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Adidas in 2009: Has Corporate Restructuring Increased Shareholder Value?


August 1 2012
Evan J. Fontana
Evan.Fontana@gmail.com
Executive Summary
With the creation of Adidas by two German brothers in 1920, it was the innovator in the sports equipment industry
for marketing strategies and the creation of new cleats for the superior athlete. For over 40 years, it was the most popular
athletic shoe among Olympic athletes but with the combination of the market entry of competitor Nike, the death of the
Dassler father and son leaving the company astray, and a myriad of other factors, caused Adidas to fall from its industry
leading position to the bottom. Through a merger and an acquisition with some corporate restructuring, Adidas has come
back to be second in the sports equipment industry.
Introduction
The sporting goods industry depends on innovation, variety, marketing, and endorsements of professional athletes.
For the most part, each company in the industry is the same with only slight variations between them. The industry is very
competitive where companies are often acquiring companies and in some cases, dissecting and selling off to other
companies. The case study of Adidas from its inception in 1920 until 2009, demonstrates the constant acquisition of
companies in the industry.
Corporate Strategy
Before Restructure
Adidas was founded by a German baker Adolph (Adi) Dassler in 1920, his focus was to make competitive footwear
for athletes playing soccer, tennis, and track and field events.His brother Rudolph Dassler in 1924 joined the soleproprietorship;the company was named Gebruder Dassler Schuhfabrik (Dassler Brothers Shoe Factory) and prided itself in
innovation in design and marketing. They created the first track and field shoe with spikes and studs in the soles for better
competition; redesigned arch supports. These two innovations were one of 700 patents and property rights by Adi Dassler
until he passed away in 1978 (Thompson et. al, 2009). Marketing the company by providing free shoes to Olympic athletes
at the games in 1928 Amsterdam led to the next games in Berlin in 1936 to have most athletes using the innovative spiked
cleat included the Usain Bolt of the time, Jesse Owens. Eventually after a short hiatus due to World War II, the brothers
split over design differences leading Rudolph to create what is now Puma.
Adidas kept up with innovations from the screw in spikes and molded rubber track cleats, and screw-in studs on
soccer shoes led the company to be the favorite brand among Olympic athletes in 1960 with 75% of track and field athletes
competing in the Rome Olympic Games. This trend continued until the early 1970s when 78% of all athletes were wearing
Adidas in the Munich Olympics. Eventually the company expanded its product line in 1963 from shoes to soccer balls and
athletic apparel. When jogging became popular in the United States in the early 1970s, it became had the most popular
jogging shoe in addition to fashion with teenagers wearing all sorts of apparel with the distinctive logo. It is ironic though
the most popular shoe was for a training activity created by Bill Bowerman, who co-founded Nike and trained Steve
Prefontaine, track and fields Michael Jordan of long distance.
Robert Louis-Dreyfus, a French advertising executive who led a takeover of the controlling interest of Adidas with a
group of investors. His attempt at restructuring the company took the company from having 2% market share in the U.S.
with being ranked eighth in footwear to third by 1994 with a 75% increase in annual sales from 1993. Louis-Dreyfous
signed popular athletes such as Kobe Bryant, cut costs, improved styling, and new models of products being released (442).
The turnaround led to the eventual merger of a French sports equipment manufacturer, Salomon SA, for an agreed 1.5
billion in 1997 which led to the company now surpassing Reebok to place it in the second largest sports manufacturer. This
diversified Adidas by expanding into ski equipment, gold clubs, bicycle components, and winter sports apparel (442). At

the time, Salomon was the number one ski producer; TaylorMade was the second largest golf equipment manufacturer; and
Mavic was the leading producer of high-performance bicycle wheels and rims (442).
The business entities that were acquired were very strong and seemed like a good investment.However, the price of
Adidas stock fell once investors realized Adidas lack of manufacturing experience in sport equipment and the amount
agreed upon by Adidas to pay Salomon SA. Eventually a net loss of $164 million for Adidas-Salomon came as a result in
the loss of popularity from golf and winter sports equipment, and the integration of Salomons business did not meet
expectations. Poor performance of the stock declined by a third in 1999 from the high of 1998, led to Louis-Dreyfus
stepping down as president and replaced by Herbert Hainer who was the head of marketing in Europe and Asia in 2001.
After Restructure
Hainer restructured the company once again, able to have the stock price return to its 1998 high by 2004. Similar to
Louis-Dreyfus, he cut costs, introduced new products in apparel and footwear where he boosted advertising, continued
endorsing athletes, and opened company-owned retail stores (443).Hainer then divested the winter and Mavic brands of the
company to Amer Sports Corporation for 485 million as these divisions were seen as unprofitable, ultimately leaving
TaylorMade Golf the only remaining division from Salomon. After the divestiture, Hainer received approval from
stockholders to change the name of the company to Adidas AG.
Haines focus on restructuring the company revolved around athletic footwear, apparel and golf equipment. In 2006,
Hainers final step to completing his goal of restructuring was complete by leadingAdidas AG to acquire Reebok
International Ltd. for 3.1 billion. Reebok unlike the wide variety of products Salomon AS had, Reebok focused on athletic
footwear and apparel, including the complete design, marketing, and selling of Rockport footwearand CCM hockey
equipment (443). Adidas had also received Greg Norman golf apparel in the deal but quickly divested the brand.The
acquisition of Reebok nearly doubled Adidas revenues from 5.8 billion to 10.1 billion in years 2005 and 2006, respectively.
It also managed to open up a whole new market where Adidas was for the serious athlete, while Reebok offered a product at
a mid-level price for the everyday consumer at leisure (443).
In 2009, the corporate strategy shifted since the business model had become stabilized focusing on its three core
brands, Adidas, Reebok and TaylorMade (444). The strategy began to focus on several key factors: extending its
leadership in product innovation, expanding controlled retail space through its network of company-owned store, creating a
differentiated image for the products offered by each of its three business segments, and achieving efficiencies in its global
supply chain processes and activities (444). Adidas alsocontinued its focus on product design and innovation that made
them a contender in the industry once again under the expectation that each division would develop at least one new product
innovation per year which can be exemplified by the highly customizable r9 driver released by TaylorMade in 2009.The
company did continue to invest in its continuous brand building activities to keep the company differentiated from its
competitors.
PEST
Political. The only political issue would be issues in Asia regarding the thriving counterfeit market of athletic shoes
and apparel.
Economic.The global recession not only was responsible for harmingAdidass profits, it also effected its competitors
as they all operate in the same regions. It did though cause critics toquestion the long-term effectiveness of the
restructuring strategy from 2005 2006 (452).In addition, the depreciation in the value of exchanged currencies
would cause companies to lose profits.
Social.As Olympic athletes began to receive shoes for free in 1928 by the Dassler brothers, Nike eventually started
taking it to a new level and signing specific popular athletes to use its brand. Soon athletes would begin to receive
large monetary compensation.
Technology.Innovation between the companies caused a very competitive relationship. It went to the point Adidas
expected at least one new innovation per year for each of its three divisions.

Five Forces
Industry Competitors. It is extremely high for the competition among industry rivals. The dominant forces in the
industry are Nike and Adidas who are striving to expand into new and emerging markets while trying to outdo each
other, specifically Adidas trying to overtake Nike, by expanding product lines, increasing R&D and advertising
costs. New Balance and Puma which account for the smaller forces in the sports equipment industry and need to
make a presence in the online marketplace since they have rather low market share in the retail market.
Threat of New Entrants. The threat of new entrants into the market is a low to moderately low because the lack of
barriers for entry. However, with dominant players like Nike and Adidas, competition would make it difficult with
the necessary capital to invest for a start up, R&D, marketing and advertising, endorsements of popular and
upcoming athletes who do not have a contract with a company yet, and the ability for production whether
outsourcing or in-house.
Bargaining Power of Suppliers .With selling products that are made from raw materials that have a high abundance,
the threat of suppliers is low.
Bargaining Power of Buyers. It is high to extremely high for buyers because of the price sensitivity for buyers
purchasing bulk orders in the current economic climate. The buyer switching costs for substitutes are low with an
industry of only a few major companies, leads to a strong bargaining power for buyers.
Threat of Substitutes. The threat of substitutes is moderate from the consumer always looking for a reasonable price.
With only a few major companies in the sporting goods industry, it does not necessarily drive price down when the
threat of new entrants is low.
Figure 2. Porters Five Forces

Competitive Strength Analysis


Figure 3. Competitive Strength Analysis Business Units
Adidas
KSF
New product lines

Importance
Weight
0.3

On-going Branding

0.2

On time delivery

0.1

Company-owned stores

0.1

Accesiblity

0.3

Total

Reebok

Rating

Score
2.7
0
1.6
0
0.9
0
0.9
0
2.7

TaylorMade

Rating

Score
2.4
0
1.2
0
0.9
0
0.7
0
2.7

8
6
9
7
9

8.8

Rating

Score
2.1
0
1.4
0
0.9
0
0.5
0
2.7

7
7
9
0
9

7.9

7.6

Figure 4. Competitive Strength Analysis Product Lines


Adidas
KSF
Golf

Importance
Weight
0.25

Rating

Reebok
Score

Rating

TaylorMade

Score
0

Rating
9

Score
2.25

Hockey

0.25

2.25

Footwear

0.25

2.25

2.25

2.25

Apparel

0.25

2.25

2.25

2.25

Total

4.5

6.75

6.75

Strategic Group Mapping


In order to identify the market position of rivals, a visual tool that can be used is the strategic group map. The data
input about the companies in the industry will move the companies being analyzed away from equilibrium to their own
distinct quality on the map demonstrating the characteristics of the company through its weakness, strengths, differences
and similarities. The size of the company indicates the relative control it has in a particular industry or market; while the
proximity will determine its immediate and distant competitors.
The strategic group map below in depicted in Figure 6 shows the four industry competitors in athletic footwear in
the U.S. market between 2006 and 2008. New Balance with its size has the lowest market share of the four. Its distant
proximity shows it not only has the least amount of sales growth in the U.S. athletic footwear market, but the least amount
of product lines available for customers to choose from. Next is Puma which has slightly more product lines and a larger
market share than New Balance. Puma and New Balance though are struggling for a share in the U.S. market from the
sheer size of its competitors Nike and Adidas who control most of the market.
Adidas is overlapping Nike in the upper right quadrant which infers they have competing product lines that are both
doing fairly well depending on the line being sold. However, Nike still has a larger sales growth which equates to a better
financial performance in the U.S. market. Also, Nike has slightly more product lines which allow it to have a larger sales
growth, not to mention Nike is a U.S. company which must be factored into the market equation it is doing business in.

Figure 5. Strategic Group Map

Value Chain Analysis


When assessing the how competitive are a companys price and costs with that of its industry rivals can be analyzed
using the value chain analysis. The analysis is broken up into two parts, the primary activities and the support activities.
The primary activities are what is mainly responsible in creating value for customers while support activities facilitate and
enhance the performance of the primary activities (83).
Primary Activities. The efficient supply chain management initiative, World Class Supply Chain, allowed the Adidas
operation to produce enough products at a low-cost to distribute to the market on time and in force by the means of factories
in Asia and new inventory methods for its retail operations. Adidas used heavy marketing and advertising techniques to
grow its market share in the United States after its restructuring to gain back the region it once dominated by being the
innovator in athletic marketing. The development and expansion of its retail and online operation provided a service to the
consumer by being able to try to the product, shop at convenience and consult with an employee about different lines.
Support Activities. Through technology and product R&D, Adidas AG was the first to modify and create what is
now the modern track and soccer cleat. The new policy is each of its three units is responsible for at least one new
innovation per year. With Human Resource Management, the company hires and trains knowledgeable employees to
operate its retail locations while contracting to outside factories in Asia to assemble its product lines which saves on capital.
General Administration of Adidas has changed several times since the founder and son passed away but each new
administration has similar goals, to overtake Nike and give a new edge to the company through restructuring.

Value, Rarity, Imitability, Organization (VIRO)


Value. The product is not valuable. The brand is valuable but in a market with apparel and footwear, only a few
factors separate Adidas from its competitors.
Rarity. It is not rare. Adidas ability to manufacture products in Asia for low production costs, or have athletic wear
and apparel can easily be emulated by an entrant or a seasoned company like Nike.

Imitability. It is easily imitated. The design of its products can easily be emulated by other companies with little to
no cost to the company.
Organization. The firm is organized and able to exploit a resource quickly. With the efficient supply chain, it
enables Adidas to meet the market quickly with its products. Also, with its contracted suppliers in a resource rich
area, the access to new resources is easy to come by.
Financial Analysis
Between 2006 and 2008, the four leading sellers of athletic footwear in the United States were Nike, Adidas, New
Balance and Reebok. In that time, Nikes market share increased annually from 29.73 % to 34.61%; this was the only
company to have increased market share during the two years. New Balance decreased from 9.26% to 6.26% while Adidas
declined from 10.62% to 5.86%. Even with the acquisition of Reebok International by Adidas, it declined from 4.68% to
2.66%. Yet, even with a steep declining trend in market share to rival Nike, the Adidas brand increased in net sales. The
increase for Adidas was not significant as Nike but from 2003to 2005, there was negative growth in the company because it
was still recovering from the Salomon SA merger in 1998. In 2005, an increase can be seen from the divestiture that
occurred with its winter sports brands and its Mavic bicycle brand.
Figure 6. Net Sales (in Millions)
20
18
16
14
12

Nike

10

Adidas

New Balance

Puma

4
2
0
2003

2004

2005

2006

2007

2008

Year

Recommendations
Based on the information of this analysis, Adidas went from fast mover, to a company with no direction and failing,
it took a period of about a decade of difficult reorganizations, rose up to become a fast follower to sporting goods
equipment king, Nike. The business strategies at first were overzealous with the merger of Salomon SA but the nearimmediate divestiture of its declining popularity divisions and retaining TaylorMade Golf was a good decision.
The Reebok International acquisition was a positive move and helped encourage growth to Adidas in a time it
needed the boost. It not only removed a rival from the industry taking away market share, but Reebok added to its product
line. Reebok was the shoe for the everyday consumer at a mid-range price, while Adidas maintained its identity as a shoe to
the superior athlete (443). The niche market it caters to of hockey players with the Reebok line it overtook, CCM has
become the top seller of hockey skates and gear, bringing increased profits (450).

According to Figure 7, after the merger, Adidas was separated from its closest rivals Puma and New Balance in a
category all by itself. But it has stayed almost stagnant for two years. With the acquisition, Adidas needs to maintain its
innovation strategy with heavy marketing and advertising campaigns for new products. With the expansion into new,
emerging markets, Reebok stands to gain a substantial footing if it continues with its efficient supply chain management. It
will save time, capital, and with the combination of its new restocking methods, prevent a low inventory without added
more cost to the individual store.
Overall, unless Adidas AG begins to acquire companies within its core focus and divest unneeded divisions, the
business will most likely stay within its price point with a minor fluctuation due to increased or decreased revenues from a
bad economy or disappointing returns on foreign investment.