External Factor Analysis

ExternalFactor Analysis

ExternalFactor Analysis

Theporter’s five forces model is a structure that aims at analyzingthe level of competition within a given industry. The five forcesdefine the competitive intensity within an industry and consequently,it is used to determine the attractiveness of the industry. Theforces are used to ascertain the profitability of the industry. Aprofitable industry is one which the forces act together to increasethe cost-effectiveness of an organization within the industry. Thefive forces as per the porter’s model evaluates the power ofcustomers and suppliers, the threat of substitutes, the ease of newentrants and the intensity of competition (Lululemon Athletica Inc.,2015).

InLululemon`s case, the five forces exist within the sports clothingindustry. Specifically, there are only four significant forces actingwithin Lululemon’s line of specialization. They entail the ease ofnew entrants, substitute products and services, the power of buyersand the competition (Lululemon Athletica Inc., 2015).

NewEntrants

First,new entrants pose as a threat due to the attraction by theprofitability of the apparel industry within which Lululemonoperates. The profitability emanates from the targeted customers andincludes career women that require physical exercise to maintaintheir internal peace.Specifically, Lululemon was able to increaseits sales from 452 million United States Dollars in the year 2010 toUSD 1,512 million in 2014. The business is further characterized bylow operational costs due to the use of the franchise model and theonline platform. Consequently, new entrants only require setting upthe original store and franchise other retailers to sell theirproducts as they subsequently use the online platform (LululemonAthletica Inc., 2015).

Second,the intensity of the threat of new entrants is intensified by thelack of market entry barriers. Lululemon fails to enjoy technologicalpatents in the production of its apparel. The production activitieswere not performed internally since the store did not own nor operateits manufacturing facilities to produce fabrics and make garments.Instead, the store outsourced the fabrics from a group of 65 fabricmanufacturers. Further, the garments were sourced on contracts frommanufacturers. Besides, the company was adamant to enter intolong-term contracts with the fabric suppliers and manufacturers. Itpreferred to transact on an order-to-order basis. The ability tooutsource major operations reduces the entry expenditure and makes iteasy for new entrants to venture the business. Specifically, a newentrant does not need to own a manufacturing unit that is expensivebut rather outsources it from existent manufacturers (LululemonAthletica Inc., 2015).

Inaddition to lower cost, outsourcing of manufacturing operationsimplied that a lot of people knew the production secrets ofLululemon. Specifically, it exposed the choice of the designs and thechoice of fabrics. Consequently, any content producer could easilybegin their business in selling sportswear (Lululemon Athletica Inc.,2015).

Thethreat is further intensified by the lack of customer loyalty andswitching costs for Lululemon’sapparel. Lack of customer loyaltyemanates from the lack of special features in the apparel to identifywith the customers. Special features make the customer stick to theproduct and find it hard to move to a new product. Consequently, thecustomers are easily swayed from one supplier to the other throughordinary means such as color and design. Besides, the lack of brandidentity within the Lululemon’sapparels further contributes to theeasy conviction of buyers by new entrants. The lack of switchingcosts enables the customers to switch swiftly from one product to theother (Lululemon Athletica Inc., 2015).

Threatof Substitute Products

Thethreat of substitute products for Lululemon’s is high. It emanatesfrom the large market for athletic fitness apparel. The marketentails the United States of America and the whole world. Despite theefforts to open more shops, the market for Lululemon’s apparelproduct remains humongous. Besides, the customers buy in smallerquantities, and the best strategy is to encourage repeat purchases.However, the threat of substitutes emanates from the low switchingcosts of the buyers. Besides, the apparel is not very important tothe consumer and implies that they can do without the sportingapparel for some time and hence more threat for substitute products(Lululemon Athletica Inc., 2015).

Besides,the sporting clothes do not form perfect substitutes since they areonly slightly differentiated. The use of products from one supplierdoes not eliminate the need to use other supplier’s products.Besides, sporting apparels are a matter of lifestyle that iscomplicated to understand and create a niche. Most customers differconcerning their preferences concerning material, size, shape andcolor. For example, Athleta specialized its product by improving thecomfort ability and the fashion of the apparel. The competitor thenincluded leisurewear in their product portfolio yet they grew sofast. In the year 2014, the variety of apparel items and colorselections at Athleta exceeded that at Lululemon`s. The use of theinternet in marketing contributes to the threat of new entrants sincethe internet is accessible to the majority of possible manufacturersand buyers. Besides, the internet improves the marketing capabilityof competitors (Lululemon Athletica Inc., 2015).

ThePower of Buyers

Thepower of the consumers of Lululemon’sapparel products appears to bequite high. The power emanates from the oversupply of a varietyproducts. Consequently, customers have a broad range of apparelsubstitutes to choose. The variety originates from the existence ofsmall-scale suppliers like Lululemon, Bebe stores and Athleticafighting over a small market. Besides, there are large suppliers suchas Adidas, Reebok, and Nike. The buyer’s power demands thatLululemonhas to provide an extreme edge in its products to maintainits customers (Lululemon Athletica Inc., 2015).

Buyer’spower further implies that their satisfaction is easily communicated.For example in 2013, Lululemon’s customers were dissatisfied withthe quality of the company’s yoga products. Consequently, thecompany had to recall all the affected products and replace theproducts with more quality. The action implied substantial costs onthe enterprise due to lost sales and additional costs toremanufacture better products. The buyer’s power further impliesthat Lululemon is under continued risk of adverse public relationscaused by poor quality apparels. The bargaining power of thecustomers is further amplified by the low switching costs as they canchoose to move from one supplier to the other without much cost(Lululemon Athletica Inc., 2015).

TheIntensity of Competition

Theintensity of competition within the sports clothing industry is high.First, Lululemoncompetes with big and established wholesalers anddirect sellers of apparel. The apparel was made of special fabricslike those of Nike, Adidas, and Reebok. All of the competitors hadinternationally known brand names. Competitors such as Nike hadwidely spread retail accounts- over 40,000, company owned stores-753and 23distribution centers. Second, the strength of competitionemanated from the fact that the apparels appeared as closesubstitutes with petite differentiation. The new entrants onlyduplicated Lulumelons Ideas and added petite additional features fordifferentiation purposes. The threat is evident from the entrance ofnew formidable competitors such as Athleta, Lucy, and Bebe stores.The new entrants experienced an easy entry and were able to flourishin Lulumelons industry by providing more comfort ability and fashion.The new entrants can easily duplicate the various mediums similar toLululemon. Athleta used the online platform Lucy used the designsfor women’s footwear for style performance and fit for yoga. Similarly, Bebe stores duplicated the collection of apparels forfitness and recreation purposes (Lululemon Athletica Inc., 2015).

Thelack of switching costs for new entrants is further indicated by theimmense growth of the new entrants. For example, Athleta wasestablished in 2011 and had grown from one store to 65 stores inthree years. Besides, Athleta intended to open more stores after theyear 2014. It indicates that the shop had made sufficient profits toenable the forecasted expansion. Similarly was the case for Lucy thathad grown into 65 company-owned stores in 15 countries. Bebe storeshad managed to acquire other250 retail stores. In addition, itboasted with 100 stores that operated with international licensee. It also operated from the online platform (Lululemon Athletica Inc.,2015).

Therealso emerged other retailers at the national and regional levels tocapitalize on the growing sales of the apparel. Retailers such asNordstrom had managed to install 117 full-time departmental stores in36 states and provided its products online.The additional entrantsproduced apparel product at prices lower by 10 percent of the pricesat Lululemon (Lululemon Athletica Inc., 2015).

PESTELis a strategic tool that aids in scanning the external environment ofa business. It is an acronym for Political, Economic, Social,Technological, Legal and the Environment (Lululemon Athletica Inc.,2015).The political environment for Lululemon is stable enough thereare no political associations that seem to affect the apparelindustry. The United States Economic environment is stable. TheEconomy’s health entails thedemanding attitude of the buyers thatseems to favor thegrowth of the apparel industry. The levels ofcustomer’s disposable income seem quite high and they are able tobuy at high prices. The level of employment is high as explained bythe size of the customer base for the apparel industry. The globalEconomy is in good health too and favors high rate of internationalgrowth among the new entrants into the apparel industry (LululemonAthletica Inc., 2015).

Thesocial cultural environment is competitive and customers have a tastefor customized products. The culture calls for high quality productsand producers have to meet customer requirements to sustaincompetition. The technological environment is competitive, theemergence of more competitors implies that the demand formanufacturers of apparel will increase and prices will rise too.Lululemon will require better technology to reduce cost (LululemonAthletica Inc., 2015).

Thelegal environment is favorable and calm. The law has wide doors forapparel producers by allowing an ease to enter and exit. In addition,the law seems to pave way for international markets that encouragethe apparel industry to grow internationally. The environmental arenafor the apparel business seems calm. The productionof apparel isenvironmentally friendly (Lululemon Athletica Inc., 2015).

Summary

Theanalysis of Lululemon’s external environment through the Portersfive forces model indicates thatit operates in a highly competitiveenvironment. Each of the five models indicates significant levels ofthreats. Consequently there is need to conduct constant research anddevelopment to identify more innovative approaches for survival inthe apparel industry (Lululemon Athletica Inc., 2015).

Thethreat caused by new entrants in the sports clothing industry hasproved highly strong. First, the new entrants are attracted by highprofits associated with the industry. Lululemon was able to more thandouble its profits within a period of three years. Second, theintensity emanates from the lack of market entry barriers.Outsourcing of manufacturing operations reduces the market entrycosts and makes the venture affordable to producers that are morecontent. Third, the ability to use leases and franchises furtherreduces the operational cost of the business. The use of the internetfurther magnifies the rate of access to customers (LululemonAthletica Inc., 2015).

Buyersbargaining power is high due to the availability of a broad range ofproducts for consumers to choose. Consequently, the customers aresensitive to prices. A slight difference in the price, design andshape of apparel is enough to cause massive switching of thecustomers. Besides, the low switching cost increases the ability ofbuyers to switch from one product to the other (Lululemon AthleticaInc., 2015).

Theintensity of competition is moderately high in the apparel industry.First, the magnitude of competition is amplified by the existence ofinternational manufacturers. Adidas, Nike and Reebok have anextensive customer experience with large-scale production anddistribution capacity (Lululemon Athletica Inc., 2015).

Thethreat of substitutes is high due to the lack of perfect substitutes.Besides, the intensity results from the absence of perfectsubstitutes. In addition, the apparel industry depends on thelifestyleof the customers that are complex. People’s lifestyles aredifferent and it is difficult to keep track of changes in preferences(Lululemon Athletica Inc., 2015).

PESTELanalysis has identified various threats and opportunities. Thepolitical environment is calm. The economic environment is favorableand presents an opportunity for growth. The social culturalenvironment poses a challenge. The apparel industry players have tomeet high product requirements among customers.The technologicalenvironment poses a challenge in the future. The increase inproducers of apparel increase the demand for apparel manufacturingand consequently, prices are deemed to rise in the near future. Itcalls for devising new ways to reduce costs of production in thefuture. The environmental arena for the apparel industry is calm. Thelegal environment provides an opportunity of easy entry and exit andto conduct international business (Lululemon Athletica Inc., 2015).

References

LululemonAthletica Inc.(2015). Form 10-K (Annual Report). EDGAROnline, Inc. Washington,D.C. 20549.