The Key Success Factors of Volcom Inc - Case Study Example

The Key Success Factors of Volcom Inc Introduction This paper is a critical analysis of Volcom Inc. Volcom is a clothing manufacturing company in Los Angeles that produces fashionable cloths for the middle-class. The Volcom brand has created a strong control of a considerable market share in the past five years. It continues to grow, based on a strong strategy. The analysis of the case draws on the case study presented in the course text. The aim of this paper is to examine the key success factors that have brought Volcom to its current position. As a clothing and fashion company, the researcher will draw on important elements of the planning processing and systems of Volcom that enabled it to capture a significant market share and maintain brand loyalty. In this analysis, the following core components of strategic management will be explored in full. 1. The core vision and mission of Volcom. 2. The systems of raising capital and the asset position of the company 3. The organizational structure and systems of the company 4. An evaluation of competitors 5. An environmental scan and implications to the internal structures (SOWT Analysis) 6. An evaluation of the strategies used to attain the vision and mission of the company. The paper will analyze the mission and vision of the company. It will go on to evaluate the financial statements of the company over the past couple of years and give an overview of the asset base and working capital of the company. It will go further to examine the organizational structures and internal strengths of Volcom. Afterwards, the competitive stratagy of Volcom will be analyzed. They will be evaluated in relation to the survival of the company. The paper will then evaluate the external environmental factors and how it interacts with Volcom. This will involve a SOWT analysis of the company and the current strategies that are in place. The strategies used by the company will be re-examined critically and re-evaluated. The paper will end with a set of recommendations. Mission Statement Volcom's initial vision of providing fashionable cloths was modified because the focus had to change to the expansion and control of the markets. This led to the focus on marketing in the second year of Volcom. Volcom focused on the brand and the media. This brought together strong skills in design, entertainment and marketing. The vision of Volcom in the first five years was therefore steeped in the desire to sign on winning athletes and other figures who endorsed the brand. These endorsements showed the innovative side of the products of Volcom. Also, the focus on the media led to the promotion of the brand and the growth of the company. This vision led to the presentation of Volcom as an exciting and preferred brand that challenged fundamental structures in the society. In the late 1990s, Volcom's vision changed again. After almost a decade in existence, the vision changed into an expansionist vision. This saw the opening of more retail shops and the acquisition of other firms that complemented Volcom's operations. Also, the expansion led to the growth of an international presence. Through this vision, Volcom has outlets and branches in Europe, Japan and other parts of the world. After the evolution of vision of Volcom over the years, the key philosophy of Volcom is summed up as 'youth against establishment'. This statement appropriately presents a strong description that encompasses the various facades and stages that the changes in Volcom's vision went through. First of all, the mission statement suggests innovation. It shows that the company supports some kind of fashionable trends that challenges established standards in a safe and harmless manner. It presents Volcom as a 'cool' brand for beach and ice sports. This idea encapsulates Woolcott's vision to establish a stylish outlet for brands that encompasses entertainment and the most relevant current trends. The mission statement of Volcom can be identified as: 1. To provide a major brand in the American and international boardsport industry 2. To blend fashion, entertainment, innovation and youthfulness to provide preferred beach sport and snow sport brands for consumers. 3. To expand and promote the brand to different sectors of the American and international society. Financial Analysis Volcom is a classical example of a company with an aggressive trading strategy. The company's working capital ranged between $70 million and $90 million. This represents the extent to which the management sought to spend money on the attainment of the three main components of the business' philosophy: brand, marketing and outsourcing. Attaining this objective required that more of the assets of the company were held as short term liquid (current) assets rather than longer-term assets like plant, property and equipment. Typically, Volcom maintained fixed assets worth less than $10 million over the past five years. The strategy of growing the brand through marketing and expanding sales did not favor a conservative approach that upheld the capitalization of resources. Volcom's strategy was to maintain strategic partnerships and outsource its operations. So as an organization, the main focus was on the creation and expansion of strategic outside partnerships. This created a convenient system that led to the promotion of Volcom brands around the world through third party partner organizations. The main vehicle through which relationships with outside companies were maintained was through licensing arrangements. The licensing arrangements led to the creation of outlets that purchased the Volcom license. The licensees were therefore able to sell Volcom products from other nations around the world. Volcom again had to maintain a marketing revenue in these foreign nations t ensure that the brand was promoted duly and more and more people remained interested in buying Volcom brands and products. The shareholders of Volcom are also expansionist in orientation. This is because they maintained retained earnings of over $100 million to promote the growth of Volcom around the globe. This surely provides a high degree of assistance and assurance in the asset base of the company. The clear implication is that there is less reliance on third party loans and other sources of funding like account payables which was kept between 10 and 20 million dollars. In the past three years, revenue has kept rising because of the effective combination of marketing, brand promotion and strategic partnerships. The increases in revenue have been between 25% and 45% and this shows that the various investment techniques for the three point strategy is really working well. On the other hand, there have been increases in pay outs through employee related payments. Also, the increases in rent seem to become a major component of the cost base of Volcom. The amount paid for bad debt has increased steadily between 2005 and 2008 at a rate of between 10% and 20% each year. This shows that there might be some weaknesses in the internal control systems and some other methods of collecting revenue. Income taxes also remained a major source of decreases in income. It represents about 35% of the revenue of Volcom. In 2008, they paid as much as $11.6 million in taxes. Volcom uses a deferred tax method that sets aside the taxes before they are due. This system has ensured that the taxation systems and methods of Volcom have not received serious set backs. In terms of segmental analysis, it appears that the US operation has continued to yield profits that consistently exceed $200 million per annum between 2007 and 2009. This has increased periodically each year. The European operations is also increasing quickly although it is still a fraction of the US operational revenue. The new electric department has also provided good results for 2008. This implies that Volcom relies heavily on the US operations in the core sectors that generates most of Volcom's revenue. Organizational Structure Volcom is ran by a board of directors and a corporate management team. The board of directors is made up of 7 directors. Richard Woolcott is the Chairman of the Board. He is also the President and heads the corporate management team. The board is in charge of risk management and supervision of the activities of the management team. The board includes shareholders like Renee Woolcott who is a major shareholder. The corporate management team on the other hand heads the day-to-day running of the company. There management team is made up of Richard Woolcott who is the president. There are four other managers who head the four key components of the company: Finance, Operations, Sales and Marketing. Finance is organized into units of cost centers, profit centers and revenue centers. The main cost centers are manufacturing, distribution and sales as well as research and development. The main profit centers are music, film and clothing sales units. The licensing department is a major revenue center because they have cost and profits which are matched up against each other. Operations mainly involves the the oversight of retail companies as well as other related manufacturing processes and partners. The operations department uses a risk-based approach to supervise the various production centers and retail outlet. They conduct routine checks and ensure that import and exports conducted appropriately in the right systems and structures. Sales involve the distribution and sales of Volcom products. This involve the control of sales systems and methods. It involves the use of innovative and effective systems and methods to ensure that goods are maid available to customers. They also conduct research and development to ensure that new and more effective methods are employed in the sales of goods. Marketing department concerns itself with the promotion of the Volcom brands. They are involved in four main marketing outlets and systems. They include athlete sponsorship, print advertisement, events and website promotions. These four departments work together to ensure that the Volcom establishment works to further its strategy which focuses on brand, marketing and strategic partnerships. These important departments function together to attain the specific objectives of Volcom. Competitive Analysis Volcom has built its competitive strengths on its inherent abilities. Although it controls under 1% of the market, it is working hard to maintain a strong grip on its market share. However, there is a potential for the growth and expansion of the market share. The strategy seem to be one that is steeped in the consolidation of the market it controls and grow when the opportunity presents itself. The inherent competitor strength of Volcom lies in its position as a clothing manufacturing pioneer in the boardsport industry. This is because Volcom began as a sole manufacturer of boardsport-related products and entertainment. This forms the core of its competitive strategy. However, Volcom needs to rub shoulders with larger traditional sports manufacturers like Nike and Adidas. These brands have boardsports fashion as a part of a larger conglomerate of sports brands which give them an advantage of maintaining a stronger global presence. In remaining competitive, Volcom maintains a focus on its core lifestyle. In other words, it seeks to specialize in the production of boardsport and other unique entertainment products that they can produce with excellence and class. Their distinctiveness and concentration of strengths in what they do best presents them as a formidable competitor in the industry. The capture of the small niche market has allowed Volcom to grow core competencies in the manufacture of boardsport products. The main competencies that the Volcom strategy focuses on improving are brand development, marketing and strategic partnerships. These three strategies build the core strengths of the company and keeps Volcom in operation. Brand Development The research and development department seeks continuous improvement of the brands. The research and development seeks the continuous improvement of boardsport products. They use their expertise, built over the last couple of years to ensure that they get the best products onto the market. Marketing & Promotion In terms of marketing, Volcom focuses on a direct marketing and promotion systems that target the individual customer. In this quest, they use personal advertising techniques which makes a direct impact on the consumer. The strongest of Volcom's competitive marketing system is the sponsorship of athletes. They spend a lot of money to sponsor athletes, including Olympic gold medalists in the board sports. This enables the ordinary member of the society to connect with Volcom as a winning brand. This create a psychological impact on the potential buyer. Also, Volcom ensures that it is present at events. In such events, there is a personal appeal to participants. They see the Volcom signage and other ideas that envision the innovation element of the brand. The sponsorship of events allow Volcom to become more resounded in the minds of consumers. This leads to personal recommendations and builds the brand in a distinctive way. Volcom also uses various means of marketing online. Volcom advertises its brand through internet outlets. Their online presence has been improving consecutively each year for the past ten years. The online presence also exposes the Volcom brands to specific target clients. This is done through facebook, twitter and other social networks. They are carefully arranged to ensure that consumers with an interest in boardsports are targeted and won over. Volcom also focuses on entertainment. The promotion of the brand through videos and films ensure that the urban youth are presented with the product offering of Volcom. Entertainment allows the brand to get into various homes and this builds longer-term interest in the product. Strategic Partnerships Also, Volcom maintains strong strategic partnerships with manufacturers and other sellers around the world. Through the licensing arrangements and manufacturing contracts, Volcom is relieved of the normal administrative work that larger outlets and similar sports manufacturers go through. Rather, Volcom builds on its core competencies of brand improvement and marketing. This allows Volcom to leverage its strengths and abilities into the right sectors and units. SOWT Analysis The strategy of Volcom comes with various strengths and obviously identifiable weaknesses. Although they are doing well, these strengths and weaknesses are important factors that have contributed to the results attained from the existing strategy. In the analysis below, the various strengths and corresponding opportunities will be examined. On the other hand, the weaknesses and their corresponding threats will be identified Strengths 1. Competent and Established Management Team Volcom is ran by a competent and highly qualified team. Richard Woolcott has experience in marketing and playing innovative roles in Quicksilver. He holds a business degree as well. He is an athlete and has some exposure working for a competitor. Woolcott's team of managers are also experts in what they do. Each of them have relevant qualifications and experience and have been with Volcom for a considerable amount of time. The members of the management team have considerable education, experience and have worked within the company's values for years. Due to that, they are very much familiar with the industry and trends and can make important contributions to the strategy of the company. Opportunity: The technical team's competence ensures that the company remains at the forefront of the competition in the industry. This is because they are capable of identifying opportunities and taking the right steps to maximize them. They also have the potential of working together to collectively attain the highest synergistic influence in the markets. 2. Capability for Innovation The Volcom team has the ability to innovate and meet the new demands of the markets. This is because they have put in place structures and systems that ensure that the innovation of their brands and systems are continuously updated. Due to this, they entire operation cycle is highly responsive and they can make changes as and when necessary. Opportunity: The survival of Volcom is guaranteed even if the economy deteriorates. This is because Volcom's team have the ability to change its systems and capabilities to match up new opportunities in the external environment. This keeps the company viable through profitability. 3. Strong Research & Development Capabilities The R& D systems of Volcom is very strong in identifying the actual fashion trends at different points in time. This ensures that the fashion units remain responsive to exactly what customers want at different points in time. The fashion department remains responsive to changes in customer tastes and social factors. This ensures that it makes recommendations for the development of new clothing lines to suit its customers. Opportunity: The customers' interests are always aroused. This means that they will always remain loyal to Volcom. This ensures that Volcom remains in contention with its competitors like Nike and Adidas. 4. Control of the Media Volcom has made a considerable investment into videos and films. It has made investments into the kind of entertainment that is modern and current. This keeps the youth interested in their activities. The considerable investment in the internet, also enables cutting edge and real-time interaction with its fan base. Opportunity: Volcom is able to maintain an active communication with its customers at all time. Through this, it will maintain brand loyalty and promote the quality of its services by examining their feedback at different points in time. 5. Wide Range of Sporting Product Volcom has a wide range of products for different categories of customers. The clothes are available to different segments of the society. This means that there are numerous opportunities to make sales to consumers at different forms of the society. 6. Effective and Flexible Sales Outlets There are numerous sales systems and outlets that are being utlized by Volcom which has proven to be helpful. These outlets and systems have kept on working efficiently and are quite numerous in terms of numbers. Another side of the numerous outlets is that, they can be varied as and when necessary. Opportunity: The effective and flexible sales outlets ensure that customers are always satisfied. There are numerous opportunities and options of purchasing from local shops to online sales which customers can utilize. This increases sales for Volcom. 7. Strong Marketing Systems Volcom maintains a distinct marketing unit that is different from the Sales System. They sales and marketing departments work together to provide exceptional results for the company. Volcom's marketing team ensures that the brands of Volcom are promoted in different parts of the world. Opportunity: The strong marketing systems ensure that the Volcom brand is promoted in different parts of the world. The strong marketing structures ensure that brand exposure is gained and the brand is grown over the years. 8. Strong Working Capital Base Volcom maintains a strong working capital base. The ratio of working capital to fixed assets is about 10:1. This means that there is always enough funds for trading. The stronger working capital base provides better opportunities for the attainment of the three main objectives: brand growth, innovation and strategic partnerships. Weaknesses 1. Lack of Diversification Volcom is focused strongly on the boardsports clothing industry. Volcom's strengths are concentrated in the clothing and fashion sector of a very specialized sports area. They have little investments in other ventures. Although they have introduced the Volcom Electric, it is not enough diversification for a modern business which must normally have a large range of investments in its portfolio. Diversification must be necessary for the aversion of risk. Threat: Too much investment in the fashion sector exposes Volcom to risks. This is because in the case that there is a major issue in the surfing sport and skiing industry, there could be major falls in revenue. A typical example is the case of the cycling industry where a series of drug scandals made investors in the industry lose millions of dollars in a short time. If such a fate befalls the cycling industry, Volcom will be severely hit. 2. Limited Control of Partners Volcom maintains links with its partners around the world. These partners are mainly autonomous in nature. Volcom has limited nature in the affairs of these partners. This means that they can become a bit hostile to Volcom in future and this could adversely affect them 3. Limited Fixed Asset Base Volcom is involved in extreme overtrading. They have very limited assets for the generation of wealth. This means that they do not have a store of capital in assets like buildings. The danger in this is that any risks in production and sales will mean that the company could be forced to fold up. 4. Ageing Working Population The staff of Volcom are becoming older by the day. The management are in their mid-40s. They have spent a lot of time working for the company and do not really have much contact with the outside world. The threat of this weakness is that Volcom could fall into a period of decline that results from the excessive reliance on older staff members. There might be the need to inject newer staff members to ensure that the company remains innovative. Recommendations There are four major recommendations that I believe would affect Volcom in a positive sense. These recommendations are meant to add up to the strategy to support Volcom to remain productive into the future. 1. Diversification Volcom needs to expand its portfolio. It is not enough to remain as a fashion company that focuses on the small niche of boardsports. It is necessary for Volcom to expand its portfolio by introducing new methods and systems of generating funds. At Volcom's level of growth, it will be very appropriate for the company to consider investing in fixed assets like real estates. They could consider building structures to store up their values. This is because the value of buildings continue to appreciate even if conditions in the economy becomes adverse. Volcom could also consider investing in other ventures that are equally good. This will spread the risks of the company since Volcom currently relies on trends in the boardsport industry. 2. Expansion Volcom needs to consider expanding to gain a firmer grip on its strategic partners. As it stands now, each of the strategic partners are almost autonomous. Many of them are free to consider other offerings from competitors of Volcom. This is because Volcom does not own and control these companies. Volcom will do better by expanding its ownership and control over these companies by purchasing shares in the companies. It will be preferable for them to buy majority shares to ensure that they gain stronger and firmer control over these companies. Volcom can consider vertical integration which will involve them controlling some of the companies that they outsource their works to. This will provide some support for the going concern position of the company. Alternatively, Volcom could consider horizontal integration, which involves the purchase of other competitors in the industry. Smaller companies springing up in the boardsport fashion industry could be considered to give Volcom a stronger grip on the industry. 3. New Recruitment Volcom will need to recruit younger people to inspire debate and power new developments. This will lead to innovation and improvement in the systems and structures of the company. The recruitment of younger people onto the board of directors will help provoke discussions on new things. This will break the trend of groupthink which could otherwise affect a highly innovative company. Also, the R&D, Marketing and Sales department are thriving on innovation. This means that an ageing staff of these units is a danger to the company. It is therefore important for the staff of Volcom to recruit younger people who will be an asset to the innovative theme of the company. 4. Capitalization Clearly, Volcom is overtrading. It is improtant for Volcom to consider introducing new systems and methods of capitalizing their assets. Volcom needs to consider investing in buildings and other durable fixed assets. This will give the company a stronger fallback position in case the investments in the working capital fails. This is because there is too much investment in working capital. This leads to a situation where all the resources of the company remains at risk of being misused by the staff and members of the company. Conclusion Volcom's strategy is steeped in the vision of promoting innovation in the boardsport industry. Volcom's philosophy is to promote fashion and innovation in a youthful context in relation to skiing and surfing. Volcom's strategy is based on the brand promotion, marketing and strategic partnerships. It has the competitive strength of trading aggressively and expansion into other nations. The company has been successful because of the qualified and enthusiasm of its leadership. It is also focused on responsive innovation and development. However, Volcom is too focused on the boardsport and has limited assets. To overcome these deficiencies, there is the need for the leaders of Volcom to promote diversification, expansion, new recruitment and capitalization. Reference Buenafe, C. B. & Vincelette, J. P (2010) Strategic Management Business Policy 13th Edn New York: Prentice Hall Read More