Keeping Fit: The Liz Claiborne StoryPublished: March 01, 2000 in Knowledge@Wharton
An analysis of fit would seem an appropriate choice for a discussion involving the largest manufacturer of women's fashion-apparel in the U.S. Yet in his paper, "Change in the Presence of Fit: The Rise, the Fall, and the Renascence of Liz Claiborne," Wharton professor Nicolaj Siggelkow is alluding to a very different kind of fit than that of clothing to consumer. The paper instead proposes a new framework for studying how tight fit within a firm's activity system influences a firm's ability to react to environmental change. It illustrates that framework by studying retail manufacturer Liz Claiborne's developmental journey from its inception in 1976 to late 1997.
As developed by Siggelkow, fit, in this case, refers to both the internal fit between the strategy and the structure of a company as well as the external fit between the firm's structure and the environment in which it operates. Strategy and organizational scholars have studied fit as it relates to the performance of a firm, and have concluded that the analysis of firm performance should take a holistic approach that recognizes the company as a system of interconnected choices. Each choice that management makes - including organizational structure, policies and the like - impacts the other choices within the entire system. The more coherent the configuration, the stronger the internal fit. The more appropriate the configuration as a whole, given the general business environment, the higher the external fit.
"One of the main points of the paper," Siggelkow says, "is to make a distinction between the different types of fit. Firms can have systems that have wonderful internal fit, but that might be totally inappropriate for the environment they're in." Moreover, environmental changes can disturb both internal and external fit. Siggelkow argues that firms have a particularly difficult time reacting to "fit-conserving" changes that leave internal fit intact yet compromise external fit.
In the illustration of his framework, Siggelkow details how Liz Claiborne was able to construct a successful system of interconnected choices - in other words, create tight internal fit. Those choices, considering conditions in the retail industry at the time, also led to high external fit. But as time went on, changes in the industry reduced the external fit of Liz Claiborne's internally coherent system. Moreover, Liz Claiborne's tight internal fit resulted in a reluctance to change with the times - until new management stepped in with a new approach.
The Liz Claiborne case study reveals an early success story. The retailer was founded in 1976 with a starting capital of $250,000. By 1981, the year it went public, it had revenues of $116 million. By 1989, Fortune magazine reported that Liz Claiborne had achieved the highest return on year-end equity during the 1980s among all Fortune 500 industrial companies. In 1991, sales surpassed the $2 billion mark.
Liz Claiborne's steady rise was more than simply being in the right place at the right time. Founder Liz Claiborne recognized that the workforce included more and more professional women and she moved to fill that apparel void. What's more, she pioneered the idea of collection design. By designing clusters of skirts, shirts, blouses and sweaters that could be mixed and matched, she provided high value to her customers and made shopping easier. As Siggelkow's paper points out, to reap the full benefit of the design innovation, Liz Claiborne made reinforcing choices in the areas of design, presentation of merchandise, the selling process to retailers, marketing, and production/distribution.
For instance, Liz Claiborne convinced retailers to switch from a "classification" to a "collection" presentation of its merchandise. Clearly, the value of the mix-and-match design could only be appreciated when the entire collection was presented together (rather than having, e.g., shirts in the shirt department and skirts in the skirts department). Similarly, Liz Claiborne required its retailers to buy complete collections - guaranteeing that customers had always a full collection from which to choose.
But, for Liz Claiborne, the good times didn't last forever. Beginning in 1992, the company's sales stagnated and its net income declined. In the next three years, its market capitalization dropped from $3.5 billion at the end of 1992 to $1.2 billion at the end of 1994. Liz Claiborne encountered problems on three fronts. First, its main distribution channel - traditional department stores - fell on financial hard times, resulting in bankruptcies, mergers and buyouts. Pressed to meet debt payments, department stores cut down on retail staff support, which compromised Liz Claiborne's in-store presentation. Moreover, department stores required from their suppliers fast reordering to reduce inventories in order to free up cash.
Second, in the early1990s, Liz Claiborne faced an increasing trend towards 'casualization' of the workplace requiring a shift in its product portfolio towards merchandise for which reordering was feasible. Third, Liz Claiborne faced new competitors that employed a different production paradigm allowing efficient reordering. The company responded to these challenges by setting up a reordering program for items in the casual division. However, Liz Claiborne did not change any other activities, leading to large inventory buildup at Liz Claiborne. Changing a single aspect of its coherent internal configuration did not solve its problems, but rather created misfits in its activity system, leading to further performance declines. A much larger revamping of the entire system of choices was necessary to efficiently accommodate reordering.
In 1994, the company hired Paul Charron, the former executive vice president of VF Corporation, the manufacturer of Wrangler and Lee jeans, Vanity Fair Lingerie and Jantzen Swimwear. He became CEO one year later. Charron implemented a series of operational and marketing changes that injected new life into Liz Claiborne's financial performance, both on the balance sheet and the stock market. For instance, to fully capture the value of Liz Claiborne collections, Charron started to install new in-store fixtures in department stores around the country. Moreover, designers now coordinated across divisions to provide customers with the ability to mix and match across casual and more formal styles. To increase supply efficiency, the number of suppliers was cut by half and cycle times were cut by 25%. By May 1997, the company was trading close to a record high, with a market capitalization of $3.2 billion.
In the case of Liz Claiborne, as in many other cases, the hiring of an outsider to run the operations proved to be the key to its resurgence. According to Siggelkow, "new management is frequently necessary to facilitate the unlearning of old routines and to create substantial second-order learning." This is particularly the case when long-tenured managers face fit-conserving change. Says Siggelkow: "The case that poses the most difficult problems for managers is if the environment changes in a way that renders the set of choices they have made less valuable, yet keeps the internal coherence of the set of choices alive.
The first problem is that the system still makes internal sense so it's not quite clear what should be changed. Since the internal logic of the choices is undisturbed, managers are very much tempted to rely on and trust previously successful practices and choices, even if performance has declined. The second problem is that incremental changes lead to performance declines. This is the direct consequence of still having intact internal fit. That's why this type of change is so pernicious: there seems to be no good reason to do anything, and even if you engage in incremental change, it is more likely to hurt you than to benefit you."