japanese apparel

APPAREL DISTRIBUTIONINTER-FIRM CONTRACTING AND INTRA-FIRM ORGANIZATION

Group 8 (Section A)

THEORY OF THE FIRMIt consist of number of micro-eco theories which deals with the existence, structure and behavior of an organization

In simplified terms, the “theory of the firm” aims to answer these questions:

Existence. Why do firms emerge, why are not all transactions in the economy mediated over the market?

Boundaries. Why is the boundary between firms and the market located exactly there as to size and output variety? Which transactions are performed internally and which are negotiated on the market?

Organization. Why are firms structured in such a specific way, for example as to hierarchy or decentralization? What is the interplay of formal and informal relationships?

Heterogeneity of firm actions/performances. What drives different actions and performances of firms?

Evidence. What tests are there for respective theories of the firm?

TRANSACTION COST THEORY

INTER-FIRM CONTRACTING VS INTRA-FIRM ORGANIZATION Devised by Ronald Coase in

1937

Internal Transaction cost > External Transaction cost, firms go for Inter firm contracting

Or else firms opt for internal organization

Vertical Integration/ Forward Integration

Devised by Ronald Coase in 1937

Least-cost-avoider theory

THE HIGH-ENDDEPARTMENT STORES Higher Status labels did not have shops

Suits were not sold via tailors

DS was the ultimate buying point

GENESIS• Department stores had its roots

with antecedents• Multi-floored buildings with

number of stores• E.g. Tobu had 1st floor for

cosmetics, 2nd for women apparels and 3rd and 4th for women clothing and jewelry

CONTRACTUAL PRACTICE• Right to return by Onward

Kashiyama in mid-1950s

• Ensured that he did not lose sales for lack of department store stock

• To handle business risk, Kashiyama took two steps:

1. Control over price

2. Seconded Employees (to monitor sales)

THREE CONTRACTUAL TERMS EMERGED1. DS obtained title goods and

customary right to return at full price

2. Contractual right to return3. Goods on consignment

THE MIDDLE MARKET (MASS MARKET CHAINS)

General merchandize stores/super stores Three largest chains sell more merchandize than largest DS

Positioned variously in enormous expanse between Walmart and Sachs (US equivalent)

Ito Yokado Not discount stores, good value at slightly higher price

Can find Prada, but more space to American Tourister

Goods show price sensitivity, customers can easily gauge quality

Clean stores, good natured employees

Shimamura True discount store; shabby place; harassed few workers

“Oh, so cheap”

SPECIALITY STORES

Sub-segment of middle segmentDifferent since owned or franchised by a specific

brandRelatively newer segment

Created for particular segments when forward integration made sense

Aoyama shoji for business suits segmentSan’ei for young chic segmentFast Retailing for Cheap chic casual segment

FRAGMENTATION ALONG VALUE CHAIN

• Mostly imported, 913 establishments, 8700 workersRaw Material• Spinning firms, 540 firms, 25700 workers, also importedThread

Manufacturing• Brokers (922, 6600 workers), Finishing (5480, 23600

workers)Thread Finishing• 31800 firms, 169300 workersWeaving, knitting• Wholesaler (6005, 52900 workers), Print shops (6305,

75200), foreign competitionPrinting and

Finishing• Apparel maker (in-house), independent factories (50890,

566700 workers)Garment

Manufacturing• 23200, 286800 workers, foreign imports (16102bn yen)Wholesaler• Department stores (2364, 156800 workers)• Other outlets (183633, 644524 workers), convenience storesRetailing

KEY PLAYERS Apparel Makers

Design in-house or approach a designer

Manufacture in-house or outsource manufacturing

Keep no fabric or thread in stock

Wholesalers/Brokers Reflects division of labor into very small operations

Provide information about market, bear risk

Economize on search costs for trading partners

Retailers Departmental Stores

Other outlets

Convenience stores (Sell underwear, socks etc., handle 11795bn yen’s worth)

CONTRACTUAL AGREEMENTS

Business suits Shift from tailor-made to ready-made suits

Reduced retailers’ reputational capital (Department stores affected)

Emergence of new players, Aoyama shoji and Aoki International

Basic business suits, long shelf life

Owned stores, exploited scale economies

Forward integration to obtain accurate information about consumer preferences, plan production statically beforehand


Young chic Department stores traditionally avoided this segment

Rising consumer incomes, highly trend conscious

Emergence of Harajuku’s fashion industries

San’ei and Five Foxes major players

Forward integrated to capitalize on-

Repeat purchases

Response time

Quick Response systems

Integration limited to wholesale in upstream


Young chic casual Fast Retailing at the forefront with its “Uni-Qlo” stores

Replacing dark suits with Khaki casual

Non-age uni-sex casual wear

Integrated wholesale and retail to cut on response time


For segments other than the extreme cases

Wholesaling only

Economies of scope leading to scale economies (San’yo Shokai), marketing expertise

Manufacturing only Economies of scope leading to scale economies (Wacoal),

manufacturing expertise

Both manufacturing and wholesaling Onward Kashiyama

IMPLICATIONS

On Exclusivity Huge quantities on imports

High correlation between exchange rates and imports

On Efficiency Highly competitive market

Low distribution margins

On Opacity Cost based rationale (Price mechanisms)