Case Teaching Note 05

case teaching note 5

Blue Nile, Inc.Worlds Largest Online
Diamond Retailer
Overview
Founded in 1999, Blue Nile had grown to become the largest online retailer of certified diamonds
and fine jewelry, with sales of $203.2 million in 2005 (up from $169.2 million in 2004).
According to Internet Retailer Magazine, in 2006 Blue Nile was larger than the next three largest
online jewelers combined; the magazine had ranked Blue Nile No. 48 in its Top 400 Guide to
Retail Web Sites; in its December 2006 issue, the magazine went a step further and named Blue
Nile an Internet Retailer Best of the Web 2007 company (one of five companies cited).
In 2006, the market for jewelry in the U.S. was an estimated $55-$60 billion industry. Annual
sales of diamond jewelry were in the $30-$35 billion range, with diamond engagement rings
accounting for sales of $4-$5 billion. In an industry famous for big markups, frequent closeout
sales, and myriad judgments of value that often mystified consumers, the marketing challenge for
online jewelers was to convince understandably skittish shoppers to purchase fine jewelry online.
It was one thing to shop for a diamond in a reputable jewelry store where one could put on a ring
or other jewelry item to see how it looked, perhaps inspect a stone with a magnifying glass or
microscope, and have a qualified jeweler describe the features of various stone(s) and cuts,
compare the character and merit of various settings, and explain why some items carried higher
price tags than others. It was quite another thing to commit to buying expensive jewelry based on
pictures and information provided on an Internet Web site.
Blue Niles strategy to attract customers had two core elements. The first was offering high
quality diamonds and fine jewelry at competitively attractive prices. The second entailed
providing jewelry shoppers with a host of useful information and trusted guidance throughout
their purchasing process. Top management believed its strategy of providing educational
information, in-depth product information, and grading reports, coupled with its wide product
selection and attractive prices, were the key drivers of the companys success and, ideally, would
lead to customers looking upon Blue Nile as their jeweler for life; the companys 2005 10-K
report stated:
We have established and are continuing to develop a brand based on trust,
guidance and value, and we believe our customers view Blue Nile as a trusted
authority on diamonds and fine jewelry. Our goal is for consumers to seek out the
Blue Nile brand whenever they purchase high quality diamonds and fine jewelry.

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Case Teaching Note 05

About 72 percent of Blue Niles 2005 revenues involved sales of engagement rings; Blue Niles
average engagement ring sale in 2005 was $5,600. Blue Nile management believed the
companys market share of online sales of engagement rings exceeded 50 percent and its 2005
share of the overall engagement ring market in the U.S. was approximately 3.2 percent. Sales of
diamond jewelry other than engagement rings accounted for 18 percent of Blue Niles 2005 sales;
management considered this segment to present significant growth opportunities because satisfied
buyers of Blue Nile engagement rings would likely consider Blue Nile in their future purchases of
diamond jewelry. Blue Nile provided engagement rings for over 80,000 couples during the 2000
to mid-2006 period. Sales of jewelry not containing diamonds accounted for 10 percent of Blue
Niles 2005 revenues; sales of these typically lesser-priced items were considered important
because they helped develop both trial and repeat purchase opportunities.

Suggestions for Using the Case

The Blue Nile case has all the ingredients for an outstanding and enlightening case assignment
and class discussion. You will find that it is a good vehicle for having students identify and
evaluate a companys strategy and wrestling with the strategic issues that surround Blue Niles
status as an early mover and leader in an emerging market segment with sizable growth potential.
The case is of modest length (something students always like) and the analysis that is required is
not demandingmaking it highly suitable for an early case assignment. Students wont have to
scramble to understand the business and they are virtually sure to have some convictions and
opinions about shopping at Blue Nile and the companys prospects for future market success. The
Blue Nile case should have particular appeal to female students.
We think the Blue Nile case is best assigned after you have covered Chapters 1-5; moreover, the
information in Chapter 6 concerning Internet strategies and the discussion in Chapter 8 about
competing in emerging industries should be helpful as well (but not essential).
We see Blue Nile as an ideal case for drilling students in the tools of analysis covered in Chapters
3 and 4 (especially Chapter 4) and then having them translate their analysis into action recommendations. Students will have to do some strategic thinking about the competitive forces Blue
Nile confronts and the key success factors for an online jeweler, conduct a SWOT analysis and a
competitive strength analysis, identify the strategic issues confronting Blue Nile management,
and make action recommendations. And students will welcome the fact that the case is a
relatively short 13 pages.
There is a four minute video accompanying the Blue Nile case that we recommend showing at the
very beginning of the class. It focuses on How to Pick the Right Diamond and should help
students grasp why the educational component of Blue Niles website is such an important
component of the companys strategy.
Because this case works so well in the first third of the course, we developed a case preparation
exercise for Blue Nile as part of the Case-TUTOR software package to assist students in learning
proper use of the all-important analytical tools in Chapters 3 and 4. The Blue Nile case
preparation exercise pushes students to think through all the details of Blue Niles strategy,
evaluate the strength of the five competitive forces facing Blue Nile and rival online jewelers,
identify the key success factors for an online jeweler, undertake a SWOT analysis of Blue Nile,
do a competitive strength assessment using the methodology in Table 4.5 of Chapter 4, identify
the issues facing Blue Nile management, and provide action recommendations.

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Case Teaching Note 05

Again, we want to reiterate the value of having your students conscientiously work through
several of the case preparation exercises that are on the Case-TUTOR software. All 11 of the CaseTUTOR exercises for this 16th edition were created to provide concrete guidance to students in
better understanding and correctly applying the concepts and tools discussed in the 13 text
chapters. As you can readily see by skimming through the Blue Nile or any other of the exercises
(and as was discussed more thoroughly in Sections 1 and 3 of the IM, these 11 exercises point
students in the direction of what to think about, prod them to go through a step-by-step analysis
of the right kinds of things, and help them learn proper use of the tools of strategic analysis
more quickly and efficiently than is likely to occur operating on their own. This is why we
strongly recommend that several of your early case assignments include some of the 11 cases that
have accompanying case preparation exercises.
Moreover, we strongly recommend having students bring the printouts of their work on the CaseTUTOR exercises to class to use as notes for arguing their positions more forcefully and
completely. Insisting that students conscientiously complete the Case-TUTOR exercise prior to
coming to class and that they should make liberal reference to the analysis they have done when
responding to the questions you pose will materially enhance the caliber of the class discussion.
You may even want to go so far as to have students hold up their Case-TUTOR printouts prior to
starting the class discussion of the Blue Nile case and to choose students sitting on one row to
turn in their printouts at the end of class so that you can peruse their work to see what kind of
preparation they are doing. Some spot checking of the work they do should spur class members to
do a bit better job of working through the Case-TUTOR exercises.
We heartily recommend use of the Blue Nile case for written assignments and oral team
presentations. A good assignment question is as follows:
Blue Nile management has employed you as a consultant and asked you to assess the companys
overall situation and recommend a set of actions to improve the companys future prospects.
Please prepare a report to the senior executives at Blue Nile that includes
an evaluation of the competitive forces facing Blue Nile and other online jewelers,
a discussion of the key success factors for an online jeweler,
an evaluation of the companys strategy and business model,
an assessment of Blue Niles strengths, weaknesses, opportunities and threats,
an evaluation of its strategic and financial performance,
a weighted competitive strength assessment using the methodology in Table 4.5,
an identification of the strategic issues and problems that Blue Nile management needs to
address, and
a set of action recommendations to deal with these issues and problems.
Your report should be 5-6 pages plus it should include an assortment of charts, tables, and
exhibits to support your analysis and recommendations.

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Case Teaching Note 05

Assignment Questions
1. How strong are the competitive forces confronting Blue Nile and other online retail jewelers?
Do a five-forces analysis to support your answer.
2. What key factors will determine a companys success in the online jewelry business in the
next 3-5 years?
3. What is Blue Niles strategy? Which of the five generic competitive strategies discussed in
Chapter 5 most closely fit the competitive approach that Blue Nile is taking? What type of
competitive advantage is Blue Nile trying to achieve?
4. What do you like and dislike about Blue Niles business model?
5. What does a SWOT analysis of Blue Nile reveal about the overall attractiveness of its
situation?
6. What is your appraisal of Blue Niles financial performance based on the data in case Exhibit
4? How well is the company doing financially? Is there evidence that Blue Niles strategy is
workingwhat is the story of the numbers in case Exhibit 4? Use the financial ratios in Table
4.1 of Chapter 4 as a guide in doing the calculations needed to arrive at an analysis-based
answer to your assessment of Blue Niles recent financial performance.
7. Does Blue Nile have adequate competitive strength to go head-to-head against its rivals? Do
a weighted competitive strength assessment using the methodology presented in Table 4.5 of
Chapter 4 to support your answer. Has Blue Nile built a sustainable competitive advantage in
the online retail jewelry business? Why or why not?
8. What strategic issues and problems does Blue Nile management need to address?
9. What does Blue Nile need to do to strengthen its competitive position and business prospects
vis--vis other online rivals and traditional jewelry store competitors?
10. Would you buy stock in Blue Nile at this time? Why or why not?

Teaching Outline and Analysis

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Case Teaching Note 05

1. How strong are the competitive forces confronting Blue Nile and other
online retail jewelers? Do a five-forces analysis to support your
answer.

Below is a representative five-forces model of competition for the online jewelry business:
Rivalry among online jewelersa moderate to strong competitive force that is likely to
intensify in the years ahead
In assessing this competitive force, students should be directed to consider the presentation in Figure 3.4.
Students should conclude that rivalry among Blue Nile and other online jewelers is
normal to moderate, but it is likely to grow more intense (owing to the success that Blue
Nile is enjoying). Rivalry is centered on such factors as
z

Price and value delivered to customers

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Case Teaching Note 05

Selection and breadth/variety of product offerings

Ability to customize and customization options

The caliber and trustworthiness of the information/guidance provided to online

shoppers (educational information, in-depth product information, access to professsional grading reports, and so on)

Image/reputation

Delivery times

Customer service

User friendliness of web sitesearch functionality, ease of browsing through all the
selections, finding and understanding the information provided, etc.

Refund and return policies

Advertising and promotionMuch of the advertising/promotion is being done

online, but the online jewelry business is not one that is a heavy user of TV, radio,
and newspaper advertising on a regular basis. Word-of-mouth is a fairly big factor

Most online jewelry competitors pursued either a differentiation strategy to try to set
themselves apart or else tried to attract shoppers via the appeal of very low prices (which
entailed employing a low-cost strategy). Some rivals focused their efforts narrowly on
particular jewelry items/product categories while others had broad product lines.
Several factors were working to affect rivalry among industry participants:
z

All rivals seem to be actively and busily trying to attract jewelry shoppers to their
websites, partly via online advertising and promotional initiatives (including search
engine listings)fresh strategic initiatives on the part of various rivals heightens
rivalry.

Low switching costs on the part of buyersit is simple for people shopping for
jewelry online to locate and visit competitor web sites.

Rivalry decreases when the rate of market growth risessales of jewelry online seem
to be growing briskly (with the sales increases coming at the expense of brick-andmortar jewelry retailers). There is reason to suspect that the online jewelry segment
of the overall retail jewelry industry is in its infancy (an emerging business or
industry in its own right); hence, online sales of jewelry are likely to grow faster than
sales of jewelry in generala condition which will act to contain rivalry among
online jewelers.

Rivalry increases when one or more rivals are dissatisfied with their market position
and launch moves to bolster their standing at the expense of rivals. A case can be
made that Blue Nile and most all of its online rivals are dissatisfied and thus are
likely to make further moves to bolster their market standing, image, and sales.

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Case Teaching Note 05

Rivalry increases as the product offerings of rivals become more standardized

many of the online jewelers seems to be offering shopper many of the same things
wide selection, customization, educational information, access to grading reports, and
so on. We see the differentiation among online jewelry rivals as growing
smaller/weaker, not larger/strongerwith the possible exception of reputation/image,
where Blue Nile seems to be the standout leader.

Threat of entrya moderate to strong competitive force

In assessing this competitive force, students should be directed to consider the
presentation in Figure 3.5.
We see that Blue Niles success and growing reputation is almost certainly draw more
competitors into online jewelry sales.
The barriers to entry into the online segment of the jewelry industry are moderately low;
the barriers include:
z

The costs of developing a Web site.

Developing supply chain relationships

Developing order fulfillment capability and achieving short delivery times

Expenditures for advertising and promotion needed to draw visitors to a web site and
build a trustworthy reputation/image.

In addition, students should see that the pool of entry candidates is probably fairly
largeespecially for brick-and-mortar retailers already in the jewelry business.
Hence, the entry threat in upcoming years should be viewed as fairly strong. There would
seem to be ample opportunity for new entrants to gain a market foothold and to achieve a
level of sales high to be profitable. But the longer a company delays entry, the harder it
will be to compete effectively against online jewelers like Blue Nile that have built a
clientele and that have formidable images/reputations.
Competition from substitute sellers of jewelrya very strong competitive force.
In assessing this competitive force, students should be directed to consider the
presentation in Figure 3.6.
Obviously, jewelry shoppers have many other options for buying jewelry than from
online retailers. Traditional brick-and-mortar jewelry retailers have the lions share of the
market and currently are the retailers of choice for the big majority of jewelry shoppers.
Hence, the competition that online jewelers face from other jewelry retailers is quite
formidable.
In addition, there are hordes of possible substitutes for jewelry altogether (but most
people are unlikely to see these alternatives as good substitutes).
Consequently, students should conclude that substitutes for buying jewelry online are a
strong competitive force, given that
z

Acceptable substitute sources for purchasing jewelry are readily available and the
prices charged by some of these substitute types of jewelers are reasonably
competitive

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Case Teaching Note 05

Buyer costs to switch to substitute types of jewelry retailers are relatively low

Many consumers are familiar with and comfortable with buying jewelry from other
than online jewelry retailers.

The bargaining power and leverage of suppliers to the online jewelry retailers and
jeweler-supplier collaborationa moderately strong competitive force, especially as
concerns the suppliers of diamonds/gems and other jewelry items.
In assessing this competitive force, students should be directed to consider the
presentation in Figure 3.7.
Students should recognize that the suppliers of gems/diamonds/jewelry items have
considerable bargaining power and leverage in determining the prices and terms at which
they will supply their products. Yes, there are many alternative suppliers, and it would
seem relatively easy for a retail jeweler to switch its gem/diamond purchases from one
supplier to another. But it is doubtful that suppliers compete aggressively with one
another on pricein other words, switching suppliers is unlikely to lead to acquiring a
particular gem of particular quality at a lower price. There is no evidence in the case that
suppliers of diamonds/gems compete with one another on the basis of price (indeed, with
the exception of Blue Nile and other online jewelers, there is little evidence that price
competition is active in the market for fine jewelrythat is, rival jewelers are not
aggressively trying to compete with one another by selling a diamond of given cut,
clarity, grade, etc. at a lower price than their rivals). Blue Niles lower prices stem from
its lower costs of doing business, not from the fact that it obtains diamonds/gems at lower
prices than do traditional retail jewelers.
What is important for students to recognize here is that Blue Niles close collaboration
with its diamond/gem suppliers has resulted in giving it a lower cost value chain as
compared to traditional Main Street jewelers. The distinctive feature of Blue Niles
supply chain was its arrangements with leading diamond and gem suppliers that allowed
it to display the suppliers diamonds and gems on its web site; some of these arrangement
entailed multi-year agreements whereby designated diamonds of the suppliers were
offered to online consumers only at Blue Niles websites. Blue Niles suppliers
represented more than half of the total supply of high-quality diamonds in the U.S. Blue
Nile did not actually purchase a diamond or gem from these suppliers until an order was
placed by a customer; this enabled Blue Nile to minimize the costs associated with
carrying large inventories and limited its risk of potential mark-downs.
Other online jewelers seem to have similar collaborative arrangements with their
diamond/gem suppliers. These collaborative arrangements offer a sizable cost advantage
over Main Street jewelersthese cost-saving arrangements put added competitive
pressure on traditional local jewelers because such collaboration (and the resulting lowercost business model) puts them at a cost disadvantage.
The bargaining power and leverage of jewelry shoppersa weak competitive force
In assessing this competitive force, students should be directed to consider the
presentation in Figure 3.8.

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Case Teaching Note 05

Individuals have little power to bargain for a lower price on the jewelry items they
are looking to purchase (except perhaps in the case of very expensive items where
some price haggling is often fairly normal). Individuals can, of course, choose to buy
or not buy at the marked price but no one individual is usually in a position to enter
into direct negotiations over the terms and conditions under which he or she will
purchase a diamond ring or other jewelry item from an online retailer. Any individual
can certainly opt to buy from one retailer rather than another, but this does not equate
to bargaining and exerting leverage.

Conclusions concerning the overall strength of competitive forces: Competitive pressures

in online jewelry retailing are strong but not overwhelming so (the best evidence for this is
Blue Niles record of attracting new customers and growing its sales at a rapid clipa
convincing sign that it is able to successfully contend with the prevailing competitive forces).
Currently, we see competition from substitute types of jewelry retailers and rivalry as far and
away the two strongest of the five competitive forces. The entry of new competitors could
also prove to be significant, if one or more of the new entrants have a well-recognized and
trusted brand name and if such entrants opt to price their products competitively versus the
prices charged by Blue Nile.
Moreover, while competition is fairly strong, it is not so strong as to prevent companies like
Blue Nile from being profitable. The online jewelry retailing portion of the jewelry industry
is rather attractive from the standpoint of promising growth and attractive long-term
profitabilityBlue Nile is demonstrating that its business model and strategy are quite
attractive. This is the big reason why new entry can be expected. But online sales of fine
jewelry are likely to remain a relatively small fraction of total sales of fine jewelry for years
to cometraditional brick-and-mortar local jewelers are not going to be driven out of
business by online jewelers in the foreseeable future.

2. What key factors will determine a companys success in the online

jewelry business in the next 3-5 years?
The identification of key success factors for online jewelry retailers is a pretty easy task. The
list that students come up with should include most all of the following:
A wide product line
Effective collaborative arrangements with diamond/gem suppliers that allow an online
jeweler to display a large variety of stones (but not purchase them until they are ordered
by a customer)
An informative and educational website, with good search features
Professionally credible grading reports on all the diamonds displayed
Ability to offer customization
Attractive pricing
A trustworthy reputation and brand name image

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Case Teaching Note 05

3. What is Blue Niles strategy? What type of competitive advantage is

Blue Nile trying to achieve?
Blue Niles strategy had two core elements:
Offering high quality diamonds and fine jewelry at competitively attractive prices.
Providing jewelry shoppers with educational information, in-depth product information,
grading reports, and trusted guidance throughout their purchasing process.
In addition, there were several other important strategy elements:
Wide product selectionas many as 60,000 independently certified diamonds and styles
of fine jewelry, including rings, wedding bands, earrings, necklaces, pendants, bracelets
and watches.
Ability to offer customization and deliver the customized orders within several days
Supply chain efficiency, driven principally by collaborative partnerships with important
diamond/ gem suppliers
z

The distinctive feature of Blue Niles supply chain was its arrangements with leading
diamond and gem suppliers that allowed it to display the suppliers diamonds and
gems on its web site; some of these arrangement entailed multi-year agreements
whereby designated diamonds of the suppliers were offered to online consumers only
at Blue Niles websites. Blue Niles suppliers represented more than half of the total
supply of high-quality diamonds in the U.S.

Blue Nile did not actually purchase a diamond or gem from these suppliers until an
order was placed by a customer; this enabled Blue Nile to minimize the costs
associated with carrying large inventories and limited its risk of potential markdowns.

Lean operating costs

z

The company had only 146 employees as of early 2006, of which 133 were full-time;
independent contractors and temporary personnel were utilized on a seasonal basis.
Operations were conducted via a combination of proprietary and licensed technologies.
Blue Nile licensed third-party information technology systems for financial reporting,
inventory management, order fulfillment, and merchandising. Redundant Internet carriers
were used to minimize service interruptions and downtime at its Web site. Various
operating systems were monitored continuously using third-party software, and an on-call
team responded to any emergencies or technology issues. Management continuously
explored avenues to improve operating efficiency.

Blue Niles economical supply chain and comparatively low operating costs allowed
it to sell comparable quality diamonds, gemstones, and fine jewelry pieces at
substantially lower prices than those of reputable local jewelers

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Case Teaching Note 05

Blue Niles lean costs and supply chain savings gave it a significant pricing
advantage. For every dollar that Blue Nile paid suppliers for stones, settings, and
other purchased items, it sold its finished jewelry for a markup of about 33 percent
over cost (equal to a gross profit margin of 22 percent). In contrast, Zale sold at an
average markup of 100 percent over cost of goods sold and Tiffany sold an average
markup over cost of goods sold of 127 percent in 2005 (equal to a gross profit margin
of 56 percent).

Blue Niles cost-efficient supply chain and lean costs enabled it to earn respectable
profits selling at prices that ranged 20 to 40 percent below those of local retail
jewelry stores.

Free shipping with every order delivered to a U.S. address. All orders under $250 were
shipped via FedEx Ground if within the 48 contiguous states or by U.S. Postal Service for
destinations in Hawaii and Alaska. Orders between $250 and $1,000 were shipped via
FedEx 2-day delivery. All orders over $1,000 and all loose diamond orders were shipped
via FedEx Priority Overnight. Customers had the option to upgrade the delivery of items
under $1,000 to FedEx Priority Overnight for a $15 charge.
30-day returns
Providing customers with appraisalsBlue Nile automatically provided an appraisal
stating the approximate retail replacement value of the item to customers who bought (1)
a pre-set engagement ring priced under $2500, (2) a diamond jewelry item priced $1000
and over (except pre-set solitaire engagement rings, pre-set earrings, or pre-set solitaire
pendants priced $2500 or over which come with IGI appraisals), or (3) any custom
diamond ring, earring, or pendant. An appraisal represented value-added to customers
because it was necessary to obtain insurance coverage and determine what constituted
equal replacement in case of loss, theft, or damage.
Which of the 5 generic competitive strategies is Blue Nile employing? If students have
already read Chapter 5, then you should press them at this point to identify which of the five
generic competitive strategies most closely fits the competitive approach that Blue Nile is
taking. We think Blue Niles strategy corresponds very closely to that of a classic low-cost
provider strategy; a few students may argue that the strategy is one of being a best-cost
provider, but their case is thin because Blue Nile doesnt really try to create upscale features
at a lower cost.
What type of competitive advantage is Blue Nile trying to achieve? Blue Nile is definitely
striving for a low-cost advantage over rivalsthis is pretty clear from the above portrayal of
Blue Niles strategy. So far, theres every indication that Blue Nile has a definite cost
advantage over traditional local jewelers. But it may have little cost advantage over its online
rivals, most of whom appear to employing very similar competitive strategies and business
models.

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Case Teaching Note 05

4. What do you like and dislike about Blue Niles business model?
There is much to like about Blue Niles business model:
Very little inventory is required.
The ability to generate cash 40 to 55 days ahead of the need to pay suppliers
z

In a very real sense, Blue Niles business model was self-funding because suppliers
financed Blue Niles sales growthsee Exhibit 5.

Readily scaleable to substantially higher sales volumes with minimal additional capital
investment. Blue Niles capital expenditures for facilities and equipment were a meager
$3.5 million in 2003, $1.4 million in 2004, and $1.1 million in 2005. Hence it takes little
capital investment to grow the business rapidly.
It is profitableBlue Nile is making attractive profits with its business model.
We see very little to dislike about Blue Niles business model. But it is a business model that
other online rivals can copy fairly easily.

5. What does a SWOT analysis of Blue Nile reveal about the overall
attractiveness of its situation?
Blue Niles Resource Strengths and Competitive Assets
The current market leader in the online retail jewelry segment by a wide margin
A better known brand name and reputation than rivals
A first-rate strategy and business model
A broad and attractive product line from customers to choose from
A user-friendly web site with good search functionality and very good educational
information
A sizable and competitively potent cost advantage over traditional local jewelry stores
due to lean operating costs and a cost-effective supply chain
Its collaborative partnership arrangements with important diamond/gem suppliers
Good product customization and order fulfillment capabilities (core competencies?)
Blue Niles ability to grow sales with very little incremental capital investment
Blue Niles Resource Weaknesses and Competitive Liabilities
Limited brand name recognitionmany shoppers for fine jewelry have never heard of
Blue Nile
Limited financial resources relative to bigger and better-known retail jewelry chains
There is nothing proprietary about Blue Niles strategy and business modelboth are
subject to imitation by rivals

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Case Teaching Note 05

Market Opportunities
Geographic expansionentry into the markets of foreign countries
Lots of room to grow the business by attracting customers away from traditional local
jewelry stores in the U.S.Blue Nile still has such a relatively small (tiny!!!) market
share of the total market for fine jewelry in the U.S. that it can continue to employ its
current strategy for many years. The more that the word spreads about Blue Niles
attractive prices and quality product offerings and the more it becomes a trusted place to
shop for fine jewelry, the more it stands to steal away customers from traditional local
jewelers.
Product line expansion
External Threats to Blue Niles Future Well-Being
The entry of more online jewelry rivals that opt to employ much the same strategy and
business modelespecially if these new entrants should be retailers that have a brand
name that is more widely recognized and trusted than Blue Niles.
Diamond/gem suppliers either become less willing for Blue Nile to display their
inventories on Blue Niles web site or decide not to renew their multi-year agreements
with Blue Nile whereby certain designated diamonds in their inventories are offered to
online consumers only at Blue Niles websites. (Blue Niles suppliers represented more
than half of the total supply of high-quality diamonds in the U.S.)
Untold numbers of people shopping for fine jewelry are very leery of buying fine jewel
online and thus are not likely to ever be customers of Blue Nile
Conclusions and Key Teaching Point. Just making 4 lists is not all there is to SWOT
analysis. The payoff from SWOT analysis comes from the conclusions about a companys
situation and the implications for strategy improvement that flow from the four lists. Hence
we urge that you press the class hard for the conclusions to be drawn from the four listings
above.
In the case of Blue Nile, we think the SWOT listings should make it clear to students that
Blue Niles strategy, business model, resource strengths, and competitive capabilities put
it in a very strong market position to succeed in the online retail jewelry business in the
upcoming yearsit is easy to understand why the company has been extremely
successful in growing its sales over the past several years.
Blue Nile would seem to have a sustainable cost advantage over traditional brick-andmortar retailers of fine jewelry.
Blue Nile has no resource weaknesses that make it highly vulnerable to competitive
attack from local jewelers.
Blue Nile has ample market opportunities to continue to grow its sales for many years to
come.
The risks Blue Nile faces from external threats are quite tolerable and manageablethe
companys long-term business prospects do not seem unduly threatened.

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Case Teaching Note 05

In short, the SWOT analysis indicates that Blue Niles competitive market position is strong
and that its prospects for the future are bright.

6. What is your appraisal of Blue Niles financial performance based on

the data in case Exhibit 4? How well is the company doing financially?
Is there evidence in case Exhibit 4 that Blue Niles strategy is
workingwhat is the story of the numbers in case Exhibit 4?
If you have not already done so, we suggest that you urge class members to use the financial
ratios in Table 4.1 of Chapter 4 as a guide in doing the calculations needed to arrive at
analysis-based answers in assessing Blue Niles recent financial performance (and the
financial performance assessments of other assigned cases).
If students do a conscientious job of crunching the numbers in case Exhibit 4, they should
come up with most of the following assessments:
Blue Niles revenues grew briskly from 2001 through 2006, climbing from $48.7 million
to $251.6 million; this is equivalent to a highly respectable compound average growth
rate (CAGR) of 38.9%.
Blue Niles bottom line grew from a negative $7.4 million in 2001 to a positive $13.1
million in 2006.
While Blue Nile reported earnings of almost $27 million in 2003 (it biggest profit to
date), this figure was inflated by $15. 7 million of tax credits due to tax loss carryforwards associated with the losses in prior years.
Blue Niles diluted earnings per share went from ($2.44) in 2001 to $0.76 in 2006. The
company has thus gone from losing money (as a start-up business) to respectable
profitability.
Blue Niles financial ratios show an improving trend for the most part, although in 2006
the gross profit margin, the operating profit margin, and the net profit margin all eroded
slightly, as did the current ratio:

Cost of sales as a
% of net sales
Gross profit margin
SG&A expenses as a
% of net sales
Operating income as a
% of net sales
(operating profit margin)
Net income as a % of net
sales (net profit margin)
Current ratio
Net income as a %
of stockholders equity
(return on equity)
Days of inventory
Inventory turnover

2006

2005

2004

2003

2002

2001

79.8%
20.2%

77.8%
22.2%

77.8%
22.2%

77.2%
22.8%

74.8%
25.2%

77.1%
22.9%

13.6%

13.3%

13.2%

14.1%

19.6%

31.7%

6.6%

8.9%

8.8%

8.8%

5.0%

(10.9)%

5.2%
1.57

6.5%
2.38

5.9%
2.78

20.9%
1.54

2.3%
n.a.

(15.1)%
n.a.

27.6%
26.6
13.7

16.1%
27.2
13.4

11.9%
27.5
12.3

n.m.
37.5
9.8

n.a. = not available

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n.m.
35.0
10.4

n.m.
64.3
5.7

Case Teaching Note 05

n.m. = not meaningful (due to negative stockholders equity in 2001-2003)

The companys stock repurchases in 2006 had a highly positive effect on EPS and ROE
(the associated reduction in the number of weighted average shares outstanding in 2006 is
shown in case Exhibit 4).
Net cash from operating activities has been rising at a significant clipup from $4.5
million in 2001 to $40.5 million in 2006. The company has adequate cash to finance
operations and to repurchase shares, since capital requirements to grow the business are
quite modest.
Conclusions: Blue Niles financial performance over the past several years is commendable,
proving the viability of its business model and signaling that its strategy is definitely working
rather well. There is no reason we can see for students to conclude otherwise. But the erosion
of the companys profit margins in 2006 is pause for some concern and a matter for top
management to correct in 2007 and beyond.

7. Does Blue Nile have adequate competitive strength to go head-to-head

against its rivals? Do a weighted competitive strength assessment
using the methodology presented in Table 4.5 of Chapter 4 to support
your answer. Do you believe that Blue Nile has built a sustainable
competitive advantage in the online retail jewelry business? Why or
why not?
There is ample data in the Blue Nile case for students to do a solid competitor strength
assessment using the methodology described in Table 4.5 of Chapter 4. We suggest spending
10-15 minutes of class time walking students through proper use of this analytical tool and
thereby putting some punch behind their opinions as to whether and why Blue Niles
situation is attractive vis--vis its rivals.
If you have assigned students to do the Case-TUTOR exercise for the Blue Nile case in
preparing for class, then they should be primed to respond to your questions about the
companys competitive strengths vis--vis rivals since doing a competitive strength
assessment like that shown below is part of the exercise.
Our unweighted and weighted competitive strength assessments are shown in Table 1 of this
note. We opted to do strength ratings of Blue Nile versus other online jewelers versus local
retail jewelers as a group versus major retail jewelry chains (as a group) because it seemed to
be the best way to get at Blue Niles competitive strength. Just rating Blue Nile against other
online retail jewelers is an incomplete strength assessment since it faces strong competition
from other types of jewelry retailers besides just those selling online.

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Case Teaching Note 05

Table 1
Competitive Strength Assessments of Selected Jewelry Industry
Rivals
(Rating scale: 1 = weak, 5 = average, 10 = strong)
Key Success Factor/
Competitive Strength Measure
Breadth of product line
Reputation/image
Quality/appeal of product offerings
Caliber/completeness of product
information provided to customers
Relative cost position
Customization capabilities
Supply chain capabilities
Sum of the weights
Totals of Ratings/Scores

Importance
Weight
0.15
0.25
0.15

Key Success Factor/

Competitive Strength Measure
Breadth of product line
Reputation/image
Quality/appeal of product offerings
Caliber/completeness of product
information provided to customers
Relative cost position
Customization capabilities
Supply chain capabilities
Sum of the weights
Totals of Ratings/Scores

Importance
Weight
0.15
0.25
0.15

0.15
0.10
0.10
0.10
1.00

0.15
0.10
0.10
0.10
1.00

Blue Nile
Rating
Score
10
1.50
4
1.00
7
1.05

Other Online
Jewelers
Rating
Score
7
1.05
2
0.50
6
0.90

10
10
10
10

1.50
1.00
1.00
1.00

8
9
8
8

1.20
0.90
0.90
0.80

61

8.05

48

6.25

Local Retail
Jewelers
Rating
Score
3
0.45
9
2.25
6
0.90

Retail
Jewelery Chains
Rating
Score
4
0.60
6
1.50
7
1.05

6
2
4
3

0.90
0.20
0.40
0.30

5
5
5
6

1.00
0.50
0.50
0.60

33

5.40

38

5.75

Conclusions: Students can differ in their competitive strength evaluations because of

different strength measures, different weightings, and different rating scores. But we think
they should conclude that Blue Nile has the resource strengths and capabilities to do quite
well in competing against other industry participants. The competitive strength ratings in
Table 1 shows Blue Nile as being the stron-gest player, all things considered. There is some
justification for such a surprising conclusion:
Blue Nile has a stronger relative cost position versus local and chain retailers (due to its
lean operations and cost-effective supply chain arrangements with diamond/gem
suppliers). Thus it has the ability to charge substantially lower prices for items of the
same quality than its key brick-and-mortar competitors.
It has a substantially wider product line and bigger product selection as compared to most
all other jewelers.
Blue Nile has potent product customization capabilities in the industry and can do
customization quickly and cost effectively.

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Case Teaching Note 05

It provides extensive and trustworthy information about its diamonds and gems to
customers/shoppersmuch more so than one is typically going to get from clerks in a
local jewelry store or chain jewelry store.
Blue Nile provides customers with a positive, satisfying jewelry shopping experience.
Of course, Blue Niles big weakness at present is that it is not a well-known name in
jewelrybut this can be overcome in time via word-of-mouth and growing shopper
familiarity with Blue Nile.
Hence we think students should see Blue Nile as a potent competitoreven if they do not
give it the highest competitive strength rating.

8. What strategic issues and problems does Blue Nile management need
to address?
Several issues stand out at Blue Nile:
How to continue to attract a growing volume of traffic to the Blue Nile web site?
How to build the Blue Nile brand name and raise shopper awareness of the companys
very attractively-priced product offerings?
How to make jewelry shoppers even more comfortable and confident in purchasing from
Blue Nile?
What to do to bolster the companys profit margins (which eroded some in 2006 as
compared to 2005).

9. What does Blue Nile need to do to strengthen its competitive position

and business prospects vis--vis other online rivals and traditional
jewelry store competitors?
Very clearly Blue Nile should continue with its present strategy and business model. Both are
working quite well. There are no glaring problems that need fixing quickly, other than
returning profit margins to 2005 levels or even higher. This can be accomplished by paying a
bit closer attention to controlling expenses and to keeping prices at levels needed to restore
profitability to at least 2005 levels. One suspects that prices might have been trimmed a bit to
bolster sales during the 2006 Holiday sales season (and the cost of advertising might have
also been a factor contributing to thinner margins).
But top priority probably needs to be given to pressing forward to grow Blue Niles business,
build its brand name franchise, and expand shopper awareness of the Blue Nile web site and
product offerings. We suggest spending 5-10 minutes of class time getting students to put
forth their suggestions as to what specific actions Blue Nile management can take to address
the four issues set forth in the preceding question.

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Case Teaching Note 05

10. Would you buy stock in Blue Nile at this time? Why or why not?
Class members can, of course, lean either way on the issue of being an investor in Blue Nile.
The point of the question is to get them to commit on whether they see Blue Nile as an upand-coming company with potential to reward shareholders via significant stock price
appreciation.
Some students (risk-avoiders?) will say no way because they are themselves nervous about
buying fine jewelry from an online seller and will argue than many other people will be
nervous alsothus limiting Blue Niles future growth. Yet, theres likely to be a substantial
fraction of the class that will conclude Blue Nile is definitely going to grow and boost its
profits sufficiently to drive the stock price upward over time and provide shareholders with
good capital gains.

Epilogue
Blue Nile reported strong financial results for the quarter ended April 1, 2007. Net sales increased
34.0% to $67.9 million; operating income rose 38.3% to $3.7 million; and net income totaled $3.2
million, or $0.19 per diluted share, compared to $2.4 million, or $0.13 per diluted share, in the
prior year. Other financial highlights included the following:
Net cash provided by operating activities was $33.7 million for the trailing twelve month
period ended April 1, 2007, compared to $31.5 million for the trailing twelve month
period ended April 2, 2006.
Cash and marketable securities totaled $59.2 million at April 1, 2007.
Gross profit for the first quarter of 2007 increased 28.1% to $13.2 million, compared to
$10.3 million in the first quarter of 2006. Gross profit as a percentage of net sales was
19.5% in the first quarter of 2007 compared to 20.4% in the first quarter of 2006.
As a percentage of net sales, selling, general and administrative expense declined to
14.1% in the first quarter, from 15.1% in the first quarter of 2006. Selling, general and
administrative expense for the first quarter of 2007 was $9.6 million, compared to $7.7
million in the first quarter of 2006.
Capital expenditures in the first quarter of 2007 totaled $0.2 million, compared to $0.6
million in the first quarter of 2006.
International sales, representing the Companys Canada and U.K. websites, totaled $2.6
million in the first quarter, an increase of 84.1% year over year.
During the quarter, Blue Nile repurchased 344,655 shares of its common stock for $13.5
million. Since the inception of its stock repurchase program in February 2005, the
company had repurchased approximately 2.7 million shares of its common stock, or
15.2% of shares outstanding, at an average price of $32.75.

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Case Teaching Note 05

According to CEO Mark Vadon, Blue Nile had a terrific first quarter of 2007. We experienced
tremendous growth in our business and generated substantial profitability. Our first quarter
performance was driven by significant traction with consumers as a result of the appeal of the
Blue Nile customer experience and value proposition. Top management was particularly
enthusiastic about jewelry sales at price points above $25,000, the companys fastest growing
sales category.
Management indicated that Blue Niles full year 2007 results should entail:
Net sales of between $295.0 million and $305.0 million.
Net income in the range of $0.86 to $0.91 per diluted share.
Capital expenditures were expected to total about $5.0 million for 2007, which included the
expansion of the Companys U.S. fulfillment center and a new international facility.
For the very latest information on www.bluenile.com at Blue Nile, we urge that you check the
press releases and the investor relations sections at www.bluenile.com. You can also consult the
Case Epilogue Updates section of the Instructor Center at the website for the text
(www.mhhe.com/thompson); these Case Epilogue Updates are brought up-to-date once or
twice annually.

5-19