Lululemon Case Study [Type the document subtitle] [Pick the date]
Table of Contents Introduction .................................................................... .......................................................................................................................................... ........................................................................ .. 3 Cross Boarder Expansion and Location Control ...................................................................... ...................................................................................... ................ 3 The Cultural Shift and Organizational Organizational Tension ............................................................ ....................................................................................... ........................... 5 Inventory and Infrastructure Infrastructure ................................................................. .................................................................................................................. ................................................. 6 Conclusion............................................................................................. ............................................................................................................................................... .................................................. 7 References ........................................................... .............................................................................................................................. ................................................................................... ................ 8
Introduction Lululemon was founded in the year 1998 by now Founder and Chairman Chip Wilson as a speciality retailer which designed, manufactured and sold women’s athletic apparel that was yoga inspired. The company presented a unique blend of culture where employees educated customers about the technology and research that went into their fabrics and why they were better than competitors. Employees Emplo yees were valued and the company compa ny soon began b egan to expand. ex pand. The company had opened a total of 20 stores in Canada by the year 2005 and had become the most favourite athletic brand with combined revenue of $ 40 million. The company then under the leadership of Bob (Former Reebok CEO) undertook an aggressive expansion strategy in Canada and the U.S. By 2008, the company had more than 35 stores and combined revenue of $350 million. The company however faced several issues and the company’s cultur e began to fall apart as the new CEO Christine Dale stepped in.
In light of this discussion, the current report is aimed at relying on management accounting theories and identifying three unique problems that Lululemon is faced with. The report also attempts to identify causes of these problems and their consequences for the organization.
Cross Boarder Expansion and Location Control The very first control problem based on management accounting theory that could be identified in the case consists of controlling locations where Lululemon stores would open in the U.S. A management accounting system in literature is defined as system that has been specifically and uniquely designed for an organization. This system is responsible for the provision of all necessary information that the organization might need for making decisions. In other words, management accounting systems in an organization are responsible for the provision of reliable and accurate information to the organizational management (Broadbent, 2012). 2012). In accordance with the Contingency Theory of Management Accounting, this uniquely designed accounting management system for an organization is contingent on situational or circumstantial factors in which a firm is progressing. The theory also suggests that circumstances in which every organization progresses are distinct and they largely impact mechanism, adoption and sophistication of effective accounting management system. Six circumstantial factors have been defined in accordance with the contingency theory. These include the external environment, mission and strategies, technology, firm interdependence, business unit and knowledge k nowledge of observable factors fact ors (Carter et al, 2010). 2010).
The case clearly explains that Lululemon emerged as a Canadian entrepreneurial venture. On its way to scaling up, they closely studied the Canadian marketplace and picked up best possible locations for every store. They were able to do this as they were well versed with their customers and their needs. However when the company under Bob Meyer’s aggressive expansion strategy decided to expand cross borders into the U.S, they had fairly limited knowledge to operate on. They were new to the American market, did not understand the real estate in U.S, did not have a very good real estate head in place and they decided to duplicate the Canadian location model in the U.S. As a result, they ended up with several high cost locations where product demand was minimal. This problem can be explained to be framed by the contingency theory in several ways. In this case, the external environment of the firm was formed by the intersection of taxation laws, supply chain and distribution of two different countries. Given the complexity of the external environment, the company was not well equipped and merely ended up following the advice of local developers in the U.S without adequate research (Parker, 2011). 2011). The corporate strategy and mission of the company at that time had been aggressive expansion. Bob had been provided express directions from the Lululemon investor board that he was to deliver 35 stores. Under these express directions, little attention was paid to actual locations where these stores would be opened and their impact on the company future. Lululemon’s technology at the time of its inception could be categorised as small batch
production technology which slowly moved up to large batches as the company expanded. Under the aggressive expansion strategy however, technological readiness of the company could not be moved to mass production with the speed of company expansion. Lastly, Lululemon as a company had been designed on pooled interdependencies and this led to various cost inefficiencies (Parker, 2011). 2011). The greatest consequence of this control problem for the company could be realised in the form of a constant revenue loss. Lululemon was trapped with several locations where the store operating cost was very high. Owing to the fact that there was little to no demand for the product, this money could not be recovered. Furthermore, these locations had been taken on long term leases and it was not possible to get out of these leases thereby resulting in a constant loss of revenue. Lululemon’s difficulties were escalated by the fact that the revenue loss came at a time of global economic recession. A bad real estate policy also served to
tarnish the brand’s image in U.S and the brand was often quoted as a failure. Lululemon’s
culture could not be maintained in stores with low demand and sales personnel had to press their products rather than merely educating customers. Lastly, since the real estate strategy was not well planned out, the company’s supply chain and di stribution network could not be
established effectively thereby resulting in further cost inefficiencies (Whittle & Mueller, 2010).. 2010)
The Cultural Shift and Organizational Tension Another significant control problem that Lululemon experienced was that of a cultural shift within the organization. Academic literature presents evidence to the existence of Bourdieu’s theory of practice. In
this theory, Bourdieu recognised two major elements namely field and habitus. Here field refereed to overall organizational structure and habitus refereed to knowledgeability of human agents involved within the organization. Both these elements interact with each other on a regular basis and impact on each other. Every individual is a part of this field and is able to include rules and norms of this field into his/her own habitus with the help of knowledge or experience. Furthermore, the theory also suggests that sources of capital that an individual has is responsible for defining the overall level of power of the individual. Capital has been expressed by the theory in terms of economic, cultural and social. Therefore, in accordance with this theory, the most powerful person in the organization would be the one with most number of connections, greatest social influence and most access to economic capital (Bourdieu, 1977). 1977). In this case, the investor board at Lululemon had appointed Bob as the CEO in order to be able to build proper systems, structure and processes within the organization. Bob realised that a lot of work needed to be done within a small time frame and this task might not be possible to properly train and educate the company’s existing staff. In this context, Bob brought in several members from his former company (Reebok) into the management and started giving them express directions. This in turn started taking away from the original model on which the company had been built and organizational personnel started taking these actions personally. This could also be attributed to the fact that very little explanation for any particular action was given giv en and people only onl y know as much as Bob had told them.
This problem can be explained on the basis of Bourdieu’s theory of practice pra ctice in several ways. When management personnel from Bob’s former company came in, they began to change the
manner in which the structure interacted with agents. They started telling people what to do instead of letting them have their say and participate in the decision making process. This rules and norms slowly became ingrained in the habitus of agents working in the organization and this caused a drift away from the original culture. Furthermore, since Bob had access to most resources in the organization, he was inevitably regarded as the most powerful person in the organization. This resulted in everyone following his express directions without questioning any of his strategies or accessing impact of these strategies on the organization in the long run (Ma & Tayles, 2009). 2009). Consequences of this problem could be realised majorly in the form of internal organizational tension. Various departments felt that that Bob is taking their functionality away from them without providing any explanation. They also felt that they were being ruled by outsiders who had little or no knowledge about core values of the organization. This created organizational tension. Management teams within the organization could not function in a cross functional manner as they only had access to specific knowledge. Employees of the organization were no longer valued the way they had been till now and this resulted in high employee turnover. Since local store managers and employees were no longer a part of the decision making process, their responsibility responsibilit y and accountability towards a blunder decreased and the management no longer was able to hold a single person/ group of people responsible for something that had gone wrong(Parker, wrong(Parker, 2011). 2011).
Inventory and Infrastructure A third most significant problem faced by Lululemon might be recognised in the form of lack of inventory and infrastructure. In accordance with academic literature, the theory of legitimation crisis has been well recognised and supported in the field of management accounting. In accordance with this theory, an organization and the accounting management system within might be treated as a structure where crisis might be caused as a result of four different factors namely rationality, economic, motivation and legitimacy. ERP systems in organizations were developed as a result of increasing popularity of this approach and to be able to deal with uncertainties in these four areas (Joensson & Lukka, 2006). 2006).
In this case Lululemon had been expanding fairly quickly. It had gone from under 20 stores in a domestic market to approximately 35 stores in both Canada and the U.S under a rapid expansion plan. This did not give the company enough time or resources to put the required amount of research in getting the order quantities right, doing demand forecasting and retail assortment etc. Hot products from the company would therefore vanish from stores in a matter of three days thereby revealing a huge gap in production and demand. This problem can easily be explained on the basis of the theory of legitimation crisis. The theory clearly suggests that an accounting management system in an organization might experience crisis based on four different factors. In this case, economy of production contributed to the crisis as production costs were extremely high and this came in addition to off shore production and a distribution system for two different countries. The idea of fuelling expansion without first building the required inventory base had appeared legitimate at first. Motivation levels within the organization were at an all time low as everyone had been operating only on a limited amount of information thereby resulting in huge communication gaps which further served to widen the gap between production and demand (Malmi & Granlund, 2009). 2009). Consequences of this problem could be recognised in the form of a drop in per square foot of sales even as the company kept expanding. The brand’s overall image was stained and customers could no longer trust the brand to fulfil its commitments. Performance and therefore profit margins of stores dwindled even further thereby increasing the company’s
financial losses (Nielsen, 2010). 2010).
Conclusion Looking at the above discussion, it might be concluded that three most significant problems that Lululemon was faced with consisted of cross border expansion and location control, cultural shift from its original values and inventory and infrastructure problems. These problems combined together resulted in severe consequences for the brand including financial losses, a stained image, higher employee turnover, poor cost recovery and loss of valuable clients to competitors.
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