La Gear Case Study

Overview

LA Gear is a company that enjoyed a meteoric rise to become the number three branded shoe maker in the country. Through a combination of excellent advertising campaigns and perception in to what kinds of shoes would sell, LA Gear became a major force in the industry in a relatively short period.

Beginning in 1990 however, a convergence of poor decisions and bad luck led to a run of declining revenues and stock price. There were three big factors in this decline that were aggravated by bad decisions and a poor business structure that only seemed to work as long as revenues continued to increase.

The release of the Michael Jackson Shoe in 1990 was supposed to coincide with the release of a greatest hits album. The album failed to materialize and the shoe was a huge failure. The Kareem Abdul Jabbar shoe, the catapult, also failed to sell. To top off the 1990 year, in December, before a nationally televised audience, a basketball player wearing a pair of LA Gear shoes stumbled and fell to the floor when the shoe fell apart as he was running.

Because LA Gear operated with an at once ordering system which forced then to carry a huge amount of inventory, when the new shoes failed to sell and the quality of their shoes were called into question because of the televised incident, they were left with massive inventory costs. They dealt with the inventory by dumping it at deep discounts to wholesalers. This decision angered their full margin customers like NordstromÐŽ¦s who felt that the LA Gear brand had been cheapened by the decision to dump that a discount or value stores.

A good but poorly planned decision to move to a futures ordering system like most of the rest of the industry further served to alienate their customers because systems were not put in place to ensure this transition went smoothly.

What ensued was a several quarter run from 1990-1992 of dramatically decreasing revenues, layoffs, new management, and essentially a loss of focus on what built this company into a success in the first place.

SWOT Analysis

Strengths

„h LA Gear still owns a significant market share at 5%, which positions them for future growth.

„h Their light-up shoes have been a success with kids.

„h LA Gear has enjoyed market leadership in womenÐŽ¦s fashion and childrenÐŽ¦s shoes as its base.

Weaknesses

„h The quality of their shoes was seriously called into doubt after the failure of a pair on national TV. This was a major factor in declining sales across every product category.

„h Non traditional at once ordering system left it vulnerable to high inventory cost. A failure to implement properly a futures ordering system caused a further weakening of sales.

„h By hiring a group of former Reebok executives for a company that is not like Reebok risks damaging the culture at LA Gear and the loss of key talent.

Opportunities

„h Emerging markets in Russia, Eastern Europe and in Asia could be a significant opportunity to grow the business.

„h The larger shoe companies rely heavily on advertising and LA Gear could use a well thought out advertising strategy to help boost sales again.

„h LA Gear is trying to sell at both full margin and discount stores. This strategy is a difficult one to juggle and a decision will probably have to be made to go with one or the other.

„h The company achieved its phenomenal growth by carving out an identity of the Southern Californian lifestyle using sexy ads that appealed to young girls and women most especially. They have the opportunity to return to this philosophy and possibly recapture market share.

Threats

„h Competition is fierce in this industry and it is extremely difficult to increase market share. High R&D and advertising costs are two factors in this industry that make it hard for a small or struggling company to remain competitive.

„h Lawsuits threaten the company financially and in the eyes of consumers.

„h Quality problems are a serious challenge for any company to overcome.

„h Potential regulations governing shoes produced overseas could lead to increased costs or reduced supply.

„h The new corporate culture, a departure from the informal way the company operated previously can lead to talent leaving the company.

Possible Solutions ÐŽV what should they do next?

LA Gear grew to be the number three shoe company because