Case Analysis
American Apparel: Unwrapping Ethics

Whether American Apparel should change their advertising or stay with the highly sexualized nature they have been using for advertising
Situation Analysis
How American Apparel is going to take the brand from where they are at and move forward with it, either by changing their ways or staying the same.
Internal Environment
The resources American Apparel has available to them internally come from hiring young people for design and advertising to help them better reach their targeted market, and come up with the advertisements and style of clothing. The overall organizational goals are to offer a sustainable, high quality clothing product that appeals to young urbanite individuals who are likely to be loyal to their brand, and advertise it just by wearing it and making it popular.
External environment
Five Forces
Influence the industry as a whole and determine the conduct of the firms within the industry and also determines profitability
Competitive intensity-High
Part of the reason American Apparel wants to change in order to build a lasting brand and to make a turnaround is due to the competitive intensity within the clothing industry. Competitive intensity reduces profitability because the more strongly firms are competing, the more likely they are to cut their prices. This intensity increases when there are numerous balanced competitors, slow growth, high fixed costs, lack of perceived difference between products offered by competitors, lack of switching costs. The clothing industry is highly competitive and what sets American Apparel apart from others is their added value to customers of all clothing being manufactured in the United States, instead of China like many others.
Threat of New Entrants- Moderate
When the barriers to entry high, threat of new entrants goes down. High fixed costs, access to distribution channels, likelihood of retaliation reduce new entrants from entering. Barriers to exit also reduces the threat of new entrants. Whereas, high, stable returns increases the threat of new entrants.

Buyer Power- Moderate
Buyers don’t have a lot of power when a product has a premium price, if buyers can negotiate prices they have power in which they cannot pay premium prices. In most of the clothing industry buyers have moderate power, they can wait for sales, or go to outlets, and can buy things second hand, instead of brand new. But, they also don’t have much power because if they want a high end brand, they are going to have to pay the high end prices.
Substitutes- High
The closer the substitute, the more perfect the substitute and therefore the bigger the threat. Within the clothing industry there are many substitutions, and especially with more popular and expensive brands the threat of “knock off” substitutes is high. Substitutes put a ceiling on how much you can charge, which reduces profitability. The benefits of substitutions is that it shows that the customers who purchase a specific brand are loyal to that brand and aren’t affected by the substitutes.
Supplier Power- Moderate-high
In an industry, suppliers have a lot of power when there is a small number of them, and when a company requires large quantities. There is moderate supplier power in this industry because there are a small number of them in the United States, but a large number of outsourced suppliers in other countries, such as China. Most clothing companies requires large quantities, so the suppliers have more power in regards to what they are going to charge.
Key competitors
Urban Outfitters They are a key competitor because they are also targeted at young urbanites, “hipsters”, and use sexual appeal advertisements to grab their consumer’s attention. Urban Outfitters has also been controversial in their advertising tactics, such as promoting “no eating” and being skinny, so they have been accused of negatively affecting girl’s body images. They use sustainable practices in producing clothes, and the price of clothing is on the same scale as American Apparel.
Nordstrom
Nordstrom is a key competitor to any company within the clothing industry, they are a well-known brand, with great customer service, quality products, ethical business practices, and a large variety of high and lower end clothing. They affect American Apparel because they offer many substitutes, which customers may be more likely to buy because Nordstrom has such a long, positive history with their customers.
Brand Competitors
If a company offers the same products at a similar price then they are considered to be brand competitors, such as Coca-Cola vs. Pepsi. Within the clothing industry, and compared to American Apparel, brand competitors would be, Nordstrom, American Apparel, Macy’s, The North Face, Lulu Lemon, etc. Most of the brands that appeal to young people, and stores, but excluding the discount stores that make cheaper and poorer quality products such as Forever21, Target, and Walmart.
Product Competitors
The product competitors are companies of the same product class, but who offer different benefits, features, and prices, such as energy drinks vs. Gatorade. Compared to American Apparel or everyday clothing stores would be dress stores, suit stores, such as Men’s Warehouse, David’s Bridal, boutiques, and discount stores like Forever21, Walmart, Marshalls, Target, etc.
Generic competitors
The generic competitors within an industry have very different products, but they solve the same problem, such as going to a concert like Paradiso vs. baseball game; both of which solve an entertainment purpose but are completely different. In the clothing industry and compared to American Apparel, generic competitors would solve the issue of buying something that isn’t totally ‘necessary’ but you buy it for the appearance, or because it makes you happy. The competitors would be things that show on the outside, such as cars, makeup, jewelry, and even services such as tanning, hair salons, nail salons, and gym memberships. They all are purchase for appearance, or emotional reasons, to look or feel better.
Total budget competitors
The total budget competitors within an industry are all competing for the same financial resources, but are very different products, such as potato chips vs. soda, who are both in the food industry but one is for thirst and one is for hunger. For American Apparel and the clothing industry, it would be clothes vs. shoes, hats, and gloves; the clothing is for your body, the others are for your feet, head, or hands.

SWOT Analysis- Current STRENGTHS | WEAKNESSES | * Short product development cycles & quick response time * High quality products * Iconic t-shirt & hoodies * Well defined niche market * High exposure, low cost advertising | * Litigation exposure & corporate governance * Comparatively high production costs & prices * Dependence on immigrant labor * Limited product mix | OPPORTUNITIES | THREATS | * US apparel market is forecasted to grow * Global and emerging apparel markets are expected to grow * Plus-size consumer market growth * Customer loyalty interfaces with profitability * Diminishing bargaining power of supplier | * Low cost foreign clothing manufacturers * Steep manufacturing cost structure * Economic conditions & significant fluctuations in exchange rates * Change in style or fashion * Sustaining brand image & value |

STP
Segmentation
American Apparel segments include U.S. wholesale, U.S. retail, Canada, and international /e-commerce.
Targeting
American Apparel targets young urbanites, “hipsters”, and those interested in purchasing only American made products.
Positioning
American Apparel positions itself through a unique, vertically integrated manufacturing system, a business model which concentrates on developing value for customers and the community, and providing a sustainable and sweatshop free alternative for quality clothing. They do this through cultural force, being the “Hip American made alternative to other clothing brands”, and sexual imagery ads in popular, fashion magazines, while having reasonable pricing.
Core Competencies
Their mission, of creating sustainable products in the US in non- sweatshop conditions, while understanding consumer needs, and producing high quality products, just as their competitors offer are some of their main core competencies. They also strive to attract young people to their products as they are their main consumers, and they do so through controversial sexual imagery advertisements.

Competitive Advantage
Vertical Integration Integrated Products that are seamlessly tied together and function as one
Retail strategy
Created their own retail stores and controlled the retail experience
Fashion design
Have a simple and elegant design across all of their products which made it difficult for competitors to imitate

Differentiation advantage vs. cost advantage
American Apparel with its American made clothing, labor strategies that reduced costs by hiring immigrants, and sexual advertisements, have proved to be successful with consumers being brand loyal and it puts them in a special class of companies that have realized success with differentiation strategy. They have shown superior financial performance and outstanding marketing performance, with return on sales and return on assets that are equal or higher to their competitors (Appendix A1, A2). Although, the products are moderately premium priced as they offer highly sought after customer benefits as part of their product differentiation advantage. They do not have a significant cost advantage over competitors, as they are competing with sweatshops in China compared to competitive salaries in less harsh working environments in the United States. But, this increase their customers WTP because they know the product was made in America, under good working environments, and was not made by a 10 year old in a foreign country who is forced to work under harsh conditions. American Apparels customers support the companies’ values and are loyal because of them.
Strategic Alternatives
Grow market demand
Early on market growth strategies are good to get people to understand what the product it is. Offer a new, limited time only product, which people HAVE to have.
Increase Market Share
More advertising, that is new with brand ambassadors that are well known and liked celebrities, and less sexual, which might increase costs and runs the risks of decreasing market demand. But, after things start to take off positively, will eventually increase market share.
Grow Customer Revenue
If they increase price it might push down demand, at first. But, as the curve starts to level out then customer revenue will gradually increase. A higher price might also make American Apparel seem like a more high quality brand, and the loyal customers will remain loyal, and the new customers will become loyal quickly and purchase more frequently.
Reduce Costs After trying these other alternatives, American Apparel could think about how to reduce costs when the product has reached its maturity and people start to die off.
Recommendations
Based on the strategic alternatives and goals, I recommend that American Apparel introduce a Corporate Social Responsibility campaign, penetrate a new market with fuller figured and progressive thinkers, introduce a new product line that combines their core competencies in product quality and advertising, with less focus on sexual ads, and creating positive brand ambassadors through celebrities that are well known for being women’s rights activists, anti-feminists, and who are popular in both political and social aspects.
Appendix
A1

A2