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Monday, 25 April 2011

ADIDAS STRATEGIC MANAGEMENT

OBJECTIVES:
To identify the main strategic issues facing Adidas in maintaining their current global competitive position.
To evaluate potential strategic options that Adidas should consider in order to sustain and develop their global competitive positioning.
To discuss the implications of these options for the strategic management decisions of the company.
To make appropriate recommendations for the future.
Summary:
This report sets out the different aspects of strategic management at the Adidas group. Sometimes the two are used interchangeably, but there is a lot of difference between the two. They can partly be distinguished on the basis of different ways of financing them and partly by comparing the sizes of the companies involved.
The takeovers and different issues related to it are of very much importance in present times of LPG (Liquidation, Privatisation and Globalisation). The basic fields of concern are the benefits related to M&A, post M&A activities, M&A failures and success, etc. All these concepts have been undertaken in this report. There is also a case study of Adidas and Reebok given at the end for a deeper analysis of the concept. The various aspects of the Adidas and Reebok merger have been clearly explained.
Introduction:
Adidas-Salomon is one of the major sports apparel manufacturer. It consists of Reebok Sportswear Company, Taylormade Golf Company, Maxfli Golf and Adidas Golf. It is the second largest sportswear manufacturer of the world after Nike. The company was founded by Adolf (Adi) Dassler in 1948 and is named after him. But the story started way back in 1920 when Dassler and his brother Rudolf Dassler started making shoes Herzogenaurach, near Nuremberg. Rudolf Dassler is also the founder of other sports goods manufacturer company, Puma.  The group is actually named as Replica Adidas Shoes.
1.    SWOT Analysis:
In order to identify the main strategic issues facing Adidas in maintaining their global competitive position, it will be quite useful to undertake a SWOT analysis of the company. According to Rogoff and Bezos (2007:44), the best way to begin a research on the competitive advantage and competitive position of a company is to do a SWOT analysis of the company which is an acronym standing for strengths, weaknesses, opportunities and threats of the business.
SWOT analysis of Adidas will involve the evaluation of its internal as well as external environment. In order to be the market leader and gain more and more profits, Adidas always intends to develop new opportunities which make it highly prone to risks.
STRENGTHS
·         Renowned brands.
·         Extensive Marketing Infrastructure.
·         Diversity and Variety.
WEAKNESSES
·         Underperformance of Reebok.
·         Channel Conflicts.

OPPORTUNITIES
·         Growing Demand in Sport Equipment.
·         Emerging Markets.
·         Developing Technology.
THREATS
·         Increased Raw Material Costs.
·         Competition.
·         Economic Recession.
·         Counterfeit Products.


1.1.        Strengths:
Following are the key strengths of Adidas Group:
1.1.1.   Renowned Brands:
It is one of the major strengths of the company. Adidas group owns brands like Adidas, Reebok, TaylorMade (Adidas Group Website). The strong brand image of Adidas has increased its brand loyalty which in turn has led to increase in profits. It is the brand reputation which has helped Adidas to be the market leader in almost every part of the world. Adidas brands are not only popular in Europe and US but they have also captured most parts of Asia now. According to Shanley, 2006 (Helmsman Online), Adidas emerged as a market leader in Japan in 2005 replacing Nike for the first time. According to a report of Adidas, it is has maintained its top position in Europe till date. Adidas also strengthens the images of its brands by customer satisfaction (Adidas Official).
1.1.2.   Extensive Marketing Infrastructure:
The company has a widespread marketing infrastructure. The policy of the company to focus on a single distribution channel has changed. It is now focussed on having various distribution channels and has a huge network of stores and outlets worldwide (Adidas Official). 
Due to an extensive marketing infrastructure and advertising, Adidas has been able to undergo market penetration which helps them to draw more profits. According to Manzenreiter (2004:303), Adidas kept doing the advertisement campaigns with popular sports celebrities after the 2002 football World Cup like David Beckham, Hidetoshi Nakata, etc in order to gain more and more market share in the markets like Japan. Adidas also formed one of the pillars in 2006 football World Cup in Germany.
1.1.3.   Diversity and Variety:
According to Adidas (Corporate Website), “We will remain committed to understanding, valuing and incorporating the diversity into the corporate culture of the Adidas Group.” This helps them in market penetration and gain competitive advantage. Adidas has a large number of products in a number of styles for both men and women (Runningshoes4u). The company has gained strong reputation in almost every part of the world due to its innovative technology and continuous introduction of new brands.  
1.2.        Weaknesses:
1.2.1.   Underperformance of Reebok:
The merger between Adidas and Reebok was basically an attempt of Adidas to gain more market share in US- the Nike’s own turf (Tribune LA). Adidas wanted to confront Nike on its own home land. The takeover was supposed to be a friendly takeover and the stock prices of both the companies started to improve from the very day of the announcement (MSNBC report). But during the last months of 2005, sales of Reebok dropped from $1 billion to $912 million. The poor performance of Reebok continued from the very time. In March 2007, Adidas also admitted that the merger was not as successful as it was supposed to be and the causes for the failure of the takeover were fully attributed to Reebok. Adidas blamed Reebok to be the basic reason as the group had 3.6% drop in the overall gross margins by the end of 2007 (Marketingmagazine.co.uk).
1.2.2.   Channel Conflicts:
In the times of growing e-business, Adidas has also begun to sell its products online on a large scale (Official Site). This has led to the conflicts with the retailers. Retailers will be less reluctant to sell Adidas products in future which can lead to drop in sales.
1.3.        Opportunities:
1.3.1.   Growing Demand in Sports Equipment:
According to Walker and Seidler (1993:5), since 1960, sports has changed a great deal and sports equipment industry has become a multibillion dollar industry as a virtue of this change. Also with growing population there is a large demand for goods (Draak, 1986). So, Adidas need to improve its strategies much more in order to avail maximum benefits.
1.3.2.   Emerging Markets:
According to Cavusgil et al (g2002:10), Emerging markets have a high birth rate and accommodate about 75% of the world’s total population. As more population means more sales, it is important for the company to strengthen its roots beyond the European and US borders. The company is doing well for its brand popularity in the emerging economies. Such as, the company has launched the apparel for Indian yoga to target the market share in India (Ameinfo News). After the Beijing Olympics the company increased sales in China also (Opendoor.com report). Southeast Asia and Eastern Europe (Russia) are also emerging markets with opportunities due to their large populations.
1.3.3.   Developing Technology:
According to annual report 2009, the company is aiming to use new technology and come up with new brands. Although the company’s innovative technology can be regarded as its strengths yet a great deal needs to be done in this field. As Maier (2009) clearly states that as a business grows the importance of keeping up with changes in business computing and technology can be more important over time.


1.4.        Threats:
1.4.1.   Competition:
As the merger between Adidas and Reebok was an attempt to gain more market share in US and to give a tough competition to Nike (No. 1 in the industry) and Puma (No. 4) (Tribune LA). At the time of the merger, it seemed that it really made sense but Nike was never on the backseat. Nike is the most tough and giant competitor of the company.
1.4.2.   Increased Raw Material Costs:
The company is facing higher raw material and wage cost (BBC Online). This is one of the key threats to Adidas. Due to this reason, Adidas was thinking of closing some stores at the end of the previous year.
1.4.3.   Economic Recession:
Global recession is one of the biggest threats which almost every business is facing right now. According to BBC Online (2009), “Adidas sees profits drop by 97%.” It further says that Adidas made 5m euros net profit during the first quarter of 2009 which was 169m in 2008. Adidas blamed economic downturn as a basic cause for this.
1.4.4.   Counterfeit Products:
According to Adam (2010), the market is full of counterfeit products which resemble the genuine product and are made to deceive the customers. According to a Behean, about 12% of sportswear in 2001 was fake. This has become a key threat to Adidas over the past years.
2.    ANSOFF’s Matrix:
In order to evaluate potential strategic options that Adidas should consider in sustaining and developing their global competitive position, we need to use Ansoff’s matrix. As commented by Fifield (1999:143), Ansoff stated that there are actually only four ways through which a company can expand its operation in order to sustain its global competitive position. From the market point of view, Adidas group believes in market development and market penetration.



MARKET PENETRATION
·         Global Brand Visibility.
·         Advertisements/Sponsorships.

MARKET DEVELOPMENT
·         New Markets.
·         New Distribution Channels in Emerging Markets.
.
PRODUCT DEVELOPMENT
·         New Products.
·         Relevant Modified Products.
           DIVERSIFICATION
·         Diversification of Products – Athletics, Cricket and Hockey.
·         Casual Footwear.

2.1.        Market Penetration
2.1.1.   Global Brand Visibility:
According to Kaferer :338 the biggest advantage of global brand visibility is that it provides the company with a competitive advantage. Adidas’s brand visibility gives it a competitive advantage over the local brands and helps it in the market penetration i.e. penetrating the existing market with the existing products. The customers are attracted by the cheap prices of the global brands of Adidas with respect to their local brands. For example, in India the local sports shoe manufacturer Proton produces expensive shoes when compared to Adidas’s global brands CSR (12:4). Similar is the case in Czech Republic where Adidas shoes are cheaper than the local handmade shoes (Press Adidas).
The key to Adidas’s global branding visibility is its innovation. It creates a very good image of its products. That is the reason why there is a worldwide awareness of Adidas brands. The advantages related to global brand visibility are higher economies of scale, synergies, etc.
2.1.2.   Advertisements/Sponsorships:
The other key method of market penetration followed by Adidas is aggressive advertising. According to Rotzoll et al : when there is a strong appeal to fear along with product benefits, there is a possibility to get potential consumers to move to an immediate purchase. Adidas is also using the aggressive advertisement strategy to gain more market share with its existing products in existing markets e.g. in 2000 Adidas launched a series of new advertisements featuring reputed sportspersons in daring but eccentric conditions (Drummond and Ensor, 2003:203). The basic objective was to target the young market segment without giving details of the features of the product. Similarly, prior to the football World Cup in Germany, there were poster advertisements featuring the Germany’s football captain M. Ballack saying the Adidas tagline, ‘Impossible is Nothing’(Bleachers brew). The main motive of this advertisement was to catch customer attention by creating a hope for Germany’s World Cup win. Adidas also has a tradition of making reputed sportspersons, with a lot of fan following, their Ambassadors. It helps the company to target the sports lovers. These include Mohammad Ali, David Beckham, etc. Overall Adidas carries out an extensive advertising on TV, Radio, Web sites, through posters etc (Tennis Blog). Adidas Group also sponsors numerous sports events such as Basketball, Football, etc which helps them to penetrate the market effectively.
2.2.        Market Development:
2.2.1.   New Markets:
In order to develop markets, Adidas has always been in search of new markets. In the emerging markets of India, China, Russia, etc, Adidas is continuously expanding its business by entering new markets with existing products. In case of marketing strategy, Adidas has always been following the offensive marketing strategy in new markets.
2.2.2.    New Distribution Channels in Emerging Markets:
Emerging markets also open new channels for Adidas. For example, Adidas entered India long time ago. But recently, in 2008, it was able to conquer the sports market of Jammu & Kashmir state of India by opening two stores, one each in Jammu and Srinagar (Greater Kashmir, May 23:2008). Similarly, after the sponsorship of Beijing Olympics Adidas opened the biggest Adidas store in Beijing.
2.3.        Product Development:
2.3.1.   New Products:
Adidas is known for coming up with new products from time to time. Through continuous introduction of new products in the market, the company has been able to enhance its strong recognition. Adidas group mainly launches new products in North America. It is also considered the main platform for communication strategy by the company. Therefore the company has replaced its focus on a single distribution channel with the focus on various distribution channels. For example, Adidas launched several new products in 2008 like Matchball of the UEFA, ‘Europass’- the football boot. In the existing markets of India, Adidas has introduced the Yoga apparel to gain market share (Adam, 2010). The product design is based on the partnerships with Stella McCartney, etc.
Moreover, the three brands Adidas, Reebok and TaylorMade all offer different personalisation platforms and products which reflects the strategy of each brand.
2.3.2.   Relevant Modified Products:
Technological innovations have led Adidas to the modification of products as well. From the first day football boots with screws embedded in spikes to the present day ClimaCool Adidas has been creating Adidas has modified them several times. Like the present day Predator Mania which is modified football boot meant for accuracy, speed and control.
Adidas has formed brand teams to conduct a research about customer needs so that products are renewed and modified according to those needs. It has also teamed up with Diesel to sell the jeans at its Adidas Original stores.
2.4.        Diversification:
According to Ansoff this strategy is highly risky of the four as it involves the introduction of new products in new markets without having a proper knowledge of different parameters.
2.4.1.   Diversification of Products in Athletics, Cricket & Hockey:
This would help Adidas in competing in the markets of huge competition. The group has a strong hold on soccer and basketball product line. The development of products for athletics, cricket and hockey will help Adidas to be a market leader in new markets like India and Pakistan where people are more interested in cricket and hockey instead of football and basketball.
2.4.2.   Casual Shoes:
In order to minimise competition and increase profits, Adidas has implemented a multi-brand strategy. Both as a mass and a niche player this objective helps them in the times of fierce competition and provides them a competitive advantage. Adidas is capable of providing a wide range of products for different customers. Adidas has now also started to manufacture the casual leather shoes (Annual Report, 2009). Adidas (2009) was clear in its strategy to sell leather shoes by saying that it will offer them a significant opportunity.
3.    To discuss the implications of these options for the strategic management decisions of the company.


3.1.        Leadership:
Drucker (1999) writes that it is only a leader’s ability to generate unusual or exceptional commitment to a vision (Boddy, 2008:458). So implementation of strategic plans requires inspirational leaders. It was until 1987 that Horst Dassler, being egoistic, ruined his family reputation because of his usual comparisons with the competitors.
Herbert Hainer was made CEO of Adidas in 2001. He is an inspirational leader and has been looking forward to implement new strategies from time to time. He extended the Beckham deal and was the person to launch the Beckham’s line in 2005 when he saw Beckham’s huge fan following. In the same year, Hainer and Fireman (CEO of Reebok) joined hands for the growth of both the companies and give a tough competition to Nike. The merger was aimed to gain more market share and become the market leader in US. According to Hainer (CEO), “We will expand our geographic reach, particularly in North America, and create a footwear, apparel and hardware offering that addresses a broader spectrum of consumers and demographics. With Reebok we are advancing our position on the playing field of sports good industry and are improving our financial strength to drive increased shareholder value.”                                                                        (Inside Hoops.com)
It is clear from his statement that the group has innovative brands and market position which gives them a competitive platform. The biggest challenge is to improve the products and strategies with time and undergo a successful integration of Reebok.
 After the merger, Hainer had a strategy of targeting the basketball and soccer lovers individually with Reebok and Adidas brands. According to the Chief Executive Hainer:
 “The brands will be kept separate because each brand has a lot of value and it would be stupid to bring them together. The companies will continue selling products under respective brand names and products.”                                        (ICMR India)
3.2.        Organisational Structure:
According to Drummond and Ensor (2003:254), in developing a marketing strategy it is very important for an organisation to have teams. Adidas has multifunctional teams which help the company in its offensive marketing strategy.  Headquartered at Herzogenaurach, Germany, Adidas is the largest producer of sportswear in Europe. The organisational structure of the company is in accordance with its business strategy. As the business activity of Adidas includes three product lines, footwear, apparel and hardware of sports, the structure of the company is also emphasizing on a sporty environment and is in complete agreement with its products and services. After merger, Reebok targeting basketball lovers was kept separate and its previous management was retained. The identity of the brands of both Adidas and Reebok was kept distinct as before even after the merger. This reflects Adidas’s strategy based structure. The construction of ‘Originals Stores’ was an attempt to target fashion forward people. The designs of these stores also reflect the strategy of the company.
3.3.        Culture:
According to Drummond and Ensor (2003:253) a strategy is most likely to fail if it goes against the dominant culture. Same was the case with Adidas. The merger between Adidas and Reebok in 2005 was an attempt of Adidas to capture US markets. But the merger was not culturally fit as one of them was German and the other was American and it forced Adidas to pay a high price. The merger was not in agreement with the cultural fit and as a result it is considered as an almost failed merger. Reebok sales are declining continuously and are one of the key weaknesses of the company right now.
3.4.        Innovation:
In the present times of huge competition, Adidas has always created symbols which stand for its innovation and product development. According to Palmer (2004:267), innovation not only refers to the products offered by a company but includes all marketing functions, including distribution and promotion. Adidas is highly innovative not only in the field of technology and new product development but also in the other aspects of marketing such as creating a suitable image of its brands. The basic factor responsible for the faster innovations is the global influence of the company. Adidas follows the strategy of increasing premium partnerships and attracting its customers through consistent innovations with various marketing issues.
3.5.        CSR/Ethics:
Corporate social responsibility and ethics at Adidas is an important part of the company’s corporate strategies. The company is focused on the healthy living of people as it deals with sports equipment and sportswear. It is due to Adidas that different sports activities have become popular in all social classes particularly kids. However, the violent and eccentric advertising is a bit unethical on the part of Adidas.
Adidas is also concerned with its employees very much. The supervisory board which consists of a total of 12 members has six members from employees. Adidas cares very much about the employee satisfaction. Asian employees are focussed on the production whereas European and American employees are focussed on the marketing, distribution and retailing.
4.    Recommendations:
Adidas marketers need to enhance their product reputation more. Adidas needs to come out of the family rivalry with the Puma manufacturers and needs to focus on the competition with Nike and modern markets. The three stripes of the Adidas logo which gives it a customer loyalty needs to be justified.
Adidas needs to look on the various aspects of competition like workforce, management expertise rather than concentrating on the competition based on sponsorships and advertisements as it seems like this. A common example is that when Nike started its Ad’s tagline ‘Just Do It’, Adidas also started ‘Impossible is Nothing’. Adidas can really do well if it focuses more on getting the customer feedbacks in order to improve its brands.
The merger with Reebok in 2005 gives an evidence of the company’s expansion strategies. But still there a successful integration of Reebok has not been done yet. Adidas needs to integrate Reebok in its business culture so that the two become culturally fit and look forward to achieve the goals. This might involve organisational change of either of Reebok or Adidas.
It is also highly recommendable to undergo an analysis of the issues related with the brand awareness. In emerging markets like India, Sri Lanka, etc, where the people do not like soccer much, Adidas should launch more products associated with cricket, hockey, etc in order to target the population. Also, Adidas does not go for more advertisements on Indian Television as the most of the local population in India is not used to read newspapers, surf internet and watching foreign TV channels. So, Adidas needs to look on these issues as well.
Already Adidas is showing very satisfying returns on its investment when compared to its competitors but the matter of concern is the geographical expansion of the company. It is not as good as should be at this level of competition. For example, Nike stores are in very much abundance in India. However, hardly an Adidas store can be seen except in the metropolitan cities like New Delhi, etc. Expansion policy will assure the company a good market share and profit in the emerging markets. There is a great future for Adidas ahead if it mends its strategies a bit.
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