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Under Armour Company’s Strategic Challenges Case Study


Introduction

Under Armour is one of the many companies that have seen its inception and growth through athletic events. Under Armour found its inception with the sole aim to improve the athletes’ performance by promoting the participation conditions of the athletes in all weather conditions. The aim was achieved through innovative measures of tailor-made athletic products of various athletic events inform of apparel, footwear, and accessories to promote the body conditions and enhance performance. These tailored products are an alternative to the old athletic gears. They include various products for male and female, old and youth athletes, and all end users involved in sporting and recreational activities. The overall activities involve designing branded products with the company’s logo, marketing, distribution, and athletic wear to various sports individuals and organizations.

Marketing activities include sponsorship agreements with colleges and professional sports institutions to support a sporting event and sell the athletic garments to individual athletes and team managers. This marketing approach promotes product and brand awareness on field sports audiences and new global markets through television coverage, enhancing market penetration and expansion. Individual athletes’ sponsorship poses a great challenge to the company’s financial planning and budgeting as performance-based agreements. However, several other foreseen challenges hinder the company’s expansion that includes the famous Brexit affecting the European countries as new policies will be put in place to regulate business activities plus entrance, expansion, and tax levy. The competitive edge posed by other companies providing competing products with bigger market share and financial strength that include Nike and Addidas adds to expansion challenges affecting Under Armour. Despite these challenges, the foreign market remains one of the unexploited markets that gives great hope for exploiting and expanding market share.

Strategic Issue

Under Armour enjoys the identical brand recognition of its athletic garments locally in North America and gaining gradual penetration to Japan, China, and European countries. The objective to earn over $4 billion from the sale of the company’s product is the chief strength for the company’s growth with the current localized market share of over 90% of sales in North America alone. The company’s revenue position of over $1,834,921 provides financial strength to support marketing, brand, and product promotion in existing and new markets. Moreover, distribution channels in the form of factory outlets, company websites, and specialty stores for the diverse sports and recreational activities garments in different market segments bolster its revenue and market share. Additionally, licensing agreements with other firms and advertisements through television programs, catalogs, online and social media promote consumer demand, expand target market segments, and increase revenue income.

Various challenges hinder the growth and expansion of the Under Armour. Competition from established market-leading companies such as Nike and Adidas is a threat to the company’s expansion and market penetration. The extra financial cost that cuts into the net revenue is required to market and advertise the products and company brand, including sponsorship programs to different individual athletes, sports organizations, and sporting events. Sponsoring individual athletes’ cost has an added constraint in financial planning as agreements are performance-based and cannot provide a robust position to make a future forecast of the company’s marketing and expenditure cost. Moreover, the cost of funding the designing of retail outlets in different market segments to promote the company’s retail consumer store product adds to the financial burden. Therefore, the strategic issue is, ‘What tactical business steps should the company take to break these growth challenges and increase its market share?’

External Environment

In an organization, the external environment comprises the immediate competitive environment and the extensive environmental factors. The immediate competitive environment refers to factors such as economic, market, and competitor forces that dictate the industries’ opportunities, profits, and expansion. The Macro-environment factors include political, economic, social, cultural, technology, environmental factors, and legal policies that direct its objectives, strategy, and direction of operation. In the sports, attire manufacturing industries, sporting, and recreational activities are factors of the external environment that support the industry’s existence and growth.

The relevance of the political factors involves the decision by states, countries, or governing bodies to hold a sport or recreational event in a certain geographical location. A change in the political environment such as Europe Brexit leads to new terms in the business environment that may include a change of trading conditions, inflation, and currency that negatively affect the industry’s income revenue. The negative impact on the economic conditions affects the buyers’ buying potential and subsequently reduces the profit margin hindering growth and expansion. Additionally, political influences by governing bodies on sponsorship of sports or recreational events limit companies’ competition and subsequently affect growth and expansion of an industry.

The shifting socio-cultural needs of sports, recreational activities, and healthcare awareness by the rising population adjust the manufacturers’ flexibility to meet the changing consumer markets. Incorporating technology to support sales, research, and product development to meet the dynamic customer behaviors promotes industry growth. Combining the two factors heightens the competition between local and established industry firms that manufacture various quality performance products to meet the market demand. The heightened competition forces companies to take strategically costly steps to cut on market share or face market fall-out.

Environmental and legal factors influence the sporting events within a given geographical location. Various climate conditions widen the sports and recreational activities of a population and diversify customer needs. Developed countries have strict legal policies aimed at protecting its citizens and the county’s economic position by regulating local and foreign companies’ business operations. Companies must comply with the regulations that involve local and global rivalry to gain market penetration before engaging in any business activity to promote their brand name and boost its business activities.

Porter’s Five Forces Analysis

The five forces analysis provides important economic market characteristics of various products that shape the strategic direction of Under Armour and subsequently influence the growth of the industry. The analysis offers knowledge on market size given the geographical locations, the existing demand and supply forces, competitive forces, and the technological shift that offer business growth and expansion opportunities. Buyer bargaining power influences the degree of sales, profit potential, and the overall growth of a company in a given target market. Companies promote brand awareness and customer loyalty through several advertisements and promotional efforts to claim a significant market niche with a considerable impact on the companies’ profit margin. Sponsorship programs in the sports industry promote sales through buyer brand identification and restrict competition from new entrants and small companies such as global market penetration by Under Armour already dominated by Nike and Adidas.

The diversity of sports activities influences product quality in any given industry. The presence of substitute products with superior quality promotes competition between manufacturing industries to control buyers’ tastes and needs. In the sports industry, athletic and leisure shoe, apparel and sports equipment companies provide substitute products, influence product price, and increase advertisement and promotions cost that subsequently decrease income revenue and threaten growth. Sponsorship and athlete endorsement lowers the seller bargaining power as there is high customer switching cost to sponsoring companies. The industry competition from the new entrants is thus limited due to the sponsorship and promotion barriers by large-scale operators such as Nike, causing high investment requirements from new companies. The rivalry is due to the need to improve market standing and business performance by the existing companies, fear of being faced-out, or overtaken in the otherwise slow-growing industry.

Key Success Factors

Sponsorship and endorsement programs, coupled with the provision of highly designed performance products, promote customer satisfaction and loyalty despite being costly. The growth of technological know-how such as online and social media amongst the world population, specifically in the developed countries and the youth with various ways to access the global market, proves to be a good solution for market penetration. Companies must gain their competitive advantage by incorporating these factors with a quick delivery process to meet these customers’ needs to promote their market relevance.

Industry Profile and Attractiveness

Despite the great political influence, dynamic legal regulations, and the economic instability in several markets due to inflation, the sports industry remains the most attractive to the incumbent investors with high projected growth and expansion due to the population’s shifting ecological needs. The healthcare awareness, changing recreational activities and the rapid technological growth provide a need for product diversity, increased revenue and growth in the industry

Company Situation

In the earlier years of its life, Under Armour experienced a milestone in marketing, brand promotion, and sales growth that positively influenced its revenue income and local market penetration. Licensing agreements, college, high school, and professional athletes’ sponsorship and endorsements proved to accelerate market penetration and the company’s growth rate improving the sales revenues every year. The company aims to provide highly designed quality performance apparel, footwear, and accessories that provided a competitive advantage over rival and substitute products. Under Armour established its competitive edge by expanding its selling units to retail customers, online markets, the opening of factory outlets, and specialty stores. The expansion provided promotional marketing and customer service touch that improved brand recognition and customer satisfaction.

Under Armour realized the highest increase in percentage growth of net sales in the year 2011 with a characteristic fall in sales growth rate in 2012(Table1). Nike enjoyed total sales of $20.9 billion in fiscal 2011, with a huge sales increase of $3.2 billion to hit a total of $24.1 billion in 2012. The great margin of total sales between the two competing companies informs that there is a great space for growth and expansion of the industry. Nike’s huge sales growth of $3.2 billion in 2012 provides a clear indication that much of the industry’s market is untapped and needs exploitation as the sports and recreational industry is still in the growth phase of its life cycle.

Financial Analysis

The analysis of the financial data indicates that Under Armour has had a good financial position with an ability to meet its liability obligations that had continually grown each year. As shown in Table 1 (Appendix), the profitability ratio of gross profit margin stagnated at about 48%, which means that there was no significant growth in revenues. However, profitability ratios indicate that the benefits have increased from 2008 through 2012. Specifically, profit margin, return on assets, and return on equity have increased from 5.27% to 7.02%, 7.84% to 11.13%, and 11.55% to 15.76%. Liquidity ratios indicate that the liquidity of Under Armour fluctuated across the five-year duration (Table 2).

In 2008 through 2012, the quick acid ratios were 2.24, 9.26, 12.79, 2.26, and 5.52 respectively. Working capital ratios for 2008 through 2012 were 10.69, 26.98, 42.36, 11.83, and 18.70 correspondingly. Leverage ratios of Under Armour are less than one. Evidently, debt ratios of Under Armour are 0.094, 0.037, 0.024, 0.085, and 0.053 for 2008 through to 2012. Debt to equity ratios of the same period are 0.14, 0.005, 0.03, 0.12, and 0.08 while equity ratios are 0.68, 0.73, 0.74, 0.69, and 0.71 (Table 3). In the aspect of activity ratios, inventory turnover has 2.04, 3.01, 2.48, 2.34, and 2.99 for 2008 through 2012 respectively.

The financial analysis indicates that Under Armour has robust financial status, which would enable it to grow and develop in competitive markets. Under Armour has a profit margin of about 6%, Nike has about 24%, and Adidas has about 4.8%. Profit margin shows that Under Armour ranks second in profitability performance. Liquidity ratios such as quick ratio and working capital ratio reveal that Under Armour can pay its liabilities at any instance. Under Armour has leverage ratios of less than one, it shows that its debts are significantly low and within acceptable financial levels. The activity ratio of inventory turnover shows that Under Armour is active for its inventory has a turnover of two or three times. Therefore, the overall financial status of Under Armour indicates that it can grow its sales and augment profits.

SWOT Analysis

Under Armour’s objective and passion for the production of highly designed performance attire despite high cost incurred promotes brand name and customer loyalty over competitor products. The company’s expansion of selling units to retail customers, online, and websites supported by the technological shift by consumers provides a great means for product promotion and marketing to lead to profitability, as seen in the current financial position of the company. The growing diversified consumers’ need in the global market is a good opportunity for investment to drive the company objectives to venture into the foreign market. Contractual agreements with manufacturing firms’ pull together the companies’ interest and provide a combined strength to absorb the shocks of rivalry and competition from local and global established firms providing substitute products. The financial strength together with the opportunities promotes profitability, growth, and expansion of the company in the industry

Despite the prospective growth potential of the company, great challenges limit its expansion. Lack of long-term contractual agreements with the manufacturing firms having no obligation to make and use the company’s products leads to reduced market penetration and expansion due to poor brand recognition and customer loyalty. Under Armour, diverse products directed to meet various customer needs faces several setbacks due to the impact of external forces. Petroleum-based products that largely rely on the cost of oil prices, which undergo frequent fluctuation together with charged-cotton products relying on the cotton harvest, have led to unstable product prices and product availability due to the cost of production subsequently damaging the customer trust on the company and brand loyalty. Rival companies and competing substitute products take advantage of these production challenges to gain an extended market segment and threaten the company’s market share while risking market fall-out as a result of poor returns on investment.

Recommendation

Strategic Issue

To achieve its objectives of increased sales, market penetration, and expansion, Under Armour, must take several tactical steps directed towards reduced production cost, market penetration, stable product price, adequate production of diverse products, and long-term contractual agreements. These steps will provide a robust operation platform for the company to compete in the local and global markets by adequately meeting different customer needs while reducing operational costs and improving product quality and availability to boost net revenue returns.

Strategic Recommendations

Contractual agreements with manufacturing firms provide a great step for market penetration and global expansion. Under Armour Company should take a bold step to make long-term contractual agreements with other firms in foreign markets to boost production and use of its products. In addition, the company should establish constant cotton supply in different cotton production countries for Charged-cotton products that high rely on cotton harvest leading to the shortage in the market. The production of these seasonal cotton products should be bulk during the cotton harvest season and stocked to avoid shortage in the market.

Moreover, the company should target to promote more sponsorship programs in colleges and professional sports organizations in the foreign market as the chief marketing and brand promotion tool. Expansion of selling units with product diversification to meet the increasing number of customers with diverse needs is another strategic marketing tool that is still underutilized. In this view, Under Armour should strive to open and maintain extra stocked selling units in foreign markets while keeping local stores fully facilitated to limit the chances of product shortage or unavailability in the market.

Objectives

Sales from the foreign market should continually be monitored every quarter, and adjustments made to meet the needs of the diverse customers and competition of the global companies. The company’s profit target should be set and revised for both local and foreign markets every quarter for the whole year. Analyze sponsorship agreements to check the extent of coverage, cost, and effect of individual agreements on the market within a given location—controlled production cost to control the pricing of all company’s products, including Charged-cotton products to build customer loyalty.

Strategic Justification

Production of Charged-cotton products in bulk during the cotton harvest season will help the company meet customer demand of these products throughout the seasons. The production move will help control and stabilize market prices for these cotton products. Establishing additional selling units such as factory outlets, online websites, and retail customers to cut across local and foreign markets will provide customers with easy placement of orders and faster delivery of goods and build customer loyalty while at the same time acting as the marketing and promotional sites. The technology incorporation and additional outlets will provide an additional point of research to understanding customer needs that will promote the company’s objective of meeting the ever-changing diverse customer needs. Additionally, sponsorship programs will provide on-field authenticity of the company’s products to the audience while building a brand relationship with the sports organizations and professional athletes that helps boost trust from other consumers with active lifestyles in the global market. These steps promote market penetration, growth, and expansion of Under Armour in the sports industry across both local.

Appendix: Financial Ratios

Table 1: Profitability Ratios.

Years Ending 31st December
Profitability Ratios 2008 2009 2010 2011 2012
Revenues 725244 856411 1063927 1472684 1834921
Cost of Goods Sold 372203 446286 533420 759848 955624
Gross Profit 353041 410125 530507 712836 879297
Net Income 38229 46785 68477 96919 128778
Total Assets 487555 545588 675378 919210 1157083
Total Stockholder’s Equity 331097 399997 496966 636432 816922
Gross Profit Margin 48.68% 47.89% 49.86% 48.40% 47.92%
Profit Margin 5.27% 5.46% 6.44% 6.58% 7.02%
Return on Assets 7.84% 8.58% 10.14% 10.54% 11.13%
Return on Equity 11.55% 11.70% 13.78% 15.23% 15.76%

Table 2: Liquidity Ratios.

Years Ending 31st December
Liquidity Ratios 2008 2009 2010 2011 2012
Cash and Cash Equivalents 102042 187297 203870 175384 341841
Total Current Liabilities 45591 20223 15942 77724 61889
Total Current Assets 487555 545588 675378 919210 1157083
Quick Acid Ratio 2.24 9.26 12.79 2.26 5.52
Working Capital Ratio 10.69 26.98 42.36 11.83 18.70

Table 3: Leverages Ratios.

Years Ending 31st December
Leverage Ratio 2008 2009 2010 2011 1212
Total Current Liabilities 45591 20223 15942 77724 61889
Total Current Assets 487555 545588 675378 919210 1157083
Total Stockholder’s Equity 331097 399997 496966 636432 816922
Debt Ratio 0.094 0.037 0.024 0.085 0.053
Debt to Equity Ratio 0.14 0.05 0.03 0.12 0.08
Equity Ratio 0.68 0.73 0.74 0.69 0.71

Table 4: Activity Ratios.

Activity Ratios 2008 2009 2010 2011 2012
Inventory 182232 148488 215355 324409 319286
Cost of Goods Sold 372203 446286 533420 759848 955624
Inventory Turnover 2.04 3.01 2.48 2.34 2.99
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