Kayla Fox Rivers

Organizational Theory for Managers

MBA F617

University of Alaska, Fairbanks

Professor Nicole Cundiff

March 1, 2016

Contents

Company Overview

Organization Structure and Culture

Mission

Vision

Values

Challenges

Leadership

Threat of New Entrants

Lack of Patents

Product Quality

Critical Evaluation

Conclusions

References

Appendix

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Company Overview

Lululemon was founded in 1998 by Dennis “Chip” Wilson and the first storefront was opened in Kitsilano

beach, Vancouver BC in 2000. Noting the increasing number of women participating in sports, and

specifically yoga, Mr. Wilson developed lululemon athletica to address a void in the women's athletic

apparel market.

The firm is a yoga-inspired athletic apparel company who designs and retails technical athletic apparel.

Products are designed to offer superior performance, fit and comfort while incorporating both function

and style. The company also employs a distinctive community-based strategy that enhances their brand

and reinforces customer loyalty. Lululemon is a purpose driven firm motivated by its manifesto to,

‘Elevate the world from mediocrity to greatness.”

In 2005, Wilson sold 48 percent of the company to private equity firms Advent International and

Highland Capital Partners. By 2007 Lululemon (LULU) went public on the NASDAQ and sustained a

period of high growth. In 2013 shares tumbled as Lululemon had to recall many yoga pants from stores

due to a sheerness problem. To make matters worse, when interviewed about the incident founder Chip

Wilson was quoted saying that woman's bodies may be to blame for problems with the luxury workout

attire.

However, even through the turmoil Lululemon has bounced back because customers still love their

products and what they stand for. In its 2014 fiscal year, annual net sales reached $1.8 billion, up 13

percent year over year (Business of Fashion).

In October 2015 Lululemon had 354 stores worldwide. They currently work with factories in Canada, the

United States, Peru, China, Taiwan, South Korea, Israel, India, Bangladesh, Indonesia, Malaysia, Cambodia,

Sri Lanka, Vietnam and Switzerland. All of their garments are designed in Vancouver while their fabrics

are manufactured overseas.

Lululemon has been largely successful; capturing a growing market with perfect timing and creating a

desirable culture that drew customers to their products. Even through product and leadership difficulties

their culture has prevailed and customers still covet the Lululemon brand name. The company is now

faced with increasing competition and powerful emerging competitors. Their strategy going into the next

decade will determine if the Lulu name is here to stay, or of it will fade away.

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Organization Structure and Culture

Lululemon is a public company that competes in the high-end athletic apparel market. They design,

develop, manufacture and sell yoga-inspired technical athletic wear to primarily women. They are

working on introducing two more clothing lines geared towards men, and another called Ivivva for young

girls ages 6-14.

Mission: Creating components for people to live longer, healthier, fun lives. We promote a set of core

values in our business, which include

Vision: Elevating the world from mediocrity to greatness. Motivating others to get out and sweat

everyday.

Values: Sustainability, breathing deeply, drinking water and getting outside. Developing the highest

quality products, operating with integrity, leading a healthy balanced life and instilling in employees a

sense of self responsibility and the value of goal setting. These core values allow them to attract

passionate and motivated employees who are driven to succeed and share the vision of "elevating the

world from mediocrity to greatness."

Laurent Potdevin is the current Chief Executive Officer, he and five others make up the executive

management team. Working alongside them is the board of eleven directors. Lululemon employs 8,630

people worldwide in full and part-time positions. The nature of Lulu’s organization can be described as

mission driven, centered on training and personal growth. When hired into the company an employee

will enter a positive, goal oriented, inclusive environment. Lululemon has 22 departments spanning

administration to strategic sales and strategy (Appendix IV). Each department is responsible for

individual daily tasks, while still maintaining contact and receiving specific orders from upper

management.

Lululemon stores are staffed with inspirational “educators” who encourage others to life out their health

and fitness goals. Aligned with company culture, educators are passionate about fitness and educated in

order to help answer any customer questions. Educators are taught to listen to customers concerns,

record their complaints and forward them to headquarters. This allows for swift changes and gives the

firm the ability to quickly turn a negative customer experience into a positive one. Lululemon is able to

retain customers much more effectively than their competition since they are so heavily invested in

customer responsiveness.

Employees are often energetic, athletic, with an interest in healthy eating. Due to the multitude of shared

interests many employees are quick friends and can be found attending free yoga, cross fit or spin classes

together. These strong, shared cultural norms attract particular personality types, which viewed by some

gives Lululemon’s corporate culture a cult-like appearance. However, teamwork is an integral part of

their culture and can be seen working in all aspects of the company.

Challenges

Leadership

In 2013, after a string of difficulties, founder Chip Wilson decided to step down as CEO and was replaced

by Christine Day. Wilson came under fire for alluding that women’s bodies were the cause of yoga pant

sheerness. "Frankly, some women's bodies just don't actually work [for the yoga pants]," Chip Wilson

said in an interview on Bloomberg TV. This comment caused major uproar and lost the company many

loyal customers. His comment was the last straw after a barrage of complaints about product quality,

such as piling and holes after only a few months of wear.

The most damage was done when one of its popular yoga pants styles had to be pulled from store shelves

for being too sheer and revealing when wearers bent over, costing the company $67 million in sales

(Motley Fool). The rest of the company’s senior leadership has done little to reassure Lululemon

customers and shareholders. In 2013, CEO Christine Day abruptly stepped down after leading the

company through five years of growth, international expansion and the yoga pant recall. Her replacement

Laurent Potdevin, the former CEO of Toms Shoes, as of yet has failed to show shareholders an adequate

plan for stabilizing the business. Most recently, CFO John Currie stated his plan to retire by the end of this

fiscal year. The lack of strong enduring executive leadership after Chip Wilson’s resignation has dented

the Canadian company’s reputation, but they are working on developing stable leadership, and it could

very possibly be found in their current CEO Laurent Potdevin.

Threat of New Entrants

The sportswear industry has been questioning how many competitors can survive in the relatively new,

increasingly competitive yoga apparel environment. However, recent statistics point to market growth.

Within the US, an estimated $27 billion is spent annually on yoga products. Yoga spending overall

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increased 87% between 2008 and 2012. The industry is expected to report annual revenue growth of

4.8% through 2017 (Motley Fool).

This new rapidly expanding market in the sportswear industry has caught the attention of more

established sportswear companies. Recent weakness in Lululemon’s brand has opened up the market for

others to offer similar products at less premium prices and snag a piece of the market share. Established

brands like Athleta owned by Gap, UnderArmour, Nike, and Adidas already have a global reach, brand

recognition and economies of scale. These emerging competitors can offer similar products at lower

prices (See Appendix I). Customers who have been disenchanted with Lululemon in the past may find a

substitute and switch to lower priced brands.

Lack of Patents

Although Lulu has a first mover advantage in the premium-quality athletic-wear industry they do not

have the power for the long-term. They own no patents or exclusive intellectual property rights in the

technology, fabrics or processes underlying their products, their current and future competitors may be

able to manufacture and sell products with performance characteristics, fabrication techniques and

styling similar to our products. A lack of patented fabrics means that anyone can reproduce virtually

identical pants and sell them at a lower price point. In 2012 it happened. Calvin Klein introduced a pair of

pants that Lululemon accused was an infringing of design patents for its “Astro Pant”. The companies

settled the patent suit but kept the details confidential. This will continue to be a risk that Lululemon

must mitigate if it wishes to survive in an increasingly competitive environment (See Appendix I).

Quality Control

Ten years ago Lulu sourced from a single supplier making quality control simple. However, this left them

open to the risk that if something happened to that single factory they would be out of fabric and their

supply chain would come to an abrupt halt. To alleviate this risk they began to use multiple suppliers

across multiple countries. Now their fabrics are sourced from ~65 suppliers, and products are

manufactured in factories in Canada, the United States, Peru, China, Taiwan, South Korea, Israel, India,

Bangladesh, Indonesia, Malaysia, Cambodia, Sri Lanka, Vietnam and Switzerland. Coordinating all of these

sources and inspecting that they are produced with the upmost quality has been a challenge, resulting in

several expensive product recalls. Another possible risk is that they do not have any long-term term

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contracts with any of their suppliers or manufacturing sources for the production and supply of their

fabrics and garments (Investor, Lululemon).

Critical Evaluation

Lululemon is pursuing a narrow focused differentiation strategy. They offer a unique and distinctive

product to a niche market, targeting high-end customers that value functionality and fashion. They

demonstrate low price sensitivity by pricing their goods higher than their competitors, currently selling

$98 yoga pants and $118 hoodies. Lululemon has been able use its functional strategy to create and

maintain superior value for their customers.

The functional strategy that has been implemented most successfully at Lululemon to create value and

superior profitability for their firm has been their position in the high-end market and their product

exclusivity. Lululemon sells to a diverse group of people from high school students to active moms.

Buying the luxury brand gives the wearer a sense of exclusivity that comes from wearing something that

not all consumers can afford.

The firm needs to find a way to sustain growth in an environment that is becoming increasingly

competitive. Staying within their niche, maintaining a community marketing strategy, and continuing to

sell only within their own stores online will preserve their brand image as a high status company who

sells top of the line products.

Recommendations

Recommendation 1:

As a response to increased competition, Lululemon has strayed away from its core competencies.

Lululemon should focus on its core competencies such as its company culture, its product quality and its

image of prestige.

Culture – Maintaining a strong sense of culture will always be central to Lululemon’s success. Founded on

a grassroots idea of promoting health and fitness and developing into a company that offers free yoga

classes in their stores. When you buy a Lululemon product you are buying into an entire image. Owning a

piece of their clothing will render you a yogi fitness guru with an unbelievably good-looking backside.

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Product Quality - From the start Lululemon has always been focused on product quality. Technical fabrics

with superior style and design is what their design studio based in Vancouver, Canada is dedicated to

creating. Critical to maintaining a consistent high quality product is maintaining control over your supply

chain.

Status - Due to their high price and high quality Lululemon products have long been seen as a status

symbol. If you were wealthy enough to afford the $98 yoga pants you wore them proudly and you

expected them to perform well and last a reasonably long time. A very important aspect of their

exclusivity is that they do not sell their products to big stores. Instead of selling their clothing to high-end

retailers they have decided to sell only out of their own stores and select yoga studios.

One way they maintain status is by using methods of product demand. Rotating in-store products every 3

to 12 months means customers will see new products each time they visit the store. Limited quantities

and sizes of items is another way they preserve brand prestige. Seeing a single item that you like on a

shelf creates a feeling of urgency to buy the product before someone else does.

Recommendation 2:

Menswear is something that Lululemon is only starting to introduce. The ability to effectively target men

would mean that Lululemon would be able to double their market share. To do this they will need to

employ a similar strategy that they use to market to women. Using brand ambassadors that act as brand

evangelists they are able to build a loyal following of customers who connect the products with the brand

ambassadors who are often yoga instructors, dedicated athletes, and overall inspirational people.

Lululemon needs to entice inspirational men to become their brand ambassadors and share their

menswear options. One question is weather the brand name “Lululemon” will ever be an appealing brand

name for men. Surveying men on their opinion of the brand name would be a good start, but keeping in

mind that rebranding for the menswear line may be necessary. Prioritizing growth of its men's lines will

differentiate Lululemon from Athleta and other boutique yoga wear providers, which does not carry

men's styles. Eventually, Lululemon can begin marketing itself as a place where couples can come to shop

together instead of having to travel to different locations to shop for sportswear.

Lululemon should consider some changes to the organizational structure, including a new role of Creative

Director, to unify the design teams for men’s and women’s apparel. Introducing this new role would

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facilitate communication between upper management and the design team and serve as a liaison

between the teams, promoting stability in design. It will be a move to unify design under one creative

vision ensuring brand continuity. Creating this new position will be a change, but as long as management

focuses on continued communication with everyone involved, and assures the group that a renewed

focus on menswear is a viable opportunity for the company, I believe the transition will go over smoothly.

Conclusions

Lululemon has positioned itself in a prime spot in the sportswear industry. It has a great culture, a

desirable product and brand recognition. The next few years will be interesting to see how Lululemon

handles the increase in competitors. Lululemon would be wise to begin promoting its menswear line and

hiring a Creative Director to ensure brand continuity between the women and menswear product lines. If

the company keeps its strategy aligned with its primary goals and stays strong to their core competencies

of culture, high product quality and status I can see them maintaining a top spot in the industry for years

to come.

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References

Frequently Asked Questions. (n.d.). Retrieved from http://www.lululemon.com/about/faq

LULULEMON ATHLETICA INC. (LULU) IPO. (n.d.). Retrieved from http://www.nasdaq.com/markets/ipos/company/lululemon-athletica-inc-742560-54363#ixzz41yvjSmuJ

Lululemon, Calvin Klein Agree to Settle Yoga-Pants Suit. (n.d.). Retrieved from http://www.wsj.com/articles/SB10001424127887324851704578131501425509018

Lutz, A. (2013). 15 Brands Vying To Be The Next Lululemon. Retrieved from http://www.businessinsider.com/hot-brands-vying-to-be-the-next-lululemon-2013-3?op=1

Management. (n.d.). Retrieved from http://investor.lululemon.com/management.cfmhttp://www.fool.com/investing/general/2014/07/15/what-really-happened-to-lululemon.aspx

Welcome to Market Realist. (n.d.). Retrieved from http://marketrealist.com/2014/12/lululemon-supplier-manufacturer-distribution-overview/

Yoga, Inc. - Yoga Journal. (2007). Retrieved from http://www.yogajournal.com/article/lifestyle/yoga-inc-2/

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Appendix I

Porters Five Forces

Appendix II

SWOT

Threat of New Entrants (High)

Threat of Subsitutes (Moderate)

Barganing Power of Buyers (Moderate)

Barganing Power of Suppliers (Low)

Intensity of Competitive Rivalry

(Increasing)

StrengthsStrong company cultureDifferentiationNiche-focusedFirst MoverProduct QualityAddictive Experiences-A community-centered marketing approach that builds brand awareness, through relationships and philanthropic activities

WeaknessesBad PublicityExpenseRecalls

OpportunitiesInternational expansionE-commerce developmentNew market segment — Menswear, Plus sized and youthGrowth in U.S. marketBuild U.S. brand recognition

ThreatsPoor Economic ConditionsEmerging RivalsThe loss of brand exclusivity (Once everyone has it, its not as cool)

SWOT

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Appendix IIIKEYACTIVITIES

Design Develop Manufacture (outsourced) Sell Global Expansion R&D Innovative technology New Product Introduction

KEYRESOURCES

Intellectual Property: Patents & Copyrights(weak)

Employees:o Laurent Potdevin-CEOo Design teamo Sales team “Educators”

Brand Awareness/ Culture Awareness

Headquarters Infrastructure

KEYPARTNERS

Material suppliers for products

Factories that manufacture products

Yoga studios Material suppliers for

the powertrain systems they manufacture.

Commercial Banking Partners

COST CENTRES Cost Of Revenue $ 883.03 Million(49.13% of Total Revenue) Selling/General/Admin $ 538.15 (29.94%)

REVENUE STREAMS

Product Sales $ 1,797.21 Million (2015 Total Revenue)

CLIENTS

Yogis Runners High-income, fashion

conscious, comfort focused consumers.

Global Markets: North America Europe Asia Australia

RELATIONSHIPS

Dedicated personal serviceo In-store product

“Educators”

Personal Assistance and customer feedback

Investor Relations

CHANNELS

Online High profile stores Own their entire sales network Sell directly to customers No retailer involved Distribution centers in

Vancouver (Canada), Sumner (Washington), Melbourne (Australia), Columbus (Ohio).

OFFER

Manufacture high-performance technical sportswear:

o Fitness pantso Shortso Tops o Jackets

Quality technical fabrics

Luon and Silverscent Fabric Technology

Product Improvement

Appendix IV

Organizational Chart