Under Armour Executive Summary
Executive Summary
Under Armour (UA) was the pioneer company that introduced performance apparel with moisture management to keep athletes dry, cool, and light while practising or competing. Founded in 1996 becoming a public company in 2005, UA now competes globally in the multisegment retail market for both sports apparel and active wear, though 90% of its sales are in North America. In 2011 UA’s market share was approximately 2.8% compared with Nike at 7.0% and Adidas at 5.4%. UA is in a good financial position with sales of almost $1.5 billion and consistent profits over the past five years, though 2011 saw an 80% increase in its debt obligations compared to the prior year.
Although UA has substantially increased its market share …show more content…
in a short time period and has strong brand recognition in North America they are competing with strong global competitors who have global brand recognition. UA needs to review its strategy to determine how best to compete in this global market. Competition is intense in the sports apparel market but an analysis of the financial statements of Nike, Adidas, and UA show there is opportunity for strong profitability for existing competitors. UA has been able to increase its North American brand awareness by showing the advantages of its differentiated product which has improved athletes’ comfort and performance.
In order to compete in the global markets against Nike and Adidas UA should consider the following four alternatives: mergers or acquisitions, establishment of foreign subsidiaries, joint ventures, or a continuation of the North American strategy to be used in the international markets. The decision criteria used in evaluating each option looked primarily at how to increase UA brand awareness and market share, the financial strain on UA resources, protection of UA patents and intellectual property, and the level of control maintained by UA.
It is recommended that UA pursue appropriate mergers or acquisitions that will increase its resources and competencies internationally and enable UA to more quickly build its market presence. UA’s big competitors have been selling their performance apparel internationally for several years, with the added advantage of already having international brand recognition. Since UA won’t have the first-to-market advantage they had in the US Market they need to carefully find complementary companies that can assist in both brand recognition and in core understanding of the global markets. Significant resources will be required initially, but it is expected that this investment will be paid back within 3 to 4 years. If this alternative proves unsuccessful UA should consider a joint venture or alliance which shifts some of the risk on to those other participants. For the full recommendation and action plan please refer to pages 12 to 13.
Table of Contents
Executive Summary 2
Identification 4
Background 4
Problem Statement (Scope of Report) 4
Current Strategy 4
Analysis and Evaluation 5
External Analysis 5
Macro-Environment 5
Five Forces Analysis 6
Strategic Group Map 7
Key Success Factors 8
Internal Analysis 9
SWOT 9
Financial 9
Alternatives 10
1. Merger and Acquisitions 10
2. Foreign Subsidiaries (Greenfield Venture) 10
3. Joint Ventures and Alliances 11
4. Status Quo – Utilize the US Strategy Internationally 11
Decision Criteria 12
Recommendation 12
Action Plan 13
Contingency Plan 13
Appendix A 14
Appendix B 15
Bibliography 16
Identification
Background
Under Armour (UA), formerly known as KP Sports, was founded in 1996 by former University of Maryland football player Kevin Plank.
KP Sports was the originator of performance apparel engineered with supreme moisture management to keep athletes cool, dry, and light throughout the course of a game, practice, or workout.
The company’s operations started out of the basement of Kevin Plank’s grandmother’s house. Shortly after founding KP Sports, Kevin recruited one of his acquaintances from Maryland University to join the company as a partner. Kip Fulks, the gentlemen brought on as partner utilized his excellent credit rating to open 17 different credit card accounts to fund the cash flow requirements of KP Sports. By 1998 the company’s revenues had increased sufficiently enough for KP Sports to acquire a $250,000 small business loan. The company was ever growing with a broader product line and consumer segments and from time to time it would take out additional loans needed to fund their working capital requirements. It was not until 1999 that Kevin recruited another acquaintance, a gentleman by the name of Ryan Wood from high school, to join the company as Vice President of …show more content…
Sales.
In 2005, KP Sports changed their name to Under Armour and went public. This initial offering generated net proceeds of approximately $114.9 million, from the 9.5 million Class A common stock issued.
Problem Statement (Scope of Report)
Although UA has done well in the present US market, carving out a sizeable market share, it is unknown how their current strategy will be able to compete with fierce rivals like Nike and Adidas on a global frontier. Their big competitors have been able to start selling their performance apparel internationally for several years, with the added advantage of already having international brand recognition, so UA will no longer have the first-to-market advantage that they had in the US Market. If UA hopes to be successful in the global market, they will need to analyze their current strategy while exploring other possibilities to make an informed decision on how best to proceed.
Current Strategy
The company’s principal business activities in 2012 were the development, marketing and distribution of branded performance apparel, footwear, and accessories for men, women, and youths. 90% of its sales were from North American, though international sales were growing. UA uses a broad differentiation strategy as its corporate strategy. It has developed its own patented fabrics to create a differentiated product that its customers are willing to pay a premium for. Its growth strategy includes broadening its product lines, targeting additional consumer segments, increasing distribution, expanding internationally, and growing brand awareness.
UA’s business strategies include how it will compete in each of its product line offerings of apparel, footwear, and accessories for men, women, and youths. Its strategy is to offer a variety of styles and price levels for its customers that will improve comfort, performance, and mobility no matter what weather condition exists. For its apparel it has designed three lines of gear designed to work in various temperatures (HeatGear, ColdGear, and AllSeasonGear). Its footwear is designed to be light, breathable, and high performing. Its line of accessories (such as gloves, headwear and bags) has similar differentiated performance features as UA’s other products.
UA’s main functional strategies include its marketing, brand management and promotion strategies as well as its product design and development strategies. UA has an extremely large marketing budget (close to 168 million in 2011) which includes athlete endorsements, sponsorship of sporting events and advertising costs. It utilizes an in-house promotion and marketing department whose focus is to increase demand and build brand awareness. UA’s main retail marketing strategy is to obtain as much UA exclusive floor space as possible in each of its major retail stores. UA’s product design and development strategy is to continually upgrade its products and to use “visible technology” (Thompson, p C-51) to market the benefits of UA’s products. There is a high degree of collaboration between the sales, product development, and sports marketing teams in identifying opportunities and markets.
UA’s key operating strategies include its distribution strategies and its sourcing, manufacturing, and quality control strategies. Its distribution strategies included wholesale distribution (70%), direct-to-consumer sales (27%), and product licensing (3%). UA has two distribution facilities in Maryland, though it expects to add another facility overseas in the future. Many of UA’s technically advanced fabrics were developed by third parties. These fabrics are available from a small number of sources. In 2011 UA had 23 main manufacturers which operated in 16 countries. All manufacturers had to follow stringent quality control processes and had to adhere to a code of conduct with respect to quality, working conditions and social concerns.
Analysis and Evaluation
External Analysis
Macro-Environment
The macro-environment is positive for the sports apparel industry without many restrictive influences in the political or regulatory realm. The most strategically relevant factors of the PESTEL analysis (political factors, economic conditions, socio-cultural forces, technological factors, environment forces, and legal/regulatory Factors) include the socio-cultural forces and technological factors as noted below:
Socio-cultural Forces
Recreational and professional sports are both very popular in North America and throughout the world. With an emphasis on active and healthy living in addition to the “life skills” learned in playing on sports teams schools and athletic associations offer many sports opportunities for all ages. Professional sports are a multi-billion dollar industry with athletes and coaches making very large salaries. Although there may be aging demographics in some areas of the world enthusiasm for sports remains high.
Technological Factors
Technology has only continued to improve as sports apparel companies continue to refine and develop the relatively newly available “technologically advanced fabrics and specialized manufacturing techniques” (Thompson, p C-43) in an effort to create a more comfortable, drier experience for the athlete. Great strides continue to be made with these products.
Five Forces Analysis
Competition from Rival Sellers (Strong):
Competition among rival sellers is intense. There are approximately 25 brand-name competitors in the market for sports apparel, athletic footwear and related accessories in which (UA competes. UA’s major competitors in its sports performance apparel and athletic footwear include Nike, Inc. and the Adidas Group, both highly successful brand-name global companies. UA competes with other top name brands, such as Columbia, Spyder, and North Face in its performance Skiwear products. Nike is the clear market leader with approximately 17% of the footwear market share and 4.4% of the sports apparel market share.
Customer Bargaining Power (Strong):
Since approximately 70% of UA sales are from retailers, the retailers do have strong bargaining power. 75% of all retail sales are to large retail chains who also sell UA’s competitor products. They have the discretion as to whether to allocate a certain level of floor space exclusively to UA or not. Although there is some differentiation in products between competitors many of the products are fairly standardized, increasing customer bargaining power. The cost of switching to competitor brands is likely fairly low as all competitors will be fighting for key retail space.
Supplier Bargaining Power (Moderate):
UA specialty fabrics and other raw materials come from a relatively small number of sources. In 2011, a little more than half of the fabrics used came from six suppliers in several different countries. With only six suppliers for such a large volume the suppliers do have some leverage in increasing their prices. It seems that it may be difficult for UA to find alternative suppliers, though these suppliers must also depend on the revenues from UA. As such, they will not want to price themselves out of the market and they will want to see UA succeed.
Competition from Potential New Entrants (Weak):
Given the strength and number of large brand name competitors already in the industry the threat of new entrants is relatively weak. The Adidas Group has several well-known brands within its company, such as Reebok, Rockport, and Adidas. Nike and UA are also well-known brands. All of these companies participate heavily in sponsoring sporting events and invest significantly in athlete endorsements. As a result, there are high degrees of customer loyalty, making it difficult for new entrants. These large companies also have well-established networks of distributors. All of these things as well as the capital investment requirements limit the potential of new entrants to the industry.
Competition from Producers of Substitute Products (Weak):
Although it is unlikely that there are significant substitute products in existence, UA and its success shows that it is possible for a creative company to enter the industry with some sort of product which would be more appealing. Additionally, both Nike and Adidas spend significant amounts of money on research and development. It is possible that one of these competitors will be able to develop a next generation substitute product.
Summary
Overall, the industry’s competitive forces are moderate to strong. The competition among rival sellers is quite intense and the retail buyers have significant power in working with all of these sellers. Brand image and loyalty are important in this industry. Nike is a well-established company and the clear market leader, but the Adidas Group is also a global leader. UA has done very well at establishing a solid market share in its sports apparel and training/fitness clothing. Strong profitability is evident in this industry as can be seen in the net profit margins among Nike, the Adidas Group, and Under Armour.
Strategic Group Map
Key Success Factors
Performance and Reliability – To remain competitive in this industry, UA products must meet or exceed customer expectations for high performance and reliability. UA was founded on creating clothing that was cooler, drier, and more comfortable for its athletes. UA must continue producing high quality items which can be counted on. This includes utilizing high quality standards.
New Product Development – In this competitive environment it is important that UA invest sufficient funds into research and development so that it can gain improvements in its fabrics and its products. Additionally, UA must keep a sufficient number and styles of products available to be able to meet various consumer segments, such as it has done with HeatGear, ColdGear, and AllSeasonGear. UA will need to re-examine its product line and its inventory management systems to ensure it is able to better meet customer needs without high levels of excess inventory.
Pricing – Due to the number of brand name competitors in the industry with similar products an appropriate pricing strategy is crucial to UA’s success.
UA will have to remain vigilant in watching competitor prices and discounts given.
Brand and Product Image – Each competitor in this industry will need to continually work on communicating and maintaining its overall brand image that is consistent with its mission and vision. Additionally, certain key products should have high visibility in terms of the image they represent. Loyalty from customers will be driven in part by these branding images.
Customer Support and Services – In part a company is only as strong as it is perceived to be by its customers. UA’s retailers and its direct sale customers must be treated fairly and be given adequate support when purchasing UA products. Retailers (representing 70% of sales in 2011) will be driven to work with UA’s competitors if customer support and service is
lacking.
If Under Armour is able to successfully manage each of these key success factors which matter to its customers it should have continued competitive success for the long-term.
Conclusion
The external environment is conducive to successful results and profitability for the current competitors in the sports apparel industry. Although UA is competing against some large global rivals it has been able to gain substantial market share from 0.6 percent in 2003 to almost 2.8 percent in 2011. This is compared with 7.0% market share for Nike and 5.4% market share for Adidas. UA should be able to remain competitive and earn reasonable profits as long as management remains attentive and pro-active with any changes in the environment.
Internal Analysis
SWOT
Under Armour has a variety of strengths which allows them to compete in the highly competitive sports apparel industry. Over the years, the business has focused on building an authentic brand with high quality apparel that has allowed them to gain significant market share from their competitors. Below you will find an analysis of their internal and external environments.
Strengths
Built an incredibly powerful and authentic brand in a relatively short time
Became the official footwear supplier of major league baseball
Uses superior technically advanced fabrics
Weaknesses
International presence is very low
Limited number of distributors to ship their products
Insufficient tools in place to manage inventory efficiently and accurately
Opportunities
Ability to broaden UA’s product offerings for wear in a variety of recreational activities and sports
Athletic wear, a category historically dominated by men, is seeing significant growth with females
Gender equality continues to grow in other parts of the world
Threats
Highly competitive market
Competitors have a well established footprint in international markets
Materials used in UA products are petroleum-based synthesis and therefore subject to crude oil price fluctuation
Financial
Under Armour financials shows both positive and negatives (see Appendix A for the full financial details). The profitability ratios are in good standing and are relatively stable over the 5 year period 2006-2011. The gross profit ratio indicates that UA has enough revenues to cover operating expenses and leave the company with a profit. The net profit margin shows that their after-tax profits per dollar of sale decreased from 9.05% in 2006 to 6.58% in 2011. That is a drop of 2.47%. The return on total assets and return on shareholder’s equity have both decreased from 2006-2011. A return of 12-15% range is average and Under Armour is at 15.23% as of 2011 which is within the range.
Liquidity analysis shows that the working capital has improved over the years. As of 2011, the company has $506,056 of internal funds to cover its current liabilities. That is $332,667 more that in 2006 showing a big improvement.
The leverage ratios show the negative side of Under Armour. The debt to asset ratio has been increasing from 2% in 2006 to 8% in 2011. This means that 8% of borrowed funds have been used to finance assets. Also the debt to equity ratio has increased from 3% to 12%. This signifies lower creditworthiness, potential excessive debt and a weaker balance sheet. On the other hand, in order for a business to continue growing and compete with the industry taking on additional loans is a requirement. Even though it appears that UA has the capability to pay off the debts these ratios should be watched carefully to ensure that covenants are not broken.
The activity ratios show that UA inventory management efficiency has decreased over the years. As well, the inventory turnover decreased from three in 2006 to two in 2011. While this is not extremely bad this shows that the company is not selling its inventory as fast as it used to back in 2006.
Alternatives
The following alternatives being put forth are available options to UA to help them compete on a global frontier against their fierce competitors:
1. Merger and Acquisitions
Under this alternative, UA can combine with another company or look to acquire other companies to enhance the capabilities and purchasing power of the organization. Mergers and acquisitions are much-used strategic options to strengthen a company’s market position.
Pros:
Provides UA with the opportunity to increased resources and core competencies (Mergers & Acquisitions)
Quickly builds market presence for UA (Mergers & Acquisitions)
Ability to gain knowledge of local markets without costs of acquiring a new company (Merger)
Cons:
Foreign ownership may have negative consequences for consumers loyal to companies who are owned by members of their own country (Acquisition)
May lose key employees (Mergers & Acquisitions)
Challenges relating to building trust, overcoming conflicting objectives, overcoming language/communication barriers, and combing cultures (Mergers & Acquisitions)
2. Foreign Subsidiaries (Greenfield Venture)
UA can look to setup Foreign Subsidiaries that utilize the R&D of UA but act as their own company. This reduces the operational risk on the parent company because each subsidiary is inevitably responsible for its own fate.
Pros:
Each company is run predominately by local employees, increasing the market knowledgebase to make more informed business decisions
Reduced risks of losing intellectual property
Gives UA the ability to exercise full control of operations at any time
Cons:
It may be a slow process finding skilled workers and competing in a foreign market due to culture and technological differences
If the subsidiary does not make significant profit, the parent company must bear the loss
Any legal actions against the subsidiary will likely have a negative impact on the parent company
If unsuccessful in any given country, the added infrastructure becomes a sunk cost
3. Joint Ventures and Alliances
UA can set up a business agreement with other companies indefinitely or for a predefined time to enhance synergies such that both organizations benefit.
Pros:
Access to more financial resources
Reduced rivalry
Ability to utilize the different strengths from each partnering company
Cost savings due to sharing distribution facilities, dealer networks, and marketing costs
Cons:
Profits split between all partners
Less control than other options
4. Status Quo – Utilize the US Strategy Internationally
UA could opt to continue expanding in international markets with much of the same strategy being utilized today. The overall strategy being increased sports apparel offerings, increased brand awareness, and improved supply chain management.
Pros
No additional resources needed to reinvent a strategy that has proved worthwhile in North America
Motions/Plans are already underway (cost savings from not having to cancel/change them)
Familiarity
Instantaneous implementation
Cons
No two markets tend to be alike
UA possesses lower purchasing power in foreign markets compared to their main competitors
Weak international supply chain management
"First-to-Market" advantage does not exist in most foreign markets
Decision Criteria
When going through the process of selecting which alternative should prove the most probable of being successful, we scored the alternatives on the following metrics:
1. Effect on increasing UA Brand Awareness
2. Effect on increasing UA International Supply Chain Management
3. Financial Strain on UA Resources*
4. Level of Increased Market Share in the Short Term (1 - 3 years)
5. Level of Increased Market Share in the Long Term (5 - 8 years)
6. Protection of UA Patents and Intellectual Property
7. Absorption level of Profits
8. Absorption level of Losses*
9. Level of Control
All metrics were scored as Weak, Moderate, or Strong which translated into the values 1, 5, and 9, respectively. The only exception to this metric #3 & #8, which were given reverse values (ie. Weak = 9, Strong = 1).
Please refer to Appendix B to see the results of the Decision Criteria chart.
Recommendation
After analysing all of the alternatives it is recommended that UA adopt option #1, mergers & acquisitions, as their international strategy. The main benefit of this option is UA’s ability to target companies for different reasons. For example, they can choose to target a company with superior supply chain management in international markets or a company with good supplier relations that will help with their international sales. UA can take advantage of an existing company’s (with whom they want to merge or acquire) reputation and core business competencies. This not only gives UA access to further resources but also direct insight into markets. UA should consider merging with a company that has global brand recognition in order to increase its brand recognition outside of North America. More research will be required to determine if UA should use a multidomestic, global, or transnational strategy to achieve the best international results. It appears that both Nike and Adidas favour the global strategy given their global brand recognition.
In contrast, if they go with option #2, subsidiaries, it may be more difficult to align the longer term objectives of all companies with the parent company UA. This option also does not improve UA’s weak international supply chain management. Option #3, joint ventures and alliances, has not been recommended because this will limit the long-term potential of UA to compete internationally. While it may safeguard a portion of losses initially (only up to what has been invested) it will withhold an unlimited amount of profit relative to the percentage of UA ownership. Furthermore, under a joint venture UA may lose control against the local operating management which could negatively impact UA’s long term objectives. Lastly, UA should not continue pursuing their current strategy with international markets. While this may be the least costly, in terms of immediate cash requirements, there are many weaknesses in trying to apply this strategy to the international markets. The most important being is that UA products are likely not going to have the first-to-market advantage because their competitors have already been operating in these countries for several years now.
In summary, UA should focus on international markets through mergers and acquisitions.
Action Plan
The following action plan relates to the recommended alternative of expansion through mergers and acquisitions. It can be viewed as a road map that must be taken by UA.
Short-term (1 - 2 years)
Prepare a full weighted competitive strength assessment with UA, Nike, and Adidas to determine how to best manage UA’s strengths in the global market (such as its innovative products) and how to strengthen its competitive weaknesses (such as lower global brand recognition)
Consider the best type of merger or acquisition for UA, considering the following possibilities
Which countries UA should target, considering whether to continue concentrating in a few countries or to compete in many countries like Nike and Adidas
What company has global brand recognition that would complement UA’s brand image internationally relatively quickly
Which companies could assist and be used to improve UA’s supply chain management overseas, such as providing a distribution warehouse
Which companies have the resources and capabilities to assist in increasing oversea sales
UA needs to consider any barriers to entry of some international markets due to political, cultural and/or legal issues.
Medium-term (3 - 5 years)
Look to acquire/merge with companies identified as being smart opportunities
Determine the best international strategic approach to use (multidomestic, global, or transnational)
Set up benchmarks for their financial and non financial goals and track the progress regularly.
Long-term (6 - 8 years)
Evaluate if further expansion through mergers and acquisitions is still the best option or if another strategy should be adopted
Contingency Plan
Should expansion through mergers and acquisitions not be possible, either because of financing difficulties, inability to find suitable businesses to acquire, or not being able to merge with a worthwhile business it is recommended that UA look into joint ventures and/or alliances. These joint ventures and/or alliances should serve as a short-term solution to increase the brand awareness and international supply chain management of UA. It should also serve to help UA understand the different local markets and begin to learn customer buying habits, preferences, price points, etc.
Any companies identified as a potential candidate for an alliance or joint venture may turn out to be suitable companies for UA to later acquire or with whom to merge. This would again allow UA to pursue the initially recommended approach of expansion through mergers and acquisitions as a vessel to compete internationally.
Appendix A
Appendix B
Bibliography
Thompson, Arthur; Peteraf, Margaret; Gamble, John; Strickland III, A.J. 19th Edition. Crafting and Executing Strategy. McGraw-Hill Irwin.
Under Armour (UA) was the pioneer company that introduced performance apparel with moisture management to keep athletes dry, cool, and light while practising or competing. Founded in 1996 becoming a public company in 2005, UA now competes globally in the multisegment retail market for both sports apparel and active wear, though 90% of its sales are in North America. In 2011 UA’s market share was approximately 2.8% compared with Nike at 7.0% and Adidas at 5.4%. UA is in a good financial position with sales of almost $1.5 billion and consistent profits over the past five years, though 2011 saw an 80% increase in its debt obligations compared to the prior year.
Although UA has substantially increased its market share …show more content…
in a short time period and has strong brand recognition in North America they are competing with strong global competitors who have global brand recognition. UA needs to review its strategy to determine how best to compete in this global market. Competition is intense in the sports apparel market but an analysis of the financial statements of Nike, Adidas, and UA show there is opportunity for strong profitability for existing competitors. UA has been able to increase its North American brand awareness by showing the advantages of its differentiated product which has improved athletes’ comfort and performance.
In order to compete in the global markets against Nike and Adidas UA should consider the following four alternatives: mergers or acquisitions, establishment of foreign subsidiaries, joint ventures, or a continuation of the North American strategy to be used in the international markets. The decision criteria used in evaluating each option looked primarily at how to increase UA brand awareness and market share, the financial strain on UA resources, protection of UA patents and intellectual property, and the level of control maintained by UA.
It is recommended that UA pursue appropriate mergers or acquisitions that will increase its resources and competencies internationally and enable UA to more quickly build its market presence. UA’s big competitors have been selling their performance apparel internationally for several years, with the added advantage of already having international brand recognition. Since UA won’t have the first-to-market advantage they had in the US Market they need to carefully find complementary companies that can assist in both brand recognition and in core understanding of the global markets. Significant resources will be required initially, but it is expected that this investment will be paid back within 3 to 4 years. If this alternative proves unsuccessful UA should consider a joint venture or alliance which shifts some of the risk on to those other participants. For the full recommendation and action plan please refer to pages 12 to 13.
Table of Contents
Executive Summary 2
Identification 4
Background 4
Problem Statement (Scope of Report) 4
Current Strategy 4
Analysis and Evaluation 5
External Analysis 5
Macro-Environment 5
Five Forces Analysis 6
Strategic Group Map 7
Key Success Factors 8
Internal Analysis 9
SWOT 9
Financial 9
Alternatives 10
1. Merger and Acquisitions 10
2. Foreign Subsidiaries (Greenfield Venture) 10
3. Joint Ventures and Alliances 11
4. Status Quo – Utilize the US Strategy Internationally 11
Decision Criteria 12
Recommendation 12
Action Plan 13
Contingency Plan 13
Appendix A 14
Appendix B 15
Bibliography 16
Identification
Background
Under Armour (UA), formerly known as KP Sports, was founded in 1996 by former University of Maryland football player Kevin Plank.
KP Sports was the originator of performance apparel engineered with supreme moisture management to keep athletes cool, dry, and light throughout the course of a game, practice, or workout.
The company’s operations started out of the basement of Kevin Plank’s grandmother’s house. Shortly after founding KP Sports, Kevin recruited one of his acquaintances from Maryland University to join the company as a partner. Kip Fulks, the gentlemen brought on as partner utilized his excellent credit rating to open 17 different credit card accounts to fund the cash flow requirements of KP Sports. By 1998 the company’s revenues had increased sufficiently enough for KP Sports to acquire a $250,000 small business loan. The company was ever growing with a broader product line and consumer segments and from time to time it would take out additional loans needed to fund their working capital requirements. It was not until 1999 that Kevin recruited another acquaintance, a gentleman by the name of Ryan Wood from high school, to join the company as Vice President of …show more content…
Sales.
In 2005, KP Sports changed their name to Under Armour and went public. This initial offering generated net proceeds of approximately $114.9 million, from the 9.5 million Class A common stock issued.
Problem Statement (Scope of Report)
Although UA has done well in the present US market, carving out a sizeable market share, it is unknown how their current strategy will be able to compete with fierce rivals like Nike and Adidas on a global frontier. Their big competitors have been able to start selling their performance apparel internationally for several years, with the added advantage of already having international brand recognition, so UA will no longer have the first-to-market advantage that they had in the US Market. If UA hopes to be successful in the global market, they will need to analyze their current strategy while exploring other possibilities to make an informed decision on how best to proceed.
Current Strategy
The company’s principal business activities in 2012 were the development, marketing and distribution of branded performance apparel, footwear, and accessories for men, women, and youths. 90% of its sales were from North American, though international sales were growing. UA uses a broad differentiation strategy as its corporate strategy. It has developed its own patented fabrics to create a differentiated product that its customers are willing to pay a premium for. Its growth strategy includes broadening its product lines, targeting additional consumer segments, increasing distribution, expanding internationally, and growing brand awareness.
UA’s business strategies include how it will compete in each of its product line offerings of apparel, footwear, and accessories for men, women, and youths. Its strategy is to offer a variety of styles and price levels for its customers that will improve comfort, performance, and mobility no matter what weather condition exists. For its apparel it has designed three lines of gear designed to work in various temperatures (HeatGear, ColdGear, and AllSeasonGear). Its footwear is designed to be light, breathable, and high performing. Its line of accessories (such as gloves, headwear and bags) has similar differentiated performance features as UA’s other products.
UA’s main functional strategies include its marketing, brand management and promotion strategies as well as its product design and development strategies. UA has an extremely large marketing budget (close to 168 million in 2011) which includes athlete endorsements, sponsorship of sporting events and advertising costs. It utilizes an in-house promotion and marketing department whose focus is to increase demand and build brand awareness. UA’s main retail marketing strategy is to obtain as much UA exclusive floor space as possible in each of its major retail stores. UA’s product design and development strategy is to continually upgrade its products and to use “visible technology” (Thompson, p C-51) to market the benefits of UA’s products. There is a high degree of collaboration between the sales, product development, and sports marketing teams in identifying opportunities and markets.
UA’s key operating strategies include its distribution strategies and its sourcing, manufacturing, and quality control strategies. Its distribution strategies included wholesale distribution (70%), direct-to-consumer sales (27%), and product licensing (3%). UA has two distribution facilities in Maryland, though it expects to add another facility overseas in the future. Many of UA’s technically advanced fabrics were developed by third parties. These fabrics are available from a small number of sources. In 2011 UA had 23 main manufacturers which operated in 16 countries. All manufacturers had to follow stringent quality control processes and had to adhere to a code of conduct with respect to quality, working conditions and social concerns.
Analysis and Evaluation
External Analysis
Macro-Environment
The macro-environment is positive for the sports apparel industry without many restrictive influences in the political or regulatory realm. The most strategically relevant factors of the PESTEL analysis (political factors, economic conditions, socio-cultural forces, technological factors, environment forces, and legal/regulatory Factors) include the socio-cultural forces and technological factors as noted below:
Socio-cultural Forces
Recreational and professional sports are both very popular in North America and throughout the world. With an emphasis on active and healthy living in addition to the “life skills” learned in playing on sports teams schools and athletic associations offer many sports opportunities for all ages. Professional sports are a multi-billion dollar industry with athletes and coaches making very large salaries. Although there may be aging demographics in some areas of the world enthusiasm for sports remains high.
Technological Factors
Technology has only continued to improve as sports apparel companies continue to refine and develop the relatively newly available “technologically advanced fabrics and specialized manufacturing techniques” (Thompson, p C-43) in an effort to create a more comfortable, drier experience for the athlete. Great strides continue to be made with these products.
Five Forces Analysis
Competition from Rival Sellers (Strong):
Competition among rival sellers is intense. There are approximately 25 brand-name competitors in the market for sports apparel, athletic footwear and related accessories in which (UA competes. UA’s major competitors in its sports performance apparel and athletic footwear include Nike, Inc. and the Adidas Group, both highly successful brand-name global companies. UA competes with other top name brands, such as Columbia, Spyder, and North Face in its performance Skiwear products. Nike is the clear market leader with approximately 17% of the footwear market share and 4.4% of the sports apparel market share.
Customer Bargaining Power (Strong):
Since approximately 70% of UA sales are from retailers, the retailers do have strong bargaining power. 75% of all retail sales are to large retail chains who also sell UA’s competitor products. They have the discretion as to whether to allocate a certain level of floor space exclusively to UA or not. Although there is some differentiation in products between competitors many of the products are fairly standardized, increasing customer bargaining power. The cost of switching to competitor brands is likely fairly low as all competitors will be fighting for key retail space.
Supplier Bargaining Power (Moderate):
UA specialty fabrics and other raw materials come from a relatively small number of sources. In 2011, a little more than half of the fabrics used came from six suppliers in several different countries. With only six suppliers for such a large volume the suppliers do have some leverage in increasing their prices. It seems that it may be difficult for UA to find alternative suppliers, though these suppliers must also depend on the revenues from UA. As such, they will not want to price themselves out of the market and they will want to see UA succeed.
Competition from Potential New Entrants (Weak):
Given the strength and number of large brand name competitors already in the industry the threat of new entrants is relatively weak. The Adidas Group has several well-known brands within its company, such as Reebok, Rockport, and Adidas. Nike and UA are also well-known brands. All of these companies participate heavily in sponsoring sporting events and invest significantly in athlete endorsements. As a result, there are high degrees of customer loyalty, making it difficult for new entrants. These large companies also have well-established networks of distributors. All of these things as well as the capital investment requirements limit the potential of new entrants to the industry.
Competition from Producers of Substitute Products (Weak):
Although it is unlikely that there are significant substitute products in existence, UA and its success shows that it is possible for a creative company to enter the industry with some sort of product which would be more appealing. Additionally, both Nike and Adidas spend significant amounts of money on research and development. It is possible that one of these competitors will be able to develop a next generation substitute product.
Summary
Overall, the industry’s competitive forces are moderate to strong. The competition among rival sellers is quite intense and the retail buyers have significant power in working with all of these sellers. Brand image and loyalty are important in this industry. Nike is a well-established company and the clear market leader, but the Adidas Group is also a global leader. UA has done very well at establishing a solid market share in its sports apparel and training/fitness clothing. Strong profitability is evident in this industry as can be seen in the net profit margins among Nike, the Adidas Group, and Under Armour.
Strategic Group Map
Key Success Factors
Performance and Reliability – To remain competitive in this industry, UA products must meet or exceed customer expectations for high performance and reliability. UA was founded on creating clothing that was cooler, drier, and more comfortable for its athletes. UA must continue producing high quality items which can be counted on. This includes utilizing high quality standards.
New Product Development – In this competitive environment it is important that UA invest sufficient funds into research and development so that it can gain improvements in its fabrics and its products. Additionally, UA must keep a sufficient number and styles of products available to be able to meet various consumer segments, such as it has done with HeatGear, ColdGear, and AllSeasonGear. UA will need to re-examine its product line and its inventory management systems to ensure it is able to better meet customer needs without high levels of excess inventory.
Pricing – Due to the number of brand name competitors in the industry with similar products an appropriate pricing strategy is crucial to UA’s success.
UA will have to remain vigilant in watching competitor prices and discounts given.
Brand and Product Image – Each competitor in this industry will need to continually work on communicating and maintaining its overall brand image that is consistent with its mission and vision. Additionally, certain key products should have high visibility in terms of the image they represent. Loyalty from customers will be driven in part by these branding images.
Customer Support and Services – In part a company is only as strong as it is perceived to be by its customers. UA’s retailers and its direct sale customers must be treated fairly and be given adequate support when purchasing UA products. Retailers (representing 70% of sales in 2011) will be driven to work with UA’s competitors if customer support and service is
lacking.
If Under Armour is able to successfully manage each of these key success factors which matter to its customers it should have continued competitive success for the long-term.
Conclusion
The external environment is conducive to successful results and profitability for the current competitors in the sports apparel industry. Although UA is competing against some large global rivals it has been able to gain substantial market share from 0.6 percent in 2003 to almost 2.8 percent in 2011. This is compared with 7.0% market share for Nike and 5.4% market share for Adidas. UA should be able to remain competitive and earn reasonable profits as long as management remains attentive and pro-active with any changes in the environment.
Internal Analysis
SWOT
Under Armour has a variety of strengths which allows them to compete in the highly competitive sports apparel industry. Over the years, the business has focused on building an authentic brand with high quality apparel that has allowed them to gain significant market share from their competitors. Below you will find an analysis of their internal and external environments.
Strengths
Built an incredibly powerful and authentic brand in a relatively short time
Became the official footwear supplier of major league baseball
Uses superior technically advanced fabrics
Weaknesses
International presence is very low
Limited number of distributors to ship their products
Insufficient tools in place to manage inventory efficiently and accurately
Opportunities
Ability to broaden UA’s product offerings for wear in a variety of recreational activities and sports
Athletic wear, a category historically dominated by men, is seeing significant growth with females
Gender equality continues to grow in other parts of the world
Threats
Highly competitive market
Competitors have a well established footprint in international markets
Materials used in UA products are petroleum-based synthesis and therefore subject to crude oil price fluctuation
Financial
Under Armour financials shows both positive and negatives (see Appendix A for the full financial details). The profitability ratios are in good standing and are relatively stable over the 5 year period 2006-2011. The gross profit ratio indicates that UA has enough revenues to cover operating expenses and leave the company with a profit. The net profit margin shows that their after-tax profits per dollar of sale decreased from 9.05% in 2006 to 6.58% in 2011. That is a drop of 2.47%. The return on total assets and return on shareholder’s equity have both decreased from 2006-2011. A return of 12-15% range is average and Under Armour is at 15.23% as of 2011 which is within the range.
Liquidity analysis shows that the working capital has improved over the years. As of 2011, the company has $506,056 of internal funds to cover its current liabilities. That is $332,667 more that in 2006 showing a big improvement.
The leverage ratios show the negative side of Under Armour. The debt to asset ratio has been increasing from 2% in 2006 to 8% in 2011. This means that 8% of borrowed funds have been used to finance assets. Also the debt to equity ratio has increased from 3% to 12%. This signifies lower creditworthiness, potential excessive debt and a weaker balance sheet. On the other hand, in order for a business to continue growing and compete with the industry taking on additional loans is a requirement. Even though it appears that UA has the capability to pay off the debts these ratios should be watched carefully to ensure that covenants are not broken.
The activity ratios show that UA inventory management efficiency has decreased over the years. As well, the inventory turnover decreased from three in 2006 to two in 2011. While this is not extremely bad this shows that the company is not selling its inventory as fast as it used to back in 2006.
Alternatives
The following alternatives being put forth are available options to UA to help them compete on a global frontier against their fierce competitors:
1. Merger and Acquisitions
Under this alternative, UA can combine with another company or look to acquire other companies to enhance the capabilities and purchasing power of the organization. Mergers and acquisitions are much-used strategic options to strengthen a company’s market position.
Pros:
Provides UA with the opportunity to increased resources and core competencies (Mergers & Acquisitions)
Quickly builds market presence for UA (Mergers & Acquisitions)
Ability to gain knowledge of local markets without costs of acquiring a new company (Merger)
Cons:
Foreign ownership may have negative consequences for consumers loyal to companies who are owned by members of their own country (Acquisition)
May lose key employees (Mergers & Acquisitions)
Challenges relating to building trust, overcoming conflicting objectives, overcoming language/communication barriers, and combing cultures (Mergers & Acquisitions)
2. Foreign Subsidiaries (Greenfield Venture)
UA can look to setup Foreign Subsidiaries that utilize the R&D of UA but act as their own company. This reduces the operational risk on the parent company because each subsidiary is inevitably responsible for its own fate.
Pros:
Each company is run predominately by local employees, increasing the market knowledgebase to make more informed business decisions
Reduced risks of losing intellectual property
Gives UA the ability to exercise full control of operations at any time
Cons:
It may be a slow process finding skilled workers and competing in a foreign market due to culture and technological differences
If the subsidiary does not make significant profit, the parent company must bear the loss
Any legal actions against the subsidiary will likely have a negative impact on the parent company
If unsuccessful in any given country, the added infrastructure becomes a sunk cost
3. Joint Ventures and Alliances
UA can set up a business agreement with other companies indefinitely or for a predefined time to enhance synergies such that both organizations benefit.
Pros:
Access to more financial resources
Reduced rivalry
Ability to utilize the different strengths from each partnering company
Cost savings due to sharing distribution facilities, dealer networks, and marketing costs
Cons:
Profits split between all partners
Less control than other options
4. Status Quo – Utilize the US Strategy Internationally
UA could opt to continue expanding in international markets with much of the same strategy being utilized today. The overall strategy being increased sports apparel offerings, increased brand awareness, and improved supply chain management.
Pros
No additional resources needed to reinvent a strategy that has proved worthwhile in North America
Motions/Plans are already underway (cost savings from not having to cancel/change them)
Familiarity
Instantaneous implementation
Cons
No two markets tend to be alike
UA possesses lower purchasing power in foreign markets compared to their main competitors
Weak international supply chain management
"First-to-Market" advantage does not exist in most foreign markets
Decision Criteria
When going through the process of selecting which alternative should prove the most probable of being successful, we scored the alternatives on the following metrics:
1. Effect on increasing UA Brand Awareness
2. Effect on increasing UA International Supply Chain Management
3. Financial Strain on UA Resources*
4. Level of Increased Market Share in the Short Term (1 - 3 years)
5. Level of Increased Market Share in the Long Term (5 - 8 years)
6. Protection of UA Patents and Intellectual Property
7. Absorption level of Profits
8. Absorption level of Losses*
9. Level of Control
All metrics were scored as Weak, Moderate, or Strong which translated into the values 1, 5, and 9, respectively. The only exception to this metric #3 & #8, which were given reverse values (ie. Weak = 9, Strong = 1).
Please refer to Appendix B to see the results of the Decision Criteria chart.
Recommendation
After analysing all of the alternatives it is recommended that UA adopt option #1, mergers & acquisitions, as their international strategy. The main benefit of this option is UA’s ability to target companies for different reasons. For example, they can choose to target a company with superior supply chain management in international markets or a company with good supplier relations that will help with their international sales. UA can take advantage of an existing company’s (with whom they want to merge or acquire) reputation and core business competencies. This not only gives UA access to further resources but also direct insight into markets. UA should consider merging with a company that has global brand recognition in order to increase its brand recognition outside of North America. More research will be required to determine if UA should use a multidomestic, global, or transnational strategy to achieve the best international results. It appears that both Nike and Adidas favour the global strategy given their global brand recognition.
In contrast, if they go with option #2, subsidiaries, it may be more difficult to align the longer term objectives of all companies with the parent company UA. This option also does not improve UA’s weak international supply chain management. Option #3, joint ventures and alliances, has not been recommended because this will limit the long-term potential of UA to compete internationally. While it may safeguard a portion of losses initially (only up to what has been invested) it will withhold an unlimited amount of profit relative to the percentage of UA ownership. Furthermore, under a joint venture UA may lose control against the local operating management which could negatively impact UA’s long term objectives. Lastly, UA should not continue pursuing their current strategy with international markets. While this may be the least costly, in terms of immediate cash requirements, there are many weaknesses in trying to apply this strategy to the international markets. The most important being is that UA products are likely not going to have the first-to-market advantage because their competitors have already been operating in these countries for several years now.
In summary, UA should focus on international markets through mergers and acquisitions.
Action Plan
The following action plan relates to the recommended alternative of expansion through mergers and acquisitions. It can be viewed as a road map that must be taken by UA.
Short-term (1 - 2 years)
Prepare a full weighted competitive strength assessment with UA, Nike, and Adidas to determine how to best manage UA’s strengths in the global market (such as its innovative products) and how to strengthen its competitive weaknesses (such as lower global brand recognition)
Consider the best type of merger or acquisition for UA, considering the following possibilities
Which countries UA should target, considering whether to continue concentrating in a few countries or to compete in many countries like Nike and Adidas
What company has global brand recognition that would complement UA’s brand image internationally relatively quickly
Which companies could assist and be used to improve UA’s supply chain management overseas, such as providing a distribution warehouse
Which companies have the resources and capabilities to assist in increasing oversea sales
UA needs to consider any barriers to entry of some international markets due to political, cultural and/or legal issues.
Medium-term (3 - 5 years)
Look to acquire/merge with companies identified as being smart opportunities
Determine the best international strategic approach to use (multidomestic, global, or transnational)
Set up benchmarks for their financial and non financial goals and track the progress regularly.
Long-term (6 - 8 years)
Evaluate if further expansion through mergers and acquisitions is still the best option or if another strategy should be adopted
Contingency Plan
Should expansion through mergers and acquisitions not be possible, either because of financing difficulties, inability to find suitable businesses to acquire, or not being able to merge with a worthwhile business it is recommended that UA look into joint ventures and/or alliances. These joint ventures and/or alliances should serve as a short-term solution to increase the brand awareness and international supply chain management of UA. It should also serve to help UA understand the different local markets and begin to learn customer buying habits, preferences, price points, etc.
Any companies identified as a potential candidate for an alliance or joint venture may turn out to be suitable companies for UA to later acquire or with whom to merge. This would again allow UA to pursue the initially recommended approach of expansion through mergers and acquisitions as a vessel to compete internationally.
Appendix A
Appendix B
Bibliography
Thompson, Arthur; Peteraf, Margaret; Gamble, John; Strickland III, A.J. 19th Edition. Crafting and Executing Strategy. McGraw-Hill Irwin.