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3 Lessons For Leaders From Stitch Fix’s Strategic Fix

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Plenty of companies that enjoyed a demand boom during the pandemic have abruptly shifted into reverse. Products and services that people needed when they were couped up at home are no longer in as much demand.

As people return to the office, go to movie theaters, and otherwise scramble to make up for lost time, companies like Zoom, Peloton, Netflix, Wayfair, DoorDash and many others are suffering sharp reversals.

Leaders of such companies must act to restore their growth. If they don’t, they could find themselves in a doom loop of cost cutting, burning through dwindling cash, and loss of customers that ultimately sends them to their final resting place.

Consider the case of Stitch Fix, the San Francisco-based online personal styling service, whose shares have lost 93 percent of their value since peaking in January 2021. For the quarter ending April 2022, Stitch Fix’s revenues fell eight percent; it reported a $78 million net loss; and it lost about 16 cents for every dollar of those declining sales, according to CNBC.

Declining growth and big losses loom larger in Stitch Fix’s future. It forecast that revenue would be down as much as 15 percent — in the range between $485 million and $495 million — for the quarter ending in July 2022. So on June 9, it announced it would cut 15 percent of its people — about 330 of them — which would reduce costs about $50 million and result in one-time charges of about $18 million.

CEO Elizabeth Spaulding — who told CNBC “We still have work to do” — has an impressive background as a consultant, so she should be able to solve Stitch Fix’s strategic problems. Sadly, the company’s stock has been in a swan dive over the last 11 months since she took over as CEO.

What would you do if you were in her shoes? Here are three things I would recommend (and I think any business leader should consider these steps — especially if their company is in a similar position).

1. Identify the right problem.

When it comes to strategic problems, business leaders must separate the critical few from the trivial many. To that end, they should use the Toyota concept of the Five Whys — meaning that they should ask why that initial problem is happening, get a fact-based answer, and then turn that answer in a new question which they investigate.

I would start Stitch Fix’s Five Whys analysis as follows:

  • Question 1: Why did Stitch Fix’s total revenues drop by 8%?
  • Answer 1: Its active client count fell by 5% and revenue per active client declined 4% from $131 to $126
  • Q2: Why did Stitch Fix’s active client count and revenue per active client decline?
  • A2: Stitch Fix’s process for onboarding new clients is inefficient, Apple’s privacy changes are reducing traffic to its site and hampering new client acquisition, and fewer site visitors are buying, noted its June 9 earnings call transcript. Revenue from its Fix service — in which stylists select items for clients — fell more than 8%.
  • Q3: Why did Fix revenue decline?
  • A3: Fix’s appeal to customers may be declining, according to Motley Fool.

Although I could not find enough publicly-available information to complete this analysis, business leaders can use this Five Whys approach to identify the critical few problems.

2. Investigate what is causing the problem.

The outcome of the Five Whys analysis should help business leaders narrow down the range of problems they must solve. To investigate their cause, leaders should conduct customer interviews and competitor analysis.

I think Stich Fix should ask their customers — including some of the 200,000 who have left in the last year — questions such as:

  • Will you increase or decrease your spending on clothing? Why?
  • Will rising gasoline and food prices cause you to cut your clothing budget?
  • Will you increase or decrease how much you spend on clothing at Stitch Fix?
  • Which provider(s) will receive more of your clothing budget? Why?
  • How can Stich Fix win more of your clothing budget?

To find new growth, Stitch Fix should ask similar questions to customers who are buying more these days.

3. Invent a growth solution that will restore revenue increases — or seek a buyer.

Such investigation should help business leaders invent a strategy to restore the company’s growth.

Spaulding hinted that Stitch Fix may have such a solution — improving its customer experience by investing in technology,  product functions, incorporating its new Freestyle product — which uses AI to make product recommendations — and adding more marketing channels.

Will this strategy boost revenue or merely limit how much Stitch Fix’s revenues decline? The pressure is on Spaulding and other business leaders to implement the right answers.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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