Adidas Corporate Strategy

Corporate Strategy Of By: Divya Mishra School of Management Purdue University Part I: NIKE INC COMPETITIVE ADVANTAGE PART II: CORPORATE STRATEGY SCOPE OF THE FIRM Describe the scopes of the firm (e.g. Vertical integration, geographical, and diversification) and its rationale (e.g. Why vertical integration: costs and benefits of vertical integration; geographical: see chapter 15 slide on porter’s diamond model, multinational strategies etc.; diversification: see chapter 16 slides on motives of diversification and competitive from diversification etc.). Do you think that the firm can compete successfully in the international markets? You can use porter’s diamond model figure VERTICAL INTEGRATION STRATEGIES (EXISTING MARKET/ DIFFERENT STAGE OF PRODUCTION) A vertical integration strategy describes “The degree to which a firm owns its upstream suppliers and its downstream buyers” (Blackwell Reference Online, Vertical Integration Strategy). The purpose of vertical integration is to increase the control of the stages of development. In the early beginnings Adidas produced all the shoes and apparel on its own. Through the huge expansion in the last decades Adidas does not produce all their apparel on its own. Today Adidas owns 9 own factories where it produces some of its products. Further, it has around 615 main suppliers from all over the world. Production is in Europe (27%), Asia (51%) and America (22%). Adidas has now switched from its past vertical integration strategy to the outsourcing in production and manufacturing. Most of the products of the company like sports shoes, apparels, accessories and equipment are manufactured in the Asian countries. The reason for outsourcing the manufacturing is the lower cost of raw material and labor in Asian countries. In 1993, Adidas moved its production overseas to Asia in order stay competitive in the industry. Even though Adidas has outsourced its production and manufacturing but the design and development process of all the products is still based in Germany. The Challenge due to Outsourcing The Adidas product line includes more than 20,000 items, from soccer and inline skates to outdoor jackets and snowboards, with thousands of product variations. To keep up with market demand and competition, the company changes its product range twice a year. The change in the product range depends more often on the availability of the new technologies and the also on the product range and technology of the competitors. Adidas also designs products for local, vertical and niche markets. Developing this complex mixture of products means the design studios and development departments are working at full capacity and under enormous competitive pressure. Once the designs of the products are created, managing the production is the next significant and often more complex step. The design and development process of all the products is based in Germany. Adidas has 900 active suppliers worldwide and more than 90 percent of the company’s products are produced in outsourced manufacturing locations around the world, especially in Asia. With such a large amount of manufacturing outsourced, communication between designers, suppliers and manufacturers is critical. Outsourced to Asian countriesWorldwideGermanyMarketing and Selling of productsManufacturing & Production of shoes, apparels, equipment & accessoriesProduct Design and Research & DevelopmentLayout of outsourcing process at Adidas Group Product Development Process at Adidas Group OutsourcedProduct Design process in Germany based R&D Production of ProductFinal DesignPlanningTesting & RefinementCost ModelingDetailed Concept Design Benefits and Concerns of Outsourcing Benefits Cost Saving: There can be significant cost savings when the business functions are outsourced. Raw material cost, labor cost, employee compensation costs, office space expenses and other costs associated with work space or manufacturing are eliminated. Focus on Core Business: Outsourcing allows firms to focus on their expertise and core business. When organizations go outside their expertise, they get into business functions and processes that they may not be as well-informed and educated about .This could potentially take away the firms from their main focus resulting in low value creation. Utilization of new Resources and Capability: Outsourcing helps the firms to utilize the new resources and capabilities of country they are trading in. Sometime the firms learn and adapt to the new core competencies. Operational Efficiency: Outsourcing gives an organization exposure to vendor specialized systems. Concerns Product Quality or Service Risk: Outsourcing can lead to compromises in product /service quality due to lack of necessary resources and competencies. Organizational Knowledge: An outsourced employee may not have the same understanding and passion for an organization as a regular employee. Labor laws & Regulations: Different countries have different laws and regulation for labor, which may be different and difficult to follow. Employee& Public Opinion: There can be negative perceptions with outsourcing and the sympathy of lost jobs. Outsourcing of Footwear production by region Supplier distribution worldwide Outsourcing of Apparel production by region GEOGRAPHICAL SCOPE Adidas AG is a German sports apparel manufacturer and parent company of the Adidas Group selling its products in more than 150 countries around the world. Adidas is a multinational company because aside from its main parent headquarters Herzogenaurach, Germany, it has set up regional headquarters in other countries, such as United States of America, China, Indonesia, Great Britain, Middle East and so on. Such a globalized company has profound effects on the company itself and the host countries. Adidas Inc. is a marketer of sports apparel and athletic shoes. The German manufacturer, through its marketing strategy which rests on a favorable brand image, has evolved into a large multinational enterprise. “For over 80 years, Adidas has been part of the world of sports on every level, delivering state of-the-art sports footwear, apparel and accessories. Today, Adidas is a global leader not only in the shoe industry, but also in the sporting goods industry. Shoes from the Adidas are available in virtually every country of the world. A strong advertising and public relation events makes Adidas as a worldwide recognized brand and it would be more sustainable in the world market. The company is the largest sportswear manufacturer in Europe and the second biggest sportswear manufacturer in the world, to its US rival Nike. But it still has the largest international portfolio of sport ambassadors. In conjunction with providing performance products, Adidas recognizes that consumers make purchase decisions based not only on brand but also on availability, convenience and extensiveness of product offering. As a result Adidas has been refining its distribution proposition, concentrating on expanding its own outlets or ‘controlled’ space and improving retail relationships. There are now over 1000 Adidas stores around the world offering sports apparels, shoes and equipment to the athletes and non-athletic customers. Global Strategy In simple words global strategy is “treating the world as a single market and selling, marketing and distributing the standard products and services worldwide” At more sophisticated level global strategy is “Strategy that recognizes and exploits linkages between countries”. The Benefits of Global Strategy for Adidas Cost Economies from Scale and Replication: Accessing global scale of economies in purchasing, manufacturing, product development and marketing. Replicating knowledge assets. This helps to improve the quality of products and processes primarily by simplifying the manufacturing, product development, purchasing and so on. The high quality products promote the brand recognition globally and increase the customer preference. Serving Global Customers: Sports is the most common fitness and recreational activity for people of any country. Adidas is the manufacturer and marketer of sports apparel and athletic shoes. So there is a requirement of sportswear, sports shoes as well as sport equipment for the people. The requirement creates an attractive market for Adidas to sell its products to the customers in different countries. Thus globalization strategy is beneficial for both the ends-company as well as customers. For the company geographical expansion creates new opportunities and attractive market. The customers on the other hand receive the products and services as per needs, wants and desires. Exploiting National Resources: A company achieves its competitive advantage by utilizing its resources and capabilities to the fullest. The resources and capabilities may be available to the company in one country or in different countries. When an organization expands its boundaries beyond the international borders, it finds an attractive market and profitability by selling goods as well as new resources and capabilities. Global strategy provides the management with a greater capability to respond to the worldwide opportunities. Thus with globalization Adidas finds options for manufacturing, purchasing, product development at a lower operational cost. Learning Benefits: Accessing and integrating knowledge from multiple locations Competing Strategically: Global strategy helps in exploiting global strength to win local wars. Global coordination is necessary to monitor and respond to the competitive threats in foreign and domestic market. Global strategy helps Adidas to compete with its chief rival Nike in local wars. By the graphs it is clear that Adidas is geographically present in many countries of Asia, Europe and America. Adidas has sales in Asia, Europe and America. The Adidas Group sells products in virtually every country around the world. As of December 31, 2010, the Group had 169 subsidiaries worldwide with its headquarters located in Herzogenaurach, Germany. The Adidas Group has also assembled an unparalleled portfolio of promotion partnerships around the world, including sports associations, events, teams and individual athletes. Major LocationsEuropeAdidas Group Headquarters, Herzogenaurach, GermanyAdidas International Trading, Amsterdam, NetherlandsAdidas Group Russia, Moscow, RussiaNorth AmericaAdidas North America, Portland/Oregon, USAReebok International Headquarters, Canton/Massachusetts, USAThe Rockport Company Headquarters, Canton/Massachusetts, USAReebok–Ccm Hockey Headquarters, Montreal/Quebec, CanadaTaylor Made-Adidas Golf Headquarters, Carlsbad/California, USAAsiaAdidas Global Sourcing, Hong Kong, ChinaAdidas Group China, Shanghai, ChinaAdidas Group Japan, Tokyo, JapanLatin AmericaAdidas Group Latin America, Panama City, Panama Porter’s Diamond Model for Adidas Factor Conditions Demand ConditionsRelating & Supporting Industry Strategy, Structure & Rivalry Factor Conditions: Porter emphasizes the role of specialized resources many of which are home grown rather than endowed. Germans are very devoted towards their own brand. The brand recognition of Adidas in home country can be associated to the loyal nature and attitude of Germans. The resource constraint may encourage the development of substitute capabilities. Related and Supporting Industries: According to Porter, for each industry, closely related industries are sources of critical resources and capabilities. Adidas is a German brand in sports shoes and apparel industry. Germany is also famous for its designer fashion clothes and accessories like Hugo Boss, Helmut Lang, Karl Lagerfeld, Chanel and Fendi. Chanel and Fendi may not be German, but they do have famous German designers behind the scenes. Adidas success can be can be related to the available resources and capabilities of the related fashion industry. Demand Conditions: Demand conditions in the domestic market provide the primary driver of innovation and quality improvement. Adidas preeminence in sports shoes and apparels is supported by the love and passion for soccer among Germans. Adidas market share in the sports industry can be much related to the enthusiasm for soccer in Germans and their one of the best soccer team in the world. Strategy, Structure and Rivalry: National competitive performance in particular sector is inevitably related to the strategies and structure of firms in those industries. The domestic competition plays a very important role in driving innovation, efficiency, and the upgrading of competitive advantage. Adidas’s excellent performance in the sports industry can be related to its competition and rivalry with other domestic companies like Puma Brand. The competition to excel in the industry, led to the competitive advantage of high product quality and innovation for Adidas. DIVERSIFICATION STRATEGY FOR ADIDAS Diversification (new products/ new markets) Diversification is also a growth strategy. “The purpose of diversification is to allow the company to enter lines of business that are different from current operations”. (Thomas, Joe, Diversification Strategy) This means that companies try to sell new products to new markets. The basic issue in diversification strategy is the degree of the industry attractiveness and the competitive advantages which companies can possess being in the industry. Industry Attractiveness Issues in Diversification Strategy Competitive Advantage Diverse brand portfolio of Adidas Consumers want choices and options in every product and service they use. Whether it is the athlete looking for the best possible equipment, or the casual consumer searching for the next fashion trend, Adidas is inspired to develop and create experiences that engage consumers in long-lasting relationships with the brands. To maximize the consumer reach, Adidas has embraced a multi-brand strategy. This approach allows Adidas to tackle opportunities from several perspectives, as both a mass and a niche player, providing distinct and relevant products to a wide spectrum of consumers. In this way, each brand is able to keep a unique identity and focus on its core competencies, while simultaneously providing Adidas with a broad product offering, increasing its leverage in the marketplace. The motives of diversifications are: ,[object Object]

Value CreationDiversification Strategy for Adidas The diversification strategies adopted by Adidas are concentric and horizontal diversification strategies. Adidas wants to enlarge its markets and is searching for new ways to expand its business. In January 2010 Adidas introduced the miCoach interactive training system guide. The program miCoach is available over the Adidas website. Customers can choose between different training plans such as de-stress or learn how to run. It can be described as horizontal diversification because Adidas now offer a service “personal training “which is unrelated to their core business of manufacturing and marketing sports shoes , apparels and equipment. The miCoach pacers that it sells can be seen as concentric diversification because pacers that measure your heart rate are related to sports and sports apparel. Adidas’s concentric diversification can be seen in the deodorant and shower gel that Adidas is selling at drugstores and supermarkets. Adidas focuses on different growth strategies to gain market share and increase sales and revenue from every country it is doing business. It focuses on product extension to improve its product assortment. Adidas is a well-established brand and consumers trust the products and services of this brand. A lot of people all around the world are fascinated by sports. Adidas can also sell healthy drinks and juice to support a healthy sport-oriented life style. Brand Portfolio in Adidas Group Adidas Adidas Sports PerformanceAdidas OriginalAdidas Sports Style Taylor made AdidasTaylor made Adidas GolfAdidas GolfAshworth Reebok CCM Hockey Adidas Brand Portfolio with the sales contribution per brand Reebok Rockport Sharing Resources The diversification strategy adopted by the Adidas group is the related diversification strategy. All the brands under the Adidas group are engaged in the production of related products like sports shoes and apparels, sports equipment, accessories like glasses, eye pieces and bags. The biggest advantage for Adidas group from the related diversification is the sharing of resources and capabilities between various brands. The size of the whole corporation is very large. It is not possible for all the brands under the Adidas group to share every resource. Every brand under Adidas group has its own key resources to excel. Like within the Adidas brand, the resources are shared between Adidas Performance, Adidas Style and Adidas Original. Similarly there is resource sharing between Reebok group and Reebok CMM hockey. Although the some of the resources are decentralized like R & D, but still there is some extent of resource sharing. Economies of Scope An economy of scope is defined as reduction in the long-run average and marginal cost, due to the production of similar or related goods or services where the provision of one product reduces the cost of the other product. The cost of producing multiple products simultaneously is often less than the costs associated with producing each product line independently. Adidas is into the production of sports related products like sports shoes, apparels, sports equipment, accessories, fitness services and so on. The diversification strategy adopted by the Adidas group is the related diversification strategy. All the brands under the Adidas group are engaged in the production of related products like sports shoes and apparels, sports equipment, accessories like glasses, eye pieces and bags. The biggest advantage for Adidas group from the related diversification is the sharing of resources and capabilities between various brands. Adidas’s management structure, administration systems, research and development, marketing capabilities, manufacturing and distribution capabilities are very effective in carrying out functions for more than one product. Warehouse facilities may be used to maximum advantage by storing a range of the company’s product lines. Adidas Diversification Strategy Shower Gels & Deodorant, accessoriesRockport Leather Fashion ShoesTaylor-made Adidas GolfTraining program: miCoachSports Apparels & FootwearSports equipments for different SportsReebokBrand TrainingRunningBasketballFootball AdidasFootwear, Apparel, AccessoriesReebokFootwear, Apparel and Accessories Tailor-Made-Adidas GolfGolf Equipment: Metalwoods, Irons Putters, Golf Balls, Footwear, Apparel and Accessories RockportDress, Casual and Outdoor Footwear, Apparel and AccessoriesCCM-HockeyHockey Equipment and Apparel RESOURCES & CAPABILITIES OF ADIDAS GROUP Identify the firm’s key resources/ capabilities. Specify the dominant logic of the firm i.e. how does it create value (reduces transaction cost, increase competitiveness, exploit relatedness, etc) Managing Linkages between Businesses, What Corporate Management Activities are implied by Porter’s concepts of corporate strategy)? Specifically, what type of corporate strategy/ strategies (corporate portfolio, restructuring, transferring skills or sharing activities) that the firm use to create value? The resources and capabilities are the key driving forces for a company to achieve its competitive advantages. Adidas utilizes its key resource and capabilities to create value and performance excellence. The resource and capabilities of Adidas are: Key Resources/Core Competencies ,[object Object]

Integrated Research and Development

Good Reputation as mid-priced brand in Industry

Diverse brand portfolio (merger with Reebok) Key Capabilities ,[object Object]

Effective Distribution Capability

Diversification Capability The key issue for any firm is to value creation. The value to a firm is created by utilizing the resources and transferring capabilities. The capabilities possessed and generated by the firm leads to the competitive advantage and key success factor. The value creation by Adidas can be explained by the “Porter’s Concept of Corporate Strategy” ,[object Object]

Ensuring Cost Competitiveness/Restructuring: As part of this priority, Adidas focuses on optimizing product creation through a more efficient cost selection process. This is achieved by the company by outsourcing its manufacturing to the Asian countries where the cost of labor as well as the material is low compared to European and American countries. This, coupled with increased automation in manufacturing, enhances the productivity, shorten lead times and improve overall quality. These improvements are expected to enhance profitability for the firm and ensure that Adidas provides to its consumers with the best value proposition in the industry.

The Profitability Management department assumes a central role in realizing cost competitiveness by driving the strategic costing efforts and optimizing the buying strategies. This includes monitoring macroeconomic trends, to identify the future impact on product costs as well as the ongoing financial assessment of the Adidas Group’s supply base.

Adidas creates value by efficient monitoring of business unit performance. The various business units at Adidas are very integrated and coordinated. There is communication at all the levels in each business unit.

Sharing Resources: The corporate strategy of “sharing resources” helps Adidas the most in adding and creating value to the company. Adidas has a diverse brand portfolio and broad product range. The resources of the Adidas create the competitive advantage to the company. Adidas has the key resources of strategic innovation, integrated R&D, Distribution network, supplier relation, volume manufacturing, efficient employee and reputation within industry. The different business units of the Adidas Group like Reebok, Taylor-made golf and so on, share operational resources and functions like sales and distribution, manufacturing facilities to create value, performance excellence and innovative product offering.

Research and Development and supply chain are the greatest strengths for Adidas. Creating innovative products to meet the shifting needs of athletes and consumers is critical to drive brand perception. As a result, research and development (R&D) is a keystone for the success of Adidas business. Adidas invests substantial resources into developing and commercializing new technologies as well as brand new design thoughts, in order to best fulfill the unique needs of the consumers worldwide. The research and development process is driven by teams of employees with diverse professional backgrounds.

R&D within the Adidas Group follows a decentralized approach. But at the same time the fundamental and biomechanical research, is shared across the Group. In line with its unique positioning, each brand runs its own research, design and development activities. But there is a degree of sharing R&D in each brand. The teams generally have either a category or a technology focus. R&D is not a separate organizational entity, but is closely integrated with the sourcing, design and product marketing functions.

The key resource of efficient employees is shared among various brands under the Adidas group. The sourcing team together with the material team, within product development works closely with the suppliers to identify innovative materials as well as integrate cost and production process aspects into the development phase.

To solidify Adidas Group position as a leader in technology and innovation, the Adidas Innovation Team is responsible for the ongoing development of new technologies and concepts in all key product categories. he team is divided into groups that focus on apparel, footwear and hardware, within which there are individual product focus categories like basketball, football (soccer), American football or cross-category project areas such as intelligent products or energy management systems (cushioning technologies).

The size of the whole corporation is very large. It is not possible for all the brands under the Adidas group to share every resource. Every brand under Adidas group has its own key resources to excel. Like within the Adidas brand, the resources are shared between Adidas Performance, Adidas Style and Adidas Original. Similarly there is resource sharing between Reebok group and Reebok CMM hockey. Although the some of the resources are decentralized like R & D, but still there is some extent of resource sharing.The diversification strategy adopted by the Adidas group is the related diversification strategy. All the brands under the Adidas group are engaged in the production of related products like sports shoes and apparels, sports equipment, accessories like glasses, eye pieces and bags. The biggest advantage for Adidas group from the related diversification is the sharing of resources and capabilities between various brands. Below is the pictorial representation of sharing of resources in Adidas Group Resource Sharing Sharing resourcesSharing resources Reebok group Sharing resourcesSharing resourcesSharing resourcesAdidasTaylor-made golfRockport leatherReebok CMM Hockey CORPORATE MANAGEMENT OF ADIDAS GROUP Describe the corporate management of the firm: structure, systems and processes (strategic planning, control, HR, corporate initiatives), leadership style, culture, vision/ mission etc. Corporate Control over the Businesses and Goold & Campbell’s Corporate Management Styles: Financial and Strategic control. At the heart of Adidas culture ADIDAS MISSION Mission of Adidas Global is to be the best sports brand in the world offering the best products and services. Adidas aims to come up as a socially and environmentally responsible organization that embraces creativity and diversity and reward its employees and shareholders.ADIDAS VISION ,[object Object]

To develop the market for sports goods and services

To be perceived as the leader of sports products/services in the industry

Be the company teams, associations, athletes, customers, consumers want to be associated with

Set standards of the sports industry

To consistently deliver outstanding financial results

Be the place where people want to work, recognized for its employees’ development and working environmentADIDAS ORGANIZATION STRUCTURE At Adidas the structure of the organization is very well defined. There are different functional departments such as marketing, production, R&D, customer services, operations, distribution, and human resource with clearly defined jobs at all levels. CEO Chairman of BoardDirectorDirectorDirectorDirectorDirector Director Employee Representative BoardDirector Employee Representative BoardDirector Employee Representative BoardVice chairman Employee Supervisory boardVice chairman of Board The CEO is at the top position in the Adidas. Then there is an executive board consisting of four members who reflect the international character of the group. Each board member is responsible for at least one major function within the group. Then there is a supervisory board consisting of 12 members. Adidas GroupCOMPANY STRUCTURE ON BRAND BASIS ReebokTaylor-made GolfAdidas COMPANY STRATEGY AT ADIDAS The goal of Adidas Group is to be the leader of the sporting goods industry with brands built upon a passion for sports and a sporting lifestyle. In order to achieve the goal a profound understanding of the consumer and customer is essential. To anticipate and respond to the needs of the customer, Adidas Group continuously strive to create a culture of innovation and creativity to embrace changes. The ability to embrace changes strengthens the competitiveness and maximizes the Adidas Group’s operational and financial performance. This, in turn, drives long-term value creation for our shareholders. The strategies of the company are: ,[object Object]

The diversification strategy adopted by the Adidas group is the related diversification strategy. All the brands under the Adidas group are engaged in the production of related products like sports shoes and apparels, sports equipment, accessories like glasses, eye pieces and bags. The biggest advantage for Adidas group from the related diversification is the sharing of resources and capabilities between various brands.

Focus on High potential markets and channels: Adidas Group, targets the leading market positions in all markets. However the company has prioritized its investments in those markets which offer the best medium- to long-term growth, productivity and profitability opportunities. In this respect, Adidas Group continue to place a significant emphasis on expanding the growth activities in the emerging markets, particularly China, India and Russia, as well as building market share in underpenetrated markets such as the United States.

Creating a flexible supply chain: The objective of Adidas Group is to meet the demand of its customers by ensuring product availability in the correct size and color. It also aims to provide the game-changing technical innovations and the latest high-end fashion product of the highest quality and standards to its customers. A key strategic priority of the company is to shorten the design, development and production lead times by constantly improving the infrastructure, processes and systems. By effective information sharing from point of sale to source and vice versa, Adidas’s operations strive to connect and integrate the various elements of supply chain, to enable quick response to shifting consumer trends and choices.

Leading through Innovation: One of the core competencies of Adidas Group is its strategic innovation and creativity. Therefore, the Group aims to generate at least one new meaningful innovative improvement per year. Technological evolution and cutting-edge design in products is essential to achieving sustainable leadership in the sports and apparel industry. At the same time, there is a continuous process of enhancing services for the customers and implementing more efficient and effective internal processes at the company.

Sustainability: Like any global business, the Adidas Group has to manage a wide-range of commercial and competitive pressure to convey increased financial returns, growth and profitability. At the same time the company has a responsibility towards the workers in the suppliers’ factories, employees and also for the environment. The company tries to strike balance between shareholder interests and the needs of employees and workers and the environment. Thus the company makes every effort to become a sustainable company.

Expand Internationally: Adidas Inc. is a marketer of sports apparel and athletic shoes. The German manufacturer, through its marketing strategy which rests on a favorable brand image, has evolved into a large multinational enterprise. “For over 80 years, Adidas has been part of the world of sports on every level, delivering state of-the-art sports footwear, apparel and accessories. Today, Adidas is a global leader not only in the shoe industry, but also in the sporting goods industry. Shoes from the Adidas are available in virtually every country of the world. A strong advertising and public relation events makes Adidas as a worldwide recognized brand and it would be more sustainable in the world market.ADIDAS CULTURE Adidas group strives to create a culture of innovation and creativity. At Adidas there is a great culture to embrace changes. By harnessing this culture, the organization pushes the boundaries of products, services and processes to strengthen its competitiveness and maximize the Group’s operational and financial performance. This, in turn drives long-term value creation for our shareholders and innovative product range for the customers. At the same time the company is well diversified with employees from various ethnicities. There is a code of ethics for all employees as well as suppliers in the company. There is respect and value to the employees. Employees are crucial to the success of any organization. According to Adidas group, achieving the objective to be the global leader in the sporting goods industry depends on the talents, enthusiasm and engagement of the employees within the organization. At Adidas there is a climate that celebrates diversity. The employees are rewarded in a fair way and related to their, and achievements. Employees have a responsibility to adhere to the Employee Code of Conduct; and as an employer Adidas takes the responsibility to ensure employee health and safety. ADIDAS PROCESS AND SYSTEM The system at Adidas Group consists of automated inventory control, high-tech R&D system, and automated warehouse and distribution systems. The process at Adidas Group consists of highly innovative product design, volume manufacturing of shoes, apparels and accessories; outsourcing for manufacturing to mainly Asian countries; innovative marketing involving celebrities; effective IT usage to support diversification, geographical scope and outsourcing; distinctive R&D; financial control and asset management; use of information technology in inventory management. ADIDAS GROUP FUNCTIONAL UNITSFunctional Units at Adidas Sale SubsidiariesSupply Chain ManagementSourcingDesignMarketingResearch & Development Operations & DistributionSalesManufacturingProduct CreationConceptBriefing PART THREE: ANALYSIS AND RECOMMENDATION Propose and support your ideas of how corporate scope, key resources, dominant logic, and/or corporate management can enhance the competitiveness of any of the firm’s business units (or potential business unit). For example, we can bound and identify some important linkages using the framework below. The relationships can also be “multiple cells” e.g. the combined impact of scope and dominant logic on firm competitive advantages. To answer this question you can begin with developing an overall “value added” table. Then elaborate on each cell in the table. You can start your discussion of the cells by reminding me relevant information from the sub. For example, for cell related to competitive advantage and scope, you can remind me by writing what the sub’s competitive advantages are Feel free to include if you can identify other dyadic relationship. Extra points will be rewarded for that. P.S. Column 1 relates to characteristics of the subsidiary (Sony Computer Entertainment) and the rest relates to the parent’s (Sony Corporation). In this question, it is assumed that if Nike and Adidas merge as partners, how can they add value to each other and improve and add to the competitive advantage of each other. So the explanation should be seen not for Nike or Adidas in particular but for the partnership. Five forces & KSFs of NIKEScope of PartnershipKey resources & Dominant Logic of PartnershipCorporate Management of Partnership1.Industry Rivalry- HIGHNIKE has grown immensely and established its foot firmly in the industry. The firm is globally recognized and has a huge loyal customer population. The giant firms of the industry invest heavily in building a strong brand identity. The competition is fierce and thus the rivalry is very highNike can gain cost advantages by using Adidas’s outsourcing relationships, scale of operations and sourcing of diversified products and vice versaNike can advantage of Adidas’s position as leading sports brand in the emerging markets to make a stronger presence on those markets like India & China. Since Adidas is not so premium priced like Nike, partnership will be a great scope for Nike to be more famous in those price sensitive marketsThe corporate strategy of Adidas and Nike of a diverse brand portfolio and international expansion will help both the firms to strengthen the roots in the sports industry and maintain the position of the two firms as leader and reducing the rivalry2. Threat of Entrants-LOWNIKE has always striven to provide a competitive edge to foster the best possible performance in their athletes. NIKE is a fashion brand. Even being a sports brand, it attracts the sports as well as non-sports population.Adidas has a greater market share in Asian countries like India. A partnership of Nike with Adidas will strengthen Nike’s roots more in these emerging markets The partnership between Adidas & Nike will enhance the resources and capabilities of both companies leading to more competitive advantages to both, making the entry difficult for new entrantsThe corporate strategy of Adidas and Nike of a diverse brand portfolio and international expansion will help both the firms to strengthen the roots in the sports industry and maintain the position of the two firms as leader. This will keep the threats of entrants as low3. Supplier power- LOWNIKE definitely has an advantage over their suppliers. Thus the suppliers are dependent on the firms like NIKE and Adidas as their means of their earningsNike can take advantage of Adidas outsourcing/supplier relations in the Asian countries to improve its product development in those countries. This merger will allow Nike to have more strong position over suppliersNike and Adidas are the leaders in the sports industry and have greater power over their suppliers. With the outsourcing capability and supplier relations, save a lot of cost and maintain power over the suppliersThe corporate strategy of Adidas and Nike of a diverse brand portfolio and international expansion will help both the firms to strengthen the roots in the sports industry and maintain the position of the two firms as leader. Both the firms are high volume production firms utilizing large amount of raw material. Thus the suppliers cannot afford to lose such big firm, keeping the supplier power low4. Buyer power- HIGHThe power of buyers in the footwear industry is distributed among several companies. There are a large number of buyers relative to the number of firms in this industryThe diverse brand portfolio and geographical presence in almost all countries will make them non substitutable in the domestic/international market. It will become very hard for the buyers to have a company that can fulfill their requirements as Nike & AdidasNike and Adidas combined resources and capabilities can lead to more product innovation. This will provide customers highly sophisticated products/servicesThe corporate strategy of Adidas and Nike of a diverse brand portfolio and international expansion will help both the firms to strengthen the roots in the sports industry and maintain the position of the two firms as leader. The new merged firm can provide customers highly sophisticated products/services. This might reduce the buyer power5. Threat of Substitutes- LOWThe substitution for the athletic footwear is low, as there are little alternatives available to choose from. , there are no real substitutes for athletic footwear. And similarly there are lesser substitutes available for athletic garmentsNike can utilize Adidas’s capabilities to emerge as mid-high priced brand in price sensitive markets like Asia ,in offering products and keep away competition like Puma which is premium pricedAdidas has more store presence and online presence than Nike. Use Adidas’s resources to open new stores in locations closer to consumersThe product diversification and brand diversification strategy of both the companies offer a wide variety of sophisticated /technologically advanced products to the customers reducing the threat of substitute Competitive Advantage of NikeScope of PartnershipKey resources and Dominant logic of the PartnershipCorporate management of the partnershipBrand Recognition & ReputationNIKE is the globally recognized brand. It is the largest seller of athletic footwear and athletic apparel in the world, with the highest sales and market shareAdidas group has a huge brand portfolio and brand diversification, which includes a leading sports brand Reebok. Adidas is more famous in Asian market compared to Nike. Nike can utilize Adidas’s brand reputation in these countries and enhance its recognition in the unsaturated Asian and other emerging marketsNike can utilize the mid-high priced reputation of Adidas and Reebok and attract more customers in Asian market (Price sensitive customers). Nike can utilize the diverse brand portfolio image of Adidas Group and can lead these upcoming marketsBoth the firms have a corporate strategy diverse brand portfolio, capability to lead through innovation and international expansion. This would enhance the brand recognition and reputation of the new partnered firmCost EfficiencyNike is a globally recognized brand. But compared to other firms in the same industry, it has been successful in maintaining a low cogsNike can utilize the outsourcing capability of Adidas and make itself more cost efficient Nike can utilize Adidas’s supply chain capability, distribution capability in Asian market and grab these new unsaturated markets. Adidas has a better cost efficiency compared to Nike. Nike can utilize the supplier’s relation of Adidas to lower its costs of production. Adidas can also utilize the inventory management capability of Nike to save distribution costThe corporate strategy of Nike of efficient inventory management can help Adidas to cut cost. On the other hand, Adidas flexible supply chain strategy will help Nike to cut cost and help Nike to shorten the design, development and production lead times by constantly improving the infrastructure, processes and systemsInventory ManagementNike has a competitive advantage of high inventory turnover which is due to the deployment of IT and efficient distribution/subcontractor network of NIKE. High inventory turnover is due to the distribution capability of NIKE. The distribution capability of the company is so efficient because of the core competency of distribution/subcontractor networkWith the help of the merger, Adidas can improve its inventory management with the help of Nike efficient distribution capability and strong ITNike has a stronger inventory management compared to Adidas. It is due to its effective IT and distribution capability. Here Adidas can utilize Nike’s capability to strengthen its competitive advantageThe corporate strategy of Nike of efficient inventory management and integrated IT can help Adidas to manage its inventory effectively and reduce cost. This would be very beneficial for the new partnered firm. On the other hand, Adidas flexible supply chain strategy will help Nike to cut cost and help Nike to shorten the design, development and production lead timesProduct Quality & DesignThe R&D of NIKE results in the competitive advantage of innovation and high product quality. The firm has product design capability, which is due to its highly efficient integrated research laboratories. NIKE invests heavily in having researchers perform a number of scientific techniques to quantify their productsThe partnership would provide Nike an opportunity to be a part of a well-diversified brand portfolio of Adidas. Nike can cultivate the Adidas-Reebok diversified brand portfolio and may become the leading brand of the portfolioBoth Adidas as well as Nike are very efficient in strategic innovation and research and development. So both can utilize the competencies of each other and excel in the industry. But since Adidas has its product design based in Germany, Nike can utilize this opportunity and design its products for European customers in GermanyThe corporate strategy of both the firms is leading through innovation. The firms have the capability of integrated R&D. Thus the new merged firm will have added advantage of the innovation capability Core competencies NikeScope of PartnershipKey resources & Dominant logic of PartnershipCorporate Management of PartnershipMarketingNike has the key success factor of distinctive marketing capability by celebrity endorsement. Marketing capability through celebrity endorsement has always been the core competency of NIKEAdvertising and marketing campaigns focus on the product quality, price and portfolio which are made possible through Adidas Group brand diversification and the wide range of products. So Nike’s position can be enhanced by the Adidas’s product scope.Nike has the excellent marketing capability. Adidas can utilize this distinctive capability of Nike and market its products. At the same time Nike can follow Adidas in keeping marketing and promotion cost low with the help of Adidas financial controlThe strategy of Adidas is to lead through which includes its excellent marketing capability. Nike also has the distinctive marketing capability strategy. This would enhance the marketing capability of the new merged firmInformation TechnologyEffective utilization of Information technology in every functional area such as R&D and inventory management has been a key success factor for NikeDue to Adidas group complex outsourcing, its geographical dispersion and its broad product and diversified brand portfolio scope, the company needs powerful IT systems. Nike has a strong IT capability which it can share Adidas. At the same time Nike outsourcing ,diversification needs strong IT support, which can be provided by AdidasAdidas information systems and the financial resources invested in the Nike will help the partnership in improving the technological aspect of the company. At the same time Nike’s has powerful IT systems and strong technology can help Adidas to keep its inventory under control and improve its inventory managementThe corporate strategy of both the firms is to lead through innovation and technological advancement. It would help both the firms to continue the efforts in innovating and adopting advanced IT DistributionThe efficient distribution/subcontractor network is connected to the presence of the functional areas of distribution & sale and information technology. NIKE invests in IT to keep a track of the inventory controlLarge scale outsourcing capability of Adidas Group, supplier partnerships, global presence and diversified product portfolio Both the companies have excellent distribution capability and IT resources. The merger would further strengthen their distribution capabilities leading to increased cost saving and other competitive advantagesThe flexible supply chain strategy of Adidas and distinctive distribution capability of Nike will help both the firm to enhance the core competency of distribution capability Sustainability of the NikeScope of PartnershipKey resources & Dominant logic of PartnershipCorporate Management of PartnershipProduct QualityThe R&D of NIKE results in the competitive advantage of innovation and high product quality. The firm has product design capability, which is due to its highly efficient integrated research laboratories. NIKE invests heavily in having researchers perform a number of scientific techniques to quantify their productsThe product quality of both the firms is very high because of the strong R&D. The strong brand portfolio ,brand diversification and design capability of Adidas will help Nike in sustaining the product quality and vice versaThe integrated R&D, strategic innovation of Adidas and Nike will help both the firms to maintain the high product quality compared to the competitors. It is very difficult for competitors to imitate the product quality of both the firm’s resources and capabilities. Both firms can sustain by continuously improving their capabilities and core competenciesGlobal outsourcing, corporate strategy of leadership by innovation ,diverse brand portfolio and flexible supply chain will maintain the product quality of the partnered company Business Model of NikeScope of PartnershipKey resources & Dominant logic of PartnershipCorporate Management of PartnershipProduct DifferentiationThe generic business strategy for NIKE is a product differentiation strategy. NIKE emphasizes on the key strategy elements of branding advertising, design of products, exclusive customer service, high quality products and new product developmentNike will have an advantage of diverse product range arising from leveraging Adidas’s brand diversification and its geographical scope Nike will be able to utilize Adidas’s diversification capability and strategic innovation strategy to excel in its product range and maintain a high operating income and profit marginsDifferentiated strategy, well diversified brand portfolio initiatives to increase profit margins Outlook of NikeScope of PartnershipKey resources & Dominant logic of PartnershipCorporate Management of PartnershipInternational ExpansionThe geographical scope of both the companies would help each other in the partnership to grab the new emerging marketsNike will utilize Adidas’s resources to expand operations in the international market. Since Adidas’s position is more strong in Asian countries, Adidas group presence would help Nike to strengthen its root into the new emerging international marketAdidas corporate strategy to expand domestically as well as internationally will help Nike to expand in the new emerging international markets and vice versaBrand & Product DiversificationThe diversification scope of Adidas can help Nike to in diversifying its brand and differentiating its product line to the next level. Nike is already the market leader, but a merger with Adidas Group will enhance its brand portfolio more. On the other hand, Nike’s product differentiation strategy can help Adidas Group to improve the product portfolio and qualityAdidas has the key resource of product design capability, innovation capability and diversification capability. Utilization of these capabilities will help Nike to strengthen the brand portfolio and product diversificationThe corporate strategy of product diversification and leadership through innovation can help the new firm arising from the merger, to be highly diversified in product offering and brand portfolio PART IV: VALUE CREATION Now you have developed an overall value added relationship between the parent and the subsidiary. Now estimate the potential value creation for the sub. First, estimate the new and improved value drivers (as sales growth, operating profit margin, cash tax rate, proportion of net working capital to sales, proportion of fixed assets to sales, and proportion of other long term assets to sales) of the sub’s future free cash flows. Read file FCF drivers.doc in your Blackboard vista. Identify which value drivers that can be improved and justify. Assume that the firm has certain competitive advantage period and the residual value is the firm’s book value. For example competitive advantage period of 4 year suggests that there won’t be any economic profit created after year four. Thus, the residual value is the perpetuity value of the firm’s book value at year four and discounted at t = 4. The value drivers considered for the Nike Inc. in test 1, to derive the historical values and also the new value drivers after recommending Adidas Group to be the partner of Nike Inc. Table IV-1 Historical data of Nike Inc. in Percentage of revenues and new value driver Value Drivers (%)20092010AverageNew Value DriverSales growth2.98%-1.0%1.0%5%Operating Profit (EBIT)9.69%13.06%11.375%16%Taxes24.0%24.2%24.1%20%After Tax Operating profit7.5%9.88%8.69%8%FCF4.36%10.75%7.55%11% Table IV-2 Historical data of Nike’s value creation before new value driver consideration Value Drivers (%)20092010AverageSales19,176,100 19,014,00019095050Operating Profit1,858,5002,474,000 2166250Taxes469,800 610,200540000After Tax Operating profit141246018802401646350FCF831.7 million2045 million1438.35 million Table4 IV-3 Expected data of Nike Inc. in future after proposing the new value driver with its partner as Adidas Group Value Drivers (%)2011201220132014Sales20049802.521052292.6322104907.2623210152.62Operating Profit2512850.02914906.03381290.963922297.51Taxes503380503380503380503380After Tax Operating profit1778058.01920302.642073926.852239840.99FCF1596.56 million1772.18 million1967.12 million2183.50 million SALES: The sales growth of Nike Inc. should be of 5% annually, which serves as a new value driver for the company after it enters into a partnership with the Adidas Group. JUSTIFICATION: Like any global business, the Adidas Group has to manage a wide-range of commercial and competitive pressure to convey increased financial returns, growth and profitability. After the global economic crises, the Group has generated a record €12 billion in sales growing 9% currency-neutral and clearly outpacing our major competitors Adidas Group is more successful in Asia as compared to Nike Inc. It has the growth advantage over Nike in Asia. Asia is the most promising and fastest growing market in the world. Thus a partnership with Adidas group will definitely help Nike to grab more market share in Asia and increase its profitability by higher sales figure. OPERATING PROFIT: The historical data revel that the operating profit of Nike Inc. has grown at an average rate of approximately 12% .Nike Inc. is one of the most technologically advanced and efficient company. The firm has got the all the capabilities and resources to increase its operating profits with increase in sales at an average of 16% annually. JUSTIFICATION: After the economic crisis and difficulties of 2009, Adidas Group has rebounded strongly in 2010. The Group has generated a record €12 billion in sales growing 9% currency-neutral and clearly outpacing our major competitors. Group gross margin increased 2.4 percentage points to 47.8%. As operating profit refers to the measure of a firm's profitability that excludes interest and income tax expenses. The profitability depends on reducing the operating costs. Adidas Group has reduced the operating overhead – operating expenses as a percentage of sales despite marketing investments to support its brand initiatives and portfolio. The operating margin of the firm has jumped to 7.5%. And net income increased 131% to €567 million. The financial data shows that Adidas Group has shown significant improvement in 2010 compared to Nike Inc. Therefore the partnership with Adidas can be very beneficial for Nike in reducing its operating expenses and generating more operating profit. Thus the operating profit of Nike can be expected to grow to 3922297.51million by 2014 TAXES: The historical tax rate of Nike Inc. shows an average of 24.1%. The new value driver tax rate for Nike is 20% with the annual expense of $503380 million. JUSTIFICATION: The Adidas Group has its diverse operations all over the world. The firm has always followed the political and legal regulations. There a partnership with Adidas Group might help Nike in deducting the tax rate to 20%. This would create value to the firm and will add to the wealth of the stockholders. FREE CASH FLOWS: The historical average FCF’s of Nike Inc. increase at an average of 7.55%. The value driver of FCF for Nike Inc. is expected to increase with an annual rate of 11%, with the partnership with Adidas Group. JUSTIFICATION: “Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt”. An increase in the FCF adds to the value of the firm. Tight working capital management and disciplined investment activities are expected to help optimize the Group’s free cash flow of Adidas Group in future. Favorable exchange and interest rate developments can potentially have a positive impact on the Group’s financial results. To maximize operating cash flow generation across the organization, management of Adidas Group operating segments and management at market level have direct responsibility for improving operating profit as well as optimizing operating working capital and capital expenditure. To boost the long-term performance improvements the firm has adopted a modified economic value added (EVA) model. Therefore a partnership between Adidas Group and Nike will definitely help Nike to increase it free cash flow and create value to the shareholders. REFERENCES ,[object Object]

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