Strategic Managemen Exam

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- As noted by Porter (2008), strong competitive pressures from the five forces of competition drives industry profitability to low levels, produces losses for many members, and forces some members out of business. This occurs when rivalry is vigorous, entry barriers are low, competition from substitutes is strong, and suppliers/buyers have considerable bargaining power. The dimension on which rivalry takes place is particularly crucial. Intense rivalry generally occurs with numerous competitors, slow growth, and high exit barriers. In addition, competition is destructive when such pressures force companies to gravitate to price-based rivalry, thereby paying less attention to other sources of differentiation.

PACCAR competes in the heavy truck industry, building Kenworth and Peterbilt vehicles. Because heavy trucks are built to regulated and standard features, price competition is rampant. With high fixed costs and large buyers, competitive pressure is intense. To deal with such intense rivalry, PACCAR identified a portion of its industry where the five forces were weaker, thereby insulating itself from competitive pressures. In particular, it focused its trucks on owner-operators (a niche segment), thereby avoiding large, fleet buyers. Small buyers have less clout and are less price sensitive, preferring certain differentiated attributes. It then initiated actions to produce a competitive advantage: offering superbly engineered vehicles, thereby avoiding price-based competition. By understanding its competitive forces, PACCAR developed an effective position within its industry to insulate itself from intense rivalry, leading to a market leading position, award-wining trucks, and strong profitability.

- Competitive rivalry is the ongoing set of competitive actions and responses that occur between a firm and its rival as they maneuver for an advantageous market position. These initiatives help the firm build or defend its competitive advantages and to improve its market share. This competitive behavior is driven by the extent to which competitors recognize the degree of their mutual interdependence that results from market commonality and resource similarity (i.e. awareness). In addition, the firm’s incentive to take action or to respond to a competitor’s attack relates to perceived gains and losses (i.e. motivation). Furthermore, the firm’s ability to launch competitive actions and responses reflect its resources, such as capital and personnel, to support its competitive behavior (i.e. ability).

The likelihood of initial attack and response to the moves of rivals is driven by various factors. The likelihood of attack is driven by the extent of first-mover incentives, organizational size, and product / service quality. If pioneering tends to build a firm’s reputation and leads to cost advantages, firms have incentives to be an early adopter with new technology and/or products. In addition, smaller firms are more likely to launch quick actions, while large firms have the resources to launch many initiatives. A firm is unlikely to launch an action when its products / services lack quality. The likelihood of response reflects the type of competitive actions, rival’s reputation, and market dependence. Firms respond when rivals implement effective actions, when the market leader makes specific moves, and when rival actions threaten their market position.

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Section C: Short Answers on Case Analysis

- Based on the calculation of various ratios for lululemon in 2010 and 2014, it is clear that their profitability has improved over this period. Indeed, revenue and net income growth, as measured by the CAGR, increased 36.9% and 48.0%, respectively. The company witnessed an improvement in operating and net margins, as well as an expansion in liquidity as measured by the current ratio. Indeed, the company operates with no debt! However, the astute analyst will have noticed the decline in margins from 2012, even though over the full period from 2010 the results show improvements. The one negative has been the decline in inventory turnover.

Ratio

2014

2010

Change

- Operating profit margin

24.6% = $391.4 / 1,591.2

19.1% = $86.5 / 452.9

Increased

- Net profit margin

17.6% = $279.6 / 1,591.2

12.9% = $58.3 / 452.9

Increased

- Return on equity

25.5% = $279.6 / 1,096.7

25.0% = $58.3 / 233.1

≈

- Current ratio

8.31 = $942.8 / 113.5

3.69 = $216.4 / 58.7

Increased

- Inventory turnover*

4.04 = $751.1 / 186.1

5.21 = $229.8 / 44.1

Decreased

- CAGR

Revenue = 36.9% = ($1,591.2 / 452.9) ¼ – 1

Net Income = 48.0% = ($279.6 / 58.3) ¼ – 1

Increased

- Based on the financial information, it is clear that lululemon has performed extremely well using a focused differentiation business-level strategy. However, as the case study noted, until recently, lululemon has been unchallenged in serving a distinct premium yoga niche for women. Dozens of established apparel companies, including Nordstrom, Adidas, Nike and Under Armour, have now entered this attractive segment. This niche faces some favorable general trends, such as a large demographic with disposable income, increasing health concerns, and the use of technology to provide superior materials. All of this has attracted considerable entrance into the premium yoga segment. As a result, customers may decide that the value of lululemon’s products compared to rivals’ products does not justify the price premium.

To address the increase