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Strategic Management: Case Study Of Lululemon Athletica Inc

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Question:

Discuss about the Case Study for Strategic management of Lululemon Athletica Inc.

 

Answer:

Introduction

The aim of the essay is to analyse internal and external business environment of Lululemon Athletica Inc. This is a Canada based retail company, which provides athletes apparel bat premium price. As per May 2016, the profit margin of the company is 12.36%. Quarterly revenue growth of this company is 17%. Current ratio of the company is 4.80, which indicates that the company has strong financial position (Ca.finance.yahoo.com, 2016). Current ratio value more than 2 indicates that current asset of the company is more than current liabilities, which helps the company to meet short term liabilities. Despite facing controversies regarding product quality several times, the company has strong position in market. The essay analyses competitive advantage of Lulu lemon in the sports apparel industry. In a competitive market the company faces several challenges and risks, which are analysed here. Weaknesses and opportunity of the company in future are highlighted to assess company’s growth prospect.

Discussion

Lululemon operates in a competitive environment. The market of sport apparel is oligopolistic market, as there is few numbers of sellers. Strong competitors of Lululemon are Adidas, Nike, GPS and Under Armour etc (blogs.ubc.ca, 2013). Quarterly revenue growth of Lululemon is more than the competitors and even more than the industry growth rate. Market capitalisation of this company is less than Nike and Adidas. Labour power of the competitors is more than that of Lululemon. Financial position of Lululemon is stronger compared to other competitors as it has current ratio of 4.80. High current ratio is attractive to the investors, as it signify that the company has sufficient current assets to finance the current liabilities,

Comparisons among the direct competitors (in USD)

 

LULU

NIKE

Adidas AG (Pvt1)

GPS

Industry

Market Cap:

10.97B

95.99B

31.27B

10.30B

983.09M

Employees:

11,000

70,700

537,311

141,000

3.60k

Quarterly Rev Growth (Year Over Year ):

0.17

0.06

0.13

-0.06

0.16

Revenue (ttm):

2.13B

32.38B

17.67B

15.58B

1.46B

Gross Margin (ttm):

0.48

0.46

N/A

0.36

0.42

EBITDA (ttm):

432.14M

5.16B

N/A

2.06B

131.05M

Operating Margin (ttm):

0.17

0.14

.78

0.09

0.05

Net Income (ttm):

263.57M

3.76B

595.60M1

808.00M

N/A

EPS (ttm):

1.89

2.16

4.49

1.99

0.39

P/E (ttm):

42.49

26.49

N/A

12.98

20.24

PEG (5 yr expected):

2.25

1.68

N/A

1.61

1.48

P/S (Trailing Twelve Months (as of May 1, 2016) ):

5.04

2.95

N/A

0.65

1.19

Table: Companies’s key statistics as of 2014

(Source: Ca.finance.yahoo.com, 2016)

Among the total market capital, NIKE has highest share. Market capital reflects the value of outstanding share of the company. It indicates that among the competitors, share value of NIKE is highest. Employee strength of NIKE is more than Lululemon. The quarterly revenue growth rate shows opposite result of market capital. Quarterly revenue growth rate of Lululemon during 2016 is 17%, which is higher compared to the competitors. This value signifies that sales of Lululemon are growing more than that of its competitors. However, revenue of the year is highest for NIKE. Gross profit margin shows company’s financial health. Gross profit margin indicates the value left over from revenue after deduction of cost of goods sold. This value is 48%, which is highest for Lulullemon. In the current year, the net profit is highest for GPS. The operating margin of Lululemon is lowest due to high pricing strategy compared to other firms. Therefore, net income of this company is also lower compared to other firms. EPS stands for company’s earning per share. EPS is highest for Adidas. The price earning ratio compute current share price in relation to its eaning per share. P/E ratio of Lululemon is highest. The highest value signifies that market assumes higher growth rate of Lululemon in future and higher risks for investment compred to other companies.

Competitive advantage of Lululemon can be categorised into four segments such as efficiency, quality, innovation and customer loyalty. Competitive advantage adds value to the business. Lululemon efficiently outsource the products in different countries like Bangladesh, Indonesia, Israel, Peru and China. The products are outsourced through its own labels. Unique products and market segmentation gives the company sustainable competitive advantages. Providing different types of products for sportswear for both men and women gives advantage in the market. The company provides option for online purchase and free delivery of goods. Free delivery gives benefit to the customer in terms of cost and time saving (McGrath 2013). The activities of the company are divided among different departments. This strategy brings operational efficiency in the company. The guest education centre is a part of the company, which provides education and knowledge about products to the users and greater community. Distribution centre is a different segment, which manages the supply chain of the company (DaSilva and Trkman 2014).  The store support centre has expert team on various aspects such as product innovation, training of the employees, finance, technical support, merchandise management and community relation.  There is a specific department, which researches continuously for product up gradation. This company applies differentiated business strategy such as giving 15% discount to the certified yoga and fitness instructors. Brand recognition and maintaining product quality facilitates the company. More than 60% consumers perceive that Lululemon provides women brand.

The competencies of the company are high quality products with innovative features and comfort. Continuous innovation gives the company competency in the market (AJ and Jain 2013). It has collaboration with fashion designer to bring new styles in products. The company has strong brand recognition. Although it has less number of employees compared to the competitors, it has well trained staffs. Currently the company has 11000 staffs across different stores. Quarterly revenue growth of the company is 17% and gross profit margin is US$997.17mn. Operating cash flow during 2016 is US$317.53 mn. Increasing stock value and revenue growth gives advantage to the Lululemon in the market. Inventory management system of the company is very strong (Ca.finance.yahoo.com, 2016).

Growth statistics of Lululemon Athletic Inc

Figure: Growth statistics of Lululemon Athletic Inc

(Source: Ca.finance.yahoo.com, 2016)

The company faces challenges since 2013 regarding fall in revenues. Despite having more than 100 stores in US, this company has low brand recognition in U.S market. Limited global exposure is another weakness of the company. It has presence in some developing company, however, there is no such exposure in developed companies. During global slowdown, demand for Lululemon product is likely to decrease due high price (Azarian et al. 2014).

The external environment such as political and legal factors affects the company’s business performance. The company manufactures in Canada and United states however, depend on distribution channel in China, Peru, South Korea, Thailand and Vietnam etc.  Changing environment of these countries affect the operational performance of the company (Monczka et al. 2015). In doing business US, Lululemon has faced challenge regarding California Transparency in Supply Chain Act of 2010. This act deals with human trafficking and slavery in supply chain. Internal trade laws have impact on the business of Lululemon. During economic crisis, consumers cut their spending on costly products. In order to coup up with changing economic environment, the company can provide differentiated product. In business process, the company has to maintain environmental standard of the economy in which it is operating. Reduction in paper usage, reducing packaging wastage in the office is strategy of the company for reduction ecological footprint (Ganin 2014). Considering the external environment, the company has developed ivivva brand for children. In order to maintain global customer base, this company has developed the e-commerce business. The company has decided to launch new brand for men in different countries during 2016. Presently the company has strong brand recognition in women’s apparel. Breaking the perception may give the company wider customer base (Lavrence and Lozanski 2014).

 


The main advantage of Lululemon’s business level strategy is sustainability in the business model. Customer segmentation and product differentiation are core business strategy of Lululemon (Info.lululemon.com, 2016). It focuses on the health and fitness of the customers. This company provides yoga class to thee employees and customer to grow awareness. Executives of the company conduct direct market survey through visit in stores in order to observe consumer behaviour. Customers of the company are treated as guests rather than buyer (Monczka et al. 2015). There is different complaint and comment section, which receives and addresses the issues coming from customers. Therefore, building up good relation with customers facilitates the company to meet the customer needs and product development. The product design team analyse the market trends based on market research and intelligence (Hassan 2013). The company generates artificial scarcity in industry to keep demand high. The scarcity is created by keeping low level of inventory. The artificial scarcity creates urge among the customers for new products. Therefore, when demand exceeds the supply, they release the stock in the market and the market clears before the expiration date. Products of the company are mostly technology driven. The business model of the company emphasises on own capabilities of product development. Helping customer in maintaining healthy lifestyle and stylish performance apparel is one of the business strategies of the company. The future strategy of the company is to increase sales of ivivva globally. Penetration in new market is a risk for the company (Vendemia 2015). Strong rivalry and growing competition in online retail market are also risks for the company.

Duuring 2012-13 the company-faced challenges regarding ecommerce business. Sales fell during this period. Lululemon faced controversies regarding stock’s valuation (blogs.ubc.ca 2013). At this period, the company faced serious quality issues, which caught media attention. Maintenance of high quality at premium price always remains business strategy of the company. Therefore, any news regarding quality issue is sensitive for the business of Lululemon (Chesbrough 2013). The business expansion in new market depends on economic and social structure of the country. Hence, demand, per capita income, infrastructure of the locality, demographic structure etc influence the business. Expansion of business depends on cultural aspects (Fernie and Sparks 2014). Market penetration may not be successful if there are cultural differences between the organisation and target economy. Hence, incorporation of dynamic culture in business model is recommended for the company to reach local customers. In the competitive environment, creating scarcity may not be sustainable in future. Therefore, the innovative business model needs to be undertaken to reduce future risks.

Conclusion

The essay highlights the business strategy of Lululemon. This is a Canada based company; however, it has global presence. The company has strong brand recognition in Canada market. There is a scope for the company to expand business in the international market. The business model relies on the sustainability and maintaining premium quality product. This company has faced challenges regarding quality during 2012-13. Therefore, it experienced fall in sale during this time. After 2014, it started recovering by changing its market strategy.

 

References

A.J. and Jain, A.K., 2013. Crafting & Executing Strategy 19/e: The Quest for Competitive Advantage: Concepts and Cases. McGraw-Hill Education.

Azarian, R., Sociologiska institutionen, Stockholms universitet & Samhällsvetenskapliga fakulteten 2014, "Trade-offs in choice of inter-firm transaction structure: A qualitative study of perceived comparative advantages of business relation over vertical integration", Journal of Sociology,vol. 50, no. 4, pp. 472-485.

blogs.ubc.ca. (2013). lululemon athletica inc.. [online] Available at: https://blogs.ubc.ca/ssdong/files/2013/12/LULU-Stock-Report-eportfilio-1.pdf [Accessed 19 Aug. 2016].

Ca.finance.yahoo.com. (2016). LULU Key Statistics | lululemon athletica inc. Stock - Yahoo! Canada Finance. [online] Available at: https://ca.finance.yahoo.com/q/ks?s=LULU [Accessed 19 Aug. 2016].

Chesbrough, H., 2013. Open business models: How to thrive in the new innovation landscape. Harvard Business Press.

DaSilva, C.M. and Trkman, P., 2014. Business model: What it is and what it is not. Long Range Planning, 47(6), pp.379-389.

Fernie, J. and Sparks, L., 2014. Logistics and retail management: emerging issues and new challenges in the retail supply chain. Kogan Page Publishers.

Ganin, C., 2014. American Apparel, Crumbs Cupcakes, and Lululemon, Oh My-Examples of Why Increased Shareholder Invovlement Will Not Fix Corporate America. Ariz. L. Rev., 56, p.937.

Hassan, D., 2013. Managing the business of sport. Managing the Business of Sport: An Introduction, p.446.

Info.lululemon.com. (2016). Responsible Supply Chain | lululemon athletica. [online] Available at: https://info.lululemon.com/sustainability/responsible-supply-chain [Accessed 19 Aug. 2016].

Khan, I., 2016. Impact of Visual Merchandising on Consumer Buying Behavior: A Study on Retail Outlets. International Journal of Scientific Research, 4(5).

Lavrence, C. and Lozanski, K., 2014. “This Is Not Your Practice Life”: lululemon and the Neoliberal Governance of Self. Canadian Review of Sociology/Revue canadienne de sociologie, 51(1), pp.76-94.

McGrath, R.G., 2013. The end of competitive advantage: How to keep your strategy moving as fast as your business. Harvard Business Review Press. Thompson, A., Peteraf, M., Gamble, J., Strickland III,

Monczka, R.M., Handfield, R.B., Giunipero, L.C. and Patterson, J.L., 2015.Purchasing and supply chain management. Cengage Learning.

Seijts, G. and Gandz, J., 2013. Good leaders learn. Developing Leaders: Executive Education in Practice, pp.50-57.

Vendemia, M.A., 2015. Seeing Is Believing? Perceptions of Interactivity in Company-Consumer Interactions on Social Networking Sites (Doctoral dissertation, The Ohio State University).

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