Pest analysis of the external environment - Sample Essay
The Apparel industry in general and particularly the Sweater industry is facing problems of declining sales and increased overheads. Steinhouse operates in the higher price band and this sector is dominated by named brands such as Polo and others and departmental stores and the customers prefer such brands over the lesser-known brands such as Steinhouse. Large retailers such as Walmart, prefer to buy directly in bulk from low wage countries such as Bangladesh, China and others.
The US market has a very high potential and trade barriers are not present meaning that the company can sell their products freely in the market. They are also allowed to sell in Europe and sales would depend on their quality, brand and price (p. 369).
Economic The company has seen falling sales and sales have declined from 7. 5 million USD in 1968 to 2. 7 million USD in 1998 while the US sales alone were 2. 4 million USD. From this figure, annual overheads, excluding management salaries would be about 1.2 million USD and there would be a margin of about 7. 2 percent as sales commission. It can thus be seen that there is a reduction in the profitability of the company. The market is growing in US were the products can be sold but by using wool yarn of a higher gage (p. 369). The sales people receive a commission of 7. 2 percent on the gross sales that they bring in and travel and other expenses are not reimbursed. About 70% of sweaters are bought by Women for their husbands and boyfriends (p. 372).
All sweaters for the fall line are 70% acrylic and 30 percent wool and this combination contributes 85 % to the annual sales while the spring verities are 50 percent acrylic and cotton. Since the company prints the word acrylic on the sweater label, customers perceive the sweater as inferior and hesitate to buy the product. All sweaters are done as per booked orders from the retailers and distributors and the company has created a huge stock of acrylic raw material that it sources from the same supplier, since 30 years.
The supply cycle for the fabric and yarn takes eight weeks hence the company has to create enough stocks. Consequently the company has excess SKUs and money is held up in the process (p. 370). Pricing Retailers pay between 22 to 70USD for Steinhouse sweaters and the average price is 40 USD. The company makes 40% average gross margin and receivables are after 95 days. Customers of retail stores pay between 80 to 100 USD for a Steinhouse sweater while the average retail price of an imported sweater is 40$ or lesser (p. 373). Environment/ Technological
The industry is effected by the amount of cold and if the weather is cold then sales increase and since the past few years, the weather has been less cold and so lesser number of sweaters are bought. Steinhouse does not have its own designers and Abe and Mark, the owners physically travel to Europe, gather the best samples and try to copy them. Consequently, the brand is very weak in originality and creativity. There is a shift in the men’s apparel industry and formal suits are on the decline and casual dresses with sweaters are popular. There obviously is a market for sweaters and needs to be exploited (p.372).
The company makes individually cut and stitched items and uses over 27 steps in the manufacturing process. The yarn fabrics are individually cut and this reduces the efficiency but increases the cost while low cost companies cut a number of fabrics in one setting and this produces variations between the top most and the lowest in the pile. The company uses softeners to pre shrink the fabric and also uses presses to create a good crease while other low cost companies do not do this step. Subsequently, Steinhouse incurs greater expenses (p. 370).
There is an increased demand for higher gauge lightweight sweaters that are made of natural fibers such as wool and cotton. The higher the gauge, the finer the knitting and more lightweight and expensive is the sweater. The machines that the company has are not capable of producing such sweaters and the company does not want to invest in new machinery since fashion tastes keep changing. The capital cost for modem knitting machinery is about 300, 000 USD and about 20 machines would be required to meet the demand. The yarn required for these machines would have to be imported (p. 372)