Chapter 1 Introduction

1.1 Research Background

Although  there  are  great  demands  in  domestic  and  international  sporting  goods markets,  the  development situation  of  China’s  sporting  goods  manufacturing enterprises is not optimistic. The biggest problem lies in the lack of strong brands. Only  when  strong  brands  are  built  and  the  brand  advantage  is  converted  into  the driving force to enhance competitiveness of enterprises can Chinese sporting goods manufacturing  enterprises  seize  the  good development  opportunity  of  the  world’s sports  industry  so  as  to  hold  more  market  shares.  The  LN  Company, as  a  leading enterprise in China’s sporting goods industry is faced with a series of problems, such as high inventories, decrease in the number of shops, the stock diving, profit warnings, departure of top executives, layoffs, which poses serious challenges to the sustainable development  of  its  profit  model.  Under  this  circumstance,  it  is  of  great practical significance  to  study  the  optimization  of  profit  models  of  enterprises  in  the  sports industry by exploring that of the profit model of LN Company. With the deepening of the market economy, whether enterprises can win the fierce market competition is, to a large extent, affected by their business strategies. Faced with challenges from strong competitors  and  its  own  weakness,  LN  Company  must  develop  new  business strategies  to  optimize  the  existing profit  model.  Based  on  the  strategic  financial analysis  of  LN  Company  and  the  development  situation  of domestic  and  foreign sports  goods  manufacturing  enterprises,  this  paper  tries  to  study  the  competitive advantages  and  disadvantages  of  LN  Company,  analyze  its  problems  and  design strategies  for  its  future development,  with  a  view  to  promoting  the  sustainable development of its profit model.

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1.2 Meaning of the Research

The choice of strategies is the competitive weapon of enterprises. If the strategy is consistent with the needs of the development of an enterprise, the competitiveness of the  enterprise  will  be  enhanced;  otherwise,  the  strategy  will be  detrimental  to  its development.  When  financial  statements  of  listed  companies  are  disclosed,  the economic development  of  companies  will  be  revealed  to  the  public.  Generally, financial  statements  and  business  strategies of  companies  are  discussed  separately. Once  the  two  are  discussed  together,  analysis  of  the  economic development  of companies will more scientific and persuasive. Therefore, this paper will try to find ways  to  optimize the profit  model  of  a  company  from  the  perspective  of  strategic finance.

Outside investors of enterprises can gain earnings but they have to undertake risks, so they  pay  more  attention  to the long-term  development  of  enterprises.  A comprehensive  analysis  of  the  development  of  companies  through  the strategic financial  analysis  framework  can  help  outside  investors  make  right  investment decisions. It also helps inside managers of companies who should be responsible for investors  discover  internal  management  problems managers  and  make  right management decisions. After a company’ management problems and their roots are identified,  management  recommendations  on  its  management  can  be  made.  These recommendations can also be used for reference to improve the management of other companies in the same industry. 

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Chapter 2 Literature Review and Theoretical Basis

2.1 Literature Review

2.1.1 Research on Strategic Financial Analysis

Professor  K.G.  Palepu  of  Harvard  University  combined  the  analysis  of  financial statements and strategies of enterprises in his book Business Analysis & Valuation: Using Financial Statements. Employing the theories of strategic management, he took a  company  as  a  sample  and  gave  suggestions  to  the  development  of  the  company through  the  analysis  of  its  financial  statements  and  strategies.  Professor  Huang Shizhong from Xiamen National Accounting Institute believed that “the new thinking of financial statements analysis based on strategies” requires scholars not to be limited to the accounting statistics, but to figure out the actual operation of a company when analyzing  its financial  statements.  Moreover,  as  financial  statements  only  present figures,  to  clarify  the  development  of  the company,  it  is  essential  to  analyze  the external environment and strategies at different times.

The financial strategies of companies are similar to the Lifecycle Theory, which is also  periodic,  so  companies  should make  different  financial  strategies  at  different stages and make adjustments based on the reality. Drawing up suitable and promising financial strategy models in line with the financial strategies and development goals is good for the long term development of the enterprise (Ruth Bender, 2010). Financial strategies include cost strategies, theory strategies and investment strategies. Financial strategies  can  also  be  classified  into  competitive  financial  strategies  and periodic financial strategies. As for the enterprise, financial strategies can be divided into three types:  expansion, retrenchment  and  stability  (Ji  Quangui,  2007).  Financial  analysis can be done in five aspects, and each leads to different results. A framework is a must when  analyzing  the  financial  statements  of  a  specific  company  and  the future development of the company can thus be forecasted (Li Xinhe, 2006).  

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2.2 Theoretical Basis

Adrian J. Slywotzky et  al. proposed the systematic mindset of profit model in  The Profit  Zone. They believed that the profit zone of an industry is  changeable in  the whole  industry  chain  (value  chain).  Sometimes,  there  are  profits for the  whole industry, but sometimes no, like the case in the so called sunrise industry. The key is to find profitable factors and their degree of matching, in order to find out the profit zone of an industry. When the matching degree is higher, the profit is bigger, which is called the high-profit zone. When the matching degree is medium or low, it is called the average-profit zone, low-profit zone or no-profit zone. The profit model constructs the matching mechanism among profit factors.

Micheal  E.  Porter  first  raised  the  basic  model  of  value  chain  in  Competitive Advantage in  1985. This  theory believed that the creation of product  value can be divided into several basic/subsidiary stages, but the value is not evenly distributed at all the stages. The rooms for added value at different stages vary, so maintaining the upstream and downstream competitiveness is important to the core competitiveness of a company. According to the profit analysis of modern industry, the added value in the upstream  research  and  design  stages  and  the  downstream  marketing and serving stages is high, which can gain extra profits and makes the company stay at the top of the value chain to control the distribution of value. The manufacturing and assembling stages in the middle is labor-intensive, with low extra value. However, at this stage, the enterprise inputs a large amount of cost and operation cost. The operation cycle is long, with long time to get return of capital and the minimum room for profit, so the company is at the trough of the value chain. By coordinating the stages of the value chain,  the  optimal  financial  performance  can  be  achieved. 

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Chapter 3 Case Description ................. 37

3.1 Analysis of China’s Sports Goods Industry ............... 37

3.2 Company Background .................. 38

Chapter 4 Case Analysis ............. 46

4.1 SWOT Analysis ..................... 46

4.1.1 Strengths .................... 46

Chapter 5 Suggestions for Profit Model Optimization ................ 77

5.1  Promote  the  Strategic  Transformation  of  the  Company  and  Rebuild  the Business Advantage ....... 77

5.2 Change the Distribution Model and Improve Inventory Turnover Rate ........ 78

Chapter 4 Case Analysis

4.1 SWOT Analysis

4.1.1 Strengths

With over 20 years’ experience in China Domestic market, “LN” becomes a famous brand of sports goods successfully instead of the personnel icon of Mr. LN. Now well, LN  is  a  well-known  brand  with  many  loyalty  customers.  LN Company  is  familiar with China sports goods market, has an advanced off-line distribution system in all of China. By 2015, it has a total number of 6133 LN stores including direct-sale stores and  franchised  stores.  It  also  enjoys  great recognition  from  Chinese  sports  circles through long-term cooperation with domestic sports events. Through introducing ERP (Enterprise Resource Planning) system, AFS and brand tracking system, it gradually realizes the standardized, systematic and integrated enterprise management, with the capabilities of internal management optimization. LN Company has core technologies competitiveness compare to China’s local brands due to mass investment in R&D. It has core lab in LN headquarter in Beijing and design and R&D centers both in Hong kong and USA.

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Chapter 5 Suggestions for Profit Model Optimization

5.1  Promote  the  Strategic  Transformation  of  the Company and Rebuild the Business Advantage

Based on the SWOT analysis aforementioned, LN Company is suggested to promote the strategic transformation of the company and rebuild the business advantage.

First, China’s economy is still in the growth stage, in which sports goods industry has a  great  development  space.  By the  improved  living  standards  and  the  enhanced demand levels, people demand for sports goods. Meanwhile, because of the frequent world-class  sports  events,  people  have  great  enthusiasm  for  sports  activities;  their sports awareness  has  also  been  enhanced.  LN  is  well-known  brand  with  higher consumer loyalty. It used to  get the high occupancy in domestic market, and had has good relationship with China’s sports circles and easy to obtain recognition from them. It  should  focus  on  domestic  market  to  maintain  the  market  base  and  expand  the market occupation.

Second, the sports goods industry has entered into the adjustment period of growth; therefore,  it  needs  to  solve inventory  backlog,  the  homogenization  of  products, saturation of sales channels and other practical problems. The customers of LN were confused  in  its  product  design,  advertisement,  store  style  and  image  spokesman, which results in inconsistent information delivery. The brand image of LN is middling grade and lack of specialized functions. Actually,  LN has the ability to design and produce exclusive products.  LN Company  could  focus  on high level  market, make functionality as market positioning, enhance the level of products and increase their value  added.  It  shall vigorously  carry  out  technological  innovation,  product innovation and marketing innovation to improve its competitiveness in the domestic market, so as to achieve industrial upgrading and sustainable development.  

Third,  LN  could  further  study  the  market  segment,  adjust  the  market  strategy  and improve its appeal to target consumers, so as to enhance the competitive advantage. For example, the proportion of females in loyal consumers is slightly higher than that of females in the main consuming force of LN sportswear and sports shoes. Therefore, LN could pay more attention female consumers, so as to find out the sally port.

Last  but  not  least,  the  LN  Company  should  implement  institutional  restructuring  to change  the  serious  problem of  bureaucratic  and  poor  executive  force.  Specifically, reducing the staff suitably, increase the efficiency; adopting flat management, set up a management structure based on product orientation.  

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