Crafting & Executing Strategy

MGMT702-003

Business Case Analysis-2

Case 09- Lululemon athletica, Inc. in 2016: Can the Company Get Back on
Track?

Submitted By- Alisha de Sousa

Kirandeep Kaur

Tomas Bernal Gaviria

Qiting Su

Date- February 7, 2019

Submitted To- Professor Byron Tobar

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Table of Contents

EXECUTIVE SUMMARY ........................................................................................................................ 3

INTRODUCTION & IDENTIFICATION OF SYMPTOMS................................................................. 5

DEFINING THE PROBLEM/OPPORTUNITY ..................................................................................... 5

PROBLEM ANALYSIS ............................................................................................................................. 9

BRAINSTORMING SOLUTIONS ......................................................................................................... 11

EVALUATION OF SOLUTIONS........................................................................................................... 13

RECOMMENDED COURSE OF ACTION .......................................................................................... 18

IMPLEMENTATION PLAN................................................................................................................... 19

CONCLUSION ......................................................................................................................................... 19

REFERENCES .......................................................................................................................................... 21

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EXECUTIVE SUMMARY

Since 1998, Lululemon has been providing generations with the right tools and resources through
its yoga-inspired, stylish and comfortable products. Its manifesto focused on motivating people to
live a healthier, longer life. Through this case analysis, we have explored Lululemon’s problems,
weighed out its possible solutions and recommended its future course of action.

In March 2013, the company faced an issue with its women’s black Luon bottom product. The
product was sheer and revealing which was a result of poor product and design quality. This
negatively affected its brand image. The above said product was recalled by the then CEO
Christine Day, but customers continued to complain about the quality of its replacement pants.
While trying to defend the company with regards to the black Luon bottom product, Chip Wilson
made an embarrassing comment with regards to women’s bodies. Even his apology was not well
received, drawing the company to more bad publicity. In addition, the company faced challenges
with regards to its management. We have discussed how, besides being unsettled, Lululemon’s
management has not shown uniformity in terms of its decision making.

The company’s revenue continues to grow but at a much slower rate than it did in 2012. The
number of stores is expanding but its sales per store has seen a 21.6% decline in comparison to
previous years. This could be due to the increasing number of competitors like Nike, Under
Armour, Adidas and the Gap’s new Athleta brand expanding into this same niche. Lululemon
currently outsources its production facility, hence losing out on the economies of scale. This can
be seen in its decreasing gross profit margins even as sales increase. We have suggested that since
the company has potential, it should consider moving into production of its products thus
eliminating the high cost, probability of shortages and the first level threat of suppliers. The
company should also consider targeting the baby boomers market segment as its shows great
upcoming demand. In order to maintain its competitive edge, we recommend that Lululemon keep
investing in R&D. For a company to operate successfully, it is important to maintain a good
working relationship between management and the board of directors, employees and customers.
Retention plans as well as fair remuneration packages will help keep the company’s internal

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members satisfied. A good, well-experienced PR personnel will help the company maintain a
unified front as well as adhere to the customers grievances.

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INTRODUCTION & IDENTIFICATION OF SYMPTOMS

Lululemon is an athletic apparel company founded by Chip Wilson at the end of 1998 in

Vancouver, Canada. This company specialises in stylish premium priced yoga wear for men and

woman. Initially, the company was created to be a community hub for people to learn the

physical and mental aspects of healthy living but the clothing line lead to massive success and

hence became the core of the new business operations. The company went public in August 2007

and has continued to grow every since. In 2009 Lululemon launched Ivivva, which specializes in

dancing-inspired, premium priced, high quality apparel for female youth.

By expanding operations overseas with more than 363 stores worldwide and a net revenue of 2.1

billon in 2015 the company targeted a growing yoga-based market estimating 16 billion dollars.

Its major competitors are Under Armor, Nike, Adidas and the Gap’s new Athleta brand retail

store.

In spite of its increasing revenue, gross profit margins have decreased from 57% to 48.39%. Its

market price fell from $80 per share in March 2013 to $64 per share in mid 2016. Shareholders

were concerned that customers were not longer enthusiastic about the company’s products. This

reflected on their sales per gross square foot which decreased from $2004 in 2011 to $1541 in

2015. However, number of stores more than doubled over a 5-year period up to 2015.

DEFINING THE PROBLEM/OPPORTUNITY

What are the central facts of the case? What assumptions are you making about these facts?

Central facts

lululemon was the pioneer of the yoga apparel. But in 2013, lululemon started to lose its craze

between its clients due to the entrance of different competitors and problems arose with the quality

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and designs of the women’s black Luon pants. Other than these problems, poor execution of the

strategies and unclear direction of management were also responsible for the problems arose for

lululemon. With increase in competition, lululemon started to losing its competitive edge over its

competitors. Shareholders of lululemon were started to being concerned regarding the customer

behaviour because customers started to switch from lululemon to Under Armour, Adidas, Nike,

Gap’s new Athleta brand. Reasons could be the lower prices or high quality or both. Because of

the above-mentioned facts lululemon’s stock price plunged to $64 in May 9, 2016 from $80 in

March, 2013.

Assumptions

lululemon was primarily focused target customer was young, sophisticated, and educated woman

who is responsible for her family and career and inclined towards a healthy and active life style.

In early years of lululemon, the management of lululemon assumed that other athletic apparel

retailers will not address the needs of this segment. But soon they realized that they should broad

their target customer and apparel line.

What is the major overriding issue in the case? What major question or issues does this case

address that merits study at this point in the course?

The major overriding issue in the case is the continuous changes in senior management within the

company which led to poor execution. Since Chip Wilson formed lululemon from 2000 until

present, the company appeared to change CEO often. Robert Meers was appointed on December

2005, after two years, Christine M. Day was appointed on April 2008. After Christine Day resigned

her position, Laurent Potdevin was appointed on January 2014. Those people did not work long

enough in the company compared to their previous companies they worked.

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The major question comes in mind is that does the company knows changing CEO often will lead

to an unclear direction for the company in the future? It means that different people are doing

things in different ways because they are coming from different backgrounds; therefore, the

company was not able to get a precise direction. Also, the founder of the lululemon was too much

involved in management decisions. There was no mutual understanding between the upper

management and the founder “Chip Wilson”.

What sub-issues or related issues are present in the case that merit consideration now?

In this case, lululemon appeared to have number of sub-issues:

 Lacked preparation for established competitors in the athletic and fitness apparels market

including Nike, Adidas and Under Armour.

 Few retail stores: Lululemon has less than 400 stores worldwide comparing to its

competitors: Nike (1182), Adidas Group (1,500) stores, Gap Inc. (3,000) stores, Lululemon

strongest presence is in North America, when it comes to premium products, new

customers tend to buy them at the stores.

 Market segment is relatively small only reaching 24% of the population alone whereas the

competitors have a larger target market, however, this can be seen as an expansion

possibility for the company as it can extend its products and target markets segments such

male and baby boomers (older generation).

 The company outsourced its products from overseas. This is the main reason behind the

higher selling price, higher operating costs, and less profit margin for the shareholders.

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  Problems with the design and quality of women’s black Luon Pants which led to recall of

the pants in 2013.

 Despite the increase in the sales revenue, the levels of inventories were increasing

continuously. Increasing levels of inventories was also a problem for the management.

 Chip Wilson did not properly handle the issue of the pants. He said that there was no

problem with the quality of the pants. He said “Quite frankly, some women’s bodies just

actually don’t work with pants”, this statement probably done a huge damage to the image

of the lululemon among its customers.

Who are the stakeholders in the case and what are their stakes? What challenges, threats or

opportunities are posed by these stakeholders?

Chip Wilson, Chairman and Founder of lululemon, he was the one who oversaw the board of

director and the shareholder’s interest; however, he did not carry out his duty properly regarding

of the recall of pants. His action caused threat to the reputation and public image of company.

Shareholders including Advent International Corporation, Highland Capital Partner and a private

company that Wilson sold his share after the argument with the board. Their main stake is the

return of their investment in lululemon. This is a threat to the company since the company does

not perform well, and the shareholders may choose to sell their shares.

Suppliers of lululemon, as lululemon does not have its production manufactured internally, fabric

and garment are manufactured overseas including Southeast Asia, South Asia, China and North

America. Those suppliers rely on the company’s revenue generation to be able to pay them on

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time, but the suppliers have low threat to the company because lululemon has other alternatives as

well.

Customers of lululemon, their stake is safety, quality and value of the product. Since the recall of

pants issue did not handled effectively, customers started losing trust in the company, they might

choose to go somewhere else such as lululemon’s competitors.

Competitors of lululemon including Nike, Adidas and Under Armour. Those competitors are

globally well recognized organizations. They have better competitive advantages over lululemon,

for example, price and quality.

If the case involves company actions, evaluate what the company did or did not do in handling

the issue affecting it.

One issue in this case is the recall of women’s black Luon pants, the problem was due to the design

of the pants and the quality of fabric. The company first made the replacement of the pants for

customer, but the replaced pants were also not good. Customers were still complaining about the

quality of the replaced pants. Chip Wilson did not believe the problem was the design and quality,

he made his statement that the pants just did not fit some of the women’s bodies. After few days,

he made apology to the public, however, his apology was not well received by the public.

PROBLEM ANALYSIS

FISHBONE DIAGRAM

Major problems: There were several problems. But the major problem for lululemon was, the

instability of management which led to poor execution of the company strategies and actions.

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Moreover, Chip Wilson was always involved in management decisions and he always tried to

implement his own strategies which sometimes were not applicable or appropriate.

Causes Effect

Changes in Different strategies and different views led to

Management poor execution

Disagreements
and instabilities
within the
management led
to poor execution
of the company
strategies and
actions.
Disagreements among the Problems within the
Management and company
Chip Wilson

Other Problem: Other than instable management, lululemon was facing problems regarding the

quality and design of their products, increasing levels of inventories, threat of competitors.

Causes Effect

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Problems with the Pants were sheer and revealing of the garments
Women’s luon pants being worn underneath
Lululemon had lots
of problems such as
Increasing levels of inventories Signalled problems in growth design and quality
Of the sales problems with
black Luon pants,
Wilson’s statement It caused damage to reputation levels of
regarding women bodies of lululemon inventories,
competitors’
Outperforming competitor Customers switch brands from lululemon to performance in the
Gap’s new Athleta, Nike, Adidas due to lower industry caused a

prices and higher qualities lot of damage to

lululemon.

BRAINSTORMING SOLUTIONS

Identification of different Solutions:

1) Instability in management: In order to avoid high management turnover, the company

could focus on the happiness of its personnel in terms of appropriate hand-over of duties,

remuneration, proper work life balance and effective and efficient co-workers.

2) Competitors: Lululemon is facing high competition. They need to keep investing in

research and development so as to stay ahead of the market. Patents through hi-tech

innovation will help them maintain their competitive advantage.

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 3) Women’s black Luon bottoms: In order to avoid a similar situation in the future, the

company should focus on in-dept testing of final products. Products should be reviewed

and carefully tested to ensure that they keep up with the company’s standards and its

consumers expectations.

4) Outsourcing: Lululemon is currently outsourcing all its production to contractor factories

located mostly in South East Asia and China creating a higher cost of production. It is

recommended that the company open its own factory in any of the current locations and

start manufacturing its products in order to reduce the cost of goods sold and increase

profit margins.

5) PR: Public statements of the company must be managed by a public relations manager,

someone trained to answer any difficult questions in order to avoid issues as occurred in

past occasions with comments made by its founder over the black pants and criticizing

the former CEO. These public statements are very powerful tools that if not managed

properly, will affect the company.

6) Inventory: Excess inventory has been a growing problem for Lululemon. In order to

tackle this problem, 2 main strategies must be implemented. The first strategy is to invest

in e-commerce by enhancing the customer's engagement with the company by being able

to hold a higher liquidity on inventory levels. The second strategy is to create small pop

up shops with the excess inventory in health and business events with special prices for

the old merchandise. These shops will be an outdoor and roofless where people can shop

lululemon products in the park, sand and forest, this strategy is taken from one of the

yoga principals which mentions the connection of human beings with nature.

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 7) Expand into the market segment of baby boomers: By entering into a new segment of the

market, the company can tap into an untapped market.

EVALUATION OF SOLUTIONS

1. Instability in management: In order to avoid high management turnover, the company

could focus on the happiness of its personnel in terms of appropriate hand-over of duties,

change in remuneration structure and effective and efficient co-workers (for example: A

new CEO could be allowed to bring in his own team of specialists who he trusts).

Pros: Cons:

 Duties that are handed over  The predecessors and new

through a proper span of time and
training will ensure a smooth
transition through CEO’s for the
company.
 A change in remuneration
structure will motivate employees
to work better.
 If a CEO is allowed to bring in a
team of members whom he trusts
and works well with, it would be
motivational and lead to higher
performance.
management may not have a good
working relationship, hence
defeating the purpose.
 If the new remuneration structure
works against some employees this
would cause a division within the
firm causing unrest.
 Hiring a CEO along with a few of
his trusted people, may lead to
laying off some of the current
employees.

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 2. Lululemon is facing high competition. They need to keep investing in research and

development so as to stay ahead of the market. Patents through hi-tech innovation will

help them maintain their competitive advantage.

Pros: Cons:

 Due to its constant innovation,  R&D costs keep increasing over

Lululemon will become trend
setters. This will increase the
Goodwill of the company.
 R&D will give the company a
head starts to the competition
that will follow. Through this
they can take advantage of the
consumer’s eagerness to try out
what’ new.
 Lululemon’s products will be
unique.
the years. This indicates that
huge capital investments will be
required on a continuing basis.
 The time frame between
investments, patent approvals
and reaping benefits of these
investments will be huge.
Hence capital will be tied up.
 Difficulty in an estimating
customer changes in
preferences and their reaction to
the new product.

3. Women’s black Luon bottoms: In order to avoid a similar situation in the future, the

company should focus on in-dept testing of final products. Products should be reviewed

and carefully tested to ensure that they keep up with the company’s standards and its

consumers expectations.

Pros: Cons:

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  Additional testing would ensure that
company products always meets its
standards.
 Additional testing and in-turn good
 It could cause a delay in the
quality products would be a
competitive advantage to the
company.
 Testing of new products would be
expensive and eat out of the
company’s net profit margin.
launching of a new product which is
risky due to the ever-changing needs
of consumers as well as a possibility
of competitors reaching out to
customers first.

4. Outsourcing: Lululemon is currently outsourcing all its production to contractor factories

located mostly in South East Asia and China creating a higher cost of production. It is

recommended that the company open its own factory in any of the current locations and

start manufacturing its products in order to reduce the cost of goods sold and increase

profit margins.

Pros: Cons:
 Company has full control of  High initial investment.
code of ethics operations on the  Communication barriers.
company.  Dependence of suppliers.
 Also, if there is a product recall,
the company does not have to
make the full order, they can
stop production and reuse
materials.
 Economies of scale.

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 5. Public statements of the company must be managed by a public relations manager,

someone trained to answer any difficult questions in order to avoid issues as occurred in

past occasions with comments made by its founder over the black pants and criticizing

the former CEO. These public statements are very powerful tools that if not managed

properly, will affect the company.

Pros: Cons:

 Company's ability to handle  It can be difficult to measure

public issues will be managed
by a professional.
 By having one speaker allowed
by the business, the information
will come from one source and
not multiple sources inside the
business, avoiding
misunderstandings and opposite
views by company's employees
that can lead into a lack of trust
by customers.
the result of PR activities.
 Lack of trust on company's
CEO by not being able to
receive public comments from
the top manager.
 No guaranteed result that
having a PR manager will
improve client relations.

6. Inventory: Excess inventory has been a growing problem for Lululemon. In order to

tackle this problem, 2 main strategies must be implemented. The first strategy is to invest

in e-commerce by enhancing the customer's engagement with the company by being able

to hold a higher liquidity on inventory levels. The second strategy is to create small pop

up shops with the excess inventory in health and business events with special prices for

the old merchandise. These shops will be an outdoor and roofless where people can shop
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 lululemon products in the park, sand and forest, this strategy is taken from one of the

yoga principals which mentions the connection of human beings with nature.

Pros: Cons:

 Ecommerce industry is growing  Possibility of a hack in the

rapidly and also, by creating a
strong ecommerce platform,
lululemon could reach anyone
anywhere in the world.
 Pop up stores will create brand
awareness in new location with
its new outdoor concept as well
as will allow to reduce the high
inventory levels of previous
products.
systems and information could
be sold to competitors.
 Outdoor pop up stores could
damage the clothes as they are
exposed to nature, grass and
sand.

7. Expand into the market segment of baby boomers: By entering into a new segment of the

market, the company can tap into an untapped market.

Pros: Cons:

 There are currently 75 million  High investment in new ad

baby boomers on USA alone,
50% of the USA population will
be over 50 this year, baby
boomers will inherit 15 trillion
dollars over the next 15 years,
campaigns.
 high prices might turn
customers away.
 it will be more difficult to build
customer relations because a lot

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 and the new healthy lifestyle of baby boomers do not use
trends are constantly growing. social media platforms.

RECOMMENDED COURSE OF ACTION

1) Begin the process of acquiring production facilities in order to reduce costs.

2) Invest in e-commerce and the company's website as well as the new outdoor pop up

stores in new markets such china and Europe.

3) Hire a good public relations manager.

4) Expand into the baby boomers target market with the campaign called: "A chance to live

longer".

5) Expand products in the men’s category.

6) Partner up with Fitbit in order to test devices and potentially move into the high-tech

industry devices within the high-tech clothes.

7) Engage in marathons, large yoga events in new target locations in order to engage and

build more brand awareness, focusing in China, and then the rest of Asia.

8) Create an employee retention plan and a new remuneration packages for the new

management.

9) Continue with high investment in research and development, partnership with tech

companies.

10) Enhance the testing and feedback procedures for new products.

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IMPLEMENTATION PLAN

ACTION & IMPLEMENTATION PLAN

Immediate Actions  Hire an experienced public relations
manager.
 Engage in a marathon, large yoga
events in new target locations in order
to engage and build more brand
awareness, focusing in China, and
then the rest of Asia.
 Create a strategy to enter the market of
baby boomers.
 Invest in e-commerce and the
company's website as well as the new
outdoor pop up stores in new markets
such china and Europe.

Short Term Actions  Hire a team of developers

(3 months – 1 year)
Long Term Actions  Diversification of products.
(1 year – 3 years)  International expansion of the Brand.

CONCLUSION

lululemon is a great example of a business that believes in high quality products with the highest

level of service and engagement. Since initiation, they had a couple of problems regarding

product dissatisfaction and lack of product sizes for their specific target market which reflected

in the decrease in stock prices and sales. However, since then, Lululemon managed to overcome

these issues. The company has been able to establish itself with a high customer loyalty basis,

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proving its affective strategy implementation. Lululemon has huge opportunities ahead regarding

new product segmentations, target markets and target locations. If the company manage to

capitalise on these opportunities, it has the potential to become one of the most successful retail

companies in the world.

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REFERENCES

Thompson, A. A. (2018). Case 09- Lululemon athletica, Inc. in 2016: Can the Company Get

Back on Track? In A. A. Thompson, M. A. Peteraf, J. E. Gamble, & A. J. Strickland III,

Crafting and Executing Strategy- The Quest for Competitive Advantage. New York: Mc

Graw Hill Education.

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