Adidas Strategic Management of International Enterprises - Essay Example

Strategic Management of International Enterprises (Adidas) Table of Contents Introduction 3 Section Company Overview 4 Section 2: Adidas Competitive Advantage and International Strategy 5 2.1 Competitive Advantages of Adidas 5 2.2 International Strategies of Adidas 6 Section 3: Yip Global Strategy of Adidas 8 Section 4: Five Forces Analysis of Adidas 11 Section 5. SWOT Analysis 15 Section: 6 Diamond of National Advantage of Adidas 17 Section 7: Adidas Financial Analysis 20 Section 8: Critical Issues and Recommendations 22 Conclusion 23 References 24 Bibliography 27 Introduction The notion of strategic analysis refers to an empirical study concerning the strategic measures and practices that leverage the organisations to gain competitive advantage. In relation to the recent competitive environment of internationalisation, the strategic management processes of the marketers are often observed to build their sustainable position in a global setting1. The Multinational Corporations (MNCs) from different industrial fields are highly motivated to expand their overseas subsidiaries across the different geographical regions with the aim of stabilising capabilities of their major organisational resources. Moreover, establishing strong brand image and a sustainable business position in the global business environment is also a common and widely practiced motivational factor for the multinationals, which can frequently be observed in the recent pace of globalisation2. In keeping with the unconventional trend of internationalisation of the multinationals, the primary aim of this report is to critically analyse the strategic directions and practices of Adidas Group, a German based footwear manufacturing giant in the present global business environment. In order to critically assess the strategic direction of the company, the report would focus on examining the international operations of Adidas that led the company to sustain its dominant position in the global footwear manufacturing and marketing industry. Moreover, the report also critically evaluates issues surrounding its future strategic endeavours. In this context, the report focuses on identifying potential issues driven by the current business trends and develops effective measures that can enable Adidas to uphold its competitive position in the global footwear business industry. Section 1: Company Overview Founded in the year 1920, the Adidas Group (Adidas) is a highly valued and a renowned brand operating in the industrial periphery of manufacturing footwear and sports apparels for both men and women. The company is highly envisioned with the aim of being as the dominant marketer in providing best portfolio of sports brands to the customers across the different global markets3. The corporate strategy of Adidas significantly incorporates a wide range of strategic measures that ensures to build its strong and sustainable position in the competitive sports goods business industry. In relation to the current business performance of the company, the corporate strategies can be observed to play a crucial role for Adidas to build its strong brand position in the present competitive footwear and sports apparel business industry4. Adidas is now one of the renowned brands around the world, which operates above 1200 independent factories and produces its quality based footwear and sports apparels in 65 overseas nations across the world. According to the recent observation, the global supply chain system of the company incorporates a multi-layered characteristic by integrating a wide range of business partners. Adidas is further regarded as one of the leading companies in the footwear and sport apparel industry which has completely remained transparent with its key suppliers. The key suppliers of the company are generally from the United States, Asia, Europe and Middle-East Asian countries that are likely to provide major support to the company for producing and marketing its exceptional range of footwear and sports apparels5. Section 2: Adidas Competitive Advantage and International Strategy In relation to the current business position of Adidas, it has been apparently observed that the company implements exceptional ranges of strategic measures and practices leading to its competitive position in the footwear and sports apparel business industry6. In this regard, a few of the major competitive advantage and international strategies of Adidas have been briefly discussed in the following section. 2.1 Competitive Advantages of Adidas 2.1.1 Aligning Business Operations in line with Changing Consumers’ Trends: The competitive advantage of Adidas in the context of changing customers’ trends can be characterised into five major aspects that led the company to gain considerable outcome than the other marketers in the similar industry7. 2.1.2 Fit for Life: “Sport is becoming more embedded in consumers’ everyday lifestyles.”8 In this regard, enhancing value of individual life, socialising and fun through producing and marketing footwear and sports apparels are a few of the major strategies of Adidas. The strategic measures by complying with these notions enable the company to gain competitive advantages over its global rivals. 2.1.3 Celebrating Individuality: The continuous effort of research and development regarding the changing trends in sports apparel and footwear items is a key attribute of Adidas leading to its competitive position9. 2.1.4 Back to Basics: According to the recent trend in the global footwear and sports apparel business industry, customers are often observed to be motivated with the desire for being simple and authentic. Incidentally, the process of making consumers’ lives easier by delivering innovative and widely accepted products is also a key advantage leading to the competitive position of Adidas10. 2.2 International Strategies of Adidas 2.2.1 Driving Long-Term Development: In relation to the current business performance of the company, the continuous endeavour of long-term development regarding the group along with its key brands can be considered as the major global strategy of Adidas. In this purview, the continuous development of Adidas Group and its key brands such as Reebok has been highly witnessed as a key strategy for the company to build its long-term sustainability in the respective industry11. 2.2.2 Brand Architecture and Differentiation: The strategy of brand architecture and differentiation of products to collect the interests of the global customers is one of the key competitive strategies of Adidas. The strategy is highly influenced by the leadership associated with the product innovation, marketing and communication that led the company to maintain its dominant position in the footwear and sports apparel industry. Besides, activation and validation of the key brands and other sub-branded items through an effective set of promotion partnerships can also be considered as a major international strategy of Adidas behind its leading position in its respective industry12. 2.2.3 Marketing and Communication Leadership: In order to maintain the dominant nature in the current footwear and sports apparel industry, the marketing and communication strategy of Adidas is focused on building clear desirability with each segment of global customers. In this context, it has been determined that the creation of innovative and inspirational brand marketing campaigns along with continuous development of effective communication techniques significantly help Adidas to position its wide range of footwear and sports apparel brands in the global markets. Building brand equity can also be considered as an effective international strategy of Adidas. The strategy helps the company to achieve its commercial goals and re-energise its leading position in the global markets13. Section 3: Yip Global Strategy of Adidas Yip’s global strategy provides significant insight regarding the industry forces which create the potential for an organisation in order to become global. According to Yip, there are four set of drivers which trigger the degree of globalisation in an industry (see figure 1). The four forces for footwear and sports apparel industry are described below: Figure 1: Yip’s Global Strategy for Adidas Market Drivers: The extent to which customers’ requirements, distribution channel and marketing approach are global can determine the level of globalisation of an organisation. With respect to footwear and sports apparel industry, customers in different parts of the world increasingly demand different products and services. Thus, for Adidas, opportunities can appear by marketing less standardised offerings to the customers, in order to fulfil the diverse requirements. With respect to footwear products the requirements, tastes and preferences vary significantly by customers and are subject to cultural aspects, disposable income and level of similarity. This applies to the industrial products as well. Thus, the key for Adidas to exploit the international market opportunity depends on understanding which components of products can be standardised without compromising the local preferences and conditions. Therefore, Adidas provides similar quality in its products no matter where they perform in the world. Furthermore, in footwear and sports apparel industry, international distribution channel is emerging in order to meet the needs of global customer base. Besides, as consumption pattern of footwear products has become more standardised, international branding and marketing will become more vital for Adidas in order to achieve success14. Cost Drivers: An industry having high level of fixed expenses has a high tendency to become global, because such expenses can be reduced by high sales volume. Adidas has taken the advantages of such cost drivers by expanding the sales in the global level. High sales volume has resulted in low level of fixed expenses as Adidas obtain advantages from higher economies of scale. At the core of cost driver for Adidas is the fact that a single market is no longer sufficient enough to support competitive advantages on an international level. Consequently, global reach of Adidas has far-reaching impact on the cost of its products. The higher the international reach of Adidas, the higher would be the economies of scale. Besides, the cost drivers also make it challenging for new entrants to enter in the footwear and sports apparel industry15. Competitive Drivers: The existence of international competitors from various nations along with the level of exports and imports and interdependence between nations are vital drivers of globalisation. Considerable level of footwear and sports apparel industry sales is materialised by export and import volume. Furthermore, at present point, Adidas has faced strong competition from other popular brands such as Nike and Puma among others. These competitors also provide quality products with reasonable prices. Furthermore, the competitors also have strong presence in the international market and engage in various marketing and branding activities. Since the underlying characteristics of the footwear and sports apparel industry have not changed, competitors have preserved their unique competitive advantages. This has caused footwear and sports apparel industry to globalise rapidly16. Government Drivers: Government globalisation drivers comprise trade policies, technological standards, regulations and subsidised competitors among others. These aspects help to shape the international competitive environment in the footwear and sports apparel industry. In this context, it can be stated that the growing trade liberalisation due to reduction of trade barriers has enhanced the potential of footwear and sports apparel industry to become globalise. Hence, it encourages Adidas to invest in foreign business operations. Furthermore, there is a high tendency of government to regulate the marketing activities on the basis of international standards. As a result, Adidas has been able to develop marketing and advertising campaign that meet the international standards, such as the ability to offend certain cultures have reduced17. Section 4: Five Forces Analysis of Adidas Porter’s five forces model is a valuable tool for evaluating the industry structure of an organisation. Porter stated that there are five key forces which can determine how effectively an organisation can perform in the existing marketplace. The five key forces also have considerable influence towards industry profitability and help to make key decisions about the business18. The five forces are described below: Barrier to Entry: Adidas operates at a large scale which provides the organisation the advantage of controlling the expenses of its products over other rivals. Adidas also has strong branded differences for its products in the footwear and sports apparel industry. The brand name is renowned globally and thus plays a vital part for making purchasing decisions. Furthermore, Adidas also has strong online presence. Thus, it is hard for entering into the footwear business by using traditional bricks and mortar business model. However, it is quite easy for competitors to enter into the online segment of footwear business because the capital requirement of online business is quite low. Consequently, it can be stated that the barriers of entry in the footwear and sports apparel industry are moderate19. Bargaining Power of Buyers: There are a large number of customers in relation to the number of organisations in the footwear and sports apparel industry. Furthermore, the increased use of e-commerce has allowed for better accessibility of different products and intimacy among users regarding product features. On the other hand, the switching cost of footwear products is also quite low and is subject to customers’ preferences. Hence, it can be stated that the bargaining power of customers in footwear and sports apparel industry is high. Thus, organisations such as Adidas is required to constantly invest in proper marketing and branding activities in order to increase the sales and market share20. Bargaining Power of Suppliers: There are several suppliers in the footwear and sports apparel industry. In reality, there is very little difference among the raw materials provided by suppliers. Raw materials such as leather, rubber and cotton are easily available in the marketplace. Thus, it can be stated that the bargaining power of suppliers in the footwear segment is quite low and Adidas has strong power over the suppliers. Furthermore, Adidas is able to quickly switch the suppliers because of its strong international network. Threats of Substitutes: In the footwear segment, the inclination of customers to substitute products is quite low, since there are very few alternatives to switch. For example, certain substitutes for sports shoes can be boots or bare feet among others. Customers are not likely to use substitute products because of performance specification. Therefore, it can be stated that the threat of substitutes in footwear and sports apparel industry is quite low21. Rivalry Among Existing Competitors: There is high level of rivalry among different players in the footwear and sports apparel industry. Large organisations such as Nike and Puma have increased enormously during the last few decades. Their international expansion has expanded in almost every continents and such expansion was attributed to the emergences of internet and e-commerce. Online selling has enlarged the market reach of footwear organisations and allows them to enhance sales while maintaining low operational expenses. Almost every large organisation has their own website which includes virtual stores and provides convenience to the customers. Competition is quite fierce in the footwear and sports apparel industry and those who dominate or lead the market spend a large amount of money for marketing activities. The following figure demonstrates the Porter’s five forces model for Adidas22. Figure 2: Porter’s Five Forces Analysis for Adidas Section 5. SWOT Analysis Figure3: SWOT Analysis of Adidas Group23 Strengths Strong brand image of the Group Wide range of renowned brands and sub-brands Strong financial performance Innovation and inspirational brand marketing techniques Weaknesses Extensive outsourcing of global production to the third-party manufacturers Higher pricing strategy of the products as compared to the existing rivals Higher level of homogeneous products or leading brands Opportunities Emerging trend in the global footwear and sports apparel business industry Expansion of ‘Sports Style’ in fast fashion with its NEO model Growing demand of fitness-brand in the global market Threats Internal operational conflicts due to the integration of sub-brands Instability in the global economic development Existence of strong competitors and increasing numbers of new entrants in different global markets With regard to an in-depth understanding derived from the SWOT analysis, it has been identified that the strong and renowned brand position is amid the major strengths of Adidas. Moreover, the existence of prominent sub-brands and continuous innovation and development of products can also be regarded as an effective set of strength factors of the company24. On the other hand, extensive focus on outsourcing global productions through third-parties in different emerging markets can be a major weakness of Adidas to sustain its leading position. With reference to the recent observation, the company outsources a majority of its global production to the third-party manufacturers which has been recognised to create numerous problems to the company. Similarly, the higher level of homogeneous products and increasing pricing structure can also be regarded as a major weakness for Adidas to uphold its dominant position in the global footwear and sports apparel industry25. In the context of opportunity, continuously emerging trend of footwear and sports apparels along with growing demands for fitness-brands can be regarded a major opportunity for Adidas to obtain a large number of potential clients. More significantly, its recent strategy of expanding ‘Sports Style’ in fast-fashion market with its latest NEO brand would further enable the company to achieve a large market share across the different geographical locations26. However, the internal issues associated with the integration of sub-brands such as Reebok can be a major threat for Adidas to uphold its brand value and image in the global footwear and sports apparel industry. Nevertheless, the strong market position of the other key competitors and rising volatility of the global economy especially in the European and Asian countries may cause a major threat for Adidas to achieve its commercial goals. Section: 6 Diamond of National Advantage of Adidas Porter’s diamond model generally refers to an effective framework in order to ascertain appropriate understanding about the national competitive advantages that enables companies to successfully achieve their desired business goals. The model essentially contains four key dimensions that significantly reveal why marketers are likely to become key market leaders in different global regions or countries. The following pictorial representation depicts the key elements within the diamond model of national advantage for Adidas in the footwear and sports apparel industry. Figure: 4 Diamond of National Advantage of Adidas27 Factor Condition: The factor condition in the Porter’s diamond model ascertains the ability of a nation to turn its natural resources and infrastructure into an effective set of competitive advantages. In relation to the present business performance of Adidas, the company has gained a number of competitive advantages across its numerous manufacturing locations around the world. The developed and developing countries from the Americas, Asian and EMEA regions have been witnessed to deliver abundant resources that influence the business performance of Adidas that further lead the company to gain competitive position28. Demand Conditions: This factor in the Porter’s Diamond model significantly refers the sophistication level and the number of potential customers for a particular product or service from an industry29. In this regard, the sophisticated consumers’ demands regarding fitness-brands and fast-fashion sports products in the US, the UK and Asian market have been observed to strengthen the competitive position of Adidas30. Related and Supporting Industries: The aspect basically provides an apparent view regarding the availability of other industries in a nation through which a particular organisation can leverage adequate support to achieve its commercial goals. In the context of Adidas, the company has been observed to gain abundant suppliers while performing its manufacturing functions in the US, European and EMEA regions31. Company Strategy, Structure, and Rivalry: The factor in the Porter’s diamond model depicts the governing condition of the country in which the corporations are managed and organised. Moreover, it also represents the intensity of competition between the companies underneath a similar business industry. According to the observation of current business position, Adidas significantly gains a major support from the nation by critically recognising the competitive pace of its major rivals which in turn helps it to formulate competitive strategies32. Section 7: Adidas Financial Analysis The sales of Adidas are geographically diverse and have high exposure in European region as well as emerging markets. It also has significant exposure in China. Irrespective of high exposure, Adidas faced challenges due to constant economic uncertainties. Adidas has high retail distribution mix and the sales are primarily driven by Western European region. In the year 2013, the sales of Adidas were about €14,492 billion, representing 3% increase in sales than 2012. Among different segments, the sales in the retail sales have increased by 14%. In relation to the sales, the operating expenses of Adidas had decreased by 3% in 2012 to about €2,055 billion. The key factor attributable to this reduction in operational expenses is the decrease in the loss of currency conversion, which has counterbalanced the expenditures particularly for marketing and consultation costs. In the year 2012, Adidas has recorded profit of about €231 million which was a significant increase than the losses it incurred in 2011 of about €9 million. The increase in net sales is a key attributable factor to the increased profit of Adidas33. In summary, the financial performance of Adidas has improved. Adidas also experienced increase in the amount of assets to about €7,030 billion in 2012 in comparison with €6,046 billion in 2011. The following figure demonstrates the five year overview of sales of Adidas. Figure: 5 Annual Sales of Adidas Group 2008-2012 Section 8: Critical Issues and Recommendations From the SWOT analysis, the key issue that have been identified for Adidas in the international market is to maintain its global competitiveness. Adidas faces strong competition from other footwear brands which have significant influence on its performance. Furthermore, Adidas also faces certain internal conflicts due to the integration of Reebok in the organisational culture. Apart from these, the recent economic recession also generated challenges for Adidas to operate effectively in the international market34. Thus, in order to maintain its competitive position, Adidas requires enhancing its market reputation. The organisation should observe numerous facets of competitors such as enhancement of workforce capability or enhancement of management, rather than only focusing on sponsorships and advertisements. Furthermore, it is also recommended that Adidas can perform effectively if it obtains the feedback of customers for enhancing the brand image35. On the other hand, concerning the internal organisational conflict, Adidas requires to incorporate Reebok effectively in its organisational culture. It is also highly recommended that Adidas undertakes evaluation of the issue with respect to brand management in emerging markets. In order to increase the sales, Adidas must launch more products in the emerging markets where there is high demand of footwear items. Although Adidas has demonstrated satisfying performance in the recent years but it should expand its geographic scope for enjoying more economies of scale36. Conclusion Achieving competitive advantages over the existing rivals has long been witnessed as one of the common strategic measures of the multinationals. In relation to the rapidly increasing competition in the footwear and sports apparel industry, organisations are highly motivated to develop an effective set of practices that can enable to strengthen their dominant position over the competitors in a respective business market or industry. Correspondingly, the report intends to provide an in-depth understanding regarding the key international strategic decisions of Adidas leading to its continuous success in the footwear and sports apparel industry. In order to critically analyse the international strategies, the report has significantly focused on briefly demonstrating the key competitive factors of Adidas that led the company to strengthen its operation and management functions. Furthermore, the report also provides a clear understanding about the issues surrounding the future development of Adidas. Subsequently, the study also provides an effective set of recommendations through which Adidas can mitigate the potential threats derived from the existing issues faced by the company. References Adidas Group, ‘History’, Group, , 2014. (accessed 8 May, 2014). 1Adidas Group, ‘Supply Chain Structure’, Sustainability, , 2014, (accessed 8 May, 2014). 2Adidas Group, ‘Global Brand Strategy’, Investors, , 2014, (accessed 8 May, 2014). 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