New Balance Athletic Shoe Inc - Case Study Example

 New Balance Athletic Shoe Inc Introduction New Balance Shoe Athletic Inc. (New Balance) is one of the world’s major retailers of athletic footwear and sports apparel. From its base in Boston, Massachusetts, United States; the company markets its products to over 120 countries globally or across six continents. The company’s product mix encompasses gents wear, ladies wear, children wear, footwear, athletic merchandise, and visual frames, among other assorted merchandise. The company’s products are marketed through a variety of brands that include the flagship name New Balance; Dunham, PF Flyers, Aravon, Warrior and Brine. New Balance supply chain encompasses independent distribution channels to retail its products while also now actively trading online through its own website. By the end of 2008 New Balance had over 4,000 employees and $1,640.0 million in reported sales. Macro Analysis The current global economic recession has led to the shrinking of many markets as consumers’ cutback on spending especially on non-essential consumer goods. The downturn has continued unabated from 2008 despite the large infusion of funds to the markets by governments. The large scale employee layoffs has contributed to many firms going bust as credit availability is curtailed leading to less demand for the consumer products. The International Monetary Fund (IMF, 2009) predicts a grim scenario of a sluggish recovery globally. This bleak economic forecast reflects on the reduced consumer spending especially on non-essential products like clothing (Doll, 2005). The fashion and garments industry encompassing footwear has similarly been unfavourably affected by the ongoing global recession with many indicators pointing to a condensed market for the current year 2009 (Yildiz, 2009). The market has been contracting due to the credit squeeze prevailing hence impacting on the spending patterns of many consumers. However this negative trend provides opportunities for larger firms like New Balance as many smaller firms are forced to merge with the larger corporations. Nonetheless most markets in the developed world are currently experienced upsurges including the Dow Jones Industrial Average and the S&P 500 (Conrad, 2009). Other challenges include the continued threat of counterfeit products, mainly from China (Qiuzhi Footwear). Apart from eroding the firm’s revenue, the continued issue of counterfeit substandard products affects the company’s quality levels perception to the public hence impacting on the company’s credibility. The company’s heavy reliance on external suppliers also from China rendered the company vulnerable to extended delays. These include: making purchase orders (one week); manufacture of the product by the supplier (six weeks); and shipping (five weeks). Orders were traditionally placed on monthly basis before the years 2000s (20,000 pairs). New Balance has since then revamped the whole process by initiating several measures including: placing fewer orders on weekly basis, and suppliers allowed by New Balance to ‘pre-buy’ own material. These measures have reduced the turnaround time from 12 weeks to nine weeks. Comparative Industrial Analysis The industrial analysis was conducted via an evaluation of the renowned publications on the footwear industry and New Balance and competitors’ websites information. New Balance Inc. possesses several wholly-owned auxiliary firms in Europe, Asia, Australia, Americas and Africa. In addition New Balance has evolved a number of joint projects and distribution channels worldwide. The firm has established five manufacturing plants within the United States: two in Massachusetts, and three in Maine (newbalance.com, 2006). However, New Balance has opposed public ownership, maintaining private equity to enhance its independence and a social responsibility. Even though the company lags behinds its major competitors Nike, Reebok and Adidas, it has discounted relocating its manufacturing plants abroad unlike her rivals. This adversely impacts on the company’s production expenditure and overall revenue. The company is nevertheless more focussed on manufacturing as opposed to marketing unlike the rival firms that far outspend New Balance in brand advertising while maintaining scaled down production expenditure (See Exhibit 2 - Appendix). The proportion of the marketing expenditure in terms of net revenue is therefore considerably lower than those of competing rival firms. According to Herb Spivak, New Balance vice president operations, the company is unique in that it does not endorse athletes but rather, “aim to make every one of our shoes a performance product as opposed to just a fashion product…fit is a critical performance characteristic” (Bowen et al, 2008, p.4). Although most of the company major rivals spend millions in endorsement deals with major athletes and heavy advertising, New Balance has conversely concentrated on research, design, and domestic manufacturing. This was accentuated by its 1992 campaign of ‘Endorsed by No One’ though it only enjoyed a three percent U.S. market niche then (Pereira, 2005). Another campaign dubbed ‘For love or Money’ was launched in 2005. New Balance global marketing vice president Paul Heffernan reiterated that, “It’s all about everyday athletes playing for the love of the game” (Aoki, 2005). This is contrasted with another advert by rival Reebok within the same month that featured NBA superstar Yao Ming, Olympic gold medallist Kelly Holmes, actress Lucy Liu, and tennis player Andy Roddick with a tagline ‘I Am What I Am’ (Aoki, 2005). In product design, New Balance has maintained a width sizing and fitting for comfort arrangement rather than developing fashionable styles. The company has therefore directed most of its products to the older generation of consumers within the 25 – 49 age group range. New Balance is highly focused in design and development, but the company is nevertheless very conservative. The company has started to diversify and in a two-fold developmental model this underscored; first through the improvement of the existing brands; and secondly by the integration of latest technologies exemplified by the Absorb EX and Zip designs both high quality ‘responsive-cushioning’ technologies that are targeted at the youthful clientele. In 2007, New Balance launched CoCoNa, a natural product technology extracted from coconut plants for its apparel line. Internal Analysis A company’s growth is usually gauged according to its stock performance; however New Balance being a non-public listed firm, its progress can be evaluated through its published returns and other reports from economic analysts. A company’s growth variance has been predominantly attributed to systematic market influence (over 50 percent), industrial influence (13 percent), and the balance due to the firm’s own performance. The Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce identifies several economic indicative parameters to discern a firm’s stock performance (Arnold, 2002) (Appendix: Table 3). Although monetary statistics are a good indicator of the financial health of a company, additional extensive investigation among the fiscal and financial journals give a more balanced portrayal of a company’s status. Corporate Culture New Balance has maintained a corporate culture that emphasizes on teamwork and empowering employees. Similarly the company has made social responsibility a long-standing commitment hence “make people feel good about dealing with the company”. The company has also encouraged an entrepreneurial spirit of risk taking from the manufacturing employees to senior managers. The later are organised in cross-functional teams that are the driving force of change in the company. According to John Withee, the CFO, “continued improvement is a mantra here. Do the best we can, work cross-functionally and work towards a common goal” (Bowen et al, p.5). This was exemplified by its introduction of the hitherto overly expensive 990 series running shoe that was retailing at double the average price of other athletic shoes. Despite the high retail price the shoes were an immediate success and have become one of the company’s top-selling products accounting for 3.5 percent of total sales. Distribution In 2004, New Balance introduced New Balance Exceptional Excellence (NB2E) scheme that was modelled after the Toyota Production System (TPS) to its footwear production. This was aimed at enhancing the company’s distribution channels to a minimum of 24 hours. New Balance channels its products mainly through smaller retailers with a network of over 3,500 representing 12,000 locations. The company’s largest retailer is Foot Locker a major chain network which has over 3,000 stores within the U.S. market. New Balance has separated the retailers into two major groups’ specifically: key accounts and speciality dealers. The former are further dissected into six tactical units and 49 other units while the speciality dealers were subdivided further into three main channels that include: elite running shops, autonomously operated shops, and independent family shops (See Exhibit 3). The company has no in-house sales force but rather continues to use independently operated sales agencies that are exclusive to New Balance paid through commission (Bowen et al, 2008). Although they are not permanent employees, these sales teams have maintained their loyalty to the firm for many years. Large accounts were directed by ten senior salesmen including six strategic account managers. The speciality accounts however were run by an average of 100 independent agents supervised by five regional managers. According to Fran Allen, New balance vice president Sales and Service, “We have a loyal group of sales people, and their longevity of service provides us with a distinct edge over our competitors” (Bowen et al, p.7). Allen attributed the sales force loyalty to growth illustrated by his persistence when with the firm in 1991 when the firm sold $84 million shoes in the United States as compared to the over $1 billion registered in 2007. Gap analysis and Assessment of Current Strategy A company analysis requires both qualitative and quantitative company analysis. New Balance qualitative analysis covers its strategic plans, commercial set-up, strength and weaknesses, potential, and risks envisioned. The critical analysis utilised include Porter’s Five Forces Model (Competitive Environment), PESTLE (Political-Economic-Social-Technological-Legal- Environment) Analysis and a SWOT (Strength-Weakness-Opportunity-Threat) Analysis. The detailed Porter’s Analysis and PESTLE Analysis are given in Tables 1 and 2 respectively in the Appendices. The results are summarized into the SWOT Analysis illustrated in Table 3 (see appendices). New Balance Athletic Shoe Inc. core products are based on its footwear and athletic apparel manufacture, the company has however diversified into other associated merchandise development. The company has also pioneered various innovative products aimed at giving it a competitive edge. Its global sway ensures that it’s able to tap into the expanding global footwear market. However, New Balance main shortcoming is in the area of brand awareness when compared to its rivals due to its shunning of celebrity endorsements. Strategic brand management is crucial for firms to develop enduring growth and profitability hence brand awareness and strong associations with the trademark guarantees lasting success (Gladden & McDonald, 1999). Additionally, New Balance faces stiff competition from other global companies like Nike, Reebok and Adidas plus the emergence of counterfeit products. Nonetheless a SWOT analysis of the company’s key commercial arrangement and procedures, history and commodities, which offers a synopsis study of its key revenue outline and stratagem illustrate that New Balance Inc. has more potency than limitations and better prospects than threats (See Table: 3). A gap analysis reveals that New Balance can breach the fissure occasioned by its lack of star endorsements and slow penetration of the main youthful market. Similarly, the company should consider shipping out its manufacturing sector overseas to lower its production costs. Similarly a Gap Analysis on New Balance Athletic Shoe Inc indicates the reforms necessary to improve the company’s current lethargy (see Table 5). Options, Recommendations and Implementation Issues New Balance has managed to harness its core capabilities to cultivate a competitive edge in the shoe and apparel industry, however our analysis has revealed that the company has not fully realised its potential. Basically a conservative company, New Balance Athletic Shoe Inc. has shunned the widespread tradition of celebrity endorsements and overseas production regime, nevertheless the company has managed to maintain its overall market presence by manufacturing high-end innovative footwear and sports attire. Recommendations The company use of an independent distribution networks has reduced its expenses incurred from domestic production while enjoying a valuable employee loyalty but its supply chain is not optimised and should be further improved to reduce the turnaround time. The company has incorporated a number of modern hi-tech programs that are aimed at streamlining its distribution channels. These include Balance Exceptional Excellence (NB2E) system and other high end technical solutions. New Balance is beset by the aggravating fabrication of counterfeit products that seriously erodes its market share and revenue. A more thorough regulation of the international markets should be conducted to safeguard its brand name and markets. This can be enforced through the international and local statutes which require the support of the U.S. government plus the international regulators. The company’s rebuff of celebrity endorsements is nevertheless inadvisable. Nike and Adidas/Rebook have successfully engaged popular athletic sportsmen and teams to enhance their brand names. Nike Air athletic sneakers were greatly popularised by basketball superstar Michael Jordan to become the highest selling brand shoe in the world. To further entrench and enhance its market share, New Balance should seek endorsements form recognized global iconic athletes and seek more overseas manufacturing links to reduce its production costs. The company’s slow penetration of the traditionally booming youth segment is imprudent as they constitute the more robust consumers than New Balance core clients. By evolving more fashionable products like her competitors, New Balance can successfully penetrate the youth market. Trendy brands from the dominant footwear firm, Nike continue to dominate the market due to the focus on this active market segment. This will mean that New Balance will have to diversify from its core trademark design of width and form fitting shoes to encompass the more fashionable styles. This market segment will also require the company to secure the services of celebrity athletes or music stars to endorse the brands. Conclusion New Balance has a healthy financial and market outlook that however needs to be further entrenched and enhanced to face the challenges poised by the rival firms and the current economic recession. The footwear and apparel industry is well supported macro economically by the various governments in the developed world that have contrived a conducive environment for doing business. The company’s organisational structure is well constructed but however is too conservative hence not fully utilising its well endowed potential. This is especially exemplified in the minimal market presence in the youthful segment. The company’s distribution network is sound but the company should also like the main competitors erect display stores at strategic areas to further market its products. The brand name should also be further improved through celebrity endorsements. The company has nonetheless initiated a raft of measures to enhance its organizational network and penetration of the youth market. Similarly the firm’s distribution systems have been improved considerably. References Aaker, A. & F. Joachim Shaler 1999. The lure of Global Branding. Harvard Business Review, 77(6): 137—144 Aoki, N. (2005, February 28). New Balance Latest Ads Celebrate The Older Amateur. The Boston Globe. Arnold, G., 2002. Corporate Financial Management. 2nd ed. London: Financial Times Pitman Publishing. Business Wire, 2006. New Balance Achieves its Centennial Year; Global Athletic Manufacturer recognizes Past Milestones and Looks to Innovative Future, January 5, 2005 [Online: Factiva.com] Conrad, R. 2009. The Other Shoe. Retrieved October 2, 2009, from KCI Doll, V. 2005. Industry Overview: Footwear Manufacture/Wholesale/Retail. College Park, MD: First Research, Inc. Empson, L. 1999. The challenge of Knowledge Management, Mastering Strategy (Part Two), October 4, 9-10. Gladden, J. M., & McDonald, M. A. 1999.. The brand management efforts of a niche specialist: new balance in the athletic footwear industry. (The Brand Management Efforts of a Niche Specialist). Encyclopedia.com: International Journal of Sports Marketing & Sponsorship. Hansen, M. T., N, Nora, & T, Tiarney, 1999. Whats your strategy of Managing Knowledge? Harvard Business Review. 77(2); 106—116 Hamet & C. K. Prahalad, 1989, Strategic intent, Harvard Business Review, 67(3): 63—76. H. Kent Bowen, R. S.-I. 2005. New Balance Athletic Shoe Inc. In J. Pereira, New Balance Sneaker Ads Jab AT Pro Athletes Pretenlons (p. March 10). New York: Wall Street Journal. Investing.com: International Monetary Fund, 2009a. Global Financial Stability Report (GFSR) Market Update. [Online] International Monetary Fund. Available at: [Accessed Sept 29, 2009]. International Monetary Fund, 2009b. World Economic Report (WEO) Crisis and Recovery. [Online] International Monetary fund. Available online at: [Accessed Sept 29, 2009]. Lel, M. A. Hitt, & FtA. Bettis, 1996, Dynamic Core Competencies through Metalearning and Strategic Context, Journal of Management, 22: 247—267. McEvily, B. & A. Zaheer, 1999. Bridging ties: A source of firm heterogeneity in competitive capabilities. Strategic Management Journal, 20; 1133—1156. McGrath, R. B. 1999. Fast Forward: Real Options Reasoning and Entrepreneurial Failure, Academy of Management Review, 24:13—30 McGrath, MacMillan, & Venkataraman. 1999. Defining and Developing Competence, p.253. Miner, D. A. 2007. ‘It’s Gotta be the Shoes, Money!’: Sneakers, Identity, and Consumption in the Making of an Authentic (Black) Basketball Culture. East Lansing, MI: Michigan State University. Newbalance.com. (2006). Fact Sheet: New Balance Athletic Shoe, Inc. [Retrieved September 29, 2009] from newbalance.com: Stephanie Nan, 2005. Putting a Fashionable Fast Forward; Pacific Shipper, September 23, 205 [Online: Factiva.com] Yildiz, A., 2009. Ready-wear industry may see more problems in 2009. Today’s Zaman, [Online] 2 Jan. Available online at: [Accessed Sept 29, 2009]. Appendices Table 1 Competitive Environment Analysis (Porter’s Five Forces) Bargaining Power of Suppliers: New Balance is athletic footwear and apparel manufacturer. It needs to source its supplies and invest in warehousing domestically. It also needs to depend on logistics service providers. The company designs its products and sources mostly commoditized footwear and apparel. However, it expends a lot of resources in developing its regular suppliers to its corporate requirements within domestically rather than outsourcing abroad. As such, the switching outlay of suppliers is relatively is high. The bargaining power of its suppliers is also perceived to be high. Bargaining Power of Customers: New Balance in the business of selling athletic shoes to the more mature clientele. Though the company has built a strong niche for itself, its customers have a minimum range of choices as compared to its main competitors. Although its customers are not organized and lack a collective bargaining forum, switching cost for its customers is relatively low. Generally, the bargaining power of her customers is apparently high. Threat of New Entrants: The footwear industries necessitate generating a unique brand presence and sustaining it, which acts as the primary entry barrier in an otherwise competitive market. With such daunting hurdles, the entry barrier into this industry is quite high. However, New Balance seems to have created a strong brand presence, which will help in mitigating the risk of low entry barrier into its market. Threat of Substitute Products: With a vibrant highly innovative competitive environment, the threat from substitute products is very high due to the very nature of the footwear and apparel business. The ever-changing fashion industry poses a prominent with the possibility of new future trends and products threatening the company’s market share. The overall the threat of substitute product is therefore quite high. Competitive Rivalry within the Industry: The nature of the industry is highly competitive with several strong competitors in the field. The competitive rivalry within the industry is very high as expedited in the negative marketing advertisements. Table 2 PESTLE Analysis Matrix Political Economic Political intervention in this industry is minimal. Risk of adverse legislations within the major operating markets as regards New Balance products not very high. However, adverse legislation could arise owing to sourcing from other countries and sourcing from suppliers who use unethical means of production like child labour. Inter-country relationships in this region in good. However, relationship with sourcing countries may not be very good. No price regulation or control is envisaged in this industry. New Balance performance is directly proportional to the level of consumer spending, which is dependent on the domestic and global economy. New Balance business is geographically is not restricted to the U.S. The company has greatly diversified into all the major regions of the globe. Seasonality/ weather issues usually have minimal effect on the business. The company seems to have a robust internal cash flow situation with increasing revenues and profit. New Balance is privately owned enterprise and has minimal indebtedness Privately owned hence no dividend policy could hurt investor sentiment. Social Technological Client attitudes/ opinions and media views or outlook is generally affirmative. The company pioneered the design of orthopaedic shoes and specialises in customer compatible shoes rather than fashion designs. Due to its emphasis on domestically sourced production, New Balance enjoys rapport with most consumer observers. The company has maintained invested highly on its workforce with veritable employee training and development; staff loyalty and commitment is therefore high. New Balance has a strong management and support team. The company relies on a reliable supply chain of retailers. The company however needs to establish own display stores to exhibit its product line. The company has maintained an innovative edge by integrating latest technology in its products. Innovative concepts: twofold i.e. redesigning or improvement of existing brands and designing new products. Promoting an entrepreneurial spirit at all levels of the company both at lower manufacturing end and at senior management. Innovative designs e.g. Absorb EX and Zip high Legal Environmental Litigation from dissatisfied customers is always a risk. New Balance is very sensitive to its environment as exhibited in its various social responsibility ventures. New Balance requires acquiring strategic acquisitions to strengthen its market share. Strategic tie-up with logistics partners like Footlocker, The Sports Authority, Finish Line, and The Athletes Foot distribution firms should be enhanced. Table 3: SWOT ANALYSIS Strengths Weakness Innovative Products Lack of Celebrity Endorsements International Links Minimal Branding Distinctive Products Over-reliance on Suppliers Low Market Presence in the high Spending Youth Groups Solid Management Team Loyal Employees Secure Distribution Channel Opportunities Threats Expanding International Footwear Markets Escalating Raw Material Costs Expanding Fitness and Accessories Markets Stiff Competition Resilient Apparel Market Emergence of Counterfeit Products Table: 4 Leading Indicators of Economy Average weekly hours of production workers (manufacturing) Average weekly initial claims for unemployment insurance Manufacturers’ new orders (consumer goods and materials industries) Vendor performance – slower deliveries diffusion index Contracts and orders for plant and equipment New private housing units authorized by local building permits Change in manufacturers’ unfilled orders (durable goods industries) Change in sensitive materials prices Stock prices, 500 common stocks Money supply (M2) Index of consumer expectations Table 5 New Balance - Gap Analysis End State Current State Gaps/Action Incorporate younger clientele Minimal Presence in the Market Develop New Products Enhance Brand Name/Celebrity Endorsements No Celebrity Endorsed Slow Brand Penetration/Engage Popular Athletes Reduce Production Costs Domestic Production cutting on Profits Engage Foreign Partners for Production Enhance Supply Chain Management Lethargic Production to Retail Time Develop Improved Systems and Technology Reduce Counterfeit Products Widespread Imitated Products Engage Regulatory Authorities/Create Customer Awareness Read More