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/