Case Study

By Nyasha Ganda Jason Truscott David Winn

Table Of Contents

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Executive Summary
Introduction Adidas went through turmoil since 1978 after the death of its founder, Adi Dressler. After going bankrupt in 1990, and being handed over to Robert Louis Dreyfus, Adidas has seen a remarkable turnaround. Dreyfus knew little about the sporting goods industry, and as a result analysed the situation similarly to as is shown below. The external environment is analysed, as well as the industry forces. The firms, and competitors strategy was revealed, as well as its capabilities and resources. Finally a SWOT analysis is performed, and from this recommendations are derived.

External Environment In analyzing the external environment, a number of factors should be considered, including the general environment, industry environment, and competitors environment. The general environment includes the traditional factors which affect an industry, including the political, economic, global, social, technological and demographic environments. The industry analysis is performed using Porters five forces model.

General Environment The shoe industry is showing rapid growth and development. World demand is increasing, particularity in Asia. The entire dynamic of the sports industry is changing, with sports equipment being used for leisure wear as well. In addition with the development of new fun sports for casual sportsmen/woman sports equipment is becoming a form of lifestyle

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for use in all occasions. Shoe technology changes slowly, but results in a long term competitive advantage. All firms have different key technologies all achieving a similar effect of improving comfort. The sports industry has two seasons and has to meet the needs of a wide combination of customers, which is increasing including fashion conscious under 25s and women.

Industry Environment The use of Porters 5 forces revealed that the sporting industry is moderately attractive to operate in, as there is not a high threat of new entrants, and bargaining power of both suppliers and buyers is low which makes conditions easier to operate in. However, the threat of substitutes is high, with intense rivalry between firms, which makes the industry more difficult and less attractive to operate in. It is certainly an interesting industry to operate in, which is not difficult to gain access to, but exceptionally difficult to gain a market foothold.

Strategies Adidas Adidas uses the Integrated Cost Leadership Differentiation Strategy as their shoes are sold at a lower cost to their competitors, while still have a high technological quality focus equal to that of their competitors. IN addition Adidas focuses on 5 core markets.

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Nike Nike employs a differentiation strategy as it focuses on adding value to their customers throughout the purpose process, from deliveries, customer service, quality and technology. As a result of these efforts to satisfy customers in all aspects, a premium price is charged. Reebok Reebok utilizes a differentiation strategy as it markets itself as a trendy, fashion oriented sports company. Its sporting goods quality has been lost in the eye in the consumer in the effort to clearly define itself as trendy and fashionable.

Resources and Capabilities

Adidas Adidas has a number of resources, including a large financial base on which to operate. It has a strong R&D department both in the development of new shoe technologies and production advancements. Through the ownership of a number of its own factories it can ensure quality and assist in further supplier technology development. Adidas capabilities include its effective marketing at sporting events capturing the sporting market. Combined with an extensive retail network, Adidas has developed the capability to maximise reach through subsidiaries and licenses. Nike Nike has an exception resource pool, with enormous sales by in America. An effective R&D team comprising of a number of sources to address all possible desires in a shoe. Through outsourcing, Nike can harness its true skills in

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marketing and designing of its products. Effective capabilities include the ability to market by using top sports personalities that appeal to the market. In addition, they have developed the capability to sell merchandise in 80 countries quickly through a strong preordeing system, accounting for 70% of sales.

Reebok Reebok has vast economic resources, and a business which is split into two major divisions; Reebok and the Speciality business group with each division being responsible for different lines, thus ensuring a differentiated product line. Strong innovation has led to the development of a number of new technologies to increase their competitiveness. Reeboks capabilities lie in their ability to market effectively through different mediums, but primarily TV. Their capability in distribution to sell in 140 countries through who9lly owned subsidiaries is representative in their strength in logistics. Extensive distribution:

SWOT Analysis
STRENGTHS Strong Brand Good Quality Strong R&D Global Footprint Control European market Licenses in countries with import restrictions Revenue well divided between shoes and clothing WEAKNESSES High Clearance sales 90% of income from core products Pre-ordered stock arrives late Delivery with a 7 month lead time Not regarded as a fashion brand Not well regarded by woman and teens OPPORTUNETIES Sports market growth by 28% Increasing woman entering sports Footwear used casually as well Development of outdoor recreation sports Greater access to USA Development of fashionable image Global markets THREATS 80% of shoes sold in casual wear, where Adidas produces for sports Development of new sports, may encourage new market entrants Nike and Reebok entering the

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 Various distribution channels

1 TV advert per year Loss of market share in Britain, France and Spain Neglect of US market Turbulent management after death of Adi Dresser

offer greater opportunities

specialty market Licensees may decide not to produce Adidas Brash marketing by Nike and Reebok to earn teen market

Recommendations
To be more effective we would recommend a number of adjustment. The Develop of more fashionable clothes and footwear is crucial to capture the fashion conscious market. The low prices lowers the bottom line, and does not give additional volume, so prices should be aligned with competitors. In addition retail outlets should be used as opposed to wholesalers to increase profit. Outsourcing all production would also lower costs, as quality assurance from in house production does not earn a premium from the market. Poor logistics should be urgently addressed, possibly by adopting a decentralized approach, which also gives the benefit of customizing products to individual market needs.

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Question 1 : How are changes in the external environment impacting the sporting goods industry?
In analyzing the external environment, a number of factors should be considered, including the general environment, industry environment, and competitors environment. The general environment includes the traditional factors which affect an industry, including the political, economic, global, social, technological and demographic environments. The industry analysis is performed using Porters five forces model. The competitor environment is analyzed in question 2 of this paper.

External Environment Political Environment o There is little information on any political factors which had an impact on the shoe industry. However, certain countries restricted imports of shoes, so as a results shoe manufactures had to find an alternative method of servicing that market. Economic Environment o There is little information on any economic circumstances which had an impact on the shoe industry. However, the shoe industry was expected to grow by 28% to $55 Billion by 1998. This implies that the shoe industry was growing rapidly, and as a result fierce competition could be expected to capture a share of this lucrative market. Global Environment

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o There is an increasing usage of global outsourcing, with 60% of production facilities being based abroad. This resulted in significantly cheaper production costs, and as a result all firms have had to utilize this approach to remain competitive o With Asian demand expected to double, as well as being huge proportion of the worlds population, firms need to be aware of this and be prepared to take advantage of this expected growth. Social Environment o There is an increasing trend of using sports equipment being used for leisure purposes. This accounts for approximately 50% of sales, and as a result people require quality durable multi-purpose shoes. This is a trend that shoe firms should be prepared to embrace and develop products specifically for this niche. o With an increasing interest in health and sports, and the development of aerobics development, a multi purpose shoe is required by the market. o Sport is increasingly no longer an elitist activity, with fun sports developing such as basketball, soccer and mountain biking. o 80% of shoes are used in casual wear, particularly in the under 25 age group, which indicates that firms should focus on this segment. o With the development of outdoor recreation sports such as skiing, golfing and hiking, functional outdoor clothing is also required. However, this equipment is less prone to fashion changes, but with a focus on authentic performance products. Thus sports firms need

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to ensure that this segment is provided with quality performance products with a lesser focus o fashion. o Sports equipment is tending to become a form of lifestyle, with the clothing being used in all aspects of clothing wear, thus it is necessary for firms to develop products which are functional and can be used anytime. Technological Environment o Sports technology is a key element of success in differentiation of products between competitors. It is not rapidly changing, with advances providing a long term competitive advantage. o Typically 1-3% of sales are spent on R&D, with the aim of increasing comfort and performance. o The mayor competitors each have different technologies providing similar advantages, with Nike having the Air sole technology to reduce impact and shock. Reebok utilizes Hexalite, Graphlite and Pump technology to make the shoes more comfortable, increase stability, and improve strength. Adidas utilizes Torsion technology to increase stability and strength. Thus all the manufacturers utilize different methods to achieve the same objectives, thus lowering any technological differences between them. Demographic Environment o There are two seasons in the shoe industry, with one for Spring and Summer, and one for Autumn and Winter. Thus firms have to be prepared and have different lines for the different seasons.

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o The age groups of the major sports buying segment is changing, with a trend of younger people making up a large proportion of the industry. Firms need to be aware of this trend and cater for this need, specifically in the fashion segment. o With the development of aerobics, woman rapidly became another segment in the sports industry market. Industry Environment Porters 5 forces Threat of new entrants o Economies of scale are required to enter the sports shoe industry, to obtain the reach to be competitive o Extensive capital requirements are necessary, in terms of physical production facilities, and marketing to establish a firm in the industry. o It is difficult to establish a brand, as strong brands are already well established, and extensive, expensive marketing would be required to compete against them. o There are very low switching costs, as it is easy for buyers to change suppliers, thus it is relatively easy for a customers to buy from a new firm. o Access to distribution channels is not difficult to obtain, as a new firm would easily have access to existing channels in department stores and specialist sports shops.

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o Strong retaliation would be expected by existing firms, as the sports industry is lucrative thus they would wish to defend their market share. o Considering these factors the threat of new entrants is regarded as moderate, as there are certain barriers to entry, but not to the extent that the market is impossible to gain access to. Bargaining Power of Suppliers o Switching costs are low, thus it is easy for a firm to obtain suppliers o There are few substitute inputs to produce shoes with the essential elements of rubber, and fabric being the main ones which are hard to substitute. o There are many suppliers of raw materials, thus making it easy to obtain supplies o There is a strong threat of backward integration whereby the shoe firm produces its own raw materials to ensure quality. However, there is a very small threat of forward integration as the suppliers do not posses a highly differentiated product. o Bargaining power of suppliers is considered to be low as it is easy to obtain supplies from a number of sources. Bargaining Power of Buyers o Bargaining Leverage There is a low buyer concentration as there are many of them, thus the individual consumers have little power. 12 of 28

However, there are a few large retailers which buy a substantial volume, thus they have a high bargaining power as they have the ability to leverage. There is a low switching costs as it is easy for consumers to change to another sports shoe brand without incurring any costs. It is difficult to integrate backwards as consumers lack the resources to manufacture sports equipment. o Price sensitivity There are very few product differences which could be regarded as significant to sway a customer, as essentially the shoes have different technologies which produce the same effects, thus price and design are factors which may sway buyers, but with 2 similarly designed shoes, they will be price sensitive. Possessing a strong brand is a differentiating factor, thus being an influential aspect when buyers choose a product. o Bargaining powers of buyers is believed to be moderate, as they do not have a significant ability to influence the industry as individuals, but collectively they have considerable influence. Threat of product substitutes o There are low switching costs for the consumer, as it is easy to change between brands and sports equipment suppliers o There is a low propensity to substitute away from the industry as the products provided are highly specialized.

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o Counterfeits are a significant threat in the branded shoe sector, being sold at a lower price, but at a perceived similar quality and performance. o The threat of substitutes has been evaluated as high, as there are many substitutes available, and with extremely low switching costs it is easy for customers to change. Intensity of rivalry among competitors o There are many competitors but with only a few major players who have approximately equal resources which intensifies the competition. o There is rapid industry growth which would reduce the competition to take market share away from competitors as there are sufficient growth opportunities without engaging the competitors. o There are few fixed costs thus rivalry between firms is reduced, as they are not constrained by the capacity of their equipment, and forced to produce large volumes to cover costs. o There are few product differences thus customers are unlikely to be loyal as many firms have products to satisfy their needs. As a result there are low switching costs, thus increasing competition between firms to capture the market. o There is little diversity of competitors thus competition is increased due to their inability to differentiate on the basis of product. o There are low exit barriers as there are few specialized assets, few labour agreements, as production occurs predominately in third world countries. There are no strategic alliances, or emotional

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barriers which could prevent a firm from exiting the industry or a geographic segment. o The Rivalry among competitors is considered to be high, as there are few differences between them, thus forcing competition to increase due to their inability to differentiate on the product basis.

Question 2: What are the strategies of Adidas, Nike and Reebok?

Adidas Adidas uses the Integrated Cost Leadership Differentiation Strategy. This is supported by the fact that their products are cheaper compared to the other industry participants whilst it also looks at other different markets as a sports leader. According to Adidas, the company strives to be a global leader in the sporting goods industry with sports brands built on a passion for competition and a sporting lifestyle. Our strategy is simple: continuously strengthen our brands and products to improve our competitive position and financial performance. Reasons o The company stresses performance and quality not fashion showing a differentiated focus. o Concentrates on five core products whilst having with a strong focus on soccer, again showing a differentiated focus. o Adidas markets its products at sporting events showing a differentiated marketing approach

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o High technological focus tension technology and the use of new materials showing a differentiation focus o Goods are priced lower than competitors thus showing a cost leadership strategy. Nike Nike employs a differentiation strategy as it focuses on customers who perceive value in its products compared to the other products that are produced and marketed by competitors. Reasons o Consistent manufacturing of attractive products o Rapid responses to the unique customers desires o Through excellent inventory management and consistent production planning Nike is able to respond rapidly and deliver and on time to retailers and distributors showing a differentiated distribution strategy o Makes use of a strong brand, with Research and Development expertise and a strong marketing leverage with top sport stars to differentiate the product. o By offering support and sales personnel training to the 14 000 strong retailers Nike has a differentiation focus with regard to customer service. Reebok Reebok utilizes a differentiation strategy. It markets itself as a trendy, fashion oriented sports company. Reasons

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o Through Reeboks focus on branding in sport and fitness, they have differentiated themselves, such that they are ranked as the number 1 sports and fitness brand o The firm has separate divisions for athletics and sports thus ensuring the complete differentiation of different lines of equipment and apparel. o Retain a differentiated focus by charging a premium as They operate in 140 countries and emphasizes different elements in each market, Reebok emphasizes the use of high-quality retailers and avoiding lower margin merchandisers and discount outlets. Distributes through specialty retailers, sports stores and department stores and clothes through specialty shops Utilizes concept stores that sold a collection of Reeboks footwear and clothing o Enhances its brand image by signing sports stars for sponsorship

Question 3: Compare the Resources and Capabilities of Adidas, Nike and Reebok.
Adidas Resources Europe represents 32% of worldwide sales in sporting and footwear sales and Adidas is the leader in this market. Gross profit 38%, Net profit 5%

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A strong R& D division o Adidas was the inventor of Torsion Technology, which is a system of a pair of cross supports running from the front to the back of the shoe, allowing movement and at the same time maintaining strength and stability. o Product innovation is primarily focused on the creation of new footwear and textiles.

Effective Production o They however wanted to maintain a certain level of company owned production to ensure quality and hence kept factories in France and Germany.12% of the footwear and 7% of the textiles are produced in-house. Outsourcing of production was divided between Asia (70%) and Europe (30%)

Capability Effective Advertising o Adidas strength is in international and Olympic events in which participants were amateurs, and endorsements were made with national sporting associations rather than individuals. This built the brand through event marketing rather than individual athlete endorsements. Adidas supplies team athletes with products and benefited from the resultant coverage. o A large resource budgets accounted for Adidas spending $60 million on advertising in Europe which accounted for on average 6% of sales, of which 75% of the marketing budget was spent on promotion. 18 of 28

o T.V. advertising was covered by a single spot which stressed the quality of Adidas products and ran for a year without review. Effective Distribution networks o Adidas utilized various methods to ensure maximum coverage to gain market share. They leveraged their capabilities in distribution through subsidiaries and licensees. Germany, France, U.K. and U.S. were the most important subsidiaries representing 43% of total sales. o Licenses are granted in countries with restrictions on imports e.g. Argentina and Japan (18% of sales). Licensees paid royalties to Adidas and distributed the Adidas brand whilst Adidas provided guidelines on prices, provided representation and quality assurance. o Adidas also had its own brand shops in Eastern European countries e.g. Budapest, Prague, Moscow and Riga. o Adidas delivered to its subsidiaries with a seven month lead-time, resulting from considerable sourcing and production in Asia. On average 50% of products were pre-ordered and the remaining 50% consisted of on-demand re-ordering. However Adidas wasnt considered reliable and half the re-ordered stock consistently arrived late.

Nike Resources Gross profit margin (38%), Net profit 11%

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America accounted for approximately 50% of worldwide sales and Nike is the leader with 32% of the market sales worth $3.4 Billion in 1992

Effective R&D o Strong R&D team which consists of research committees and advisory boards made up of coaches, athletes, trainers and other experts to review designs, materials and concepts for product improvement. They also developed the Air-Sole technology by using air in the soles to reduce the shock of impact. This was claimed to allow athletes to train longer and educe the risk of injury.

Production o By utilising outsourcing of production and manufacturing agreements meant that Nike was able to harness their core competencies, and behave like a marketing and design group, utilising Indonesia, China, Taiwan and Thailand for manufacturer because of the cheaper labour costs

Capabilities Effective Marketing and advertising o Nikes ability to leverage athlete endorsements meant that the company chose top athletes with brash personalities- John McEnroe and Andre Agassi (tennis), Ronaldo (soccer) and Michael Jordan (basketball) - which particularly appealed to the young market and portrayed the image Nike were seeking. o Most of the extensive advertising budgets ($280 million) was spent on television spots targeted at young customers. They sold a 20 of 28

lifestyle, a combination of sports and music, fashion and fun. On average Nikes advertising budget accounted for 10% of sales and in 1992 they spent $180 Million in the U.S. and about $100 million in Europe. They then used these spots along with the athletes and one catchy slogan Just do it. o By harnessing their capability in the career management of sports stars to promote Nike acted not only as a shoe company but as a sports company Extensive Distribution o Nike sold its products to approximately 14,000 retail accounts in the U.S. and in as many as 80 counties resulting in a huge footprint. o Nikes strategy was to sell merchandise through different channels to different target segments. They sold shoes for athletes in spots shops, for amateurs in department stores, and for the mass consumers in shoe stores. Nike further pioneered the future in preorders. This was possible due to the strong demand for Nike products and consequently, 77% of Nike footwear products were pre-ordered in 1992. This strategy had considerable impact on inventory management, production planning, and securing retail accounts. o Nike developed the Nike Town concept, a 20,000-square-foot mall with 14 stores that sold equipment for 25 different sports. Reebok Resources Gross Profit 40%, Net profit 8%

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Reebok has harnessed their resources through two major divisions within the business; Reebok and the Speciality Business Group. The Reebok division was responsible for designing, producing and marketing the sports shoes and accessories. The Speciality Business Group included Above the Rim basketball clothes, Tinley running and cycling performance clothes and Weebok for toddlers and infants.

Product research and Development o Reeboks rise to success was fuelled by innovation which lead to the production of the first aerobic/dance shoe Freestyle designed for women. Freestyle captured the vast majority of the female sporting market and branded Reebok as a fitness company rather than a performance company. Although Reebok had developed its own technology it was not branded as a sporting company, despite having developed a strong line of technological innovation (Pump, Instapump, Hexalite, Graphalite) which increase shoe comfort, stability and strength. However, the companys strength lay in its trendy shoes.

Capabilities Effective Marketing and Advertising o With an advertising budget of $85 million in the U.S. $25 million in Asia, and $10 million in Europe, Reebok had exceptional reach. Of this 60% was used in television and the remaining 40%in media. They effectively used their resources to optimise their ability to create advertisements to appeal to their customers.

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o They further made a strong strategic push in the sports market, gaining increased visibility on playing fields and sporting arenas worldwide through endorsement arrangements of prominent stars in a multitude of sports. o They utilised the resources available to them in the advertising department to launch their first global campaign Planet Reebok, further adopting a single global logo strengthening their global brand position. Production o Outsourcing is the major form of production accounting for 80%, although some of the clothing and footwear components were still done in the U.S. Extensive distribution o Reeboks utlised their capbabililty in logistics to distribute and market their products in 140 countries through wholly owned subsidiaries in Austria, Belgium, Canada, Chile, France and Germany. o Reebok further had concept stores located in Boston, Santa Monica and New York that sold a selection of Reeboks footwear and clothing

Question 4: Do a SWOT analysis of Adidas

Strength o Strong brand of performance and quality o High quality 23 of 28

o Strong Research and Development in products and materials utilized in production o Strong culture of winning within the organization o Global footprint o Control the European sector of the shoe industry o Sold licenses to give access to additional countries with import controls To produce according to specifications to ensure quality, provide technicians Check up to ensure brand was well represented

o Covers a broad range of sports, and secondary product such as sports bags o Regarded a genuine sports brand o Strong soccer focus and reputation o Popular with middle aged men o Various distribution means to gain market share, o Revenue well diversified between clothing and shoes o Makes use of event advertising which shows their premium quality Weaknesses o High clearance sales (30%), with the industry average being 10%, showing weak production planning o Core products accounted for 90% of revenue, thus if market changed rapidly and Adidas could not adjust they would have no income

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Pre-ordered stock often arrived late to retailers Strong German influence, could be regarded as a negative factor to foreigners, as little English possibly spoken

Centralized management approach, which results in all geographic segments receiving the same marketing material and products, which may not be appropriate to each region.

Delivery with 7 month lead-time Not regarded as a fashion brand Not well regarded by woman and teenagers Only one advert on TV which is used globally, which suggests that marketing in certain regions I not well targeted.

Neglect of the American market which is the largest market Loosing of market share in Britain, France and Spain Turbulent organizational and management changes after the death of Alfred Adi Dassler.

Opportunities o The sports market that was expected to grow by 28 percent to $55 billion by 1998, indicating greater opportunities for expansion due to Increasing number of woman entering the sports or leisure market, so offering the firm a larger possible customer base Athletic footwear was no longer reserved for professional exercise and competition but also has become a part of leisurewear, thus the leisure market can be exploited

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Development of outdoor recreation sports such as golfing, skiing, jogging and hiking which was encouraging growth of functional outdoor clothing,

o Greater access into the USA o Develop more of a fashion image o Price shoes higher to match competition, if regarded as better quality, this is possible o Endorse athletes to further enhance the premium quality sports image o Greater advertising to appeal to the younger generation, and woman o Greater control of licensees to control prices, and marketing o Deliver faster to reduce lead time, which will allow greater inventory control, and fewer clearance sales o Global markets offer the firm more opportunities to obtain critical resources for success o Developing an internet distribution channel o Can make use of E-Commerce and E-Business to improve distribution as well as selling direct o Changing the Adidas image to one of an attractive leisure sports wear company while retailing their performance image Threats o 80% of shoes are used for casual wear, and this is increasing,. However, where Adidas makes most of their sales in the sports shoe segment 26 of 28

o The development of new markets such as street baseball, street soccer, which may encourage more competitors to enter the market, o Nike and Reebok further entering the specialty market, eroding their market share o Nike and Reebok moving more into Europe o Licensees may decide not to produce Adidas o New entrants into the leisure shoe industry such as Timberland o Brash marketing campaigns from Nike and Reebok that were supported by huge budgets that were targeting women and teenagers with lower quality, more fashionable products, which could erode market share

Question 5: What should Adidas do to become more competitive?

Design more fashionable clothes and footwear to capture the a larger share of the leisure market Increase price of apparel as under priced compared top rivals Utilize own production facilities in hard to reach countries Deliver pre-ordered stock on time through faster delivery to reduce leadtime and clearance sales. More effective distribution channel to achieve this Focus on USA as such a large market, as well as attempt to gain a first move advantage in the emerging markets.

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Use decentralized approach, with each country organizing itself, in terms of marketing and production so that each can respond faster to changing trends

Change Adidas image to one of a fashion designer as well as producing high quality sports products.

Outsource the rest of production to Asian firms, as the additional quality control does not allow a premium to be charged for this.

Open more retail outlets, as they mark-up by a 100% as opposed to 20% when they sell to the wholesaler.

Have more distribution channels to target different segments, for example, department stores for amateur products, chains for mass consumers,

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