Research Paper: Gilt Groupe

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[. . .] Winning the supply chain war is going to critical to success in this industry, perhaps more than dealing with customers.

Overall, there are reasons to be concerned with the flash sale business model. Most factors are unfavorable. Bargaining power is fairly low, there are many alternatives for customers to spend their money, and there are expected to be a lot of new entrants into a market that is seeing slowing growth and supply chain constraints. With a high-volume, low-margin product, it will be difficult for firms going forward to maintain the volumes needed to cover fixed costs. Already, some major players in the industry are shifting their business models away from flash sales (Berk, 2012).

Implications for Gilt Groupe

Despite the doom and gloom, the flash sale industry is still growing, and Gilt Groupe is still growing. There will always be consumers who value a bargain, and if the industry remains/becomes unfavorable then many competitors will either exit or rethink their plans to enter. In particular, if competitors have difficulty accessing steady inventory supplies, they might exit the industry. IBIS (2012) note the revenue volatility can be quite high in this industry, especially for smaller companies that do not always have inventory they can discount. Larger companies in other areas of flash sales, like Groupon, have managed to enjoy some success largely because they have enough inventory supply. This means that Gilt Groupe needs a strategy to ensure that it has competitive advantage in its supply chain, because that is how it will have competitive advantage overall. Of all the things that Gilt can do to help itself succeed, supply chain dominance is the most important.

Recommendation

It is recommended that Gilt focuses effort on optimizing relationships within its supply chain. Ultimately, supply chain partners do not care that much what Gilt sells the merchandise for, or whether Gilt turns a profit; what they value in a partner is someone that will buy from them consistently. Gilt, as the largest player in the fashion flash sale industry, can offer that. However, there are ways that Gilt can enhance its attractiveness to suppliers.

Gilt should restructure its organization to an organizational design that is better suited for its business needs. As a young company, Gilt has built itself up with little regard for optimizing its organizational design, and presently has a horizontal functional structure, which is very basic and traditional, but does nothing to enhance its business. Supply chain is just one of many divisions, given roughly equal weight within the company. This model is acceptable for a start-up, but at this point Gilt is facing an increasingly challenging industry environment. The good news is that Gilt has the ability to dominate this market. Operating from a leadership position with a 30% share is operating from a position of strength.

The Recommendation is to move to a balanced matrix structure. The balanced matrix structure operates project groups underneath of the functional structure. It does not require a high amount of reorganization from the functional structure currently used, but emphasizes cross-functional project teams in order to tackle major problems within the organization. An example of a balanced matrix structure for Gilt would be:

This chart shows how the balanced matrix structure would work for Gilt. The company would have cross-functional buyer teams that consist of people from several different functional divisions. In particular, there would be supplier relations people, merchandising and IT sales, and they would work together to identify and meet the needs of the key suppliers in the industry. Such teams would have the objective of working with the biggest suppliers to bring them on board with using Gilt as their main outlet. There would be targets for both the number of clients and the volume of business. While it would probably be illegal to have these clients sign exclusivity deals given the market-leading position for Gilt, such a strategy could be employed in some way, if only to squeeze a few competitors out of the market. The legal department will want to advise on that.

The key to this recommendation is that currently supplier management is an ad hoc process. But there are major suppliers within the industry whose goods will regularly appear at flash sales. Many suppliers, however, have reservations about using the industry, for example many might prefer to avoid deep discounts on their brands. Certainly, many suppliers of premium goods want to have fairly tight controls over the discounts that are offered. By optimizing supply relationships, Gilt can offer the discounts on the brands that are most attractive consumers, while also finding a way to meet the needs of key suppliers (Tellis & Zufryden, 1995). Gilt's size will help it to do this better than the competition, and that can create a significant barrier to entry. Noting that one of the biggest threats to Gilt is that the industry is facing a glut of new entrants at the same time as growth is slowing, finding ways to be a the retailer of choice for the best suppliers in the industry is an essential element of success. Raising the barriers to entry is a tactic that will serve Gilt well in the long run.

Conclusion

Shifting organizational priorities is important for Gilt at this stage of its growth. As growth begins to slow, there is the risk that the entire industry will become mature. For Gilt, the opportunity is now to restructure the organization in preparation for this. Gilt's current organizational structure is very basic, and within it there are barriers to success. By shifting to an organizational structure with a balanced matrix, Gilt can retain much of its current structure at the higher levels, but develop cross-functional buyer teams that will be better able to meet the needs of key industry suppliers.

This shift in the organizational design is the most important strategy that Gilt can undertake right now. The shift will allow Gilt to leverage its current position as industry leader to shore up its supply chain and create more barriers to entry, perhaps preventing this glut of new arrivals into the industry. Gilt can do this now while the industry remains only moderately concentrated -- if it tries to do this when the industry is more concentrated it might face antitrust action.

The buyer teams will help Gilt to deal with the biggest challenge that the industry is facing right now, which is a supply shortage. There is little doubt that buyers still want flash sales, even if growth in the industry is slowing, but firms in the industry need a steady supply of good merchandise in order to retain their existing customers, continue to attract new ones, and to generate enough revenue to cover fixed costs. For Gilt, a change in organizational structure will help it to gain competitive advantage in supply chain, because while its smaller competitors are trying to build their brands and their websites, Gilt will be able to focus on supply needs, in addition to its competency in meeting the needs of customers.

References

Berk, C. (2012). Time for flash sales to adapt or die. CNBC. Retrieved May 4, 2014 from http://www.cnbc.com/id/47507737

Brown, M. (2012). 5 ways the flash sale industry is changing. PFS Web. Retrieved May 4, 2014 from http://www.pfsweb.com/blog/5-ways-the-flash-sale-industry-is-changing/

Deogirikar, P. (2013). Online flash sales: Second wave of e-commerce or next bubble? IIMB Alumni Association. Retrieved May 4, 2014 from http://www.iimbaa.org/IIMBAA/index.php?option=com_content&view=article&id=350%3Aonline-flash-sales-second-wave-of-e-commerce-or-next-bubble&catid=24&Itemid=134

IBIS (2012). Online fashion sample sales in U.S.. IBISWorld In possession of the author

Investopedia. (2014). Herfindahl-Hirschman Index. Investopedia. Retrieved May 4, 2014 from http://www.investopedia.com/terms/h/hhi.asp

Porter, M. (2008). The five forces that shape competitive strategy. Harvard Business Review. Retrieved May 4, 2014 from http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1

Sachs, A. (2012). Flash sales entice bargain-hunting travelers. Washington Post. Retrieved May 4, 2014 from http://seattletimes.com/html/travel/2018088994_weblashsalestrend29.html

Tellis, G. & Zurfryden, F. (1995). Tackling the retailer decision maze: Which brands to discount, how much and why. Marketing Science. Vol. 14 (3) 271-299.

Yi, J. (2013). The rise… [END OF PREVIEW]

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