Management Control Systems - Lululemon Ltd - Case Study Example

Title page Running header: Management control systems Student’s name: Instructor’s name: Subject code: Date of submission: Table of Contents Title page 1 Table of Contents 2 Introduction 3 Brief background of Lululemon 3 Cultural control problems 3 Planning control problems 4 Administrative control problems 6 conclusion 8 References: 9 Management control problems at Lululemon Introduction Management control systems can simply be referred to as the systems which gather and use information in a bid to evaluate how different organizational resources such as financial, human and physical resources as well as the organization as a whole perform in achieving organizational goals and strategies. In essence, management control systems entail the devices and systems used by management in ensuring the behaviors and decisions of their employees comply with the organizations objectives and strategies and include planning controls, cybernetics controls, cultural controls, administrative controls and reward and compensation controls. For an organization to function effectively and achieve its objectives, all these controls have to be in place and be performing effectively. Devoid of sound management control systems in organizations, they will be faced with a lot of confusion which may even lead to their failure. This paper examines the problems that relate to defective control systems in organizations. In this regard, three control problems with be analyzed. These are control problems associated with culture controls, administrative controls and planning controls at Lululemon Company. Brief background of Lululemon Lululemon dates back in 1998 when it started as yoga inspired athletic apparel company and had its base in Vancouver Canada. Since its inception, it has grown to become what it is today with its sales exceeding the billion dollar mark annually. However, the company’s journey has not been smooth and it has faced many challenges especially due its constant changes in the top management. The company has had to grapple with culture changes, declining revenues especially in revenue per square meter, increasing competition from other upcoming stores, lack of trust among employees among other problems. All these problems can be associated with defective management controls in the areas of administrative controls, planning controls and cultural controls. As such, there is urgent need for the company to come up with strategic actions that will combat the problems. These problems are analyzed below; Cultural control problems According to Jenny (2005), organizational culture is a set of values, social norms and beliefs that are shared by the members of the organization and which in turn influence their way of thinking as well as their actions. Although culture may be beyond the control of the management, it is a control system that regulates organizational behavior and is hence essential. At its inception, Lululemon’s core values included entrepreneurship and the importance of making quality products while encompassing the issues of integrity, work life balance and the importance of having fun. It also has a training and goal setting arrangement for its employees in which it invested $3.76 million. Other important aspects of its culture included its employees having to work in the stores and having to be conversant with yoga as well as actual involvement in Yoga. Even their compensation policy was designed such that it encouraged entrepreneurial behavior among the company’s employees. The company’s strong culture served to create oneness and cooperation within the company and hence teamwork. This would translate to good customer service hence enhancing the company’s revenue. In other words, the strong Lululemon’s culture served to give the company its personality. However, this has changed over time. Owing to weak administrative controls at the company, there have been numerous transitions at the executive level of the company’s management with each new executive bringing in changes in the corporate culture. The company’s culture for instant shifted when Robert Meers joined the company as the CEO to oversee the IPO. When Meers was instructed to turn Lululemon into a $1 billion business, he began rapidly expanding the Lululemon Empire without maintaining the culture that had been curated so identifiably by founder Chip Wilson and was such an important asset to the organization (Tushman, 2010). This is because the new culture no longer supported the values described above. According to Wilson who is the board’s chairman, Meers was not a strong fit culturally as he pulled down all the company’s employees bringing in his own people. According to Wilson, they did not have access to Meers’ team to bequeath them the gift of Lululemon’s culture. As a result, the company’s corporate culture was to some extent replaced by uncooperative employees who lack trust between themselves and to the company owing to executive mismanagement and aloofness. The company has also been blamed for a negative culture characterized by the company chairman installing neighbors and family members in senior management instead of basing it on qualification thus creating tension at the top. In addition, the culture of the chairman interfering with top management’s work ends up heightening the tension at the top. For instance Martell, (2012) states that the chairman and the Day the CEO have few nice things to say about one another owing to the chairman’s style of running company affairs. The cultural problem at Lululemon can be linked to lack of strong cultural and administrative controls as discussed above. The strong company culture at its inception should be reinstated in a bid to cultivate strong values that are essential for the company’s success. In addition, the chairman should learn to let the CEOs hands free. The consequences of weakening the company’s culture would be a de-motivated workforce, dissatisfied customers and high levels of turnover from both the executive and employee levels. Planning control problems Williamson (2008) states that planning is all about setting out the goals of the organization’s functional areas and hence directing effort and behavior. In addition, it sets out the organizational standards to be achieved in relation to its goals, while clarifying the level of effort and behavior expected from its members. Furthermore the planning control function should enable coordination by alignment of a set of goals across functional areas of the organization. As such, an organization that fails to put in place a proper planning control system is likely to fail in achieving its goals and objectives. This has been observed in the case of Lululemon. It is due to lack of proper planning that the company’s expansion and growth seems to conflict with the company’s current operations since the company is also experiencing stock outs. This implies that there is no proper inventory control system in place. It is therefore surprising that the company is opening 38 new branches yet there are no finances to install a proper stock management system and a supplier management system. This is a case of misplaced priorities and hence a sign that there is no proper planning. Lack of proper planning control systems is also seen in the company’s underinvestment in infrastructure. For instance, Kathryn Henry the company’s chief information officer states that when she joined the company, the company’s back office systems did not fit the company’s size. To her, it was not unusual for operations to run on excel spreadsheets. This resulted from the founder’s culture of mainly investing in growth of the company’s products while ignoring the support functions. The company’s lack of proper planning control system is also seen in its understaffing despite its growth strategies. The company’s former executives accuse it of lacking a rigorous manufacturing model. In other words, non financial control systems are also running. When designers require more time to work on a product, they are given in spite of pressures on the company’s production calendar. In addition, the company is understaffed with its two dozen employees in Taipei and Hong Kong overseeing production of 90% of its 30 million unit’s annual production. Furthermore, the company fails to hire people with expertise in clothing manufacturing technical aspects including raw materials and quality controls. This was evidenced by its recall of its Lycra-nylon blend –Luon in 2013 due to lapses in quality controls. The company’s planning control problems are worsened by the American real estate problems. This is because the company has been choosing bad locations resulting in poorly performing stores. Lululemon suffers from decreased profits within many of their new stores, bringing the average sales per square foot from a high point of $1,710 in 2007 to $1,451 in 2008 in addition; the company has experienced a decrease in comp store sales from 24% to 3% (Tushman, 2010). Much of this can be blamed on the rapid expansion under the former CEO, inconsistency in culture reinforcement , external forces such as new competitors (Porter, 2008), lack of communication and collaboration with communities (Grams, 2012), and communication problems with store managers (Tushman, 2010) and more so lack of a proper planning control system. As has been observed above, lack of a proper planning control system as well as proper non financial controls has really cost Lululemon in terms of lack of sales due to stock outs, customer dissatisfaction leading to calling back of already sold yoga pants and hence denting of the company’s image. It would thus be prudent for the company to put in place proper planning control systems as well as non financial controls such as a proper quality control department. A prudent thing would be to halt growth in America and address its infrastructural challenges as well as its quality control systems. Once this is achieved, proper planning will facilitate controlled growth that will help it survive the increasing competition. Administrative control problems These systems are aimed at directing employees’ behavior by organizing individuals and groups. In addition, it enhances monitoring of employees behavior, making them accountable for their behavior and specifying how behaviors and tasks are to be performed or not to be performed. It involves organization design and structure, the firm’s governance structure as well as the organizations procedures and policies. Lack of proper control procedures may lead to its failure as it leads to confusion and duplication of roles. The administrative control problems at Lululemon can be attributed to lack of proper administrative control systems in the organization. For instance, since 2007, there Lululemon’s organizational structure has been altered three times. Currently, Lululemon faces several organizational changes as a result of the leadership of previous CEO, Bob Meers (Tushman, 2010).  These crucial changes and resulting challenges could lead to continued decline if not addressed soon.  As the organization has gone public, there is now increased pressure to satisfy shareholders with an aggressive growth strategy.  As a result, the prior and more successful growth strategy (Kowit, 2013) has become completely absent from Lululemon’s growth strategy in the U.S. This has led to decreased revenue in U.S. locations that are locked into leases at a high cost. Owing to the rapid growth described above, the Lululemon infrastructure (manufacturing and supply chain) cannot meet demands. Additionally, Lululemon faces threats from external forces (Porter, 2012) and “red oceans” (Kim & Maubogne, 2004) including increased competition in yoga gear at lower prices, as well as  an overall economic recession leading to lower profits in the retail market since in 2009.  And lastly, due to the rapid growth strategy and externally recruited senior level executives who did not understand or choose to acknowledge the existing Lululemon culture, a lack of trust and communication has developed between Lululemon store managers, corporate offices, and a tenured manufacturing team that has been displaced by another decentralized manufacturing team.  These new cross-functional barriers eroded the sense of teamwork causing misalignment in culture and growth strategies (Grams, 2012). The administrative control problems in the company are further amplified by the company’s board chairman. He admits that he has been the company’s chairman yet acting as though he was an employee. This way, he has found himself interfering with the CEOs work thus bringing in role conflict and confusion. In addition, workers may not be comfortable with this behavior. As has been evidenced by Day’s exit in 2013, the chairman’s behavior is a problem that can lead to organizational failure owing to exit of experienced executives. As Day put it, you either have to be really in, and in the job as a CEO or another functioning member of management, or 'peace out (Kowit, 2013). conclusion As observed above, Lululemon faces a number of challenges which may hamper its performance in future. These problems range from lack of inventory controls, weakening organizational culture, lack of proper planning and lack of adequate controls. These problems if not urgently addressed may lead to the company’s deteriorating performance in future especially in the light of increasing competition. As such, the management needs to put in place adequate management control systems that will help the company remain relevant in the market. References: Kowit, B2013, Lululemon: In uncomfortable position, Retrieved 23rd April 2014, from; http://money.cnn.com/2013/08/29/leadership/lululemon-day-wilson.pr.fortune/ Tushman, M., Page, R & , Ryder, T2010, Leadership, Culture, and Transition at Lululemon   Porter, M, 2008, The five competitive forces that shape strategy. Harvard Business Review, vol. 86, no.1, pp.78-93, Boston, MA: Harvard Business Publishing. Grams, C, 2012, The Ad Free Brand: Secrets to building successful brands in a digital world. Kim, W&, Maubogne, R 2004, Blue ocean strategy. Harvard Business Review, vol. 82 no.10, pp.76-84. Boston, MA: Harvard Business Publishing Williamson.M2008, Cultures in organizations: Three perspectives, New York: Oxford University Press. Martell, A., 2012,   Lululemon rises on earnings, vows to defend patents, Retrieved on October 18, 2012 from: http://www.reuters.com/article/2012/09/07/us-lululemon-earnings-idUSBRE8860I820120907.   Jenny, B2005, Organizational culture, London, Rutledge. Read More