Blue Nile Case Study

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Blue Nile Inc. Strategy

2011

Blue Nile Inc. Strategy

2011

Introduction
In 2009, the U.S. jewelry and watch market was 42% of the worldwide market, which was estimated to be as much as $140 billion. Industry revenues had grown 5.5% annually for the 20 years prior to the recession in 2008. Despite the recession and intense competition in this highly fragmented market, Blue Nile Inc. (NILE) capitalized on the industry growth rates and grew to become the world’s largest online retailer of certified diamonds and fine jewelry. In order to remain a leader in the industry, Blue Nile’s management must remain conscious of industry pressures resulting from the continued poor economic conditions in the U.S.; the encroachment of brick-and-mortar competitors into the online space; consumer reluctance to shop online for jewelry; international opportunities; and other weaknesses in the firm’s strategies. The ensuing analyses detail Blue Nile’s current strategic approaches, the competitive forces confronting Blue Nile, SWOT and financial analyses, and recommendations to strengthen the company’s position and future strategic and financial performance. Blue Nile’s Strategy

Blue Nile’s strategy was developed around the Best Cost Provider strategy, a hybrid strategy that uniquely combines elements of differentiation and low-cost strategies. The two core elements of Blue Nile’s strategy were to 1) offer high-quality diamonds and jewelry at attractive prices and 2) provide its customers with educational information, in-depth product information, grading reports, and trusted guidance throughout the purchasing process. In addition to these two core components, Blue Nile employed other strategies focused on marketing, customer service and support, order fulfillment, and product line expansion. The first component of Blue Nile’s strategy aimed at building a lower-cost competitive advantage. Competitive Prices, Lean Costs, and Supply Chain Efficiency

Efficient supply chain management and operations helped Blue Nile achieve a net profit margin of 4.2% in 2009 where some competitors, like Zale, registered a net loss. Because Blue Nile sold jewelry online exclusively, it was able to eliminate costs that burdened its brick-and-mortar competitors and pass the savings onto its customers. Additionally, Blue Nile was able to realize significant cost savings through its economical supply chain by sidestepping the markups of conventional layers of diamond wholesalers and brokers. This allowed Blue Nile to obtain comparable-quality diamonds and fine jewelry pieces at substantially lower costs than reputable brick-and-mortar jewelers. Blue Nile kept inventories down and reduced risks of markdowns by only purchasing diamonds and gems from suppliers when a customer placed an order. At the end of 2009, Blue Nile’s inventory of $19.4 million hardly compared to Zale inventory of $740.3. Another cost saving factor of Blue Nile’s supply chain was the variety of suppliers with which the company did business. The top three suppliers only accounted for 24% of the company’s purchases in 2009, which emphasized that Blue Nile wasn’t limited to or dependent on any particular supplier. Arrangements were also favorable to suppliers because Blue Nile was able to provide them with real-time information about what items were selling, high sales volumes, and faster inventory turns. Evidence of Blue Nile’s supply chain savings can be seen in the comparison of its average markup on finished jewelry. On average in 2009, Blue Nile sold its product at 28% over cost, while its competitors like Zale and Tiffany sold their products at 88% and 130% markups respectively. Effective and efficient supply chain management was a driving force for lower costs at Blue Nile; however, lean operating costs also contributed to Blue Nile’s low-cost competitive advantage. In early 2010, Blue Nile had only 183 fulltime staff members, 5 part-time employees, and 1...
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