In the third of a series of articles looking at strategies to succeed in a period of industry decline, David Birnbaum looks at the reasons why so many fashion brands and retailers are doomed to fail.

With the possible exception of Italian restaurants, the garment industry has the highest bankruptcy rate of all commercial endeavours.

Clothing stores open and close at a mind-boggling rate. New fashion labels appear only to disappear almost instantaneously. People filled with hope and vision spend months and sometimes years to plan the first step in their evolution to become the next H&M, North Face, or Zara. "If they did it, why can't we?"

Regrettably while it is undeniably true that almost all successful retail groups and global fashion labels were built on modest structures, it is equally true that for every H&M, North Face and Zara, there are hundreds, if not thousands, of start-ups that fail within the first year of operation.

We should not be surprised to hear that start-ups usually fail. This is true of most industries.

But what makes the garment industry different is the large number of long-established, previously profitable companies that go broke. We have a pattern: we create Innovative companies that rise and prosper, only to decay and die.

Our industry, particularly in the United States is built on the dead bones of yesterday's winners.

Have you ever heard of Rosenthal & Kalman or Samuel Parnes? What about David Schwartz (Jonathan Logan) or Freddie Pomerantz (Leslie Fay)?

Rosenthal & Kalman and Samuel Parnes were the leading companies in the early 20th century. These people built the world's first ready-to-wear women's fashion garment industry.

David Schwartz (Jonathan Logan) and Freddy Pomerantz (Leslie Fay) were the industry leaders from 1947-1970. Both are forgotten - unless of course you graduated from The Fashion Institute of Technology (FIT) or the Parsons School of Design, where the main buildings carry the name of their respective benefactors.

Surely you have heard of Sears and Liz Claiborne.

Sears used to be the world's largest department store group. For all practical purposes Sears invented the consumer catalogue. More importantly it was the single most trusted retailer in the United States. Quality was impeccable and prices reasonable. Today Sears is quickly moving towards oblivion.

Liz Claiborne was a remarkable company. Starting from nothing, in 10 years Liz Claiborne and her husband Art Ortenberg built the greatest fashion brand of its generation. Liz Claiborne was the first fashion brand importer to go public on the New York Stock Exchange. Its management and technicians were perhaps the best in the world. Their sourcing people included Bob Zane and Gary Ross - the super stars of the era.

There is every likelihood that within the next five years both companies will disappear completely. Indeed, the process has already begun with Sears selling off stores and Liz Claiborne selling its eponymous label.

Why do so many of our leading companies fail? Why is our industry so different to others?

The short answer is CHANGE:

Companies succeed because they provide value to their target customers. Their core competencies are geared to understanding their customers' needs and providing for those needs.

However over time, the world changes and so too do our customers' needs. We are the fashion industry, and in our industry either you are in the forefront of change or you are on your way out.

All of us are aware of the current changes which will affect the global garment industry:

Demographics change
Our population is ageing. Middle and upper middle class families are having fewer children while those in the lower economic class are having more children.

People who previously moved from city centres to the suburbs are returning the city centres. Clearly if you operate a chain of designer label children's wear boutiques located in suburban malls, you might to do well to change your business model.

Technology changes
We live in the 21st century internet age, yet our internet strategies differ little from the 19th Sear Roebuck catalogue. The new generation of consumers are computer literate, who expect to buy by internet. They will need physical stores at best only to try-on garments. Selling via the internet reduces costs and therefore should reduce prices. Until and unless retailers recognise they are playing a new game with new rules, they will simply be sending their business to those who are computer savvy. Ten years from now Amazon may have a greater garment retail volume than Wal-Mart.

Customer psychology changes
Today, our customers govern the market place. We can no longer tell the customer what to buy. Our role is to determine what our customers want and provide those products at a price they are willing to pay. To try to sell the customer something else, whether through clever advertising or enticing price reductions is more than foolish; it is an expensive way to commit suicide.

All of us recognise the need to change. Yet many retailers and brand importers cannot adapt, let alone be at the forefront of change.

If we can understand why some companies embrace change while others reject change, we can begin to understand why companies which had previously been vibrant, profitable and successful, reverse course and move towards total failure.

Garment company pathology
A company is legally defined as an artificial person. It is certainly an organism. As with any organism, companies are susceptible to disease. I suggest that previously successful companies fail because they become infected with one or more diseases that are ultimately fatal.

Corporate Sclerosis (CS)
This is a disease where middle and senior management are not just unable to react to change, they will fight against change and even lapse into a psychotic state where they believe they are operating the 1970s - a time when customers bought what we told them to buy; the internet did not exist; the customer-base grew because the population grew; and when the brand-importer and retailer was in charge. The disease is potentially fatal.

Liz Claiborne is a prime example of CS. The organisation of highly qualified innovative professionals is gone; either replaced by a string of second-raters or their work outsourced entirely. Today the company no longer has any definable core competencies. Everyone's single goal has become survival - to hold on to their jobs for another year, or even month. Here there can be no reaction to change because the company must operate at the level of the competency of its current management.

Pathological ego (PE)
This is a pathological state where senior management are right because they are senior management, and where any idea not their own was a bad idea. Regrettably our industry is genetically prone to PE. Ours is a difficult industry, where those who succeed ultimately believe they are specially blessed. A person who runs a garment company successfully for ten years believes he talks to G-d. After 15 successful years he thinks that G-d is listening. After 20 successful years he thinks G-d is talking back.

Sears is an equally prime example of PE.

Successful companies exist to provide value to their customers. In this sense profit is a measure of value compared with costs. When customer value exceeds costs, you make money.

Current management believes that their company exists to make money and that providing customer value is an unnecessary extravagance. They believe that with the proper advertising campaign customers will pay more for less. Management does not believe that they are the smartest people in the world, but rather that everyone else is stupid.

Neither Liz Claiborne nor Sears will survive unless each undergoes a radical cure. Regrettably they are but two of many. Just look around.

Click on the links below to read the other articles in this series:

Comment: Strategies for success (Part I) - core competencies

Comment: Strategies for success (Part II) - determining the right strategy

Comment: Strategies for success (Part IV) - the supplier's road to failure

David Birnbaum is the author of The Birnbaum Report, a monthly newsletter for garment industry professionals. Each issue analyses in-depth US garment imports of four major products from 21 countries, as well as ancillary data such as currency fluctuations, China quota premiums and clearance rates. Click here to visit David's website.