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In the Visayas
Cebu College
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In partial fulfillment
Management 173
Case No.2
L.A. Gear, Inc.
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Presented to
Presented by
Balingcasag, Honeylyn
Gabucan, Anya
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.
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.
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.
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
Criteria Percentage
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.
Weaknesses:
• Old management’s relentless for fast growth to attain growth objective
Greenberg set higher objectives for the company after it succeeded in
increasing its sales with the brightly colored shoes and sexy ads aimed at teenage
girls. The company tried to challenge big competitors, Nike and Reebok, by directly
adding a line of men’s performance shoes. This move was obviously too much, and
too fast. This caused the image of L.A gear to blur, thus, creating an appalling
publicity. This also has caused poor product quality due to desire of hastily releasing
the new line of performance shoes for men, thus, creating a bad publicity for the
company’s name. Consequentially, it has lost its way form its successful attractively
styled shoes designed primarily for women.
• Delivery delays
These delays refer particularly to the untimely delivery of new product
especially when it is for a certain season. Before the L.A. Gear could delivery, for
example, a spring collection of shoes, their competitors had already launched their
spring collections ahead. Because of this, distributors feel particularly that L.A. Gear
is delayed.
Opportunities
• Growth of international market
This refers to the increasing international footwear net sales. As showed in
Exhibit 3, International footwear sales had increased by 7% in 1992. This may
perhaps be a big chance for L.A gear to be known internationally. This will help them
increase brand awareness and may increase their market share.
L.A Gear had also begun to focus on Asia .Asia is a huge continent, with
large population, and is viewed also as huge market. L.A gear had found this as a
potential retail sales market. Inevitably, L.A gear started promotional alliances and
equity partnerships with Asian companies.
A growing number of consumers overseas were becoming increasingly
interested in the U.S sports. Due to the increasing popularity of US sports worldwide,
people are becoming fascinated in adapting them, particularly in basketball. This
helps advertising reach across the US borders. This will increase brand familiarity,
awareness, and perhaps, popularity.
• The US footwear market was valued at about $12 billion with Athletic shoe
market comprise about $6 billion
This trend of the domestic shoe market was expected to continue to grow at a
rate of 5.5% at least until the year 2000. L.A Gear may perhaps still continue its
operation in the U.S market.
Threats
• The maturing footwear market
U.S footwear industry was maturing and analyst expected that consumers
would purchase more non-athletic footwear than athletic footwear. Many footwear
companies began expanding overseas where the market was expected to grow at a
rate of 23% a year in the next decade due to the growing footwear market in the US.
They can extend their operation and may optimistically gain profitable sales outside
U.S. This will help the company to increase its brand awareness, not just
domestically but also worldwide.
• Use of foreign manufacturing facilities subjected the company to the customary
risks of doing business abroad
L.A gear manufactures their products in China, South Korea, Taiwan and
Indonesia. The footwear products imported into the US by L.A gear were subject to
custom duties. Doing business abroad is subject to customary risk like fluctuations in
the value of currencies, export duties, import controls, trade barriers, restrictions on
transfer of funds, work stoppage, and political instability. Although these factors may
not seem to affect L.A gear, the company still has to be cautious on policies so that
they won’t tarnish their image.
• Effects of Recession
Recession brings the company at risk of scarce resources and low demand of
the market. This makes the company feel unprofitable on their operations.
1. Push Strategy
L.A Gear will drive their product through distribution channels to their final consumers.
They will direct their marketing actions, mainly personal selling and promotions, towards
channel members to encourage them to carry the product and to promote it to final
consumers.
Pros:
Cons:
Retailers in which L.A. Gear will be distributed might give different mark-
up for the product and in the process making pricing inconsistencies.
2. Pull Strategy
L.A Gear will direct their marketing actions, principally on advertising and consumer
promotion toward final consumers to encourage them to buy the product. The strategy’s
objective is to create the demand from the final consumers.
Pros:
This strategy can help the company project and can approximate the number
of inventories to stock since the consumers directly demand to channel
distributors.
The use of aggressive promotion and advertising by the company can reach
and communicate to the greatest possible number of audience. It is not anymore
necessary for the distribution channels to heavily advertise the product.
Nevertheless, these channels serve only as a location where the product can be
acquired.
The company can manage and control their production and distribution
operations since the company rely only on the frequency of consumers’ purchases.
Cons:
• Expensive / Costly
The company becomes familiar with their consumers’ buying pattern. They
can track the frequency of buys and might predict the next buys. However, it is not
too certain that the consumer would really demand or buy according to what the
company expects. Underestimation of the consumers buying trends can ruin the
company’s reputation by creating a bad impression to the consumer. On the other
hand, overestimation of demand puts the company at risks of large inventories.
Evaluation of Alternatives
Alternative Alternative
Criteria Percentage
1 2
In the first alternative which is the push strategy, the group gave 31% in market share
because through distribution channels, it will build brand equity in a way that many retailers
would now want to market L.A Gear. For the increase in sales, the group also decides to
give 33% because there are consumers who prefer convenience where they can easily
purchase and re-purchase L.A Gear anywhere they want. While in inventory turnover, the
group only gave 10% because focusing on distribution channels would increase inventories
on hand as a result of large safety stocks.
The second alternative is the pull strategy which has a 34% in market share. Through
advertisement and intensive promotions, the company will be given the chance to inform and
educate consumers about their product’s unique differentiation that would encourage them
to prefer L.A Gear. A next criterion is increase in sales which yields 36% in such a way that
the more the company communicates their products, the more the costumers will buy it. And
also, promotions will develop brand awareness on the consumers that will definitely turn into
purchase, thus, leads into greater sales. The last criterion is increase in inventory turn over
with 17%. The group decides to give high percentage on this because they believe that
having intensive promotion could leads into greater sales that will also increase inventory
turnover rate.
VII. RECOMMENDATION
Short-term
The group recommends that LA Gear Inc. should adopt the pull strategy in order to
address its current problem regarding the losing sales and market share. Through this
strategy, the company will direct its marketing activities toward final consumers to induce
them to buy the product. Part of the marketing activities is the extensive advertising that
would be an effective tool to convey the message directly to its target markets. It would
increase brand awareness. If the products will successfully deliver the ad campaign and will
gain customer satisfaction, it would strengthen brand equity for LA Gear.
LA Gear Inc will do extensive advertising and consumer promotions to build up
consumer demand. TV spots can be used to advertise the brand to a broader audience
since the television has good mass market coverage. It is also a good media vehicle since
the products need a high visual representation. Consumer magazines have high credibility
and prestige. They also last longer and have a good-pass-along readership. The internet is
also a good advertising medium because it has interactive capabilities. LA Gear can develop
a website so that consumers and members of other publics can visit the site for information.
Consumer promotions should be used to help build long term market share.
Brochures and fliers can be distributed to consumers in different locations to attract
consumers to try the revitalized LA Gear products.
For public relations, the company can hold special events to bring the brand to the
consumers. Press releases have strong impact on public awareness at a much lower cost
than advertising since the company does not have to pay for the space or time in the media.
Rather, it pays for a staff to develop and circulate information and to manage events.
LA Gear can organize trade shows to promote their products. These shows can help
the company reach many prospects and find new sales leads, meet new customers,
introduce new products, sell more to present customers and inform them about LA Gear’s
products.
To build and increase LA Gears’ relations with the public, they can sponsor major
sports events. This tool can help build up corporate image and gain favorable publicity. More
importantly, in can increase short term sales or help build long term market share.
Long-term
After the company will establish back their brand equity and address their problem in
the U.S. market to increase their sales and market share, L.A. Gear would then continue to
internationalize and try to use its U.S promotions in the international market. The
international market is huge, especially Asia. The huge market would be a source for more
sales to the company experience.
Athletic – male and female that belongs to ages 14 – 35 years old, who are highly
involved in sports and recreational activities. They prefer comfort brought about by
good cushioning and proper structure that supports the foot.
Lifestyle – male and female that belongs to ages 14 – 35 years old, likes
fashionable shoes brought about by the design and style
Children – children, both male and female, belonging to ages 5 – 13 years old.
Fashionable and comfortable.
POSITIONING
Athletic
“LA Gear Athletic focuses on delivering shoes with comfort and design. It has good
cushioning and proper structure that supports your feet. It offers true performance during
your sports and recreational activities.”
Lifestyle
“LA Gear Lifestyle focuses on delivering you fashionable shoes. It gives you a lot of
designs and styles to choose from that matches your personality and mood.”
Children
“LA Gear Children focuses on delivering fashionable and comfortable shoes for kids.
It offers good design and style that would complement your kid’s personality.”
IMPLEMENTATION
The group suggests that LA Gear’s new top management should focus on building its
brand image through promotional strategies in order to effectively communicate their
turnaround strategy that would strengthen brand equity. In effect, this would increase the
sales and market share for LA Gear. Pull strategy focuses on the development of trust and
perceived value. The “pull strategy” is preferred by the group since it would directly
communicate to the final consumers. In effect, this would create a buzz and increase
demand for the LA Gear products.
The promotional strategies should follow the categorization made by the new
management: athletic, lifestyle and the children’s line. This is in order to not confuse the
consumers to the products delivered by LA Gear. By building the brand name “LA Gear”, it
would also follow that the categorization made will gain consumer awareness.
In order to effectively relay the message of LA Gear to its consumers, the group
recommends these promotional strategies using the pull strategy.
Media Vehicles
d. Official Website for LA Gear - This will create a portal wherein consumers
could interact with LA Gear and vice versa. This will also be a good platform
to deliver message to the consumers like the upcoming Spring Line
Collection, Summer Special Collection and etc.
The entire pull strategy will be evaluated every year. The main aim of the strategy is
to strengthen the brand equity of L.A. Gear. It will be indicated through the sales that would
come into the company once the strategy would be put into action. The company will then
compare the sales it had received and the promotional expenditure they had incurred in that
year and see if it the spending did pay-off.
For the implementation of the strategy, it will be evaluated quarterly to see its
effectiveness. The company will make a survey of L.A. Gear before they launch their new
promotion. The survey would be about L.A. Gear’s product awareness, knowledge and
preference. After three months, the company would then conduct the same survey and see
where the company stands principally on product awareness and preference. If it improves
the standing of the product it would be retained. In case of failure of promotion, the company
would look into where that particular promotion failed and formulate another or choose
another promotional strategy without repeating the same mistake.