Case Study Assignment 4

The case study assignment for module 4 draws on the following textbook case:

Case 18: "Adidas in 2008: Has Corporate Restructuring Increased Shareholder Value?" by John E. Gamble, C332–C345.

Read case 18 in the textbook, and then respond to the case questions given below. (See "A Guide to Case Analysis" for further guidance on written case analysis.)

Case Questions

1. What is adidas's corporate strategy? Was there a common strategic approach used in managing the company's lineup of sporting goods businesses prior to its 2005–2006 restructuring? Has the corporate strategy changed with restructuring?

Adidas’s corporate strategy is, “to lead the sporting goods industry with brands built upon a passion for sports and a sporting lifestyle (Adidas-Group).” In 2008 Adidas organized their business into three units: Reebok, Adidas, and Taylor-Made Golf. Their corporate strategy is based on extending their leadership in product innovation, creating a differentiated image for each brand names products, expanding retail space through their company owned stores, and achieving efficiencies in their global supply chain.

For some time Adidas’s goal has been to surpass Nike and become the global sporting goods industry leader. Before it was restructured, Adidas tried to expand into more areas than it could handle. Facing a sudden downturn in the winter sports market and unable to integrate Salomon's product line with their current operations the Salomon acquisition quickly became unattractive (Gamble, 2008).Prior to the 2005-2006 restructuring their common approach was to merge and divest into other sporting goods, apparel, and other shoe entities and to match their product lines with famous athletes and sporting events. Since the restructuring their corporate strategic approach has changed and become more singularly focused. Adidas has narrowed their divestment's and focused on products with core cross business value chain activities. Rather than trying to incorporate ski's into their product line Adidas has focused on different shoes lines such as Reebok and improving and re-inventing their current products comfort and innovation.

2. What is your evaluation of adidas' lineup of businesses in 2008? What does a 9-cell industry attractiveness/business strength matrix displaying adidas' business units look like?

Adidas should invest more into their core Adidas business unit as it is a highly attractive industry and has potential for continual growth. Meanwhile, Adidas could still invest in the Taylor-made unit as it has medium-level business strength in an attractive industry that shows room for growth. Reebok is a mature business venture with a sizable market share but little room or signs of growth.

Excluding North America, Adidas global sales figures rose in 2008. In terms of overall

revenues taken on a basis of neutral currency, Adidas segment grew by as much as 14% (Adidas-Group). The Reebok acquisition helped to grow the business by increasing total revenue, and the integration of Adidas and Reebok supply chain activities aided in cutting costs (Gamble, 2008). Adidas distinctive brand images has allowed them to differentiate themselves from from competing brands and helped them expand globally in Europe, US, Russia, and China. Their World Class Supply Chain initiative reduced complexities in procurement planning and allowed for more rapid change due to market demands. By outsourcing production Adidas was able to keep cost's low and this contributed sustainable gross margins.

High

6.7

Medium

3.3

Low

6.7 3.3

Strong Average Weak

Competitive Strength/Market Position

A 9-cell industry attractiveness /business strength matrix displaying Adidas business units shows the Adidas unit is extremely strong and sales are rising, the Reebok unit is fairly strong and stales are stagnant, and the Taylor-made golf line has strong brand name and slightly rising sales (though it's overall size is still dwarfed by Reebok and Adidas).

Adidas

Taylor

Golf Reebok

IndustryAttractiveness

Below is a chart of the three units financial data.

(All figures are in millions)

Adidas Reebok Taylor-made

2008 2007 2008 2007 2008 2007

Net Sales 7,821 7,133 2,148 2,333 812 804

Gross Profit 3,902 3,370 812 902 359 360

Gross Margin

48.6% 47.4% 37% 38.7% 44% 44.7%

3. Does adidas' business lineup exhibit good strategic fit? What value-chain matchups exist? What opportunities for skills transfer, cost sharing, or brand sharing are evident? Prior to its divestiture, what kind of strategic fits existed between adidas' core business and its Salomon business unit?

Adidas business lineup of footwear and apparel exhibits good strategic fit. The acquisition of Reebok has made Adidas the second largest sportswear manufacturer in the world. They have been able to transfer technological know-how and other capabilities between their business units. Adidas is marketed as a innovative shoe for the serious athlete, while Reebok is marketed as the affordable leisure shoe. The value chains of both these business units are sufficiently similar to present opportunities for cross-business transfer; lower costs for value chain activities and cross business collaboration.

Adidas knowledge in the apparel and footwear industries has created a good value chain match up for running Reebok's footwear and apparel lines. Adidas powerful brand, expertise, and sporting-goods knowledge has created another value-chain match up with Taylor-made products.

Adidas acquisition of Reebok should give them more bargaining power and thus reduce costs for both companies. This acquisition also created the opportunity for skills transfer and industry related market knowledge. TaylorMade could use Adidas’s apparel and footwear manufacturing strengths and technological knowledge to expand their product line and increase their market share. Taylor-Made would could experience cost reduction and other competitive advantages through their relationship with Adidas.

Prior to Adidas divestiture of Salomon the companies did not exhibit good strategic fit. Mavic was a bicycle unit component of Salomon and it was quite different from the Adidas footwear industry. There was little opportunity for brand sharing and skill transfer allowance between the two business units. There also were few very resource fits and Adidas experienced difficulty trying to cross train management. Due to the non-related

nature of their Mavic divestment, Adidas was unable to capitalize on economies of scale through combined production.

4. Has adidas' business lineup exhibited good resource fit between 1998 and 2007? What have been the financial characteristics of its major business segments during that time period? Which businesses might have been considered cash hogs and cash cows?

No, the business lineup of Adidas did not show good resource fit from 1998-2007. The

businesses were too different in order to gain any economies of scale from combined

production. Management skills and employee skills were not similar enough to move from

one company to the other without retraining. Another concern is majority of the overall

sales resulted from Adidas with very little from Salomon and TaylorMade. Adidas stock

price also dropped significantly after acquiring Salomon. The decreased value of the

Salomon acquisition and their disproportionately low percentage of sales created combined

with Adidas decreased stock value put an undue financial strain on Adidas core business

activities.

However, once Adidas diversified Salomon, retained Taylor-made, and acquired Reebok a

good resource fit was created. These changes created great economies of scale between

Adidas and Reebok's athletic apparel and footwear business units.

The acquisition of Reebok increased Adidas revenue from 5.8 to 10.1 billion euros in 2006 (approximately $13.3 billion). Adidas revenue grew to approximately 10.3 billion euros by 2007 and the integration of business units was expected to create cost savings of 105 million euros by the end of 2008 (Gamble, 2008).

During this period Adidas was responsible for the majority of gross profits and definitely was a cash cow. On the other hand Salomon's capital expenditures, operating profits, and net income were a great disappointment and created an unnecessary cash hog for Adidas.

As a result of the divestiture of Greg Norman apparel-Reebok's sales decline in North America and Europe by 5% and 1% respectively ( Gamble, 2008) However, Adidas gained greater economies of scope in sourcing activity. In 2007 Reebok sales in Latin America and Asia increased by 32% and 24% respectively. Gross Margin improved by 3.7% during 2007. Higher gross margins improved Reebok's operating margins by 3.5% in 2006 to 4.7% in 2007.

Taylor Made Gold was the third largest producer in the golf industry. However, the golf

equipment industry declined by about five percent from 200-2007. The number of US golfers also declined from 27.5 million in 1998 to 22.7 million in 2007. As a result Taylor Made's proportion of US sales dropped 17% from 1999-2007. On the brighter side management successfully increased sales in Asia from 13% in 1999 to 35% in 2007. In 2008 Taylor Made was the number one seller of metal-woods, however, their market share was still about half of the industry leader Callaway ( Gamble, 2008).

5. Based on your analysis of adidas businesses, did the restructuring undertaken in 2005 and 2006 make sense? Does it appear the acquisition of Reebok International will produce higher returns for shareholders? What strategic actions should adidas' top management initiate to improve the company's financial and market performance now that restructuring is complete?

Based on my analysis Adidas restructuring in 2005 and 2006 did make sense. It rid them of unprofitable and bad fitting business units, narrowed their corporate structure with related diversification, created good strategic fits and value chain match ups, and ultimately it increased shareholder value.

It does appear the Reebok acquisition will produce a good strategic fit and produce higher stakeholder returns. This acquisition has also allowed Adidas to successfully expand into Asia and overall enhance their core competencies.

Adidas shareholder equity increased from 2,828 million euros in 2006 to 3,023 million in 2007. Earnings per share increased by 25% during the first half of 2008.

Top management should target innovated product specialization and brand differentiation.

Non-related diversification has proven to be a failure and Adidas should remain committed

to what they do best. Reebok should be continue to be marketed as a leisure shoe, while

Adidas remains the innovated shoes for the serious athlete.

Reebok's sales are declining in North America, but increasing in Asia and South America.

Top management could offset Reebok's domestic struggles by pursuing a more globally

centered strategy.

Management could also leverage Adidas core competencies to expand Taylor-Mades shoe

and apparel product line. Reebok's leisure image could also allow them to create and market

products to skateboarders and other new consumer groups.

Another way to improve Adidas performance is by eating into Nike's market share and even

more aggressively signing top level athletes.

List of Works Cited

Adidas-Group (n.d.). Retrieved from http://www.adidas-group.com/en/investor/strategy/default.asp

Adidas-Group (n.d.). Retrieved from http://adidas-group.corporate-publications.com/2008/gb/en/konzernlagebericht/adidas-business-perfomance.html

Adidas-Group (n.d.). Retrieved from

http://adidas-group.corporate-publications.com/2008/gb/en/konzernlagebericht/adidas-

business-perfomance.html

Gamble, J. (2008). Adidas in 2008: Has corporate restructuring increased

shareholder value?. (pp. C-332 - C-345). New York, NY: McGraw-Hill Irwin.