Strategic Analysis: Under Armour Sportswear - Essay Example

? Strategic Analysis: Under Armour Sportswear BY YOU YOUR SCHOOL INFO HERE HERE TABLE OF CONTENTS EXECUTIVE SUMMARY 0 Company Background 1 Organizational Mission and Vision 1.2 Company Value Statement 2.0 Environmental Scan 2.1 Threat of Substitutes 2.2 Threat of Supplier Power 2.3 Threat of Buyer Power 2.4 Threat of New Entrants 2.5 Competitive Rivalry Risks 3.0 Valuating the Firm 4.0 Strategic Direction 4.1 Value Discipline 4.2 Generic Strategy 4.3 Grand Strategy 4.4 Recommendation for Direction 5.0 Taking Manufacturing Overseas 6.0 Implementation Plan – Objectives 6.1 Functional Tactics 6.2 Action Items 6.3 Milestones and Deadlines 6.4 Budget and Forecasted Financials 7.0 Risk Management REFERENCES EXECUTIVE SUMMARY Under Armour has experienced significant growth in revenues since 2008 that have given the business much better opportunities for expansion and capital asset procurement. These revenue improvements have come through dedicated focus on innovation achieved through focused research and development. With more capital availability and opportunities for offshoring in foreign countries as it relates to manufacturing, the business can pursue a differentiation strategy by providing lower cost merchandise. The business is currently priced higher than Nike, one of its main competitors, which has given the organization less opportunities for capturing new markets; those with lower resources but considerable interest in sportswear products and sportswear innovations. It is recommended in this report that Under Armour seek internationalization of its manufacturing to remove costs from the existing operational model so that consumers can experience a more competitive pricing mechanism. The report identifies risks to the business including strategic alliance development and potential cheapening of the brand by repositioning away from its current premium pricing strategies. Strategic Analysis: Under Armour Sportswear 1.0 Company Background Under Armour was founded by Kevin Plank in 1995, a former University of Maryland football player with practical, experiential understanding of what it means to perform using soaking wet shirts. Using minimal resources and establishing operations from his grandmother’s basement, Plank set out to create an innovative T-shirt prototype maintaining moisture-wicking fabrics that would keep sports players dry and comfortable. After his graduation from the University of Maryland, Plank had soon generated a series of orders from interested consumers that generated his first $17,000 in sales. Now maintaining $40,000 in resources from credit card advances and personal savings, Plank established his first manufacturing facility in South Baltimore, Maryland under the operating name of Under Armour Athletic Apparel. The company has evolved considerably since 1996. 1.1 Organizational Mission and Vision The company’s mission is clear: “To make all athletes better through passion, science and the relentless pursuit of innovation” (Under Armour, 2013, p.1). This illustrates the tangible value to potential and existing consumers and the benefits of Under Armour’s research and development focus to improve sports activities. The company mission is aligned with the specific operational activities occurring within the firm. The organizational vision is to “empower athletes everywhere” (Under Armour, 2013, p.1). This is accomplished through a dedicated focus on research and development and scientific expertise present within the organizational model. The company vision describes to consumers a relationship-oriented, consumer-centric organization fanatical in improving sportswear quality and innovation. 1.2 Company Value Statement Under Armour expresses value by illustrating what is referred to as a Universal Guarantee of Performance, building a better and more innovative product line than what is currently available to consumers in this market (Under Armour, 2013). The company guarantees its products have been field tested to ensure that product offerings are directly aligned with organizational mission and vision. Value is also expressed by illustrating a cohesive and unified organizational culture focused on achieving greatness, improving corporate social responsibility, and embracing change within the existing organizational culture (Under Armour, 2013). Value is generated by combining innovative prowess with internal culture to express total brand worth and significance to its important revenue-building target markets. 2.0 Environmental Scan There are externally-generated threats to the business with the ability to influence strategic direction at Under Armour that must be considered to develop a viable and profitable business model domestically and internationally. These include threats of substitutes, competitive rivalry in the market, supplier and buyer power, and risks of new market entrants. Further, analysis of competitive forces in the market must be examined and monitored by the company to ensure that the value chain and critical promotional elements are aligned with the goal of outperforming competitive behaviors. 2.1 Threat of Substitutes This is a very saturated market and there are a number of off brand suppliers that make items that are closely in resemblance to the larger company that may sway the customer to purchase at a much lower price and receive the inferior product because of the close resemblance. It may have a lower quality, but not all consumers shop for quality. This applies to apparel and footwear. Coupled with substitute products produced by major competitors such as Nike, Reebok, and Adidas, Under Armour must be ever-aware of the product lines available from powerful and less-powerful brands that can erode market share. 2.2 Threat of Supplier Power This force within the model is solely dictated by the suppliers and the need that may be present within the market. Sports apparel is primarily manufactured in the Middle East where labor cost is at a minimum. This is a driving force within Under Amour and other sports apparel companies. There are very low switching costs for fabrics and finished apparel producers in this industry, which to Under Armour is an oligopolistic market structure, one with few firms that dominate the market (Investopedia, 2010). Therefore, there are powerful competitors with significant capital assets to guarantee suppliers business in the event that they defect to such competition as Nike and Adidas. 2.3 Threat of Buyer Power Since the market is saturated there is no defined competitive edge that is present for any particular company. This leaves the choice of which brand should be purchased solely up to the customer. In this instance whether the customer a University, professional entity, or individual; the power is shifted and the negotiation power is no longer with the company. There are also considerable risks of brand defection in an industry where pricing is made transparent through price differentiation strategies by some competition thereby giving consumers more options that reduce company negotiating power along the value chain. As identified by Michael Porter (2012), transparency in the market can drive more risk of unpredictable consumer brand loyalty. 2.4 Threat of New Entrants When companies such as Nike, Adidas, and Reebok who have been in the industry for number of decades and then a company such as Under Armour who is fairly new enters into the industry and in such a short time, it leads to the notion that the market is moderately difficult to enter. Concurrently, some barriers to new entry are established by generally high start-up costs along the value chain. 2.5 Competitive Rivalry Risks The competitors in the industry are Nike, Adidas, Reebok and Starter; they make up a large part of the market sales. Competition between these company’s’ span across the entire sports spectrum, competing for dominance in footwear, apparel and sporting equipment. Though the competition amongst these companies’ may be fierce, the market has become so saturated and it has become difficult to differentiate between brands. This has only intensified the competitiveness of the brands within the market as competitors seek innovative marketing strategies to position themselves effectively among competition with varying (yet replicable) business models. 3.0 Valuating the Firm The internal analysis of Under Armour has a strong stance within the sports apparel industry capitalizing on five factors. Under Armour is ahead of the curve by establishing a brand name, maintaining an industry lead in the production of special fabrics, choosing key sponsorship opportunities, capitalizing on economies of scale, and having such stars like Tom Brady, Ray Lewis , and Cam Newton signed to Endorsement deals. According to marketing theory, celebrity endorsements will lead to brand loyalty with key markets when they are deemed relevant, credible and attractive to target segments (Pornpitakpan, 2003). Under Armour excels in utilizing sponsorships and celebrity endorsements to improve its brand position. Brand-building is one of the most fundamental, existing differentiation strategies that provide much more brand attachments with key revenue-building market segments. It should be recognized that the marketing and promotional prowess of Under Armour is what continues to valuate the firm as a long-term opportunity for private and public investment; believing in using this operational function as the most primary method of gaining future market share and securing brand loyalty with key target markets. Under Armour has reported an 11.49% return on assets in the latter months of 2012 after falling 12.19% return in 2011 (Ycharts, 2012). Eighty percent of Under Armours’ revenue comes from apparel sales, and then comes footwear, accessories, and licensing. There is no signs of this company declining in sales, complete opposite of that position the company is continuing to produce new and innovative strategies that will continue to keep Under Armour one step ahead of the competition. Figure 1: Stock Performance Chart for Under Armour Source: Under Armour. (2012). 2011 Under Armour Annual Report. http://files.shareholder.com/downloads/UARM/2316209575x0x553892/7BB998C7- 0789-453B-8245-F11EC4419FE7/2011_FINAL_Annual_Report.pdf As illustrated by Figure 1, stock valuation has continued to achieve continuous performance since 2008, thus enhancing investment opportunities for this business model and strategic direction. 4.0 Strategic Direction This section describes the value discipline, generic and grand strategies driving activities under the existing business model. 4.1 Value Discipline Under Armour is within a market that has been revolutionized by Nike and the Adidas Group whom is comprised of the company Reebok who was a major sports apparel company from the 1970’s until it was purchased by Adidas Group in 2005 (NBC News, 2005). Under Armour has gained its ground by being ahead of the filed by investing time and money into making sure that the company can put out a superior product each and every time it introduces a new product. By incorporating product leadership companies that pursue this discipline strive to produce a continuous stream of state-of-the-art products and service (Pearce, 2011). Under Armour has put great work into developing and maintaining the moisture wicking fabric that has set them apart with the dri-fit technology. It is this type of innovation that must be continued if the company will maintain the edge with their products. As many companies have gained ground on the tight fitting dri-fit clothing. When companies such as Nike and Reebok designed similar technology, Under Armour moved on to the next level of sporting wear and created the heat gear and cold gear which were designed to keep the wearer cool in hot climates and hot in cold climates. This type of innovation is what will keep the company ahead of the competition. 4.2 Generic Strategy A generic strategy is a core idea about how a firm can best compete in a marketplace (Pearce, 2011). The most appropriate generic strategy for Under Armour to incorporate is the differentiation strategy. It is important that Under Armour is able to stay ahead of the competition by continuing to re-invent the wheel. As the competition continues to chase the behind the puck and Under Armour moves to where the puck will land next the competition will always be playing catch up. As companies continue to produce the Dri-Fit technology that was the original design by Under Armour, the company has started producing cotton blended material that can have the same effect as the original materials have had (UnderArmour, 2013). It is this type of differentiating that will continue to place distance between Under Armour and the competition. 4.3 Grand Strategy A grand strategy is defined as a long term plan that provides basic direction for major actions directed toward achieving long term business objectives (Pearce, 2011). Market development will be what is necessary to take Under Armour to the next level of branding. By entering into the youth market by sponsoring athletic competitions and sporting teams; this will allow the brand to be introduced to a new generation as companies like Nike and Reebok has in past decades. If Under Armour can become sponsors of events like the Little League World Series this will give way to being introduce into the international market, as China and Japan are represented in these games and will surely be observant of the sponsors and the equipment and apparel quality. It would be in a favorable light of the company acquired European soccer endorsements as these athletes are some of the most recognized athletes in the world. In the international market it is important to acquire contracts with athletes that are famous in these markets that are targeted. Domestic athletes are not as famous on an international scene in most cases. 4.4 Recommendation for Direction To date Under Armour has not participated in the generic strategy, low-cost leadership which would bring in a new customer base. Under Armour is currently priced higher than Nike for the Dri-fit technology (Ashworth, 2012). By introducing a lower price item, Under Armour will be able to reach the inner city youths that may be less fortunate and not able to wear the brand. This would be taking a chapter out of Nike’s book, several years ago the company began to sponsor inner city teams and made shoes that were more affordable or the single parent homes (ultiworld, 2013). Under Armour is a growing company that is becoming a leader in the industry of sporting goods and the way to improve is to reach the lower income Americans and the middle class Americans in these tough economic times. 5.0 Taking Manufacturing Overseas In order to effectively follow the proposed recommendation for generic strategy, low-cost leadership, it will be necessary to find new efficiencies, synergies, and cost recognition within the procurement model and adjust manufacturing methodologies. Costs must be reduced throughout the value chain, namely the operational model, in order to effectively build a differentiation strategy based on new discounted pricing structures for certain merchandise offerings. To seek the recommended new markets, some with less resources that will likely be notoriously price-sensitive, the business will need to maintain its profit expectations while also being able to offset potential losses by introducing a set of new pricing mechanisms. The most effective strategy is for the business to pursue offshoring opportunities, aligned with benchmarked best practices by Nike that has found considerable cost savings by establishment of a manufacturing facility in China. The Chinese currency exchange rates, lower labor payments, and taxation incentives for foreign direct investment provide ample opportunities for cost savings in manufacturing and distribution. Under Armour should establish a subsidiary organization offshore to provide lower price opportunities for a variety of existing and new target markets identified in the recommendations section. An ideal environment for establishing this subsidiary is Mexico, which is geographically close to the current North American target markets and also is beneficial to the business profit expectations due to the currency exchange rate of Mexican economics. Currently, one U.S. dollar is valuated at 12.75 Mexican pesos (M Experience, 2013). Mexican labor, furthermore, is valuated at only one-quarter of U.S. labor costs in a manufacturing environment (Farrell, 2007). Figure 2: Breakeven Analysis for Adopting Offshoring Strategy This information is projected numbers of an approximated cost of production. The diagram above represents a fixed cost of production which are low based on expenditures associated with Mexican currency valuation and investment costs in Mexican Pesos for new manufacturing facility development in this new country of offshoring production. One way to make a lower priced item without compromising the quality that has built the brand would be to move manufacturing to western countries where not only do labor laws not exist but the workers wage is lower. Keeping the manufacturing in Maryland may be good for the US economy, but it would be more beneficial to move manufacturing to China. In US currency the Chinese workers make approximately $.44 per hour (War on Want, 2012). This drastic reduction in employee wages will give the necessary room needed to enter the price differentiation strategy, much the same as Mexico. Thus, the business maintains two specific offshoring opportunities in order to find competitive advantages through new pricing mechanisms. In Western market environments where price-sensitive consumers can impose buying power and threats of brand defection, development of offshoring manufacturing subsidiaries can ensure that product can be priced competitively with Nike. Nike currently utilizes a premium pricing strategy that is built on many years of brand loyalty created by intensive marketing and promotional prowess. Nike is a first mover in the sportswear marketing and, according to marketing theorists, this gives them advantages as pioneers are often assessed by consumers against late movers with often unfavorable evaluations (Chaudhuri & Holbrook, 2001). 6.0 Implementation Plan – Objectives Improve target market increases to include youth markets and middle class Americans by end of 2013. Improve revenues from increased target market availability by 20 percent at year’s end 2013. Redevelop procurement to include strategic alliances along the supply network to facilitate offshoring benefits in China and/or Mexico. 6.1 Functional Tactics Under Armour has built a brand by implementing strategies of differentiation. Since its inception the company has focused its attention on quality and design. Entering into a market dominated by companies that have existed for over thirty years, it was necessary to develop something that was not only different than the competition but also had a quality and an image that was second to none. Moving forward it is important that Under Armour refocuses the mission from the quality differentiation strategy to a price differentiation strategy. As many smaller companies attempt to reproduce the same types of apparel with similar materials at a lower price; Under Armour is losing potential sales. By appealing to a lower income demographic this has the potential of increasing not only sales but the exposure across the world. 6.2 Action Items Under Armour will need to assign a group within the next 3 weeks to make the international move a reality. This group needs to be made up of people within the company that have dealings with the international market. This group will be headed by Charlie Maurath, President of International Relations. Next will be Jim Hardy, Chief Supply Officer followed by Mike Fafaul Senior Vice President of Global Logistics. The group will be completed by having the additions of Amy Larkin, Vice President of Culture and Diane Pelkey the Vice president of Global Brand Communications. This group will be responsible for putting together a complete plan of the location in which the company will be able to conduct business within a 90 day period. The group will then make sure that the company will be able to comply with the regulations that may govern Under Armour doing business in international soil. This task will have a 30 day time frame. 6.3 Milestones and Deadlines Specific dates for employment process are concurrent with the January 2014 target for establishment of an appropriate organizational structure and determinations of what will drive human resource and management functions along this model. Market research will need to be conducted concurrently with lower price launch deadline on consumer characteristics and also the collectivist versus individualistic characteristic of foreign laborers that will be contributing to the offshoring manufacturing facilities in China and/or Mexico. To ensure that the company stays aligned with its values of cohesive and unified organizational culture that has given the business much Western following, sufficient and relevant human resources, reward systems, and management philosophy will need to be determined. Since value associated with CSR and also internal cultural development is significant brand-building attributes, they cannot be negated in the new manufacturing facility that will be operating in Mexico and/or China. 6.4 Budget and Forecasted Financials Figure 3: Expenditure Budget Monthly Advertising $20,000 monthly Capital Loan Repayments $40,000 monthly Accounting and Legal $5,000 monthly Utilities $10,000 monthly Labor Payments - China/Mexico $70,000 monthly Short-Term Loan Repayment $10,000 monthly Raw Product Purchases $80,000 monthly Capital Asset Expenditures $20,000 monthly Travel / Executive Expenses $10,000 monthly ANNUAL TOTAL $3,180,000 As is illustrated by Figure 3, and according to expenditures outlined in Under Armour’s 2011 Annual Report, the most significant reduction of annual payments associated with facilities management, executive expenses, and materials procurement (et al.), the most significant savings are associated with labor payments that are radically different in China and Mexico. This will allow Under Armour to pursue its internationalization strategy for price differentiation by offsetting such price reduction mechanisms to gain competitive advantage with existing and new markets. 7.0 Risk Management There are two notable risks to this new operational and pricing strategy. First, the business could, long-term, cheapen the brand if not utilizing proper marketing strategies that are aligned with psychographic characteristics of desired target markets. The business, as a contingency plan to offset these risks, must continue to conduct regular market research on consumer satisfaction perceptions, buying behaviors, and general attitude toward sportswear pricing to ensure that business is aligned properly with fluctuating consumer characteristics. Secondly, the business must work to develop strategic alliances with supply chain partners both in the West and in the new manufacturing offshore environments. The organization will be devoting more travel expenditures under this new operational model to meet with international vendors to improve their supply efficiencies and also exploit their knowledge of Mexican and/or Chinese business-to-business environments. The synergies achieved will be evaluated by establishing a 360 degree feedback mechanism in conjunction with executive level training in business psychology and cultural awareness to facilitate more effective business relationships and also reduce risk of cross-cultural conflict. References (2010). Retrieved February 1, 2013 from Investopedia: http://www.investopedia.com/terms/o/oligopoly.asp#axzz2IljCcaYu (2012). Under Armour. Retrieved from YCharts February 2, 2013 from http://ycharts.com/companies/UA/return_on_assets Ashworth, W. (2012). Battle of the Athletic Gear Makers Nike vs Under Armour http://www.dailyfinance.com/2012/01/23/battle-of-the-athletic-gear-makers-nike-vs- under-armour-vs-lu/ Chaudhuri, A. & Holbrook, M. (2001). The Chain of Effects from Brand Trust and Brand Affect to Brand Performance: The Role of Brand Loyalty, Journal of Marketing, 65(2), pp. 81-92. Farrell, Diana. (2007). Developing Mexico’s Offshoring Opportunity. Retrieved February 1, 2013 from http://www.mckinseyquarterly.com/Developing_Mexicos_offshoring_opportunity_1940 M Experience. (2013). Mexico Currency Exchange. Retrieved February 2, 2013 from http://www.mexperience.com/guide/essentials/mexico-currency-exchange.php NBC News. (2005, August 3). Sportswear maker Adidas to buy Reebok. Retrieved from MSNBC February 1, 2013 http://www.msnbc.msn.com/id/8805430/ns/business- world_business/t/sportswear-maker-adidas-buy-reebok/ Pearce, John A. (2011). Strategic Management, Formulation, Implementation and Control. McGraw-Hill Company. Pornpitakpan, Chanthika. (2003). Validation of the Celebrity Endorsers’ Credibility Scale: Evidence from Asians, Journal of Marketing Management, 19(3), pp.179-195. Porter, Michael. (2011). Porter’s Five Forces: A Model for Industry Analysis. Retrieved February 2, 2013 from http://www.quickmba.com/strategy/porter.shtml Under Armour. (2013). Mission and Values. Retrieved February 2, 2013 from http://www.underarmour.jobs/our-mission.asp Under Armour. (2013). Our History. Retrieved February 1, 2013 from www.underarmour.com/our-history War on Want. (2012). Overseas Work, Sweatshops and Plantations. Retrieved February 1, 2013 from http://www.waronwant.org/overseas-work/sweatshops-and-plantations/china- sweatshops Read More