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Business report

To: Potential investors

From: Strategic Analyst

Date: December 2016

Subject:   BIB3 Entrepreneurship - Individual report – Spanx

Executive Summary

Spanx is an interesting entrepreneurial business and has set a gold standard for many other businesses. Blakely has transformed her 500 USD into a billion dollar business through delivering customer value even though there was no advertising whatsoever. This has been an unusual case, as many of the most successful corporations of the 21st century have invested huge amounts into advertising i.e.McDonalds, Coke a Cola and Apple just being a few to mention. The 7 domains of attractive opportunities has shown that what has made Spanx such a successful corporation has been their high propensity for risk, as well as creating market benefits and attractiveness that is beyond what the market currently offers with other companies like La Senza. This has been successfully executed through Michael Porter's strategy of product differentiation. The POCD framework has highlighted a network of various factors which have led to Spanx current ‘fit' in the market place. Notably, this is highlighted Blakely exploiting market opportunities in order to present customers which a solution which is not only more comfortable but also more image (visual) friendly. In addition, The Business Model Canvas has highlighted the link between various key activities creating value propositions and thus led to customer relationships. The case of Spanx has presented a sound lessons learnt for many other entrepreneurs today. Such lessons include the importance in understanding one's customers and presenting a solution to address the ‘need' in the market. As a result, a gap in the market needs to be first established in order to present opportunities to meet such needs.

Introduction

Spanx, Inc. is an American underwear maker focusing on shaping briefs and leggings, founded in Atlanta, Georgia in 2000. The company manufactures mainly pantyhose and other underwear for women and, more recently produces male underwear. In lesson than a decade and a half, the company has transformed a 500 USD business into a billion dollar organisation which has interest from consumers from all over the globe, including high profile celebrities such as Oprah Winfrey and Kim Kardashian. This report will closely look at the success experienced by Spanx and Blakely in such as short period of time and thus provide a useful ‘lessons learnt' for other entrepreneurs to follow in finding success. In doing so, this report will employ various models including: the seven domains of attractive opportunities, the POCD framework and the Business Model Canvas which provide a useful way of analysing the current position of Spanx and thus better understanding how it has derived it success.

(i) The “Seven domains of attractive opportunities” by J. Mullins;

o Market Domain/Macro Level: Market Attractiveness

This considers the market attractiveness of Spanx. The underwear and pantyhose industry is huge, at £1.5bn industry. Being a necessity item, such items are used by all in the developed world. Nonetheless, it is important to note that these products can be purchased as necessity items i.e. no frills versions from say Primark or more luxury versions of the same product, as Spanx has successfully positioned itself with its products e.g. Bra-llelujah. As a result, although it appears the market is very much saturated, there is a gap in the market for companies who like Spanx are innovative and thus provide a difference to items that are already in the market. Barac et al. (2010) Therefore, although the industry is not a growing one, Sara Blakely has been successful by being innovative in a well-established, saturated industry.

o Market Domain/Micro Level: Sector Market Benefits and Attractiveness

Spanx has been successful by focusing and targeting their products to one segment of the population that is not satisfied with the current market offerings. Furr and Ahlstom, (2011). Therefore Spanx has focused its model on creating an ‘alternative', items which are not only more comfortable, but are also visually superior to what was already in the market. Moreover, Spanx was successful in targeting its products to celebrity clientele such as Oprah Winfrey and Kim Kardashian who are loyal clientele.

o Industry Domain/Macro Level: Industry Attractiveness

As Mullins suggests, it is best to use Porters 5 forces (please see appendix) to assess which factors affect the profitability of the underwear industry. It appears that rivalry within this industry if quite fierce with competitors such as La Senza looking to also make slight variations in the standardised items to put themselves in a dominant position. Therefore the biggest threat is rivalry and the bargaining power of customers, given the level of choice and options in the market place.

o Industry Domain/Micro Level: Sustainable Advantage

According to Wheeler, D, Sillanpaa ,M (1997) what has made companies like Spanx so successful is its Unique Selling Point (USP) of producing an everyday item in a way that is comfortable and visually more appealing due to being adapted to people's body shapes. As a result, Spanx has been successful to date by continuing to build on its competency of producing user and image friendly clothing wear for women and more recently, men.

o Team Domain: Mission, Aspirations, Propensity for Risk

This is where the main success of Spanx has been derived. Sara Blakely's propsensity for risk has been enormous. Without a single dime on traditional advertising, the company has been able to become a billion dollar business. The company continually takes risk by introducing new non-conventional products, one of the most recent being targeted at men. Cadotte,E.R., Bruce,H.J.(2003)

o Team Domain: Ability to Execute on Critical Success Factors

Spanx has identified its critical success factors (CSFs) as the sales of its innovative products

o Team Domain: Connectedness Up, Down, Across Value Chain

According to Furr, Nathan, and Paul Ahlstrom (2011), it is important for companies to have connection across their value chain. Spanx has been successful in this area due to the relationships it has built with its suppliers (all the channels it uses to sell its items) and also the relationships it has built with celebrities such as Oprah who are proud users of the Spanx.

(ii) The POCD framework of W. Sahlman

o People

The reputation of Sara Blakely in the industry is one of entrepreneurial success and continued innovative ideas without a single dime on advertising. Since Spanx was founded in 2000, Sara and the CEO Laurie Ann Goldman have created an image of commitment, risk taking and placing the customer needs as paramount. Furr, Nathan, and Paul Ahlstrom (2011).

o Opportunity  

The market for women's bras and pantyhose is massive and equates to £1.5bn in the UK alone. The opportunity for Spanx was to offer a product that is different to what was already available in the market, to offer a product that is more user and image friendly. The products are looking to solve the pain of cellulite and dis-proportionment for the customer. The business looks to reach as many customers are possible for a variety of distribution channels including internet and various carriers of the items such as Macys and Net-a-porter.  Wheeler, D, Sillanpaa ,M (1997)

o Context

The opportunity for Spanx appeared in 2000 due to a clear gap in the market for womens bra, underwear and pantyhose items not being comfortable and image enhancing. Given the fast pace of the market, the window of opportunity is open as long as the gap exists. It is believed that given the high levels of rivalry in this industry, even if Blakely did not address the issue with respect to the gap in the market, another entrepreneur would have.  Furr, Nathan, and Paul Ahlstrom (2011).

o Deal

The investors of Spanx products are the stores which hold the lines such as Macys and Net-a-porter. Hence, it is important for the company to have a good relationship with all these companies. In addition, the unofficial investors are also the celebrities such as Oprah who wear the items and thus indirectly endorse the brand. Cadotte,E.R., Bruce,H.J.(2003)

(iii) The Business Model Canvas

Key Partners

• Spanx must make sure it does not fall into producing standardised products which are not innovative and unique. Currently, the companies' competitive advantage is derived from its development of innovative clothing items for comfort and visual conscious consumers.

Key Activities

• Successfully market products through word of mouth and customer usage of the products. (no paid advertising).

• Takes risks and produces uniquely innovative clothing items for women and men to enhance comfort ability and self image.   

Value Propositions

• Innovative clothing

• User friendly

• Comfortable fit

• Image enhancing for image conscious customers Customer Relationships

• Repeat customers coming back due to satisfaction with product items

• Adapting product lines to meet the needs of customer.

• Interacting with customers through successful freebies where clients are able to try items on.

• Indirect celebrity endorsement through celebs openly highlighting their liking and usage of the products.

Customer Segments

• Celebrities i.e. Oprah Winfrey, Kim Kardashian etc

• Ordinary customers – ranging from students to the working population who use such items.

Key Resources

• Successful partnership with major distributors of underwear clothing e.g. House of Fraser

• Successful partnership with celebrities who use the Spanx products and are open to broadcast this.

• Continuing to take risks and produce innovative items.

Channels

• Online via company

• Various retailers / stockists such as Macys

Cost Structure

• The major cost drivers are materials for producing the underwear, bra wear etc

• Other costs include: manufacturing of the products from the materials, wages and salaries for the circa 170 employees of the company. Revenue Streams

• Revenue is earned through on line sales

• Revenue is earned through retailers who purchase and stock Spanx items e.g. Net-a-porter.

(iv) The testing method

o Phase 1 – Customer Validation – in this phase Spanx validated that customers for their product actually do exist and they have a real need which the company can provide a solution to. For Spanx, this was validated by Sara Blakely who had a need for clothing which would be comfortable and hide cellulite. This was validated by Blakely realising she was one of many consumers who had the need for something different in the market which would address the need of ‘visual enhancement'. According to Furr, Nathan, and Paul Ahlstrom (2011), a business which is does not validate its products / services with its customers will eventually fail as it won't be entirely customer focused. The first stage is validating which customers it will be targeting.

o Phase 2 – Solution Validation – in this phase Spanx ultimate goal is to validate a solution and its key features and benefits, before building it. Here, Spanx got deep insights about women consumers needs. Moreover, this was made possible by receiving feedback about the innovative solution, before continuing to develop it further.   According to Mullins, John (2012), the next stage is validating the solution with the customer need in order to make sure it addresses the customer need.

o Quick Test #1 Plan– first hand insights will be obtained by the company evaluating customer experience of their products. Moreover, the company was successful because they understood they would get access to potential customers through various retailers and word-of-mouth advertising as opposed to usual paid advertising. According to Furr, Nathan, and Paul Ahlstrom (2011) although word of mouth is one of the most basic methods of advertising, it is one the most important methods, as a good or bad experience will travel on average to 13 people.

o Quick Test #2 Key insights about customers – this is what Spanx is concerned about in relation to consumer needs. The company was successful in understanding the needs of clients, especially famous celebrities such as Kim Kardashian. Mullins, John (2012)

(v) Recommendations to new entrepreneurs, outlining what can be learned and how the start-up process can be improved using the lessons learned from the case.

o Identify a gap in the market – a true entrepreneur identifies a gap in the market and then capitalises on this by providing a proposition to address the unfulfilled need. Blakely found a gap in the market to address the need for women with cellulite and therefore produced underwear that would address this need. Whatever industry you are looking to enter it is important to identify a gap, as that is where most of the potential is. All the most recent successful businesses have exploited this. For example, Uber exploited a gap in the market by using technology and convenience to book cabs.

o Take risks – taking risks is important part of setting up new entrepreneurial business. To be successful, one has to do something that has not been done before, or not in the fashion and manner that it already has done. As a result, just as Sara Blakely took a risk nearly two decades ago in using all her personal finance, without external support or marketing to promote her underwear items as being innovative in addressing a gap in the market.

o Partnership is key – all successful enterprises require partnership between themselves and third parties. Spanx developed successful partnerships between itself and retailers who would stock its products. Similarly, every company requires some sort value chain partnership. This requires a sound, detailed business plan to provide confidence to any third party on why your proposition would be successful and why they should take part.

o Understand your customers well – it is imperative that you understand your customers needs and wants in order to satisfy them. “Develop sincere relationships. The Collaborative Model will be the only thing that turns around the global economy,” says Dave Phillipson, CEO Space. “Real growth occurs not by adding clients but by multiplying them. Your clients will suggest you to others over and over when you exceed their expectations.

o Have adequate finances – it is important for businesses to budget accordingly to have sufficient finances to successfully bring their products to the market. Most businesses fail in the first year or two due to not adequately budgeting and having financial resources until they are fully established.  

Conclusion

The case of Spanx has provided a gold standard in the entrepreneurial world as it has highlighted how Blakely has transferred a small business which seemed to be going nowhere into a billion dollar corporation in little over a decade, with a cult celebrity following for its customer focused products. The main lessons have been the risk appetite of the company and the founder: Blakely being high and thus taking risks which have bared fruits. Moreover, all this success has been derived from no tradition advertising whatsoever; however, the success has been derived from being customer focused and providing a differentiated approach which has led to following from celebrities and everyday customers. As a result, anyone looking to set-up a business would find it most valuable to use this report and thus the case of Spanx as a gold standard to follow.  

Appendix:

Porter's five forces – to highlight the attractiveness of the

Bargaining power of suppliers

This is believed to be Medium-to-low – as:

It is important to note that Spanx suppliers are those that provide the materials used for the production of their women and men underwear and other clothing lines. As Spanx is a major producer of such clothing lines, it is in a position to easily shift suppliers to other companies producing cotton, linen etc.

Bargaining power of customers

This is believed to be High – as

➢ There are a high number of customers for clothing items such as underwear. As a result, customers have power to dictate what products they want and the prices they are willing to pay for them.

➢ Although there is difference between competitors, most competitors produce homogenous items, with the differences not being significant. However, for Spanx there is a high level of heterogeneity given the innovation and uniqueness of the products.  As a result,  Spanx has tried to somewhat differentiate itself from the other underwear producers in addressing needs of the customers who are visual and comfort conscious.

➢ Price sensitivity is high – it goes without saying that customers want value for money, especially in a market where there are many other providers who are providing value for money. Wheeler, D, Sillanpaa ,M (1997)

Threat of substitutes

This is believed to be High – as:

➢ Switching costs are extremely low, leading to ease of customers switching between different online dating providers if they are not happy with Spanx products. As a result, Spanx needs to ensure its products and user experience remains at the forefront of what it does, in order to lead to repeat business and therefore customers not change providers.

Competitive rivalry

This is believed to be High – as:

➢ In the UK alone the underwear industry is a £1.5bn industry, with hundreds of companies providing such items. Hence, it goes without saying that there is a high level of competition between these different companies.  Companies like Spanx all try to differentiate by providing something ‘different'.

Threat of new entrants

This is believed to be Medium to High – as:

➢ The cost of producing underwear items is not very high, the main challenge is the securing of successful relationships with partners / retailers who will stock the products and sell them in their store and thus provide shelf space. Spanx found this a challenge, however eventually was successful.  

References:

o Barac et al. 2010. Perceptions on the value added companies and innovation. Pp 23-45

o Furr and Ahlstom, 2011. Nail it Then Scale It. Pp 13-18, 23

o Cadotte,E.R., Bruce,H.J.2003. The Management of Strategy in the Marketplace South Western, US. Pp66, 91-97, 101

o McWilliams, A., Van Fleet, D. D. and Cory, K. (2002). ‘Raising rivals' costs through political strategy: an extension of the resource-based theory. Journal of Management Studies, 39, 707–23.

o Wheeler, D, Sillanpaa ,M 1997. The Stakeholder Corporation, Pitman Publishing, London

o Blank, Steven Gary, and Bob Dorf. The startup owner\'s manual: The step-by-step guide for building a great company. K&S Ranch, Incorporated, 2012.

o Furr, Nathan, and Paul Ahlstrom. Nail It Then Scale It: The Entrepreneur\'s Guide To Creating And Managing Breakthrough Innovation. NISI Institute, 2011.

o Mullins, John. The new business road test: What entrepreneurs and executives should do before writing a business plan. Pearson UK, 2012.

o http://www.forbes.com/forbes/welcome/?toURL=http://www.forbes.com/global/2012/0326/billionaires-12-feature-united-states-spanx-sara-blakely-american-booty

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