b-LULU-ooming business!

In chapters 14 and 15, Barney expands upon mergers as well as the strategic benefits of international growth.  In Lululemon’s recent 10-K, the company discusses the importance of international markets to “gain access to new customers for current products” (Barney 420).  However, the company focuses on syncing its competitive advantage with its expansion strategies:

“We are focused on accelerating our international expansion. During fiscal 2014 we opened corporate-owned stores for the first time in the United Kingdom and Singapore and opened showrooms for the first time in China. We will continue to utilize a community-based approach to building brand awareness and guest loyalty in new countries but will look to do so over a shorter period of time than previously, so that we can accelerate our international growth.”

Lululemon Athletica Inc. (2014). 10-K. Retrieved from http://www.bloomberg.com/research/stocks/financials/secfilings.asp?ticker=LULU

Chapter 13 - "Anti-Stink" Alliance

“A strategic alliance exists whenever two or more independent organziations cooperate in the development, manufacture, or sale of products or service” (Barney 363).  Lululemon and Noble Biomaterials, Inc. teamed up a year and a half ago to engage in a nonequity alliance, where “cooperating firms agree to work together …but do not take equity positions in each other or form an indentent organizational unit to manage their cooperative efforts” (Barney 363).  Noble Biomaterials produces X-Static ®, an antimicrobial, odor-resistance fabric.

“lululemon has worked with Noble for nearly a decade to differentiate our products and we welcome the opportunity to solidify this partnership,” said Christine Day, CEO of lululemon. “This unique opportunity allows us to continue to innovate our technical product with X-STATIC®, which has helped lululemon set the industry standard by using the most powerful silver fabric technology to create our Silverescent fabrics, and secure our leadership position in the “anti-stink” athletic apparel market.”

http://investor.lululemon.com/releasedetail.cfm?releaseid=790499

Chapter Twelve delves into corporate diversification and the competitive advantages that can be gained through firm organizational changes.  Interestingly enough, I began this blog with lots of discussion on the founder, Chip Wilson.  However, after a “high-profile feud with company directors,” Wilson resigned from the company last month (http://business.financialpost.com/2015/02/02/lululemon-athletica-founder-chip-wilson-resigns-from-board-of-directors/).

The current structure of the organization (depicted below), has five officers (internal) and eleven directors (ten external).  While Potdevin, the CEO, serves on the board, he does not serve in the chairman capacity.  This helps “ensure the independent monitoring required to resolve agency conflicts in the modern diversified corporation” (Barney 343).

 

http://investor.lululemon.com/management.cfm

Luluemon has three subcommittees, with board members spread amongst said committees, to further this diversification (see below).

http://investor.lululemon.com/committees.cfm

Diversification?

Chapter 11 delves into the economic benefits of diversification strategies.  Lululemon can be described as having a limited (or non-existent?) diversification.  Lulu’s website states “We make technical athletic apparel for yoga, running, dancing, and most other sweaty pursuits.”  Yes, the fabrics differ and the patterns can be slightly different.  But all in all.  Lulu running pants are quite similar to Lulu cycling pants.  The same demographic is targeted in each of the lines and the company’s reach can be somewhat limited.

But is this necessary a bad thing?  Nope!  As a substitute for diversification, “a firm may decide to simply grow and develop each of its business separately.  In this sense, a firm that successfully implements a cost leadership strategy or a product differentiation strategy in a single business can obtain the same cost or customer willingness-to-pay advantages it could have obtained by exploiting economies of scope but without developing cross-business relations” (Barney 325).

Essentially: Lulu is not Adidas.  It is not trying to serve a wide variety of markets.  Instead, it focuses on its niche.  Because of its excellence in this niche, Lulu can charge $118 for a pair of running pants.  And plenty of the narrow demographic will continue to purchase!

“The number of stages in the value chain in a product’s or service’s value chain in which a particular firm engages defines that firm’s level of vertical integration” (Barney 272).   Lululemon has a strong vertical integration strategy acting as “an entity that controls everything from manufacturing to the store experience” (http://nymag.com/shopping/features/58082/index2.html).

By selling products direct to consumers only at Lululemon branded stores or through the website (contrast this with the ability to purchase other brands, such as Nike, Adidas and Lucy at a variety of retailers), Lululemon leverages forward vertical integration (https://sites.google.com/site/mngt255tina/organization-planning/strategies).  Similarly, the use of only designated factories and ingrained global distribution strategies yield strong backward integration for the brand.

Lululemon is able to demand a higher price than some of its competitors by leveraging the quality differential.  However, its vertical integration styles may help balance some of the costs it incurs on the firm level.

In Lululemon’s latest 10-K, it’s vertical integration strategy is cited SIX TIMES, further proving the firm’s perception of the value of it to the company as a whole.

“We believe our vertical retail strategy allows us to interact more directly with, and gain feedback from, our customers, whom we call guests, while providing us with greater control of our brand.”

http://investor.lululemon.com/secfiling.cfm?filingID=1397187-14-21

coLULUsion

Chapter 9 delves into collusive strategies, illegal ways in which “several firms in an industry cooperate to reduce industry competitiveness and raise prices above the fully competitive level” (Barney 246).

 

While Lululemon has not been accused of this, Nike’s takeover of Umbro, a rival athletic apparel supplier, in 2007 was questioned as possible collusion.  Despite the large market share that resulted from the transaction, the merger was ruled legal (http://www.wired-gov.net/wg/wg-news-1.nsf/0/1FEB32C065494417802573D20053FEFD?OpenDocument).

There are a large number of firms in the active wear apparel industry.  Because there is such a product and cost heterogeneity amongst the brands (i.e. Lulu vs. Reebok), the industry doesn't necessarily foster collusive transactions (Barney 260).

Financial Flexibility

Flexibility and Lululemon go hand and hand in the traditional, yoga sense.

Chapter 8 delves into the strategic definition of flexiblility, “that is, the ability to change direction quickly and at low cost, given unanticipated changes in the competitive situation within which a firm is operating” (Barney 216).  This flexibility, or lack thereof, leads in to real options theory.

Last summer, rumors of a potential sale of Lululemon resulting in “Open interest in Lululemon options [increasing] 40 percent [over three months], with traders owning about 1.4 calls for every put” (Barach).  Clearly, Lulu proved it was as flexible as its stretchy yoga pants, remaining independent.  Moreover, the latest 10-Q directly speaks to said flexibility: “We believe our strong cash flow generation, solid balance sheet and healthy liquidity provide us with the financial flexibility to execute the initiatives which we believe will continue to lead our profitable growth" (10-Q).

Works Cited:

Barach, J. (2014, July 24). Lululemon Traders Say Namaste to Takeover Speculation: Options.  Retrieved March 8, 2015, from http://www.bloomberg.com/news/articles/2014-07-24/lululemon-traders-say-namaste-to-takeover-speculation-options

 

Lululemon Athletica Inc. (2014). 10-Q. Retrieved from http://biz.yahoo.com/e/141211/lulu10-q.html

Lululemon: Premium Player in the Apparel Industry

What first comes to mind when you think of Lululemon?  Low prices?  Or quality products?  Most likely, it’s the latter…even if you hit a sale right, low prices and Lulu aren’t typically used in the same sentence.  A product differentiation strategy “is a business strategy whereby firms attempt to gain a competitive advantage by increasing the willingness of customers to pay for the products or services they sell (Barney, 180).  In comparison to a cost leadership business strategy, this is clearly where Lululemon places its focus. 

In the latest 10-K filing, Lululemon even cites its differentiation strategy as its competitive strength, focusing on the following areas:

·         Premium Active Brand

·         Distinctive Retail Experience

·         Innovative Design Process

·         Community-Based Marketing Approach

·         Deep Rooted Culture Centered on Training and Personal Growth

·         Experienced Management Team with Proven Ability to Execute

These aforementioned items correspond directly with Barney’s way that firms can differentiate their products (182).  As an example, the 10-K states that “we locate our stores in street locations, lifestyle centers and malls that position lululemon athletica stores to be an integral part of their communities. We coach our store sales associates, whom we refer to as ‘educators,’ to develop a personal connection with each guest” (http://investor.lululemon.com/secfiling.cfm?filingID=1397187-14-21).  Using this “differential emphasis on consumer marketing,” Lululemon provides a strong stake hold in the market, significant competitive advantage and protects itself from the threat of competitors who focus more heavily on cost leadership strategies (Barney 184).

Works Cited:

Lululemon Athletica. (2014). 2013 annual report of lululemon athletica. Retrieved from http://investor.lululemon.com/secfiling.cfm?filingID=1397187-14-21

Lulu - A Different Kind of Cost Leadership

A cost leadership business strategy “focuses on gaining advantages by reducing its economic costs below all of its competitors” (Barney 159).  In the apparel industry, all competitors attempt to gain this advantage by outsourcing manufacturing overseas (Soni).  However, as one of the higher priced brands in the industry, Lulu can’t compete on the cost leadership platform in the traditional sense, simply because Lulu will most likely never offer prices that are lower than Lucy, Adidas, Reebok, etc.

 While Barney discusses the importance of both market economies and diseconomies, Lulu employs a slightly different strategy – leveraging a “relatively high inventory turnover ratio compared to rival firms…[implying] that either the stock sells out really fast in its stores or the inventory levels are kept low deliberately” (Soni).  Thus, while consumer costs may not be the lowest in comparison to competitors, Lulu is finding ways to find cost advantages within its actual strategy.

Works Cited:

Soni, P. (2014, December 15). Company Overview: An Investor's Key Guide to Lululemon Athletica. Retrieved March 7, 2015, from http://marketrealist.com/2014/12/lululemons-profit-margins-trumping-companys-peers/

Chapter 5 briefly discusses how people historically sought to understand a firm’s strengths and weaknesses.  One interesting historical fact mentioned was that Harvard Business School began analyzing the role of the general manager as a firm’s distinctive competency as early as 1911. 

The work stated that decisions made by general managers (managers with significant profit-and-loss responsibility in an organization who typically have more than one function reporting to them) had significant effect on the firm’s performance.  Simply put, high quality general managers were seen as organizational strengths, low quality general managers were weaknesses.   (Barney, 117)

Chip Wilson was Lululemon’s founder, former Chief Innovation Officer and just left the board last week is one such manager that was a strength and a weakness for his company.    Chip’s strengths were in product design, ideation and brand building.  He had the initial idea for Lulu from snow pant material.  He was able to translate the fabric into yoga pants, he went on to build the brand and ultimately create a new type of apparel-- fabrics to support individuals in both their practice of yoga and their daily activities.   He convinced consumers, initially women but now men,  that wearing Lululemon made you cool and consumers were willing to pay an extremely high price for the gear.  

Outspoken, Chip had this to say about his management style.   "If you are doing a brand well, you need to offend somebody, or you're not standing for anything," he told the Times reporter. "I mean, how women can say these things about me given everything I've done to build the women's company? My background has always been people telling me my ideas are crazy. And I've noticed that 90 percent of them have come true." (Novellino). 

But as Chip alludes too, he had some weaknesses too – namely his outspokenness and perhaps his restlessness.  He took a sabbatical from the company in 2012 and went to Australia.     Wilson was then brought back by the company to try to repair the damage to the brand.  Lululemon had produced yoga pants, made of Luon, which were basically see-through.   When trying to fix the damage resulting from poor product quality; Wilson actually fat-shamed those who wore his pants, saying

 “Some women's bodies don't work for the pants. It's really about the rubbing through the thighs, how much pressure is there over a period of time."  This angered consumers and ultimately lead to Wilson resigning from the board and selling most of his shares in Lululemon. 

The challenge of the work done by Harvard in the early 1900s was that the qualities that define a high-quality manager are difficult to measure.   Does being outspoken make you a good company leader?  Is your leadership, a result of luck, skill, because of product or marketing ability?   What are the prevailing characteristics about leaders, like Chip, that determine if they will be a strength or a weakness for their companies?   It’s ambiguous.  In summary, the historical analysis of looking solely at managerial decisions to evaluate the performance of a firm does not go far enough when seeking to understand firm strategy and results. 

Novellino, Theresa. "Founder Chip Wilson Leaves Lululemon Board, Says Sometimes Brands." Upstart Business Journal. Upstart Business Journal, 2 Feb. 2015. Web. 19 Feb. 2015.

Strategic Groups (Chapter 4)

                A strategic group is a defined as a set of firms that face similar threats and opportunities that are different from the threats and opportunities facing other firms in an industry.   (Barney, 106)

Strategic Group analysis can be used when there is ambiguity about the limits of an industry and even differences in the structure of threats and opportunities that similar firms face.   Lululemon is a good example of an industry where strategic group analysis can be important. 

First let’s identify an industry .  Here we are discussing the athletic wear/athleisure wear.    We have discussed in past blogs that industry defines items that individuals wear when working out or just running errands around the town.   Basically, it has become cool to wear yoga pants as real pants and many humorous facebook posts and you tube videos are dedicated to this trend. 

Now let’s focus on all the competitors:   Lululemon often competes with Nike, Reebok, Under Armour, Lucy and Athleta.

Using Strategic Group Analysis,  I might define the following:

Nike, Reebok, Under Armor are  in Strategic Group 1

Lulu, Lucy and Athleta, Fabletics are in  Strategic Group 2.

The reason for this differentiation is due to the isolation of mobility barriers (106) which is similar to identifying barriers to entry at the industry level.   

Here, I might look at the following: 

First mover status = Lulu and Lucy and Athleta were all in the printed yoga pant space first

Industry Status = Nike, Reebok, UA were all established sports brands with broad product offerings
Technology/R&D = Fabric –Lulu was the first set of unique material used to make a better pair of yoga/running pants

Gender Focus -  Lulu, Lucy, Athleta, Fabletics began as all women only (although Lulu now has a men’s line) 

Price = Lucy,  Lulu, Athleta all price their pants between $60-100 while Nike, UA, Fabletics and Reebok all price under $50 traditionally. 

After isolating these barriers, I might build out a similarity matrix by doing simple correlation analysis, comparing the number of the firms in the industry, in my example there are  7 firms, so it would be a 7 x 7 matrix.  Each element on this matrix (I, J) would be the correlation between the vector of measures of conduct for firm (I), with the vector of measures of conduct for firm (J), effectively comparing firm behavior.    Each axis would represent firm conduct in the industry, above First mover status, Technology/RD, Gender Focus, Price.    In this matrix, it would be likely that I could see firms facing similar threats and opportunities clustered together on the same axis.  My analysis allows me to describe how competition effects and evolves across and within strategic groups in the athleisure wear  industry.  The limitation though is that since probability theory is not associated with cluster analysis it can be challenging if not impossible to identify if a strategy group defined through cluster analysis is statistically significant.  Therefore, the best use of this tool is more for gaining a deeper understanding of the level of threats and opportunities that a firm faces.  

SCP at Lulu

Yesterday, I read probably the most insightful article to date about Lululemon’s strategy.   In a New York Times magazine article, Lulu founder, Chip Wilson talks about his strategy and missteps at Lululemon, the company that “started the ‘athleisure’ trend and is changing the fashion industry.” (Business Insider)  Wilson spoke about his ideal customer and also his current work on a new company Kit and Ace, discussing his strategy for both.  Interesting topics as our class explores how companies evaluate  their environmental threats. 

According to Business Insider, “Wilson created a ‘muse’ who inspired the merchandise, an ideal customer, “a 32-year-old professional single woman named Ocean who makes 100,000 a year.  Ocean is engaged, has her own condo, is traveling, fashionable, has an hour and half to work out a day.”  (Business Insider)

Don’t I wish. 

Wilson goes on to say, “if you’re 20 years old or graduating from university, you can’t wait to be that woman.   If you’re 42 years old with a couple of children, you wish you had that time back.” (Business Insider)

Agree. 

He talks about how he invented the Lululemon pants, his rise and fall out of power and his ultimate resignation of chairman and his new work at Kit and Ace. 

Using the framework of the structure – conduct – performance (SCP) model, its’ easy to see why Lululemon was/is now in the position to change the fashion industry, why Lulu resonated with so many “Oceans, like myself and discusses some of the strategic challenges that Lulu will face in 2015. 

The SCP is a theoretical framework that evolved as economists were looking for an approach to understand the relationships between a firm; its environment, behavior and performance.  Originally, with the goal of describing conditions where perfect competition would not develop in an industry; so as to help government regulators identify monopolistic behavior.  Now strategic analysts such as myself, and Lulu founder Chip Wilson, used SCP flipped upside down to identify competitive advantages for firms. 

SCP says that Industry Structure (# of competing firms, homogeneity of products, cost of entry and exit) influences Firm Conduct (price taking, product differentiation, tacit collusion, exploiting market power) and ultimately performance (performance of individual firms and then ultimately the economy as a whole).

When Lulu began it was because Wilson saw that he could translate body slimming long underwear fabric that he had developed into yoga tights and “have his own retail stores and sell the pants for $90 to $95….  betting that women will buy billions of them.”   (New York Times)

Wilson had capitalized on Industry structure - at the time there we no competing firms with the fabric, the product was unique and customers, “Oceans,” loved the product.  There were also quasi high barriers to entry as it was risky to start a new clothing company and current athletic competitors like Nike and Under Armor didn’t have the same quality of fabrics that Lulu had.  Lulu had for a short while, an oligopoly in leisure wear. 

This allowed Wilson, as he stated to charge extremely high prices for the product, which was differentiated from anything else out on the market at the time.  “Oceans” flocked to Lululemon allowing them to open more stores, create and sell more pants achieving a completive advantage. 

In the beginning, under the five forces model level of threat in the leisure wear model was low.  Lulu had few rivals, limited threats of entry, they were the powerful supplier of their proprietary fabric, their buyers ‘Oceans were buying the product and there were not many substitutes in the market.

In 2015,  threat of entry in the athleisurewear industry is high.  

Ultimately, old competitors, and new entrants, like Althelta (GAP), Under Armor and Nike began to put out similar fabrics, eroding Lulu’s market share.  Some even looked for substitutes in products like skinny jeans. Chip Wilson will tell you that he angered their now powerful buyers through his comments about who should wear these pants and the quality of their new fabric (see through Luon)  ultimately these buyers responded and many left the brand. Chip Wilson left too, stepping down last week as Chairman. 

Now Chip Wilson is using his knowledge and background from Lulu and a new competitive fabric, that Lulu turned down, to try to create the perfect competitive advantage for Kit and Ace.  Wilson is working to re-create the same level of success that he had at Lulu.   We will see how he does in 2015, in the meantime this Ocean will be heading back to eBay to scoop up some more athliesure wear. 

Works cited:

"Lululemon Founder Chip Wilson Resigns From Board." The New York Times. The New York Times, 02 Feb. 2015. Web. 02 Feb. 2015.

Lutz, Ashley. "Lululemon Calls Its Ideal Customers 'Ocean' and 'Duke' - Here's Everything We Know about Them." Business Insider. Business Insider, Inc, 02 Feb. 2015. Web. 03 Feb. 2015.

Lululemon by the Numbers (Chapter Three)

Lululemon by the Numbers (Chapter Three)

                When I first started college, I dreamed of making money in the stock market, maybe even enough to finance my education.  I watched the ticker tape of stock performance, originally overwhelmed by all of the different ratios that measure a firm performance.  What I learned was that some simple accounting measures can evaluate firm performance and get a sense of how well company managers are achieving their strategic priorities.   These financial measures are not without limitations; accounting measures aren’t good at accounting for brand loyalty or manager discretion in choosing accounting methods and don’t account for the short term bias—that sometimes measures are understated because accounting measures of performance are calculated on an annual basis. 

Lululemon’s performance measures are captured on stock analytic websites, in this case Marketwatch.   Lululemon’s statistics can give us a sense of the company’s performance.

(Marketwatch) - "Lululemon Athletica Inc." LULU Key Statistics. MarketWatch, n.d. Web. 29 Jan. 2015.

I won’t cover all of the ratios but highlight a few examples below. 

Activity Ratios: 

Receivables Turnover:  (Annual credit sales/ Accounts receivables)  -  A measure of the average time it takes a firm to collect on credit sales.  Here it is takes Lululemon an average of 174 days to collect on their receivables. 

Liquidity Ratios: 

Current Ratio: (Current assets/Current Liabilities) - A measure of the ability of a firm to cover its’ current liabilities with assets that can be converted into cash in the short term.

Quick Ratio: (Current assets – inventory)/ Current Liabilities) -  A measure of the ability of a firm to meet its short term obligations without selling its current inventory. 

Here Lulu can cover its’ current liabilities 8 times and can meet its short term obligations 6 times over. 

Are these good ratios to have?  The answer is…..it depends. 

Athleta – Lulu’s closest competitor, whose parent company is Gap, posts these statistics.  

("Gap Inc." GPS Key Statistics. Marketwatch, n.d. Web. 29 Jan. 2015.)

Comparing these ratios – the Gap collects on its’ receivables much quicker than Lulu does but Lulu looks to be much more liquid, or healthier at being able to cover its’ debt obligations by ratios of 8 to 1 and 6 to 1.

So ratios and stock statistics are helpful when choosing between two different companies for investment purposes.  However, understanding one or two ratios are not enough to understand and analyze the complex dynamics of company performance for that more work must be done to understand the firm. 

Three Reasons why Lululemon Needs to Figure out this Strategy Thing in 2015 (Chapter One)

Yoga pants are the item for women to wear; whether they are heading to the gym, the supermarket or even a night on the town and Lululemon Athletics Inc. (LULU) are the pants women are choosing.  Just like choosing the right pair of pants for your figure, Lululemon and its’ competitors in the sportswear industry are in charge of setting the right methods and operating (or strategy) in order to achieve high levels of performance and thus generate positive returns for their stakeholders.  Lululemon originally differentiated themselves by combining yoga classes and their sportswear and charging premium prices for their pants and other clothes.  With an interesting brand, an outspoken founder and sometimes outrageous prices, Lululemon will be an interesting study on strategy in 2015.

1.  Just this past week, LULU was upgraded by stock analysts at JPMorgan Chase & Co. from a “neutral” rating to an “overweight” rating in a report issued on Friday (Forouzandeh).

Lululemon set its’ strategic management process much earlier than the past month.  Their original intent was “elevating the world from mediocrity to greatness and their mission statement is creating components for people to live longer, healthier fun lives.” (Lululemon)  Each quarter stock analysts analyze company performance and make a recommendation as far as what they believe investors should do with the target stock.  What analysts say about the stock each quarter is one indicator of how well a company like Lululemon is executing on their strategic priorities and achieving their overall mission.  An overweight rating would indicate that portfolio manager believes that LULU will outperform others in the portfolio. 

2.  LULU has invaded Britain again with further expansion plans.

Haute Living reported on LULU’s second location in Chelsea, London with plans for 5 additional locations.  (Neykova)  The article discusses that Lululemon is not keeping it a secret that they plan to expand further in London.   A company, like Lululemon’s, decision to expand internationally may be part of their strategic objectives and/or it may be a strategic decision which the company undertakes after external and internal analyses have been completed.  Other analysts have argued that LULU may be expanding too quickly especially in light of losing some of their most devoted followers, competitive pressure from other athletic wear companies and LULU’s financial performance in 2014. 

3.  Business Insider is explaining the competitive advantage of Lululemon’s $98 pants

Business Insider just posted a video on the competitive advantages of Lululemon’s yoga pants.  (Silverstein) Each woman on the reviewing team liked the fit, style and the brand appeal of the Lululemon pants better although they thought the Athleta pants were a better deal.  This only highlights the competitive pressures that Lululemon will be facing in 2015.  Most analysts believe that LULU’s intended and then deliberate strategy was to set their prices very high.  This strategy worked because LULU had a core group of very devoted followers willing to pay those prices but as the video highlights analysts aren’t sure how loyal LULU’s followers will remain and if the demand for LULU’s products will sustain. 

2015 is shaping up to be an interesting year for Lululemon and it will be great to see where LULU and their iconic yet expensive yoga pants are headed. 

Works Cited:

Forouzandeh, Hossein. "Lululemon Athletica Inc. Stock Rating Upgraded by JPMorgan Chase & Co. (LULU)." Mideast Time RSS. Mideast Times, 26 Jan. 2015. Web. 26 Jan. 2015.

"Lululemon." Learn about Us. N.p., n.d. Web. 25 Jan. 2015.

Neykova, Devora. "Lululemon Athletica Expands in London - Haute Living." Haute Living. N.p., 26 Jan. 2015. Web. 26 Jan. 2015.

Silverstein, Joe Avella and Sara. "Here's How $98 Lululemon Yoga Pants Compare To Cheaper Alternatives." Business Insider. Business Insider, Inc, 23 Jan. 2015. Web. 26 Jan. 2015.

lululemon athletica inc.

Throughout the semester, I will be posting about one of my favorite companies, lululemon, using the lens of our text, "Gaining and Sustaining Competitive Advantage" by Jay Barney.