Introduction
Lululemon operates in the athletic attire (activewear) market, which has transitioned to the mixture with athleisure (wearing athletic clothing in everyday settings). At the time of the case in 2017, and continuing into modern day, the industry is extremely attractive and rapidly growing. The case notes a 7% annual growth of the activewear segment which consists of 16% ($33.7 billion) of the total U.S. apparel market (p.9).
The industry is highly appealing due to various factors including the popularization of athleisure attire in daily settings at the expense of other apparel such as jeans. Furthermore, social trends are shifting more each year towards wellness, casual and regular exercising, and accessibility of sports and exercise for all types of people. This has popularized the social elements of athletics through activities such as yoga or running, some of the biggest client groups that the industry and Lululemon serve.
Porter’s Five Forces
Threats of New Entrants
The threat of new competitive entrants to this market are high. This can be justified by the high financial, human, production, and marketing costs that would be necessary to achieve any substantial market share beyond a local level. There may be entrants in specific niches, such as Lululemon is associated with yoga.
However, the barriers of entry are high for new entrants, and as discussed in the case, when companies such as Under Armour and Gap Athletica entered the broader market of activewear, they were established and pursued aggressive strategies (p.10). The industry continues to attract large and well-funded competitors such as the notorious giant Nike and others.
Threats of New Substitutes
While clothing is a good that is always in demand and new iterations arise, the athletic attire market is unique as it requires a specific approach. Therefore, it can be argued that this force is medium power. For each product in athletic attire, there is a threat of more innovative versions. This is how Lululemon obtained its start, inherently redefining the yoga pants category with a more innovative design and material (p.5). It is rare that such drastic innovations occur, particularly in clothing where modern technology has allowed to explore all various types of designs and materials.
The iterations are usually more incremental. Furthermore, it is difficult for any given company to create substitute products across various sports simultaneously. At the same time, there is also the aspect of style and fashion trends as part of the athleisure market, the primary consumers of these companies. While function from an athletic standpoint is important and many companies consider it in design, style does matter and since it is more subjective, it allows for substitute products to emerge and other brands achieving popularity.
Bargaining Power of Suppliers
The bargaining power of suppliers is low. In a modern globalized economy, producers are striving to attain manufacturing contracts from these large clothing brands, including in the athleisure attire where most goods are produced from synthetic materials. Initially, when Lululemon when first starting out, it sourced the material from one supplier for its innovative yoga pants design, at which point that supplier likely had strong bargaining power.
However, in modern-day Lululemon works with a group of approximately 57 suppliers, but the Luon fabric which accounts for 30% of their products comes from only 4 manufacturers (CSI Market, 2021). Larger companies such as Under Armour and Nike in the space likely have hundreds of suppliers on multi-year multimillion-dollar contracts. Therefore, suppliers are notoriously known to attempt to appeal to the apparel companies for these large contracts, appeasing to their demands.
Bargaining Power of Buyers
It can be argued that the bargaining power of customers is a strong force in the industry. Due to the wide range of choices and brands in the market of athletic wear, it is up to buyers to select which product and brand they prefer. Companies depend on customer traffic (in store and online) and brand recognition, along with perceived value. There are low switching costs with a moderate substitute availability. Some companies may be more affected than others.
For example, Lululemon sells directly from its stores and direct-to-consumer, while Under Armour sells in widespread retail for the majority of its products. Therefore, Lululemon is directly dependent on its small contingent of loyal customers, while other brands may sell in bulk orders to retail and are less concerned with individual buyers. However, over time, the brand name and sales profits are affected by consumer choice and perception in either scenario making this element a strong force.
Competitive Rivalry
This is a strong force because it defines how competition ultimately influences the industry environment. Whilst the market is showing strong growth, there is still extremely high market penetration and saturation of just a handful of firms in athletic attire and athleisure industry. These firms demonstrate highly aggressive tactics in attempting to gain market share and achieve some sort of differentiating factors.
It can strongly affect competition, as noted in the case study, Lululemon was twice the size of Under Armour in 2012 only to see it grow to thrice its size of Lulu by 2017 (p.9). The competition is extremely strong and given the fact that there are few possibilities of new entrants or substitutes to the product, the firms compete among each other in virtually the same categories, and can easily sway market share of one another through various strategies.
Strategies
The generic competitive strategy that is pursued by Lululemon in the context of the case study is differentiation focus. Cost leadership is not fitting for the company, as companies pursuing such strategy attempt to achieve advantage by reducing costs, either of production or lowering the selling point. Lululemon has positioned itself as premium, with high-quality materials and does not necessarily seek to cut costs. Instead, it presents itself through differentiation by creating products differing from competitors. However, differentiation focus is the best fit because the company selected a niche market, and determining the scope of the focus, used the differentiation approach to distinguish themselves and add value to the products by offering them to a target market.
The founder of Lululemon saw the niche market of yoga as having potential of significant growth in popularity and adoption. He recognized the need for comfortable and stylish clothing, oriented at the female consumer which makes up most of the yoga-practicing population in the West. The differentiated approach allowed to create the new product that was niche but unique, and eventually grew the company to a wider array of athletic attire, that also sought to differentiate within its segment through patented designs and technology.
The complements to Lululemon’s products
Two complements to Lululemon’s products of athletic attire, leisurewear, and yoga-oriented clothing are athletic shoes (sneakers) and yoga mats. The relationship between the athletic shoes and athletic attire is complementary in that along with comfortable clothing, one needs shoes that are fitting, both in style and function. Even though Lululemon’s primary focus of yoga is practiced without shoes, the athleisure aspect of it requires comfortable athletic shoes for wearing outside for daily activities or other exercises such as running.
Athletic shoes are a complex and difficult to enter market on its own, so it is unlikely that the company should pursue the strategy of developing its own sneakers. Furthermore, many of competitors in the space of athletic attire such as Under Armour, Nike, New Balance also have significant sneaker divisions. Considering the complement product, Lululemon could partner with one of the smaller shoe brands that is also very niche and does not have widespread apparel lines and sell its shoes in Lulu stores and vice versa.
Meanwhile, yoga (exercise) mats are directly correlated with the company’s mission of wellness, products, and the overall fashion trends. The very same consumers which purchase the yoga clothing and athleisure also need yoga mats for their yoga classes or just any exercise outdoors and indoors. It is almost a necessity and Lululemon stores offering yoga mats of various types and designs would be highly beneficial for consumers.
Here, Lululemon could benefit from two strategies. Either developing and manufacturing its own line of yoga mats, fitting in with its other lines and sold at a premium, or simply identifying a brand of quality mats that fits their characteristics and mass order them to retail in Lulu stores alongside the clothing.
First Resource/Capability – Ability to innovate with products in the market
- Valuable – Lululemon values its ability to innovate the market, particularly within athletic apparel for yoga. It virtually created the product category of modern yoga pants using new designs and materials, which generated its start in the industry. It continues to innovate in the industry as discussed in the case study, with patented designs such as the waistband on Astro pants or a tank-top with a built-in bra (p.5). Even if the designs are not always successful leading to unfortunate recalls, it is evident that the company is pushing the limits of the industry and creating products which have benefits for consumer.
- Rare – It is somewhat rare, because it requires two main factors: 1) significant investment into R&D and product design and 2) understanding of the demands and trends of the market to produce goods that are needed. Arguably, few companies can actually achieve both those parameters at a level that is meaningful. One without the other is virtually meaningless. As companies can pump money into R&D and produce mediocre level of products, while others may have genuinely amazing ideas which capture the next iteration of the market, but do not have the resources to develop it fully or competently.
- Costly to Imitate – Yes, innovation is costly to imitate, even in the clothing and athletic apparel market. As mentioned, it requires significant investment into research and development. Companies in the sector, such as Lululemon along with its competitors of Under Armour, Athleta, and Nike knowingly invest billions of dollars into innovation and new technologies and materials. Due to the small differentiation between products and lack of substitutes among companies, it is the innovations that help products. This includes not only research into products themselves but manufacturing techniques, market trends, supply chains, and other key parameters to succeed (Green, 2017).
Second Resource/Capability – Controls own distribution
- Valuable – Controlling its own distribution has been highly valuable for Lululemon. It controls the distribution channel wholly, that allows it to maintain quality of product, customer experiences, and keep the large share of the profits. The company also uses its stores for direct promotional events and acquiring new customers directly through personalized experiences through this distribution channel alone. As a result, Lululemon has one of highest rates of revenue per squire foot retail store in the world and can generate tremendous profits off the rarity and premium elements of its products (p.8).
- Rare – The concept of controlling its own distribution is not rare, but more so in the athletic apparel sector where Lululemon’s competitors distribute largely through wholesale retail. That is the key to success and popularity behind brands such as Under Armour and Nike that are retailing in thousands of athletic and clothing stores worldwide. However, Lululemon from the start took on the approach of its own distribution, which supported its premium brand identity and created the illusion of rarity.
- Costly to Imitate – For large companies on the level of Lululemon and its competitors in the market, this is not a costly endeavour to imitate. In fact, most of the competitors in the athletic apparel space have their own brand-name retail stores in developed countries, but simply to pursue wholesale retail strategies. However, those trends have been changing as some companies such as Nike have recognized the value of own distribution through its own channels and direct-to-consumer, transitioning away from wholesale, suggesting that Lululemon did maintain an effective strategy through this method.
Organized to Capture Value and Discussion
In both cases, Lululemon does seem to be organized to capture value from these resources and capabilities. The company was built on innovation, and it continued to introduce or enter new product categories to appeal to its broader consumer base, for both men and women. It maintains a reputation of offering high-quality, innovative products and patents many of its designs (p.5).
It is not known from the case study how much the company invests into R&D, but the competitive nature of its athletic apparel which is used by both casual and professional athletes indicates high function and comfortable designs, with continuous albeit slowing growth of the company. Based on the VRIO framework, the company’s approach to innovation does allow to achieve a sustained competitive advantage, which is also true in real market conditions as the company has sustained a significant growth and market share in the segment for more than two decades.
As in regard to its distribution, the company is highly organized around that concept as its primary point of sale. This can be seen through factors ranging from supply chains to the inherent management, training, and promotion in the stores. The company is focused on making the stores the face of Lululemon to the consumers as well as making it a space of interaction and personalization for consumers to recognize the benefits of its products and associations with yoga (p.8).
Based on the VRIO framework, it allows the company to achieve a temporary competitive advantage simply because this particular resource/capability are not difficult to imitate by competitors. However, as seen in real-life market conditions, it has beneficially served Lululemon in comparison to its wholesale competitors, and potentially as the market transitions to online sales, the direct-to-consumer experience can benefit the company.
Conclusion
In the time period covered by the case, Lululemon pursued the blue ocean strategy in the very beginning of its founding and early years. It is particularly characterized by the innovation of creating athletic yoga wear from a new material and a new design which differed from the traditional cotton athletic clothing of the time. The innovation is also tied to the company’s close integration with wellness and yoga targeted at consumers which value an active lifestyle and work-life-health balance (p.4). It did so before the trend of wellness became widely popular.
The yoga pants design which then spread to other products was a market-creating innovation, while maybe Lululemon did not create the athletic attire market, it did pave the way for the niche sector of yoga sportswear. Due to the design of its clothing that could be worn both for yoga and in other settings, Lululemon was one of the first companies in athleisure attire, which was attractive to many women consumers of upper and middle class. It brought the value of being functional while also stylish.
Taking into account the ERRC matrix, Lululemon eliminated the perspective that the yoga sportswear should be unstylish and uncomfortable, and reduced the perception that athletic clothing is worn only by the most dedicated people practicing the discipline. Meanwhile, it raised the factor that yoga and sports clothing should be functional and stylish, and created the concept of athleisure wear for yoga pants as part of daily clothing.
The only element where Lululemon differed from traditional blue ocean strategy is low pricing, as the company always maintained its exclusivity and took on a premium approach. Due to the niche market, it was able to capitalize on the advantage, but by modern-day the industry has turned into a red-ocean, with the company no longer attempting a blue-ocean approach.
References
CSI Market. (2021). Lululemon Athletica Inc ‘s suppliers’ performance. Web.
Green, D. (2017). Nike and Adidas are making huge investments that should terrify Under Armour. Business Insider. Web.
Tybout, A. M. (2017). Lululemon Athletica. Kellogg School of Management at Northwestern University.