UNIVERSITY OF THE PHILIPPINES In the Visayas Cebu College Gorordo Ave., Lahug, Cebu City ________________________________________________ In partial fulfillment of the course requirements of Management 173 Case No.2 L.A. Gear, Inc. ________________________________________________ Presented to Prof. Gretchen Chaves Presented by Balingcasag, Honeylyn Gabucan, Anya Homecillo, Marie Grace Mesa, Maria La Arnie Laput, Wynn
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UNIVERSITY OF THE PHILIPPINES
In the Visayas
Cebu College
Gorordo Ave., Lahug, Cebu City
________________________________________________
In partial fulfillment
of the course requirements of
Management 173
Case No.2
L.A. Gear, Inc.
________________________________________________
Presented to
Prof. Gretchen Chaves
Presented by
Balingcasag, Honeylyn
Gabucan, Anya
Homecillo, Marie Grace
Mesa, Maria La Arnie
Laput, Wynn
February 9, 2010
I. SITUATIONAL ANALYSIS
INDUSTRY ANALYSIS
The athletic shoe market comprised about 50% of the US general footwear market.
The domestic retail shoe market was expected to continue to grow at a rate of 5.5 percent
until the end of 2000.
In the US, the two largest athletic shoe makers were Nike and Reebok with a
combed 50% share of the market. Majority of their products are manufactured in countries
outside the US such as the Asian, European, and South American countries. This caused
the high mark-ups to the retailers and consumers which were nearly 100%.
The footwear industry was seasonal rather than cyclical. Fluctuations in sales and
profitability were attributed to changes in advertising expenditures, price, product quality and
overall market trends.
Barriers to entry such as dependence on heavy advertising, brand awareness and
intensive R&D made entry to the footwear industry difficult. Companies spent large amounts
to do advertising which were their means for promoting new styles and creating brand
awareness. This made it difficult for the smaller companies which do not have enough
revenues to produce effective marketing campaigns. Brand awareness was also a barrier to
entry since consumers usually purchase based on “how they perceived the brand to perform
or on its fashion characteristics”. Research and development demanded excessive capital
from a company. Large budgets were allocated on R&D because this was how the company
determines the latest trends of the market and the possible products that it could develop.
Barriers to entry in competitive discount athletic footwear market were less formidable. Mass
producers usually carve out a niche “through brands they licensed or created on their own.”
Many footwear companies were starting to expand their operations overseas
because the US footwear industry was seen as a maturing industry. The international market
offered a bigger consumer base especially that more consumers were starting to get
interested in the US sports like basketball.
FIRM ANAYSIS
LA Gear was founded by Robert Greenberg which initially promoted the Southern
Californian lifestyle. Its early success was due to its innovative styling and ability to respond
to the market quickly. As the company grew, it opted for initial public offering and used the
proceeds to fund its growing working capital requirements and to finance advertising and
promotional campaigns. Marketing campaigns often featured scantily clad models and
attractively styled shoes designed primarily for women. The company was also publicly listed
and stocks rose to more than 178 percent. However, the stock price started to decline and
investors were losing confidence on the company. It started to experience financial
difficulties with the failure of its Michael Jackson shoes. Net sales and market share dropped
and net losses were incurred as a result. To enhance its credit rating, it sold 30 percent
stake to Trefoil Capital Investors L.P for $100 million. Following the investment, LA Gear
adopted a retrenchment or turnaround strategy to restructure the company's operations.
Under the turnaround strategy, the top management was replaced (including
Greenberg) and the new board of directors was made up with highly experienced members.
The strategy also introduced a new advertising campaign that was built around the theme
Get in Gear which changed the focus from promoting a fashionable shoe to promoting a
performance shoe. Athletic personalities were contracted for the campaigns instead of
celebrities. Product lines were divided into three categories – athletic, lifestyle and children --
in an effort to create a clear identity for LA Gear. Marketing campaigns focused on projecting
a consistent brand image across varying retail price points and distribution channels. With
this, products were marketed into two brands: the higher priced premium brand LA Tech for
the newly released, and LA Gear brand with domestic prices under $70. The LA Gear logo
was also dropped with the belief that the name was a liability to performance shoes.
The company also reduced its manufacturers to only those which are known for their
quality products as part of the turnaround strategy. It also engaged a sourcing agent that
would inspect finished goods prior to shipment by the manufacturer, supervising production
management, and facilitating the shipment of goods. There was also a reduction of its
employees and company occupancy of leased office space in five buildings to a smaller
space in two buildings. Apparel marketing and design operations were also discontinued.
Comprehensive market research was conducted using a variety of conventional
research techniques in designing its products. It depended on focus groups, product testing
and interviews with customers and retailers.
The company also increased its investment in the international market through joint
ventures, acquisitions of distributors, and the creation of wholly owned foreign subsidiaries.
It began to distribute its products through specific channels using what it called “Gear
Strategy Classification System”. Distribution channels were grouped in terms of Image,
Mainstream, Volume and Value. Each of these group marketed different products of the
company ranging from technological to their aesthetic features. It also adopted a next day
open stock system where retailers could order products and have them shipped within 24
hours. But the system had problems and to address these, the company adopted the futures
ordering system.
LA Gear accumulated inventory greater than necessary for its business because of
the imbalance between inventory purchases and sales. As a result, it sold its inventory at
significant discounts which in turn resulted in lower margins.
ECONOMICAL ANALYSIS
An economic recovery was laid down by the Federal Reserve Board to keep prime
interests low and gradually expand the money supply. Inflation rates were also kept at less
than 4 percent. However, consumer confidence in economic recovery was low and
continued to be a major obstacle to increase consumer and business spending.
LEGAL ANALYSIS
The Textile, Apparel, and Footwear Trade Act was passed which would have set
highly restrictive global quotas on imported textile, apparel and footwear products. However
this was vetoed by Bush and sustained by the House of Representatives. There was high
probability though that the same legislation would be passed again in the future and this
would put restrictions on companies relying on manufacturers outside the US.
Suppliers in Taiwan, China, Indonesia and South Korea were placed under “priority
watch list” for engaging in unfair trade practices. If proven to be engaged in such practices
and the US might retaliate against them, this would result to increases in the cost or
reductions in the supply of footwear.
POLITICAL ANALYSIS
Markets which were previously closed to Western companies were now fairly wide
open because of the political changes in Eastern Europe and the Soviet Union. This may
perhaps a good advantage for companies who have a vision of expanding their operations
internationally, particularly in this country. US footwear companies had the chance of
importing and distributing their goods to this country.
Enactment of NAFTA among the US, Canada and Mexico, was likely to strengthen
US exports. They had also expected tariff reductions which consequentially may raise U.S
real GNP by 2000.
CULTURAL ANALYSIS
In the U.S market, as well as the other countries, were favorable for footwear
producers. An increasing segment of the population was becoming more health conscious,
engaging in athletic activities such as jogging and walking. Walking had an increasing
popularity, thus, it was anticipated that the walking shoes market was the largest in the
footwear industry. This market includes those in the mid-30s and up.
II. PROBLEM IDENTIFICATION
Problem
What strategy will the company implement to increase L.A. Gears’ sales and
market share?
How will LA Gear revive its brand image to regain its leadership in the US footwear
market?
Sub Problem:
How would the company position L.A. Gear to the U.S. market?
Objectives
To increase sales by 30% in one year.
To increase market share by 10% in one year.
To increase inventory turnover rate by 20% in one year.
Key Results Area
Criteria Percentage
Increase market share 40%
Increase sales 40%
Increase turnover rate of
products20%
Total 100%
The criteria that the group had placed in the Key Results Area came from the
established objectives. The group had placed a higher percentage of 40% on the market
share because it is the measurement of brand equity for L.A. Gear. Sales also received 40%
percent because it measures the market share and enables to company to continue
operations. The turnover rate of products was given a 20% because part of the plan is to be
efficient in the inventory management of the company.
III. EXTERNAL ENVIRONMENT
In external environment, there are relevant factors affecting the whole footwear
industry especially L.A Gear and these are: recession, price reduction of competitors,
NAFTA (North American Free Trade Agreement) among the U.S, Canada, and Mexico
markets, fluctuations in the value of currencies, export duties, import controls, trade barriers,
restrictions on transfer of funds, work stoppage, and political instability. These factors have
both advantages and disadvantages since it has a direct relationship on the company’s
import and export activities.
Together with the relevant factors in the industry are the opportunities and threats in
the environment that surrounds L.A Gear. These opportunities are: Growth of international
market; unfocused marketing of Adidas and Puma; International distribution agreements to
independent distributors to maintain a consistent product offering and brand image
throughout the world; and the lifestyle changes in U.S, as well as in many other countries.
The threats also include: maturing footwear market; use of foreign manufacturing
facilities subjected the company to the customary risks of doing business abroad; presence
of competitors both in domestic and foreign market; and the effects of recession.
IV. INTERNAL ORGANIZATIONAL ENVIRONMENT
Under internal environments are the strengths and weaknesses that the company
needed to focus on. The strengths are: New Top Management, adoption of retrenchment /
turnaround strategy, clear outline of the mission and objectives, product development
strategy geared to clear product line and differentiation, “Get in Gear” concept, marketing of
performance shoes under two brand names, foreign manufacturing facilities for lower
production cost, “Sourcing” agents for quality control, Increase in research and development