Why Did Ralph Fall off his Horse?
Investors seemed surprised when the luxury apparel and accessories maker Ralph Lauren reported $400 million in restructuring charges and warned of lower sales. A Wall Street Journal article attributed the slip to a number of factors. But to me, it all added up to a strategy—or what Peter Drucker called “The Theory of the Business”— that no longer worked.
Drucker warned “the theory of the business has to be tested constantly.” Yet most companies fail to regularly assess their strategy and make necessary changes. Sometimes a strategy fails because its underlying assumptions are no longer valid. And then there are strategies that fail because the business grows without focus.
From what I can see, the latter happened to Ralph Lauren. But let me be clear: I am an admirer of the American cowboy in Lauren and the company he has built.
Fashion for Everyone
Lauren’s strategy was clear: Offer a wide range of products, all with the luxury brand, to a broad range of customers, through multiple distribution channels. There was a piece of fashion for everyone: a $3,000 woman’s handbag at Lauren’s upscale boutique on Madison Avenue, an iconic Polo shirt at a Ralph Lauren shop in a discount mall, a Ralph Lauren men’s suit in a department store, and the Polo socks I buy at T.J. Maxx.
No Clear, Consistent, Focused Strategy
Lauren’s strategy had evolved to too many brands with too many products and too much discounted inventory in department stores. But the first question to ask is: What is this company? Is it an upscale purveyor of luxury goods that wants to compete with the likes of Dolce and Gabbana or the company that sells 4 pairs of socks for $10?
An apparel maker that positions itself as a purveyor of luxury goods typically competes on the basis of style and quality. Keeping up with changing styles is important. Price is not. If you’re selling thousands of polo shirts and socks, you’re a commodity player and price is important. Making the two strategies work inside one company is difficult, if not impossible.
There are high-end apparel companies that sell lower end consumer products (Missoni at Target, Vera Wang at Kohl's). But these are very limited and focused offerings. They promote the brand rather than dilute it. Lauren needs to make some hard choices.
The good news is that Ralph Lauren can be fixed. It might emerge with a smaller top line, but it’s brand remains strong and its classic style still appeals to many consumers. The company must get clear on what it is and then rationalize its operations and competencies to fit reality. Companies that fail to rationalize their strategy over time don’t survive. But Lauren has a new CEO who brings the skills and experience the company needs. There’s hope.
Why Didn’t the Company Change Direction Earlier?
This is the question that interests me when I see a company’s strategy begin to fail. Usually there are warnings. Couldn’t Ralph Lauren’s executives see trouble ahead as inventory built up and discounts mounted? I have a sense that not only were investors surprised by the downturn, the company was too.
It’s easy to imagine that Lauren, caught up in the exuberance of growth, missed the fact that the business was slipping. It’s hard to pick up a magazine and not find a multi-page Lauren advertising spread. Sometimes your own fame and success numbs you to the problems you are encountering.
But I only speculate here. There are many reasons why companies and their leaders don’t initiate change early enough—even when they clearly see the future. Ask yourself whether you or your company has fallen victim to one of these behaviors.
The Arrogance of Icons
Sometimes a company with an iconic brand can’t believe it’s in big trouble. “We know what’s right”, its executives think. “The market listens to us, and customers do what we tell them.” The classic examples here are IBM and GM. IBM was saved by a new CEO, Lou Gerstner, who could see the problems ahead and led the company through dramatic change. GM was saved by the government. Hopefully, its executives have learned something.
Business Is Too Good to Change
This is a tough condition to deal with. Business is still very good, and if you are a publicly held company, your shareholders expect you to keep it that way. Management can see the changes in the market that will compel the company to change. But the company is frozen in its own profits, and its way of doing business. It’s afraid of the consequences if it changes its business model.
Microsoft is the classic example here. Its software licensing business is huge and profitable, so why change? But companies like Google have introduced new ways of paying for software—often making it available for free. Microsoft’s effort to shift some of its business to other areas appears to be finally succeeding with its cloud services.
This Too Shall Pass
Older readers of this column will remember the Digital Equipment Corporation. Digital was IBM’s first real competitor. It made smaller computers, but they were still big boxes. When microprocessors came along, Digital’s founder, Ken Olsen, called them “toys” and believed they were a fad.
I knew Olsen personally. He was a fine person and a great engineer but not a believer in technology’s commercial advance. Olsen was eventually removed from the Digital board, but it was too late for the company. The company, in a weakened state, was sold—a sad example of denying the future.
This Change Will Be Too Hard
When I was younger and more cynical, I often thought executives who saw the need for change, but failed to act, were just leaving the hard work to their successors. This is just too hard, so let’s leave it to the next generation. The company will be fine and has plenty of time to change.
I don’t see that happening often. A slip in performance is visible in public markets, and if problems continue, shareholders demand change. I expect Ralph Lauren’s shareholders are doing that now.
The Question to Ask
Often times, it’s a combination of these behaviors that keeps a company from moving on. Knowing why you’re stuck and changing behaviors that obstruct change is required. To get moving, just ask yourself a simple question: What will happen if we do nothing?