Follow by Email

Wednesday, April 13, 2011

Adidas corporate strategy and case studies


1.      What is adidas’ corporate strategy? Was there a common strategic approach utilized in managing the company’s lineup of sporting goods businesses prior to its 2005-2006 restructuring? Has the corporate strategy changed with restructuring?
Adidas was founded in 1920 in Germany by Adi Dassler; later in 1924 his brother joined him to promote his business. Two brothers were successful to create innovative ideas and now Adidas Company has more than 700 patents and property rights. In 1948 two brothers had some kind of conflicts and both decided to split their business, one brother continued Adidas while another brother establish Adidas tough competitors Puma (Market watch, 2010).
Adidas Group comprise of Adidas, Reebok, and Tailor-made. Adidas represent 72% of group revenue while Reebok represent 20% of group revenue, and Tailor-made represents 8% of group revenue (Adidas, 2008). Adidas is world’s #2 designer and distributer of sporting goods behind Nike. Currently Adidas has numerous contracts with food ball and basket ball athletes, golfers as well as New York Yankees. As of May 2010, company operates over 2200 retail stores under the Adidas and Reebok banner (Yahoo finance, 2010).
According to 10k report of Adidas group, their corporate strategy is “to lead the sporting goods industry with brands built on a passion for sports and sporting life style. To generate consumer excitement and enhance brand profitability Adidas group is continually strive by executing a clear strategy i.e. focused on strengthening and developing brands to maximize group’s operational and financial performance and create shareholders value.”
Similarly, as mention on case, corporate strategy was “focused on extending its leadership in products offered by each of its three business segments, expanding controlled retail space through  its network of company-owned stores, and  achieving efficiency in its global  supply chain processes and activities.” Therefore, Adidas’s corporate strategy focuses on their core strength in the athletic footwear and apparel business. The Adidas group will offer the variety of product mix to capture a greater combined market share. Adidas brand will continue to have a clear focus on sport performance and will highlight team sports, while brand Reebok will be positioned as fitness oriented, sports-lifestyle brand with the focus on individual performance. Adidas now position themselves in sporting industry as global leaders in sporting brands offering distinct brand communication to reach different consumer of athletic footwear, apparel and accessories (Adidas, 2009).
Prior to 2005-2006 restructuring, Adidas had lineup sporting goods comprise of three different business segments:
1)      Adidas: Adidas business segment offers variety of Sathletes’ products. This business segments has three different products line, they are Adidas Sport performance, Adidas Sport Heritage, and Adidas sport Style.
2)      Salomon: Salomon business unit is a number 1 brand which offers winter sports such as Alpine, Nordic and snowboard. This business segments has five different product line, they are Salomon, Mavic-adidas cycling, Bonfire, Arc’Teryx, and Cliche.
3)      Taylor Made: This business segment offers a full range of golf hardware and accessories. This business segment has two product lines, they are Adidas golf and MAXFLI
After analyzing case and their business units with product mix, the conclusion would be that there was not a common approach utilized in managing company’s lineup of sporting goods prior to 2005-2006 restructuring. Though Adidas diversified with in sporting goods industry, they are fail to realized resources fit within the various business units. Adidas athletic footwear business unit had integration problems with Salomon’s business units.
Adidas’s all business units were too diverse and require different raw materials, labors and different processes to develop products that did not allow company to capitalize on any value chain. In different sport-related industries i.e. Adidas, Salomon and Taylor made with different product mix create difficulties to cross promote the merchandise. Further due to the varied demands of each business, there were no cost savings through economies of scale. The attempt of management to generate efficiency via all business unites proved to be wrong decision. Ultimately that attempt lead to the divestiture of most of Salomon’s business units by Adidas in 2005 (Sunset Camp, 2010).
After restructuring of their business units Adidas broad objectives or mission has not changed to be a number one leader in sporting goods industry in the world but Adidas changed their strategy to achieve that objective. Before the restructuring Adidas’s corporate strategy was to diversified portfolio to be a giant in sporting industry by acquire strong competitors within the sporting industry. To achieve that goal they acquired Salomon but they were unable to achieve their goal. Still Nike is leading the sporting goods industry. Therefore, they restructure their business unit as well as change their strategy to achieve their mission. Now Adidas more focused on innovation and strengthen their brands for the high performance.
2.   What is your evaluation of adidas’ line-up of businesses in 2008? What does a 9-cell industry attractiveness/business strength matrix displaying adidas’ business units look like?
            In my evaluation Adidas’s line-up of business in 2008 looks more refined and focused towards their corporate strategy. Adidas reorganized their business units into three core brands such as Adidas, Reebok, and Taylor Made-Adidas Golf to expand their leadership in product innovation and differentiation.
            Basically 9-cell matrix enables Adidas to identify the attractiveness of various companies in their respective industry that Adidas acquired. Athlete footwear industry as well as golf equipment market is growing market. Adidas has significantly increasing their market share since their restructuring of business. Sporting goods industry is highly competitive industry having few more strong competitors. Though Adidas reach the second highest position in the world’s sporting goods industry, due to the strong completion and price cut strategy Adidas have to continuously focus their attention on innovation and differentiation. Since Adidas’s primary business is sporting industry and from the beginning of their establishment they proved themselves to be world’s innovative sporting companies acquiring more than 700 patents right, Adidas have strong knowledge base resources as well as strong financial performance. As mentioned in the case, Adidas supply chain enable them to lower their operating cost and quicker their delivery. Adidas outsources more than 95% of their production requirements from Asia. Efficient supply chain of Adidas enables them to reduce number of contract manufactures from 547 to 377 thereby reducing complexity in procurement planning. Further it helps to boost profit margin from 47% in 2007 to 48% in 2008 and operating margin from 9.2% in 2007 to 9.5% in 2008. This shows strategic fit within their operations and enables company to earned higher profit margin. Sporting industry has opportunity to expand their business into most of the part of Asia and Africa while the biggest threat for them is intense rival. While talking about risk factor, though sporting goods industry does not have complex legal and political risk associated but it has high investment risk. If new product lunch or some business unit fails to attract the customers’ attention, Company has to lose huge sum of their operating cost as well as R&D cost.
            Overall, Adidas three of its business units seems more attractive and profitable. Since Adidas have core competencies lies on athletes footwear Adidas business unit looks more attractive and profitable. Similarly primary focus of Reebok business unit is also shoes and sporting accessories which enable Adidas Company to have a good strategic fit into their value chain and make company more profitable. While Adidas’s Taylor-made golf equipment is less attractive compared to three of its business unit.
9-cell industry attractiveness matrix
Table: 1
Measures        Weighting
Ratings (1-10)
Company A          B                    C              
Adidas    Reebok    Taylor Made
Industry Attract
 A                      B                    C              

Market Size
.1
9
7
5
.9
.7
.5
Growth Rate
.15
7
8
6
1.05
1.2
.9
Intensity
.3
8
8
7
2.4
2.4
2.1
Resources
.1
7
6
5
.7
.6
.5
Strategic Fit
.15
9
8
6
1.35
1.2
.9
Opportunity / Threat
.05
6
7
8
.3
.35
.4
Social, Political conditions
.05
3
1
1
.15
.05
.05
Degree of Risk
.05
1
2
3
.05
.1
.15
Industry Profitability
.05
6
6
4
.3
.3
.2

1



7.2
6.9
5.7


3.   Does adidas’ business line-up exhibit good strategic fit? What value-chain match-ups exists? What opportunities for skills transfer, cost sharing, or brand sharing are evident? Prior to its divestiture, what kind of strategic fits existed between adidas’ core business and its Salomon business unit?
            Yes Adidas’s business line-up exhibit good strategic fit with the Reebok. After the restructuring and acquisition Adidas has been increasing its market share and lowering its operational cost. Since Adidas and Reebok are athletic apparel and footwear leaders. Their combined effort make Adidas leading sportswear manufacturer in the world. Furthermore, product mix of both Adidas and Reebok have a good strategic fit. “Adidas could continue their products to position as the superior shoe for the serious athlete while Reebok would be marketed as the leisure shoe that would sell at the middle price points” (Sunset, 2010). Excellent product mix fit enable company to remain competitive in the industry by leaving little opportunities for their competitors.
            Efficient value chain facilitates company on brand building activities to differentiate Adidas, Reebok, and Tailor-made from other competing brands in the industry. Further, same advertising, marketing and sales campaign for all business enhances Superior customer service by providing timely delivery. Supply chain management also improves profitability by marketing their products quickly and lowering production cost by outsourcing most of the production requirement from Asian countries. Value chain helps Adidas to improve coordination with their suppliers thereby reducing number of suppliers from 547 in 2005 to 377 in 2007. Integration of suppliers assist Adidas to speed their product design-to market cycle times.
Supply chain also allows Adidas to enhance visible improvement s in operating margins year by year since 2005. Company has successful to improve profitability in Europe, America and Asia. Adidas excellent supply chain management permit them to attain number one or number two position on each of sporting goods segments where they compete.
Adidas – Salomon: Aligned with customers
Figure: 1
Consumer
Performance athletes
Freeride athletes
Adidas Sport Style       Adidas Sport Heritage        Adidas Sport Performance        Salomon                Taylor made Adidas golf

Sport lifestyle Customers
Golfers
Fashion Conscious Consumers
Focused Resources:
Marketing
Operations
Sales
Brand Division
The figure below shows Adidas product mix targeting various customers.






Source: Adidas 10k, 2004
From the above figure it is easy to explain about the strategic fit between Adidas’s core businesses with Salomon business unit prior to divesture.  Except for the marketing activities no other activities fit between Adidas and Salomon business unit. Only one value chain match-up between Adidas and Salomon business unit is their combining marketing, operation and sales activities. Salomon business is more focused towards winter sporting goods while Adidas core business is athletic footwear and accessories. Adidas were unable to add the value from their core competencies on any of Salomon’s products. The reason is that, manufacturing and distributing of bicycle hardware is different from the manufacture of athletic footwear. Therefore, Adidas needed individual suppliers and different man manpower for the Salomon business unit which decreases their ability to perform and ultimately Adidas had to divest Salomon business unit from their portfolio.
4.   Has adidas’ business line-up exhibited good resource fit between 1998 and 2007? What have been the financial characteristics of its major business segments during that time period? Which businesses might have been considered cash hogs and cash cows?
            No Adidas’s business line-up does not exhibit good resource fit with the Salomon business unit.  Salomon business basically comprise of ski equipment, golf clubs, bicycle components, and winter sports apparel while Adidas has competencies on footwear and accessories. A chief concern between Salomon and Adidas acquisitions was integration problem. None of the resources of Adidas had a fit between Salomon’s resources. Additionally, after the acquisition took place the attractiveness of winter sporting start decline. Therefore, after the acquisition announcement in 1998 Adidas’s stock price went down and most of the analysts including A Merrill Lynch were worried about troublesome for Adidas regarding their integration. The big concern for the outsiders was also about financing of the acquisition.
Adidas sales continuously had been declining for three years from 2001 to 2004. Even they had to lose their position of second largest sporting goods company to third largest sporting goods. As a result of bad financial performance and poor match of portfolio, Adidas finally decided to divest some of the Salomon business unit to Amer Sports Corporation in 2005 for 485 million euro while they bought Salomon business unit on 1.5 billion euro. They had a huge loss from the acquisition. Soon after the divesture of Salomon business unit Adidas acquire Reebok in 2006. The acquisition of Reebok proved to be fruitful for the Adidas. Combined effort of Adidas and Rebook enable Adidas again to achieve second largest position on world’s sporting goods.
Analysis of the financial statement of Adidas group from 1998 to 2007 shows that Sales revenue of Adidas group increased slightly after the acquisition with Salomon from 1998 until 2001 and start declining up to 2004. Again after restructuring of Adidas group and announcement of acquisition with Reebok Sales revenue increased from 2005 to 2007. Operating profit and net income also have similar patters like sales revenue; while dividends for the stockholders have been increasing from 1998 to 2007 from 0.21 cents dividends per share in 1998 to 0.50 dividends per share in 2007.
After detail analysis of Adidas case study with their financial performance, among their business unit Salomon business unit excluding Taylor-made is cash hogs having low sales revenue with relatively low market shares and potentially of slow market growth. Reebok and Adidas business units are cash cow having higher sales revenue. Both the business units occupy relatively higher market shares compared to other companies in the industry; while both Adidas and Reebok’s current market growth is low but they have high potentials in the future to grow to become a star.
5.   Based on your analysis of adidas businesses, did the restructuring undertaken in 2005 and 2006 make sense? Does it appear the acquisition of Reebok International will produce higher returns for shareholders? What strategic actions should adidas’ top management initiate to improve the company’s financial and market performance now that restructuring is complete?
                        Based on the overall analysis of Adidas group since 1998 to 2007 the restructuring undertaken in 2005 and 2006 make sense. After the Adidas-Reebok acquisition, Adidas was able to achieve second highest position in the world’s sporting goods industry with 26.3% of market share in the world; Nike had 32.9% of market share. Additionally, Adidas was also able to achieve the second highest position in US athletics shoes market behind Nike. In the US market, Nike had 36.3% market share in 2005 while Adidas market share jumped from 8.9% to 21.1% after the acquisition took place (Balboul, 2010).   
The acquisition of Reebok was the related diversification that facilitates Adidas to match resources and their value chain activities. Adidas benefited from distribution network of Reebok in North America where Reebok already has a significant presence. Reebok also assist Adidas for promotions and in-store displays. The integration of two powerful brands enhances the improvement in operating cash flows with the increased operating capital, and synergies (Balboul, 2010).
The acquisition with Reebok also promote in shipping of Adidas goods in the United States. Adidas used to take 14 days to ship their products from factories to United States now they can ship overnight. Combined R&D activities helped both the companies to speed up on development of cutting edge technologies (Balboul, 2010).
Since 2005-2006 restructuring, earning per share has been increasing from 2.05 in 2005 to 2.71 in 2007. Additionally, Stock holders enjoyed higher divides every year.
            Adidas and Reebok acquisition proved to be beneficial for both Adidas and Reebok. For the further improvement of both the company’s financial and market performance top management could take following strategic actions:
·         Integration of Suppliers of Reebok and Adidas to achieve economic of Scale.
·         Combined Adidas marketing campaign of “Noting is Impossible” with Reebok marketing campaign.
·         Adidas has high market present in Europe therefore Adidas can promote and distribute Reebok in European market utilizing their existing infrastructure; while Reebok has higher market present with strong brand recognition in US market therefore Reebok can promote and distribute Adidas in US market utilizing their existing infrastructure.
·         Adidas and Reebok combined effort can enhance their market share into such counters where there are few Adidas and Reebok or no Adidas and Reebok presence.

Reference

Market Watch. (2010). Adidas AG: Overview. Retrieved March 31, 2010 from

Yahoo Finance (2010). Adidas AG: Industry Overview. Retrieved May 10, 2010 from http://finance.yahoo.com/q?s=ADS.F








No comments:

Post a Comment