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Strategic

New Balance
Md Nazmus Shakib CPR No: 251182-4071 MSc in Economics and Business Administration Copenhagen Business School Date of Submission: 30th March, 2012

Fitwith

Exam case On New Balance Athletic Shoe Inc.

Course Teacher: Nicolai Pogrebnyako Course Name: Strategy Execution Course No: CM J41 Course Type: Elective (cand. Merc.)

Strategic analysis on New Balance Shoe Inc.

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Table of Contents

Introduction Core competitive Strategy of New Balance Shoe Inc. Implementation of key Strategic elements and their assessments Mergers and Acquisition decision Suggesting an implementation Plan Appendix A Appendix B

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Indeed for Davises, it’s no more just wondering to have “what” in the desert rather a big time asking for a
palatable success recipe to rewrite their future at this very crunching time; especially when the shoe manufacturing industry is actually taking the toll of crafting another mammoth story in USA. So far the good part is there hasn’t been much of a reactive acts from New Balance but on the flip side there hasn’t been any reaction at all cited, which is not good either. Remaining quite offed or action less pragmatism can lead to a severe dent both in revenue and in market share for a player like New Balance who has been in industry for so many years. Responding to the issue of ‘Adidas’s purchase of Reebok’ is therefore very crucial. So it can broadly be streamlined into two different approaches; needless to say that success can still be very much achieved by New Balance through:

A. Reshaping future( it’s now or never game)
- Sensing the visionary aspects of industrial patterns and growth phenomenon. - Match and analyze own expertise arena with the concept of ever changing world criteria.

B. Executing the “winning mantra”
- Mirroring own way of doing things with a critique eye and act upon it flawlessly. - Execute rights things at the right time in the right way. (Three “right”s) It’s not a happy ride eventually in future for New Balance neither in these days nor was there before. Just adding these flairs into the engine won’t necessarily guarantee to give it the growth that it is needed now. The more important things here is to look at the things more rigorously than ever and trying to shape forces accordingly to the way where the winds are blowing now. New balance has to decide itself whether it would stay as niche player yet having the best saleable quality i.e. best fitted SKUs with the longevity or experience a roaming in consumer demographics with style and standout mechanism. While addressing issues here in the market New Balance is well aware of the fact of fierce competition with the players like NIKE and of late created giant Adidas and Reebok. It’s not all about changing the game plans as a whole for New Balance rather a proactive move to plausible and stretchy game plans in materializing “Catch the fish where the fishes are”. Apparently yes - a right apparatus or a winning tool filled with results is much needed now through which New Balance can create a formation. The formations which will focus on leveraging its core strengths and at the same time address the concurrent issues of the market. Since its game on for New Balance in the field of Manufacturing shoe Industry, we need to assess whether on the facts that New Balance should go for BHAGs in the recent future or not. Initial screening would be addressing the inner strengths of New Balance to judge their strategic buttons whether they can stand out any competitors in the field or not. While talking on this issue a bit further, we would look for the in things that keep New Balance being different than others in the pitch.. Framing our eyes from

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strategic tipping point to a whole lot of operational stuffs where we see as such no surprises of minimum errors. What we see is a player struggling with maneuvering efficiency in the zone of production and supply chain channels over time only due to the fact of Economies of Scale. It’s just a happy problem to have for any companies in the market. All that matters for this was to have firefighters who can maneuver these issues but do New Balance needs any more hands on its new journey- is another assessment. And last but not the least actions speak louder than words-we would like to suggest an implementation plan covering its core entities intact and yet capacitating the amplifying versions of needful changes.

New Balance and its core components of Competitive Strategy
Looking at the timeline of New Balance as company, it actually inherits some of the core components that have made it different from others in the business. All these components comprised a business model through which New Balance has been running a moderate shows in the shoe industry till 2004. The components that set the strategic tone for New Balance are as follows: Business Focus: Since the beginning New Balance has maintained its principle to be being the manufacturing guy. Needless to say that when all the other competitors are actually making massive amount of money taking the easiest way of just outsourcing the whole pattern of making a shoe, the model here in New Balance has just been the opposite. They still are very much relying on the hands of USA guys in Massachusetts. As a matter of fact, the only and truly manufacturer in the industry right now is none other than New Balance and it is their uniqueness that made them different. Supply Chain Management: Since heads have the headaches similarly manufacturing formation in Business models gets the pain of having streamlined supply chain management; and its very much normal. Unlike others in the market New Balance has had one more operational level to reach to the end consumers, and that’s final assembling touch in USA. Relying on 25-75 rule in supply chain management is quite handy and behaving like a double edged sword at the end. But one has to say that it is still strategically active and playing with the difference in the market. USP: If we observe Nike we see a range of “just do it” thing while looking at the New Balance, what we see are a set of very basic thoughts yet how it just creates a differentiation. The very basic has made it completely unique. Making a performance product and putting a simple proposition as “fitting is a critical performance metrics” with fulfilling through widths for shoes. Therefore, shoes from New Balance have been with different blends than any other competitors around. Less of Marketing but Crucial presence ensured: New Balance by its vision not entirely going for all flashy marketing things in opposite the way the other main competitors are doing. Since business focus is

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completely different, New Balance has taken steps to go for less on marketing but to have a crucial presence as a whole. Reasoning the presence is not the fashion or the style or the iconic momentum, it has always been the “Fitting and longevity” which are portrayed in different narratives with quite an unconventional ways. The finest example is where every other market players tried to tag their products with some iconic figures around as if SKUs had been endorsed by the icons; New Balance has played it quite tricky. The subtle yet clearly pinned down the basic facts is what “endorsed by no one” campaign is just all about. Netting the small alive through Different Sales & Distribution approach: Unlike others New Balance has not confined its distribution framework to opening up BOs at different strategic points rather it has firmly focused on the small retailers who are somehow left outs by all big players in the industry. It has seamlessly worked for availability of the product of New Balance through using the best resources of independent and active field forces. FF model combined with relevant resource optimization eventually grossed a great mileage from a Brand’s TOM (top of the mind awareness) point of view, with registering a staggering better appeal than any of the competitors available in the market then.

Assessment of Strategic components into successful implementation
Assessing the core values against the take-off pattern of implementation was not at all satisfactory in some crucial areas. The fair side is yes there have been some rays of good fortune for some of the above said values. They are really unique of theirs kind. For example, we must not forget the challenge to bill $100 for 900 series where others were still then stacked to half of it. But looking at whole what we feel is the implementations of things were really not up to the desired mark. Vision less hiking with the current Business focus: It was really impressive to be just all be an USA thing for a product which has been fighting a tremendous competition in the shoe industry. But it has taken its fair share having all pains since when New Balance found it completely messed up with improper demand and supply planning in S&OP phases. As a result, all other core values like the Brand muscles and built in Brand appeal got into at stake. It seems like a penny could have been pounds but it just turned out odd only because of inefficient implementation and to some extent rigidness to go more global. Fitting widths & longevity is good but how far! For New Balance, manufacturing the shoes with different fitting widths and longevity has been the baseline of its selling point. In the passage of time it surfaced a clear call for more innovative and fashionable products, which was missing from them so far. It really means that products just fit into a certain segments only. The inner message is it just could not

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pass the test of time; which a brand must have in distinction to a product. Image was there but due to the absence of activities of creating a value proposition for Brands; New Balance just missed the timing to make a recipe of success in the “consumers are the king” era.

Key Element in operations
There are some elements which still missed right operational mix and it has to pay for this if things go unchanged. Operational excellence is then attainable when all the other combined factors are quite gelled together towards a common goal or mission. Looking at the area of elements we might see that: A. It has been previously estimated that the industry will enjoy a 6.3% growth annually. Being a player in the industry to grab this huge additional pie New Balance seems as such having no robust planning. Industry therefore would not wait to give the biggest chunk of additional $6Billion1 to the aggressive players like Nike or Adidas & Reebok. B. One of the major reasons of not having a robust plan and grabbing a growth in market share is New Balance can’t manage additional demand posed by the market share attainment. It actually has been exposed negatively regarding the “Just in time” supply chain issues. Therefore retaining the market share is meant to be far more effective. Going to have an additional growth was just an operational nightmare. C. With all planning, end of the day it boils downs to the fact of organizational structure and its philosophies. New Balance being private owned company does not seem to have that hunger for growth; which apparently need to be changed and revamped. And talking about its structure it is unnecessary flat organization where it needs to restructure with one or two more operational verticals to move the complacent silo out of company.

Making a big decision
Going for a decision on mergers and acquisition is just as tough as to create new ventures. It is crucial when one has to make a decision on reciprocating the issues happening in the market. Reacting on Adidas move, New Balance can actually go for an economic health check before making an outright decision. Many a times it seems all right in the case of M&A but eventually things doesn’t turn out to be the finest option as it is expected. So assessing the nerves of both internal and external factors are quite heavily involved here. We would look into a matrix where both external and internal facts are covered on the basis of the case here and then we give a judgment whether New Balance could opt for M&A or not.

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Appendix A: Market share 2004-09. ( based on the case)

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Starting with matrix it is comprised of 3 elements and these are: A. Financial health B. Available options C. CBA approach (cost and benefits analysis) All these major points have some very basic yet effective questions based on two different parameters; one is own responsiveness to the issue and external responsiveness alignment. All thoughts are as below: Financial Health Available options
Players current share in the market? Growth opportunities with the option? Control and Innovation mechanism.

Costs and Benefits
Does it match with the philosophies of principal company? Does structure leverage the company to add one more company? What about the culture and soft parts?

Does it have enough cash cycles to run the business? Assets against to liabilities condition? Capacity of financing and credit risk?

Financial Health Concerns: Based on the case what is available we can say that New Balance has been going with good numbers in terms of revenues and the cash cycle looks pretty alright. It seems company has a strong back up on its assets against to its liabilities which is 7:1 now. This is a fantastic result but it has come with the expense of low budget in Marketing and R&D arena, which will be bigger in the year ahead. Therefore, no straight complex factors have seemingly seen after analyzing its finances. So HH would be the options. Available options for M&A: Well after having tag team of Adidas and Rebook there hasn’t been many options left in the market. A player like Puma is known quite a bit but yet to register a growth in USA market. And Asics from Japan can also be an interesting duo in terms of product design and innovation. But the concerning fact is there has not been much market share that New Balance can readily gain right on top after M&A; merely a raise of 2%2 share may be handy & expensive deal in the end. Costs and benefits: Every single M&A has its stakes be it’s from own or from the others. A company which values more on its core strengths may have to trade its own ingredients in turn when it has to come up with more internationalism. In a sense it can be critically harmful for the overall health of the
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Appendix A: Market share 2004-09. ( based on the case)

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company. Since it’s not a one way, there will still be real possibilities that NB can settle the score with its supply chain through sourcing more than doing less manufacturing. Therefore the matrix3 citation would be as following: Financial Health High-High Available options Low-Low Costs and Benefits Low-High

We would like to comment based on the examined facts that New Balance would rather not opt for any M&A right at this moment. It would severely concentrate on its own strengths to leverage them to gain additional market share; which is very much possible and an effective choice.

Suggesting a high voltage Implementation Plan
It is indeed the demand of time that New Balance Company takes a leap beyond to make things work for them. Every alternate implementation plan is just a shadow of its strategic and tactical game plans. And most importantly they have to be aligned with the vision; it is therefore a tailor made solution in the end. Analyzing the bits and pieces of New Balance Company we can suggest a concrete implementation plan which would be adjusted with the time. Vision: To leverage own strengths at an effective format for each doors that NB serves. Operational Objective: To achieve 5% consecutive growth (both organic and creative) through powering the essence of NB brand values in 5 year timeline. Since the above said objectives can actually set the tone for New Balance, what we need now is to back up this measureable objective through definite short burst and long term planning.
A. 60-40 rule in supply chain in the coming 4 quarters. Short term Leverage the cash surplus to R&D development Planning Increase Marketing expenditures by 10% 6-12 months

Creative Initiatives for product development Long term Planning Single thread channel from supply chain to end product Structural changes in the company
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Create Brand muscles in the market and disseminate that “it’s just different”

24-48 months

Appendix A: M&A consideration Matrix. ( based on this Case)

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Short term Plan: Currently what matters most is the lead time problems in supply chain management and to fix it up there has been some initiative from the company named as NB2E. It’s just not enough when there would be a chance of visible growth issues in the market. To maintain the core fundamentals intact and at the same time reacting to the markets needs the followings: A. 60-40 implementation: A plan where NB will phase out their only manufacturing option to more flexible outsourcing through different customized vendors. Currently it is 100% of manufacturing, we are suggesting for reducing it to 60%. B. Leverage of Cash Surplus: while sourcing 40% from vendors would allow NB have less priced products still maintaining the inherent brand image, which is likely to shoot up the revenue. In turn we can see major cash revenue with a market share gain. The surplus then can be put to R&D and better marketing activities. C. Better off with Marketing Channels: Haven’t yet marked anything does not mean that NB won’t go for extra mile. With some solid trade marketing in the surface, NB can strengthen its values giving an edge to consumer to pride for VFM. (Value for money). Long term Plan: Once the short term plans are working at a full swing we should cover the followings: A. Adding one more operational vertical: It’s marketing at this age even if you have the best of the lot so ignoring it would be disaster. A global Marketing vertical is the answer now. B. Showcasing Difference: Once there have been initiatives from R&D and product teams NB can then play in different segments at a time with its age old solely USAish factors. C. Brand Muscles: To create brand identity evident in the mind of consumers NB has to play like others in the fashion and basic products but without lofty things since it owns “widths and longevity”. D. Single thread in Creating End products: Once sourcing has been reshaped, we can expect to leverage of experienced labor force in the market. Thus the availability will be ensured in retails. E. Maneuvering Resistance: Long term incentive plans for labor force can mitigate if there has been any resistance at all although it seems quite impossible from these labor forces. In an ever growing industry one should not be complacent with a little gain in the market share in a very short time frame. But it has to be reminded here that we expect that having all the above said facts are joined into the forces of NB they will reshape their future. It’s just can be sensed right away with a minimum of 5% growth in market share. This will lead to grow a company from just being fitting widths to a great company which still can be proud of what it “has” because none possess that virtue. And finally it is “what” both Davises would like to have in desert, I believe.

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Appendix A

Appendix B

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Appendix B