ANALYSIS OF THE ADIDAS STRATEGY

Any industry has companies that are market leaders and have won clients' trust with the caliber of their offerings. One such business is Adidas, which has grown to become Europe's top sportswear producer and the world's second-largest after Nike. Since its creator formed Adidas in 1920, the company has consistently given athletes the greatest gear. Today, the business provides a wide range of products and serves as the brand name for businesses like Reebok and Taylor Made. The current paper is an evaluation of the management strategies of the German company, focusing on how it leverages its macro-environment and also how it uses its resources and capabilities to gain and maintain a competitive advantage. The tools of analysis employed include the PESTEL analysis, Porter’s five forces analysis and the VRINE framework. The last section of this paper identifies the business level strategy of the company and then evaluates its suitability and acceptability to the various stakeholders.

Market environment analysis

PESTEL analysis

Political factors

Being a multinational company, Adidas has to consider the not only domestic political issues but also the global political state. The company has to monitor government laws that could impact its business operations (Craig, 2016, p. 362). The company also has to react drastically to issues like the taxation policy of the host country, regulation of both government and private businesses, and the spending power of its target market as well as other companies. The company has a good reputation for implementing policies and monitoring risky substances that could affect its consumers and the environment as well.

Economic factors

As a multinational company, Adidas has been able to sustain a strong economic growth for many successive years. In 2016, the company had a strong financial execution as product sales and profitability improved to meet the expectations of the management. The company’s revenues went up by 12% in 2016 (Adidas.com, 2017). This was brought about by double-digit sales increase. The strategy of locating some of its factories in China allowed Adidas to lower its production costs significantly.

Social factors

Adidas has been able to overcome obstacles to its products by designing products that are fashionable for all no matter the age, size, religion and lifestyle. People as well as athletes across borders like sports as well.

Technology factors

Each year the company introduces new ways of performing new and old processes. The company recently launched the smart shoe, which has a microchip and also contains a wireless mp3 player. In line with its environmentally friendly policies, the company uses a hot decompose system in its production processes. Also, compared to its competitors, its packaging, storage and transport of products is more advanced.

Environmental factors

Back in 2010, Adidas developed a compatible environmental strategy that expresses a clear vision and mission and also sets annual milestones that have to be achieved within the next ten years (Adidas.com, 2017). The targets cover all stages of the supply chain, starting from the formation of the products to the sourcing of raw materials and manufacturing and also from the activities of Adidas itself to those of its retailers and suppliers. The strategy is to incorporate environmental issues as part of the company’s daily operations and make it positively contribute to its overall business performance.

Legal factors

The Adidas group ensures they observe all laws and regulations relating to the United Nations proclamation of human rights. Their policies and procedures must be compatible with the domestic laws and also adhere to the labour principles of the international labour organisation (ILO) (Adidas.com, 2017).

Porter’s five forces analysis

Degree of rivalry in the industry

Adidas competes in an industry with many powerful competitors such as Nike, PUMA and FILA. These are world leaders in the sports and footwear industry that just like Adidas also have a global presence. Adidas implements various strategies to contend in this market, including acquisitions and building partnerships with subsisting competitors. It has been able to establish itself as a world leader through the acquisition of various brands like Salomon AG, Reebok, and Sports Inc. (David, Kittler and Tobias, 2007, p. 4). It has also invested heavily in e-commerce and records high sales in its online platform. Switching costs in this industry are low while the level of differentiation for the products cannot be high as well. The products are therefore very competitive, and Adidas uses technology and innovativeness to ensure they remain market leaders with sophisticated products.

Threat of substitutes

The market growth of Adidas is also significantly influenced by the availability of substitute products from companies such as Nike, PUMA, and so forth. The price of these substitute products is what determines strategies by Adidas. Low switching costs in this industry mean that companies can easily lose customers to their industry rivals (Porter, 2008, p. 92). However, in certain instances, customer preferences and choice are what determines the decision to buy from s particular manufacturer. Thus Adidas established a research and design centre in Paris to come up with better designed and functional shoes that are attractive to its customers.

Bargaining power of suppliers

There are many suppliers who can provide Adidas with the raw materials it needs and so their bargaining power is low. Also, there is little product differentiation among the suppliers, a factor that further diminishes their bargaining power. Raw materials used in this industry include rubber, plastic, cotton and they are available plenty around the world. Suppliers, therefore, depend on companies like Adidas and Nike as their means to survive tough competition. Adidas take advantage of this by standardising their input procedures when it comes to the materials used, the labour force, supplies as well as services and logistics. The availability of cheap labour in other continents allows companies like Adidas to switch between suppliers rather easily and quickly.

Barriers to entry

The entry barriers into this industry can be said to be relatively high. However, Adidas is an established brand that would not be influenced much by the entry of new players in the industry. New firms can enter the market but face a stiff challenge in surviving and eventually challenging for market leadership. Adidas already has advantages like controlled access to raw materials, established distribution channels, economies of scale and protected intellectual property rights that can shield it from competition from any new entrants.

Internal environment analysis

Strategy building blocks (resources and capabilities)

The resources and capabilities of a business organisation can be termed as the building blocks that it uses to attain and sustain competitive advantages (Johnson, 2013, p. 251). Adidas has key resources and capabilities that help it create value and excellent performance.

Key resources include: Strategic innovation, integrated research and development, established distribution network, relationships with suppliers, good reputation, and a diverse brand portfolio.

The key capabilities include: supply chain capability, capability to outsource, product design capability, effective distribution, financial muscle, and diversification.

The VRINE model, which analyses whether a firm uses its resources for a sustainable competitive advantage, is applied to identify Adidas core competencies (Prahalad and Hamel, 2001, p. 78).

Valuable

-innovation is a key strength for this firm as it is valuable to customers, especially with ever-changing preferences and needs in clothing and footwear (Adidas.com, 2017).

-this resource is also valuable to the company as it fills its need to increase performance

-Diversification is also valuable as it relates to innovation. Its partnerships and acquisitions have allowed it to come up with unique products like Adidas headsets

Rare

-innovation is a rare resource as not all forms in this industry can generate innovative ideas regularly.

-however, diversification cannot be said to be a rare resource as any firm can enter into strategic alliances and also develop a unique brand portfolio

Inimitable

-the company’s innovation is inimitable

-also, the diversified brand portfolio is unique and inimitable as well.

Non-substitutable

-from the firm’s point of view, innovation and diversification are very important to be substituted

-however, depending on loyalty and the level of competition by industry rivals, these are substitutable on the side of the customer.

Exploitable

-from this analysis, it is clear that the German sports company takes full advantage of its core capabilities and resources

Adidas business level strategy

Three main strategies that Adidas uses can be identified from this analysis. The first is a differentiation strategy that is built around establishing itself as a premium quality and highly innovative brand (Adidas.com, 2017). This has been achieved through the development of various highly innovative products as well as collaborating with other firms to create fashionable sportswear. This customer-centric differentiation approach has seen the company’s market share increase along with its business strategy.

Strategic alliances have been vital to Adidas success. The company acquired some industry rivals like Reebok to penetrate the US market and also outsources some processes to firms in China in order to bring down operational costs. These strategic alliances with both manufacturers and suppliers have helped the company access new markets with minimal costs incurred and also expand its brand portfolio. Finally, Adidas strives to keep costs at the lowest possible level and therefore uses cost leadership to establish a competitive advantage. As opposed to differentiation and strategic alliances, monitoring operations costs is a strategy that is internal-oriented but also quite difficult to achieve (D. Banker, Mashruwala and Tripathy, 2014, p. 881). With this strategy, the company’s production budget has to focus on only the most necessary processes. Adidas has been able to keep their products cheaper than those of competitors like Nike.

Acceptability of strategy

Mergers with other companies are an effective strategy in increasing the company’s market share and its sales worldwide. Partnership with third-party logistics firms also helps the company minimise operational costs. According to Parkhe (1993, p. 796), alliances involve two organisations coming together to pursue a common strategic objective. It is risky for the partners as they have to share the benefits as well as the losses in case it is not successful. An unsuccessful venture posses the risk of wasted resources, as well as, financing and liquidity risks. The outsourcing strategy also increases the risk of rising input costs in emerging economies. However, the company stands to gain immensely as partnerships with companies in these countries open up new markets and opportunities.

Differentiation benefits the consumers who get to enjoy unique products from the company. For the company, however, there is the risk of being plagiarised by rivals and losing this competitive advantage. The low-cost strategy also presents the risk of losses as unpredictable markets have made the cost of inputs high. For the consumers, however, this strategy benefits them due to price wars between companies. Overall, the strategies by Adidas have been effective as it has been profitable and continues growing with each passing year. The company should stick to these strategies and give more emphasis on the low-cost strategy as it attracts more consumers.

References

adidas. (2017). adidas Official Website | adidas. [online] Available at: https://www.global.adidas.com/ [Accessed 18 Dec. 2017].

adidas.com (2017). adidas-group.com. [online] Available at: https://www.adidas-group.com/en/sustainability/compliance/environmental-approach/ [Accessed 18 Dec. 2017].

Adidas.com (2017). adidas-group.com/en/sustainability/products/sustainability-innovation/. [online] Available at: https://www.adidas-group.com/en/sustainability/products/sustainability-innovation/ [Accessed 18 Dec. 2017].

CRAIG, T. (2016). Organisations and the business environment. [Place of publication not identified]: TAYLOR & FRANCIS.

D. Banker, R., Mashruwala, R. and Tripathy, A. (2014). Does a differentiation strategy lead to more sustainable financial performance than a cost leadership strategy?. Management Decision, 52(5), pp.872-896.

David, R., Kittler, M. and Tobias, D. (2007). Success of International M&As: The case of adidas' acquisition of Reebok. [online] Available at: https://www.alexandria.unisg.ch/publications/55825 [Accessed 18 Dec. 2017].

Johnson, G. (2013). Exploring Strategy 10e Text Only. Harlow, England: Pearson.

Parkhe, A. (1993). STRATEGIC ALLIANCE STRUCTURING: A GAME THEORETIC AND TRANSACTION COST EXAMINATION OF INTERFIRM COOPERATION. Academy of Management Journal, 36(4), pp.794-829.

Porter, M. (2008). The Five Competitive Forces That Shape Strategy. HARVARD BUSINESS REVIEW. 86, 78-97.

Prahalad, C. and Hamel, G. (2001). The core competence of the corporation. Boston, MA: Harvard Business Review.