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Linda Park
BUSI_6105_70 MBA Portfolio
Fall 2015
West Texas A&M University
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Linda Park 25 Henderson Avenue Princeton, New Jersey 08540 609-851-6207 [email protected]
OBJECTIVE
To secure a position in the Horticulture Marketing Industry where my knowledge and skills will be utilized for the growth of the Horticultural Industry.
EDUCATION
West Texas A&M University Canyon, Texas
Master of Business Administration emphasis in Marketing December 2015 expected
Master Gardener Mercer County, New Jersey Rutgers University Cooperative Extension November 2015 expected
State University of New York, Fashion Institute of Technology New York, New York
Bachelor of Science in Marketing May, 1987
SUMMARY PROFILE
Eight plus years’ of functional horticultural experience in different capacities. Master Gardener with experience
in social media, marketing, public relations, sales and administration. Horticultural experience selling on start-
up social platforms. Highly skilled in solving needs and creating solutions for customers. Motivated online marketing professional with current social media campaign experience to help grow your business.
PROFESSIONAL EXPERIENCE
Princeton University Princeton, NJ
Administrative Assistant - PT February 2012 to Present
Assist Professor Leonard Barkan, Chair of Comparative Literature Department with administrative
tasks, research and marketing.
Created index for Professor Barkan’s Mute Poetry, Speaking Pictures book published in late 2012
through Princeton University Press. Currently supporting work for forthcoming books due to be
published in 2016.
Princeton University Press Princeton, NJ
Textbook Marketing Promotion Assistant –PT April 2012 – June 2014
Assisted Textbook Promotion Marketing Manager with direct marketing with efforts to increase course
adoptions for soon to be published undergraduate and graduate textbooks marketed worldwide.
Conduct research and analysis to directly market each textbook to select professors and courses. Focus
mainly in biology & behavioral sciences, earth sciences, economics, finance, mathematics, and physics
academic courses.
My direct marketing efforts increased textbook adoptions at premier universities by 5% in the past year.
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Adath Israel Congregation Lawrenceville, NJ
Executive Director/Administrator September 2012 -April 2012
Managed administration, financial, facilities, and purchasing functions of 300-member non-profit organization.
Created, developed and managed all social media including weekly emails on Constant Contact, Word Press
website, Facebook and Twitter.
The Jewish Center Princeton, NJ
Director of Operations February 2008 – December 2008
Management team partner accountable for analysis, planning, and implementation of 2,500-member non-profit
organization supporting administrative and educational offices.
Forecasted, directed and monitored a $2.6 million operational budget.
Recruited, trained, and organized staff of nine, including administrative, financial, and facilities personnel.
Congregation Beth Israel Judea San Francisco, CA
Executive Director/Administrator September 2005 – December 2007
Researched, wrote, and secured $100,000 California Homeland Security Government Grant to upgrade the
security infrastructure and systems of a non-profit organization.
Managed operational, financial, purchasing, and administrative functions of 500 member non-profit organization
with annual budget of $610,000 and over $1.5 million in reserves.
Recruited, trained, and supervised three direct staff, volunteers and committees.
Linda’s Orchids Foster City, CA
Business Owner August 1999 - September 2004
Wrote business plan to create an emerging Internet commerce site selling orchids on eBay marketplace.
Built business from zero to $40,000 of revenue in second year.
Performed all functions of on-line venture from sales, purchasing, financial and distribution to customers
worldwide.
Developed, designed and maintained all publicity for individual auctions on eBay of over 500,000 orchids sold.
Target Specialty Products San Diego, CA
Sales Representative December 1995 - April 1998
Managed sales territory selling fertilizers, pesticides and horticultural supplies to large San Diego horticultural
plant and flower growers in Southern California region.
Closed prospects to obtain annual revenue of $5 million from $3 million in two and a half years.
Recognized company-wide as only sales representative to exceed territory sales goals in 1997, plus increasing
profit margin 18%.
Continuing Education and Horticulture Licenses
2015 New Jersey Certified Fertilizer Applicator License #C005131
2014 Landscape for Life Trainer through the Sustainable Sites Initiative
UC Irvine Extension – Social Media Specialized Studies
New Media Tools/Technology, Social Media Marketing Tool, Social Media/Web 2.0 Essentials courses
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References
Professor Leonard Barkan
Class of 1943 University Professor Princeton University
129 East Pyne
Princeton, New Jersey 08544
[email protected] 609-258-7201 office
609-468-4151 mobile
609-688-0334 home
Julie Haenisch
Senior Text Promotion Manager
Princeton University Press 41 William Street
Princeton, New Jersey 08540
[email protected] [email protected]
609-258-6856 office
609-651-0896 mobile
Judy Gottfried
Bookkeeper
The Jewish Center 435 Nassau Street
Princeton, New Jersey 08540
[email protected] 609-921-0100 office
732-735-9421 mobile
Linda Grenis
Director of Community Outreach
Greenwood House
53 Walter Street Ewing, New Jersey 08628
609-439-6654 mobile 609-802-3900 office mobile
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Table of Contents Introductory Statement……………………………………………………….……6
Goal 1: Professional Communication: Cover Page……………………………….8
Goal 1: Professional Communication: 1.1 Professional Writing………………...9
Lululemon Retail Market Term Project………………………………………….12
Goal 1: Professional Communication: 1.2 Oral Communication……………….53
Personal Book Review……………………………………………………………...54
Goal 2: Leadership: Cover Page………………………………………...…………57
Goal 2: Leadership 2.1 Capacity to Lead………………………………………....58
Reimaging, Revitalizing, and Rebranding Pizza Hut…………………………….61
Goal 2: Leadership: 2.2 Goal Setting………….…………………………………..75
Drive Application Paper…………………………………………………………....76
Goal 3: Business Environment Cover Page………………………………...……..84
Goal 3: Business Environment: 3.1 Business Ethics……………….……..……....86
Analyzing Cyber Security Breaches at Target Corporation Project……...…….87
Goal 3: Business Environment: 3.2 Global Business Environment………..…..127
Patagonia Case Study……………………………………………………………..128
Goal 4: Business Integration Cover Page……………………………………….142
Goal 4: Business Integration: 4.1 Decision Making……………………………..144
Homework #1 Seminar in Finance……………………………………..…...……145
Goal 4 and Objective 4:2: Strategic Planning ………………...……………… ..143
Apple Case Study………………………………………………………………….156
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INTRODUCTORY STATEMENT
I am excited to reach two milestones in my life this year turning 50 years old and
obtaining my MBA. I have wanted a Masters Degree for a very long time. I tried 10
years ago to start taking classes but with two young daughters and working full time it
was just not possible. I have always felt incomplete by not having a graduate degree.
My career has been rich, deep and varied. In my first position out of college I moved into
a position of management very quickly as a purchasing manager where I learned the
ropes of how to work as a team player, motivating my employees and setting up
processes to save money and work efficiently.
I took a different career path next and went school to become a Holistic Health
Practitioner. I built from the ground up a private massage therapy practice. In this career
I learned how to manage budgets, sell my health massage services and how to become
skilled at customizing solutions and needs for clients.
At the same time having my holistic health practitioner practice, I had a large garden and
found tremendous satisfaction growing plants. My next career path became clearer to me
to move into the horticulture industry. I took classes at the local community college to
learn propagation, plant id, and floriculture and even took distance courses through Penn
State in horticulture. This was before there were online courses that one could take on
the Internet. I had found my passion!
I took a position as sales representative for a distributor of pest control products and
fertilizers in the horticulture industry. I was able to work with nursery growers going to
their production sites and helping them to grow healthy plants to sell in the marketplace.
Life changed, my daughter was born and I read an article in the Wall Street Journal that
started my next venture in horticulture, selling plants on eBay. Linda’s orchid was
started in 1999 when eBay was still in its infancy. I sold thousands of orchids all over the
United States on eBay.
Life changed again, another daughter was born and I moved into working in the religious
non-profit community. It was a different type of rewarding career helping others. I felt
honored to manage synagogues for my Jewish communities.
Life changed again, my mom needed more attention and care as she aged, so I went to
work part time to care for her. It has been extremely rewarding working with Professor
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Leonard Barkan who is world-renowned in the field of Comparative Literature and it is a
privilege to work at Princeton University.
In 2016, I plan on obtaining a position in marketing for a company that does business in
or for the horticulture industry. I hope to be able to utilize my social media skills in a
marketing job or a sales position in a horticulture company.
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Goal 1: Professional Communication
Objectives:
1.1 Professional Writing: Demonstrate capacity to employ written presentation
channels to effectively communicate with different levels of personnel and meet
organizational goals.
1.2 Oral Communication: Demonstrate capacity to employ oral presentation channels
to effectively communicate with different levels of personnel and meet
organizational goals.
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Goal 1: Professional Communication: 1.1 Professional Writing
Linda Park
MKT_5344_71 Retail Marketing
Spring 2015
Dr. Turkan Dursun-Kilic
Lululemon Athletica Retail Marketing Term Project
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Goal 1: Professional Communication: 1.1 Professional Writing
MKT_5344_71 Retail Marketing
Spring 2015
Project Requirements: To select a retail organization that is failing and prepare a
comprehensive written project report that discusses the current and future retail
marketing strategies and plans for this failing organization. The project also required us
to work in a two person team to strategize how the retail organization could have done
better in the past and what to do in the future.
Executive Summary: Lululemon Athletica Retail Marketing Term Project meets the
requirements for professional writing with its detailed communication analysis of the
retail market situation for this company. The following report contains a high-level
synopsis of Lululemon’s current state as well as the state of the activewear industry as a
whole. Recommendations for improvements to Lululemon’s Marketing Strategy / Plan;
specifically in the areas of customer service, customer relationship management and
distribution are outlined in the detail of the report.
Introduction: The introduction describes how Lululemon Athletica came in existence
and its history and current organization structure. The entire paper is structured to show
the overall situation of Lululemon from its original creation to its failing along with an
recommendation for improvement from my team.
Background: The report gives a detailed analysis of the rise and fall of Lululemon
Athletica. It delved into the mistakes that were made that created a major crisis for the
organization and how each management decision during the crisis continued to make the
situation worse. Extensive research was undertaken to understand the failings of
Lululemon and corporate strategies that led to bad decisions for the company and the
consequences of the decisions.
Analysis of Issue: A situation analysis including market structure, competitive, macro-
environmental and a SWOT analysis were researched using over 25 sources to
understand the Lululemon organization. Special detail was given to the Lululemon pants
crisis that caused upheaval to the organization with the CEO leaving the company and a
huge drop in the stock price. The paper recommends strategies that Lululemon can take
to improve their customer service, increase customer satisfaction, and improve their
supply chain which needed to be expanded and developed with more reliable suppliers of
their private label products.
Recommendation: Final recommendations were made to the market strategy for
Lululemon Athletica in the report to improve customer service companywide. Also
recommendations were made to improve the public relations strategy to better align with
the Lululemon Manifesto. It was also recommended to create a Lululemon loyalty program
for its dedicated customers and improve its overall distribution strategy where many of the
problems occurred in the quality of the fabric that Lululemon was using for their clothes..
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Conclusion: By implementing the recommended changes Lululemon can mend and
strengthen their customer relations, vendor relations and goodwill in their retail industry.
References: All references are researched, accurate and cited in APA formatting and are
in the Reference section of the paper.
Style: The writing style is to engage the reader in understanding the Lululemon
Company, their background, problem areas and solutions to improve the company. The
writing style enables the reader to fully understand all the dynamics at this organization.
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Lululemon Retail Mkt Term Project
Retail Marketing Term Project
2015 Spring MKT 5344-71
Katie Dye
Linda Park
Team 13
West Texas A&M University
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Lululemon Mkt Project
Executive Summary………………………………………………………………………..3
Background………………………………………………………………………………...4
Signs and Symptoms of Lululemon’s Crisis……………………………………………….7
Situation Analysis…………………………………………………………………………10
Market Structure Analysis………………………………………………………...10
Competitive Analysis……………………………………………………….……..11
Macro-environmental Factors……………………………………………………..13
SWOT Analysis…………………………………………………………………...15
Marketing Strategy/Plan…………………………………………………………………..15
Target marketing and target segment(s)…………………………………………..15
Mission and marketing objectives………………………………………………...16
Product/services mix and related product/service issues………………………….16
Pricing Strategy……………………………………………………………………17
Promotion Strategy………………………………………………………………..18
Placement/distribution strategy……………………………………………………19
Differentiation strategy and Competitive advantage………………………………21
Positioning strategy………………………………………………………………..23
Financials, budgeting, and forecasting…………………………………………….24
Sales forecast………………………………………………………………26
Expense forecast…………………………………………………………...26
Managerial Recommendations for Improvement of
Lululemon’s Retail Marketing Strategy/Plan………………………………………………27
Customer Service…………………………………………………………….……..27
Public Relations…………………………………………………………………….29
Loyalty Program……………………………………………………………………29
Distribution………………………………………………………………………....30
Conclusion…………………………………………………………………………………. 33
References…………………………………………………………………………………..34
Exhibits……………………………………………………………………………………...41
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Lululemon
Executive Summary
Lululemon Athletica, Inc. is a premium technical activewear retailer focused on
meeting the needs of their target customer, which is said to be “a sophisticated and educated
woman who understands the importance of an active, healthy lifestyle.” Secondary target
markets include men and athletic female youth who “appreciate the technical rigor and
premium quality” of their products (Lululemon Athletica, Inc. - Annual Report, 2015, p. 5).
Lululemon has a global presence, but their strength lies in their strong bond with local
communities on an individual store level and their grassroots marketing strategy (Lululemon
Athletica, n.d.). Since becoming public in 2007, Lululemon has experienced tremendous
growth, but this growth has come at cost. Lululemon’s supply chain has not been able to keep
up, and quality issues have arisen along with negative publicity (Kapner & Rubin, 2014).
The following report contains a high-level synopsis of Lululemon’s current state as well
as the state of the activewear industry as a whole. Recommendations for improvements to
Lululemon’s Marketing Strategy / Plan; specifically in the areas of customer service, customer
relationship management and distribution are outlined in the detail of the report.
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Background
Chip Wilson established Lululemon in 1998 to fulfill a need for high-end yoga clothing
that could move and breathe more efficiently. Wilson was fascinated with technical fabrics
and created a design studio to fulfill his passion of creating yoga clothing superior to anything
that was currently on the market. Lululemon’s focus is on technical athletic apparel mostly for
yoga, running, and active lifestyle activities. The first Lululemon store opened in 2000 in the
beach area of Vancouver, British Columbia (Lululemon Athletica, n.d.). These were the initial
steps that led to the transformation of Lululemon into a brand, a store and a lifestyle.
Lululemon was a privately held company until it went public in July 2007. There were
18,200,000 shares of common stock available at the initial public offering. The stock opened
at $18.00 per share (Lululemon Athletica, Inc., 2007). Below are the list individuals that held
leadership positions at Lululemon right before they went public. These names are listed on
their prospectus dated July 27, 2007:
Dennis J. Wilson Chairman of the Board of Directors and Chief Product Designer
Robert Meers Director and CEO
John E. Currie CFO
Mike J. Tattersfield COO
Steven J. Collins Director
RoAnn Costin Director
R. Brad Martin Director
David M. Mussafer Director
Rhoda M. Pitcher Director
Thomas G. Stemberg Director (Lululemon Athletica, Inc., 2007).
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In 2015, the current officers are:
Laurent Potdevin CEO
Stuart Haselden CFO
Tara Poseley Chief Product Officer
Delaney Schweitzer Executive Vice President, Retail Operations
Duke Stump Executive Vice President, Community and Brand
Robert Bensoussan Director
Michael Casey Co-Chairman of the Board
Steven Collins Director
RoAnn Costin Director
William Glenn Director
Martha A.M. Morfitt Director
David Mussafer Co-Chairman of the Board
Rhoda M. Pitcher Director
Thomas G. Stemberg Director
Emily White Director (Lululemon Athletica, Inc., n.d.).
There are five directors who sat on the board in 2007 that still sit on the Lululemon
Board of Directors today. Lululemon’s current organizational structure is shown in the visual
chart below:
Lululemon Organization Structure (Carr & Newell, 2014, p. 195.)
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The guiding principles of Lululemon’s philosophy are outlined in the graphic image
below. Lululemon explains their philosophy as: “the lululemon manifesto: We are passionate
about sweating every day and we want the world to know it. Breathing deeply, drinking water
and getting outside also top the list of things we can’t live without. Get to know our manifesto
and learn a little more about what lights our fire.” (Lululemon Athletica, n.d.)
lululemon manifesto (Lululemon Athletica, n.d.)
Besides apparel, Lululemon also markets accessories and yoga mats for fitness
enthusiasts. They have a girl’s performance apparel line that they market exclusively through
the brand Ivivva under the Lululemon parent brand. Lululemon has evolved from performance
wear for yogis and running enthusiasts to a lifestyle brand whereas their clothes are worn for any
activity (Lululemon Athletica, Inc. - Annual Report, 2015, p. 5). Lululemon has a cult following
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of people who have a desire to wear clothes that are comfortable, flattering and very hip
(Licorish, 2013). Although Lululemon is in the business of selling clothing and accessories, they
have societal objectives as well and want every retail store to be a community hub to educate in
all aspects of healthy lifestyles (Lululemon Athletica, n.d.).
Signs and Symptoms of Lululemon’s Crisis
Lululemon’s troubles began in 2012 when quality issues arose pertaining to multiple
apparel items. First, the colors on some of its tops were not colorfast and were bleeding in the
wash. This resulted in a high number of complaints from customers. Lululemon apologized to
their customers on Facebook. Later that year there were transparency problems with swimwear
of certain colors and some light colored pants as well (Poon & Talley, 2013). Lululemon’s stock
price fell and the Chief Product Officer, Sheree Waterson left the company. The issues cost
Lululemon tens of millions of dollars (Ng, 2013).
The next crisis to roll into Lululemon was the sheerness and transparency of the Luon™
yoga pants. Complaints started coming in early 2013 through the Lululemon blog, Facebook
page, Twitter feed, and Instagram. This turned into a worldwide media frenzy, with customers
stating that the Luon™ yoga pants were too sheer and see-through when one bends over to do a
yoga downward dog. These complaints caused the news to go viral. A press release sent from
Lululemon on March 18, 2013 stated, “The ingredients, weight and longevity qualities of the
pants remain the same but the coverage does not, resulting in a level of sheerness in some of
our women’s black luon bottoms that falls short of our very high standards” (Larcker, Larcker,
& Tayan, 2014, p. 1). That same day, the company wrote a letter to its guests explaining that
Lululemon was offering a full refund or exchange for pants that were purchased after March 1,
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2013. The comments from guests were very clear that they were extremely unhappy with the
pants, and the way that Lululemon was slow in the handling of returns and exchanges
(Lululemon, Inc., 2013). Social media sites reported that when “guests” (Lululemon’s term for
customers) went to the store to return the pants, the “educators” (Lululemon’s term for
salespeople) asked them to put the pants on and bend over so that the educator could really see
that the pants were see-through. If the educator thought the pant was not see-through they
could refuse to do a refund or exchange. This completely outraged Lululemon’s guests since it
seemed individual stores were making decisions on a case-by-case basis regarding whether to
take the pants back or not. Bloggers went viral attacking Lululemon even more on social
media.
According to Lululemon’s Annual Report, which included fiscal year ending March
2013, the Luon™ yoga pants were pulled from all stores, which accounted for approximately
17% of their total inventory. The quality issues were fixed with their manufacturers and the
Luon pants were back in the stores in 90 days (Peterson, 2013). Due to the pants crisis,
Lululemon reported a $17.5 million charge in cost of sales due to the Luon pants on their 10K
Annual Report filed March 27, 2014 (Lululemon Athletica, Inc., 2014 p. 25). The first quarter
fiscal report dated June 2013 stated that the gross profit decreased to $49.4 million from $55
million in 2012 along with income for operations decreasing by 10%. As a percentage of net
revenue, gross profit was 19.1% compared to the prior year at 25.6% (Lululemon Athletica,
2013). Christine Day, the CEO stepped down from her position three months after the luon
black pant fiasco.
It goes from bad to worse for Lululemon. On November 5, 2013 on Bloomberg Business
News, the founder, Chip Wilson made comments that, “some women’s bodies don’t work for our
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clothes,” essentially saying that some women will not fit into the Lululemon pants. The founder,
Chip Wilson goes on to say that for some women the rubbing of their thighs and how much
pressure is in their thighs doesn’t work for the pants (Bloomberg Business, 2013). Chip Wilson
quickly posted an apology on YouTube that did more damage to Lululemon’s image. The
YouTube apology was picked up by many media channels that labeled his apology, “The Worst
Apology Ever” (ABC News, 2013). The tone of the message was directed more to the
Lululemon employees than to the Lululemon customers. To drive the point even further,
different Lululemon stores posted signage on the windows of the stores making fun of the
comments that Wilson said such as, “Cups of Chai / Apple Pies / Rubbing Thighs?” (Exhibit 1.),
(Huffington Post, 2013) in a Maryland storefront and “We Want to Be Transparent With You” in
the storefront window at their flagship store in Vancouver (Exhibit 2.), (Freeman, 2013). In
trying to make light of the situation of their guests and the black sheer pants, they ended up
offending their core clients even more. Negative public relations hurt the company as much as
the quality problems with the pants, and much of the negative publicity came directly from the
way that Lululemon handled the problem.
In this situation, social media’s power had a major impact on continuing the negative
publicity. It just kept getting worse and worse and the more the Chip Wilson talked publicly
trying to fix the problem, the more he made it worse. Lululemon’s Board of Directors did not
step in to help with the social media negativity, and the reputation damage to the Lululemon
name continued, along with the quality issues (Larcker, Larcker, & Tayan, 2014, p. 4).
Lululemon seemed to continue to hurt its reputation by continuing to address the issue, insulting
their guests and denying responsibility for the mistakes. It can be suggested that it may have
been better to remain silent about their opinions on women, their bodies and the pants instead of
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the strategy that they took which ended up taking its toll on the Lululemon stock from a high of
$80 per share in 2013 to a low of $37.25 per share on June 12, 2014 (Google Finance, 2015).
Situation Analysis
Market Structure Analysis
The activewear industry is thriving, and according to Marshal Cohen, Chief Industry
Analyst at the NPD Group, sales growth for this particular category is exceeding that of the
overall apparel industry (NPD Group, Inc., 2014). The chart below shows the effect that the
activewear industry has had on the overall apparel industry over the past three consecutive years.
Cohen states that activewear is becoming very popular for casual, everyday wear in
addition to its intended purpose, and because of this growth, competition is intense (NPD Group,
Inc., 2014). An article in Fortune magazine confirms this new trend, calling activewear
“suddenly chic” (Kell, 2014).
The chart below shows that “more than 9 in 10 consumers say they wear activewear for
purposes other than exercise” and the top driver in their purchasing decision is comfort. This
isn’t just women, or millennials. The survey was conducted with a large cross-section of
consumers, ages 13-70, 50% women and 50% men, and representative of the US population
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regarding ethnicity, income, education, and geography (Cotton, Inc., 2014).
Top Purchase Drivers for Activewear (Cotton, Inc., 2014.)
Competitive Analysis
The athletic apparel industry is highly competitive. Lululemon is at the high end of the
price range for athletic apparel, but the exclusivity that this pricing strategy promotes leads to a
dedicated and loyal customer base. There are six main areas that retailers in this category
compete in: brand image and recognition, product quality, innovation, style, distribution and
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price. Lululemon places emphasis on their premium branding and their focus on innovation
(Lululemon Athletica, Inc. - Annual Report, 2015, p. 5). As yoga and other performance sports
such as running and dance continue to gain traction and popularity, competition will continue to
increase. Lululemon is experiencing pressure from well-established companies that are
expanding their product lines, as well as new market entrants (Lululemon Athletica, Inc. -
Annual Report, 2015, p. 8). They will need to continue to find new ways to differentiate
themselves to win business in a highly competitive environment.
Lululemon’s most challenging competitors are Under Armour, Atheta, Adidas AG,
Nike, Lucy, Title Nine, Prana and Bebe Sport Lululemon Athletica, Inc. - Annual Report,
2015, p. 4). Under Armour, Adidas AG, and Nike are large athletic lifestyle brands that sell to
women, men and children with an abundant assortment of athletic apparel, footwear and
accessories. All three brands use multichannel retailing and sell across multiple distribution
channels (Levy, Weitz, & Grewal, 2014, p. 67). They not only have their own retail stores but
you can find their products at Target or Dick’s Sporting Goods. Prana sells women’s and
men’s active lifestyle yoga and athletic sustainable clothing. Prana has their own retail stores,
and have online partners such as REI, Moosejaw, Zappos and a few others (PrAna, n.d.).
Athleta, Lucy and Title Nine focus on exclusively women’s yoga and athletic wear and are
both very similar to Lululemon’s clothing and accessory styles (Jones, 2010). The price point
for all three are less than Lululemon in the medium to high price range. Bebe Sport is the least
expensive line of activewear exclusively for women and Lululemon considers them a
competitor in their annual report dated March 26, 2015 (Lululemon Athletica, Inc. - Annual
Report, 2015, p. 8).
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Competitor Assessment Graph (Banks, 2014)
Macro-environmental Factors
Lululemon mentions several macro-environmental factors that affect their business in
their annual report. Firstly, they produce their apparel with technically advanced fabrics and
are in constant competition for raw materials, supplier production capacity, and global import
quotas. Lululemon mentions that they are already experiencing supply issues for their fabrics,
and locating alternative suppliers is very difficult because the quality and price must be
comparable. In addition, it would take some time to train a new supplier on Lululemon’s
methods and quality control standards. Lululemon also states that many of the raw materials
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used in their clothing - silver, petroleum, etc. - fluctuate often when it comes to price. This
could have a negative effect on their financial status (Lululemon Athletica, Inc. - Annual
Report, 2015, p. 12).
Another important factor mentioned in the report is the effect that an economic
downturn could have on the business. Most consumers feel that premium athletic apparel is a
discretionary purchase. If consumers have less discretionary income, they will buy less of
Lululemon’s merchandise. There is a direct correlation between consumer confidence and the
demand for Lululemon products (Lululemon Athletica, Inc. - Annual Report, 2015, p. 10).
Finally, Lululemon’s merchandise is largely produced in South and Southeast Asia. As
the economic conditions improve in these areas, their currency begins to strengthen and their
labor costs begin to increase. In addition, if trade relations weaken between North America
and countries in this region, it could have a significant negative impact on Lululemon’s bottom
line (Lululemon Athletica, Inc. - Annual Report, 2015, p. 15).
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SWOT Analysis
Strengths
● Loyal customers
● Innovative fabrics and design
● Community engagement through yoga
instructor ambassadors
● Lifestyle philosophy
● Grassroots marketing of the
Lululemon Brand
Weaknesses
● Reliance on limited number of
suppliers
● Negative PR due to quality issues
● Small customer base
● Customer service
● Supply chain execution
Opportunities
● Global expansion
● Grow the Ivivva Brand
● Expansion in men’s apparel
● Active, healthy lifestyle trend is
growing
● Increase revenue through e-commerce
Threats
● Lower-price alternatives (Athleta)
● New market entrants
● Economic conditions - high end
athletic apparel is a discretionary
purchase for most
● No patents or IP rights on the
technology, fabrics or processes
underlying the products. Competitors
are able to manufacture and sell
products with similar performance
characteristics, fabrication techniques
and styling
Marketing Strategy/ Plan
Target marketing and target segment(s)
According to Lululemon’s annual report, their primary target customer “is a sophisticated
and educated woman who understands the importance of an active, healthy lifestyle.” Secondary
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target markets include men and athletic female youth who “appreciate the technical rigor and
premium quality” of their products (Lululemon Athletica, Inc. - Annual Report, 2015, p. 5).
The age range of the target market is from 14 to 65 years old for women and 22 to 60
years old for men (Soni, 2014). Geographically, target customers are primarily located in high-
income areas of the US and Canada, but Lululemon is strategically targeting customers on a
global scale as well (Lululemon Athletica, Inc. - Annual Report, 2015, p. 5-6).
Mission and marketing objectives
Lululemon’s mission statement is “Creating components for people to live longer,
healthier, fun lives” (Lululemon Athletica, n.d.).
2015 Marketing Objectives (Lululemon Athletica, Inc. - Annual Report, 2015, p. 5-8, 25):
● Invest in the Ivivva brand by aggressively opening more stores and targeting a younger
demographic
● Expand men’s line and increase marketing efforts
● Increase global presence and brand recognition
● Invest in innovation to differentiate from competition
Product/ services mix
Lululemon’s main product line is performance wear for women. Their supplemental
product offerings are performance wear for men, youth, and performance accessories. All
products are designed for “healthy lifestyle activities” (Lululemon Athletica, n.d.). Lululemon
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products are superior in form, fit and function (Lululemon Athletica, n.d.). The clothes are also
able to be layered and are multifunctional for women, which means that women can wear
Lululemon at yoga class and leave it on for the rest of the day with perfect functionality. While
yoga apparel has been the focus of Lululemon’s product offering, they are projecting an increase
in the percentage of products sold in relation to other healthy living activities (Lululemon
Athletica, Inc. - Annual Report, 2015, p. 5).
Lululemon is mainly product-focused, however they do offer a number of services as
well. Complimentary hemming and clothing repair is one service that many customers
appreciate. Additionally, Lululemon offers complimentary yoga classes weekly in each
Lululemon store, and they also host events such as the “2015 SeaWheeze Half Marathon”. Their
website, www.lululemon.com, contains educational tools that assist their customers in living a
healthy lifestyle. Customers can learn how to create a personal vision and goals, and they can
find information about what yoga is, the different types, and how to practice safely. If customers
can’t make it to a Lululemon store for yoga, they have instructional videos on their website that
customers can do at home (Lululemon Athletica, n.d.).
Pricing strategy
Lululemon utilizes a premium pricing strategy. This means that prices are set high to
give buyers a feeling of exclusivity and a sense that the items are of higher quality
(Learnmarketing.net, n.d.). Lululemon wants their guests to feel self-assured, have inner
satisfaction and fulfillment. When a guest sees the Lululemon logo they see a product that they
“must have” and pay full price since there are no discounts, which makes the guest feel that they
are getting “full value”. Lululemon has pricing power because the value equals the perceived
29
benefits divided by the price (Levy, Weitz, & Grewal, 2014, p. 388). The perceived benefits of the
Lululemon brand are so high that the price can also be high because the customers see so much
value in the brand.
Christine Day joined Lululemon as CEO in 2008 and implemented the “planned scarcity”
strategy, which intentionally kept popular Lululemon items in short supply, increasing demand
for the clothing. This enabled Lululemon to charge a luxury price of $100 or more for their
specialty yoga pants (Larcker, Larcker, & Tayan, 2014, p. 1). Individuals who shop at
Lululemon know that they have to buy the items on shelf when they see them because they will
sell out fast and become unavailable.
Due to increased competition and recent quality issues, Lululemon may not be able to
maintain this pricing strategy. Their fabrics are also easily mimicked by changing a small
percentage of the material combination, leaving little room for differentiation and little reason for
consumers to pay a higher price (Peterson, 2014).
Promotion strategy
Lululemon uses a community-based promotion strategy. Through this approach,
they have been successful in building brand recognition and creating a cult-like following.
According to the Wall Street Journal, Lululemon gives free apparel to fitness professionals called
“brand ambassadors” who wear their apparel in the community and serve as advocates for the
brand (Helliker, 2010). While most ambassadors are well-known locally, Lululemon has “elite
ambassadors” that are well known internationally, including 25 Olympians (Soni, 2014). The
ambassadors are a “reference group” for people in their local community, which means that they
influence buying decisions through offering information and enhancing a customer’s self-image
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(Levy, Weitz, & Grewal, 2014, p. 105).
Lululemon also promotes their brand through the use of social media and in-store
community boards. Lululemon is extremely involved in the community at a local store level and
they support many grassroots initiatives to draw in customers (Lululemon Athletica, Inc. -
Annual Report, 2015, p. 7). Lululemon is a niche brand that is narrowly defined and has unique
benefits. One way that they market to their target audience is by using their logo, color schemes
and marketing manifesto on every reusable shopping bag (Carr & Newell, 2014, p. 195).
Lululemon used the pant controversy to their advantage when the recalled pants came
back to the selling floor in November 2013 as “Second Chance Pants”. Lululemon had taken the
pants that were removed from the stores in March and re-engineered them with extra fabric
across the backside and a see-through mesh stripe that runs along the legs, pricing them at
$92.00. It is very clear to Lululemon’s audience that these pants are back and are fixed because
Lululemon communicates the benefits of each product through clever messages on their price
tags. The tag on the “Second Chance Pants” states "These pants were inspired by a need to find
functional and beautiful design solutions for our sheer pants. This is what celebrating failure
looks like!” (Peterson, 2013). (Exhibit #3).
Placement/distribution strategy
Lululemon utilizes a vertical retail distribution strategy and they believe that this
is a competitive advantage because it allows them to have more control over their brand
(Lululemon Athletica, Inc. - Annual Report, 2015, p. 8). Lululemon partakes in vertical
integration by engaging in both backward and forward integration throughout the supply chain,
operating their own distribution centers to supply Lululemon stores (Levy, Weitz, & Grewal,
31
2014, p. 9). A small percentage of Lululemon’s business comes from wholesaling activities.
They partner with yoga studios and other premium fitness centers, mostly as an alternative
distribution channel to build brand awareness in new markets. They do not intend for
wholesaling to be a significant portion of their business (Lululemon Athletica, Inc. - Annual
Report, 2015, p. 7). While Lululemon does not own any manufacturing facilities of their own,
they do strategically select suppliers that they can partner with to develop innovative fabrics that
are ultimately trademarked (Lululemon Athletica, Inc. - Annual Report, 2015, p. 7). Their
exclusive Luon™ signature performance fabric, composed of 86% nylon and 14% lycra, is
crafted solely by a Taiwanese manufacturer called Eclat Textile Company. Eclat procures fiber
from one purveyor, which makes for an extremely narrow undiversified supply chain (Everitt,
2008).
Lululemon is a multi-channel retailer, but they primarily conduct business through their
corporate-owned stores. Lululemon stores are considered specialty stores because they carry a
limited variety (breadth) of merchandise, but a wide assortment (depth). In addition, Lululemon
uses a multi-pronged location strategy, which is consistent with the strategies of many specialty
stores (Levy, Weitz, & Grewal, 2014, p. 52). Lululemon retail stores are strategically located in
malls, lifestyle centers, and mixed-use developments. As of February 1, 2015, they owned 302
retail locations worldwide and they plan to open more over the next few years. In the U.S. there
are 211 stores, 57 stores in Canada, 26 in Australia, 5 in New Zealand, two in the United
Kingdom and one in Singapore. Lululemon opened 48 stores in FY 2014 and closed 1
(Lululemon Athletica, Inc. - Annual Report, 2015, p. 6-7).
Direct-to-consumer sales through channels such as e-commerce is also becoming a large
part of their distribution strategy, representing almost 18% of sales in fiscal year 2014 up from
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16.5% of net revenue in fiscal 2013 (Lululemon Athletica, Inc. - Annual Report, 2015, p. 7). In
addition, they use outlet stores and warehouse sales to sell through outdated inventory at
discounted prices, and they have small showrooms and temporary locations with a limited
selection of merchandise (Lululemon Athletica, Inc. - Annual Report, 2015, p. 7). According to
Lululemon’s Annual Report, their corporate-owned stores that have been open for at least one
year averaged in size of approximately 2,950 square feet and had average sales of $1,678 per
square foot (Lululemon Athletica, Inc. - Annual Report, 2015, p. 7). This number is slightly
down from the number given in our course text, which showed an average of $1800 per square
foot (Levy, Weitz, & Grewal, 2014, p. 53).
Differentiation strategy and Competitive advantage
In addition to differentiating themselves through their distribution strategy, Lululemon
also differentiates themselves through their innovative products. Their design team includes
athletes and people that actually use the products. They work with suppliers to develop
innovative new fabrics that meet the unique needs of their target market. In addition to the
construction of the fabrics, they also develop unique styles, colors and patterns (Lululemon
Athletica, Inc. - Annual Report, 2015, p. 7). Lululemon apparel is made with special materials
such as Silverescent® Luon™ and Luxtreme™ which can withstand the strains of yoga
positions and exercises. The fabric is designed to continue to make the wearer look good in the
clothes even after a workout. Luon™ is trademarked and it is described as, “Our signature
four-way stretch fabric is sweat-wicking and cottony soft - we love this high-performance
fabric for its serious stretch and recovery (Lululemon Athletica, Inc., n.d.). There is light
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Luon™, Luon™ and Full-On Luon™. Luxtreme™ is another fabric that claims it is, “A
sweat-wicking, four-way stretch fabric that’s cool to the touch and fits like a second skin – this
technical fabric offers support and smooth, low-friction performance when we’re working our
hardest” (Lululemon Athletica, Inc., n.d.). Silverescent® is yet another Lululemon fabric
described as follows: “The X-STATIC® technology embedded in Silverescent fabric bonds
99.9% pure silver to the surface of every fibre—which means that there's stink-conquering
technology woven into the very fabric of your favourite workout clothes. And it will never
wash out or stop working” (Lululemon Athletica, Inc., n.d.).
Lululemon also separates themselves from competitors by focusing on women as their
primary target market. Rather than altering men’s fitness apparel to make women’s sizes as
many of their competitors do, Lululemon actually designs around the needs and preferences of
women, allowing for a better fit and style (Lululemon Athletica, Inc. - Annual Report, 2015, p.
5).
Lululemon uses a pyramid model for their clothing designs and for stocking products.
This model implies that a limited number of “wow” items are at the top, seasonal items are in
the middle, and the majority of their inventory including basics such as yoga and running pants
are at the base of the pyramid (Kowitt & Leahey, 2013). This model has allowed Lululemon to
accelerate growth over its years in business.
Lululemon maintains a competitive advantage by being more than just a retailer. Each
store is engaged and actively involved in the local community (Lululemon Athletica, Inc.,
n.d.). Rather than looking at the small picture and pushing their apparel to consumers through
advertising, Lululemon looks at the big picture and finds ways to promote a healthy lifestyle.
34
Lululemon strategically designs each store so that their educators fold clothes near the
dressing rooms and can overhear the conversation as people are trying on clothes. Employees
are trained to be corporate eavesdroppers so that they can learn what the guests want from the
clothes and how they fit (Larcker, Larcker, & Tayan, 2014, p. 330).
To capture, differentiate themselves and expand in the marketplace, Ivivva was created
by Lululemon in 2009 for the children of Lululemon customers with a new line of exclusive
performance apparel-wear for girls in sizes 4-14. There are currently 11 Ivivva stores in
Canada and 22 stores in the U.S (Lululemon Athletica, 2015, p. 2).
Positioning strategy
Lululemon positions itself as a premium brand, only producing products of the highest
quality, and as an industry leader, paving the way for the athletic apparel industry with
innovative new fabrics and styles (Lululemon Athletica, Inc. - Annual Report, 2015, p. 5).
Lululemon shoppers desire clothes that give them a positive body image and fashion forward
design, which goes hand-in-hand with Lululemon’s salon marketing strategy. Lululemon’s
community of educators (salespeople) discusses each guest’s (customer’s) lifestyle and passion
for physical pursuits. Lululemon invests in each guest by learning their strengths, goals, and
where they stand in their journey to a healthy life. Educators are building relationships rather
than providing guests with a transactional experience (Nelson, 2011). Lululemon wants their
customers to feel valued and wants to be a companion on each customer’s fitness journey, not
just another store that is selling a pair of yoga pants. This is one of the reasons that Lululemon
can charge a high retail price.
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Lululemon also positions itself as an active, engaged member of the community. When
a new store opens, guests are invited in to experience the active lifestyle that Lululemon
promotes ((Lululemon Athletica, Inc., n.d.).
Financials, budgeting, and forecasting
Lululemon’s net revenue increased from $1.6 billion in fiscal year 2013 to $1.8 billion in
fiscal year 2014. This 13% annual growth rate had much to do with their global expansion,
opening 48 new stores and seeing a large increase in traffic on their e-commerce website
(Lululemon Athletica, Inc. - Annual Report, 2015, p. 6-7).
However, gross profit did not increase along with revenue. As a percentage of revenue,
gross profit actually decreased by 2 percentage points as a compared to fiscal year 2013.
Lululemon has explained this as an increase in product costs, a different product mix, and
increased usage of air freight (Lululemon Athletica, Inc. - Annual Report, 2015, p. 26). The
chart below depicts the decrease in net income as a percent of total revenue year over year. We
can also see the increase in costs that led to this outcome (Lululemon Athletica, Inc. - Annual
Report, 2015, p. 27). Not unexpectedly, earnings per share also dropped to $1.66 in fiscal year
2014 as compared to $1.91 in 2013 (Lululemon Athletica, Inc. - Annual Report, 2015, p. 26).
36
Retrieved from Lululemon Athletica, Inc. - Annual Report, 2015, p. 27
In order to understand the overall financial health of Lululemon, we must look at several
ratios and numbers from an industry perspective, not just the year-over-year comparison of the
company itself. Charles Schwab provides us with a variety of tools for further analysis. We can
start by looking at Return on Assets (ROA). Lululemon’s current ROA is 18.76%. This number
shows financial strength because the average ROA for the apparel industry is 12.94%
(CSIMarket.com, n.d.). Nevertheless, companies like Lululemon can enhance performance and
achieve a higher ROA by working to better manage both their profit margin and their asset
turnover (Levy, Weitz, & Grewal, 2014, p. 170). We have seen a significant increase in Cost of
Goods Sold over the previous year. If Lululemon can find a way to keep costs in control, their
ROA would increase as well.
In order to further analyze the overall financial health of Lululemon, there are a few other
important ratios that need to be taken into consideration. A high debt-to-equity ratio tells us that
a retailer has a high potential of experiencing significant financial issues (Levy, Weitz, &
Grewal, 2014, p. 174). Lululemon’s debt-to-equity ratio is actually zero. They are debt free.
37
This is definitely a sign of financial strength. In addition, their current ratio is 5.95 and their
quick ratio is 4.65, This means that Lululemon has $5.95 of assets to cover each dollar of
liabilities, and $4.65 of liquid assets to cover each dollar of liabilities. Inventory is excluded in
the quick ratio because it is the short-term asset that takes the longest to convert into cash (Levy,
Weitz, & Grewal, 2014, p. 174). Although Lululemon has had some major setbacks with recalls,
negative PR, and increased costs, we can clearly see that they are still in a strong financial
position and that their risk of going out of business is extremely low.
Sales forecast
To further prove that Lululemon is in a strong position, we can look toward expert
analysts. Polls retrieved from CNN Money show that the median estimate of 12-month stock
price forecasts represents a 1.66% increase from the last price. Analysts are also projecting a
2.16% annual growth in earnings per share and an 11.95% growth in sales (CNN Money, 2015).
Expense forecast
Although no specific numbers are given, Lululemon states in their annual report that
expenses are projected to increase in fiscal year 2015. They have laid the groundwork for their
new men’s line as well as the Ivivva brand, and they plan to continue to invest and open more
stores this year. They also plan to invest in innovation and global expansion (Lululemon
Athletica, Inc. - Annual Report, 2015, p. 25).
Managerial Recommendations for Improvement of
Lululemon’s Retail Marketing Strategy / Plan
Lululemon has recently seen a significant upswing in their sales and they have recovered
quite well from the quality and PR issues that burdened them (Lululemon Athletica, Inc. -
Annual Report, 2015, p. 24). We believe that Lululemon is doing many things well. Their
38
targeted focus on women and separate sub-branding strategies for men and female youth are
some of the things that have been working well for them, along with their grassroots marketing
strategy. We do not want to fix what’s not broken, so we recommend leaving pieces of the
current Marketing Strategy / Plan in place rather than throwing it all away and starting over.
Nevertheless, there are several things that should be improved to ensure that Lululemon
remains successful and can thrive in a highly competitive environment. As Lululemon’s newly
appointed Marketing team, we offer the following recommendations to improve the Retail
Marketing Strategy/ Plan:
● Improve Customer Service Companywide.
● Improve Public Relations Strategy to Align with the Lululemon Manifesto.
● Create a Lululemon Loyalty Program for Lulu’s.
● Improve Distribution Strategy
Customer Service
Outstanding customer service is difficult to duplicate and can be a strategic competitive
advantage for retailers (Levy, Weitz, & Grewal, 2014, p. 516). Lululemon needs consistent
customer service across all channels of engagement with Lululemon guests. Every educator
whether they are in the retail store or at the Guest Education Centre needs to be communicating
the same company message. Educators who answer questions and resolve issues on all social
media channels for Lululemon need to be providing consistent information to their guests.
Lululemon’s quality promise is “if our product doesn’t perform for you, we will take it back -
anytime” (Lululemon Athletica, n.d.). Lululemon management must disseminate this quality
promise to all employees and engage them in working together to satisfying their core
39
customers. Since 2013 there have been more negative reviews of customer service than
positive reviews (Lululemon Athletica, 2013). This shows that Lululemon is experiencing a
“delivery gap” in their customer service quality, meaning that the actual service being provided
does not meet the service standard set by the retailer (Levy, Weitz, & Grewal, 2014, p. 525).
We recommend intensive customer service-training sessions for all employees and brand
ambassadors. This should happen on a regional level and a national level. It should consist of a
series of training classes that become more in-depth as each training session is completed by the
employee. In order for strong customer focus to be embedded into the culture, the training must
be ongoing. There is not an end to the training, just higher levels and testing of current
knowledge to be sure that there is the consistency in the Lululemon customer service program.
To be an “educator” one must first be educated to educate others. Through training of
employees in a focused environment, Lululemon educators and brand ambassadors will have
the tools necessary to provide expert knowledge of the products. They will also develop
confidence in responding to guest inquiries and the ability to anticipate the needs of guests with
each interaction (Novick, 2014).
Public Relations
Embedding values such as customer focus into the culture and ensuring that all
Lululemon team members and ambassadors are communicating the same message will help
improve public relations in addition to customer service levels. Most of Lululemon’s struggles
over the past couple of years have been inflated due to their inability to handle a crisis. Crisis
management is a key component of any company’s PR strategy and needs to become a focus
for Lululemon. We recommend that Lululemon develop procedures for how to handle a crisis
and then train key employees to effectively use these procedures. Planning ahead and
40
practicing helps to iron out issues ahead of time (Meranus, 2014). While there will always be
surprising situations, a clear, focused strategy will help those on the front lines relay the
appropriate information to the public.
Loyalty Program
To further improve guest experience, we advise Lululemon to implement a guest loyalty
program for their dedicated and loyal Lulu enthusiasts. Currently Lululemon has no loyalty
program for its customers. There have been many requests for a loyalty program over the
years from Lululemon’s guests through Facebook, blogs, emails and phone calls. Lululemon
had a #nohumbug loyalty event during the 2013 Christmas shopping season where store
managers were given a few thousand dollars to deliver random acts of kindness to guests
(Shaw, 2014). There were positive and negative reviews of this loyalty event due to it being in
the same year that the pant fiasco occurred.
In order to implement a loyalty program, Lululemon should utilize their Customer
Relationship Management program to capture and analyze data about their loyal customers. By
using their CRM Program more effectively, they can collect data about their guests’ shopping
behavior, patterns and purchases. This will in turn allow them to set up a program that places
priority on the guests that really are loyal Lululemon shoppers. Lululemon can begin by
gathering more relevant information on guests as they are in the store and checking out at the
register. In addition to name, email, and address, they can start to collect information about
preferences, styles and wants (Levy, Weitz, & Grewal, 2014, p. 131, 404). Lululemon can then
offer the top tier shoppers a reward such as 20% off today’s purchase, or a free water bottle,
socks, headbands or a yoga mat when the guests reach a certain level of spending. Guests will
start earning rewards after they spend $1,000, which is equal to approximately 10 pairs of yoga
41
pants. As they reach new spending levels, they will get additional special rewards. Lululemon
may also charge a different price for a product based on loyalty spending levels. For example,
higher-level Lulu spenders could get a larger discount at the register. The Lulu loyalty program
will not be advertised but will be shared with each guest as they come close to the required
spending levels. This will incentivize them to purchase additional items in order to reach the
next tier. There will be no Lulu card; all information will be stored in the CRM system and
each educator will know the reward level of the guest once they input the name into the CRM
system. The Lulu loyalty program will be specific, direct, and focused on the dedicated Lulu
shoppers who are committed to Lululemon.
Distribution
Our key final recommendation for Lululemon is to improve current processes,
particularly within the supply chain before moving forward with any more global expansion
initiatives. Lululemon needs to take pause, analyze the situation, learn from industry best
practices, and alter their processes to achieve supply chain efficiencies. They are growing too
fast and their current customers are feeling the growing pains. According to Janet
Kloppenburg, founder of JJK research, Lululemon is having trouble with order fulfillment and
service levels. She stated in an interview with the Wall Street Journal that Lululemon spent a
great deal of time attempting to replenish stock of the Luon pants and as a result, they did not
order their fashion merchandise in a timely manner. This is causing long delays and some
customers are even canceling their orders (Kapner & Rubin, 2014).
In order to resolve service level issues, Lululemon should start at the very beginning of
the process with selection of raw materials. Lululemon states in their annual report that a key
risk to their business is that many of their raw materials are provided by a single source
42
(Lululemon Athletica, Inc. - Annual Report, 2015, p. 12). While we understand that it is
important for them to innovate and bring new products to market, they also need to ensure that
contingency plans are in place to support current products. If a natural disaster occurred and the
supplier of the raw materials needed for their trademarked fabrics was unable to fulfill orders,
this could be detrimental to the business.
Next, it is important for Lululemon to develop strategic relationships with their key
manufacturers. Competitive advantage can be the result of both parties’ willingness to invest in
opportunities that are mutually beneficial over the long term (Levy, Weitz, & Grewal, 2014, p.
373). However, Lululemon states in their annual report that they have no long-term contracts
with suppliers or manufacturers and are in constant competition for resources (Lululemon
Athletica, Inc. - Annual Report, 2015, p. 9). Industry analysts are concerned about Lululemon’s
involvement level within the supply chain. When the Luon pant quality issue arose Lululemon
blamed their manufacturer, however the manufacturer pushed back stating that all merchandise
passed Lululemon’s approved certification process and was produced in compliance with the
specification provided (Poon and Talley, 2013). Lululemon should most definitely have a
strategic relationship with this supplier because the Luon material is used in 30% of their
products (Lululemon Athletica, Inc. - Annual Report, 2015, p. 9). We can see that this is not the
case because strategic relationships require mutual trust, common goals, open communication,
and credible commitments (Levy, Weitz, & Grewal, 2014, p. 376). Clearly some of these
components are missing. If Lululemon had open communication and common goals with this
supplier, the quality issue may not have occurred in the first place.
43
Conclusion
Lululemon’s annual earnings report released on March 26, 2015 shows that they are
slowly recovering from the quality and public relations issues that occurred over the past
couple years (Lululemon Athletica, Inc. - Annual Report, 2015, p. 24-30). With
implementation of the recommended tweaks to the Marketing Strategy / Plan, Lululemon can
come back stronger, smarter and a bit more humbled. In addition, they need to listen to their
guests, solve to meet needs, and create the community experience by embracing the guiding
principles of the Lululemon manifesto, one of which is “friends are more important than
money.” (Lululemon Athletica, n.d.)
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Kapner, S., & Rubin, B. F. (2014, January 13). Supply-Chain Problems Dog Lululemon - WSJ.
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Retrieved from
http://www.wsj.com/articles/SB10001424052702304549504579318120467741330
Kell, J. (2014, December 25). Athletic apparel: Outperforming the competition in 2014 -
Fortune. Retrieved from http://fortune.com/2014/12/25/athletic-apparel-top-performer/
Kim, S. (2015, February 2). Lululemon Founder Chip Wilson's Most Outrageous Quotes - ABC
News. Retrieved from http://abcnews.go.com/Business/lululemon-founder-chip-wilsons-
outrageous-quotes/story?id=28672323
Larcker, D., Larcker, S., & Tayan, B. (2014). Lululemon: A Sheer Debacle in Risk Management.
Retrieved from Stanford University, Closer Look Series website: http://public-prod-
acquia.gsb.stanford.edu/sites/default/files/41_Lululemon.pdf
Learnmarketing.net. (n.d.). Pricing Strategies (4 p's) - The Marketing Mix. Retrieved from
http://www.learnmarketing.net/Price.htm
Levy, M., Weitz, B. A., & Grewal, D. (2014). Introduction to the World of Retailing. InRetailing
management (9th ed., p. 9). New York, NY: McGrawHill Education.
Lululemon Athletica, Inc. (2014, March 27). 2013 Annual Report. Retrieved from
http://files.shareholder.com/downloads/LULU/4127530128x0x766923/AC87B033-1A64-47B5-
9DAE-978862EF7D81/2013_10K.pdf
Licorish, E. (2013, August 2). Lululemon's Cult Culture: Get Fit or Die Trying | Elizabeth
Licorish. Retrieved from http://www.huffingtonpost.com/elizabeth-licorish/lululemon-cult-
culture_b_3690378.html
Lululemon Athletica. (2013, March 18). blog|a letter to our guests - blog| lululemon athletica.
47
Retrieved from http://lululemon.com/community/blog/a-letter-to-our-guests/
Lululemon Athletica. (2013, June 10). lululemon athletica inc. Announces First Quarter Fiscal
2013 Results, Announces CEO Transition Plan (NASDAQ:LULU). Retrieved from
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info/size-chart?mnid=mn;product;size-chart
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Retrieved from http://www.businessinsider.com/factors-that-led-to-lululemon-decline-2014-1
Meranus, R. (2014.). Developing a PR Plan. Retrieved from
http://www.entrepreneur.com/article/173460
Nelson, J. (2011, April 29). The cult of Lululemon. Retrieved from
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http://www.canadianbusiness.com/lifestyle/loco-for-lulu/
Ng, S. (2013, June 10). Lululemon CEO to Step Down - WSJ. Retrieved from
http://www.wsj.com/articles/SB10001424127887324634304578537712064607592
Novick, J. (2014, April 16). How Lululemon Goes Above-and-Beyond for Customers More
Frequently Than Any Other Retailer - Bright. Retrieved from
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customers-more-frequently-than-any-other-retailer/
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https://www.npd.com/wps/portal/npd/us/news/press-releases/activewear-growth-sets-pace-for-
overall-apparel-market/
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Business Insider. Retrieved from http://www.businessinsider.com/lululemons-second-chance-
pants-are-genius-marketing-2013-11
Peterson, H. (2014, September 24). Why Lululemon's Pants Are So Expensive - Business
Insider. Retrieved from http://www.businessinsider.com/why-lululemons-pants-are-so-
expensive-2014-9
Poon, A., & Talley, K. (2013, March 19). Yoga-Pants Supplier Says Lululemon Stretches Truth -
WSJ. Retrieved from
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Shaw, H. (2014, January 14). ‘We get it,’ Lululemon says, as it pledges to win back customers
after blunder-filled year | Financial Post. Retrieved from
49
http://business.financialpost.com/news/retail-marketing/lululemon-athletica-brand-blunders
Soni, P. (2014, December 15). Lululemon Attempts To Reinvigorate Its Interrupted Growth
Model - Market Realist. Retrieved from http://marketrealist.com/2014/12/lululemon-attempts-
reinvigorate-interrupted-growth-model/
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Market Realist. Retrieved from http://marketrealist.com/2014/12/lululemon-builds-brands-
unique-marketing-strategies/
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http://www.nytimes.com/2015/02/08/magazine/lululemons-guru-is-moving-on.html
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Exhibits
Exhibit 1. Lululemon flagship retail store in Vancouver response to Wilson’s Bloomberg Video
(Bloomberg Business, 2013)
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Exhibit 2. Display Window in Maryland Store, Lululemon reaction to Wilson’s
Bloomberg Video (Bloomberg Business, 2013).
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Exhibit 3. Second Chance Pants, The Pants Are Reengineered (Peterson, 2013).
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Goal 1: Professional Communication: 1.2 Oral
Communication
Linda Park
MKT_6352_70 Evolutionary Marketing
Spring 2015
Dr. Nick Gerlich
Sonic Boom Book Review
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Goal 1: Professional Communication: 1.2 Oral Communication
Sonic Boom Book Review Video
MKT_6352_70 Evolutionary Marketing
Organization: To effectively communicate marketing concepts and strategy in an
oral communication project that shows an understanding of how the use of sound
influences marketing in all business environments. The oral presentation is presented
in an engaging manner to bring the listener an understanding of how sounds affects
marketing. The requirements were to read the book, "The Sonic Boom, How Sound
Transforms how we Think, Feel and Buy" by Joel Beckerman and then present our
own original thoughts and theories of the book.
Content: A five-minute video was required to give a New York Times style book
review of "The Sonic Boom, How Sound Transforms how we Think, Feel and Buy" by
Joel Beckerman that needed to be uploaded to YouTube to share with professor and
class. The content included an overview if the book strengths, weaknesses and ideas
for improvement in the studies of evolutionary marketing. The video can be accessed
at: https://youtu.be/stDw9FgfsK0
Summary: The video clearly shows how sound effects the way products are
marketed and how sound will create action or inaction for a typical consumer.
Having a clear sound for a brand gives the brand a clear identity that the consumer
can identify easily. The book used real life examples of companies such as Chili’s,
NFL Monday Night Football, and AT&T sound branding that took the ordinary
sounds to full brand recognition. The real life examples drove home the points of the
work that Beckerman does with sound and marketing.
Delivery: The oral presentation was delivered within a five-minute time limit that
would engage the viewer and present the main points of the book. The oral
presentation would synthesize the overall evaluation of the book and its effectiveness
in the marketing world. The delivery was to be presented in a clear, concise way that
would keep the viewers’ attention and also give the viewer an understanding of the
book and its benefits to evolutionary marketing.
Mannerisms: For this video, the presenter gave clear eye contact, engaged the
viewer with use of speech volume, and minimal hand gestures.
Use of Media: The oral presentation utilized YouTube to for the viewer to watch the
video. The video was recorded on an iPhone5s camera. The video had insertions of
sound that related to the book to better understand how sound transforms what we
think, feel and buy. An example of the Apple boot-up sound on their computers was
inserted and discussed into the video for the viewer to have an understanding of sonic
branding.
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Comment: I enjoyed reading this book because it highlighted how important all the
sounds are that are around us such as the startup sound when I start up my Mac. The
“Apple sound” is always the same and communicates to me that my computer is
booting up. I think that more companies could utilize sound to the advantage rather
than many that use sound as a background and not put any effort in to what the sound
does for their business.
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Personal Book Review
The Sonic Boom
Linda Park
2015 SP MKT 6352-70
Evolutionary Marketing
Video Link: https://youtu.be/stDw9FgfsK0
References
Beckerman, J., & Gray, T. (2014). The sonic boom: How sound transforms the way we
think, feel, and buy. Boston: Houghton Mifflin Harcourt.
Bond, S. (2014, October 22). Review: The Sonic Boom, by Joel Beckerman with Tyler
Gray. Retrieved from http://www.ft.com/cms/s/0/a6248e10-5556-11e4-b750-
00144feab7de.html#axzz3W6XdDemO
Jurgensen, J. (2012, January 28). Making an Impression in Just Four Notes - WSJ.
Retrieved from
http://www.wsj.com/articles/SB100014240529702037185045771829514058153
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Kessler, S. (2012, November 5). The Next (Sound) Wave In Branding: How AT&T
Created Its New Sonic Identity. Retrieved from
www.fastcodesign.com/1671164/the-next-sound-wave-in-branding-how-att-
created-its-new-sonic-identity
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Goal 2: Leadership:
Objectives:
2.1 Capacity to Lead: Demonstrate understanding of the leadership skills necessary to
foster team effectiveness for making decisions.
2.2 Goal Setting: Demonstrate capacity to establish and evaluate organizational goals.
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Goal 2: Leadership: 2.1 Capacity to Lead
Linda Park
MKT6340_71 Seminar in Marketing
Fall 2014
Dr. Nick Gerlich
Reimaging, Revitalizing, and Rebranding Pizza Hut
Final Exam
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Goal 2: Leadership 2.1 Capacity to Lead
Reimaging, Revitalizing, and Rebranding Pizza Hut Team Final Exam
MKT_6340_71 Seminar in Marketing
Relating to Group: For this final exam that was done with my semester-long group of
five people, I was the leader, coordinator and final editor of the exam for my group. The
group had been working together on three projects with this final exam being the last
project. It was the best group of individuals that I worked with at WTAMU. Every
group member was accountable for their share of the work, communicated each step
along the way during projects and worked as a team with the goal of providing an
excellent final product to turn in for exams and projects. Everyone communicated well,
I was easily able to set deadlines for this project and everyone did their part readily.
Ability to Listen: Since I was the leader of this paper and final editor, I made sure to
listen to all the decisions that were made along the process of developing the paper
because we were creating new marketing concepts for Pizza Hut. Since this was a
completely new marketing idea to create a healthy menu for Pizza Hut lots of
collaboration was needed to narrow down the selection of menu options. Each person’s
suggestions were valued and analyzed to see if they fit well with the final outcome of the
finished exam. Suggestions were made throughout the process and feedback was given
on ingredients suggested, graphics and writing style.
Ability to Manage: I set up a quick brainstorm session where all the members of the
group listed ideas and then we as a group narrowed down the choice to rebrand Pizza
Hut to offer healthy menu options since the marketplace is demanding healthy outdoor
eating options. As the leader and editor of the paper, I assembled all the component
parts so that the paper was written in “one voice”. I had to make sure that the deadlines
were met since we had three days to complete the final exam and also extremely tight
deadlines for each member of the team to do their part of the exam. I keep track of
every email and all responses so that I could anticipate any problems before they occur.
Balance: Each person was assigned a specific part do for the exam. Everyone needed to
work together and I made sure that we each had an equal balance of work. All team
members contributed and make sure that they met the deadlines with excellent
communication throughout the project. I checked in individually with each team
member to see where they hit roadblocks, needed assistance and just to be sure we were
all following our close deadline. One person in the group worked on the graphics and
the others were teamed off in the writing phase while I was the leader and final editor of
the paper.
Decision: The decisions that were made for this final exam were to write a new
campaign for Pizza Hut marketing reinvention. We were tasked to come up with
something completely new to present to the management of Yum Brands for Pizza Hut.
As a team we worked together to plan what menu offerings and marketing strategy to
implement. We came up with the idea to give customer choices similar to other
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successful restaurant chains such as Qdoba and Chipolte. We also came up with a
mobile app suggestions to make create a fast easy ordering option for Pizza Hut
customers.
Understanding Change: One of the biggest challenges with this final exam was to be
creative and come up with something totally new that was innovate and realistic. Since
we felt that healthy diets are on people’s mind, we decided to make more healthy
choices available for Pizza Hut. We did discuss and narrow down the choices for our
menu and as the leader, I helped to guide the decision making of the group. Yum
Brands, the owners of Pizza Hut were looking for ways to build a larger market share for
the brand.
Comment: I was thrilled with the outcome of the grade (A) and how we all worked so
well together as a team.
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Reimaging, Revitalizing, and Rebranding Pizza Hut
Analysis prepared by SeisDamas, Inc.
Seminar in Marketing
MKT6340-71 Dr. Nick Gerlich
November 17, 2014
Team Two
Kelsey Anglin, Portia Benson, Vanessa Flores, Brandi Havens,
Linda Park & Heather Stokes
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Summary
Pizza Hut’s sales have declined over the past seven consecutive quarters (Wong, 2014).
As evidence by the increased sales figures of Pizza Hut’s competitors, this is not due to a
decreased demand for pizza, but rather a migration of customers from Pizza Hut to
other pizza franchises. Yum! Brands, owner of Pizza Hut, published press releases to the
public detailing Pizza Hut’s new menu offerings that will go live on November 19th, 2014.
Yum! Brands have hired SeisDamas to give final recommendations and predictions for
success. After careful research and surveys, SeisDamas has concluded that, in addition
to the proposed offerings, Pizza Hut would be most successful by introducing a new
menu line - Pizza Fit. This new line of menu items would cater to health-conscious
individuals, particularly the millennials. This change would involve visual changes
incorporating a program logo, expanded menu offerings and extensive post-sales
analytics.
Customer Feedback Surveys
In order to ensure a revolutionary change from the traditional Pizza Hut menu to Pizza
Fit menu, extensive consumer analysis was performed to not only get a pulse of
people’s preferences toward pizza, but also to determine the thoughts of different
demographics around the United States. After careful analysis, it was determined that
Americans do have an appreciation for healthy alternatives with the millennials being
the greatest advocate for a more health-conscious menu. This analysis resulted in
SeisDamas’ recommendation to strategically develop and deploy a “health conscious”
menu - the new Pizza Fit menu.
To determine what America wants most from their local pizzeria, the marketing team
compiled a survey to elicit feedback on new menu items and the overall attitude toward
a new healthy “vibe” of Pizza Hut.
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(Results of unscientific, random survey of less than 100 people)
When asked if consumers would consider paying a higher price for healthier menu
items, the surveys collected revealed a fairly marginal difference, but showed that most
consumers were willing to pay more for these premium options.
(Results of unscientific, random survey of less than 100 people)I
Menu Offerings
People love options and like being able to customize everything to their different tastes.
Pizza Hut has the opportunity to completely change the public’s perception of the
restaurant by offering customers something that they have never seen from a pizza
joint. It is the perfect chance for Pizza Hut to start fresh…in more ways than one.
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When people think of pizza, they don’t typically think of a healthy meal. However, what
if pizza could be an option for all individuals no matter what their health wants or needs
might be. This will be the competitive niche of the Pizza Fit line.
Pizza Hut is giving the power to the consumer by offering a new and improved “green”
menu. This new menu consists of healthy alternatives on top of the already existing
menu options. These new menu items will greatly expand the current menu and attract
a new health-conscious customer base.
Think of a green, fresh, delicious pizza complete with toppings galore. Pizza Hut
customers will have the opportunity to pick and choose toppings from a lengthy list of
fresh, in-season vegetables, delicious fruits, low fat/ fat free cheese options, wheat
bread or pita bread crusts and more.
Choosing healthy alternative toppings is just one way to make a healthier pizza choice.
Pizza Hut invites customers to start from the bottom up by exchanging the typical crust,
sauce and toppings choices with any of these creative substitutes.
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Tofu
Post Sales: Market Analytics of New Products/Offerings
As Pizza Fit’s marketing team, the post-sales focus of SiesDamas Inc. will be to
gauge the customer’s experience with Pizza Hut’s mobile apps, web site, menu
offerings, and customer service. SiesDamas is particularly interested in the
feedback provided by the millennial generation – those in their late teens or
20’s. By 2020, 30% of retail sales will be to millennials. Millennials want the fast
casual experience, in addition to premium ingredients and healthier choices.
They are also willing to experiment with flavors (Thrasher, 2013).
Data will be collected from the Pizza Fit Smart Phone App along with dine-in
orders and online orders, and will help Pizza Hut determine the most popular
healthy choices of its customers. Pizza Hut will analyze each social, print, radio
and TV media site that it uses in order to determine the ROI (return on
investment) for each advertisement. This will allow Pizza Hut to detect
deficiencies in specific channels within the marketing mix and then adjust its
strategy appropriately. It is expected that certain menu offerings may need more
bolstering or coupons in order to get more customers to appreciate them while
others may need to be removed completely. Feedback from the Point of Sale
(POS) systems will also allow up-to-date information flow to see what is selling
or not selling.
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Pizza Fit marketing analytics social media platforms (Stelzner, 2014, p. 23 SeisDamas Pizza Fit Alternative for Pizza Hut
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Pizza Fit Marketing Analytics Additional Forms of Marketing (Stelzner, 2014, p.
47)
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Pizza Fit Paid Social Media Ads for Reinvention Campaign (Stelzner, 2014, p. 39)
SeisDamas Pizza Fit Alternative for Pizza Hut
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1
125
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Conclusion
Based on extensive research and current market trends, SiesDamas, Inc. is
confident that the strategies outlined above will increase pizza sales under the
new Pizza Fit label, and return the company to a profitable status with a positive,
healthy reputation.
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Sources
CB Creative Blog (2014). Pizza Hut unveils new logo (logo image). Retrieved from:
http://www.creativebloq.com/branding/pizza-hut-unveils-new-logo-
111413437
Mind Streamed Academy (2014). Uploaded Grain Image. Retrieved from:
http://www.mindstreamacademy.org/wp-
content/uploads/2013/07/grain.jpg
Pizza Hut (2014). Flavor of Now (sauce image). Retrieved from:
https://order.pizzahut.com/flavorofnow
Sandburn, J. (2014, November 10). Pizza Hut New Menu: Courting Millennials
With Honey Sriracha. Retrieved from http://time.com/3576913/pizza-
hut-menu-new/
Sargento (2104). Shredded (image of cheese). Retrieved from:
http://www.sargento.com/products/shredded/
Stelzner, M. (2014). 2014 SOCIAL MEDIA MARKETING INDUSTRY REPORT How Marketers Are Using Social Media to Grow Their Businesses. Retrieved from Social Media Examiner website: http://www.socialmediaexaminer.com/SocialMediaMarketingIndustryRepo
rt201
4.pdf
Thrasher, M. (2013, August 2). Top Brands Are Marketing To Millennials -
Business Insider. Retrieved from http://www.businessinsider.com/top-
brands-aremarketing-to-millennials-2013-8?op=1
Vaughan, P. (2012, March 8). Why You Need Marketing Analytics, Not Web
Analytics
[Web log post]. Retrieved from
http://blog.hubspot.com/blog/tabid/6307/bid/31705/Why-You-Need-
MarketingAnalytics-Not-Web-Analytics.aspx
Wong, V. (August 6, 2014) Pizza Hut is Having Some Problems in America.
Bloomberg Business Retrieved from
http://www.businessweek.com/articles/2014-0806/dominos-and-papa-
johns-see-sales-increases-as-pizza-huts-u-dot-s-dot-salesdecline
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Yum! Brands. (n.d.). Yum! Brands - Defining Global Company that Feeds the
World.
Retrieved from http://www.yum.com/brands/ph.asp
ZDNET (2014). Starbucks iPhone Image. Retrieved from:
http://www.zdnet.com/starbucks-adds-digital-tipping-shake-to-pay-to-
iphonemobile-payment-app-7000027245/
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Goal 2: Leadership: 2.2 Goal Setting
Linda Park
MGT_6334_71 Seminar in Organization Behavior
Fall 2014
Dr. Kelly McCauley
Application Paper
75
Goal 2: Leadership: 2.2 Goal Setting
Application Paper
MGT_6334_71 Seminar in Organization Behavior
Project Requirements: To read the book, Drive: The Surprising Truth About What
Motivates Us by Daniel Pink. We were then given the assignment to conduct 40 flow tests
over a two-week period numerous times a day to understand one’s motivation at that
moment in time when we tested ourselves.. Lastly, we were to write a paper on how the
flow tests helped with goal setting and motivation in our personal lives and to see if it would
help in our business lives as well.
Goal Recommendation: The following paper provides clear, realistic high quality goals
that are measured and with clear outcomes that are evaluated for understanding of
motivations in Organizational Behavior. The goal of the paper was to understand your
intrinsic motivations and “flow” moments to better understand oneself.
Measuring Outcomes: The outcomes were measured 40 times over a two-week period with
consistency, accurate reporting and detailed observations listed on a spreadsheet with the
following criteria. The criteria was time of observation, day of observation, what I am doing in
that moment of observation, what I am feeling in that moment and whether I am in the “flow”
according to what Daniel Pink defines in detail in his book. The outcomes where then discussed
within the paper answering specific questions that the professor presented us with to help
understand the overall basics of motivation and how it relates to organizational behavior.
Conclusion: Goals provided tangible value in that they helped me to understand the best
times of flow for me personally and how to utilize the new knowledge gained to capitalize
on those moments in the future for both my personal and professional life. I appreciated
providing a motivational poster at the end of the paper to remind me of “flow” moments.
Overall the exercise and theories researched were relevant and useful in real life both on a
personal side and as a professional MBA student.
Presentation: The paper is clearly presented with proper APA formatting, clear charts and
information without errors.
Comment: This exercise was helpful in learning more about what motivates me and what
makes me driven on a daily basis. It was also helpful to clarify my future goals and career
choices.
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DRIVE APPLICATION ASSIGNMENT
Drive Application Assignment
Linda Park
West Texas A&M University
77
Abstract
I will be analyzing my flow test that I have been recording for the past 2 weeks where I have
written down my mental state at that moment of time. I will be utilizing the concept of flow,
which was discovered by Mihaly Csikszentmihalyi. I analyzed my flow from September 17,
2014 to September 24, 2014. I analyzed my flow 40 times.
Which Moments produced Feelings of “Flow”?
I found that I was feeling the flow doing some homework for the four MBA classes that I
am taking this semester, when I was exercising, when I was in my garden, and when I was
spending time with my husband and daughters. I felt the flow the most during the times that I
was picking vegetables in my garden. My garden is my sanctuary. I just focus on my plants,
how they are growing, what needs to be picked, and if I need to clean up dead leaves. I truly
love working with plants and getting my hands filled with soil. It has always been a time of
complete relaxation even when I am digging hard in the dirt. I felt the flow when I was putting
down mulch around my plants in the backyard and front yard. I love how it covers the weeds
and makes the plants stand out. I am always alone when I am gardening. It is my time, a time to
only focus on the plants. It is my time of autonomy where I am directing my life, doing what I
love (Pink, 2014).
I also found that I was in the flow spending time doing homework for my MBA classes. I
am very excited to learn, and pursuing my MBA is a personal goal for me. I also hope that it will
help me to earn more money in the future as I embark on a career change. This applies to the
mastery part of Drive. I truly want to increase my business knowledge especially in marketing.
Pursuing my MBA is a personal mastery on my part, no one is paying me to do this offering me a
reward, just my own drive to be smarter, more educated and perform better at future managerial
jobs (Pink, 2014).
I felt true flow when I spend time hugging and talking to my two daughters and my
husband. Usually it is when my daughters come home from school when they share their day
with me that I feel a sense of flow. I know that they need to vent, talk, and just have me listen to
them talk. I have learned to just listen. I try not to offer advice until they have gotten out all that
they wanted to communicate. Everyone in my family loves to snuggle, it’s something we do
every day individually with each other. There is no greater moment then when I am holding my
family in my arms. I just breathe them in and let myself feel all the love.
Are Certain times of the Day More Flow Friendly than Other Times?
I found my flow times were in the early morning during the times that I ran or biked. I love
to be outside when I exercise and I definitely feel flow during that time. Daniel Pink states,
“Motivation 3.0 is the “oxygen of the soul”- we need flow to survive! (Pink, 2009). I definitely
get oxygen for my soul on my runs and bike rides. I found that my flow was the lowest in the
evening doing homework. Since I rise early in the morning the times that I had the lowest flow
was in the evening after dinner from 6:30 p.m. to 8:30 p.m. I could try to not do homework after
78
dinner, but sometimes this is not possible. This time in the evening is when I get most frustrated
and annoyed with finishing a project. I seem to have the least amount of patience. I also get
interrupted constantly from my family to “do stuff” for them. It definitely interrupts my flow. I
could do some outside work in the garden during the evening hours after dinner before it gets
dark, since when I am gardening, I am in “the flow”. Seeing my seeds grow to vegetables and
flowers is my feedback, that I am accomplishing what I set out to do, grow plants.
How could I restructure my day based on my findings?
The biggest change that I could make is not do homework after dinner when I found my
flow to be at its lowest. I can possibly take that time instead to clean up around the house, fold
laundry and surf the Internet. I could tackle the hard homework assignments during the day
when it is quiet and I have more awake and focused brainpower.
How might I increase the number of optimal experiences and reduce the moments when I when
feel disengaged or distracted?
I can increase the number of optimal experiences by changing my day tasks around a bit. If
I do my gardening after dinner, and not do homework at that time of the evening it may help in
increasing flow times. I don’t think that I want to change much else because overall, I am happy
with amount of flow time I currently have and it is perfectly normal to have homework or
periods of time where I am not in the flow. I don’t think the distractions of my family are going
to stop when they are home in the afternoon/evening.
If you’re having doubts about your job or career, what does this exercise tell you about your
true source of intrinsic motivation?
This exercise did not really affect any doubts that I have about my career direction or
intrinsic motivation. This year in late spring, I had already made the changes to pursue a career
in horticultural marketing and get my MBA on a full time basis. I am very excited to start the
Master Gardener program next week where I will learn new horticultural information. It is a
rigorous program and I will be going once a week to class and doing 60 hours of volunteer
horticulture work. In November of 2015, I should have my Master Gardener certification and
also be close to finishing my MBA at WTAMU. I look forward in 2016, to look for a job that
will be something fulfilling in my chosen field. This exercise reinforced to me that I do love to
exercise outdoors, garden as much as possible and expand my education.
79
References
Anthony, S. D. (2012). The new corporate garage. Harvard Business Review,90 (9), 44-53..
Chai, B. (2009, December 31). How to Stay Motivated: Daniel Pink on 'Drive' - WSJ. Retrieved
from http://online.wsj.com/articles/SB10001424052748704152804574628230428869074
Kessler, A. (2014, September 23). Log In - The New York Times. Retrieved from
http://www.nytimes.com/2014/09/24/business/gm-to-split-off-cadillac-and-move-
brandshome-to-new-york.html
Pink, D. (2009). Drive, The Surprising Truth About What Motivates Us. Retrieved from
http://gicoaches.com/wp-content/uploads/2010/10/Drive.pdf
Pink, D. (2014). Daniel Pink | NYT and WSJ Bestselling Author of Drive. Retrieved from
http://www.danpink.com/ Pink, D. (2014). DRIVE: The Summaries | Daniel H. Pink. Retrieved from
http://www.danpink.com/drive-the-summaries/
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Appendix 40
Observations of Flow Test
Time Date What I am doing What I am
feeling
Whether I am in
the “Flow”
8:00 a.m. 9/17/14 Homework Full of breakfast, Yes
10:00 a.m. 9/17/14 Homework Relaxed Yes
12:50 p.m. 9/17/14 Laundry Distracted No
2:38 p.m. 9/17/14 Homework Happy Yes
4:50 p.m. 9/17/14 Gardening Happy Yes
5:56 a.m. 9/18/14 Driving to Gym Tired Yes
6:59 a.m. 9/18/14 Finishing
Exercise
Hungry Yes
8:30 a.m. 9/18/14 Computer work Content Yes
1:00 p.m. 9/18/14 Walking my dog Hot, Annoyed No
6:53 p.m. 9/18/14 Homework Full and Tired No
7:15 p.m. 9/18/14 Hugging my
daughter
Content Happy Yes
7:42 a.m. 9/19/14 Exercising Hungry No
9:00 a.m. 9/19/14 Watering
Garden
Happy Yes
9:28 a.m. 9/19/14 Closing
Computer
Busy, Distracted No
81
5:00 p.m. 9/19/14 In Garden Busy, but a good
busy
Yes
6:15 p.m. 9/19/14 Talking with my
daughter
Concerned Yes
8:02 p.m. 9/19/14 Talking with my
husband
Happy Yes
9:00 a.m. 9/20/14 Biking Energized Yes
11:36 a.m. 9/20/14 Homework Backache from
sitting
No
8:57 p.m. 9/20/14 Watching a
Movie
Tired, Content Yes
10:00 p.m. 9/20/14 Going to Bed Tired Yes
10:30 a.m. 9/21/14 Turning on
Computer
Good, Happy Yes
12:00 p.m. 9/21/14 Lunch Hungry Yes
1:00 p.m. 9/21/14 Hugging my
daughter
Happy Yes
6:00 a.m. 9/22/14 Going for Run Good, Happy Yes
9:41 a.m. 9/22/14 Homework Energized Yes
6:10 p.m. 9/22/14 Homework Tired, Full No
7:58 p.m. 9/22/14 Talking with my
husband
Frustrated No
82
5:45 a.m. 9/23/14 Getting dressed Happy Yes
12:00 p.m. 9/23/14 In my Garden Content Yes
1:35 p.m. 9/23/14 Walking to
Work
Energized Yes
3.16 p.m. 9/23/14 Walking Home Energized Yes
4:50 p.m. 9/23/14 Talking with my
daughters
Happy Yes
6:38 p.m. 9/23/14 In my Garden Tired Yes
9:00 p.m. 9/23/14 Getting ready for
bed
Happy Yes
6:10 a.m. 9/24/14 Swimming Achy, but Happy Yes
11:29 a.m. 9/24/14 Homework Happy Yes
12:42 p.m. 9/24/14 In my Garden Content Yes
3:00 p.m. 9/24/14 Picking up my
Daughters
Happy Yes
4:48 p.m. 9/24/14 Homework Hungry Yes
83
Motivational Poster
This motivational poster that I created from a photo I took at Yellowstone National Park
last year and the words on it motivate me tremendously. This photo shows how nature is
miraculous, that it can produce the most wonderful beauty and it inspires me to go after
my dreams. The depths of nature in this photograph that I took, makes me feel that
nothing is impossible. When I look at this photograph and the words I wrote, I feel the
flow running through me. Nature inspires to strive to do better, to climb the mountain
and reach the top. The cliffs rise above the running water to show how amazing nature
is and what it can produce. It teaches me that I can tackle any hurdle and reach the top!
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Goal 3: Business Environment:
Objectives:
3.1 Business Ethics: Demonstrate capacity to recognize and evaluate ethical dimensions
of business decisions and the effects on stakeholders.
3.2 Global Business Environment: Demonstrate knowledge of the issues involved in
conducting business in a diverse, global environment.
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Goal 3: Business Environment: 3.1 Business Ethics
Linda Park
CIDM_6310_70 Information Technology Management
Fall 2014
Dr. Amjad Abdullat
Analyzing Cyber Security Breaches at Target Corporation
Final Project
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Goal 3: Business Environment: 3.1 Business Ethics
Analyzing Cyber Security Breaches at Target Corporation Final Project
CIDM 6310-70 Information Technology Management
Project Requirements: This project composed of working with a team of six classmates
in a group project to present a complete analysis of a company that is having issues in
information technologies. The project required that it incorporate relevant theoretical
concepts, frameworks, and models from the course. Project was approved by the
professor to analyze Cyber Security Breaches at Target Corporation.
Detection: The ethical issue in this project was that in late 2013, Target Corporation’s
POS systems had an outside security breach where 60,000 servers were effected with
malware. This security breach was not detected immediately by Target’s security team,
which led to extensive problems for Target’s customers because their individual credit
card numbers were stolen and unauthorized purchases were made. Overall Target was
not doing a good job with managing its security systems and the security breach
happened because there was not proper controls in the overall POS systems.
Consider Stakeholders: The security breach caused 40 million Target customers to be
affected and 70 million customer records of personal information were stolen by the
cyber-attack. In the project a clear understanding of how the cyber-attack happened,
why Target did not respond immediately and what Target could have done differently.
My team did an in-depth analysis of the information technology systems at Target to
completely understand what all the parameters where before, during and after the cyber-
attack.
Choose an Action: The paper gave recommendations on how Target Corporation could
have avoided this security breach and what to do in the future so that it never happened
again. Specific, clear recommendations were made on the paper for Target to implement
the Cisco Secure Remote Access Solution which would have prevented unauthorized
intrusions in the POS systems and to ensure internal communications are being
implemented in a timely manner to prevent any cyber-breach.
Comment: This was a highly technical project and working with five other classmates
was really important since we each brought different strengths to the project. We
divided the project into sections and then assembled it into one report. Not every
member of the team was always accountable which made the project more challenging
throughout. I did gain leadership skills working with another member to do the
assembly, edits and final drafts of the paper.
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TARGET CYBER SECURITY BREACH
Analyzing Cyber Security Breaches at Target Corporation Project
Colleen Carroll
Vuong Dang
Mariam Fatima
Trai Ho
Linda Park
Ahmet Sarr
2014FA_CIDM_6310_70_Information Technology Management
November 17, 2014
West Texas A&M University
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EXECUTIVE SUMMARY .......................................................................................................................................................................................... 4
ANALYZING CYBER SECURITY BREACHES AT TARGET CORPORATION PROJECT.......................................................................... 6
BACKGROUND .......................................................................................................................................................................................................... 6
STATEMENT OF THE PROBLEM ........................................................................................................................................................................ 8
TARGET’S BREACH ................................................................................................................................................................................................. 9
TARGET’S WEAK PASSWORD AUTHENTICATION SYSTEM ...................................................................................................................10
TARGET’S MALWARE AND SPYWARE MONITORING TOOLS FAILURE .............................................................................................12
TARGET’S NETWORK SEGMENTATION DOWNFALL ...............................................................................................................................13
SIGNIFICANCE OF THE PROBLEM ...................................................................................................................................................................14
TARGET’S DATA BREACH SOLUTIONS ..........................................................................................................................................................15
NETWORK SEGMENTATION .............................................................................................................................................................................15
IMPLEMENTATION OF NETWORK SEGMENTATION ............................................................................................................................15
NETWORK SEGMENTATION SECURITY BEST PRACTICES ....................................................................................................................16
PCI DSS METHOD ................................................................................................................................................................................................16
ZONING ...................................................................................................................................................................................................................17
PROTECTION FROM THE CORPORATE NETWORK ................................................................................................................................18
REMOTE ACCESS SECURITY SOLUTIONS .....................................................................................................................................................18
ESTABLISH VPN ACCESS’S STRONGEST AUTHENTICATION METHOD ...........................................................................................19
ENCRYPTION METHOD FOR VPN ACCESS .................................................................................................................................................20
Two-Factor Authentication Implementation ..............................................................................................22
Two-factor Authentication Best Practices..................................................................................................24
Password Policies Update ...................................................................................................................... ...24
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Anti-Virus, Firewall Implementation .......................................................................................................26
Anti-Virus Software..................................................................................................................................26
Firewall Infrastructure ...............................................................................................................................27
Network Monitoring Tools.........................................................................................................................30
High-Level Implementation Timeline .......................................................................................................30
High-Level Implementation Plan ...............................................................................................................31
Project Cost Estimates ...............................................................................................................................33
References .................................................................................................................................................34
Figures ......................................................................................................... ..............................................40
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Executive Summary The 2013 Target breach occurred due to an external virtual intrusion through the
infrastructure that Target used to send updates down to their Point of Sale (POS) terminals. Over
60,000 POS terminals were infected with malware from the hacked server. Once infected, the
devices then forwarded mag-stripe data collected during transaction at the POS. Target’s IT
infrastructure was not properly secured from insider access, which resulted in the breach. In
addition, Target’s security team of over 300 employees failed to follow proper guidelines to
detect and prevent the breach. This oversight caused 40 million Target customers to be affected
by the breach and 70 million customer records of personal information were stolen by the cyber-
attack.
Target's security breach stems from a lack of network segmentation, in which Target
failed to keep its routine operations separate from its payment functions. ITM Buff’s first
proposed solution is network segmentation, which is among the most effective methods in
maintaining a secure network, making it much more challenging for hackers to gain access to
confidential information. Increasing the visibility of network activity, implementing traffic
controls, and setting a default deny policy will provide an organization with the tools to
immediately remediate intrusion threats. Target's lack of effective segmentation compromised its
security measures, allowing hackers to access data that would have otherwise been protected.
We recommend that Target implement The Cisco Secure Remote Access Solution to
prevent unauthorized intrusions and ensure internal communications take place in A PRIVATE,
ENCRYPTED, AND SECURE environment. Cisco Secure Remote Access is a single-appliance
VPN solution that extends network access safely and easily to a wide range of users and devices.
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It offers the most comprehensive and versatile secure mobility solution in the industry and
supports the widest range of connectivity options, endpoints and platforms to meet Target’s
changing and diverse remote access needs.
Even though Target's password policies met most of the requirements for a strong
password such as at least 8 characters, containing at least three of the four available character
types (lowercase letters, uppercase letters, numbers, and symbols), it did not help the company to
prevent the breach because the credentials were stolen. If Target had used two-factor
authentication, it would have been more challenging for hackers to intrude its system. Two-
factor authentication is a security process in which users must provide two types of identification
in order to access to the system. Two-factor authentication can drastically reduce the incidence of
cybercrime because it adds an extra protection layer such as one-time PIN, phone, or fingerprint,
to a regular log-in procedure.
The basic protection components such as anti-virus, firewalls, and virtual private
networks (VPNs) are important to build solid grounds of a cyber-security system. In short, anti-
virus software helps system detect and remove malware. Firewalls operate as filters that allow or
prevent flows of information into the system. And finally, VPNs are important to protect data and
information while they are transmitted over the Internet. Target’s lack of these protective
measures further enabled the hackers to gain access to their system.
In conclusion, Target had many opportunities to stop the cyber security breach from
happening. Target did not react to warnings during the attack or to secure their IT infrastructure
prior to the attack occurring. ITM Buffs concludes that there are many lessons to be learned
from this breach and ways to prevent it from occurring again.
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Background Target’s security breach occurred when its 60,000 POS terminals were compromised by
malware. Prior to the breach, Target’s entire IT infrastructure relied heavily on virtualization
with a “two servers per store” model. On a per store basis, these two servers leveraged
virtualization to run a custom POS solution that managed up to 30 registers, as well as
applications that managed inventory, stock replenishment, pharmacy data, infrastructure as well
as databases. The 1,700+ Target retail stores mostly functioned as autonomous units that had
their own control room. Whereas the central authentication, domain name resolution and
endpoint monitoring services of all the stores were connected to the central hub (Westin, 2014).
Target operated most of their systems on Microsoft. In each store the Microsoft System
Center provided the distribution point for application updates and security patches to 170+
devices per store including the POS register systems. Since each Target store did not have its
own IT staff, it relied on a third party IT services provider to perform maintenance at each store.
The patches from Microsoft System Center were automatically deployed late at night and the
POS systems rebooted before the stores open, so that business was not disrupted during the day.
The central hub at Target was compromised and the point-of sale malware was deployed to all
the stores’ servers. This resulted in the update of all the point-of sales devices to the same
compromised code that was deployed by the hackers. This allowed the hackers to infiltrate data
out to another external server directly from the device. Figure 1 illustrates how Target breach
occurred (Westin, 2014).
Target’s information security staff of over 300 people regularly monitored the system for
any viruses or malwares that intruded the Target computer system. Before the data from the
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Internet reached Target, it was scanned by the FireEye, a security software. On November 30,
2013, FireEye detected an unfamiliar malware called “malware.binary”. In addition, it also
detected the address for the servers where the hackers wanted their stolen data to be sent.
Additional security alerts were sent out by FireEye as hackers inserted more versions of same
malware. However, the system that would automatically delete the malware was turned off by
the Target’s security team. This clearly shows that Target security teams lacked competence in
managing their security system. The company’s anti-virus system, Symantec Endpoint
Protection (SYMC), also identified suspicious activity for several days before the breach. The
intruders had gained access to the system by using stolen credentials from the third party vendor,
Fazio Mechanical. They infected the vendor with general-purpose malware known as Citadel
through an email phishing campaign (Riley, 2014). Although, the Target system was segmented
so that the most sensitive parts like customer payments and personal data are walled from the
other parts of the network, the hackers were able to gain access by disguising itself with the name
‘BladeLogic’, a name of legitimate software used by the company to protect cardholders and
payment data (Riley, 2014). This shows the Target walls were not properly secured and the
Target security team did not follow up on the earliest FireEye alerts to stop the hackers from
stealing the customer’s personal data and credit card information.
Retail stores such as Target desperately need innovation in detection of and response to
cyber-attacks. Based on evidence, it appears that the “Target breach was discovered not by
monitoring tools within its enterprise but by law enforcement noting the existence of large
batches of credit card information being sold that were all correlated to purchases at Target”
(Sorebo, 2014).
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Target needs to improve its leveraging of third parties to help determine when the breach
occurred. In addition, they must properly secure their Infrastructure from insider access and have
an incident response plan for what to do when breach occurs.
Figure 1. Target’s POS system breach (Westin 2014)
Statement of the Problem Target Corporation had a security breach over a three-week period from November 27,
2013 to December 15, 2013 during their busiest holiday shopping season. Approximately 40
million Target customers got their credit card data stolen during this time period
(KrebsOnSecurity, 2014). A diagnostic of Target’s security breach reveals a failure to
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implement a secure virtual private network, a properly segmented network, a weak password
authentication, and a failure to monitor suspicious activities
Target’s Breach The hackers entered the Target POS system through one of its vendors, Fazio Mechanical
Services, a refrigeration contractor in Pennsylvania. Fazio had a data connection to Target for
electronic billing, contract submission and project management. Fazio started working with
Target in 2006 by installing and maintaining refrigeration systems at Target stores (Ziobro,
2014). Target issued network security credentials to Fazio Mechanical and the credentials were
stolen via an email malware attack that occurred approximately two months before the attack on
Target’s POS systems.
Target uses Ariba systems for vendors to log in, and then close their work orders so that
they then can get paid by Target. According to a former Target security team member, the
backend systems of Ariba are what led the hackers into the Fazio system. The hackers were able
to access a Target employee username and password, which enabled the hackers to be able to log
into the Target portal. This provided hackers the ability to have access to the server that runs
more applications. All internal applications at Target use Active Directory (AD) credentials and
when a Target administrator accesses the credentials, it then opened the server for the rest of the
corporate network (Krebs, 2014).
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Figure 2. How the Hackers Broke In (Riley, Elgin, Lawrence, & Matlack, 2014)
Target’s Weak Password Authentication System An in-depth view of the IT infrastructure that led to the breach is as follows. The
attackers went into PHP file, named "xmlrpc.php." which allowed the attackers to find
vulnerability within the web application to bring in the attack. No security checks were
performed on this file, since the file was made to look like a popular PHP component. The
hackers then focused on getting to the customer credit card data by using the string "MSSQLSvc"
to search for the POS systems. The hackers used a technique called “Pass the Hash” to get
access to the NT hash token that would allow them to act as the Active Directory administrator
until the administrator changed his or her password. The attackers then used their stolen
privileges to create a new Domain Admins group with complete access to the Target POS
systems and control of a password. But according to documentation from Tal Be’ery, the lead
researcher from Aorato, a security firm that specializes in Active Directory monitoring and
protection, the hackers used a username that was so obvious it was amazing that Target’s security
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did not see it. The username was "best1_user," the exact same name used by BMC’s Bladelogic
Server Automation product. The hackers were in plain sight, but no one saw them. The
attackers used “Angry IP Scanner” to detect computers that were accessible by the network and
then bypassing security measures by a port forwarding IT tool. The attackers then went with
their stolen credentials and used Microsoft PSExec utility and Windows remote desktop client.
Finally, they used Microsoft Orchestrator management solution to gain regular access and allow
them to continuously execute code to on the servers at Target. The hackers were in and the
breach occurred (Olavsrud, 2014).
Target had installed FireEye, security software prior to the breach occurring and during
the breach there were multiple alarms that went off at Target from FireEye as the hackers were
grabbing credit/debit card information. The security team at Target was aware of the alarms as
they happened and interpreted them as something that they did not need to follow up on (Harris
& Perlroth, 2014).
According to a recent research of Dashlane Inc., “the Minneapolis-based retailer [Target]
tied for No. 4 in the nation for its online customer password policies” (Bornu’s, 2014).
According
98
to a former Target vendor
manager, “Target rarely
required two-factor
authentication from its low-
level contractors. PCI-DSS
require two-factor
authentication for remote
access to payment networks
and access controls for all
users, although the Ariba system is not technically related to Target’s POS system” (U.S. Senate
Committee on Commerce, Science, and Transportation, 2014). Target could have prevented the
attack by requiring two-factor authentication for its vendors.
Target’s Malware and Spyware Monitoring Tools Failure The security breach happened exclusively to in-store POS transactions, it did not occur
on Target’s online transactions. Target has 1,797 stores in the United States and 124 stores in
Canada (Sidel, Yadron, & Germano, 2013). Malware was installed on to the Target’s security
and payment system POS which enabled every swipe of a customer’s credit/debit card to access
the customer’s name, credit/debit card number, the cards expiration date, and CVV (Target
Brands, Inc., 2013). The malware that was installed on Target’s POS in store systems is known
as Trojan.POSRAM which is a memory scraping tool that grabs all data directly from POS
systems (Zetter, 2014). The TrojanPOSRAM monitored all payment activity on the POS systems
such as pos.exe and POSW32.exe to enable it to read and process all the data that is on the
magnetic strip on a customer’s credit/debit card. This RAM scraping code (Black POS Malware)
got a list of PIDs on Target’s system and cycled through that list to get to the full path of the
Figure 3. Dashlane Password Policy Infographic
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customer information on the credit/debit card magnetic strip. It then striped the file name portion
and converted it to all lowercase letters/numbers. It then compares it to the “pos.exe” with
strcmp to collect data. If Target had known to check this system, it could have renamed its POS
application and may have stopped the breach (Ligh, 2014).
Figure 4. Trojan.POSRAM POS.exe String from Target Security Breach (Ligh, 2014)
Target’s Network Segmentation Downfall Target’s security breach was the result of a company’s failure to keep its routine
operations and maintenance functions on a properly separate network from critical payment
functions. Because Target failed to segment its network, hackers were able to use third party
remote credentials to access Target’s sensitive POS servers. The hackers then took advantage of
this vulnerability and uploaded malware to a portion of Target’s POS systems, which then
captured the payment and personal information of up to 70 million customers. Had Target
followed security guidelines and segmented its network to keep payment servers isolated from
networks that allow broad access, this breach could have been avoided. As stated by Jody Brazil,
founder and CTO of security firm FireMon, “Target chose to allow third party access to its
network, but failed to properly secure the access” (Tanous, 2014).
Significance of the Problem
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Brian Krebs, on his blog KrebsOnSecurity, gave these statistics below about the
magnitude of Target’s security breach to the world.
40 million credit/debit cards stolen during November 27, 2013 to December 15, 2013.
70 million records stolen that had names, addresses, email addresses of Target shopper’s during
that time period.
46% drop in profit for Target in the fourth quarter of 2013 compared to the same time in 2012.
$200 million dollar cost to credit unions and banks to reissue new 21.8 million credit cards that
were compromised at Target.
1-3 million credit/debit cards that were sold on the black market from Target’s security breach.
$53.7 million dollars that the hackers generated in income from the sale of over 2 million cards
stolen. They were sold in the price range of $18.00 to $35.70 per card (Krebs, 2014).
On December 19, 2013 Target announced on their website and to the press about the
security breach. Target’s CEO, Gregg Steinhafel wrote a letter to the public in January 2014
addressing the security breach (Steinhafel, 2014). Shortly after the breach the CIO and key IT
professionals were forced to resign and on May 2, 2014 the CEO, Gregg Steinhafel resigned.
Later in May, 2014 a large proxy advisor recommended Target’s largest shareholders to remove
seven of the 10 Target board of directors for not being proactive to ensure that Target’s security
measures were strong enough to withstand security breaches (Verschoor, 2014, p. 12).
Target’s Data Breach Solutions Target’s data breach solutions framework entails a combination of fixes. Fixes are
detailed below, but key fixes include proper network segmentation, a secure VPN, and a two-
factor password authentication.
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Network Segmentation Implementation of Network Segmentation
Network segmentation is one of the most effective controls Target can implement to
mitigate the second stage of a network intrusion, propagation, or lateral movement. If
implemented properly, it can make it much more challenging for a hacker to locate and gain
access to an organization’s most sensitive information (Solomon, 2011). When considering
implementation of network segmentation, the below requirements should be taken into
consideration (Network Segmentation and Segregation, 2012): x Gain visibility of traffic, users
and assets: Understanding how the network you want to segment is actually used is extremely
important. The traffic profile with regard to inbound and outbound communications must be
well defined in order for the access controls to be effective.
Protect communications and resources, both inbound and outbound: Security is your
primary goal; simple access controls between segments are not enough, you need the
ability to rapidly remediate any detected threat.
Implement granular controls on traffic, users and assets: All data entering and leaving
a segment should be controlled. Detective controls followed by preventative controls
should be implemented to establish a baseline for identifying and investigating
unexpected traffic.
Set a default deny policy on all inter-segment connections: Only when a default-deny
policy is in place is the segment successfully separated from the rest of the network
and able to operate as its own logical unit.
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Network segmentation can assist organizations in both detection and response to an
intrusion. The technologies implemented to enforce segmentation will (Network Segmentation
and Segregation, 2012):
Contain audit and alerting capabilities that may be critical in intrusion identification
Allow an organization to better focus on their auditing and alerting tools to limit attacks
based on approved access methods
Provide a ready way to isolate a compromised device from the rest of the network in the
event of an intrusion.
Network Segmentation Security Best Practices
PCI DSS Method
The PCI DSS method isolates, or segments, the cardholder data environment (CDE) from
the remainder of an entity’s network. Without adequate network segmentation, the entire network
is in scope of the PCI DSS assessment. To be considered out of scope, the system must be
properly isolated from the CDE. Thus, it is a best practice to segment networks and servers that
perform credit card transactions and store this information on a server not involved with those
transactions. Putting constraints around the “PCI Zone” allows connectivity for as few servers
and networks as possible, as the security requirements for the “PCI Zone” are much greater than
the rest of the network, which can be achieved with an effective firewall and VLAN’s (Erdheim,
2014).
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Figure 5. Company Network within PCI DSS Scope (Lopez, 2011)
Zoning Segmenting the network into multiple zones with varying security requirements helps to
enforce what is allowed to move from zone to zone, aka a “Zoning policy.” Anything designated
within the PCI Zone should be isolated from the rest of the network as much as possible. Had
Target utilized a zoning policy, their POS system would have been within the PCI Zone, thus,
protected from the other networks accessible to third party vendors. If a system does not need to
communicate with another system on the network, it should not be allowed to. Users, systems
and services should have their access restricted to that required to perform their designated
functions. Lastly, granting access to the known good, rather than denying access to the known
bad will improve an organizations ability to analyze log files (Erdheim, 2014).
Protection from the Corporate Network
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Segmenting the network so that key systems are protected from the corporate network is
vital in assuring top-notch security of the system. In doing so, minimizing logical network
connectivity to sensitive servers to only those hosts and ports/protocols that are essential will
ensure security. It is especially important to only allow connections to be established from more
trusted to less trusted zones, and not vise-versa. Moreover, using multi-factor authentication for
the most sensitive users and services on a system or network will assist in maintaining a secure
sharing environment. Minimizing the use of implicit trust relationships between systems in the
same and different zones, so as trust relationships defined across different zones should be
implemented so that each side of the trust authenticates the other. Lastly, implanting content
filtering, anti-virus, and intrusion protection to block the known bad will aid in improving system
security (Network Segmentation and Segregation, 2012).
The key thing to note is that segmentation must be considered at all layers, it is not as
simple as implementing a firewall with restrictive access control lists (Network Segmentation
and Segregation, 2012). When implemented correctly, network segmentation can make it
significantly more difficult for hackers to locate and gain access to an organization’s most
sensitive information.
Remote Access Security Solutions VPN has an important role to help organizations consolidate their cyber security,
especially organizations with continuously remote communications between many offices or
stores such as Target. VPNs allow computers or equipment in the same system to connect and
share information along with data to protect the encrypted information packets while they are
transmitted over the Internet. In other words, VPN is similar to a tunnel that is built to prevent
unauthorized intrusions and ensure internal communications take place in a private and secure
environment (Lawson, 2011). Companies enjoy gains in productivity and reduction in costs
105
when granting remote access to trusted employees and key contractors. However, remote access
onto companies’ network must be secure to prevent attackers from penetrating into the system. A
prerequisite to remote access lies in securing the network with a public environment like the
Internet, sharing important data over the Internet is extremely dangerous as the data can easily be
leaked or stolen.
Therefore, VPN is a good solution to limit such risks.
Establish VPN Access’s Strongest Authentication Method The network infrastructure and the VPN operating system determine the strongest
authentication method. Extensible Authentication Protocol-Transport Level Security (EAP-TLS)
smart cards provide the most secure authentication for a network made up of Microsoft servers.
In fact, these smart cards require a public key infrastructure (PKI) and incur the overhead of
distributing and encoding smart cards securely. On these networks, Extensible Authentication
Protocol (EAP) and Microsoft Challenge Handshake Authentication Protocol Version 2 (MS-
CHAP v2) grant the next best authentication security (Heller, 2006). Shiva Password
Authentication Protocol (SPAP), Password Authentication Protocol (PAP), and Challenge
Handshake Authentication Protocol (CHAP) are too weak to be allowed.
Encryption Method for VPN Access Implement a layer Two Tunneling Protocol (L2TP) over Internet Protocol security (IPsec)
for a network with Microsoft servers. Run OpenVPN, a Secure Socket Layer (SSL) VPN with
TLS-based session authentication, Blowfish or AES-256 encryption, and SHA1 authentication of
tunnel data (Heller, 2006).
Restrict VPN Access to those with a valid business reason, and only when necessary.
106
A Virtual Private Network (VPN) connection is a door to the firm’s Local Area Network and
needs to be open and monitored upon request. Target’s enforcement of a strong remote access
policy helps limit contractors and employees’ use of VPNs. Contractors and employees should be
discouraged from connecting to the VPN all day just to check email or to download commonly
needed files.
Enforce a strong remote access policy.
Provide access to selected files through intranets or extranets rather than VPNs.
Build a secure HTTP Secure (HTTPS) Web site with safe password authentication (not basic
authentication) exposes only selected files on a single server, not the whole Target’s network,
and scales better than a VPN.
Enable e-mail access without requiring VPN access.
Enable Internet Message Access Protocol (IMAP) mail receipt and Simple Mail Transfer
Protocol (SMTP) mail and Post Office Protocol 3 (POP3) on other mail servers. This requires
SSL encryption to improve the security of these mail systems and secure password authentication
(SPA).
Quarantine users upon remote access login.
When a client computer kicks-off a VPN session, access to the network should not be granted
until compliance with network policies has been verified. This includes checking for current
antivirus and antispam signatures, an operating system fully patched against critical security
flaws and no active remote-control software, key loggers or Trojans.
One downside of a thorough scan at login is the delay the user experiences from doing useful
work for several minutes. Logging for frequent VPN users can be improved by having the server
107
remember each client computer's scan history and reduce the scan level for several days after
each successful scan.
Restrict the use of remote-control software while connected to Target’s VPN.
A clear written policy about what constitutes acceptable Internet usage while connected to
the VPN must be clearly established and enforced within the corporate network. A personal
firewall and a client for the proxy firewall can allow contractors and employees to have safe
remote network access without slowing down their Internet connection.
Secure remote wireless networks.
Employees or /and contractors working from home or the office often use laptops connected
to a cable or DSL modem through their own wireless access point. However, many home
wireless routers are not configured for security. Companies must train their employees on
configuring their wireless routers for WPA with a pre-shared key.
x CISCO VPN Solutions Implementation
Remote-office VPN and remote-access connectivity are common points of entry for
threats, such as viruses, worms, spyware, hacking data theft, and application abuse. Poor
designed VPNs coupled with incomplete VPN security causes security breaches.
Two primary methods for deploying secure remote-access VPNs exist: IP Security
(IPsec) and Secure Sockets Layer (SSL). Many VPN remote solutions offer either SSL or IPsec.
Cisco remote-access VPN solutions offer both technologies (SSL and IPSEC) integrated on a
single platform with unified management and we recommend it for Target Stores. Both IPsec
and SSL technology offerings enable organizations to customize their remote-access VPN
according to their operating and deployment environment requirements without any additional
hardware or management complexity (Cisco, nd).
108
Two-Factor Authentication Implementation Two-factor authentication is a security process in which users must provide two types of
identification in order to access to the system. There are typically three types of identification
(Rosenblatt, 2013):
Something you know, such as a Personal Identification Number (PIN), password, or a
pattern
Something you have, such as an ATM card, phone, or fob
Something you are, such as a biometric like a fingerprint or voice print
Ideally, two-factor authentication can drastically reduce the incidence of online identity
theft, phishing expeditions, and other online fraud because it adds an extra step to regular log-in
procedure (a.k.a. single factor authentication). The users’ password would no longer be enough
to give hackers access to their information.
There are some common and cost efficient approaches to implement two-factor
authentication as follows (TechTarget):
Paper based tokens: this is basically a sheet of paper with predefined one time passwords.
Each time users log in, they use one of those passwords and then cross it off the list. This
method is easy and inexpensive to implement even on a large scale, and almost
“impossible” to be attack by malwares. However, it is easy to attack with a copy machine
and there may be chances that users can accidentally lose or reveal the sheet.
Out-of-band authentication: this approach improves account security because it requires
users’ identification from two separate and unconnected channels. For instance, a SMS
message, sent to customer’s registered phone number with a random PIN. The advantage
of this is that companies can save cost by using phones that the users already have and
that the message travels out of band. The main disadvantage is the reliability of the “out-
109
of band” channel because the messages may be delayed. Moreover, there are possible
ways that hacker can find a way around out-of-band authentication. For example, hackers
can use their own phone number as substitute for customer’s number.
Soft token: it is a software-based security token that generates a single-use login PIN.
“The advantage is cost saving and ease of deployment. Once the application is written, it
is easy to deploy and there is no incremental "per user" cost making it ideal for a large
deployment. The disadvantage is the fact that it is software. It could be compromised by
malware. It is very much possible for malware to "pull tokens" from the software to send
them to an attacker. And attacker may even be able to clone the token without the user
knowing” (Ullrich, 2010).
Two-factor Authentication Best Practices Companies should consider the recommendations listed below while identifying their
2FA needs and plan the project accordingly (TechTarget):
Understand the corporate IT environment x Find the target users
Adopt a risk-based approach
Avoid unnecessary cost and complexity
In order to ease the challenges that companies may face when implementing two-factor
authentication, the following practices should be considered (TechTarget):
Select a factor that fits enterprise need
Consider implemented phased approach
Provide sufficient user support
Password Policies Update Since Target needs to issue credentials – which are commonly combinations of username
and password – for its partners to remote access to its system for business purposes, it is very
110
important for Target to define and enforce password policies, which ensure the use of strong and
secure passwords, for their partners’ accounts. By establishing strong password policies, Target
can make it more difficult for unauthorized people to access its system. In order to fortify
password policies, the following factors should be taken in consideration (Stanek, 2009):
Enforce Password History: this sets the number of unique new passwords that a user must
use before using the old ones again. This policy will help to restrict users from using just
several common passwords.
Maximum Password Age: this determines how long users can keep a password before
they have to change it. The purpose of this is to force users to change their passwords
frequently. Based on the security level concerned, the time can vary from 30 to 180 days.
In the case of Target’s partners, a period of 60 or 90 days should be appropriate.
Minimum Password Age: this determines how long users must keep a password before
they have to change it. This is usually used to prevent users from bypassing the system
by entering a couple new passwords and then changing back to the old one. Reasonable
settings are from three to seven days. However, this policy may prevent users from
changing their compromised passwords also. Therefore, it is necessary for system
administrators to be ready to deal with this situation.
Passwords Must Meet Complexity Requirements: this policy ensures that users’
passwords must have an acceptable strength including length, complexity, and
unpredictability, which Target has already applied for its customers’ accounts (and
should be applied for its partners’ account also) as follows:
o The password is at least 8 characters long.
111
o The password must contain at least three of the four available character types:
lowercase letters (a - z), uppercase letters (A - Z), numbers (0 - 9), and symbols
(For example: !, @, #, $, or %). o Passwords can’t contain the user name or
parts of the user’s full name. x Store Password Using Encryption: all passwords must be
encrypted before being stored in database by using proper encryption algorithms such as
AES, RC4, MD5, SHA-1,
RSA, and etc.
Anti-Virus, Firewall Implementation When it comes to cyber security, the first thing most people think of is to build a firewall,
install anti-virus software or something similar to prevent the attacks and illegal intrusion.
Traditional security technologies including firewalls and anti-virus software continue to play an
important role in protecting computer networks from malware infection. Although anti-virus and
firewall have the same purpose to provide the security for IT network, they have different
functions.
Anti-Virus Software Anti-virus software is a popular tool used to detect and delete different kinds of malware
from traditional computer viruses, worms, and Trojan horses to spyware, and adware. The virus
scanning function also allows computers to realize and prevent files containing viruses from
outside resources such as emails and messages before they intrude into the computer system
(Drew, n.d.).
The role of anti-virus software is a guardian of computers. According to a dictionary of
viruses that is programmed in software, they will check content of any files to identify virus
signatures and remove such threats immediately.
112
As attackers are trying to change viruses in different strains and create new viruses every
day, anti-virus software may not protect computers perfectly because the latest viruses might not
be detected and prevented. However, many advanced anti-virus software can reduce such risks
by analyzing and identifying variants of known malware and viruses in the dictionary. It is also
necessary to update software frequently so that new virus signatures can be realized and
prevented from impacting on the computer system.
Firewall Infrastructure The main function of the firewall is to establish a mechanism for controlling the flow of
information between the internal network and the Internet. The firewall operates as a filter,
which examines whether the flows of information are qualified or not. If they meet
requirements, they can go through the system. By contrast, they will be discarded. In short,
duties of firewall for cyber security of companies are to protect information and data of internal
network and prevent malware and other Internet hacker attacks from the outside into the system
(Lawson, 2011).
Some firewalls with advanced functions can fool hackers by leading attackers to follow a
certain direction in order to make them believe that they have broken the system and could access
further into the network. But the firewall detects the attack and takes over it so that the attacker’s
activities may be recorded and monitored.
Today, next generation firewalls such as Palo Alto Networks firewalls may support
Target to prevent breaches. They enhance controls of traffic between the POS terminals and their
servers by including zone, IP address, port, user, protocol, application information, and more in a
single policy. The malware would not be able to change or intrude the network and
communicate with the servers (Frank, 2014). The Palo Alto Networks firewall is illustrated as
the figure 1 below.
113
Figure 6. The Palo Alto Networks firewall (Frank, 2014)
Moreover, in order to enhance security, Target can build multi-tiered firewall
infrastructure. For example, a multi-tiered firewall includes at least two main tiers. In the first tier
(typically hardware), firewall may remove most frontal attacks on the web server and mail server
system such as scattered attacks that hackers use to make the server overload and lead it to stop
working. However, hackers can overcome this first tier of firewall by using valid code packets.
Therefore, implementation of the firewall software in the next tiers may support and increase
security of the entire network. In the case that a firewall system fails, the other systems still
maintain their controls. Below is a simple example about three-tiered firewalls with a corporate
firewall at the center and firewalls at stores. In this way, data is checked and filtered every time
it is transmitted between stores with the central office (Long, Henson, Hanes, &Wilmer, n.d.).
114
Figure 7. Three Tiered, In-Store Server, Retail Store Deployment Example (Long, Henson,
Hanes, & Wilmer, n.d.).
In conclusion, in order to reduce risks of breaches, Target should improve its security
system, and it is necessary to start from basic security components such as anti-virus and
firewalls. As each component has different roles, they all should be installed and updated to keep
the system’s security and privacy more efficiently. The lack of or weakness of any of these
components may reduce the protection, and hackers might easily break the barriers and attack to
the system. It might be never enough for a perfect -security system, but a good one needs to be
built from solid grounds first.
115
Network Monitoring Tools A successful monitoring of suspicious activities depends upon the tools that are utilized to
record any security related events. These tools can be hardware and software, and we
recommend that Target acquire them. Sensors for network devices, configurations, packet
analysis, and hardware with security based capabilities are all components of a network
monitoring tool, and their implementation greatly increases the chances of avoiding data loss,
detecting unauthorized activity, pinpointing hardware or connections issues, and optimizing
performance (Pegram, 2014).
High-Level Implementation Timeline
High-Level Implementation Timeline
20 14
Oct Nov
Network Segmentation
and VPN Solution
implementation Complete
Legend
Milestone
Figure 8. ITM Buffs High-Level Implementation Timeline
Mobilize Plan Execute and Control Close
Project Management
Assess Target’s Network Systems
Target’s Network Findings Complete
1
Network Segmentation and VPN Solution Implementation
Monitor and Maintain Solutions
Analyze
Deploy
Design
Configure
Test
116
High-Level Implementation Plan
Task
# Task Name Duration
% Work
Complete Start Finish
Resource
Names
Target Cyber
Security
Implementation
18 days 0% Mon
11/17/14
Wed
12/10/14
1 Initiating 3 days 0% Mon
11/17/14
Wed
11/19/14
2 Complete Project
Charter 2 days 0%
Mon
11/17/14
Tue
11/18/14 Target
3
Complete Target’s
Network Security
Assessment
1 day 0% Wed 11/19/14 Wed
11/19/14
Project
Team
4
Complete Hardware
and Software Vendors
Selection
1 day 0% Wed 11/19/14 Wed
11/19/14
Project
Team
5 Planning 3 days 0% Thu 11/20/14 Mon
11/24/14
6 Develop Project
Management Plan 3 days 0% Thu 11/20/14
Mon
11/24/14
Ahmet
Sarr
7
Secure
Communications plan
completed
3 days 0% Thu 11/20/14 Mon
11/24/14
Mariam
Fatima
8 Procure Network
Security Hardware 3 days 0% Thu 11/20/14
Mon
11/24/14 Target
9 Procure Networking
Software 3 days 0% Thu 11/20/14
Mon
11/24/14 Target
10 Procure Cisco VPN
Solutions Package 3 days 0% Thu 11/20/14
Mon
11/24/14 Target
11 Procure Networking
Monitoring Tool 3 days 0% Thu 11/20/14
Mon
11/24/14 Target
12 Analyze 7 days 0% Thu 11/20/14 Fri 11/28/14
13 Gather Security
Requirements 3 days 0% Thu 11/20/14
Mon
11/24/14
Vuong
Dang
117
14
Gather Network
Segmentation
Requirements
Hardware-Software
3 days 0% Thu 11/20/14 Mon
11/24/14 Trai Ho
15
Gather VPN Remote
Access Requirements-
Hardware-Software
3 days 0% Thu 11/20/14 Mon
11/24/14
Colleen
Carroll
16
Gather Networking
Monitoring Tools-
Hardware-Software
3 days 0% Thu 11/20/14 Mon
11/24/14
Linda
Park
17 Gather Environment
Requirements 3 days 0% Thu 11/20/14
Mon
11/24/14
Ahmet
Sarr
18
Update Policy
Standards and
Guidelines
4 days 0% Tue 11/25/14 Fri 11/28/14 Trai Ho
19 Design 2 days 0% Mon 12/1/14 Tue 12/2/14
20 Segment Network 2 days 0% Mon 12/1/14 Tue 12/2/14 Trai Ho
21 Design Virtual Private
Network Environment 2 days 0% Mon 12/1/14 Tue 12/2/14
Ahmet
Sarr
22 Configuration 2 days 0% Wed 12/3/14 Thu 12/4/14
23 Configure Servers 2 days 0% Wed 12/3/14 Thu 12/4/14 Van
Duong
24 Configure Routers
and Switches 2 days 0% Wed 12/3/14 Thu 12/4/14
Mariam
Fatima
25 Configure VPN
Gateways 2 days 0% Wed 12/3/14 Thu 12/4/14
Mariam
Fatima
26 Configure CISCO
VPN Solution 2 days 0% Wed 12/3/14 Thu 12/4/14
Vuong
Dang
27
Configure E7
Networking
Monitoring Tool
2 days 0% Wed 12/3/14 Thu 12/4/14 Trai Ho
28 Configure Firewalls 2 days 0% Wed 12/3/14 Thu 12/4/14 Linda
Park
29 Install and configure
Anti Viruses 2 days 0% Wed 12/3/14 Thu 12/4/14
Ahmet
Sarr
30 Enforce two-factor
authentication 2 days 0% Wed 12/3/14 Thu 12/4/14
Ahmet
Sarr
31 Testing 3 days 0% Fri 12/5/14 Tue 12/9/14
118
32 Test Servers 3 days 0% Fri 12/5/14 Tue 12/9/14 Colleen
Carroll
33 Test Routers and
Switches 3 days 0% Fri 12/5/14 Tue 12/9/14
Colleen
Carroll
34 Test VPN Gateways 3 days 0% Fri 12/5/14 Tue 12/9/14 Colleen
Carroll
35 Test CISCO VPN
Solution 3 days 0% Fri 12/5/14 Tue 12/9/14
Linda
Park
36 Test E7 Networking
monitoring Tool 3 days 0% Fri 12/5/14 Tue 12/9/14
Ahmet
Sarr
37 Deployment 1 day 0% Wed
12/10/14
Wed
12/10/14
38 Deploy VPN
Gateways 1 day 0%
Wed
12/10/14
Wed
12/10/14
Linda
Park
39 Deploy CISCO VPN
Solution 1 day 0%
Wed
12/10/14
Wed
12/10/14
Colleen
Carroll
40
Deploy E7
Networking
monitoring Tool
1 day 0% Wed
12/10/14
Wed
12/10/14
Ahmet
Sarr
41 Close Project 1 day 0% Wed
12/10/14
Wed
12/10/14
Project
Team
Figure 9. ITM Buffs High-Level Implementation Plan
119
Project Cost Estimates
Top-Down Project Estimates
Top Down Estimates
Labor Costs* $ 216,000
Non-Labor Costs $ 21,600
Hardware- Estimate $ 1,500,000
Software & Licenses-
Estimate $ 1,000,000
Subtotal $ 2,737,600
Contingency
(20% of subtotal) $ 547,520
Grand Total $ 3,285,120
Figure 10. ITM Buffs Top-Down Estimates
*Labor Costs- Computation Details
Number of Resources 6
Weekly Hours per resource 40
Weekly Hours 240
Number of days 18
Total Hours 4,320
Hourly Rate $50
Total Labor Costs $ 216,000
Non Labor Costs -10% of total Labor costs $ 21,600
Figure 11. ITM Buffs Labor Cost Details
*estimated
120
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Figures Figure 1. Illustration of the Target’s POS system breach above. (Westin 2014)
Figure 2. How the Hackers Broke In (Riley, Elgin, Lawrence, & Matlack, 2014)
Figure 3. Dashlane Password Policy Infographic (Bjorhus, 2014)
Figure 4. Trojan.POSRAM POS.exe String from Target Security Breach (Ligh, 2014)
Figure 5. Company Network within PCI DSS Scope (Lopez, 2011)
Figure 6. The Palo Alto Networks firewall (Frank, 2014)
Figure 7. Three Tiered, In-Store Server, Retail Store Deployment Example (Long, Henson,
Hanes, & Wilmer, n.d.).
Figure 8. ITM Buffs High-Level Implementation Timeline
Figure 9. ITM Buffs High-Level Implementation Plan
Figure 10. ITM Buffs Top-Down Estimates
Figure 11. ITM Buffs Labor Cost Details
127
Goal 3: Business Environment: 3.2 Global Business Environment
Linda Park
Econ_6305_70 Seminar in Microeconomics Theory
Summer 2014
Dr. Duane Rosa
Patagonia Case Study
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Goal 3: Business Environment: 3.2 Global Business Environment
Patagonia Case Study
Econ_6305_70 Seminar in Microeconomics Theory
Project Requirements: To analysis a Harvard Business School Case Study of the company Patagonia
Inc. There were numerous global factors that were considered in this case study that were addressed.
Identification of Global Factors: This particular case study had specific global factor questions that
needed to be addressed and researched. The factors are below.
Evaluate Patagonia’s Business Model. How does Patagonia create and capture value?
How important to Patagonia’s Business Model is its environmental position?
What is your assessment of the Product Lifecycle Initiative?
Analyze all the financial documentation presented in the case.
How would Patagonia’s Business Model differ if the company were publicly traded?
Using a game theory approach could Patagonia achieve a dominant or Nash equilibrium strategy
with regard to its environmental practices?
International Trade Theories: Since Patagonia does most of its manufacturing overseas, international
trade issues and theories where addressed within the case study report that are specific to environmental
factors that Patagonia addresses in all international trade. Patagonia certifies its vendors and is very
transparent with its manufacturing sources. It has a detailed information on their webpage of their
supply chain from the plants in the field to the final product in the store.
Analysis of Global Factors: The paper clearly outlines the different global factors that Patagonia
addresses in doing business globally in addition to the challenges of being environmentally responsible.
Patagonia’s goals are two-fold; they create and capture value through their extensive global field testing
and their dedication to leaving as little as possible of a carbon footprint on the earth. Since Patagonia
views their business as globally responsible the paper addresses in detail Patagonia’s global business
model and all the factors involved in the way that they run their business which is very unlike most
businesses.
Application of Analysis to Management Situation: The paper addresses the economic business model
comparing Patagonia as a private company compared to a publicly traded company. The paper also
addresses the game theory approach to Patagonia’s environmental practices. It is also discussed how
Patagonia is a role model to other businesses regarding their manufacturing and environmental policies.
Comment: This was my first class that I took in my journey of getting my MBA. Learning how to
write in an APA format was challenging since it was something I had never done before.
Patagonia Case Study
Patagonia Case Study
Econ 6305_70
Seminar in Advanced Microeconomic Theory
Summer 2014
Linda Park
West Texas A&M University
130
Patagonia Case Study
Evaluate Patagonia’s Business Model. How does Patagonia Create and Capture Value?
Patagonia’s mission statement is, “Build the best product, cause no unnecessary harm,
use business to inspire and implement solutions to the environmental crisis” (Patagonia Inc.,
n.d.). Patagonia business strategy maximizes the willingness to pay a high price for its products
due to the value its customers place on a Patagonia made product. Consumer choice theory is
where people behave rationally in their purchases of goods and services and always want to
maximize their satisfaction of their purchase. According to revealed preferences in consumer
behavior, “If a consumer chooses one market basket over another, and if the chosen market
basket is more expensive than the alternative, then the consumer must prefer the chosen market
basket”(Pindyck, & Rubinfeld, 2012, p. 93).
Patagonia has been in business since 1973; they are a privately held company that makes
high-end outdoor performance clothing. Patagonia creates and captures value by creating
products they stand behind. Patagonia’s employees are not only the producers of the products
but also active consumers in using the products they create. This is a crucial factor for Patagonia
that creates value to its customers. The products are made, used, tested and then the research is
shared with its customer base through its informative and extensive catalog and website.
Patagonia uses field testers, they are called ambassadors that go out and put the products to the
harshest tests to refine and validate everything that they make. This gives the customer the
reassurance that Patagonia products can be used under a variety of harsh and difficult situations
or just for walking to work. Patagonia’s goal is to create a product for your lifetime and beyond.
Its target market is an environmentally outdoor oriented person who lives the dirtbag lifestyle.
According to Masanell, Crooke, Reindhardt, and Visishth, “Patagonia customers may be more
likely to exhibit willingness to pay a price premium for green goods than the average American
consumer. As discussed below, the average income of Patagonia catalog customers exceeds the
American average, and because the products are often used in outdoor recreation, their
purchasers may be more interested in environmental issues” (2009, p. 207). According to
Crooke, one of the things they learned doing the research was that Patagonia could charge up to
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10% more for organic grown cotton shirts and the demand curve did not change one unit.
Their goals are two-fold; they create and capture value through their extensive field
testing and reporting but along with their dedication in helping reduce their footprint on the
environment. Then they encourage their customers to commit with them in the Patagonia
mission. Patagonia customers believe in their products. The brand is connected to its consumer
through its authenticity and the choices that Patagonia makes on a daily basis to the environment.
The consumer needs to experience Patagonia’s products under true conditions no matter how
hard the conditions can become. Crooke describes this in “one true brand story that
communicates the value one our customers who was in near-comatose condition from severe
hypothermia. This customer would not allow helpers to remove his Patagonia Capilene
underwear even though it was soaking wet and freezing cold. After recovering, the customer
related to his rescuers that he knew if he had allowed them to remove his Capilene underwear he
would surely perish” (2011). Crooke explains that in order to get everyday customers to
understand Patagonia’s commitment to product quality without having a near-death experience,
the company enacted their “Iron Clad” guarantee, which states, “If you are not satisfied with one
of our products at the time you receive it, or if one of our products does not perform to your
satisfaction, you may return it to us for a repair, replacement or refund” (Crooke, 2011).
Patagonia had it best two years ever during the recent recession in 2008-2010.
According to Exhibit 1 of the Harvard Business Study on Patagonia from 2008 to 2010, sales
increased by 12% and gross margin increased by 19% (Reinhardt, Casadesus-Masanell, and Kim,
2010, p. 11). Patagonia believes that consumers are willing to pay more for a product that is
multifunctional and will last a longer amount of time then a jacket not made by Patagonia.
Consumers will purchase a jacket and not only use it only for climbing or skiing, but to wear to
work on a daily basis. Patagonia stays successful by following their motto of making a great
product and doing it with the least damage possible to the earth. A recent article quoted Rick
Ridgeway, who oversees environmental affairs for Patagonia, addressed how Patagonia does
business. Ridgeway stated,
“There will be an increasing number of people that recognize that if
you pay more for a jacket that lasts a lot longer and you run the
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numbers, you’re saving money. It’s an investment. Now, I know that
that’s a long ways from a Wal-Mart or H&M or Zara customer, but I
believe that all of those companies are starting to recognize they would
be smart to begin delivering higher-quality products. They’re thinking
about it, and maybe over time there will be a shift away from fast
fashion, speaking about the example of our own sector, towards
products that last a lot longer.” (Makower, October 21, 2013).
On the video featuring former CEO Michael Crooke, he showcases how Patagonia uses
the SEERS Business Model: Quality/Product/Service, Environmental Stewardship, Financial
Strength, and Corporate Social Responsibility which shows how Patagonia runs its company.
(Crooke, Opportunity Green Video).
How Important to Patagonia’s Business Model is its Environmental Position?
Patagonia’s business model is to be a worldwide leader of environmentally responsible
business. They don’t know all the answers and don’t have it all figured out, but they choose to
strive every day to cause the least amount of harm possible to the earth. Patagonia exists as a
business because they stay true to their environmental mission. Chouinard states,
“We’re not in business to make clothing.” “We’re in business to ask
questions and make choices that prove to the rest of the world that it’s
possible to be environmentally responsible and profitable, too. Profits
happen when you do everything right. That’s one of the hardest things
to get across to a new person working for us — the more quality we
put into the product, the more profit we make (Bell, 2009 p. 3)
Chouinard’s commitment to environmental responsibility leads it to donating 1% of its
sales (not profit) to grassroots environmental groups. They support people and organizations that
are on the frontlines of helping to making changes in the environmental crisis. Patagonia Inc.
says that they have given over $55 million in donations in grants and in-kind donations to more
than 1000 organizations.
Patagonia’s business and environmental models are radical, not the typical way most
businesses are run today. Their new CEO, Rose Marcario was even a skeptic when she first
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came to work at Patagonia that their environmental goals and profit targets could be aligned. She
soon realized that a private enterprise should care more about its stakeholders than its financial
shareholders. The environment comes first and foremost in all Patagonia business decisions.
Patagonia does business in a sustainable way with a partnership with its customer. They are
leaders in showing their customers how to reduce the environmental damage by making a high
quality product that does not need to be replaced every year. Patagonia Inc. focuses on
examining their practices in the context of the environmental crisis. Walmart has been assisted
for free from Patagonia how to green its supply chain. Patagonia is honored to work with
Walmart. Chouinard says, “I always thought the revolution would start at the bottom,” he says.
“It’s starting at the top” (Burke, 2010).
Last year Patagonia became the first company in California to be a Benefit Corporation.
Passed into law in California on October 10, 2012, Benefit Corporations give the directors of the
business legal cover to consider social and environmental missions over financial returns. Prior
to this new law, shareholders could sue corporate boards for not maximizing profits, a risk that
hamstrings companies interested in pursuing costly environmental or social initiatives (Tozzi,
2012).
What is your Assessment of the Product Lifecycle Initiative?
Product Lifecycle Initiative, Reduce, Repair, Reuse and Recycle is revolutionary in its
ability to show Patagonia customers exactly what they can do to help their individual footprint
on the environment. In September 2011, they launched the Common Threads Partnership.
Patagonia makes a pledge to make useful gear that lasts a long time and strive for its customer to
only buy what they need.
The first part of the initiative is to reduce. Patagonia states, “Through our partnership
with bluesign® Technologies we are reducing energy and water use and toxic substances in our
manufacturing processes. We also use environmentally conscious fibers in many of our products,
including organic cotton and recycled polyester, and try to minimize our packaging and
transportation waste” (Patagonia Inc., n.d.). Reducing consumption is changing consumer
behavior from the mentality of more, more, more to less, less less. Buy smart, buy something
that will last even if you have to pay more for it. In the long run, the better made product will
last longer and probably cost less than in the short run.
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Repair is the next step in the initiative. Patagonia will either help you repair your gear or
send it back to them to be fixed. One can watch IFIXIT videos on how to do it yourself in
repairing your products (Patagonia Inc., n.d.). There is information on how to fix it in the field
and Patagonia sells an expedition field kit. You can even learn on IFIXIT how to sew.
Reuse is the third step in the initiative. Patagonia will help you find a home for its
products that you no longer need or want. They will buy back used but in good condition items
in 4 of their stores in the U.S. They have partnered with eBay in the Common Threads
Partnership to assist in directing customers how to sell or pass it on to someone in need.
Take the Pledge Partnership states, “I'd like to become a partner
in the Common Threads Partnership to reduce our environmental
footprint - and to help wrest the full life out of every Patagonia product
by buying used when I can (and selling what I no longer wear, to keep it
in circulation).
As a Common Threads partner, I become eligible to sell my used
Patagonia gear on eBay's Patagonia Common Threads Partnership site
and in the used clothing section on Patagonia.com” (eBay, Inc. n.d.)
Recycle is the fourth step in the initiative. Patagonia will take back its worn
out gear and reuse it, recycle it into a new fabric or make it into a new product.
Their goal is to keep the product out of landfills and keep reusing it again and again.
Reimagine is the fifth step in the initiative. Take only what nature can
replace. Stop the cycle of going to the mall shopping just to make yourself feel
better. Patagonia wants the message to be loud and clear to everyone, “Don’t buy
what you don’t need. Think twice before you buy anything” (Nudd, Adweek 2011).
Patagonia is very bold with its environmental message. On Black Friday,
November 25, 2011, they took out a full page ad in the NY Times, with the title,
“Do Not Buy This Jacket” (Patagonia, Inc. 2011). They used the busiest shopping
day of the year to educate their customer and consumers in general to reduce, repair
reuse, recycle and reimagine how one can make difference in the environment.
After a year of the “Do Not Buy This Jacket” campaign their sales in 2012
increased almost one-third, to $543 million, as the company opened 14 more stores.
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In 2013, revenue ticked up another 6 percent, to $575 million. In short, the pitch
helped crank out $158 million worth of new apparel. Yvon Chouinard states, “I
know it sounds crazy, but every time I have made a decision that is best for the
planet, I have made money. Our customers know that—and they want to be part of
that environmental commitment” (Stock, Businessweek 2013).
Analyze all the Financial Statements Presented in the Case.
According to Exhibit 1, Lost Arrow Corporation Financials, Patagonia has successfully
grown not only their net sales from $220,344 in fiscal year to $332,862 in fiscal year 2010.
Their gross margin has increased as well from $104,929 in fiscal year 2002 to $175,125 in fiscal
year 2010. Patagonia’s selling general and administrative expenses have increased $83,168 in
fiscal year 2002 to $148,162 in fiscal year 2010. That is a 78% increase in expenses. Which is a
pretty significant change in expenses. Patagonia made significant changes in its manufacturing
from switching to organic cotton for its shirts and using the highest quality environmentally
friendly materials such as its manufacturers using bluesign® Technologies. Patagonia has 10-
15% higher cost of raw materials than its competitors.
Operating Margin has fluctuated up and down from fiscal year 2002 to fiscal year 2010.
It did have a very healthy operating margin in 2010 of $26,963. On exhibit 2, called Patagonia
and Selected Competitors, financial data shows that Patagonia is leading its competitors in 12
month net income growth by 44% in the fiscal year ending 2010. Patagonia has definitely
achieved their goals in profit that they wanted in fiscal year 2010.
Patagonia retail stores earned over $100 million in sales with a gross margin of over 65%
according to the case study. Patagonia has four sales channels; wholesale, retail, catalog and
internet. Patagonia limits its distribution to a small channel of approximately 1000 dealers
compared to Columbia Sportswear Company that distributes its products in North America to
over 4,000 dealers. In fiscal year 2010, Patagonia’s wholesale channel generated approximately
$145 million in sales and had a gross margin greater than 50%. In comparison, Columbia
Sportswear Company had a gross margin of 42.5% on sales over $1.2 million. Patagonia’s
biggest competitor is The North Face, which had annual sales of approximately $1.2 billion.
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In 2013 Patagonia launched their latest marketing goal to limit growth. Patagonia is
aiming to make less than the previous year of specific items in order to better serve the
environment. The campaign is called “The Responsible Economy” (Ryan, The Bottom Line,
2014). An article from September 2013 in Adweek states, “Sales at privately owned Patagonia
have grown 27 percent over the last two years, reaching $575 million in fiscal 2013” (Voight,
Adweek, 2013).
How would Patagonia’s Business Model differ if the Company were Publicly Traded?
Patagonia’s business model may differ if they were a publicly traded company. The
reasons would be that they would have disclose more financial details. Patagonia would have to
answer to a board of directors who may not agree with the philosophy that the company took
when it was private. Privately, Patagonia is able to make business decisions that are based on
what the individual owner’s beliefs and philosophies on the environment. If Patagonia was a
publicly traded company it would need to have its board of directors to be committed to the
mission of Patagonia. In a publicly traded company, executives prioritize keeping the stock price
up over all other priorities except, perhaps, compensation, and they devote extra cash to
dividends instead of donations. Publicly traded companies are solely focused on growth,
typically 15% a year. Typically publicly traded companies would not restrict growth to save the
planet.
Patagonia’s organizational strategy in caring for the environment has definitely become
more feasible today. Political economist Thomas Malthus believed that the world’s limited
supply of land would not be able to supply enough food as the population grew. He predicted
that as both marginal and average productivity of the labor fell there would be more mouths to
feed, and mass hunger, which would lead to starvation (Pindyck, & Rubinfeld, 2012, p. 212).
There is a change in thinking today that business are responsible for saving the planet.
According to Saving the Planet: A Tale of Two Strategies written by Roger Martin and Alison
Kemper, “rescuing the environment involves restraint and responsibility. Consumers and
companies must do more with the resources they consume, recycle daily, and process their waste
more efficiently, and curb their appetite for consumption. In short, resources are finite and need
to be carefully husbanded—an argument that appeals directly to the traditional virtue of
moderation” (Martin & Kemper, Harvard Business Review, 2012). This theory goes directly
back to Malthus. “Modern Malthusianism generalizes the argument beyond food: The better we
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get at making things, the cheaper it is to consume and the faster we reproduce and use up the
planet’s resources. The fear is that economic growth comes at the expense of the world’s natural
resources, including oil, fish, clean air, clean water, carbon-absorbing forests, and so on”(Martin
& Kemper, Harvard Business Review, 2012).
Patagonia has absolutely the right idea, we must be responsible to ourselves, to others and
to the planet we live on. Their philosophy is being adopted by other companies, such as Levi’s,
Walmart, Coca-Cola and Kellogg. They are not at the same degree of commitment as Patagonia
but are taking steps to be responsible to our environment.
Using a Game Theory Approach could Patagonia achieve a Dominant or Nash Equilibrium
Strategy with regard to its Environmental Practices?
Patagonia Inc. role in game theory is to utilize a special case of equilibrium in dominant
strategies of a Nash equilibrium. Their dominant strategy is optional no matter what the other
players do. Patagonia has influenced its other firms to move towards adopting some of
Patagonia’s environmental practices.
Greenbiz.com recently published an article about who are the most sustainable
companies. The following graph explains the results of GlobeScan's and Sustainability's just-
released 2014 Sustainability Leaders Survey where Patagonia came in #2 behind Unilever
(Whan, Survey, Greenbiz.com, 2014)
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Graphs from Greenbiz.com, by Eric Whan, Published May 23, 2014
Patagonia influence and help create change in other firms to adopt environmental practices. Rick
Ridgeway, VP of Environmental Initiatives and Special Media Projects at Patagonia sits on the
board of the Sustainable Apparel Coalition. The SAC vision is have “An apparel and footwear
industry that produces no unnecessary environmental harm and has a positive impact on the people
and communities associated with its activities” (Sustainable Apparel Coalition, 2014). It utilizes the
Higgs Index 2.0 for assessment of sustainability.
The Higg Index 2.0 is a tool to help organizations standardize how
they measure and evaluate environmental performance of apparel
products across the supply chain at the brand, product, and facility
levels. It is a self-assessment tool that enables rapid learning through
identification of environmental sustainability hot spots and
improvement opportunities. A starting point of engagement, education,
and collaboration among stakeholders in advance of more rigorous
assessment efforts. The Higg Index 2.0 is a learning tool for both small
and large companies to identify challenges and capture on-going
improvement. It targets a spectrum of performance that allows
beginners and leaders in environmental sustainability, regardless of
company size, to identify opportunities” (Sustainable Apparel Coalition,
2014).
Lead by example, be a responsible company, help others to reduce the harm that
they cause. That is the goal of Patagonia Inc. in 2014.
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References
Patagonia, Inc. (n.d.). Patagonia Company Information: Our Reason for Being - Values, Mission
Statement. Retrieved July 5, 2014, from
http://www.patagonia.com/us/patagonia.go?assetid=2047
Pindyck, R. S., & Rubinfeld, D. L. (2012). Consumer Behavior. In Microeconomics (8th ed., p.
93). Upper Saddle River, NJ: Prentice Hall.
Casadesus-Masanell, R., Crooke, M., Reinhardt, F., & Vasishth, V. (2009). Households'
willingness to pay for “green” goods: evidence from Patagonia's introduction of organic
cotton sportswear. Journal of Economics & Management Strategy, p. 207.
doi:10.1111/j.1530-9134.2009.00212.x
Reinhardt, F., Casadesus-Masanell, R., & Kim, H. J. (2010). Patagonia (9-711-020, p.11).
Boston, MA: Harvard Business School Publishing.
Wang, J. (2010, May 12). Patagonia, From the Ground Up | Entrepreneur.com. Retrieved from
http://www.entrepreneur.com/article/206536
Makower, J. (2013, October 21). Can Patagonia's 'responsible economy' campaign catch a wave?
| GreenBiz.com. Retrieved from http://www.greenbiz.com/blog/2013/10/21/can-
patagonia-responsible-economy-catch-wave
Crooke, M., & Wilson, C. (2011). Creating Advocates: A Values-Oriented Approach to
Developing Brand Loyalty | Graziadio Business Review | Graziadio School of Business
and Management | Pepperdine University. Retrieved from
http://gbr.pepperdine.edu/2011/09/creating-advocates-a-values-oriented-approach-to-
developing-brand-loyalty/
Crooke, M. (n.d.). Opportunity Green Video - Dr. Michael Crooke, Former CEO of Patagonia
showcases his innovative SEER Business Model - which focuses on innovating business
strategies that incorporate social, ethical and environmental values profitably [Video file].
Retrieved from
http://www.opportunitygreen.com/videos/michael_crooke_green_business_model
Bell, J. (2009, December). Patagonia Clothing: Making a Profit and Meeting Environmental
Challenges. Mother Earth News, p. 3.
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Tozzi, J. (2012, January 4). Patagonia Road Tests New Sustainability Legal Status - Bloomberg.
Retrieved from http://www.bloomberg.com/news/2012-01-04/patagonia-road-tests-new-
sustainability-legal-status.html
Burke, M. (2010, May 6). Wal-Mart, Patagonia Team To Green Business - Forbes. Retrieved
from http://www.forbes.com/forbes/2010/0524/rebuilding-sustainability-eco-friendly-mr-
green-jeans.html
Patagonia's Common Threads Partnership to Reduce Our Environmental Footprint. (n.d.).
Retrieved July 15, 2014, from http://www.patagonia.com/us/common-
threads?assetid=1956
Patagonia Repair Partnership - iFixit. (n.d.). Retrieved July 15, 2014, from
https://www.ifixit.com/patagonia
Patagonia - Take the Pledge. (n.d.). Retrieved July 16, 2014, from
http://campaigns.ebay.com/patagonia/join/
Nudd, T. (2011, November 28). Ad of the Day: Patagonia Asks You to Please Stop Buying Its
Products | Adweek. Retrieved from http://www.adweek.com/news/advertising-
branding/ad-day-patagonia-136745
Patagonia, Inc. (2011, November 25). Do Not Buy This Jacket. Retrieved from
http://patagonia.typepad.com/files/nyt_11-25-11.pdf
Stock, K. (2013, August 28). Patagonia's 'Buy Less' Plea Spurs More Buying - Businessweek.
Retrieved from http://www.businessweek.com/articles/2013-08-28/patagonias-buy-less-
plea-spurs-more-buying
Ryan, K. (2014, July 2). The Bottom Line: Patagonia, North Face, and the Myth of Green
Consumerism | Groundswell. Retrieved from http://www.groundswell.org/the-bottom-
line-patagonia-north-face-and-the-myth-of-green-consumerism
Voight, J. (2013, September 29). Patagonia’s New Initiative, 'The Responsible Economy' |
Adweek. Retrieved from http://www.adweek.com/news/advertising-branding/patagonia-
taking-provocative-anti-growth-position-152782
Pindyck, R., & Rubinfeld, D. (2012). Chapter 6. In Microeconomics, Student Value Edition (8th
ed., p. 212). Upper Saddle River, NJ: Pearson College Div.
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Whan, E. (2014, May 23). Survey: Unilever maintains sustainability leadership amid change |
GreenBiz.com. Retrieved from http://www.greenbiz.com/blog/2014/05/23/survey-
unilevers-sustainability-leadership-persists
Sustainable Apparel Coalition - Overview. (n.d.). Retrieved July 20, 2014, from
http://www.apparelcoalition.org/higgindex/
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Goal 4: Business Integration:
Objectives:
4.1 Decision Making: Demonstrate capacity to integrate quantitative and qualitative techniques
from functional business areas to analyze business alternatives.
4.2 Strategic Planning: Demonstrate capacity to formulate strategies that are feasible,
understandable, and foster long-term sustainability within the context of achieving
organizational goals and social responsibilities.
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Goal 4: Business Integration: 4.1 Decision Making
Linda Park
FIN_6320_70 Seminar in Finance
Homework Assignment #1
Spring 2015
Dr. James Owens
Goal 4: Business Integration: 4.1 Decision Making
FIN_6320_70 Seminar in Finance
Homework Assignment #1
Project Requirements: This homework was given after the midterm exam to further test our
understanding of the concepts of financial management. Analytical techniques had to be utilized
to answer each specific question. Individual questions had to be answered addressing financial
problem solving having to do with the material learned so far at the mid-point of the course..
Specific objectives of financial understanding were in the homework problems. The time value
of money, knowledge of stocks and bonds, knowledge of capital budgeting and cost of capital,
knowledge of risk, return and diversification, and knowledge of financial statements.
Identifies Alternatives: Each question on Homework #1 focused on different areas of financial
understanding. Alternatives where addressed in the problem solving of answering the questions
given. Giving clear and concise answers to the relevant financial problems that mirrored real life
situations in corporate finance was presented.
Appropriateness: Utilizing the professor’s videos, chapter readings and homework practice
problems, answers to the questions were developed to clearly show an understanding of the
financial material. Each question focused on the areas that were learned up to that point in the
class such as theory of the firm, financial analysis and planning, time value of money, capital
budgeting metrics, risk and return of the firm, and issues in capital budgeting.
Interpretation: The reading, interpretation, and understanding of each homework question and
then developing the answers on excel spreadsheets to solve the questions were utilized for every
problem. Problems were reviewed for accuracy in financial decisions and correct use of excel
formulas and spreadsheets. Each problem was extensive in dealing with the different areas of
financial functions, stocks and bonds, cost of capital and knowledge of risk, return and
diversification of financial portfolios of firms.
Comment: This was an interesting and relevant learning experience for me to have a better
understanding of finance.
Fin6320_70 Seminar in Finance
Linda Park
Homework #1
1. At the end of 2014, the Long Life Light Bulb Company announced it had produced a gross
profit of $1 million. The company has also established that over the course of this year it has
incurred $345,000 in operating expenses and $125,000 in interest expenses. The company is
subject to a 30% tax rate and has declared $57,000 total preferred stock dividends.
1a. How much is there in earnings available for common stockholders?
Gross Profit $1,000,000
Less: Operating Expenses $ (345,000)
Operating Profits $ 655,000
Less: Interest $ (125,000)
Net Profit before Taxes $ 530,000
Less: Taxes (30%) $ (159,000)
Net Profit After Taxes $ 371,000
Less: Preferred Stock Dividend $ (57,000)
Earnings Available for Common Stockholder $ 314,000
1b. Compute the increased retained earnings for 2014 if the company were to declare a $4.25
common stock dividend. The company has 15,000 shares of common stock outstanding.
Earnings Available for Common Stock $ 314,000
Dividend $4.25x15,000shares $ 63,750
Increased Retained Earnings $ 250,250
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2. Terrel Manufacturing expects stable sales through the summer months of June, July, and
August of $500,000 per month. The firm will make purchases of $350,000 per month during
these months. Wages and salaries are estimated at $60,000 per month plus 7 percent of sales. The
firm must make a principal and interest payment on an outstanding loan in June of $100,000. The
firm plans a purchase of a fixed asset costing $75,000 in July. The second quarter tax payment of
$20,000 is also due in June. All sales are for cash.
2a. Construct a cash budget for June, July, and August, assuming the firm has a beginning cash
balance of $100,000 in June.
Cash Budget Terrel Manufacturing June July August
Sales (cash) $500,000 $500,000 $500,000 Less cash disbursements
Purchases 350,000 350,000 350,000 Wages and Salaries 60,000 60,000 60,000
Variable portion (W&S) 35,000 35,000 35,000 Principal and interest 100,000
Purchase of fixed asset 75,000 Tax Payment 20,000
Total Cash Disbursement $565,000 $520,000 $445,000 Net cash flow -65,000 -20,000 -55,000
Add: beginning cash 100,000 35,000 15,000 Ending Cash 35,000 15,000 70,000
Required Financing Excess Cash 35,000 35,000 70,000
148
(b) The sales projections may not be accurate due to the lack of experience by a newly-hired
sales manager. If the sales manager believes the most optimistic and pessimistic estimates of
sales are $600,000 and $400,000, respectively, what are the monthly net cash flows and required
financing or excess cash balances?
Cash Budget Terrel Manufacturing
June Pessimistic
June Optimistic
Sales (cash) $400,000 $600,000
Less cash disbursements Purchases 350,000 350,000
Wages and Salaries 60,000 60,000 Variable portion (W&S) 28,000 42,000
Principal and interest 100,000 100,000 Purchase of fixed asset
Tax Payment 20,000 20,000 Total Cash Disbursement $558,000 $572,000
Net cash flow -158,000 28,000 Add: beginning cash 100,000 100,000
Ending Cash -58,000 128,000 Required Financing 58,000
Excess Cash 128,000 Cash Budget Terrel Manufacturing
July Pessimistic
July Optimistc
Sales (cash) $400,000 $600,000 Less cash disbursements
Purchases 350,000 350,000 Wages and Salaries 60,000 60,000
Variable portion (W&S) 28,000 42,000 Principal and interest
Purchase of fixed asset 75,000 75,000 Tax Payment
Total Cash Disbursement $513,000 $527,000 Net cash flow -113,000 73,000
Add: beginning cash -58,000 128,000 Ending Cash -171,000 201,000
Required Financing 171,000 Excess Cash 128,000
149
Cash Budget Terrel Manufacturing
August Pessimistic August Optimistic
Sales (cash) $400,000 $600,000
Less cash disbursements Purchases 350,000 350,000
Wages and Salaries 60,000 60,000 Variable portion (W&S) 28,000 42,000
Principal and interest Purchase of fixed asset
Tax Payment Total Cash Disbursement $438,000 $452,000
Net cash flow -38,000 148,000 Add: beginning cash 171,000 201,000
Ending Cash -209,000 349,000 Required Financing 209,000
Excess Cash 349,000
150
percent tax rate.
3a. Given the 2014 income statement above, estimate net profit and retained earnings for 2015.
Pro forma Income Statement December 31, 2014
Sales $2,400,000 Less: Cost of Goods Sold 1,440,000
Gross Profit 960,000 Less: Selling Expense 240,000
General &Administrative Expense 72,000 Less: Depreciation 48,000
Operating Profit $600,000 Less: Interest 96,000
Earnings before taxes $504,000 Less: Taxes (40%) 201,600
Net Profit after taxes/EACS $302,400 Common Stock Dividends 120,000
Retained Earnings $182,400
(b) If $200,000 of the cost of goods sold and $40,000 of selling expense are fixed costs; and the
interest expense and dividends are not expected to change, what is the dollar effect on net
income and retained earnings? What is the significance of this effect?
Pro forma Income Statement December 31, 2014 Sales $2,400,000
151
Less: Cost of Goods Sold 1,200,000
Fixed COGS 200,000 Gross Profit 1,000,000
Less: Selling Expense 192,000 fixed selling expense 40,000
General &Administrative Expense 72,000 Less: Depreciation 48,000
Operating Profit $648,000 Less: Interest 80,000
Earnings before taxes $568,000 Less: Taxes (40%) 227,200
Net Profit after taxes/EACS $340,800 Common Stock Dividends 100,000
Retained Earnings $240,800
The dollar effect on net income is $38,400 and the dollar effect on retained earnings is $58,400
using the percent of sales method. The significance of this effect is that with using the percent of
sales method the net profit is understated by $38,400 and the retained earnings is understated by
$58,400. This approach allows Ace Manufacturing to get a more realistic estimate for long term
needs in financing.
4. Julie's X-Ray Company paid $2.00 per share in common stock dividends last year. The
company's policy is to allow its dividend to grow at 5 percent for 4 years and then the rate of
growth changes to 3 percent per year from year five and on. What is the value of the stock if the
required rate of return is 8 percent?
Value of Stock today $44.22
5. You are considering the purchase of new equipment for your company and you have narrowed
down the possibilities to two models, which perform equally well. However, the method of
paying for the two models is different. Model A requires $5,000 per year payment for the next
five years. Model B requires the following payment schedule. Which model should you buy if
your opportunity cost is 8 percent?
Answer: Model A
152
6. Champion Breweries must choose between two asset purchases. The annual rate of return and
related probabilities given below summarize the firm's analysis.
Asset A Asset B
Rate of Return Probability Rate of Return Probability
10% 30% 5% 40%
15 40 15 20
20 30 25 40
For each asset, compute
(a) the expected rate of return.
Asset A Expected return 15%
Asset B Expected return 15%
(b) the standard deviation of the expected return.
Standard deviation of Asset A is 3.87%
Standard deviation of Asset B is 8.94%
(c) the coefficient of variation of the return.
Asset A coefficient of Variation of the return 0.26
Asset B coefficient of variation of the return 0.60
(d) Which asset should Champion select?
They should choose Asset A for 15% rate of return and lesser risk.
Goal 4: Business Integration: 4.1 Decision Making
Linda Park
MKT_6348_70/71 Seminar Market Strategy
Fall 2015
Dr. Robert King
Apple Case Study
Goal and Objective 4.2: Strategic Planning
Apple Case Study
MKT_6348_70/71 Seminar Market Strategy
Project Requirements: To write a 5-10 page APA style paper with a case analysis of
Apple Inc. based on the case reading in Market Strategy Text and Cases by Ferrell and
Hartline. The case is called Apple’s Winning Market Strategy and we were to analyze
Apple from the evidence provided in the case.
Theoretical Foundation: To do well on this case, you must demonstrate that you know
how to look at Apple’s situation and determine what are the positives and negatives of
the past and present and the best options for proceeding in the future. The idea of this
case was to make sure as a student that I can think my way around a situation and base
the paper on a solid understanding of the case including outside sources. The theories
that were presented in this Apple Inc. Case Study gave a specific view of Apple their
customer’s loyalty to the brand and their marketing strategy.
Critical Elements and Feasibility: The criteria for the paper was suggested to include a
full overview of the case, explaining the main points addressed in the case study, the
benefits of the case study and how the benefits came to be for the company. A critical
analysis of Apple’s weaknesses and how they came to be along with how I would suggest
that they change their strategy in the future based on the elements in the case study
presented.
Evidence of Strategy: The paper was written with the evidence of the case, a SWOT
analysis of Apple focusing on its strengths, weaknesses, opportunities and threats in their
industry. The paper identified key evidence of Apple’s marketing strategy and what
happened as they introduced new products and also upgraded established products.
Implementation: In reading and researching for writing the paper planning what to
write, how to address the entire paper was thought of throughout the paper. Constraints
of paper length, quality of writing, detail to specifics of the Apple case and its marketing
strategy were all taken into account into the writing of the paper. The paper was written
in consideration of the goals of Apple and to continue its efforts in innovation and
technology with improvements in its supplier relations.
Conclusions, Implications and Consequences: The conclusion of the paper identified
that Apple needs to manage its suppliers more closely since there has been labor issues in
the Far East that has caused Apple to deal with buying from suppliers that have poor and
unsafe working conditions for employees. The implications in the paper is that Apple
will continue to innovate with new products, new inventions and new technologies to
continue its world domination in the technology marketplace. Apple needs to be sure that
it creates positive customer loyalty as it moves into other technology marketplaces
besides computers and mobile phones.
Comment: I was pleased to receive a 100% on the paper and the Professor told me that
my paper would be used as a model for other students in future classes.
.
Case 2: Apple’s Mkt. Strategy
Case 2: Apple’s Winning Marketing Strategy
Linda Park
September 12, 2015
2015FA_MKT_6348_70_Seminar in Marketing
West Texas A&M University
Case 2: Apple’s Winning Marketing Strategy
Everyone knows the name Apple, not the apple you eat, but the global company Apple Inc.
that has revolutionized the way we live on a daily basis. Apple Inc. has created innovation tools
that help live life with more information, more opportunities and spending more of our income to
use Apple products.
Apple has used technology and innovation to create the latest and greatest technological
products. The loyal customers of Apple products keep the brand in the spotlight because the
customers are so enthusiastic about Apple’s new products and upgrades. Apple excelled under the
leadership of the late Steve Jobs who not only created Apple but also brought it back from near
bankruptcy. Steve Jobs and Steve Wozniak created Apple Computers in Job’s parent’s garage in
1976 where they created the first computer of Apple, the Apple I (Time, n.d.). Apple Computer
continued on an upward growth path with the Macintosh in 1984 and it was the “belle of the ball”
in the computer industry. Easy to use, simple interface, one could do all sorts of word processing
without having to do any basic codes to use the computer. I owned a Macintosh back in 1988 and
it was a wonderful computer compared to the Radio Shack Tandy computer I had previously.
Apple came out with a few more computers the Macintosh SE30, that was also an excellent
computer at the time and I owned one as well. But along with the success in the late 1980’s there
were many flops and lots of turmoil within the executives of Apple Computer. Job’s was pushed
out of the company and Apple went through numerous CEO’s ending up near bankruptcy in the
mid 90’s. It was then that Jobs came back to Apple and brought it back to the forefront of the
latest and greatest technological companies in the world. Apple Computer became Apple Inc. The
global recognizable logo of the bitten apple, and the lower case “i” became everything Apple. The
iMac, iPod, iTunes, iPhone, iPad, Apple Watch and Apple Health are incredible products that do
things that we never imagined.
Apple partnered with Microsoft in 1997 to allow the Microsoft software to be available to
iMac’s users. Microsoft helped save Apple from bankruptcy and Apple finally saw Microsoft as
not a competitor that Apple had to beat, but as one where both Apple and Microsoft would benefit
(Shontell, 2010).
Apple marketing program is a role model to other companies and often copied. The prices
of an iMac, iPhone, iPad are priced high, usually more than competitors. Apple products are
always priced on the higher end and their customers are more than willing to pay more for an
Apple product. Apple’s promotion is very simplistic, clean and easy to understand (DeMers,
2014). Apple’s corporate culture is one of secrecy, where Apple employees don’t tell other Apple
employees what they are working on unless they are also working on that project (Ferrell &
Hartline, 2014, p. 332). Employees are loyal, challenged and work in a fast paced environment
not unlike the rest of Silicon Valley companies.
Below in this case analysis, I will below the pros and cons of Apple’s marketing challenges, its
supply chain, and what the future holds for Apple based on what is in the present and what Apple
may do in the future.
Apple’s Marketing
It is a given that Apple makes great products and everyone wants an Apple product whether it is
an iPhone 6s or 6Plus or an iPad. According to Apple Inc. fourth quarter numbers reported
January 2015 there are 575 Apple iPhones sold every minute of every day (Apple Insider Staff,
2015).
SWOT Analysis
Apple’s Strengths – Apple has a strong brand image, high profit margins and an effective
innovation process (Smithson, 2015). Apple is recognized everywhere on the globe. Apple
consistently wins first place as the World’s Most Admired Company (Ferrell & Hartline, 2014,
p. 332). It brand recognition is unlike any other brand, possibly Google comes the closest to it.
Apple sells its products at a high price, which leads to high price margins and a very profitable
bottom line. Apple’s net income as of June 28, 2015 was 10.677 million dollars. It is far away
from its bankruptcy days. Apple is continuously innovating with new product introductions. They
just released this month September 2015 an updated iPhone 6s and 6Plus that has 3D Touch
technology and a new camera with Live Photos Features where you can combine photos to create
a GIF-like effect (Garun, 2015). Apple is introducing Apple TV which will have a Siri remote and
gaming capabilities. Siri is more sophisticated to recite back to you if you missed some dialogue
on TV (Garun, 2015).
Apple’s Weaknesses – Apple has a limited distribution network, high selling prices, and its
sales are mainly to the high-end marketplace (Smithson, 2015). Apple’s distribution network is
focused on the middle to upper class market and because the products sell at high prices. The
majority of the global market is not in the middle to upper class, which is a huge weakness for
Apple. Android operating phones are very affordable and in many parts of the world an Android
phone is all someone can afford. Apple’s iMacs, iPads and all devices are again priced on the high
end so that it makes it out of reach for many people globally. Someone might be able to buy an
iPhone but not also an iPad, and an iMac too. One of the weaknesses is that Apple employees and
developers are middle to upper class and therefore not as in touch with the lower income
marketplace. They are designing products for themselves, but not for the person who makes
$50/month and obtaining an iPhone is completely out of reach in that income bracket.
Opportunities for Apple – Apple would greatly benefit from expanding their distribution
network, higher demand for smartphones and tablets and creating new product lines (Smithson,
2015). Apple has increased their own retail stores worldwide to 461 stores in 16 countries. The
first store that was opened was in 2001 in the U.S. and Apple plans on opening a store in Belgium
on September 19, 2015 (Wikipedia, n.d.). Apple stores made $4,798.82 per square foot at the end
of 2014 according to data provided by eMarketer (Wahba, 2015). More Apple stores worldwide
would be an extremely smart move for Apple Inc. Apple has a global base of 450 million users
and once someone has purchased an iPhone for example, the chances of them upgrading to another
iPhone is more than 86%. Once you have had an iPhone you never want to go back to an Android
phone (Barjarin, 2015). Apple’s expanding into TV’s and creating a brand new tvOs which allows
third party developers to create apps that will play on Apple TV is also a great marketing strategy
move (Garun, 2015).
Threats facing Apple – Apple is faced with aggressive competition, imitation, and rising
labor costs and unethical production practices where Apple products are produced (Smithson,
2015). Apple’s competitors such as Samsung, Huawei, Google, Dell, Hewlett-Packard, and Paypal
are trying hard to beat and keep up with Apple. Microsoft Windows10 has a user interface that is
more “Mac-like”. The Android operating system has also moved to look more like the iOS
operating system (Investopedia, n.d.)
Apple’s largest product component makers are in China and there have been many issues of unfair
wages, unethical working conditions and safety issues. Foxconn, Apple’s largest supplier has had
consistent violations but Apple keeps using them to make the products. Foxconn just signed an
agreement with India’s Maharashtra state to set up 10 to 12 plants over the next five years.
Foxconn employs 1.3 million people worldwide during peak production times but has been
plagued with suicides at Chinese plants because of working conditions (Reuters, 2015). Apple is
trying to be more transparent with consumers about their suppliers. On Apple’s website they list
the addresses of suppliers and the names of all their smelters in the supply chain. Apple states that
they have a code of conduct for all suppliers and it is honorable that they have listed the addresses.
Apple needs to stay on top of labor practices with their suppliers since this has been a major issue
for them (Apple, Inc., 2015).
Market Strategy is it Working for Apple?
Apple has evolved as a company and continues to innovate as we see from the recent Apple
event on September 9, 2015. As they have done in the past and continue to do, Apple continues
to update the iPhone and iMac. Apple’s new iPhone 6s and 6sPlus has advanced technology that
it can tell between a light touch or a heavy press and Apple is the first company to feature this “3-
D Touch” technology. What this means for Apple’s supply chain is it will bring in more demand
for the assemblers who can do this touch technology. Due to additional components needs for
touch technology additional assemblers will be utilized therefore increasing growth in those
markets (Luk, 2015). Apple innovation “3-D Touch” technology is just another example of their
market strategy to focus on consumer’s needs. Apple uses innovation in its product design,
branding strategic alliances and its business-marketing model to continue to make it the market
leader in smartphones, laptops and tablets (Ferrell & Hartline, 2014, p. 86). Apple is now the 2nd
in the most innovative companies in 2015, still ahead of Google (Gunelius, 2015).
Word is buzzing that Apple is developing an electric car that may be available in 2020. Due to the
secrecy that is Apple’s corporate culture it is not fully possible to confirm that this is true but it
has been reported in The Wall Street Journal (Wakabayashi & Ramsey, 2015). CarPlay is another
new innovation from Apple where they have partnered with automobile makers and with Siri voice
control, one can text, answer phones all while driving and not physically touching the actual phone
(Apple, Inc., n.d.). Apple’s CarPlay is competing against Google’s Android Auto, again other
relatively new technology in the Apple realm of products.
Apple wants to own the market, which means when someone buys a smartphone they will
buy an Apple. Just as you don’t buy tissues, you buy Kleenex’s, Apple wants world domination
of the market, they want consumers to “buy the name”, APPLE (Hangan, n.d.)!
References
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Apple, Inc. (2015). Apple - Supplier Responsibility - Our Suppliers. Retrieved from
http://www.apple.com/supplier-responsibility/our-suppliers/
Apple, Inc. (n.d.). CarPlay - Apple. Retrieved from http://www.apple.com/ios/carplay/
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