Lululemon Case Study
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Table of Contents
Introduction
Lululemon was founded in the year 1998 by now Founder
and Chairman Chip Wilson as a speciality retailer which designed, manufactured
and sold women’s athletic apparel that was yoga inspired. The company presented
a unique blend of culture where employees educated customers about the
technology and research that went into their fabrics and why they were better
than competitors. Employees were valued and the company soon began to expand.
The company had opened a total of 20 stores in Canada by the year 2005 and had
become the most favourite athletic brand with combined revenue of $ 40 million.
The company then under the leadership of Bob (Former Reebok CEO) undertook an
aggressive expansion strategy in Canada and the U.S. By 2008, the company had
more than 35 stores and combined revenue of $350 million. The company however
faced several issues and the company’s culture began to fall apart as the new
CEO Christine Dale stepped in.
In light of this discussion, the current report is
aimed at relying on management accounting theories and identifying three unique
problems that Lululemon is faced with. The report also attempts to identify
causes of these problems and their consequences for the organization.
Cross
Boarder Expansion and Location Control
The very first control problem based on management accounting
theory that could be identified in the case consists of controlling locations
where Lululemon stores would open in the U.S.
A management accounting system in literature is
defined as system that has been specifically and uniquely designed for an
organization. This system is responsible for the provision of all necessary
information that the organization might need for making decisions. In other
words, management accounting systems in an organization are responsible for the
provision of reliable and accurate information to the organizational management
(Broadbent, 2012). In accordance with the
Contingency Theory of Management Accounting, this uniquely designed accounting
management system for an organization is contingent on situational or circumstantial
factors in which a firm is progressing. The theory also suggests that
circumstances in which every organization progresses are distinct and they
largely impact mechanism, adoption and sophistication of effective accounting
management system. Six circumstantial factors have been defined in accordance
with the contingency theory. These include the external environment, mission
and strategies, technology, firm interdependence, business unit and knowledge
of observable factors (Carter et al, 2010).
The case clearly explains that Lululemon emerged as a
Canadian entrepreneurial venture. On its way to scaling up, they closely
studied the Canadian marketplace and picked up best possible locations for
every store. They were able to do this as they were well versed with their
customers and their needs. However when the company under Bob Meyer’s
aggressive expansion strategy decided to expand cross borders into the U.S,
they had fairly limited knowledge to operate on. They were new to the American
market, did not understand the real estate in U.S, did not have a very good
real estate head in place and they decided to duplicate the Canadian location
model in the U.S. As a result, they ended up with several high cost locations
where product demand was minimal.
This problem can be explained to be framed by the
contingency theory in several ways. In this case, the external environment of
the firm was formed by the intersection of taxation laws, supply chain and
distribution of two different countries. Given the complexity of the external
environment, the company was not well equipped and merely ended up following
the advice of local developers in the U.S without adequate research (Parker, 2011).
The corporate strategy and mission of the company at
that time had been aggressive expansion. Bob had been provided express
directions from the Lululemon investor board that he was to deliver 35 stores.
Under these express directions, little attention was paid to actual locations
where these stores would be opened and their impact on the company future. Lululemon’s
technology at the time of its inception could be categorised as small batch
production technology which slowly moved up to large batches as the company
expanded. Under the aggressive expansion strategy however, technological
readiness of the company could not be moved to mass production with the speed
of company expansion. Lastly, Lululemon as a company had been designed on
pooled interdependencies and this led to various cost inefficiencies (Parker, 2011).
The greatest consequence of this control problem for
the company could be realised in the form of a constant revenue loss. Lululemon
was trapped with several locations where the store operating cost was very
high. Owing to the fact that there was little to no demand for the product,
this money could not be recovered. Furthermore, these locations had been taken
on long term leases and it was not possible to get out of these leases thereby
resulting in a constant loss of revenue. Lululemon’s difficulties were
escalated by the fact that the revenue loss came at a time of global economic
recession. A bad real estate policy also served to tarnish the brand’s image in
U.S and the brand was often quoted as a failure. Lululemon’s culture could not
be maintained in stores with low demand and sales personnel had to press their
products rather than merely educating customers. Lastly, since the real estate
strategy was not well planned out, the company’s supply chain and distribution
network could not be established effectively thereby resulting in further cost inefficiencies
(Whittle & Mueller, 2010).
The
Cultural Shift and Organizational Tension
Another significant control problem that Lululemon
experienced was that of a cultural shift within the organization.
Academic literature presents evidence to the existence
of Bourdieu’s theory of practice. In this theory, Bourdieu recognised two major
elements namely field and habitus. Here field refereed to overall
organizational structure and habitus refereed to knowledgeability of human
agents involved within the organization. Both these elements interact with each
other on a regular basis and impact on each other. Every individual is a part
of this field and is able to include rules and norms of this field into his/her
own habitus with the help of knowledge or experience. Furthermore, the theory
also suggests that sources of capital that an individual has is responsible for
defining the overall level of power of the individual. Capital has been
expressed by the theory in terms of economic, cultural and social. Therefore,
in accordance with this theory, the most powerful person in the organization
would be the one with most number of connections, greatest social influence and
most access to economic capital (Bourdieu, 1977).
In this case, the investor board at Lululemon had
appointed Bob as the CEO in order to be able to build proper systems, structure
and processes within the organization. Bob realised that a lot of work needed
to be done within a small time frame and this task might not be possible to
properly train and educate the company’s existing staff. In this context, Bob
brought in several members from his former company (Reebok) into the management
and started giving them express directions. This in turn started taking away
from the original model on which the company had been built and organizational
personnel started taking these actions personally. This could also be attributed
to the fact that very little explanation for any particular action was given
and people only know as much as Bob had told them.
This problem can be explained on the basis of
Bourdieu’s theory of practice in several ways. When management personnel from
Bob’s former company came in, they began to change the manner in which the
structure interacted with agents. They started telling people what to do
instead of letting them have their say and participate in the decision making
process. This rules and norms slowly became ingrained in the habitus of agents
working in the organization and this caused a drift away from the original
culture. Furthermore, since Bob had access to most resources in the
organization, he was inevitably regarded as the most powerful person in the
organization. This resulted in everyone following his express directions
without questioning any of his strategies or accessing impact of these
strategies on the organization in the long run (Ma
& Tayles, 2009).
Consequences of this problem could be realised majorly
in the form of internal organizational tension. Various departments felt that
that Bob is taking their functionality away from them without providing any
explanation. They also felt that they were being ruled by outsiders who had
little or no knowledge about core values of the organization. This created
organizational tension. Management teams within the organization could not
function in a cross functional manner as they only had access to specific knowledge.
Employees of the organization were no longer valued the way they had been till
now and this resulted in high employee turnover. Since local store managers and
employees were no longer a part of the decision making process, their
responsibility and accountability towards a blunder decreased and the
management no longer was able to hold a single person/ group of people
responsible for something that had gone wrong(Parker,
2011).
Inventory
and Infrastructure
A third most significant problem faced by Lululemon
might be recognised in the form of lack of inventory and infrastructure.
In accordance with academic literature, the theory of legitimation
crisis has been well recognised and supported in the field of management
accounting. In accordance with this theory, an organization and the accounting
management system within might be treated as a structure where crisis might be
caused as a result of four different factors namely rationality, economic,
motivation and legitimacy. ERP systems in organizations were developed as a
result of increasing popularity of this approach and to be able to deal with
uncertainties in these four areas (Joensson &
Lukka, 2006).
In this case Lululemon had been expanding fairly
quickly. It had gone from under 20 stores in a domestic market to approximately
35 stores in both Canada and the U.S under a rapid expansion plan. This did not
give the company enough time or resources to put the required amount of
research in getting the order quantities right, doing demand forecasting and
retail assortment etc. Hot products from the company would therefore vanish
from stores in a matter of three days thereby revealing a huge gap in
production and demand.
This problem can easily be explained on the basis of
the theory of legitimation crisis. The theory clearly suggests that an
accounting management system in an organization might experience crisis based
on four different factors. In this case, economy of production contributed to
the crisis as production costs were extremely high and this came in addition to
off shore production and a distribution system for two different countries. The
idea of fuelling expansion without first building the required inventory base
had appeared legitimate at first. Motivation levels within the organization
were at an all time low as everyone had been operating only on a limited amount
of information thereby resulting in huge communication gaps which further
served to widen the gap between production and demand (Malmi
& Granlund, 2009).
Consequences of this problem could be recognised in
the form of a drop in per square foot of sales even as the company kept
expanding. The brand’s overall image was stained and customers could no longer
trust the brand to fulfil its commitments. Performance and therefore profit
margins of stores dwindled even further thereby increasing the company’s
financial losses (Nielsen, 2010).
Conclusion
Looking at the above discussion, it might be concluded
that three most significant problems that Lululemon was faced with consisted of
cross border expansion and location control, cultural shift from its original
values and inventory and infrastructure problems. These problems combined
together resulted in severe consequences for the brand including financial
losses, a stained image, higher employee turnover, poor cost recovery and loss
of valuable clients to competitors.
References
Bourdieu, P. (1977). Outline of a
Theory of Practice. Cambridge: Cambridge University Press
Broadbent, J. (2012). Building on
foundations: Analysing and developing the work of Richard Laughlin. Critical
Perspectives on Accounting. http://dx.doi.org/10.1016/j.cpa.2012.09.006
Carter, C., Clegg, S., & Kornberger,
M. (2010). Re-framing strategy: power, politics and accounting. Accounting,
Auditing & Accountability Journal, 23(5), 573–594. http://dx.doi.org/10.1108/09513571011054891
Joensson, S., & Lukka, K. (2006).
There and Back Again: Doing Interventionist Research in Management Accounting.
In Chapman, C., Hopwood, A., & Shields, M. (Eds.), Handbook of
Management Accounting Research (Vol. 1, pp. 373–397)
Ma, Y., & Tayles, M. (2009). On the
emergence of strategic management accounting: An institutional perspective. Accounting
and Business Research, 39(5), 473–495. http://dx.doi.org/10.1080/00014788.2009.9663379
Malmi, T., & Granlund, M. (2009). In
Search of Management Accounting Theory. European Accounting Review,18(3),
597–620
Nielsen, R. (2010). Practitioner-based
Theory Building in Organizational Ethics. Journal of Business Ethics, 93,401–406
Parker, L. D. (2011). Twenty-one years
of social and environmental accountability research: A coming of age. Accounting
Forum, 35, 1–10
Whittle, A., & Mueller, F. (2010).
Strategy, enrolment and accounting: the politics of strategic ideas. Accounting,
Auditing & Accountability Journal, 23(5), 626–646. http://dx.doi.org/10.1108/09513571011054918
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