Polar-adidas

Introduction
On Sunday, April 3, 2005, in a downtown hotel in Erlangen, Germany, Mr. Jorma Kallio, managing Director of Polar Electro Oy, a Finnish family-owned manufacturer or heart rate monitors, was preparing his opening speech to a group of some 100 Polar Electro employees and part ners. He was in central Germany for an internal launch of a partnership between Polar Electro and adidas, the sec ond largest sporting goods manufacturer in the world. The next day, on the premises of the expansive headquarters complex of adidas in Herzogenaurach, the partnership and "Project Fusion," the world's first completely inte grated training system, would be introduced to marketing and sales personnel. The project had been under devel opment for the last year and a half and kept confidential only some 40 people within Polar Electro knew about it. Project Fusion was a new, complete solution for runners to be launched in 2006, consisting of adidas shoes with built-in electronics, running textiles that had built-in sen sors, and watch-type sports computers that would display such information as heart rate data, speed, and distance to the runner (see Exhibit 1). The electronics technology is provided by Polar, but the textiles and shoes will be sold as premium adidas-branded goods. Mr. Kallio was convinced that the partnership with adidas would be very beneficial for his company. First of all, becoming a trusted partner of adidas, an icon in sport ing goods, was like a top-grade seal of approval for Polar. Polar would certainly benefit from the great brand equity that adidas owned. The majority of consumers around the world have heard of adidas, but selected few were aware of Polar. The adidas partnership would certainly raise consumer awareness of the Polar brand, something that Polar needed if it was to achieve its ambitious goals of both growing its sports-related business and extending from the core of serious sports into lifestyle applications. Second, the partnership could give a boost to the distri bution of Polar goods. \l'hile Polar was represented through some 35,000 retailers in 50 countries, the channel
This case was authored by Hannu SeristO of the Helsinki School of Economics and IIkka A. Ronkainen. For further information on the companies and their strategies, see http://www.adidas-polar.com; http://www.polar.fi/ polar/channels/engl; http://www.adidas-group.com/en/home!welcome.asp; and http://www.nokia.com.

power of adidas could not be ignored by wholesalers or retailers. Third, there was certainly a lot to learn from a successful company like adidas, be it in concept devel opment or marketing processes. There were some concerns, however. First of all, the sheer difference in size between the two companies: Polar's sales in 2004 had been 170 million euros, whereas adidas sales exceeded 5 billion euros, making it 30 times the size of Polar. The track record of alliances in general is not great and significant size differences between partners can cause dif ficulties in the relationship sooner or later. As an example, when adidas could appoint 5 people to a certain part of the project, Polar could afford two at most. Executives who were to implement the partnership, such as Christian Franke, Director of Brand Marketing at Polar, would have a lot on their plates. Another concern was the ability of Polar to perform in the relationship. Even though Kallio had full confidence in the capabilities of his managers, the fact that Polar was engaged in the development of very demanding high-tech electronics, whereas adidas would be responsible for shoes and textiles, was a factor that might bring surprises. His concern was that if there were unexpected difficulties in the development of electronics, the schedule of introducing new, jointly developed products with adidas might turn out to be frighteningly tight. A large company could hire an ad ditional twenty R&D engineers if there were unexpected challenges in the development work, but for a company of Polar's size that would be financially an extreme solution. In terms of the classic risk of enabling and creating a future competitor, Kallio did not see it very relevant in this very case. He had full confidence in the partner, largely thanks to the solid personal relationship that existed between Kallio and key executives at adidas. Referring to the key executives in both of the companies, Kallio said: "We all understand and in fact love sports, so we talk the same language-that is a great starting point for the relationship."

About Partnership Agreements

The agreement with adidas comprised, first of all, joint de velopment of technology for endeavors such as "Project Fusion." Polar is responsible for providing the sensor, but joint work is needed particularly in fusing the textiles and

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HelsinkilHerzogenaurach-August 4,2005
adidas and Polar introduce the world's first completely integrated training system

Polar Electro. the innovative leader in heart rate monitoring. and adidas. one of the world's leading sports brands, have formed a partnership that will introduce the world's first completely integrated training system. Called "Project Fusion," it seamlessly integrates Polar heart rate and speed and distance monitoring equipment into adidas apparel and footwear. The integration simplifies use and increases comfort, allowing the products to become part of the athlete. Included in the project are the adidas adiStar Fusion range of apparel (t-shirts,long sleeve shirts, bras, women's tops), the adidas adiStar Fusion shoe,Polar's S3 Stride Sensor,The PolarWearLink transmitter, and The Polar RS800 Running Computer. How does it work? Special fibers bonded onto adidas tops work in conjunction with Polar's Wear Link technology to eliminate the need for a separate chest strap to monitor heart rate. just snap the tiny PolarWearLink connector onto the front of the shirt and go. The data are sent to the Polar RS 800 wrist-mounted running computer, which easily displays and records all information in real time. Simply put. your shirt talks to your running computer. The adiStar Fusion shoe has a strategically placed caVity in the midsole which can house the vel;' light Polar s3 Stride Sensor, making it easier to use, more comfortable and more consistently accurate than top-of-shoe systems.And you won't even know it's there when your shoe is talking to your running computer. Information like speed and distance, chronograph functions, along with heart rate, are also shown on the RS800 in real time. And when the workout is over, all data can be downloaded onto a computer so workouts can be easily managed and analyzed, meaning the, whole system talks to you. "The great thing about the system is that it's so easy to use;' says Michael Birke, adidas Running Business Unit Manager. "By putting all the best equipment into one package, it's made training simpler, more comfortable and more precise. The system is greater than the sum of its parts." "An athlete can train more effectively with the right objective information," says Marco Suvilaakso, Running Segment Manager for Polar Electro. "This system caters to the individual, with preCise and personalized feedback." PurchaSing the entire system-Polar RS SOOTM, Polar s3 TI1 Stride Sensor,adiStar Fusion top, and adiStar Fusion shoe-will be around 640 Euros/680 Dollars.The products are available as separate pieces as well. and available in Spring of2oo6.

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sensor technology, which inevitably means shared engi neering and industrial design. In shared engineering, a challenging issue typically is to decide which partner owns the jointly-create intellectual property. Also, as "Pro ject Fusion" is a complete package, or solution, the indus trial design has to be coordinated in terms of form and appearance. Rights concerning the design issues should normally be covered in partnership agreements. Partnership agreements need to address the issues of exclusivity; that is, can certain technologies or solutions be offered to other companies beyond the main partners. Normally it is not recommended to lock oneself into one partner only, since it would compromise one's flexibility

or stand-alone capability. On the other hand, exclusivity given to a partner is bound to enhance commitment and trust in the relationship. The second part of the agreement deals with joint marketing efforts. Channels where there is joint pres ence and sales efforts have to be specified, induding complementary marketing efforts (i.e., whereby Polar uses the adidas distribution system to get its products to the world marketplace), A considerable benefit for Polar is that adidas controls globally 145 flagship stores, such as adidas Originals Georgetown in Washington, D.C., Performance Store Abasto in Buenos Aires, adidas Concept Store Nevski in St. Petersburg, and adidas

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Originals Sydney. As for promotion, the choice of media for shared appearance and, for instance, joint web sites (such as http://www.adidas-polar.com) are important issues to address in the agreement. In implementation, the management of the partner ship should be clarified in the agreement. Whether there is, for example, a steering board composed of members from both partners, and who will serve as its chairper son, are some of the questions to settle. Also, determina tion of areas of responsibilities between the partners and the sharing of costs and revenues is normally a standard clause in an agreement of this sort. Finally, the agree ments normally should address issues like the term and termination procedures of the partnership, and the set tlement of disputes.

The Growth of Polar Electro Oy

The origins ofthe Finnish sports instruments producer Polar Electro can be traced back to the need of cross-country ski ing coaches for a device to measure an athlete's heart rate during training sessions in the field, as opposed to this being possible only in a laboratory environment. were were no light, portable devices available, only large expen sive laboratory equipment. Promoted by this need, profes sor Saynajakangas of the technology faculty at Oulu Uni versity started development work on technology that would make such measurements possible. Work was done partly with colleagues at the Qulu University, and eventually a company called Polar Electro was founded in Oulu in 1977, with Saynajakangas as the owner. we first heart rate moni tor (HRM) was a battery-powered device that measured the heart rate from a fingertip. By the year 1982, the technology had advanced to the point that the first wireless heart rate monitor was ready. The first computer interface was intro duced in 1984. The zone feature was launched in 1987, which was a predecessor to the so-called OwnZone feature of today. The principle is that the suitable intensity levels of training may vary daily due to factors such as fatigue, illness, or jetlag, and the athlete should check the right intensity levels before each training session. In the 1980s, Polar Electro sought cooperation with top-level competitive athletes and world-class trainers and coaches. Relationships with leading universities and research institutes in the area of sports medicine were established. The target customers for Polar technology were competitive national and Olympic level athletes. From the very beginning the company was compelled to take a global look at the markets, because the chosen niche was narrow. Domestic market sales would have been in hundreds of units during the early years. During this era, Polar Electro was first and foremost a technology company that conducted research, devel oped new technological solutions and started to build manufacturing capacity for the large-scale production of heart rate monitors. Early on, the company benefited

from financial support for promlsmg high-technology start-ups in developing regions by Finnish government agencies. Products were sold mostly under other brands, through private label arrangements, particularly in the U.S. market, which was then the key market for Polar Electro. Marketing to the masses existed only in long term plans. By the end of the 1980s, Polar Electro had grown to a company of one hundred employees with annual sales of almost 20 million dollars. At this point, the target market was broadened from the original devices aimed at competitive top-level ath letes. The first steps to the so-called fitness market were taken in 1987. New models were developed for ordinary people who wanted to monitor the intensity of training, through heart rate measurement, while they were exer cising..The Polar brand became a focus of development in 1989. Polar's target was defined as being "anyone with a heart." Indeed, the company provided an HRM for race horses, which they continue to proVide to this day. Throughout the 1990s, Polar started to put more em phaSis on marketing, partly driven by increasing com petitive pressures. The heart rate monitor business had caught the attention of some big firms and entrepre neurs, all hoping to challenge Polar in this potentially sizeable business area. Large players like the U.S. watch maker Timex and the Japanese electronics company Casio started to work on HRM products, and in Europe such companies as Sigma from Germany and Car diosport from the U.K. introduced comparable HRMs. However, in terms of features, technology, quality, and even production costs, Polar was able to maintain its lead of a couple of years in this race. The building of an extensive international dealer network became the key focus of marketing efforts. The key products by Polar in the 1990s comprised specific models for runners, bicyclists, and fitness users. Two special product groups were developed: Team Sys tems, to be used in the training of football or ice-hockey teams; and Educational Systems that were used in the physical education classes of school children, mostly in the United States, where the Federal Government pro vided support for schools that adopted innovative equip ment to improve the quality of physical education. The largest product category for Polar was Fitness, because the products appealed to many different kinds of users. Several trailblazing technologies were introduced at this time, including the first integrated one-piece transmitter of heart rate measures in 1992; coded transmission of heart rate measures (from the chest transmitter unit to the wristwatch unit) in 1995; the first HlUvl combined with a bicycle computer, which had speed, cadence, and altitude measurement in 1996; personalized OwnZone training intensity zone and OwnCal energy consumption solutions in 1997; and the Polar fitness test, which pro vided a very accurate estimate of physical condition, even when measured while the person is not exercising but simply lying down for about 5 minutes, in 1999.

Polar-adidas

Polar Electro has used aggressive patenting policy to protect its inventions and intellectual property. In 2000, the company introduced a soft and very user-friendly textile transmitter belt to replace the traditional rather hard plastic model. The launch of a speed and distance measurement device in 2004 brought a new dimension to running computers; a pod attached to the running shoe measures acceleration and sends the information to the wrist unit with an accuracy of 99 percent. Now run ners can see on their wrist units not only their heart rate and training intensity information, but also their real-time pace or speed and the distance covered. Competitors to this speed-and-distance technology include GPS-based running computers by the u.s. company Garmin and by Nike, developed with the Dutch electronics firm Philips. Outdoor computers were also launched in 2004. These wristwatch type devices have an electronic compass, barometer, altimeter, thermometer, and various watch and diary functions in addition to the advanced heart rate measurement features. Polar spends some 10 per cent of its sales on research and development, which takes place mosdy in Oulu. The company benefits from the supply of high-quality engi neers from the University of Oulu. Oulu is a city with a concentration of high-tech companies, particularly in the area of electronics (Nokia, the world's largest mobile phone manufacturer, has a significant R&D and manufac turing presence in the city). The company also maintains collaborative ties with well-known institutes, such as Cooper Institute in Dallas, Texas, and leading universities in the areas of cardiology and sports medicine. After-sales service is an essential component of the HRM business. The devices are rather complicated pieces of technology, and consumers often need support in in stalling software updates or setting up data transfer be tween the devices and the PC. These computers are also very personal objects, literally dose to heart, and con sumers typically want support immediately if they have a problem in the use of the equipment. The objective is to provide an answer to consumers' or retailers' questions Within 24 hours, anywhere in the world. Competitors have not been able to match Polar's level in after-sales service, making Polar users very loyal customers. Industrial design has been a focus in the last two years. The design and looks of the products were somewhat SOUlless until a new generation of more fashionable and Colorful models was launched in 2004. In particular, fe male consumers were targeted with specific light and col orful fitness computers. Polar received international recognition for its improved design in 2004, when its new Outdoor computer AXN 500 received an award in the Gennan IF design competition. Today, Polar Electro sees its mission as being to pro vide people the best solution to achieve their personal well-being, sports, and performance goals. The company eXists to improve people's quality of life by generating innOvative, high-quality, and user-friendly products. The

Polar brand's essence is captured in the statement that "Polar is the leading brand and the true partner in im proving human health and well-being through its under standing of personal physiology and the environment." Physiology refers to the mOnitoring of heart, and the en vironment refers to the measurement of altitude, direc tion, speed, distance, and temperature. Most of Polar's 170 million in sales come from West ern Europe and the United States, while the Asian mar ket represents a very small share of business. Volume production is in the Far East, while the R&D and the manufacturing of the most advanced premium models remain in Oulu. Some 1,700 people work in Finland and in the 15 wholly-owned foreign marketing subsidiaries in the key world markets. Polar may be a household name for competitive athletes and the most active exercisers, but the average consumer does not really know the brand. Potential mar kets include millions of people that could need and want a heart rate monitor. Driving this potential is an increas ing realization by individuals, societies, and national economies that if people exercise more and are in better physical condition, the result is fewer health problems and lower consequent costs to the society. Populations particularly in Western Europe and Japan are aging, and the elderly want to stay active and healthy to lead re warding lives after retirement. Obesity is increasingly a problem, particularly in North America, but also in West ern Europe, and possibly soon in many Asian countries as well. Competition in the future is more in the area of mar keting rather than in the pure development of technol ogy. Design, trends, and fashion are becoming an essen tial part of this business, making HRMs a lifestyle product.

Polar Marketing
The heart rate monitor consists of two parts: the transmit ter and the receiver. The transmitter is worn around one's chest, as close to the heart as possible to ensure accurate sensing of the heart beat. Modern generation transmitters, provided only by Polar, are soft fabric belts where the sensors, or electrodes, are woven into the fabric, and the signal is sent to the receiver through a separate .little unit that is snapped onto the belt. The fabric transmitters are much more comfortable to use than the old versions. The retail cost of a transmitter is in the region of 40 euros. The receiver is like a sports wristwatch that functions mainly as the display for measured information. The re ceiver typically has heart rate measurement functions, watch and chronometer functions, and a variety of other features. The Simplest models display only time and the current heart rate, whereas the most advanced models have several test features; a training diary and training program features; measure air pressure, altitude, and temperature; have compass functions; and display speed and distance information. The case of the receiver is

Part 2 Cases

typically made of different grades of plastics, but some expensive models are made of steel or titanium. The basic heart rate monitors by Polar cost about 60 euros in retail, whereas the most advanced models with a titanium case can cost close to 500 euros. The cheapest heart rate monitors in the market, often by Asian manufacturers, can be bought for as little as 20 euros, but these are typically of poor quality, poor usability, and with no product support nor real warranty. Polar heart rate monitors are distributed through sporting goods stores, specialty stores, department stores, and in some cases catalog sellers and online stores. The products are so rich in features that the ex pertise and professionalism of the sales personnel is a key factor in the sales process. As a result, Polar has committed Significant resources to the training of sales people throughout the channel. Polar provides extensive online support for its prod ucts. Software can be downloaded from the Polar website, and consumers can create their own training programs and diaries on the global web site (http://www.polar.fi).

Growth Prospects of Polar

Polar Electro has many of the ingredients to grow and become a truly Significant global company. It has a solid technological basis, processes in place, and very capable personnel. In its own niche market, it is the world market leader. However, it has to acknowledge its lim ited resources: there are numerous potential new busi ness areas and an abundance of ideas, but the develop ment of completely new products takes millions of euros. Brand marketing is obViously very important in the future, but doing that with a real impact can easily consume tens of millions of euros per year. Asia is un doubtedly the market for the future, as in almost every bUSiness, but the question is how to go there, since it appears to be quite different from Europe and North America: what products (adapted or not), which fea tures, which markets (alone or with partners, or through which channels), are some of the key questions. More over, the human resources might turn out to be a chal lenge-there are limitless opportunities, but the current managers may not be able to handle all the new issues simultaneously. Both the owners and the management see the numerous avenues for growth, but there are a multitude of factors to assess when choosing the right path to follow. In terms of financial benefits, it is perhaps too early to assess the value of these partnerships. For one thing, the measurement of inputs and outputs is not that simple. For instance, how do you measure accurately the man agement effort that has been put into the partnerships, and whether that effort could have been used more effectively somewhere else? Mr. Kallio was convinced that the adidas partnership was very valuable for Polar especially in the long term. Some questions remained, however. How can a relatively small company make sure that it can perform in a rela tionship with a Significantly larger partner like adidas, and not let the partner down? How can Polar make sure that it gets most of the possible value out of the partnerships for instance, through learning from a more experienced company? How about assessing the inputs and outputs how should Polar measure whether the relationship is producing value to the company?

Other Partnerships
In early 2004, a technology and marketing partnership between Nokia and Polar was made pUblic. Polar offers a few heart rate monitor models that have the capability to communicate with a certain Nokia mobile phone, model 5140. This compatibility allows the user to trans mit training data from the wrist computer to the mobile phone, and again send it via mobile phone network, for instance, to the PC of one's coach. So, for instance, a distance-runner who is training in the warm conditions of South Africa in January can easily send his daily train ing session information for analysis by his trainer in Northern Europe in order to get instructions for the fol lowing day's training. Nokia and Polar were very visible in a jOint marketing campaign, with the theme "Training Mates," during the 2004 Tour de France. A key product that had the Nokia compatibility is the running computer model S625X. It was launched in the summer 2004 and was a great success from the very be ginning. The S625X has a speed-and-distance feature that is based on acceleration technology. Acceleration data are turned into information on distance covered and speed or pace of the runner, and then displayed on the wrist receiver. The accuracy is very high, with error rates of less than 1 percent (Le., when running 10 kilo meters, the error in the distance information is expected to be less than 100 meters). Runners love it and media have praised it. Even though the product is relatively expensive (400), it appears that S625X is becoming one of the most successful running computers Polar has ever made.

Questions for Discussion

I. How does the alliance with adidas fit with Polar's growth objectives? 2. What are the pros and cons of having a company like adidas as an alliance partner? 3. By 2010, what is the likely outcome of this alliance (e.g., will Polar become part of adidas)?