Integrating Adidas

Project report submitted as part of ODC course (Term III)

Submitted by

Group 8 Sec D

Harsh Vardhan 12P212Mayur Kumar 12P216Nikhil JagdishLilani 12P218Varun Chopra 12P219PrateekDutta 12P221SantoshGarbham 12P229

Power of Organizational Mechanisms – through a study on Adidas/Reebok PMI

AcknowledgementWe would like to express our gratitude to Prof.Madhushree N. Agarwal for her valuable guidance, support and feedback throughout the project. It was greatly helpful in carrying out this project.

Group 8 Sec D Page 2


Table of ContentsS. No. Topic Page No.

1. Introduction 4

2. History of Adidas and Reebok 4

3. Context that led to Acquisition 5

4. Problems Involved in Acquisition 7

5. Steps taken by Adidas – Learnings 8

5.1 Creation of Clean team 8

5.2 Communication Strategy for Employees 8

5.3 Integration Mechanism 9

5.4 Strategy to drive Uniform Culture 10

5.5 Restructuring Organization 11

6. Post Merger Performance 13

7. Analysis of Results 14

8. Conclusion 14

9. References 15



1. Introduction:Organizational mechanisms are important tools used by management to infuse their strategic intent throughout the organization. They play an important role in setting up an organization the way the management wants to work. The ways they are chosen have a significant impact on various stakeholders’ day-to-day involvement. So, this project gives an understanding of power of such mechanisms, the role they played during the merger of two global organizations – adidas & reebok

When two huge organizations are merged together, a lot of issues arise. There are cultural conflicts, employee apprehensions and many more. These mergers or acquisitions are a one-time process and they also involve huge finances in it. Though the main purpose of such M&A is monetary benefit that can be achieved through economies of scale and scope or access to new markets or access to diversified products, these M&A result in disastrous failures if proper care is not taken in terms of integrating the two organizations from design perspective.

So, this project explores the case where Adidas (a German Company) acquired Reebok (a U.S company) in 2005. The top management of Adidas carefully devised several mechanisms to alleviate the fears of employees during acquisition about the new culture, layoffs etc. They also devised a clear communication strategy to communicate the values and strategy across the new organization. They also had feedback mechanisms to guide them in better decision-making with regard to policy changes.

This report begins with a brief history about Adidas and Reebok. Then, it moves on to describe the context that led to merger of both the firms. Then it analyses various potential problems involved in the acquisition and the ways in which management dealt with those problems by implementing several mechanisms with respect to various stakeholders and learnings from it. And finally, conclusion is given.

2.1 History of Adidas:The history of adidas can be vaguely subdivided into four eras:

The foundation of the company by Adolf Dassler and its ongoing development until the founder’s death (1920-1978).

The era of leadership through Horst Dassler and the Dassler-Family, and the legal transition period (1978-1989).

The turn-around period and going public under the French-born chairman of the executive board Robert Louis-Dreyfus (1993-2001).

The era of a new global strategic positioning under the leadership of Herbert Hainer (2001-today).

Adidas was established in 1920, when its founder – Adolf Dassler – had the vision to “provide every athlete with the best possible equipment”. He was driven by this vision until his death in 1978.



During the second era of leadership, it was Horst Dassler who “perfected the opportunities offered by sports promotion”, and he turned Adidas into a “global leader in the sector of innovations in sports marketing”.

A third era of leadership can be defined by the period when Robert Louis-Dreyfus was on duty. He also realized the going public of Adidas in November 1995. During the leadership of Louis Dreyfus, Adidas acquired the France based Salomon-Group.

On August 3, 2005, Adidas surprised the public by announcing the planned acquisition of Reebok International Ltd., which would be the biggest transaction within the sporting goods industry of all time.

The closing of the Reebok transaction on January 31, 2006 marks a new chapter in the history of the Adidas Group.

2.2 History of Reebok:The history of Reebok starts much earlier than the one of Adidas. Already in the 1890s, Joseph William Foster founded Reebok’s ancestor company in the United Kingdom. He was driven – similar to the founder of Adidas – by a vision derived from a need for innovation: “athletes wanted to run faster”.

Several decades afterwards, in 1958, “two of the founder's grandsons started a companion company that came to be known as Reebok, named for an African gazelle”. The fact that Reebok was a family-owned company constitutes a historical analogy to Adidas.

In 1985, Reebok completed its initial public offering (IPO) and made its first strategic acquisition only one year later, when The Rockport Company was bought.

A few years later, in the late 1980s, Reebok continued its aggressive expansion and focused on overseas markets with the result that Reebok products can now be found in more than 170 countries.

In 1992, Reebok began to change its original orientation in the fitness and exercise sports sector towards all areas of sports and created “several new footwear and apparel products for football, baseball, soccer, track and field and other sports”. An essential decision was made in the late 1990s when Reebok “made a strategic commitment to align its brand with a select few of the worlds’ most talented, exciting and cutting-edge athletes”.

Later Adidas acquired it. The closing of this transaction on January 31, 2006 marks a new chapter in the history of the both Group. Through the acquisition, a new Group with “more than 25,000 employees worldwide” was created.

3. Context that led to acquisition:Global economy likely to decelerate in 2005: Economic activity in 2005 was characterized by regional discrepancies and to decelerate from 2004 levels. In Europe GDP was expected to increase by around 2%. In the USA, GDP growth of around 3% is projected. This represents a slowdown from 2004 levels as a result of declining fiscal and monetary stimuli, and increasing pressure on long-standing trade imbalances with other regions. In Latin



America, regional growth is expected to average 4% in 2005.In Asia, economic prospects are strongest, with China likely to perform particularly well (projected GDP growth: 8%). Nevertheless, growth rates in most countries are expected to decline modestly, mirroring the global slowdown in export demand.

Mixed Outlook for Sporting Goods Sector: The sales outlook for the sporting goods sector was mixed for 2005. In Europe, tough overall retail market conditions were expected to spill over into the sporting goods industry during the first six months of the year in the absence of major sporting events which could spark interest in the sector. In the second half of the year, however, increasing excitement around the 2006 FIFA World Cup is expected to support growth in the sporting goods market. In the USA, recent rationalization within the retail sector and greater distribution differentiation among suppliers is expected to help higher product sell throughs and increasing profitability within the industry. In Asia, market conditions will support further retail expansion in 2005, which is currently the strongest growth indicator in the sector.

New Products as Important Growth Driver in 2005: Coming up with new products is an important growth driver in 2005

Industry Nature – Own Retail the need of the hour: Own-retail was an important topic for Adidas in 2005. At least 100 concept stores are expected to be opened within the next year. This expansion has been accelerated to reach consumers in major markets as well as to capture new market potential in Eastern Europe and smaller Asian countries. Because own retail has a higher than average gross margin, this would positively impact profitability at brand adidas. However, operating expenses and capital expenditures will also include increases to support the expansion of own-retail activities.

Reebok’s challenges: The market for athletic footwear and apparel is intensely competitive and if Reebok fails to compete effectively, it could lose our market position. The athletic footwear and apparel industry is intensely competitive with various low price segments coming up. The principal methods of competition in the industry include product design, product performance, quality, brand image, price, marketing and promotion, customer support and service and our ability to meet delivery commitments to retailers.

So, the context shows that markets were fiercely competitive and the organizations were struggling with looming economic slowdown in U.S and Europe and mixed outlook in Asia. In 2005 report, Adidas management aimed at a double digit growth through acquisition of Reebok. The following are the opportunities seen by top management in this context further emphasize the reason for merger.

Strategic aims of the merger:1. Adidas-Salomon glitch: The Adidas- Salomon group wasn’t integrated properly. The

Salomon group remained largely isolated from Adidas and they didn’t have any shared operations for the different product portfolios they had. They even didn’t have common functions like Treasury etc united. Due to improper integration mechanisms since beginning, the Salomon group hadn’t performed well nor given any significant benefit to Adidas group. After a series of layoffs and restructuring trial in 2004, Adidas sold Salomon in 2005.



2. Face its biggest competitor: Nike was the biggest sports goods and apparel maker in the world and it was posing very stringent competition to Adidas and Solomon group. The United States was the biggest market for the sports goods and apparels. Nearly 47% of the sports market is in the United States and the annual sales are growing year by year. Nike is the biggest player in the United States. In order to fight the competition with Nike, Adidas with the strategy of expansion of the business in the United States, merged with Reebok which is one of the biggest sports goods makers in the United States.

3. Access to markets: Adidas wanted to extend their global reach. In Europe and Asia, Adidas hold a better marketing position and brand recognition and this could be used to expand Reebok market in Europe and Asia. On the other hand merger will help Adidas to capture Asian fashion oriented market where Reebok already had its presence through marketing tie ups in China.

4. Broader portfolio of world-renowned brands. Adidas and Reebok together will have a more complete portfolio of brands that fulfill the need of a global customer base.

5. A more complete product offering in key sports categories. The merger will help to have a stronger presence in American sports and a complete product offering that addresses key sports categories, including running, tennis, hockey, soccer, basketball, training, outdoor, American football and golf.

6. Worldwide Recognition: Adidas has secured long-term sponsoring contracts with the national teams of Germany, France and major European clubs such as Bayern Munich, Real Madrid and AC Milan. will bring in important sponsoring license contracts with major North American professional leagues such as the National Hockey League, National Basketball League, National Football League and Major League Baseball.This will improve the worldwide recognition of the brands.

7. Enhanced R&D capabilities and cutting-edge technology. Adidas was well known for its cutting-edge technologies and Reebok for its talented research and development professionals who developed a distinguished portfolio of breakthrough product innovations, including the Pump 2.0 and DMX. With the help of both companies’ R&D expertise, the new Adidas Group expected to accelerate new product introductions in footwear, clothing and hardware to improve brand awareness and consumer demand across all brands.

Financial aims of the merger:1. Adidas expected to reduce its debt and improve its cash flow from operational synergies.2. It aimed to reduce its annual cost and wanted to save around € 125 million annually with

substantial operational synergies. 3. It expected to increase revenue and profit from complete coverage of all consumer

segments.To conclude, this acquisition seemed a win-win opportunity for both Adidas and Reebok in competing with their archrival Nike and overall growth in the coming years by spreading their dominance globally at a rapid pace. But several experts doubted if this would work because of several reasons that are described below.



4. Problems involved in Acquisition:Differences in culture: Adidas and Reebok have different roots for their cultures. One is an Americans and the other one is a German company. Germany-based Adidas was more process oriented, while U.S.-based Reebok was more entrepreneurial.

Employees Fears: During acquisition, the employees of the acquired company are generally worried about layoffs. There are also several other worries like relocation, career growth etc.

Brand Equity (Customer Perception): Adidas and Reebok have many overlapping products. The challenge was how to deal with this problem. Two organizations at a global scale cannot change their image in customer’s eyes overnight. A decision here is going to seriously affect both the companies involved for the rest of their future. They should position their products such that they don’t cannibalize one another.

Structural Complexity: Adidas and Reebok are global organizations with vastly complex supply chains. Integration of two such complex organizations into one involves lot of complexity. Designing an organization that leverages on their synergies is a challenge in itself.

Decision Dilemma: So, the management has to decide on the following issues:1. In short run, how to handle the transition and restructuring by alleviating employees

fears effectively.2. How to design an organization structure that would produce greater benefits than costs

involved in the reunion.3. How to induce a unified culture, values and goals throughout the organization.4. To decide the future course of both the brands in long run so that it would not confuse

customers.

The project focuses on about the various steps that were taken in light of the above points that led to a smooth transition. The processes that were laid to get those expected results and the learnings from this entire exercise.

5. Steps Taken by Adidas–Learnings:

5.1 Creation of Clean Team to handle the Integration process:The preparatory work was initially done by a clean team before the deal was closed; enabling the combined entity to hit the ground running once the deal was given the green light. After the transaction was finalized, the CEO swiftly nominated first-line managers in order to remove uncertainty and gave each business function and unit under the new organization clear yet demanding synergy targets, underpinned by specific value-creation projects.

Note that as soon as deal was finalized some managers from Adidas were appointed in key positions at Reebok to do precise analysis of top level management.



Learning: Integrative structures are important to be set up right from the day one to avoid unfortunate fireworks during the merger.

5.2 Communication Strategy to alleviate Employee apprehensions:Objective: Reebok employees should have the feeling of being absorbed by Adidas and, therefore, do not feel like the losers of the acquisition. For that the following steps are taken:

1. Herbert Hainer visited the Reebok headquarters and spoke to the entire team there. Furthermore, a specific intranet site was created where employees were kept informed during all phases of the acquisition.

2. Videoconference files of both CEOs were available for download. Adidas’s efforts nurtured a strong sense of belonging for the Reebok employees. Therefore, Reebok employees might already have a greater sense of belonging to the Adidas.

3. Adidas also communicated to Reebok employees that the aim of the acquisition is not a reduction of jobs in Reebok’s structure and showed that, in the future, there will be investments in Reebok’s headquarters.

Learning: The active communication CEO regarding organization strategy boosted the morale of employees significantly. This is an example of value based leadership by Hainer. Apart from personal actions, Hainer also adopted the following mechanisms for interactive communication.

1. Every person involved in the acquisition process was asked to give her/his expertise for the respective company function, in which she or he was actively participating.

2. The development of the mood and feelings of the employees is monitored in the following way. In periodical intervals, certain sets of employees (a mixture of all hierarchies) are surveyed using a list of about eight questions in order to understand how their feelings about the acquisition are developing. These surveys are called “pulse-checks”, using a term out of the field of sports. It was conceived in order to get an idea of “how the pulse beat of the employees or the whole company is, concerning the acquisition”. These pulse checks, therefore, act as an indicator for the top level management, as they allow a prompt reaction to the emotional development of employees during the integration process.

3. Also, the human resource (HR) department worked strongly together with the management of other departments in order to develop key messages and to communicate information to interested employees regarding diverse topics, such as what will happen next and where will the path of the company lead to.

4. To communicate that the entire process is transparent, the company has appointed BCG as an independent agency to recruit managers to key positions within the organization. For every position where there are two potential employees (one from adidas and one from reebok), they have to apply to the position and the consultancy would select them.



5. Global PEP (Performance Evaluation and Planning) was used to implement a transparent way throughout both the organizations.

Learning: The Adidas team went beyond just saying and implemented mechanisms for successful integration. These mechanisms are important for any organization to achieve its goals and as evident adidas managed the integration without any glitches. If the employee morale failed, Reebok performance would have shattered with a high attrition level which didn’t happen because of these strong mechanisms.

5.3 Integration Mechanism:The actual process of integration was managed in the following way:

i. Eight “integration teams” were formed, which are filled with adidas and Reebok managers in a parity proportion. The teams reflected the regional and functional structures of each company.

ii. In the teams, cost and revenue synergies for the respective area have been identified. Further, processes, organizational structures and future growth have been analysed in order to develop “blue prints” for a new common, comprehensive line organization of the new group.

iii. These aggregated synergies have been adapted to smaller regional areas and subteams have been charged with verifying the estimated results from their sub-level point of view. In such teams, around 150 employees worked for about six months and have partly been released from their regular positions.

iv. After having completed the project, the results must be adopted now and realized within the regular line organization of the group. There has been a project management office (PMO) created with a steering board that controls the progress and achievement of the objectives within certain time limits.

Learning: Having a well defined organization process for the integration involving managers from both companies at various levels has created an overall positive response and a feeling of ownership. It also sent a clear message that reebok and adidas are equal in the organization post the acquisition. The power of this mechanism was the entire Integration process can be quickly and easily adopted as several hundreds of subteams were involved. The first phase of integration happened in a record time of six months.

5.4 Strategy to drive Uniform Culture:1. Unified Mission Statement: The Adidas declared its mission statement as “to be the

leading sports brand in the world”. It gives both Reebok and Adidas a unifying mission of beating their all time rival Nike together.

2. Adidas clearly communicated that “diversity is the key to success” throughout the organization.

3. Communication Strategy: To create a single culture and ensure that everyone worked as one, the new organization implemented a carefully planned communications strategy.



4. In addition to the standard fare of CEO letters to all employees, town hall meetings at major locations, and e-mail updates, the company carried out regular monthly pulse-check surveys of about 150 company leaders worldwide to identify hot issues that employees were concerned about.

5. The communications strategy was then adapted to address those issues. There were also face-to-face briefings with internal opinion leaders, who were brought into play to relay messages throughout the organization. Results from the pulse checks throughout the PMI demonstrated strong and growing confidence in the integration, underlining both the strategic rationale of the merger and the importance of regular, targeted communication.

Learning: It’s not just the words of the top management about culture but having a strong common mission statement, values and proper channels to communicate them are very essential. All these gave a sense of belonging to employees.

5.5 Restructuring Organization:With Customer in backdrop, the adidas and reebok were decided to remain as independent brands. So, the new organization structure kept certain parts of the two companies separate in order to preserve the distinctive characteristics of their respective brands. While sourcing and operations, finance etc were centralized, product development and marketing of the Adidas and Reebok brands remained independent. The following figure gives a brief snapshot:

Learnings:i. Corporate umbrella makes sense only when the benefits are greater than costs. In

this merger, Adidas and Reebok have different brand equity in the global market.


CEO & Chairman Adidas AGHerbert Hainer

Global OperationsGlenn Bennett

FinanceRobin Stalker

President & CEO- AdidasErich Stamminger

R &D

Sales & Marketing

President & CEO - Reebok Paul Harrington

R & D

Sales & Marketing


They are strong brands by themselves. Adidas and Reebok merged with the main goal to defeat Nike by leveraging on their synergy. Many brand analysts have predicted that combining the two would defeat the main purpose of the merger. So, the top management has decided to keep their brands independent. This is an important decision as the future course of the firm depends on this. It not only affects customers but all other stakeholders in the organization. The future management costs of managing two independent brands should reap benefits in terms of their sales. Over years their brand positioning has evolves as shown in the figure below:

This clearly shows how Adidas and Reebok position themselves. So, by keeping the two brands independent and evolving their positioning over years the top management succeeded in addressing problems of an important stakeholder – the customer.

ii. In line with the above argument, the product development (R &D) and marketing departments were kept independent. a. This would help the existing R & D teams to design in their fashion that would

appeal to their respective marketing teams’ research. So, they can serve their customer better.

b. This structure promotes competition than cannibalization because both the companies are entering new markets that are opened up by the new synergy. Also their existing loyal customer base would be retained as a result of this structure

A brief snapshot of R & D centres of Adidas and Reebok post merger.



iii. Manufacturing at Adidas & Reebok: The production is mostly outsourced in both Adidas and Reebok. a. Most of Reebok’s products are produced by independent manufacturers that are

principally located outside the United States. China, Indonesia, Vietnam and Thailand were our primary sources for footwear manufacturing during 2004, accounting for approximately 51%, 21%, 17% and 7%, respectively, of total footwear production for all of its brands (based on the number of units produced).

b. The majority of manufacturing of apparel to be sold in Europe was sourced through an agent from manufacturers in China, Taiwan and Korea, with supplemental sourcing from manufacturers in Vietnam, Portugal and Turkey.

c. In 2004, Asia continued to be the most important sourcing region for Adidas. Approximately 94% of Adidas-Salomon footwear was produced in this region, with China and Vietnam having been the largest sourcing countries, representing approximately 55% and 21% of total footwear production respectively. Production in Europe was 4%, whereas the Americas accounted for 2% of footwear purchases.

d. In apparel, too, Asian countries dominated purchases in 2004. China and Indonesia were the largest sourcing countries, representing 20% and 17% of total apparel production. The remaining 63% was produced in other Asian countries, Europe and the Americas with 40%, 17% and 6% respectively.

Under this kind of global supply chain existence, it gives economies of scale and scope to both Adidas & Reebok to centralize their operations. An excerpt from annual report of 2005 is as follows “We further expect to achieve cost synergies of around € 125 million in 2008 by savings in sales, marketing and distribution, overhead costs, IT and sourcing.”

6. Post Merger Performance: After the acquisition Adidas group financial accounts showed significant improvements,

group’s 2006 half-year result after the acquisition was fantastic.



Adidas sales revenue increases by 17 percent in euro terms i.e. €3308 million in first half of 2006 as compare to € 2816 million in first half of 2005. The year 2006 complete annual report shows a fabulous result for the Adidas group.

Sales revenue increases by 52 percent i.e. from € 6.636 billion in 2005 to € 10.084 billion in 2006, representing the highest organic growth of the Adidas group within last eight years. It was the first time in the group’s history that it crossed the benchmark of € 10 billion.

Financial aim of the merger to reduce the operating cost through substantial operational synergies seemed to be achieved as the firms had improved its gross and operating profit margin after the merger.

Adidas aimed to extend their global reach: Merger’s aim to expand in Asia market and to generate more revenue from Asia market seemed to succeed as the sales revenue from Asia market improved. In 2005 sales from Asia contributed 22.95 percent of the group total revenue which increased to 24.65 percent in 2008. And sale has increased significantly in Latin America which had contributed only 4.88 percent of total revenue in 2005, increased to 8.26 percent in 2008

Company’s main aim to compete with Nike and become No.1: Adidas was unable to achieve this and still remains as No. 2 in the world.

Other shortfall of the acquisition can be seen from the declined sales revenue of Reebok : Reebok sales went down by 9 percent in 2006, decreased by 6 percent in 2007 and declined by 8 percent in 2008. As compared to 2005 Reebok sales declined by about 21 percent after the merger till 2008 and showed very poor performance by Reebok and Adidas group’s inability to maintain Reebok efficiently.

7. Analysis of Results:The Adidas- Reebok integration is a complex process that should be carefully designed and implemented keeping various stakeholders vis-à-vis customers, employees and the shareholders in mind. The CEO and other top management had done a commendable job by implementing various integrating mechanisms and organization structure balancing all these stakeholders. Though some goals like achieving economies of scale and scope are achieved marvelously, the goals of being the Number 1 and profitability at Reebok suffered. But these kinds of mergers are not a one day process and the top management at Adidas AG is consistently trying restructuring techniques. The Adidas AG group got restructured in 2007 from brand based divisional structure to product category based divisional structure with Sport Performance and Sport Style. Then again in 2009 a functional Global structure at board level by dividing its Global brand management and Global Sales management.

The organizational merger was not as worse as was predicted by some experts and it didn’t see any mass attrition at Reebok. They were also able to achieve significant revenues growth. But Reebok failed to perform miserably. One strong reason for this was unclear brand differentiation for customer. This shows that the organization is still in an evolution



phase and it is expected that some more time for it to have a consistent performance in its two brands.

8. Conclusion: The top management at adidas has created several formal systems and mechanisms that helped in integration of two huge global organizations in a seamless manner. It’s a process that is far more complex than it appears on paper. This study describes how the Organizational mechanisms aid in implementing the values, goals and strategies of top management even in a short period of time. It also emphasizes the importance of various stakeholders the management has to consider while implementing these mechanisms and how that would impact the organization significantly in both short and long run.

9. References:1. “Success of International M&As: The case of adidas’ acquisition of Reebok” working

paper by David Rygl, Tobias Dennelein and Tamara Joyette2. “Real World PMI: Learning from companies” – BCG Publication3. adidas (2006a): At A Glance – The adidas Story.

http://www.adidas-group.com/en/overview/history/History-e.pdf, 26.05.2006. 4. adidas (2006b): Reebok. Then and Now.

http://www.adidas-group.com/en/overview/history/Reebok_history.pdf, 26.05.2006.

5. Adidas-Salomon Annual report 20046. Reebok Annual Report 20047. Adidas group annual report 20058. Adidas group annual report 20069. Adidas group annual report 200710. http://www.independent.co.uk/news/business/news/adidas-abandons-slopes-with-

deal-to-sell-salomon-ski-brand-for-acircpound330m-6146960.html11. http://www.bloomberg.com/news/2013-03-07/adidas-shares-slide-as-profit-

forecast-misses-estimates.html12. http://usatoday30.usatoday.com/money/industries/manufacturing/2005-08-02-

adidas-usat_x.htm13. http://online.wsj.com/article/

SB10001424127887323894704578106911317943392.html14. http://www.nbcnews.com/id/8805430/ns/business-world_business/t/sportswear-

maker-adidas-buy-reebok/#.UUiPKRwi7vt


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Integrating Adidas