Crocs Memo: Decisions Toward Company Growth
Saturday, November 17, 2007
Now that Crocs has achieved unprecedented levels of revenues within the market, we must refine our focus towards achieving our long-term goals of continued growth and increased profits. My problem is how we are going to facilitate this growth. When our shoes were introduced several years ago, there was a niche audience attracted to our “funky” shoes. Now, we must find a way to further build on this captured audience and realized success. I strive to continually increase our customer base while ensuring the right decisions are made when considering which strategies to change or new strategies to introduce. There are many options regarding how to solve this problem, and we must choose an option that fully utilizes our competitive advantages of Croslite material and supply chain abilities. We must decide whether or not Crocs should take similar steps to those of the past that led to the realization of our goals, or implement new plans that will help us further growth. I want to avoid reaching a peak with our feature product.
The Supply Chain
By following our company’s past model of expansion, we would continue to grow via vertical integration. In developing our supply chain through taking over the production process, utilizing global contract manufacturers, and taking over our compounding activities, we’ve effectively established a supply chain advantage through vertical integration. While creating this advantage, Crocs has been able to separate itself from the traditional shoe company supply chain model and increase focus on customer needs. In turn, we have been able to establish positive relationships with retailers, so they too have been able to take advantage of our supply chain model, selling more product during times of high demand (as opposed to waiting for orders to arrive). This “replenishment system” is made possible by the fact that we vertically integrated and took over the production process of our main product. So, it is clear that there are benefits in following this same path towards higher growth.
Conversely, continuing to follow Crocs current model could inhibit our ability to expand our customer base. Continuing with vertical integration may have more internal benefits, but how would it help us with accelerating growth? There is not a lot of room for expansion into other parts of the production process, mainly because we control and operate many of our own processes. If we are most concerned with furthering internal growth, then vertical integration should continue to be utilized. However, if we are trying to expand and extend growth in the areas of revenue and earnings per share, vertical integration is not our best option.
Product Line Extension
Building on the rapid expansion in the apparel industry, it is feasible to enter the clothing industry. With a huge market capacity, an established brand name, and Croslite production, we stand to quickly gain market share in the various segments. With a larger product portfolio, we position ourselves as a “one stop” apparel distributer and provider of all clothing and apparel needs. Croslite could be combined with apparel to create products tailored towards athletics and other high perspiring individuals. A heavy investment in research and development would be necessary to identify a target market and attractiveness of the new product.
In contrast, entering into the clothing and apparel market may expose Crocs brand image risk. With such a large market segment and immense number of competitors in the industry, we may have a tough time distinguishing our brand from other clothing manufacturers. Also, extending the product portfolio may steer Crocs away from our original product lines, compromising the overall quality and image that has led us to where we are in market today. It would be a costly venture to expand our product lines into clothing and apparel, but could provide a significant push in sales for other product lines.
Organic Growth or Acquisition
Based on our previous model of expansion, internally developing operations would create a situation where we would be capable of uniquely distinguishing our Crocs product (all operations would be done in-house). In addition to lower costs and less risks when compared to an external growth model, the process would not require a large amount of time or effort.
Based on aspirations of extending our product lines into other channels, we have an opportunity to explore the option of acquisition. By acquiring a company with a previously established brand name and image within our newly targeted market, we stand to more quickly move into the forefront of consumers’ minds. We also will be able to utilize their partners and distribution channels, allowing us to sync the operations and strategies of the acquired company with our firm’s mission and goals.
Clothing, Apparel, & Sporting Goods Expansion
As we have entered a period of extreme and rapid growth within the specialized shoe market, we have come to better understand our current market position. As a result of rapid growth via Crocs shoe line throughout the United States and internationally, we have come to realize a position in the industry among companies like Nike, Decker’s Outdoor, and Timberland. With such grounded firms positioned against us in the industry, we must exploit the biggest factor influencing our competitive advantage: Croslite material.
Considering Croslite’s qualities, we feel the best product line to introduce is sporting goods and equipment. The light weight and waterproof attributes of the material allows for use in a number of sports from Hockey and Lacrosse pads to Water-polo head pieces. The introduction of sporting goods to our product portfolio would help promote the various uses for our Crocs material, as well as help our positioning in the competitive marketplace currently dominated by companies such as Nike. Once we have penetrated the sporting goods and equipment market and established our name among major industry players, we may then choose to look at the competition’s product portfolio’s and search for any advantageous holes.
Although the market is fairly saturated, our major competitors (Timberland, Nike, Decker’s Outdoor) all sell shoes, clothing, and apparel. Having already introduced a new sporting goods product line, we stand to control some hype around our newly established brand image, allowing our new followers to consider a Crocs clothing line over that of our competition.
While the clothing market is heavily saturated, introduction of a Crocs clothing line will stand to enhance our market position against our major competitors. With a push in brand recognition from the previous release of Crocs sporting equipment, we believe the potential to steal a sizable portion of Nike’s market share is very feasible.
Avoid Further Expansion of Vertical Integration
Weighing the positives and negatives associated with alternatives of vertical integration, I recommend not expanding in this area, but rather move away from extreme vertical integration. Despite the past success we have seen through expanding our business in other parts of the production process, I believe that the supply chain is better off revised and not expanded. We have worked hard to take control of our own manufacturing processes, establishing our supply chain advantage over competitors. We are better off maintaining this advantage by streamlining processes in order to perform as efficiently as possible.
However, the more important issue lies in our problem of how to grow. Further vertical integration would not promote growth in our customer base. As previously stated, vertical integration would be best for internal growth. But we are looking into continuing our growth externally in the areas of customers, revenues, and earnings per share. It is important to note that after purchasing From Designs in mid-2004, we saw a jump in revenues from $13.5 million in 2004 to $108.6 million in 2005. It is clear that by vertically integrating and owning our own manufacturing process, that the potential for this growth was realized. However, we saw an even greater increase in 2006, with revenues up at $345.7 million. We cannot attribute the vertical integration from 2004 to our 227% twelve month revenue growth. Thus, I believe focusing on other alternatives is more advantageous in attempting to stimulate further growth and expand our customer base.
Crocs must achieve better integration of the supply chain. Currently, we are experiencing extreme vertical integration, whereas it would be most beneficial for the firm if a healthy balance between horizontal and vertical integration existed. Croc’s leveraged items (i.e. plastic pellets and equipment) and strategic items (i.e. molds for shoes and compounding) are likely to affect the company more than normal or bottle neck items (i.e. paint colors, rivets, warehousing, production, and labor). So, to better improve these processes, I recommend that Crocs strive to achieve vertical integration on leveraged and strategic items, while outsourcing the non-critical items.
Through our product line extension, we will introduce exactly what I have recommended in the previous section. This will coincide with our aspirations for our ‘revolutionary’ supply chain model. Our new products will help to position ourselves against our major competitors, as well as portray a more versatile brand image. By pursuing the sporting goods market, we create a opportunity where we can take market share from the leading sporting good brands, specifically Nike (we would continue competing in footwear). Implementing this product line extension in the long term will help us avoid complete reliance on our footwear product and the first step towards external brand growth.
In balancing vertical and horizontal integration, Crocs must be mindful when selecting its suppliers of raw materials in an effort to achieve a competitive pricing edge. As pertaining to machinery and equipment, Crocs may want to locate suppliers for leveraged items that are closer to manufacturing facilities in order to reduce transportation costs of raw materials that may increase supply costs. Conversely, strategic items should be under direct supervision of management, as the molds and compounding are key elements of Croc’s advantage over competitors. In effect, warehousing would become the manufacturer’s concern, so Crocs must keep few warehousing facilities under direct control.
Adoption of the Kaizen and Kanban model would provide us with a means for maintaining and improving our supply chain processes. Kaizen focuses on teamwork, self-disciple, high morale, quality, and feedback; thus, aiding Crocs in the achievement of reduced waste and inefficiency, an improved working environment, and firm standardization. Similarly, Kanban facilitates the need to establish a demand-driven supply chain that is capable of reacting to customer desires. Furthermore, the Kanban system provides more accurate and real-time information regarding replenishment schedules, improving efficiency of production and inventory management processes.
Crocs can regulate delivery and replenishment from suppliers to distribution centers to stores via establishment of an electronic point of sale system. This facilitates a clearer view of customer demand and inventory management throughout the supply chain. Therefore, effectively creating an advantageous inventory position at low costs and establishing an IT based infrastructure that is flexible and of higher value to customers.
We’ve had difficulty in distinguishing our products as functional or innovative. This has a direct effect on the supply chain, as it is vital for our firm to match the supply chain with the type of product offered. Crocs final product will be the innovative product that is their shoes, characterized by consumer demand, new designs, and changing trends. So, Crocs should adopt a more responsive supply chain. Conversely, a more efficient supply chain for secret raw materials and molds (functional products) should be adopted.
Crocs supply chain management changes must be incremental rather than transformational. Change management must not be overlooked. I must be convinced about the need for change, or else we may not be capable of implementing new strategies throughout the company. Kotter’s Eight Steps for Change would be perfect for methodical implementation of incremental change in Crocs supply processes.
Our ‘revolutionary’ supply chain may only last a short period of time. Due to inaccurate consumer demand forecasts, our current strategy has resulted in excess inventory and inefficient production processes. Any negative effect on stakeholders and brand loyalty generates losses for our organization.
While experiencing increasing profit quarter after quarter is a positive sign, loss of stakeholder faith and increased competition indicates a need for our change in position. So, our recommended product expansion strategy would help stakeholder morale and help our competitive positioning. Continued focus must be on a highly versatile product that can be manipulated into hundreds of other products rather than a trend. A strong core competency, demand-driven supply chain, and added end user value are our focus for improving market position. In reference to Porter, we must revise our approach towards increasing competitive advantage through hybrid supply chain processes. An IT based inventory management and planning processes will lead to increased performance quicker. Also, in reference to Kotter, more flexibility and reaction to market trends and consumer requirements will be very beneficial to our future growth.
We must recognize that the supply chain covers numerous organizational processes and activities. So, with ever-increasing technological advancements, it is likely that challenges will only increase in the future. There is no single solution to all supply chain concerns, especially in a dynamic footwear industry, and it is easy to argue that our current supply chain is and will be successful due to recent performance and growth compared to competitors over the past few years. However, the industrial environment is unpredictable in nature, and a healthy balance between internal and external processes is becoming increasingly important to a firm’s success. Miscalculation of vital success factors such as consumer demand, carrying costs, distribution, work-in-progress, and finished goods will significantly hinder Crocs growth and success, especially if prices fall for any of our fad footwear.