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Under Armour: Business Strategy Case Study

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Under Armour: Business Strategy Case Study Powered By Docstoc
					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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