EU Business Environmental Audit: Adidas Group - Assignment Example

?Adidas Group EU Business Environmental Audit Introduction There are several types of environmental audit which companies may carry out, according tothe ERM. These span anywhere from a compliance audit (which checks company practice and policy against prevailing legislation) to product or life cycle audit (which determines impact of a product through its stages various stages of development from design to disposal), A business environmental audit is taken to measure up a firm’s internal policies and practices with the mandatory regulations and standards it is expected to meet within the external business environment. This approach, derived from the concept of environmental audit emphasizing detailed policy specification (ERM, 1996), and that definition of the economic environment of a firm (Piggott & Cook, 2006). The business environmental audit therefore expands beyond the ecological scope of the conventional environmental audit, and pursues the broader approach of encompassing the totality of the chosen firm’s business environment. External Market Drivers of the EU sportswear industry This section shall detail some of the more important drivers of the various aspects of the EU business environment which have a bearing on the operations of all sportswear and footwear manufacturers operating in Europe. From all indications in the Adidas disclosures and its website, these standards and requirements have been successfully met by both Adidas and its affiliate brand Reebok. Political The principal participants in the footwear and sportswear industry, though based in developed countries (Adidas in Germany), all subcontract their manufacturing in emerging third-world countries such as China, the Philippines, Thailand, or Indonesia due to the lower cost of labour. The political conditions in these countries are therefore critical to the risk assessment of the business as they have a strong bearing on the continuity of the production function. In the EU, while national politics may likewise introduce destabilizing factors, the presence of a single market and a single legal framework has reduced much of the uncertainty, thus compliance with the EU standards means that the firm may viably operate in the jurisdiction of all the EU member states, minimizing national political uncertainties. Economic Many of the EU countries are emerging from the economic recession that resulted from the U.S. subprime mortgage crisis. Some are faster than others; for instance, of the principal EU markets, Germany and France are poised to emerge faster than the U.K. The present financial weakness in the less economically stable members (Greece, Spain, etc.) may provide shocks to the single market system, however, since a likely devaluation of the euro will create instabilities in even the stronger economies. In the EU, the three countries with the largest clothing markets in terms of consumer expenditure on outerwear are Germany, the UK and Austria (Gherzi, 2010:110) One policy observed in the EU which was actually conceived as part of the World Trade Organisation (WTO) regulations, are the anti-dumping measures. These require exporters to set product prices at a level that fairly exceeds the cost of production, and not to sell the same product domestically at materially higher prices. Socio-Cultural As a result of the mobilisation of consumer organisations, the buying public in many EU countries have become conscious of the need to compel businesses, particularly multinationals, to observe ethical trading practices. Because of the increased vigilance by consumers and the threat to boycott companies that benefit from unethical practice (even though unknowingly), several codes of conduct have been developed by importers. Sometimes, concerted action leads to government rules, such as the SA 8000 (Social Accountability), to which all European firms and their offshore subsidiaries, suppliers and subcontractors must comply (Gherzi, 2010:138). One of the more important concerns raised by consumer groups are that children are likely being used as cheap labour by new suppliers in their factories, or sweat shops are being manned by immigrants or underpaid workers in a third-world country who are forced to work in subhuman conditions. This issue identified in particular Nike, Adidas, Puma and Fila (Thibault, 2009:5). Those suppliers who can guarantee that their products are manufactured pursuant to the ethical code of corporate conduct of companies in the EU already have an edge over those who cannot. The Code of Conduct for the textile industry was agreed upon in 1997 by European Textiles Union (ETUF-TCL) and EURATEX, the employers’ organisation (Gherzi, 2010:138). In addition to this, the EU has included a “social clause” to the Generalised System of Preferences (GSP), which allows for special import tariff reductions for products that are manufactured pursuant to ethical standards. Technological There have been several directives issued by the EC for implementation within the EU that deal on textile and textile products. These include, among others: (1) Directive 2008/121/EC of 14 January 2009 on textile names – Added melamine and polypropylene/polyamide bicomponent to the list of harmonised fibre names. (2) Directive 96/73/EC of 16 December 1996 on certain methods for the quantitative analysis of binary textile fibre mixtures – Added elastomultiester, polylactide, elastolefin, melamine and polypropylene/polyamide bicomponent to the uniform test methods of quantitative analysis From 8 May 2012, the above Directives will be replaced by Regulation (EU) No. 1007/2011 of the European Parliament and the Council of 27 September 2011 on textile fibre names and related labelling and marking of the fibre composition of textile products. As for footwear manufacturing, Directive 94/11/EC of European Parliament and Council of 23 March 1994 mandates the standards and guidelines for the labelling of materials that form parts of the principal components of footwear which are made available to the customer in the market. The materials used in the three principal parts of the footwear, namely the upper, the lining and sock, and the outersole are to be properly identified and labelled, either as pictograms or in writing, and shall be conveyed in the footwear. Environmental In the EU the standard being implemented for the clothing industry is the German/Swiss Oeko-Tex Standard 100. Certification under this standard is considered the world’s leading test label to date and the most popularly regarded ecolabel associated with to clothing and textiles. The standard was established in the early nineties by the International Association for Research and Testing in the field of Textile Ecology, then was updated in 1997. This standard “comprehensively addresses the Human Ecology component of textile products” (Gherzi, 2010:135) so as to screen away any harmful substances that may be present in processed textiles that may affect the consumers who may come in contact with them. The standard is governed by the following fundamental guidelines: (1) That certain dyes be excluded for reason that they are cancer-causing agents or allergens; (2) That flame retardant or biochemical treatments be prohibited; (3) That the presence of harmful materials (e.g. pesticides, formaldehyde, heavy metals) be within safety limits in the finished product ; (4) That limitations be differentiated for particular types of textiles and depending on the target customer groups. For footwear manufacturing, the European Standard for waste classification and management is specified in the document EN 12940:2004, which supersedes all national standards within the EU. The standard is mandatory for all EU members, and provides procedures specifically to (1) reduce the quantity of waste in the European footwear industry, (2) reuse and (3) recycle the waste, (4) incinerate and recover energy from the waste, and (5) treat the waste. These procedures are also consistent with the EN ISO 14001:1996 management system standard. Legal Numerous trade regulations derived from multilateral trade agreements governing the conduct of commerce in the EU, such as the application of common Customs tariffs to import from outside the Union; this comes into operation when no special trade agreement is in force for the particular transaction (Gherzi, 2010:139). One of these is the “Renewed Generalised System of Preferences” which, pursuant to Resolution 21 (ii) at the UNCTAD II Conference is a “generalized, non-reciprocal, non-discriminatory” system that intends to provide developing countries with a trade advantage, by providing these countries a set of preferential tariff rates. Another is the Lome Convention entered into by the EU and the African, Caribbean and Pacific (denoted ACP-EC) which allowed for the condonation of tariffs for specific authorised cases (Gherzi, 2010:140). Legal remedies may also be sought under the anti-fraud investigations and actions in trade transactions in the EU. The measures are designed to protect EU entities from the fraudulent intent to: (1) evade certain measures to effect trade policies, e.g. anti-dumping measures; (2) take illegal advantage of preferential treatment concessions such as those pursuant to the GSP; (3) defraud customers (falsely claiming that products actually made elsewhere had originated in the EU); and (4) propagate counterfeiting and piracy (i.e., illegally and knowingly appropriating copyrighted designs and models without acquiring the rights thereto) (Gherzi, 2010:141). Internal Market Drivers within Adidas and the EU sportswear industry Competitive Advantage of Adidas Figure 1: Brand positioning of leading brands of choice when buying sports clothing and footwear for leisure/fashion, July 2006 (Source: Hanrahan, 2007:8) From the foregoing figure, it is evident that Nike, Adidas and Reebok command the lion’s share of the market comprised of average age, average affluence consumers, with Reebok catering to the slightly older market. The Adidas-Salomon AG buyout of Reebok International in 2005 creates a distinct advantage over American firm Nike, particularly in competing for the U.S. market which accounts for 36 per cent of international sportswear sales (Kiley, 2005). Both Adidas and Reebok brands are situated in the slightly more affluent segment of the market which allows them greater leeway in pricing and higher margins. However, they are also threatened by Puma (designated (a) in the diagram), the fourth strongest brand and which has embarked on more aggressive campaigns to market its brand. The demographic performance by social class in Table 1 following affirms the diagram above, that Adidas enjoys marginal advantage over Nike particularly among higher income consumers. Table 1: Market shares split by social class (Source: Dawes, 2009:457) Challenges and risks faced by Adidas Adidas has been having trouble reducing the time needed for customer claims processing and customer responses, where a backlog tends to develop. The problem was traced to a faulty customer information handling system, where customer records were difficult to locate, confidential information regarding customers was not secure, and as a result false claims were causing the company unnecessary and avoidable costs (Management Services, 2006:46). It was evident that Adidas relied on outsourcing of digitising and indexing its 200,000 customer records which took anywhere from three weeks to three months. These problems were resolved by the adoption of a more advanced IT system that rationalised customers’ records and improved management information delivery. Another challenge was posed by the legal action taken by Adidas against the International Tennis Federation (ITF) and the four Grand Slam tennis tournaments, namely Wimbledon, the French Open, the Australian Open, and the United States Open. Adidas claimed infringement of European competition law when the Grand Slam Committee (GSC) ruled that Adidas’ three-stripe design should be considered a manufacturer’s identification subject to GSC’s 26-square centimetre size restriction. Adidas design runs down the full length of the tennis sleeves and thus was much disadvantaged by the ruling. Eventually, the case was settled out of court with the increase of the allowed design size to 52 square centimetres, or double the previous limit. Because of this development, Adidas was able to maintain its competitive advantage over other brands through the immensely popular Three-Stripe design (Chadwick & Walters, 2009). Finally, a study showed that sportswear brands, particularly large names like Nike and Adidas, enjoy polygamous loyalty from their buyers, meaning that consumers easily switch between brands. It was also determined that there are no demographically sensitive factors for which sports brands should specifically design or cater to (Dawes, 2009:449). Thus, iconic brands, Adidas and Nike included, shows predictable patterns in brand performance, which may prove an advantage to the company who is able to more accurately forecast the future trend out of these patterns. Table 2: Cross-purchasing analysis (Source: Dawes, 2009:454) In Table 2, it is seen that across the top row, the number of Adidas purchasers allocated an average of 68 per cent of their requirements for the duration observed, 14 per cent to Nike, etc., with the row summing up to 100 per cent. The last row shows an average net advantage of Adidas by at least 2 per cent over Nike, despite polygamous loyalties (Dawes, 2009). Conclusion The environmental audit for the sportswear industry highlights the specific standards and policies of the EU which are imposed on the industry. Germany-based Adidas is already compliant with these policies, although it must ascertain that its suppliers and subcontractors are likewise compliant, particularly in so far as the ethical business practices and ecological material content and labelling are concerned. Within the industry, Adidas shows a continuing strong presence particularly in comparison to closest rival Nike and upcoming Puma, and in tandem with affiliate Reebok. References “Adidas gets the competitive edge.” Management Services, Spring 2006, Vol. 50 Issue 1, p46-47 Chadwick, S & Walters, G 2009 “Sportswear identification, distinctive design and manufacturer logos -- issues from the front line.” Marketing Review, Spring 2009, Vol. 9 Issue 1, p63-78; DOI: 10.1362/146934709X414332 Dawes, J 2009 “Brand loyalty in the UK sportswear market.” International Journal of Market Research, Vol. 51 Issue 4, p449-463 ERM (Environmental Resources Management), 1996. “Environmental audit and assessment: concepts, measures, practices and initiatives.” SNH Review No 46. SNH, Battleby. Europa 2012 “Textiles and Cothing” Enterprise and Industry. Accessed 5 March 2012 from http://ec.europa.eu/enterprise/sectors/textiles/single-market/textiles-names-legislation/index_en.htm Gherzi Group 2010 “Outerwear: Overview and Marketing Guide on Switzerland and the Major Markets in the European Union.” Swiss Import Promotion Programme, Zurich. Hanrahan, W 2007 “Business Environmental Audit: Critically Assess the Strategic Direction of the Nike Brand.” University of Newcastle Upon Tyne. Kiley, D 2005 “Reebok and Adidas: A Good Fit,” Bloomberg Businessweek, 4 August 2005. Accessed 5 March 2012 from http://www.businessweek.com/bwdaily/dnflash/aug2005/nf2005084_8340.htm Piggott, J & Cook, M 2006 International Business Economics: A European Perspective. Palgrave Macmillan Thibault, L 2009 “Globalization of Sport: An Inconvenient Truth.” Journal of Sport Management, Jan 2009, Vol. 23 Issue 1, p1-20 Read More