Micro- and Macro-Analysis of Adidas AG - Report Example

Micro- and macro-analysis of Adidas AG Name Subject & Code Instructor Institution Date Table of Contents Table of Contents 2 1. Company profile 3 2.0 Macro Analysis 5 2.1 Porter’s Five Forces model 5 2.2 PESTLE Analysis 7 3.0 Micro-Analysis 9 3.1 SWOT Analysis 9 3.2 Adidas Resources and capabilities analysis 11 4.0 Internationalization strategy 13 4.1 Main global strategy 13 4.2 Advantages and disadvantages 13 4.3 Recommendations on how to sustain its global growth 14 5.0 References 15 1. Company profile Adidas AG is a German multinational corporation that company engages in the sporting goods and equipment industry. Adolf Dassler started the company in 1924, as “Gebrüder Dassler Schuhfabrik,” and re-launched it in 1949 as, “Adi Dassler Adidas Sports.” The company specializes in the manufacture and distribution of sportswear, attires and wearable accessories. The Adidas brand is structured in three divisions: Adidas Sports Style, Adidas Sports Heritage, and Adidas Sports Performance. With more than 55,500 employees worldwide, the Adidas is headquartered in Herzogenaurach, Bavaria. It currently has nearly 100 subsidiaries situated in Europe, the United States and Asia-Pacific. The company’s subsidiaries focus on their specific markets or a function in the manufacturing process. The goods are then marketed under six brand names: Adidas, TaylorMade, Salomon, Mavic, Erima, and Bonfire. The main segments in the industry include athletic footwear, sports apparel, and sporting goods equipment. The industry comprises firms engaged in the designing, manufacturing and marketing athletic and sporting gear, such as clothing and equipment for basketball, hunting, rollerblading, football, fishing, hiking, skateboarding, baseball, tennis biking, golf, snowboarding, surfing, hockey, and skiing (Adidas 2016). Adidas has maintained a financial base. Its sales revenues have shown steady rise since 2011, Euros 14,883 million to Euro 19,291 million in 2016. The company has also witnessed steady growth in gross profit from Euro 7,103 million in 2011 to 9,379 million in 2016 (Adidas Group 2017). The company's equity ratio has remained consistent, showing that the current investors have strong confidence in the company's performance. The company’s finances have been encouraged by currency fluctuations, leading to a rise in sales by 17 percent in 2015 (Shotter 2016). The net sales grew to 14,534 million in 2014 from Euro 14,203 million in 2013. From 2013 to 2014, the gross profit had declined to 6,924 from 7,001 million (Jayawardhana 2016). Figure 1. Horizontal financial analysis of Adidas (Jayawardhana 2016). Figure 2. Horizontal financial analysis of Adidas (Jayawardhana 2016). 2.0 Macro Analysis 2.1 Porter’s Five Forces model The objective of this model is to examine an external analysis by determining the power of suppliers, threat of new entrants, level of rivalry, threat of substitutes, and power of buyers. Rivalry: The key competitors in the sports, good industry that Adidas has to contend with include Nike Ink and Puma. The industry is highly competitive. Much of the competitiveness is rooted in quality and price (Grin 2011). Power of Supplier: In agreement with all consumer-facing organizations, Nike faced challenging trading conditions since the financial crises of 2008-9 and contingent economic slowdown; this has applied in both Western markets (such as the US) and the Asia-Pacific region (Whitehead, 2012). Conversely, Nike has used its established brand equity to take advantage of growing consumer demand in emerging economies (Adidas 2016). The corollary to this has been an expansion of Nike’s value chain in which it has also taken advantage of the lower wage rates paid in those economies (Adidas 2016). Nike has defended the contingent CSR critiques by arguing that it has provided employment in otherwise underdeveloped economies, and paid the established local rate for labor. In HRM terms, this implies a considerable divide between the higher-value strategic and design function retained in the US, and those in outsourced manufacturing (Adidas 2016). Buyer Power: The two key groups of buyers in the sports goods industry include athletes who have to use Adidas's products to optimize their potential, and secondly, ordinary customers who prefer comfortable, stylish sports apparel, accessories, and footwear (Mahdi et al. 2015). Buyers have a higher bargaining power because of an intense competition and low buying power, as purchasing sports equipment tends to be seasonal, including during mega sports events like Olympic Games and World Cup. Customers in the sporting goods industry have greater bargaining power as they can switch between brands based on price, quality, fashion, and styles. Still, the buyers are also likely to lose their power when they are loyal to Adidas (Hobbs 2016). Threat of Substitutes: While Adidas's key competitors are Puma and Nike Inc, its key substitutes include companies like FB Legacy (formerly FUBU) that produce and distribute non-sport apparel, footwear, as well as other accessories like suits. Logically, it is unlikely for sports persons and athletes who must use sports equipment and wear to optimize their performance to change to using non-sports wear, like suits. The threat of substitutes is relatively low (Adidas 2016). Threat of New Entrants: As the sports goods industry is highly competitive because of the threat of strongly established rivals with a global reputation for quality, entering the industry as a newcomer would require significant investment in manufacturing, marketing and distribution chains that cut across the globe. Accordingly, the threat of new entrants in the industry is low at a global level (Adidas 2016). 2.2 PESTLE Analysis Political Factors: Adidas depends significantly on political stability in the countries where it manufactures and distributes its products, as sports is mostly a leisure and fitness activity associated with countries that are politically stable. Some of the political factors affecting its operation include civil unrest, terrorism, nationalization, and existing trade regulations. European countries where the company dominates the market like Germany, Italy, Spain and France generally politically stable. Similarly, North American countries also experience high political stability leading to stable markets. Countries like China and Singapore also offer cheap labor, which ensures that the company cuts the cost of production in the emerging markets (Adidas 2016). Economic Factors: The economic factors affecting Adidas include inflation rates, taxation policies, per capita income and unemployment rates. Adidas’s success greatly depends on the prevailing economic conditions, particular in its key trading markets. In fact, since the 2008-2009 Financial Crisis, the company’s key markets in Western Europe and North America has appeared to slow down, forcing the company to refocus its energies in emerging markets such as China and the Asia-Pacific region. The readily available labor in the emerging markets has been particularly beneficial to the company. By making inroads into the emerging markets, the company has leverage the relatively low wage rates in this places, which have enabled it to cut costs of production and realize greater revenues. Social/Societal factors Adidas is a major beneficiary of growth in the trend of societal fixation with health and fitness. The newly found meaning in engaging in health and fitness activities like jogging, yoga, and biking in the post-modern era has ensured that Adidas has a steady flow of customers. For instance, the fitness market in North America is currently a major target market for Adidas' Reebok brand. This enabled the company to grow its business by 30 percent in 2016 (Adidas 2016). Still, the company has to contend with continued challenges that arise from its engaging in corporate social responsibility. The company has engaged in the practice of outsourcing labor to emerging markets, including in China leading to claims of sweated labour conditions. Technological factors Technological advancements in the sports, good industry are enabling Adidas to optimize its marketing and sales efforts. Just like other consumer-facing organizations like Nike, Adidas use enhanced levels of digital metrics for analysis of customer demand as well as to review its market segmentation. It uses online surveys and customer reviews online to understand the changing customers’ expectations. The company also used internet marketing to advertise its goods to online customers. At the same time, the company has taken advantage of online shopping by introducing more than 50 e-commerce sites to reach out to different customer segments. For instance, Reebok.com and Adidas.com consist of the two major e-commerce sites that are rapidly growing (Adidas 2016). Legal Adidas’ expansion strategies have depended significantly on internationalization and, in the same way, the company has to adapt swiftly to the changing regulatory frameworks. Indeed, the variable nature of the regulatory frameworks that the company has to contend with has complicated business in the international market. Some of Adidas’s major markets like the United States and the United Kingdom that use the common law employ minimal interventionist policies to support shareholders’ interests. However, other countries with code-orientated legal systems like Spain and Germany support wider interests of stakeholders. Environmental Factors: The increased emphasis on sustainable production methods across all industries to ensure environmental protection has changed the manner in which players in the sports goods industry undertake their production. In the case of Adidas, the company seeks to ensure that its factories do not emit Volatile Organic Compounds or use restricted substances for production. Adidas also ensures that its factories use sustainable products. 3.0 Micro-Analysis 3.1 SWOT Analysis Strengths Adidas has a strong financial base. Its revenues and gross profit have shown steady rise since 2011, Euros16,195 million to Euro 16,915 million in 2015. The company's equity ratio has remained consistent, showing that the current investors have strong confidence in the company's performance. Adidas also maintains a highly developed point of sale network. At present, Adidas has close to 2,700 retail stores, 116,000 wholesalers, and some 11,000 franchise stores. As a result, Adidas can provide premium delivery service to its customers globally. The company has also established a strong presence across Europe. Currently, the company generates its revenues from European countries at 29 percent. The North American market comes second. Weakness The company is exposed to market risks as a result of the fluctuation of foreign exchange. Given that the company has operations in many countries that also used different currencies, currency fluctuation and changes in consumer attitudes significantly affect the sale of products. For instance, in 2015, Adidas was forced to close down its 200 stores in Russia due to the substantial devaluation of the Russian “rouble.” Strong competition in the sportswear industry affects the company's profit potential. Currently, Adidas and Nike dominate the sportswear and kit industry. Therefore, any action that Nike takes substantially affects Adidas' business. For instance, in mid-2016, Adidas made its decision to sell its gold business public after Nike had proclaimed its decision to discontinue the sale of golf equipment toward the end of 2016. In essence, the decision by Nike made Adidas consider the viability of its golf division, particularly if the company decided to sell its decision. Once Nike had announced the sale of its division, it had a potential to attenuate the likely price Adidas would charge for its golf business (Adidas 2016). Opportunity There is a rise in health awareness globally, with more people seeking to engage in health and fitness programs. This implies that a new market segment in the sportswear is steadily expanding, particularly due to an increasing number of people who are trying to keep fit. Indeed, current statistics shows an increase in the sale of sports apparel and shows by 42 percent to reach $270 billion between 2009 and 2016 (Adidas 2016). There is an increased opportunity for growth in the sporting goods industry, particularly in the emerging markets in Asia and Latin America. In China, for instance, the government has recently placed emphasis on supporting the youth to participate in athletics and to develop sports infrastructure. The government of China has set up plans to construct an additional 60 percent of sports facilities in the year 2025 and to encourage more people to engage in sports (Adidas 2016). Threats Adidas significantly depends on sports. In which case, when the popularity of one sporting activity decreases, the company experiences low sales leading to low revenues. For this reason, the company has to continually track the market to perceive any shift in the market. Additionally, the company experiences stiff competition from the major players in the industry, such as Nike (Adidas 2016). 3.2 Adidas Resources and capabilities analysis VRINE model: The VRINE model purpose seeks to analyze a company’s resources and capabilities to determine if it is valuable, rare, inimitable, non-substitutable, & exploitable (VRINE). Valuable: innovation is Adidas’s main strength. Through its research and development department, the company manages to come up with innovative products that respond to customers’ changing tastes and preference. For instance, the company's Reebok and Adidas brands have unique identities based on their key competencies in optimizing the efficiency of athletes. Indeed, Adidas (2016) acknowledges that two authentic brands have enabled it to increase its leverage in the sporting goods market. Rare: Adidas has a diverse brand portfolio that is unique in its rights, although it cannot be said to be rare given that the company tends to partner with other companies, which may capitalize the alliance to also share in the diversified portfolio (Adidas 2017). Inimitable: Adidas’ innovation is inimitable as it has a unique product portfolio. Non-substitutable: The company’s products can be substituted from the customer’s perspective, as they can switch to other brands. Exploitable: Adidas is currently taking advantage of its innovation and diversification capacity. Value Chain: Primary Activities: Inbound logistics: The Company depends on raw materials such as textiles, rubber, leather, zippers, and buttons that have to come to the firm. Operations: The Company transforms the raw-materials into finished salable goods. It also deals with athletes who want customized products (Hobbs 2016). Outbound logistics: The Company has a strong distribution channel that distributes its key products in its major markets in Europe and North America. Marketing & Sales: The Company relies on product endorsements from major athletes. It also sponsors mega sports events like Olympic Games and World Cup. After sales service: Adidas collects feedback from customers through internet surveys, and direct customer feedback on its websites. Support Activities: Adidas’ advanced, technological development, human resource management and supplies management are effectively coordinated to ensured enhanced company performance (Alsbiei 2015). 4.0 Internationalization strategy 4.1 Main global strategy The company uses franchising as an internationalization strategy. In 2013, the company announced it would pursue expansion in China for its Reebok brand through the franchise, as well as many other countries to ensure it had increased its stored by 750 by 2015 (Adidas Group 2014). It also established footwear franchises called ‘X’ and ‘ACE’ in the United States in 2015 (Adidas 2015). Currently, its worldwide sporting goods franchises in more than 30 cities include Superstar, Tubular, Stan Smith, and ZX FLUX (Adidas 2015). 4.2 Advantages and disadvantages Through franchising, the company has enjoyed a considerable degree of independence where it gets to operate its business. It has also increased the popularity of its other brands by leveraging the Adidas brand that is already established. Hence, it has benefitted from already prevalent brand-name recognition and a pre-sold customer base that can take ages to create in new markets (Adidas 2016). However, the businesses that buy franchise license from Adidas do not enjoy complete independence, as they have to comply with Adidas procedures and restrictions. Hence, Adidas is frequently forced to balance restrictions and supporting the franchisees. 4.3 Recommendations on how to sustain its global growth From the above analyses, it is clear that Adidas’s key competitive advantage lies in its established brand reputation and innovation. The company has a capacity to expand geographically without significant barriers. However, Adidas will need to determine if the value proposition in a target market is particularly relevant and what adjustments it needs to market its brands. Rather than focus chiefly on Western Europe and North America, it needs to expand further into Eastern and Central Europe, Greater China and emerging markets like Brazil, India and South Africa through franchising. The company should take advantage of social media tools and word of mouth advertising in the emerging markets where it currently focuses its expansion. Adidas should also increase its focus on how it works with retail partners to ensure greater elevation and differentiation of consumer experiences in the emerging markets. To create and foster global retail presence, the company should invest in developing direct to consumer business and build its capability to support local franchises. 5.0 References Adidas 2015, Adidas group details growth plan for adidas categories football, running and originals, viewed 24 Mar 2017, Adidas 2016, Through support we have the power to change lives, viewed 24 Mar 2017, Adidas 2017, Strategy overview, viewed 24 Mar 2017, Adidas Group 2014, Our group management report, viewed 24 Mar 2017, Adidas Group 2017, Five year overview, viewed 14 Mar 2017, Alsbiei, O 2015, Strategic management, viewed 24 MAr 2017, Barakaat Consultig 2016, Adidas Swot and Pestle analysis, viewed 24 Mar 2017, Grin 2011, Strategic management analysis of Adidas: Conditions in the sports equipment industry and available resources, viewed 24 Mar 2017, Hobbs, T 2016, "Adidas details ‘revolutionary’ three-pillar strategy as it aims to reclaim lost ground," Marketing Week, viewed 24 Mar 2017, Jayawardhana, A 2016, "Financial Performance Analysis of Adidas AG," European Journal of Business and Management, vol 8 no 11, pp.74-82. Mahdi, H, Abbas, M & Mazar, T 2015, "A comparative analysis of strategies and business models of Nike, inc. and Adidas group with special reference to competitive advantage in the context of a dynamic and competitive environment," International Journal of Business Management and Economic Research(IJBMER), vol 6 no3, pp.167-177. Shotter, J 2016, "Adidas raises profit and revenue forecasts again," Financial Times, 24 Mar 2017, Read More