Under Armour: Business Strategy Case Study
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Rotimi Oyewole December 17, 2010 INBM 400 Seminar Final Case Study Under Armour Under Armour is an emerging company in the sports apparel industry whose mission is to “Make all athletes better through passion, science and the relentless pursuit of innovation”.1 Under Armour was a disruptive innovator in the sports apparel industry by creating sports apparel using synthetic materials as an alternative to natural fibers, such as cotton. This important change in material resulted in a “shirt that provided compression and wicked perspiration off your skin rather than absorb it…that worked with your body to regulate temperature and enhance performance”.2 This promise to increase athletic performance differentiated it from competing sports apparel companies, but rivals have since implemented synthetic materials into their product lines. This case study seeks to analyze Under Armour’s history, resources, capabilities, and core competencies, business and corporate-level strategies, as well as the general environment and competitive landscape. After careful inspection of these varying areas, the factors contributing to Under Armour’s current success and future challenges will become clearer. The conception for Under Armour began over a year ago when CEO Kevin Plank played on the University of Maryland football team. Frustrated with having to repeatedly change his cotton shirt during practice, he envisioned a shirt whose 1 Under Armour, Inc. Official Website, 1993 2 Ibid materials allowed the perspiration to dry quickly, causing the athlete to be quicker, faster, and stronger as a result of less burdensome water weight. he strived to develop a shirt using synthetic materials that handled perspiration better. He developed a shirt that used synthetic materials to handle perspiration better and tested the prototype with his own football team. After he graduated, Plank went to different universities trying to sell his product. His big break arrived after managing to earn Georgia Tech’s football team as a client. As the performance apparel market grew, Under Armour diversified their product offerings, and developed different types of performance gear, and ventured into women’s apparel, footwear, and other merchandise. While Under Armour managed to develop an innovative and marketable product, their lack of resources is somewhat concerning. In terms of physical resources, their suppliers are limited thereby decreasing their bargaining power. This results in lack of control in pricing, which often translates to lower profit margins. Additionally, even though the technology behind Under Armour’s products was new, they failed to protect their intellectual property through patents and trademarks, opening up the marketplace to large competitors such as Nike and Adidas. However, one argument against filing patents for their products was that despite their claim of authenticity, it would be easy for counterfeiters and replicators to circumvent the patent and deliver a similar looking product. In regards to Under Armour’s financial resources, despite great growth, their increasing variable costs bloat their operating expenses. This challenges their future sustainability and is worrisome to investors. Nevertheless, one great resource that has had an immense effect on their operations was their investment in SAP software that greatly clarified logistics and distribution. Perhaps more influential in Under Armour’s success, however, may be its intangible resources. For instance, its reputation and popularity especially in the U.S. precedes itself. This is largely due to its authenticity claim; “most budding stars or wannabe weekend recreational athletes want to wear the gear the pros wear.”3 Furthermore, Kevin Plank’s capability to produce great ideas and motivate his employees is not only a resource, but translates into a fertile capability and core competency. When examining the individual processes and behaviors that enable the company to achieve its level of success, it becomes apparent that leadership is a monumental factor. Kevin Plank’s vision, high-risk propensity, ambitious demeanor, and team-driven emphasis all contributed to a distinct management style and human resources philosophy. This combination style accurately exemplifies the highly esteemed theories of transformational, level-five, and entrepreneurial leadership. In addition to providing the underlying vision for an endeavor with his idealized influence, the transformational leader inspires motivation through committing high expectations.4 This in turn acts as a self-fulfilling prophecy— Plank’s own high expectations serve as a model for his employees (Robbins & Judge, 2007, p. 154).5 He also gives personal attention to his employees and treats them 3 Textbook 4 Robbins & Judge, 2007, p. 437 5 Ibid, p. 154 individually. Even as CEO, Plank still has personal relationships with retailers. For instance, according to a Business Week article, “having persuaded big-name professional sports stars to wear his company’s gear, Plank has brought a degree of authenticity to his range that advertising alone cannot create” (Carey, 2006). This is an example of a leader who has great human skills and charisma, demonstrating “the ability to work with, understand, and motivate other people,” and applies these strengths in conjunction with rhetoric in attempts to persuade.6 Robbins and Judge (2007) characterize a Level-five Leader as someone who is fiercely ambitious and driven but whose ambition is directed toward his company rather than themselves (p. 437). Kevin Plank, as stated earlier, is ambitious for having starting Under Armour and enabling the company to grow to what it has today. He has also voluntarily reduced his salary from $500,000 to $26,000 exhibiting his commitment to the company’s future performance rather than his own personal gain.7 Examples of his level-five leadership are especially noteworthy when observing the essential fifth dimension that distinguishes level-five leaders from others: the combination of humility and strong will (Collins, 2005, pp. 2-3). An example of Plank’s humility would be the fact that even after experiencing extraordinary success as an entrepreneur, he is known to constantly seek professional advice from two of his mentors: the founder of GAP and CEO of EBay. Kevin Plank also practices an entrepreneurial leadership strategy described by highly acclaimed management expert Peter Drucker as “Fostest with the 6 Ibid, p. 7 7 Ulman, 2008. Mostest”.8 This risky strategy consists of creating a new market with the intention of always remaining the leader of it. This is precisely what Kevin Plank has done; while he created a market by coming up with the idea of a more efficient and better- performing material, his leadership and committed direction enabled Under Armour not only to manufacture new products, but also to dominate the competition. This impressive type of leadership is rare and thus a costly-to-imitate core competency. Under Armour’s resources, capabilities, and core competencies such as their leadership, reputation, SAP software and distribution serve as strengths, while their debt and lack of intellectual property are weaknesses. Yet, there are additional external factors that influence Under Armour’s strategy and viability. One concern is the seasonality of their sales. Since their performance apparel is more applicable to sports that are played towards the end of the calendar such as football and basketball, their sales area weak during the beginning of the year. Under Armour has attempted to address this by broadening their product offerings and increasing marketing towards baseball and other sports. In regards to demographics and sociocultural factors, Under Armour has exploited a growing opportunity in sports apparel for women as participation rates, popularity and intensity of female sports continues to increase. Just like other companies though, Under Armour is vulnerable to economic fluctuations given the unnecessary, elastic demand for sports apparel. With an economic downturn in which disposable income decreases, one of the first categories consumers will begin cutting down in is sports apparel. 8 Drucker, Peter. P. 213 A large, yet uncertain opportunity exists in international expansion for Under Armour. While Under Armour was designed for American sports and thus built a core competency and understanding of this market, sports such as American football and basketball have limited popularity outside of this country. They will need to build research and development competency to develop apparel that enhances sports in foreign countries, and improve marketing efforts in these sectors. However, with the overwhelming international familiarity and popularity of competitors such as Nike, such penetration will be difficult. Finally, Under Armour relies on raw materials such as petroleum whose prices, availability, and accessibility are all volatile. Under Armour is in a precarious situation in which there are several external opportunities and threats they must respectively exploit and avoid. The competitive landscape for Under Armour is intriguing. In the performance apparel sector they gained first-mover advantage through disruptive innovation and essentially creating the market. However their failure to secure their intellectual property opened up the marketplace to Nike and Adidas, two behemoths of the sports apparel industry. This enabled the threat of substitutes, one of Porter’s Five Forces of Competition. Further, while Plank believes that a world-class athletic brand should be able “to outfit the athlete head to toe,” the market does not lend itself to the typical first-mover advantage of customer lock-in that software or technology companies employ. Instead, Under Armour must instill customer loyalty through high quality materials and products that communicate the performance aspect of their brand. The only form of lock-in can come in forms of endorsement contracts with athletic teams, leagues and associations, or movie studios such as Warner Bros. While Under Armour experienced first-mover advantage in performance sports apparel, they are second movers in the general sports apparel and footwear sectors. This allows them to opportunity to position their products according to the competitive landscape. However, in the case of international expansion, it is a disadvantage because Nike and Adidas have had generations to popularize their brands. In addition to first and second mover advantage, one competitive factor is Under Armour’s bargaining power in respect to suppliers and buyers. Under Armour’s relies heavily on a small set of suppliers: “seventy to 75 percent of the fabric used in its products from only six suppliers.”9 This reliance gives the suppliers leverage in negotiations, as Under Armour has no other source of gaining certain rare raw materials. Moreover, the lack of bargaining power, as mentioned earlier, reduces Under Armour’s flexibility over their pricing. In regards to their bargaining power of buyers, they are in a similar situation. Given their emphasis of performance apparel, their pursuance of the high-end sector means larger profit margins to offset the high prices they must charge. With their lack of patents, it becomes easier for large companies who utilize revenue sharing to undercut Under Armour—even at a loss—in order to increase multi-point competition with a threatening company that doesn’t have the resources to compete evenly. This results in lower-priced options for competitors. This is a major disadvantage for 9 Hitt, 415. Under Armour, who can now only sell products based on unfounded assertions of “authenticity,” even though competitors have free reign to imitate them. More competitors creating the same product strains the few suppliers of the market, who have a limited amount of capacity that they can produce. Overall, Under Armour faces fierce competition from other larger companies. Such threatening rivals call for a well-devised and solidly executed business- level strategy. Under Armour exercises a focused differentiation strategy by exclusively creating performance products. Their non-standardized products are perfect for customers who prefer performance to price. This marks Under Armour’s heavy emphasis on research and technology development to “offer products that are better than what is currently in the market, and best in class.”10 Their focus strategy aims at specific sports, serving the needs of each sport more precisely than broad apparel companies such as Nike and Adidas. The potent combination of a focus differentiation strategy develops fertile niche positioning while meeting the specified needs of customers. In terms of a corporate-level strategy, Under Armour is still young and small so it practices a low level of diversification. Eight-four percent of their business is from their apparel, and 93% of their sales come from the U.S. This creates a high level of dependence on their performance apparel products. Unlike their competitor Nike, they do not have distinct, separate business units based on sport. While the company is still in its infancy stage, it should eventually adopt a related constrained diversification strategy in which each sport is its own unit, but it shares the 10 Ibid resources of the entire company. Moreover, it needs to continue its recruitment of experienced international business managers to oversee and lead these divisions. Under Armour has developed itself into a desirable brand among athletes. They have properly leveraged its resources, capabilities, and core competencies while taking cautiously taking advantage of its external environment. With its first mover advantage, it has captured a respectable portion of the performance apparel market. However, as the company grows and rivals catch up in this market, Under Armour needs to use its powerful leadership to build a more potent business and corporate level strategy if it wishes to contend with the likes of Nike and Adidas. They also need to pursue new opportunities, such as winter and extreme sports where they can increase multi-point competition and earn higher revenues. With the strong management of CEO Kevin Plank and his emphasis on teamwork, Under Armour should be able to remain competitive and grow even further. References Collins, J. (2005, July). Level 5 Leadership: The Triumph of Humility and Fierce Resolve. Harvard Business Review, 83(7,8), 136-146. Drucker, P. F. (1985). Innovation and Entrepreneurship: Practices and Principles. New York, N.Y: Harper & Row Publishers, Inc. Hitt, Ireland, Hoskisson (2009). Strategic Management: Competitiveness & Globalization. Mason, OH: South-Western Cengage Learning Hyman F. (2003). Kevin Plank: How I Did It. Inc, 25(13), pp. 102-104+. Retrieved December 2, 2008, from ABI/INFORM Global database. (Document ID: 975871911). Judge, T. A., & Robbins, S. P. (2007). Organizational Behavior (12th ed.). Upper Saddle River, NJ: Pearson/Prentice Hall. Ulman, D. (2008, March 25). Maryland-based Under Armour's CEO Kevin Plank takes a pay cut. The Daily Record, p. 1. Retrieved November 19, 2008, from ABI/INFORM Dateline database. Under Armour, Inc. Official Website. (1993). Under Armour, Inc. Retrieved December 17, 2010, from www.uabiz.com.
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