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.