedication. Planning recognizes the code of conduct issues and necessities. It also identifies the initiatives and resources needed to accomplish their business goals. Implementation/operations describe the program, responsibilities, and 48

Barbaro, M., Creswell, J. (2007). Levi’s Turns to Suing Its Rivals. R etrieved March 26, 2008, http://www.nytimes.com/2007/01/29/business/29jeans.html. 49 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.152.

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procedures that are needed to apply the key initiatives to obtain the company goals. Monitoring/Corrective Action simply monitors the effectives of the companies operations on a regularly basis. Finally, the Management Review/Follow up sector evaluates the management system as a whole. This is done to measure the effectives the companies’ efforts on achieving their goals.50

Brand Name (Heritage) Service and Quality Product Differentiation

V

R

I

O

Competitive Implications

Y Y

Y N

N N

N Y

Temporary Competitive Advantage Temporary Competitive Advantage

Y

Y

N

Y

Competitive Advantage

SWOT Analysis

Levi’s global presence provides the organization with widespread brand recognition. Currently, the company is extremely strong, and has numerous opportunities. However, just as there are constant new opportunities that Levi’s can observe, assess, and experiment with, there are frequent threats as well. Each of these threats has to be taken seriously. Levi’s must continue to recognize that our world is in a cycle of continual change. The company has to understand its strengths and weaknesses in order to evolve with their changing desires of the market. Levi’s needs to analyze their internal issues, recognize strengths and weaknesses, build upon strengths, and work on weaknesses. Furthermore, in the apparel industry, Levi Strauss must focus externally and concentrate on current market trends. The company must take advantage of all available opportunities and protect themselves from potential threats. Strengths 50

Levis Strauss & Co. (2006). Retrieved on March 26, 2008, http://www.levistrauss.com/Downloads/SupplierOwnershipGuidebook.pdf

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With all of the competition in the apparel industry, Levi’s differentiates itself from all other competitors through the ability to brand products through strong brand image. According to Levi’s website, the company markets its products under leading brand names that are among the most successful apparel brands in the world and it is one of the most widely recognized brands in the history of the apparel industry.51 Additionally, Levi’s currently has numerous retail locations including 67 company operated stores in 10 countries.52 The company distributes its products in a wide variety of retail formats around world including franchise stores, company owned stores, specialty stores, chain and mass channel retailer, such as Wal-Mart, Target, and Kmart.53

Weaknesses

One critical weakness that Levi Strauss faces is relying too heavily on few customers.54 The company actually depends on a group of key customers for a great portion of sales. Net sales to its ten largest customers totaled ab out 43 % of total sales.55 Therefore, the company needs to change in customer relationship. Opportunities

With Levi’s continuous growth, many opportunities have surfaced for the company. The company needs to transform management strategies so that it can generate and sustain competitive advantage. It has been executing a number of business 51

Levis Strauss & Co. (2006). Retrieved on March 25, 2008, http://www.levistrauss.com/Brands/ Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=9&hid=4&sid=e280ba6f-3b71-4330-bbb5-6d9a5d7647eb%40sessionmgr9 53 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=9&hid=4&sid=e280ba6f-3b71-4330-bbb5-6d9a5d7647eb%40sessionmgr9 54 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=9&hid=4&sid=e280ba6f-3b71-4330-bbb5-6d9a5d7647eb%40sessionmgr9 55 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=9&hid=4&sid=e280ba6f-3b71-4330-bbb5-6d9a5d7647eb%40sessionmgr9 52

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turnaround strategies that have resulted in significant improvements in performance. The company has been expanding licensing programs to offer more products that complement its core brand product ranges.56 The company has entered into a licensing relationship with Canadian-based Algo Group to sell home furnishing including bedding, comforts, and duvet covers under Levi’s brand name in the U.S. The U.S. household market is expected to grow at a rate of 3% to 5% through 2008.57 Therefore, Levi’s will be able to generate more profit through licensing relationships. Secondly, the company plans to increase dedicated retail stores for value-conscious consumers in No rth America, Europe, and Asia. The dedicated stores are an increasingly important part of Levi’s strategy for expanding distribution of its product in all regions of operations. The company currently plans to open approximately 150 new stores in Asia, 65 in Europe, and 20 stores in North America.58 This would help maximize profit for the company. Threats

Although Levi’s has experienced many opportunities and much growth throughout its history, the company must be aware of potential threats. One critical threat that the company faces is the decline of global cotton production. Cotton prices have increased since global cotton production decreased in 2006.59 Denim is made entirely out of cotton. Therefore, increased cotton prices affect higher raw material cost and lower company margins. Strategic Option Development 56

Levis Strauss & Co. (2006). Retrieved March 25, 2008, http://www.levistrauss.com/Company/CompanyTransformation.aspx 57 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=9&hid=4&sid=e280ba6f-3b71-4330-bbb5-6d9a5d7647eb%40sessionmgr9 58 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=9&hid=4&sid=e280ba6f-3b71-4330-bbb5-6d9a5d7647eb%40sessionmgr9 59 Data monitor. Retrieved March 25, 2008, http://web.ebscohost.com/bsi/pdf? vid=9&hid=4&sid=e280ba6f-3b71-4330-bbb5-6d9a5d7647eb%40sessionmgr9

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New Premium Denim Line

Create a new premium denim brand to help balance the company and also obtain and increase market share. Currently, Levi Strauss offers an economy line known as Signature. Levi’s also offers its core lines that include Red Tab, Silvertab, Vintage, and Premium Red Tab. The name of the new premium denim brand will have a unique identity that visually separates it from traits and characteristics of Levi Strauss Co. A new premium denim brand would increase the company portfolio and complete the Levi Strauss lineup, consisting of economy, core, and premium. A premium brand offering will put competitors on their heels and strengthen barriers of entry. The premium line will have patents and signature traits that make the line unique. The new premium denim brand would be sold at finer clothing stores such as Nordstrom, Nieman Marcus, and select high-end retailers.

Fast Fashion

Hire a team of designers that are on contract that will create new innovative products and additions to Levi Strauss’ core existing line (excluding Signature), which will keep Levi’s on the forefront of fashion. The designers will be stationed in a selected location to portray the perceived image that the company’s product is manufactured in that location. This will create a perception to the customers that the Levi products are of higher quality and value. This solution is similar to Zara, in reference to “new styles” and sending “new fashions to stores”.60 Levi will have the ability to pull culture, trends, and all influence that adds value from the location. The specified location will have qualified 60

Rowedder, C. & Johnson, K. (2008, February 20). Pace-Setting Zara Seeks More Speed To Fight Its Rising Cheap-Chic Rivals. The Wall Street Journal . Retrieved March 27, 2008, http://online.wsj.com/article/SB120345929019578183.html.

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and respected designers. Design locations will communicate and send specifications by conference call, internet, and sending concept products to San Francisco. Levi’s can produce the new innovative products in its existing production lines and factories.

Strategic Option Evaluation

The new premium denim line is feasible and effective. In recent fashion seasons, the premium denim offering continues to grow. Diesel, Seven for All Mankind, and True Religion have had success with premium denim. It’s interesting to note that “just a few years after Diesel’s previously inconceivable hundred-dollar breakthrough, $200 jeans were suddenly run-of-the-mill.”61 This is evidence that the premium denim industry is young and relatively untapped. Intrepid International believes that Levi Strauss Co. has the resources that are needed to make this solution a successful venture economically. The new premium denim brand will provide economic benefits that are greater than the costs. The industry is proof that independent type denim companies have had success. The new premium brand will seamlessly fit into the closely held company, Levi Strauss. The advantages of creating a new premium denim brand will increase revenues and profits for Levi Strauss Co. The new brand will instantly build and increase rapid value to the denim collection. By owning the premium denim line, Levi Strauss will have a larger portfolio similar to VF Corporation. In the foreseeable future, the premium denim brand will have room to grow with other garments, fragrances, and accessories. These future products will increase the potential revenu e stream. The disadvantages to the new premium denim brand will be brand launch expenses. 61

Sullivan, J. (2006). Jeans. New York: Penguin Group Inc, pp. 252.

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The Fast Fashion solution is slightly more feasible; however, its effectiveness is less than the new premium denim brand. By having designers create new innovative products and features to the existing Levi Strauss core lineup, it will strengthen the Levi name. This will increase the troublesome income of the company. By implementing this solution, executives will build on heritage and add value to products. Intrepid International firmly believes that Levi has the economic cap abilities to hire designers to be on the forefront of trends. Levi Strauss has the technical capabilities to ensure the success of Fast Fashion, such as website updates showcasing the latest fashions. The designers will easily fit in the corporate culture and organization of a global company, like Levi Strauss. The advantage of implementing Fast Fashion is that the company will build value and strengthen the Levi Strauss Co. name. In addition to strengthening the name, Fast Fashion will also strengthen the core collections such as Silvertab and Red Tab. Lower fixed expenses is advantage, since contract designers could work from home. The disadvantage of Fast Fashion is the revised product advertising. Levi Strauss will surely want to brag its latest fashions to consumers.

New Premium Denim Line

Fast Fashion

Trade Off Table Advantages Increase Revenue Generate Brand Value Potential Brand Growth

Strengthen Levi Strauss Name Increase Troublesome Income Use Levi Strauss Website Improve Core Collection

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Disadvantages Brand Launch Expenses

Revised Product Advertising

Strategic Selection

Levi must begin to implement a Cost Leadership Strategy and adopt and organizational structure, management controls and compensation policies for a new premium denim line.62 Levi needs to use a functional organization structure, where each of the major business functions is managed by a functional manager. In this new venture the CEO of Levi will be the only one in the organization that has a broad multifunctional corporate perspective, which is identified as a U-form structure.63 Levi has the ability to look within itself to find the talent to produce a new premium line. Additionally, Levi may have talent that can market the new line. Talent within Levi may have been bridled by old rules and policies that prevented creativity. An internal search must be conducted administratively while fresh ideas and talent is simultaneously recruited. Levi must take decisive action and enter this new venture with fresh ideas. Competition has already out earned Levi, so they need to have an “underdog” work ethic and pursue this venture with vigor. Levi will have to price the new product competitively while remembering that a premium jean carries a premium price. Product differentiation will be key and essential in increasing the perceived value of the new product relative to the value of the competitors.64 One strategy the Levi can take in this new premium line venture is to niche market for special sizes. Americans are becoming very big and need a bigger pair of jeans; Levi can capitalize on this market.

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“Highly differentiated firms may be able to discover a viable market niche that will enable them to survive the overall decline in market.”65

Strategy Implementation

Levi Strauss does not need to change its structure but refresh its processes, policies and systems by which fresh ideas and concepts can be generated to management and the executive for evaluation. Levi Strauss is not a novice in business and knows how to compete. Being in the top ten in an industry is not an unlearned position. It is not necessary for Levi to reinvent the wheel, but to balance and rotate is for maximum performance. However, Levi can not fall into the pit of other mature industries, by switching for radical new technologies to old product refinement.66 The new premium line must be “new.” Upon completion of the new premium line design, Levi will need to activate a marketing plan that is complimentary to the product and its appearance in the new market. As previously mention, Levi is an established organization with market knowledge and sustainability. Levi has the structure and wherewithal to survive in the current market. Production and distribution resources at Levi’s disposal are sufficient for implementing and handling new ideas, concepts and products. Levi must ensure that its “old school” mentality does not leave it in the position that is not ready for change and upward market mobility.

Measuring Competitive Advantage 65

Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.156. 66 Barney, J., Hesterly, W. (2008). Strategic Management and Competitive Advantage (2 nd ed.). New Jersey: Prentice Hall, pp.156.

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Levi can measure can their temporary competitive advantage, an “advantage that lasts for a very short period of time,” by how much buzz and/or interest the market takes on the introduction of its new product line.67 Good advertising and “hype” of the new line should generate new interest publicity, media coverage and comment the will generate good sale in the initial offering of the product. Economic measures can be used to evaluate temporary and sustained advantage. Inventory turnover ratios will “measure the speed with which a firm’s inventory is turning over,” giving Levi current data on how well the product is selling currently and in the future.68 An important economic measure that Levi will need to constantly monitor is the gross profit margins, “a measure of sales available to cover operating expenses and still generate profit. Larger is better.”69 In the long run it is incumbent upon Levi to remain flexible and expand the product line internationally as well as locally, to hold and sustain competitive advantage. A good measure of competitive advantage in this case is revenue. When Levi becomes more competitive and comparable in revenues as the top two companies in the apparel industry and hopefully becomes number one, it can claim competitive advantage.

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