(MIR Series in International Business) Stefan Schmid - Internationalization of Business - Cases On Strategy Formulation and Implementation-Springer International Publishing (2018) PDF

MIR Series in International Business
Stefan Schmid Editor
Internationalization
of Business
Cases on Strategy Formulation and
Implementation
Series editors
Michael-Jörg Oesterle
Stuttgart, Germany
Joachim Wolf
Kiel, Germany
Stefan Schmid
Berlin, Germany
Klaus Macharzina
Stuttgart, Germany
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these fields including Cross-Cultural Management, and Comparative Management.
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Stefan Schmid
Editor
Internationalization
of Business
Cases on Strategy Formulation
and Implementation
Editor
Stefan Schmid
ESCP Europe
Berlin, Germany
ISSN 2511-2244 ISSN 2511-2252 (electronic)

ISBN 978-3-319-74088-1 ISBN 978-3-319-74089-8 (eBook)
https://doi.org/10.1007/978-3-319-74089-8
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Preface
For many decades, scholars have made a considerable effort to grasp the phenomenon
of internationalization. Numerous theories try to explain how, why, where and when
firms internationalize. While this book does not deny the important role of theory in
describing and explaining business and management phenomena, it has another
objective: it illustrates the various facets of internationalization in managerial prac-
tice. The book is primarily useful for teaching purposes in undergraduate and
graduate study programmes as well as in executive education. It can be mainly
used in classes on international business, international management and international
marketing.
The book starts with a text that outlines the strategic options that firms have when
formulating internationalization strategies. The core of the book consists of six case
studies on firms from various industries, i.e. the sporting goods industry, aviation
industry, grocery discount industry, motorcycle industry, computer and IT industry
and fast food industry. The cases cover various forms of entry into and operations in
foreign markets, such as export, franchising, joint ventures, strategic alliances,
greenfield investments, acquisitions and mergers. In addition to market entry
strategies, the cases provide readers, educators and students with insights into target
market strategies, timing strategies, allocation strategies and coordination strategies
applied by well-known companies. For each of the six cases, the table below gives
an overview of the main contents.
Firm (Industry) Main topics of the case study

Adidas and Reebok • Market entry strategies: acquisitions
(Sporting goods) • Target market strategies: market segmentation
• Brand positioning
• Post-acquisition integration
Airbus • Market entry strategies: mergers
(Aviation) • Allocation strategies: centralized vs. decentralized production
• Coordination strategies: top management structure
• Centres of excellence
• Political and governmental environment
• Restructuring
(continued)
v
vi Preface
Firm (Industry) Main topics of the case study

Aldi and Lidl • Market entry strategies: greenfield
(Retail: grocery • Target market strategies: market presence, market selection and
discount) market segmentation
• Timing strategies
• Allocation strategies: standardization vs. adaptation
• Internationalization process
• Competitive strategies: cost leadership, differentiation, focus
KTM and Bajaj • Market entry strategies: joint ventures
(Automotive: • Target market strategies: market selection and market segmentation
motorcycle) • Timing strategies
• Allocation strategies: centralized vs. decentralized R&D and
production
• Emerging countries: India
Lenovo • Market entry strategies: acquisitions, strategic alliances, joint
(PCs, smartphones ventures
and servers) • Target market strategies: market selection and market segmentation
• Timing strategies
• Post-acquisition integration
• Emerging countries: China
McDonald’s • Market entry strategies: franchising
(Fast food) • Allocation strategies: standardization vs. adaptation
• Competitive strategies: cost leadership, differentiation, focus
• Americanization
• Organizational culture
• Environmental change
I am grateful to the members of my team at the Department of International

Management and Strategic Management at ESCP Europe Berlin for their manifold
contributions as co-authors of the case studies, project managers, proofreaders or
sparring partners in discussions. In particular, I want to express my thanks to Mrs.
Renate Ramlau, Mrs. Cigdem Polat, M.Sc., Mr. Philipp Leding, MIM & MILR,
Mr. Simon Mitterreiter, M.Sc. and Mr. Sebastian Baldermann, M.A.—without their
hard work and valuable support the book project could not have been realized.
I wish all readers an insightful study in the fascinating area of internationalization
strategies!
Berlin, Germany Stefan Schmid

December 2017
Contents
Strategies of Internationalization: An Overview . . . . . . . . . . . . . . . . . . . 1

Stefan Schmid
Adidas and Reebok: Is Acquiring Easier than Integrating? . . . . . . . . . . 27
Stefan Schmid, Tobias Dauth, Thomas Kotulla, and Philipp Leding
Airbus: Managing the Legacy of a Complex International Merger . . . . . 63
Stefan Schmid and Frederic Altfeld
Aldi and Lidl: From Germany to the Rest of the World . . . . . . . . . . . . . 81
Stefan Schmid, Tobias Dauth, Thomas Kotulla, and Fabienne Orban
KTM and Bajaj: An Austrian-Indian Partnership in the Motorcycle
Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Stefan Schmid and Simon Mitterreiter
Lenovo: From Chinese Origins to a Global Player . . . . . . . . . . . . . . . . . 125
Stefan Schmid and Cigdem Polat
McDonald’s: Is the Fast Food Icon Reaching the Limits of Growth? . . . 155
Stefan Schmid and Adrian Gombert
vii
Strategies of Internationalization: An
Overview
Stefan Schmid
Abstract
Firms operating across borders have to take numerous strategic decisions. The
following contribution will provide an overview of the essential strategic
decisions that compose strategies of internationalization. The five central
dimensions of internationalization strategies are (1) market entry strategies,
(2) target market strategies, (3) timing strategies, (4) allocation strategies and
(5) coordination strategies. It is further argued that the potential of foreign units
abroad should be exploited to create and utilize sustained competitive advantages.
However, before formulating internationalization strategies, extensive strategic
analyses have to be undertaken, and the firm’s internationalization philosophy
and internationalization objectives should be carefully considered.
1 Introduction
Many firms operate across borders. Internationalization is relevant not only to stock-
market listed firms, such as Daimler or General Electric but also to many family-owned
firms, such as Haribo or Kärcher. In addition, many small and medium-sized firms and
start-ups are also not restricting their scope of activities to their home country.1
While some firms have a good performance abroad, others face failures. Neverthe-
less, it is undoubted that crossing national borders can be economically productive.
For thousands of years, borders have been successfully crossed for economic reasons.2
This contribution is based on Schmid (2009, 2013).

1
See Arregle et al. (2017), Coviello and McAuley (1999) and Pukall and Calabró (2014).
2
See Dülfer (2002), Moore and Lewis (1998, 1999).
S. Schmid (*)
ESCP Europe Berlin, Berlin, Germany
e-mail: sschmid@escpeurope.eu
# Springer International Publishing AG, part of Springer Nature 2018 1

S. Schmid (ed.), Internationalization of Business, MIR Series in International Business,
https://doi.org/10.1007/978-3-319-74089-8_1
2 S. Schmid
Therefore, it is not so much a question of if and why firms cross borders. Indeed, many
answers to this question already exist.3 A (more) interesting question concerns how
firms can cross borders. Experience shows that numerous possibilities exist.4
In this contribution, I systematically elaborate the strategic options available to
firms in their cross-border activities.5 What possibilities are at hand to utilize existing
competitive advantages or create new competitive advantages when operating
abroad? I will provide a brief synopsis of the alternative strategies for crossing
geographical borders—and not horizontal or vertical borders within firms.6
As we shall see, a “one strategy fits all” approach does not exist; rather, there are
various strategic options from which firms have to choose those, which, in their eyes,
promise to be successful. The question of which strategic cross-border activity
alternatives a firm opts for primarily depends on its internationalization philosophy
and its internationalization objectives. This leads to the first main assertion: firms
must be aware of their philosophy concerning cross-border activities and of their
internationalization objectives.
2 Internationalization Philosophy and Internationalization

Objectives
A firm’s basic orientation implies assumptions about which philosophy the firm
would like to follow when entering into being or becoming international. In search
for a simplifying categorization of the philosophies of internationally operating
firms, we come across Howard Perlmutter’s seminal work in International Manage-
ment literature. According to Perlmutter, there are essentially four possibilities:7
Firms can be
• ethnocentric,
• polycentric,
• regiocentric or
• geocentric.
Admittedly, the distinction between ethnocentric, polycentric, regiocentric and

geocentric orientations is very simplistic.8 Nevertheless, as rough as the distinction
may be, it is extremely relevant. A firm’s general orientation ultimately affects how it
3
See, for instance, Kutschker and Schmid (2011, pp. 379–487).
4
See Kim and Lee (2001), or various examples in Zentes et al. (2011).
5
See, for more details, Kutschker and Schmid (2011, pp. 823–1078).
6
See also Ashkenas et al. (1995, p. 3, pp. 11–21), Czinkota et al. (2011, pp. 302–331, 358–631),
Deresky (2017, pp. 233–334), Hill and Hult (2017), Lasserre (2012, pp. 26–225) and Luthans and
Doh (2015, pp. 274–421).
7
See Perlmutter (1965, 1969), Perlmutter and Heenan (1974) and Wind et al. (1973).
8
See Schmid and Machulik (2006).
Strategies of Internationalization: An Overview 3
acts and how it functions internally: namely, how the firm makes decisions, informs,
communicates, controls and sanctions.9 In brief, a firm’s philosophy has an impact
on its strategy, organization and management. For instance, whereas in an ethnocen-
tric firm, headquarters act as the main decision-making centre, in a polycentric firm,
the authority for making both operational and strategic decisions is transferred to
foreign corporate units. In geocentric firms, either decisions are made collectively by
both headquarters and its foreign subsidiaries, or they are shared between them. In
regiocentric firms, so-called “regional headquarters” play an important role in the
decision-making process.
An ethnocentric firm is run the same way across borders as is customary at home.
The firm’s own domestic culture is “imposed” on other corporate units abroad.
Conversely, in a polycentric firm, foreign entities are run in accordance with local
traditions. In a geocentric firm, something original occurs—experiences, values,
attitudes and practices from both sides of the border merge together, forming a
kind of “symbiotic and synergetic corporate culture”. In regiocentric firms, regional
subcultures exist under the umbrella of a main corporate culture.
At first glance, ethnocentric firms appear to “break down” borders, but it quickly
becomes evident that it is similar to a colonization and monopolization, as is
sometimes practiced (and often skilfully masked) by U.S. firms. Polycentric firms
do not just accept the existence of borders but also their productivity. They recognize
that it can be worthwhile to operate in different ways in different countries. Geocen-
tric firms try to achieve a “dissolution of borders”, transcending national borders.
However, new “demarcations” are often simultaneously created, such as
“demarcations” between themselves and other firms owing to their (newly devel-
oped) strong corporate cultures. Regiocentric firms recognize boundaries between
regions, yet they also have to ensure that the regional entities do not detach
themselves entirely from each other with respect to culture.
Figure 1 provides a comparison of the four internationalization philosophies; the
differences are illustrated in a simplified visual form. Regardless of which philoso-
phy is dominating, internationalization is not an end in itself for firms. There should
be clear objectives behind internationalization; thus, each firm must continually
reflect on why it actually wants to operate across borders or why it wishes to
maintain or develop its activity across borders. There are essentially four distinct
categories of objectives. Through cross-border activity firms may pursue
• resource-seeking objectives,
• market-seeking objectives,
• efficiency-seeking objectives and/or
• strategic-asset-seeking objectives.10
9
See Heenan and Perlmutter (1979, pp. 18–19).
10
See Dunning and Lundan (2008, pp. 67–76). See also a recent debate on internationalization
objectives in Multinational Business Review, with contributions by Benito (2015), Cuervo-Cazurra
and Narula (2015), Cuervo-Cazurra et al. (2015) and Van Tulder (2015).
4 S. Schmid
Ethnocentric Orientation Polycentric Orientation
Regiocentric Orientation Geocentric Orientation
Headquarters Subsidiary
Management techniques, concepts and styles
Figure 1 The difference between ethnocentric, polycentric, regiocentric and geocentric

orientations. Source: Adapted from Bleicher (1992, p. 10)
The distinction between these internationalization objectives is important, as it is

from these objectives that logical strategic options primarily arise.11 If a firm is only
looking to gain access to certain resources (e.g., scarce raw materials), international-
ization takes on a different form than if a firm primarily wishes to exploit new
markets (i.e., to gain new customers). Internationalization takes another course again
if the objective is to improve efficiency, e.g., through economies of scale or
economies of scope, or if gaining access to local networks in foreign countries is
the key driver behind internationalization. It should also be noted that the majority of
internationalization steps are not based on one objective alone. Frequently, a whole
set of objectives leads a firm to take certain internationalization steps. Moreover, the
objectives—and the motives behind them—change over time. Thus, the original
motive behind the initial entry into a particular country might be complemented by
many other motives over time.12
Starting with their internationalization philosophy and their internationalization
objectives, firms can formulate and openly “proclaim” specific strategies for their
activities across borders. Yet, even before it comes to the formulation and “procla-
mation” of these strategies, a detailed strategic analysis should be conducted. In
other words, full strategic analysis on more than one level is the first key to creating
or utilizing competitive advantages through cross-border activity.
11
See also Ghoshal (1987).
12
See Schmid and Grosche (2008, pp. 104–127).
3 Strategic Analysis in the Context of the International Firm
Strategies are considered to help firms achieve their objectives. To do so, they must
contribute to the creation and utilization of competitive advantages. In the long run, a
firm can realize its philosophy and achieve its objectives only if it holds a competi-
tive advantage. Particular importance is attached to the strengths of a firm in terms of
its resources, capabilities and competencies. Nevertheless, a firm’s resources,
capabilities and competencies can become competitive advantages only if they fit
the appropriate environment—on both sides of the border.13 The environment
comprises both the macro environment (i.e., the political, legal, macroeconomic,
cultural and social conditions) and the industry and market conditions under which a
firm operates.14 Examples of the latter include customer demand, the competitive
situation and suppliers’ bargaining power.
SWOT analysis, a well-known tool in Strategic Management that is illustrated in
Figure 2, offers a clear explanation. Firms must analyse their strengths and weaknesses,
balance them against opportunities and threats in the environment, and then formulate
strategies based on this information. Strategic analysis is far more complex for interna-
tional firms than for domestic ones.15 SWOT analysis must be performed at three levels:
• first, at the level of headquarters and the home country,

• second, at the level of each (existing and potential) foreign unit and the respective
host country,
• third, at the level of the overall firm and the world market.
The theoretical background for the elements included in the SWOT analysis
stems from Industrial Organization and the Resource-Based View within Strategic
Management literature.16 A differentiated strategic analysis at several levels is the
first key to success. Some resources, capabilities and competencies that can be
turned into competitive advantages in the home country owing to the local environ-
ment may have little impact in some (potential) host countries. Conversely, other
resources, capabilities and competencies that might be insufficiently developed for
the home market can prove successful abroad.17
Differences between the home market, on the one hand, and the host market or
even the world market, on the other hand, can also stem from differences in the
competitive situation. Contrary to other assertions, very few industries are global
industries. In only the fewest industries, the same competitors can be found univer-
sally, and in only the fewest of cases, competitors behave identically worldwide. It is
13
See Schmid and Kutschker (2002) for an overview of these basic reflections on Strategic
Management.
14
See Daniels et al. (2015, pp. 43–172), Dülfer and Jöstingmeier (2008) and Schreyögg (1993).
15
For a more detailed discussion, see also Schmid (2011).
16
See, for example, Bamberger and Wrona (1996), Zu Knyphausen (1993) and Ossadnik (2000).
17
See also Cuervo-Cazurra et al. (2007, pp. 712–714).
6
Analysis of the Analysis of the

SWOT Analysis
Environment Firm
Firm Environment Firm Environment

Macro environment
- Natural/ecological Strengths Opportunities Strengths Opportunities
environment General firm
- Political environment analysis
- Legal environment - Strategy
- Governmental Weaknesses Threats Weaknesses Threats - Structure
environment - Systems
- Fiscal environment - Culture
- Macroeconomic Host Country A Home Country Host Country B -…
environment
Firm Environment
- Technological Functional firm
environment Strengths Opportunities analysis
- Demographic environment - Research
- Educational environment - Development
- Cultural environment - Procurement
- Linguistic environment Weaknesses Threats - Operations
- Religious environment - Marketing
- Socio-psychological - Distribution
Host Country C Host Country D
environment - Service
-… - Finance
Firm Environment Firm Environment
- Leadership
Micro environment Strengths Opportunities Strengths Opportunities - Organization
- Markets - Human resources
- Industries -…
- Competitors
-… Weaknesses Threats Weaknesses Threats
S. Schmid
Figure 2 The SWOT analysis in international firms

much more common for the competitive situation of most industries to differ from
country to country—or from one region to another.18
Hence, how can international firms create competitive advantages across borders?
The path to competitive advantages lies in their internationalization strategy or, more
precisely, in several dimensions of internationalization strategies.19
4 The Five Dimensions of Internationalization Strategies
4.1 Overview
Based on a detailed analysis of the domestic market, the host markets and the world
market, firms can formulate strategies. In particular, the internationalization strategy
has to be formulated to include answers to the five following questions (see Figure 3):
Market Entry
Strategy
Coordination Target Market

Strategy Strategy
Allocation Timing
Strategy Strategy
Figure 3 Dimensions of internationalization strategies
18
For a critical reflection of “globalization” and “global”, see Engelhard and Hein (2001),
Kutschker and Schmid (2011, pp. 159–215) and Schmid (2000).
19
For other classifications of the dimensions of internationalization strategies, see Dimitratos
(2004), Kutschker (1995), Kutschker and Bäurle (1997) and Ringlstetter and Skrobarczyk (1994).
8 S. Schmid
• Which market entry modes are to be used to internationalize (market entry

strategy)?
• Into which target markets will the firm internationalize (target market strategy)?
• What time-related issues are to be considered with regard to the internationaliza-
tion of the firm (timing strategy)?
• How does the firm intend to act regarding the conflicting demands between
centralization and decentralization as well as between standardization and adap-
tation (allocation strategy)?
• How does the firm wish to coordinate its international activities (coordination
strategy)?
(Almost) every internationalization step that a firm takes should constitute an

answer to each of these five questions. The problem is that, in practice, some
internationalization steps are not deliberately made after having strategically
connected all five dimensions. In other words, not every internationalization step
of a firm results from strategic answers to each of the five questions. Moreover, not
all firms and their managers consider the interdependencies between the strategic
dimensions for every step of internationalization that they make. Nonetheless, it is of
little use for a firm to break into several markets and then not to end up in a position to
coordinate its dispersed activities. The goal must be to use the five questions in order
to confirm that the planned route is in fact apt for creating, maintaining, cultivating,
further developing and utilizing competitive advantages. Market entry strategy,
target market strategy, timing strategy, allocation strategy and coordination strategy
are only worthwhile strategies if they help the firm to exploit existing competitive
advantages or create new ones. The five strategy dimensions that have been adopted
by many other authors in the meantime should be taken into account
simultaneously.20
The aforementioned strategies, which have an explicit international orientation,
are generally found at the business unit level. In many firms, business units differ
(considerably) with regard to their internationalization. Hence, within Siemens, for
example, the “Building Technologies” unit follows different strategies than the
“Energy Management” unit. Likewise, the “Financial Services” unit cannot be
compared in terms of internationalization to both of these units or any other unit,
such as the “Mobility” unit.
Furthermore, although they may vary among business units, internationalization
strategies must be in line with the firm’s overall strategy.21 Therefore, a firm’s
internationalization strategy must be coordinated with other strategies, such as
growth strategy, consolidation and shrinking strategy, product/market strategy (mar-
ket penetration, product development, market development, diversification),
20
See, e.g., Sachse (2003, pp. 166–168).
21
For strategy in general and for various strategy levels, see Bamberger and Wrona (2013), Bea and
Haas (2016), Collis and Montgomery (2005), De Wit and Meyer (2010), Hungenberg (2014),
Ireland et al. (2017), Johnson et al. (2017), Lampel et al. (2014), Müller-Stewens and Lechner
(2016) and Welge et al. (2017).
so-called competitive strategy (cost leadership, differentiation and focus), technol-

ogy and innovation strategy, and various functional strategies (e.g., procurement
strategy, operations strategy, marketing strategy, and distribution strategy). Interna-
tionalization strategies alone do not create competitive advantages. In other words,
internationalization strategies are useless unless they are based on or combined with
other strategies.
4.2 Market Entry Strategy
Spectacular mergers and acquisitions are regularly reported in the media and in
International Management literature.22 Examples from the past include Bayer’s
takeover of U.S.-American Monsanto, the merger between French Lafarge and
Swiss-based Holcim or the acquisition of Opel and Vauxhall by PSA. Yet, cross-
border (mega-)mergers and acquisitions are not only economically questionable23
but also by no means the only possible way to become active in foreign markets.24
The most important market entry strategies are summarized in Figure 4.
Franchising
Licensing Contract Manufacturing
Export
- Direct Joint Venture
- Indirect
Central Market Entry and
Market Development Strategies
Merger Strategic Alliance
Subsidiary
- Greenfield investment Minority Stake
- Acquisition
Figure 4 Market entry strategies of international firms
22
See Lucks and Meckl (2015).
23
See examples in Ghemawat and Ghadar (2001) and Lenel (2000).
24
For overviews on market entry modes, see, for instance, Laufs and Schwens (2014) or Morschett
et al. (2010).
10 S. Schmid
Firms can undertake exports, grant licences, build up franchise systems, execute
contract manufacturing agreements abroad, form joint ventures or strategic alliances,
acquire minority stakes in other countries, deal with legally dependent branches
abroad or set up new subsidiaries.25 Thus, there is a number of ways via which a firm
can venture abroad. Figure 5 offers an overview of the possible market entry
methods.
Numerous criteria play an important role in choosing the appropriate market entry
strategy, such as resource consumption, reversibility, flexibility, speed, possibilities
for control, various types of risk and implications on rivalry.26
Decisions about internationalization should not be limited to decisions about
specific forms of market entry. They also represent decisions about the envisioned
target markets—decisions about the general market presence, market selection and
market segmentation.
4.3 Target Market Strategy
Considerable attention in literature has already been devoted to the question of target
market strategy, especially related to international marketing.27 Figure 6 offers a
simplified overview of the relationships between the sub-strategies of market pres-
ence strategy, market selection strategy and market segmentation strategy.
First of all, it has to be decided where a firm would like to be geographically
present. Whether a firm opts for specific foreign markets, for regions (e.g., Europe,
as in Figure 6) or for the world market should be clarified and continually reviewed.
Specific foreign markets (e.g., U.K., Spain and Italy in Figure 6) can be selected
based on decisions about the general market presence, and the market selection
strategy can thus be formulated.
Yet, an ideal market selection strategy does not exist. Each firm has to choose
between foreign markets after individual consideration, during which it should not
only consider environmental factors but also its own resources, capabilities and
competencies. Numerous examples show that even firms from the same industry
have for a long time evaluated and selected foreign markets differently: Wella was
(successfully) active in the Japanese market considerably earlier than the majority of
its competitors. Traditionally, PepsiCo has paid more attention to Eastern European
markets than Coca-Cola. Volkswagen (and the Volkswagen division Audi) ventured
into China as early as the 1980s, at a time when that market was not even considered
by other automobile manufacturers. Often, those foreign markets that are not even
25
See examples in Fuchs and Apfelthaler (2009, pp. 318–380), Root (1998) and Young et al.
(1989), or many of the contributions in Macharzina and Oesterle (2002b).
26
For details, see Kutschker and Schmid (2011, pp. 931–941) and Schmid (2002a).
27
See Berndt et al. (2016, pp. 25–162), Hünerberg (1994, pp. 49–145), Keegan et al. (2002,
pp. 237–288) and Meffert et al. (2010, pp. 36–197). See also two recent special issues in Interna-
tional Marketing Review, edited by Papadopoulos and Martín Martín (2011a, b).
International market entry strategies
• Indirect Exports: The exporting of domestic goods or services abroad. The firm does not export
goods and services itself, but rather via domestic export intermediaries (e.g. via export management
companies). For example, many farmers grow agricultural products; they do not sell these products
across borders, but it is via cooperatives and export management companies that their products
get abroad.
• Direct Exports: The exporting of goods or services abroad in two ways: firstly, without foreign
intermediaries (e.g. directly to the end consumer or directly to the foreign wholesale or retail industry)
and secondly by means of foreign intermediaries (e.g. through salesmen, commission agents,
stocking agents, del credere agents or a confirming house abroad). For example, many of the
medium-sized world market leaders (“Hidden Champions”), identified by Hermann Simon, started
exporting abroad very early on. Often more than 50% of their turnover comes from direct exports
(see Simon 2012).
• Licensing: Licensing involves a contractual agreement, whereby a domestic licensor grants foreign
licensees the right to certain assets, such as patents, trade marks, copyrights or know-how,
under agreed terms and conditions. In licensing, a firm assigns rights of manufacturing and/or
use to a foreign partner, in return for the payment of royalties. For example Coca Cola’s
internationalization started with a multitude of licenses, granting firms, outside the US the bottling
and marketing rights for soft drinks.
• Franchising: In franchising, a domestic franchisor entrusts foreign franchisees with a
comprehensive, often long-established and proven purchasing, sales, organizational and
management concept. In return, the franchisor receives a lump sum and/or regular franchising
royalties from the franchisees. For example, more than 60% of the 3,000 Body Shop stores woldwide
are based on franchising contracts.
• Contract Manufacturing: Another option for foreign market entry is contract manufacturing,
whereby a firm transfers single or multiple steps of the manufacturing process to a foreign
contractual partner. Pre-production, final production, refining or complete production might
thus take place abroad. For example, more than 90% of the Adidas and the Nike production
are carried out by Asian contract manufacturers in countries such as Bangladesh, China,
Vietnam or Indonesia.
• Joint Ventures: A cross-border joint venture is a joint enterprise formed with one or more
foreign firms. Each firm brings capital, knowledge and manpower to the newly founded firm.
For example, in 2003 BMW formed a joint venture with Chinese car manufacturer Brilliance to
enter the automotive market in China. Within the scope of the joint venture, BMW and Brilliance
have manufactured the BMW 3 Series, 5 Series and the BMW X1 in two jointly run automotive
plants in China. In 2014, the joint venture was extended for another 10 years.
• Strategic Alliances: A strategic alliance is a collaboration between at least two, though generally
several, firms. Rather than setting up their own new firm, as in a joint venture, the partners of a
strategic alliance work together in clearly defined domains. They hope to achieve their objectives
more easily and more quickly through cooperation. For example, the largest alliance within the aviation
industry is Star Alliance (incl. Lufthansa, United Airlines, Air Canada, Singapore Airlines, Thai Airways),
which competes against other alliances, such as oneworld or SkyTeam.
• Minority Stakes: In a minority stake a domestic firm obtains–sometimes as a precursor to acquisition–a
maximum 49.9% stake in a foreign firm. For example, Swiss food group Nestlé has a 23.29% stake
in French cosmetic group L'Oréal. In 2016, China’s aviation and shipping conglomerate HNA Group
took a 25% stake in the US hotel chain Hilton.
• Branches: Plants, affiliates and representative offices abroad are all legally dependent foreign
engagements. For example, banks first set up representative offices in various foreign markets in
order to procure business, before (possibly) creating their own subsidiaries later on.
• Subsidiaries: Subsidiaries are legally independent foreign entities of a firm. In terms of their structure,
it is possible to differentiate between newly set up operations (greenfield investments) and
takeovers (acquisitions) and in terms of ownership, between majority stakes (between 50.1%
and 99.9% of stock or of voting rights) and wholly-owned subsidiaries. Beyond that there are
subsidiaries with a complete value chain and specialized subsidiaries (production subsidiaries, sales
subsidiaries, financing subsidiaries). For example, Nestlé has hundreds of subsidiaries with different
functions spread around the world. In France alone there are more than a dozen different entities.
• Mergers: A domestic firm merges with a foreign firm in order to collectively increase their market
presence. For example, spectacular “cross-border mergers” in recent past include the mergers of British
SABMiller and Belgian Anheuser-Busch InBev, or of the Chinese chemical company ChemChina and
Swiss-based agricultural company Syngenta.
The advantages, disadvantages and specific conditions of each alternative are explained and discussed
in detail and with examples in: Kutschker/Schmid (2011), pp. 848-941.
Figure 5 Short overview of the market entry strategies available to international firms
12 S. Schmid
Market Presence Strategy Three countries in Western Europe
UK Spain Italy
Market Selection Strategy
Intra-National
Market Segmentation
Market Segmentation Strategy
Integral Identical promising market

Market Segmentation segments across countries
Figure 6 Target market strategies of international firms
considered by large firms can, in this context, be interesting to small and medium-
sized international firms. The same applies to the targeting of market segments.
Here, too, there are often niches to be tackled abroad. In fact, firms must not only
make decisions regarding their general market presence and market selection but
formulate a market segmentation strategy. Within a chosen foreign market, there are
numerous segments. At the outset, firms can segment each individual foreign market
and decide which segments they want to tackle. In addition, the identification of
cross-border, transnational market segments is recommended.
In particular, three criteria play a central role in the selection of foreign markets
and market segments—aside from the firm’s own resources, capabilities and
competencies:
• the attractiveness of the foreign market and market segments,

• the risks of the foreign market and market segments,
• the entry barriers to the foreign market and market segments.
There are various tools that are helpful for assessing attractiveness, risks and entry
barriers. Among them are checklists, score evaluation techniques or portfolio
techniques.28
28
See Andersen and Buvik (2002). Recent examples include Ozturk et al. (2015) and Schu and
Morschett (2017).
4.4 Timing Strategy
In addition, it has to be stressed that the right timing contributes to the realization of
competitive advantages.29 A firm can enter a particular foreign market either earlier
or later than its competitors. In an international context, there are two categories of
competitors: competitors who, like the firm itself, are internationally active and
competitors who operate in a particular foreign market and are thus considered
local rivals. Compared with local competitors, an international firm is generally at
a disadvantage in terms of time because local competitors are already established.
However, compared with international competitors, the international firm can
strategically position itself in terms of timing. For each foreign market, the firm
can decide whether it would rather enter as a pioneer or as a follower. What are the
advantages of a pioneer strategy (first mover strategy) and of a follower strategy?
Pioneers assure themselves a lead in terms of profile and image in a particular foreign
market. They can gain early experiences, which allow them to adapt to local conditions
and developments. Moreover, they can build up strong relationships with local
suppliers, join local networks early on, build up a local customer base and set standards
on the market. Consequently, they can achieve quasi-monopolistic pioneer profits and
establish market entry barriers to bar (potential) competitors from market access.
Yet, the follower strategy has its advantages, too. The follower has the opportu-
nity to learn from the pioneer’s mistakes in a particular foreign market. It often finds
an already stable environment (e.g., in terms of political and legal conditions) and
has more reliable information (e.g., consumer buying patterns), and it can take over
pre-established standards and benefit from the pioneer’s investments (e.g., customer
awareness of certain products). Thus, the follower often saves on costs and can, in
some instances, beat the pioneer to the break-even point. Yum! (formerly Tricon),
the owner and franchisor of restaurant chains Kentucky Fried Chicken, Pizza Hut
and Taco Bell, operates in this fashion. Yum! will typically not penetrate a particular
foreign market until McDonald’s has made fast food restaurants popular there.
Whether a firm should tackle a particular foreign market as a pioneer or as
follower is not the only question surrounding timing strategies. They also raise the
question of how a firm should enter several foreign markets over a period of time.
Two principle options, discussed at length in the literature, are the sequential strategy
and the parallel strategy.30
According to the sequential strategy, a firm decides to enter foreign markets
sequentially. The firm first targets just one additional foreign market, often close to
the home market, and then enters another, before subsequently continuously increas-
ing the number of its foreign markets. This strategy implies that market entry into
several foreign markets will stretch over a longer period of time. Nevertheless, the
sequential strategy has numerous advantages: the firm’s demand for resources is
staggered over time, and it can offset initial losses in a new market with profits in
29
See also Meffert and Pues (2002) and Pues (1994, pp. 237–249).
30
See, for example, Henzler and Rall (1985, pp. 186–188), Kreutzer (1989, pp. 238–253) and
Ohmae (1985, pp. 33–34).
14 S. Schmid
other markets, extend the life cycles of certain technologies and products and learn
from earlier market entries for later market entries, thus limiting the risk of failure.
Similarly, with the sequential strategy, it is possible to enter easy-to-access, more
familiar markets at first and more difficult, less familiar markets later.31
The parallel strategy also has its advantages. According to the parallel strategy, a
firm decides to enter several, or even all, of the targeted foreign markets simulta-
neously or within a short period of time. Thus, there is no differentiation in terms of
time at the moment of market entry. The greatest advantage of the parallel strategy is
therefore that first-mover advantages can be achieved in many countries. Furthermore,
the parallel strategy enables a quicker amortization of fixed costs, facilitates the
establishment of standards on a worldwide scale (e.g., telecommunications or con-
sumer electronics) and enables surprise effects among consumers and competitors.
Considering that both strategies—whether sequential or parallel—have their
advantages (and disadvantages), a combined sequential–parallel strategy is often
suitable. A firm can thus enter some foreign markets sequentially and others simul-
taneously. Generally, restrictions in terms of financial resources and manpower lead
to such an approach. The three strategies—sequential, parallel and combined
sequential–parallel—are illustrated in Figure 7.
Entry
Country A
Sequential Country B
Strategy Country C
Country D
Country E
Timeline Years
0 1 2 3 4 5
Entry
Parallel
Strategy
Country A Country B Country C Country D Country E
Timeline Years
0 1
Entry
Country A
Combined Country B
Sequential-Parallel Country C
Strategy Country D
Country E
Timeline Years
0 1 2 3 4 5
Figure 7 Timing strategies of international firms
31
See, in this context, the explanation of the Uppsala approach in Johanson and Vahlne (1977,
1990), as well as in Schmid (2002b).
Moreover, cross-border activity continually raises the question of which value

activities are to be undertaken and how the products and services are brought to
market.
4.5 Allocation Strategy
Regarding allocation, cross-border activity calls for decisions regarding the

conflicting priorities between centralization and decentralization, on the one hand,
and between standardization and adaptation, on the other hand. However, what is
meant by centralization and decentralization? A firm can geographically centralize
(concentrate) or decentralize (disperse) its value activities, as Porter (1989)
demonstrates. Figure 8 shows the options available in a simplified way.
The degree of centralization/decentralization can vary depending on the particular
value activity, and within each activity, there may be different reasons to centralize/
decentralize. In many firms, so-called downstream activities, such as marketing,
sales and customer service, are more likely to be decentralized; i.e., in the majority of
foreign markets, they are undertaken on a local scale. In contrast, upstream activities,
such as research, development and production, are more commonly centralized and,
in some firms, only carried out in the home country. However, centralization and
decentralization strategies do not just concern the allocation of value activities; they
also apply to the allocation of decision-making authority. The firm can ultimately
determine where the decision making for various decision-making categories takes
place.
Strategy of Configuration
Strategy of Concentration/ Strategy of Dispersion/

Combined Strategy
Strategy of Centralization Strategy of Decentralization
Home Country
Host Country 1
Host Country 2
Host Country 3
Research & Development Procurement
Production Sales
Figure 8 Centralization and decentralization of activities. Source: Based on Kutschker and

Schmid (2011, p. 1001)
16 S. Schmid
As with activities and decisions, an international firm can vary the ways of
customization. It can offer its products or services across the world in an identical
manner, i.e., standardized, or in different ways, i.e., adapted.32 Many firms have
made major errors in the past, specifically with standardization and adaptation
strategies. How often have firms falsely assumed that consumer desires would be
identical all over the world? How often have the idea of market standardization, the
erosion of cultural differences and the globalization of demand been propagated?33
How often has it been supposed that advertisements could be standardized? How
often have firms believed that sales and marketing in country X would not differ
from those in country Y? Finally, how often have firms failed as a result? In short, in
the past, the loss of revenue through overly excessive standardization was greater
than the achieved cost savings for many firms.
It is certainly not suggested that all firms should profoundly adapt all of their
products and services—what fatal consequences that would have for Moët
Hennessy! However, it should be noted that even alleged global firms are in fact
not global firms: McDonald’s offers hamburgers all across the world, but the
restaurant menus differ from country to country. Marlboro cigarettes made by
Philipp Morris are available (almost) everywhere, but, as smokers attest, the taste
of the cigarettes varies between countries. Firms should always bear in mind that
deciding between standardization and adaptation is a question not necessarily of
“either . . . or” but rather of “both . . . and”. The core product can, for example, be
standardized, but the additional characteristics of the product can be adapted. Or the
brand name can be standardized, but the product itself adapted. These are well-
known pearls of wisdom. Yet, in some firms, they are sadly not incorporated into
strategies, because it is simply more convenient to do everything abroad as it is done
at home.
In plainer terms, we can state that the market entry strategy, target market strategy
and timing strategy enable firms to spur on their internationalization. By means of
their allocation strategy, they can simultaneously make decisions concerning where
and how to add value within their network of corporate units. Yet, an important
element is still lacking: international activities must also be coordinated.
4.6 Coordination Strategy
Coordination strategies constitute a further dimension of internationalization

strategies.34 They comprise a broad spectrum of measures and mechanisms, adapted
to hold the international firm together—and to merge its strategies.35
32
See, e.g., Müller and Kornmeier (2002, pp. 142–212).
33
As a “classic” source, see Levitt (1983).
34
For details, see Kutschker and Schmid (2011, pp. 1015–1065).
35
For international coordination mechanisms, see, e.g., Macharzina and Oesterle (2002a) or Wolf
(1994, pp. 115–119).
First, there are structural coordination strategies. The choice of the international
organizational structure, the creation of divisions and departments that deal with
foreign business, and the organization of cross-border teams and projects can all
contribute to coordination. However, they are in no way sufficient. Structural
coordination strategies must (usually) be complemented by technocratic coordina-
tion strategies. This entails the coordination of international activities regarding
plans, budgets and reporting systems. Transfer pricing systems also develop a
coordination effect. In addition, personal coordination strategies are particularly
important. Visits, short-term transfers of (executive) managers and spontaneous
personal correspondence facilitate information and communication within interna-
tional firms. The expatriation and repatriation between headquarters and subsidiaries
plays an important role in the course of the mutual development and implementation
of strategies. Finally, there is the option of culture-oriented coordination. Corporate
culture can establish a certain integrative appeal within international firms in the
form of normative control and integration—even if its effect is limited owing to
cultural differences in between countries.36 Figure 9 provides a visual summary of
all the strategic options developed so far.
Strategies of Internationalization
Market Entry Target Market Timing Allocation Coordination

Strategy Strategy Strategy Strategy Strategy
∑ Export ∑ Market Presence ∑ Timing Strategy for ∑ Configuration Strategy ∑ Structural
- Indirect Strategy One Country - Concentration/ Coordination Strategy
- Direct - Geographical - Pioneer/First Mover/ Centralization ∑ Technocratic
∑ Licensing - Fundamental Early Mover - Dispersion/ Coordination Strategy
∑ Franchising - Attractiveness- - Follower/Late Mover Decentralization ∑ Personal Coordination
∑ Contract
Oriented ∑ Timing Strategy for ∑ Customization Strategy
- Balance-Oriented Several Countries Strategy
Manufacturing
∑ Joint Venture ∑ Market Selection - Sequential - Standardization
∑ Strategic Alliance Strategy - Parallel - Adaptation
∑ Minority Stake
- Market Attractiveness
∑ Subsidiary
- Market Risks
- Market Entry Barriers
- Greenfield
Investment ∑ Market Segmentation
- Acquisition Strategy
∑ Merger - Intra-National
∑ Other Market Entry
- Integral
Strategies
Figure 9 Dimensions of internationalization strategy
36
See Schmid (1996).
18 S. Schmid
5 Internationalization Strategies and Utilizing Foreign Units
Increasingly, more internationally active firms recognize that their foreign entities,
especially their foreign subsidiaries, may also have excellent resources, capabilities
and competencies at their disposal. These strengths can be left untapped abroad.
Alternatively, the strengths of individual subsidiaries can be used to benefit head-
quarters and other corporate units in other countries. To this end, the establishment
of so-called Centres of Competence or Centres of Excellence is required.
Subsidiaries intended for this purpose are those that, as already explained in other
publications,37
• have particular resources and capabilities related to specific functions, products

and/or processes at their disposal,
• do not just implement these resources and capabilities in their own national
market but are also (jointly) responsible for other foreign markets, and,
• are simultaneously integrated within the firm.
A central element of successful internationalization strategies is to accord greater

importance to subsidiaries than it has traditionally been the case. Subsidiary
initiatives ought to be encouraged, since it can no longer be assumed that in
multinational corporations, all initiatives emanate from headquarters.38 A well-
known example of this is provided by Unilever: the shampoo Timotei was developed
by the Finnish subsidiary of the Dutch–British consumer goods producer and took
off not just in Finland but also in many other markets.39 Timotei is thus not a product
emanating from headquarters—rather, it has found its way from the former periphery
to the centre and to other (former) peripheral domains.
However, the encouragement of subsidiaries’ own initiatives, whose strengths
often result from their interaction with the local environment, generally does not
suffice.40 Subsidiaries should also be officially recognized as Centres of Competence
or Centres of Excellence. Consequently, international firms visibly transform from
strict hierarchical organizations into multi-centre organizations. In certain domains
within these multi-centre organizations, it is possible for the subsidiaries to become
more important than headquarters, and they may be granted decision-making author-
ity for the whole corporation in a specific area. The result is a kind of “decentralized
centralization” of activities and decisions within international firms.
Developments to multi-centre organizations are developments in the direction of
geocentric firms.41 These developments transform international firms in a qualitative
way—not necessarily in a quantitative one. Borders become permeable within multi-
37
See Schmid (1999), Schmid (2003) and Schmid et al. (1999).
38
See Birkinshaw (1997), Birkinshaw et al. (1998) and Schmid et al. (2014).
39
See Bartlett and Ghoshal (1986, 1989).
40
See Schmid and Schurig (2003).
41
See Perlmutter (1965, 1969).
Export Partner
...
Exports
rts
po
State/
Ex
Society Firm
B
int s
FS Jo ture
Customers n
Ve
FS FS hising Firm
Investors Franc C
HQ
Suppliers Strategic Firm
FS FS D
Alliances
St
ct ra
gi
c
ra ng FS Al te
nt turi lia gic te
Licen
es
... o
C fac nc ra
s
St
nc
ture
u es
nt
lia
an
Joi
Al
M
Ven
ing
Firm Firm
H Firm Firm E
G F
HQ: Headquarters
FS: Foreign Subsidiary
Intra-Organizational Network of Firm A
Figure 10 The international firm as a network firm
centric organizations. The flow of goods and the flow of information and communi-
cation transcend borders in both directions. This leads to a lively “exchange” of
values, norms and attitudes throughout the international corporate network, as
shown in Figure 10.42 This is of immense importance: it is not a matter of having
“more” turnover or “more” employees abroad but rather an “additional quality” of its
cross-border activity—since higher turnover or a greater number of employees
abroad does not automatically guarantee higher performance.
6 Conclusion
With the exception of some outsourcing, which is often equated with job losses, the
internationalization steps taken by firms have often been positively received by the
public. It seems to be implicitly assumed that the more internationally active a firm,
the better. Yet, caution is advised: internationalization is as seldom positively
correlated with success as growth in general is—despite all the pleas for more
growth.43 It all depends on how firms internationalize—not just that they do
so. This can be seen in many examples: BMW’s acquisition of Rover was associated
with an increase in internationality, but at the same time, the move into Great Britain
had cost the firm billions. Many start-ups in internet and software industries, such as
42
See Schmid et al. (2002) regarding flows within corporate networks.
43
See von Krogh and Cusumano (2001).
20 S. Schmid
Brokat, Intershop and Letsbuyit.com, perceived the need to produce scale and
network effects through internationalization44—and for this reason, they expanded
abroad on a large scale. Yet, many moves abroad have not been crowned with
success. Wal-Mart decided to spread its operations to the German market—but top
management in the U.S.A. had to accept that it was a “failed” market entry and
withdrew from Germany.45
Hence, crossing borders should not become an end in itself for firms. It is
important to determine whether crossing borders will contribute to an increase in
value for a firm and for its stakeholders in the long term—and not necessarily just for
its shareholders.46 Yet, one thing ought to be clear: internationalization can enhance
the value, but this is by no means a given fact. There are other possibilities that can
sometimes be worthwhile strategic alternatives to an international expansion, such as
market penetration at home, diversification into new business domains,
“downsizing”, portfolio adjustments and even so-called de-internationalization
(i.e., the reduction or closing of activities abroad).47 Anyone who prematurely
equates international expansion with higher performance is mistaken.48
It is important to verify whether and how competitive advantages can be created
and exploited through an individual market entry strategy, target market strategy,
timing strategy, allocation strategy and coordination strategy—and particularly how
the potential of foreign entities can be used. The specific internationalization
strategies do not just differ from industry to industry and country to country, but
above all from firm to firm—depending on a firm’s philosophy, objectives,
resources, capabilities and competencies. As it is the case with all other strategies,
internationalization strategies need to be firm-specific. Only when a firm manages to
customize the options presented in this contribution and to incorporate them into its
overall corporate, business and functional strategy can it set itself successfully apart
from competitors. In other words, only in doing so will a firm be more productive
than its competitors when crossing borders and through crossing borders.
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Adidas and Reebok: Is Acquiring Easier than
Integrating?
Stefan Schmid, Tobias Dauth, Thomas Kotulla, and Philipp Leding
Abstract
At the beginning of 2006, one of the biggest takeovers in the sporting goods
industry took place: the leading German sporting goods company Adidas
acquired its U.S. competitor Reebok. Building on an analysis of the sporting
goods industry and the characteristics of Adidas and Reebok, the present case
study explores the complexities of the cross-border acquisition. It outlines not
only the motives and risks associated with the acquisition but also some major
consequences for Adidas’ and Reebok’s strategy, structure and culture. In partic-
ular, the case study examines the brand positioning of Adidas and Reebok before
and after the acquisition as well as the related challenges. Furthermore, it analyses
the integration of Reebok into the Adidas Group between 2007 and 2017,
especially in the context of increasing levels of competition, such as competition
by industry rivals Nike and Under Armour.
This case study is based on Schmid et al. (2011).

S. Schmid (*) · P. Leding
e-mail: sschmid@escpeurope.eu; pleding@escpeurope.eu
T. Dauth
HHL Leipzig Graduate School of Management, Fraunhofer Center for International Management
and Knowledge Economy, Leipzig, Germany
e-mail: tobias.dauth@hhl.de
T. Kotulla
University of Applied Sciences Europe, Berlin, Germany
e-mail: tkotulla@escpeurope.eu

https://doi.org/10.1007/978-3-319-74089-8_2
28 S. Schmid et al.
1 The Industry and Company Background
1.1 The Sporting Goods Industry
To understand the situation of Adidas and Reebok in 2016, we need to go back in time
more than 10 years. In 2005, with a worldwide sales volume of US$ 126.5 billion and
annual growth rates of 3–5% over the 5 years prior to the year 2005, the sporting
goods industry was one of the most promising industries in the world.1 The sporting
goods industry can be subdivided into three product segments: The first segment,
“sports equipment”, includes all sporting goods that are necessary to practice a certain
sport, such as footballs, tennis rackets, snowboards, or boxing gloves. The second
segment, “sports apparel”, comprises all sporting goods that are complementary
components of a sport, such as jogging suits, jerseys, sports bags, or sports
accessories. Finally, the third segment, “sports shoes”, constitutes a segment of its
own because of its sheer market size, although sports shoes can also be regarded as
sports apparel or—as in athletics—as part of the essential sports equipment.2 In recent
years, the boundaries between sports apparel/shoes, on the one hand, and casual
clothing/shoes in a sporty style, on the other hand, have become blurred.3 Figure 1
shows the sporting goods’ worldwide sales volume in 2005, broken down by product
segment and by geographic region.
Sporting goods’ worldwide sales volume in 2005, Sporting goods’ worldwide sales volume in 2005,
broken down by product segment broken down by geographic region
Sports America Africa

Shoes w/o U.S.A. 3%
19% 8%
Asia/
Pacific
Sports 17% U.S.A. 41%
Equipment
42%
Sports
Apparel 39%
Europe 31%
Figure 1 Sporting goods’ worldwide sales volume (by product segment and geo-graphic region)
in 2005. Source: Sporting Goods Intelligence (2006a, b, c)
1
See Sporting Goods Intelligence (2006a, pp. 1–2, 2006b, pp. 1–4, 2006c, pp. 1–5).
2
See Sporting Goods Manufacturers Association (2007, p. 1).
3
See Steinkirchner (2005, pp. 51–52).
Adidas and Reebok: Is Acquiring Easier than Integrating? 29
While the sporting goods industry had been rather fragmented for a long
time, three “key players” emerged in the 1980s and 1990s: Nike (U.S.A.), Adidas
(Germany), and Reebok (U.S.A.).4 Figure 2 illustrates the dominance of the “big
three” in the worldwide sporting goods industry in 2005.
The increasing dominance of the “big three”, stemming from (1) offensive
marketing management, (2) numerous company acquisitions and (3) off-shore pro-
duction in low-cost countries, has had a significant influence on the development of
the entire sporting goods industry.
1. During the last few decades, the “big three” have launched powerful image
campaigns to highlight the emotional fashion and lifestyle character of their
products.5 Consequently, Nike, Adidas and Reebok have gradually disposed
their brand images as sporting goods manufacturers with merely functional
characteristics. In this context, the worldwide sporting goods market witnessed
the development of various fashion and lifestyle products that allowed the
sporting goods manufacturers to access new target groups. Examples are the
“Porsche design” shoe by Adidas and “Nike+”, a combination of a sports shoe
and an Apple iPod.6 The development is also reflected in the companies’ pricing
policies. Buyers of fashion and lifestyle sporting goods are willing to pay a price
premium for products that not only have basic functional value but also offer
added emotional value. For instance, customers in the U.S.A. paid about US$
250 for the high-tech sports shoe “Adidas I”.7 On the communications side, the
Sports 2) 2)
Sales 2) Sports apparel Sports shoes
equipment
Company Country (bn
US$)
1) Market Market Market Market Market Market
position share position share position share
1 Nike U.S.A. 13.7 6 1.9% 1 7.4% 1 36.4%
2 Adidas Germany 7.9 2 2.8% 2 5.4% 2 15.0%
3 Reebok U.S.A. 3.8 - - 5 2.5% 3 7.6%
4 Puma Germany 2.1 - - 7 1.8% 4 7.0%
5 Quiksilver U.S.A. 1.8 - - 6 2.4% 14 0.8%
6 Amer Finland 1.6 1 3.1% - - - -
7 Shimano Japan 1.5 3 2.8% - - - -
New
8 U.S.A. 1.5 - - - - 5 5.9%
Balance
9 Russell U.S.A. 1.4 25 0.4% 11 1.0% - -
10 Asics Japan 1.4 - - 18 0.7% 6 4.3%
1) For non-U.S. companies: translation based on exchange rates as of December 31, 2005.
2) “–“ means that the company is not or not substantially active in this product segment.
Figure 2 Sales, market positions and market shares of the world’s ten largest sporting goods
manufacturers in 2005. Source: Sporting Goods Intelligence (2006a, b, c)
4
See Devi and Ramya (2006, p. 3).
5
See Carr (2005a, p. 14).
6
See Adidas (2007a), Apple (2007) and Nike (2007).
7
See Kang (2004, p. D5).
30 S. Schmid et al.
hype was driven by advertising contracts with celebrities, worth millions of

dollars, and by the sponsoring of major sporting events. In 2004, the “big
three” invested US$ 158 million in communication campaigns to reinforce their
emotional and lifestyle-oriented image.8 In doing so, they further widened the gap
to their competitors. In terms of distribution, the increased dominance enabled
Nike, Adidas and Reebok to strengthen their bargaining power towards the large
sporting goods retailers, such as Foot Locker (U.S.A.), Décathlon (France), or
JJB Sports (U.K.). This also intensified the competition among the other sporting
goods manufacturers in the industry.9
2. Numerous industry-wide acquisitions have increased the dominance of the large
sporting goods companies and have sparked a process of consolidation, which,
according to many industry experts, has not yet concluded.10 Among the most
prominent transactions are the US$ 1.4 billion takeover of the French sporting
goods manufacturer Salomon by Adidas in 1997, Nike’s US$ 305 million acqui-
sition of the U.S. sports shoes manufacturer Converse in 2003, Reebok’s US$
330 million purchase of the Canadian Hockey Company in 2004 and Quiksilver’s
US$ 320 million acquisition of the French skiing goods manufacturer Skis
Rossignol in 2005.11
3. Furthermore, the big sporting goods companies have managed to cut down
production costs to a large extent by gradually shifting production to
subcontractors in low-cost countries. This move has enabled them to concentrate
on their core competences: product development, product design and market-
ing.12 However, because of the poor working conditions at their foreign produc-
tion sites—labelled “sweatshops” by critics—the sporting goods companies have
been accused of exploiting “cheap labor”.13 For this reason, the companies have
meanwhile pledged themselves to supervise their predominantly Asian suppliers
on a regular basis to inhibit child labour and guarantee humane working
conditions and adequate wages.14 Furthermore, the phenomenon of product
piracy, a problem arising primarily in Asia, is supposed to be accountable for
industry-wide losses of billions of dollars per year. Only recently, authorities
have begun to address and curb this issue by appropriate political and legal
means. However, the success of these actions has been limited to this day.15
8
See Khan (2006, p. 7) and Ryan (2003, pp. 34–35).
9
See Khan (2006, p. 5), Sporting Goods Intelligence (2004, p. 1) and Steinkirchner (2005, p. 51).
10
See Kletter and Poggi (2004, p. 9) and Steinkirchner (2005, pp. 50–51).
11
See Mikkilineni (2005, p. 6).
12
See Hainer (2005, p. 10).
13
See Arnold and Hartman (2003, pp. 429–435).
14
See Hinterberger and von Petersdorff (2005, p. 56) and Schmid and Kretschmer (2007,
pp. 56–60).
15
See Giersberg (2006, p. 18).
1.2 Adidas
The German sporting goods company Adidas, headquartered in Herzogenaurach,

Bavaria, was founded in 1949 by Adolf (“Adi”) Dassler, a professional shoemaker.16
One year before, his brother Rudolf, with whom he was at odds, had already founded
the sporting goods company Puma.17 Still today, Puma is one of Adidas’ key
competitors. Adidas first became known abroad in 1954, when the German national
soccer team was wearing Adidas shoes with convertible cleats in the final match of
the FIFA Soccer World Championship in Switzerland.18 The German team won the
match against favourite Hungary, thereby creating the so-called “Miracle of Bern”.
In the following years, Adidas extended its product range of soccer shoes by
introducing shoes for various other types of sport. In the mid-1960s, sports equip-
ment and sports apparel complemented Adidas’ range of products.19 Moreover,
Adidas soon signed sponsoring contracts with celebrities, such as Muhammad Ali
or Franz Beckenbauer, to enhance the reputation and popularity of its brand.20 In the
1960s and 1970s, Adidas was the world market leader in the fragmented sporting
goods industry.21
After Adolf Dassler’s death in 1978, his wife Käthe and his son Horst success-
fully led the company until Käthe Dassler passed away in 1984.22 In the following
years, the company faced serious financial problems: Adidas had missed the trend of
fashion- and lifestyle-oriented sporting goods initiated by Nike and Reebok and had
failed to shift its production to low-cost countries.23 Consequently, Adidas lost its
world market leadership in 1986 to Reebok, which, in turn, lost its top position to
Nike 4 years later.24 After Horst Dassler’s early death, which hit the company
unexpectedly in 1987, the crisis sharpened. In 1989, the company was transformed
into a stock corporation and shortly afterwards, a group of investors took the lead
and appointed the Frenchman Robert Louis-Dreyfus as the new CEO of Adidas in
1993.25 Eight years later, Louis-Dreyfus was replaced by the German Herbert
Hainer, who chaired the Adidas management board until 2016.26
Both Robert Louis-Dreyfus and Herbert Hainer decided to realign Adidas’
product range and marketing strategy. The new orientation towards fashion and
lifestyle was intended to refresh the company’s brand image.27 In this context,
16
See Adidas (2007b, p. 4).
17
See Schneider and Reischauer (2006, p. 55).
18
See Anonymous (2005a, p. 15).
19
See Adidas (2007b, pp. 4–5).
20
See Adidas (2007b, p. 4).
21
See Devi and Ramya (2006, pp. 3–4).
22
See Gäbelein (2006, p. 1).
23
See Anonymous (2005a, p. 15) and Fischermann and Rohwetter (2005, p. 23).
24
See Anonymous (2005b, p. 15) and Mikkilineni (2005, pp. 6–7).
25
See Anonymous (2005a, p. 15) and Gäbelein (2006, pp. 1–2).
26
See Brors (2006, p. 10).
27
32 S. Schmid et al.
Adidas signed advertising contracts with rapper Missy Elliott and with sports
celebrities, such as Anna Kournikova and David Beckham. At the same time, the
company concluded sponsoring contracts for major sporting events, such as the
FIFA Soccer World Championships 1998–2014 and the Olympic Games
2006–2008.28 The two CEOs also decided to shift major parts of the company’s
manufacturing to low-cost countries.29 This strategy helped Adidas to become
competitive again, as its production costs converged towards those of Nike and
Reebok. In 1995, the company went public, followed by admission to the German
stock index DAX30 only 3 years later.30 In 1997, Adidas invested US$ 1.4 billion to
become the major stockholder of the French sporting goods manufacturer
Salomon.31 Subsequently, Adidas changed its name to Adidas-Salomon. However,
after 8 years of poor records in the winter sports segment, Salomon was sold to the
Finnish sporting goods company Amer for US$ 625 million.32 Only Salomon’s
successful golf sports brand TaylorMade was retained by Adidas. Between 2000 and
2002, Adidas underwent a restructuring process. The company changed its product-
oriented organizational structure (with divisions for sports equipment, sports apparel
and sports shoes) to a more customer-oriented model that is still prevailing today. In
the course of the restructuring process, new divisions emerged: (1) Adidas Sport
Performance, with sporting goods for professional athletes, (2) Adidas Sport Heri-
tage, embracing sporty products for lifestyle-oriented customers, (3) Adidas Sport
Style, comprising sporty products for fashion-conscious customers and
(4) TaylorMade, with sporting goods for golfers.33
By the strategies and measures described, the Adidas management was able to
become number two in the worldwide sporting goods industry. However, as already
illustrated in Figure 2, the large gap between Adidas and market leader Nike
remained, with the latter especially dominating the growing sports shoes segment.
This gap was mainly due to Adidas’ weak position in the U.S. market.34 Outside the
U.S.A., the gap between Adidas and Nike was much smaller, as Adidas held a strong
position in the soccer goods segment as well as in the European and Asian sporting
goods market.35 On a worldwide basis, Adidas’ sales volume in 2005 amounted to
US$ 7.9 billion and its annual profit was US$ 453.4 million. Adidas employed
around 15,900 staff members in 2005.36
28
See Adidas-Salomon (2005, p. 18) and Hirn (2005, pp. 44–46).
29
See Hirn (2003, p. 109).
30
See Adidas (2007b, pp. 12–13).
31
See Anonymous (1997, p. 24).
32
See Hofer (2005a, p. 38).
33
See Adidas-Salomon (2003, pp. 30–54).
34
See Sporting Goods Intelligence (2007a, p. 1, 2007b, p. 1, 2007c, p. 1).
35
See Hirn (2005, p. 40).
36
See Adidas (2006).
1.3 Reebok
Reebok, a British sporting goods company with headquarters in Bolton in the

northern part of England, was founded in 1958 by Joseph and Jeffrey Foster.37
More than 60 years earlier, their grandfather, the English long-distance runner
Joseph W. Foster, had established the sports shoes company J.W. Foster & Sons,
which later merged into Reebok.38 Throughout the 1960s and 1970s, Reebok
remained a medium-sized sports shoes company acting on a national level with an
annual sales volume of US$ 1.5 million.39 The rise of Reebok began when American
Paul Fireman bought a license to exclusively sell Reebok products in North Amer-
ica.40 He subsequently founded Reebok U.S.A. in 1979 and the company soon
evolved into a global player with Paul Fireman as CEO.
In the beginning of the 1980s, the U.S.A. witnessed an extensive aerobic and
fitness boom. In contrast to other sporting goods companies, Reebok responded
quickly to this movement and thereby capitalized on it: in 1982, the company
designed the fitness shoe “Free-style” for women, which became one of the best-
selling sports shoes of all times. Based on this success, Reebok U.S.A. acquired
the British company Reebok in 1985 and went public with its new name Reebok
International.41 Reebok gained world market leadership in the sporting goods
industry in 1986, mainly because of its expansion into foreign markets both in
production and in sales.42 However, after 4 years at the top, customer preferences
changed and the aerobic and fitness boom subsided. Consequently, Reebok
rapidly lost 50% of its market share and the company slipped into a financial
crisis.43
In the wake of this crisis, Rebook changed from a mere provider of fitness
products into a sports apparel and sports shoes company focusing on lifestyle
products.44 In the following years, Reebok secured the exclusive sponsoring rights
for the U.S. professional sports leagues NBA (basketball), NFL (football), NHL (ice
hockey) and MLB (baseball). The company signed advertising deals with celebrities,
such as 50 Cent (hip-hop) or Venus Williams (tennis), and it invested in other
sporting goods companies, for instance, by acquiring the Canadian Hockey Com-
pany for US$ 330 million.45 In 2005, Reebok’s organizational structure was stream-
lined to form five divisions according to the company’s brands: (1) Reebok, with its
37
See Le Goff (2000, p. 40).
38
See Anonymous (2005b, p. 15).
39
See Anonymous (2005c).
40
41
See Reebok (2005, p. 15, 2007a).
42
See Anonymous (2005b, p. 15), Mikkilineni (2005, pp. 6–7) and Reebok (2007b).
43
44
45
See Anonymous (2005b, p. 15, 2005c), Hirn (2007, p. 80) and Mikkilineni (2005, p. 6).
34 S. Schmid et al.
sports apparel and sports shoes business and its sponsoring business, (2) Rockport,
comprising the sports shoes business of the Rockport brand, (3) Ralph Lauren, with
the sports shoes business of the brands Ralph Lauren and Polo, (4) Greg Norman,
with the Greg Norman sports apparel business and (5) Hockey Company, compris-
ing the hockey articles business and the brands CCM, JOFA and KOHO.46
Despite its success since the mid-1990s, Reebok did not manage to move from its
third position in the worldwide sporting goods industry. One of the reasons for
Reebok’s dead-lock is the fact that the company was not able to build and communi-
cate a consistent and credible brand image.47 As already illustrated in Figure 2, the
large gap between Reebok, on the one hand, and Nike and Adidas, on the other hand,
remained. The distance between Reebok and its competitors was still large, particularly
owing to Reebok’s weak position outside the U.S.A. Within the U.S. market, Reebok’s
position was somewhat stronger, especially in the sports shoes segment. On a world-
wide basis, Reebok’s sales volume in 2005 amounted to US$ 3.8 billion, its annual
profit was US$ 245.4 million and it employed about 8900 staff members.48 Figure 3
depicts the sales volume of Adidas and Reebok in the last business year before the
acquisition, broken down by product segment and by geographic region.
Worldwide sales volume of Adidas and Reebok Worldwide sales volume of Adidas and Reebok
in 2004/2005, broken down by product segment in 2004/2005, broken down by geographic region
bn US$ bn US$
4 4
3 3
42% 45%
2 2 48%
56%
1 1 23% 50%
44% 20%
34%
13% 0% 9% 6%
10%
0 0
Adidas Reebok Adidas Reebok
Sports Equipment Sports Apparel Sports Shoes Europe U.S.A Asia/Pacific Other
1) Reebok did not sell any sports equipment in 2004/2005.
Figure 3 Worldwide sales volume (by product segment and geographic region) of Adidas and
Reebok in 2004/2005. Source: Adidas (2006), Reebok (2005, 2006a, b, c) and Sporting Goods
Intelligence (2006a, b, c)
46
See Reebok (2005, p. 1).
47
See Hirn (2007, pp. 80–84) and Sporting Goods Intelligence (2007a, p. 1, 2007c, p. 1).
48
See Anonymous (2006a, p. 14) and Reebok (2006a, b, c).
2 The Acquisition of Reebok
2.1 A Short Outline of the Acquisition
The confidential takeover negotiations between Adidas’ Chairman Herbert Hainer

and Reebok’s Chairman Paul Fireman started in summer 2004. In August 2005,
Adidas announced its plans to acquire the U.S. sporting goods company Reebok by a
“friendly takeover” in the near future.49 The takeover, constituting the largest
acquisition in the sporting goods industry so far, amounted to US$ 3.8 billion.50
After the approval by the U.S. antitrust authorities and the European Commission,
the Reebok shareholders accepted the deal with a majority of about 98%.51 The
acquisition officially occurred on January 31, 2006. The deal was mainly financed by
contracting debts and by issuing new shares—a measure that generated cash-inflows
of US$ 795 million for Adidas.52
In the wake of the takeover, Adidas designed a new management structure with
one responsible person for each of the brands Adidas, Reebok and TaylorMade.53
These individuals were expected to report directly to Herbert Hainer, who kept his
position as CEO. Former Reebok Chairman Paul Fireman withdrew from the
company.54 As before, the three brands were managed separately, the three brand
centres were maintained and the sales departments of Adidas, Reebok and
TaylorMade continued to operate independently from each other. However, the
functional units for purchasing, logistics, human resources and IT were centralized
in Germany.55
After the takeover, Adidas was subdivided into nine divisions. For the Adidas
brands, the company kept its divisions: (1) Adidas Sport Performance, with sporting
goods for professional athletes, (2) Adidas Sport Heritage, embracing sporty
products for lifestyle-oriented customers and (3) Adidas Sport Style, comprising
sporty products for fashion-conscious customers. For the Reebok brands, the com-
pany established another three divisions: (4) Reebok, including sports apparel and
sports shoes for athletes with fashion and lifestyle orientation, (5) Reebok-CCM
Hockey, with sports equipment and sports apparel for hockey players and
(6) Rockport, with Rockport-branded sports shoes. Finally, for the TaylorMade
brand, the following divisions were created: (7) TaylorMade, with sports equipment
for golfers, (8) Adidas-Golf, with sports apparel and sports shoes for golfers and
(9) Maxfli, offering golf balls.56 The former Reebok brand Greg Norman was sold to
49
See Anonymous (2005a, p. 15) and Theurer (2005, p. 15).
50
See Anonymous (2005a, p. 15) and Symonds and Gagnier (2005, p. 48).
51
See Anonymous (2006b) and Cohen (2006).
52
See Anonymous (2005d).
53
See Hegmann (2006).
54
See Balzer et al. (2006).
55
See Brors (2006, p. 10) and Hirn (2007, p. 82).
56
See Adidas (2007c, p. 43).
36 S. Schmid et al.
Market share
Sales Market share Market share
1) sports
Company (bn US$) 2) sports apparel sports shoes
equipment
2005 2006 2005 2006 2005 2006 2005 2006
1 Nike 13.7 15.0 1.9% 2.1% 7.4% 7.3% 36.4% 35.8%
Adidas 7.9 2.8% 5.4% 15.0%
2 13.3 2.7% 7.8% 21.7%
Reebok 3.8 - 2.5% 7.6%
3 Puma 2.1 3.1 - - 1.8% 2.0% 7.0% 7.3%
1) For Adidas and Puma: translation based on the respective €-US$ exchange rates as of
December 31.
2) “–“ means that the company is not or not substantially active in this product segment.
Figure 4 Sales and market shares of the world’s three largest sporting goods manufacturers before
and after the Reebok takeover. Source: Adidas (2006, 2007c), Puma (2007), Reebok (2006a, b, c)
and Sporting Goods Intelligence (2007a, b, c)
the company MacGregor Golf and the sports shoes businesses of the brands Ralph
Lauren and Polo were sold to the company Polo Ralph Lauren.57
In 2006, Adidas’ sales volume amounted to US$ 13.3 billion and its annual profit
was US$ 635.0 million. The company employed about 26,400 staff members.58
Figure 4 illustrates the new balance of power between the world’s three largest
sporting goods manufacturers after the Reebok takeover.
2.2 Major Motives for the Acquisition
Yet, why did Adidas acquire Reebok? Adidas’ motives for taking over its
U.S. competitor Reebok were multifaceted.
First, by acquiring Reebok, Adidas managed to grow significantly. For instance,
the company increased its sales volume by 60% through the takeover.59 However,
size was not an end in itself: through the acquisition, Adidas reduced the gap to the
industry’s leader, Nike, thereby enhancing its chances to become the world market
leader in the sporting goods industry in the medium term.60 However, according to
some critics, this motive was based more on Herbert Hainer’s personal aspirations
than on an economic rationale. It was one of Hainer’s personal goals to reach world
market leadership and he even rooted this goal in the company’s mission state-
ment.61 Adidas also aimed to gain financial advantage by its increase in size and
expected to leverage synergies of more than US$ 200 million per year, starting in
2009.62 Adidas expected cost savings in purchasing owing to its increased
57
See Adidas (2007c, p. 94) and Polo Ralph Lauren (2006, pp. 36–37).
58
See Adidas (2007c).
59
See Adidas (2007c).
60
See Heeg and Meck (2005, p. 31).
61
See Adidas (2007d), Brors (2006, p. 10) and Schneider and Reischauer (2006, p. 55).
62
See Fasse (2007, p. 15).
bargaining power towards its mostly Asian suppliers. In manufacturing, the com-
pany anticipated cost savings resulting from economies of scale: after the takeover,
for example, Adidas no longer manufactured 130 million but about 200 million
sports shoes per year.63 Moreover, Adidas estimated a decrease in average marketing
cost owing to its increased bargaining power towards marketing and media
companies. Synergies in sales were planned to be achieved by a joint use of sales
channels and by increased bargaining power towards the mainly American
retailers.64
A second category of motives was grounded in Adidas’ and Reebok’s
complementarities. As Figure 5 shows, there were many areas for mutual learning:
Adidas expected to gain access to Reebok’s valuable knowledge of market structures
and customer behaviour—especially in those regions, customer segments and types
of sport where Reebok’s and Nike’s position was strong and Adidas’ rather weak at
that time.65 Above all, Adidas targeted Reebok’s knowledge of the U.S. sports and
sporting goods market and of female and leisure-oriented athletes. In return, Reebok
was supposed to benefit from Adidas’ knowledge of the European and Asian
sporting goods market and from Adidas’ professional brand management. Further-
more, Adidas planned to penetrate the product segments in which Reebok was
successful and in which Adidas was not well established because of its brand
Adidas Reebok
Europe U.S.A.
Dominant regions
Asia U.K.
Dominant men men and women

customer rather performance-oriented athletes rather leisure-oriented individuals
segments all age groups rather younger age groups
soccer fitness
Dominant types of
athletics tennis
sport
European sports U.S. sports
Dominant price
medium to high medium
segments
Dominant
spezialized retailers for sporting goods department stores
distribution
retail store chains for sporting goods fashion boutiques
channels
FIFA Soccer World Championship NBA (U.S. basketball league)

Dominant UEFA Soccer Champions League NFL (U.S. football league)
sponsoring UEFA Soccer Europa League NHL (U.S. ice hockey league)
Olympic Games MLB (U.S. baseball league)
Figure 5 Complementarities of Adidas and Reebok before the acquisition. Source: Based on
Anonymous (2005e, f) and Hirn (2007)
63
See Anonymous (2005e, p. 1) and Steinkirchner and Henry (2007, p. 75).
64
See Anonymous (2005f, p. 48) and Thomaselli (2005, p. 5).
65
See Anonymous (2005e, p. 1, 2005f, p. 48) and Heeg and Meck (2005, p. 31).
38 S. Schmid et al.
image. In this context, Adidas especially focused on the important U.S. fashion and
lifestyle segment. Without the acquisition of Reebok, it would have been very
difficult, if not impossible, for Adidas to catch up with Nike in this segment.66
Furthermore, Adidas intended to leverage Reebok’s market access, particularly by
utilizing Reebok’s U.S. distribution channels, its relations to retailers and its spon-
soring contracts with U.S. professional sports leagues, such as the NBA, NFL, NHL
and MLB.67 In return, Adidas facilitated Reebok’s access to European and Asian
markets. Ultimately, Adidas aimed to strengthen the joint position in important
regions, especially in the U.S.A. and in Asia, thereby competing more successfully
against Nike in the long run.68 Adidas’ increased diversification can be considered
another motive rooted in the complementarities of the two companies. After the
takeover, Adidas became less vulnerable to sales fluctuations at a regional,
customer-segment and sport-type-related level.69 The higher degree of diversifica-
tion also helped the company cope with currency fluctuations. Overall, Adidas
expected synergies from complementarities of more than US$ 600 million per
year. If at all, these synergies could have hardly been achieved by organic growth.70
2.3 Major Concerns Regarding the Acquisition
Despite various arguments supporting the acquisition of Reebok, some industry

experts expressed their concerns regarding the outcome of the transaction.
The first question was whether Adidas would actually have the know-how and
management competence necessary to cope with the challenges resulting from the
Reebok acquisition and from the subsequent integration of the two firms. Experts
recalled the failure of the Salomon takeover, where neither Robert Louis-Dreyfus
nor Herbert Hainer had performed very well.71 Furthermore, there were concerns
that the integration of Reebok might tie Adidas’ management resources until 2009.
Consequently, it was felt that Adidas might run the risk of losing ground to its
competitor Nike, at least for some time.72
Second, some experts raised concerns whether Reebok could actually be consid-
ered successful in its business and thus attractive for Adidas. Although Reebok had
yielded annual profits of hundreds of millions of dollars during the 5 years prior to
the takeover, subsequent developments had portrayed a fragile and vulnerable
company: Reebok’s sales volume dropped by about 10% at the end of 2005 and
66
See Anonymous (2005e, p. 1, 2005f, p. 48) and Heeg and Meck (2005, p. 31).
67
See Brors (2006, p. 10), Hofer (2006, p. 15) and Norton and Holmes (2007, p. 18).
68
See Heeg and Meck (2005, p. 31) and Steinkirchner (2005, p. 51).
69
See Anonymous (2006c, p. 5) and Carr (2005b, p. 19).
70
See Hofer (2006, p. 15) and Rygl et al. (2006, pp. 9–10).
71
See Turner (2005, p. 23).
72
See Anonymous (2005e, p. 1).
orders declined by even more than 20%.73 In addition, it became known that
Reebok’s operative profit margin was only 3.5%, as opposed to Adidas’ 11.5%.74
In experts’ view, the reasons for Rebook’s weaknesses were multifaceted: because of
its unprofessional brand management, Reebok did not have a focused and distinct
brand image. Elements of sports, fashion, lifestyle and entertainment were con-
founded, making the relevant target groups unable to perceive a clear-cut profile of
Reebok.75 The Reebok products were considered to be outdated and they did not
meet the expectations and desires of most customers.76 Therefore, various Reebok
products turned out to be “slow sellers”. Retailers gave large discounts on Reebok
products, thereby fostering customers’ perception of Reebok as a low-quality
brand.77 In addition, Reebok’s relationship with its retailers suffered from its
unreliability in product delivery.78 In total, the financial weakness of Reebok forced
Adidas to raise its investment in the acquired company by another US$ 64 million in
2007.79 Critics emphasized the long lead time resulting from retailers’ high
inventories and claimed that the turnaround of Reebok would not be accomplished
in the near future. In their minds, the purchasing price of US$ 3.8 billion was too
high.80
Third, there were major concerns regarding the “fit” between Adidas and Reebok.
Admittedly, the images of the two brands, which continued to be managed sepa-
rately, were distinct enough to complement each other. However, the sports shoes
businesses showed some overlaps, especially with regard to running, soccer and
basketball shoes in the European market.81 Therefore, Adidas and Reebok were
running the risk of suffering from some degree of cannibalization, as will be
discussed in Sect. 3.2. Finally, doubts were raised about the fit in corporate cultures
between Adidas and Reebok. Both companies shared a passion for sports and were
similar in their aspiration to displace Nike as the world’s largest sporting goods
company.82 However, Adidas was said to have a rather “German mentality”, focus-
ing on control, technological and production aspects, whereas Reebok was known
for its “U.S. mentality” of emphasizing marketing and sales.83 It remains to be seen
whether these differences will turn out to be an obstacle or an asset for the new
Adidas in the long run.
73
See Anonymous (2006a, p. 14) and Lindner and Theurer (2006, p. 20).
74
75
See Steinkirchner and Henry (2007, pp. 75–76).
76
See Theurer (2006, p. 16).
77
78
79
See Goodison (2006, p. 29).
80
See Anonymous (2005f, p. 48).
81
See Anonymous (2005e, p. 1, 2005g, p. 14).
82
See Rygl et al. (2006, p. 10).
83
See Prasad (2005, p. 7).
40 S. Schmid et al.
3 The Positioning of the Brands
3.1 Brand Positioning Before the Acquisition
As shown in Sect. 1.2, the Adidas brand is rooted in Europe and has always been
associated with high-quality and technologically innovative soccer shoes.84 In the
1950s, Adidas became famous for its “Franconian Craftsmanship” and for the
technological refinement of its soccer shoes. In the 1960s, the company successfully
transferred this brand image to shoes for other sports, sports apparel and sports
equipment.85 Through its high-quality products and its numerous sponsoring
contracts with successful professional athletes, Adidas evolved into the world’s
leading sporting goods brand in the 1970s. Adidas was attributed an image of
high-quality standards and technological innovation capabilities. The main target
groups of the brand were male, sportive and performance-oriented customers.86 In
the 1980s, when customer preferences shifted towards fashion and lifestyle,
customers’ perception of the Adidas brand changed. The image of technology and
performance orientation was increasingly deemed “uncool”, while Reebok and
especially Nike were considered to be “hip”.87 Adidas hardly benefited from the
increasing enthusiasm for sports among women and from the growing U.S. sporting
goods market. Because of the male-oriented and European brand image of its
products, Adidas had only a limited appeal to women and to U.S. customers in
general.88
Since the 1990s, Adidas has tried to gradually change its globally standardized
image towards fashion and lifestyle without denying its roots in performance
orientation and technological innovation.89 On the one hand, the technologically
refined products, the distribution via specialized retailers and the sponsoring
contracts for the FIFA Soccer World Championships and the Olympic Games
were helpful in further strengthening the brand image of performance orientation
and superior quality. On the other hand, the endorsement deals with rapper Missy
Elliott and sports celebrities Anna Kournikova and David Beckham (who were not
only successful but also trend setting in fashion and lifestyle) should broaden
Adidas’ brand image by including fashion and lifestyle elements.90 Regarding
product development, Adidas also expanded into the fashion and lifestyle segment,
for instance, by cooperating with fashion designer Stella McCartney, who created an
exclusive Adidas Fitness Collection for women.91 To keep the balance between
84
85
See Adidas (2007b, pp. 4–5) and Hirn (2005, p. 44).
86
See Devi and Ramya (2006, pp. 3–4).
87
See Anonymous (2005a, p. 15, 2005b, p. 15).
88
See Sweney (2005, p. 10).
89
90
See Adidas-Salomon (2005, p. 18) and Hirn (2005, pp. 44–46).
91
See Adidas-Salomon (2005, p. 18).
performance orientation, on the one hand, and fashion and lifestyle orientation, on
the other hand, without diluting Adidas’ brand image, the three business divisions,
mentioned in Sect. 1.2, emerged.92 As Figure 6 shows, these divisions were at the
same time three sub-brands, each with its own logo.
In 2005, the sub-brand Adidas Sport Performance still generated almost 80% of
Adidas’ sales volume.93 This shows that the company was not really successful in
penetrating the growing fashion and lifestyle segment. Presumably, the majority of
the company’s customers were still performance-oriented athletes. This performance
orientation was also reflected by Adidas’ globally standardized slogan “Impossible is
Nothing”. It addressed the athletic ambitions of its customers far more than the Nike
slogan “Just do it”.94 Yet, in 2005, Adidas was considered the most professional and
most authentic sports brand in the world, especially with regard to its competence in
the soccer market.95 According to the calculations of Swiss consultancy Interbrand,
Adidas ranked 71st among the world’s most valuable brands, with a brand value of
US$ 4 billion. Among sporting goods manufacturers, Adidas ranked 2nd behind
Nike, which had a brand value of US$ 30 billion and ranked 30th overall.96
As shown in Sect. 1.3, the Reebok brand has its roots in the U.K. and the
U.S.A. as well as in aerobics and fitness. In the 1980s, Reebok became particularly
known among women, when the company benefited from the U.S. fitness boom with
its fitness shoe “Freestyle”.97 From the beginning, Reebok’s brand image was
focused more on leisure than on sports performance—partly because of the
lifestyle-oriented U.S. sports culture.98 When the aerobics and fitness boom subsided
in the early 1990s, Reebok was forced to reposition its brand to become attractive to
other target groups as well. In this context, Reebok secured the exclusive sponsoring
rights for the U.S. professional sports leagues NBA, NFL, NHL and MLB.99 Reebok
planned to position itself as the leading brand in U.S. sports by focusing on male
Adidas Sport Performance Adidas Sport Heritage Adidas Sport Style
Figure 6 Logos of the three Adidas sub-brands before the Reebok takeover. Source: Based on
Adidas (2007b, c)
92
See Adidas-Salomon (2003, pp. 30–54).
93
See Adidas (2006, p. 94).
94
See Adidas-Salomon (2005, p. 18).
95
See Anonymous (2006e) and Turner (2005, pp. 22–23).
96
See Berner and Kiley (2005, pp. 90–94).
97
98
See Anonymous (2005c) and Mikkilineni (2005, pp. 5–7).
99
See Anonymous (2005b, p. 15, 2005c) and Hirn (2007, p. 80).
42 S. Schmid et al.
buyers. However, in contrast to Adidas, Reebok did not target performance-oriented

athletes.
In the following years, when signing numerous advertising deals with hip-hop
stars (some of whom were considered to be criminals), Reebok gained authenticity
and popularity in the Afro-American “urban street kids” community. Consequently,
Reebok lost many sports-oriented, older, middle- and upper-class customers, who
preferred Reebok’s competitor Nike because of its “cooler” and more professional
brand image.100 In contrast to Adidas, Reebok had not introduced sub-brands to
distinguish between its sports-oriented products, on the one hand, and its fashion and
lifestyle products, on the other hand. Therefore, Reebok’s image of an authentic and
high-quality sporting goods company became diluted, as the mixture of sports,
fashion, lifestyle and entertainment elements made the brand appear inconsistent.101
Additionally, Reebok products were considered to be outdated with regard to
technology and fashion. Consequently, department stores sold the products with
high discounts.102 Figure 7 shows the 16 different Reebok logos that were used
worldwide, some of which were used for promoting the brand at the same time.103
In 2005, sporting goods accounted for about one-third of Reebok’s sales volume,
whereas fashion and lifestyle products composed about two-thirds.104 One might
question the extent to which Reebok was still a typical sporting goods brand at that
time. The slogan “I am what I am” was considered to be tautological and it might
have caused more confusion than clarity among most customers.105 Furthermore,
Reebok had restricted its brand management to the U.S. market and was either
unknown or unpopular in many other regions of the world.106 Overall, this led to the
fact that the Reebok brand had a significantly lower value than the Adidas brand in
Figure 7 Various Reebok logos before the takeover by Adidas. Source: Information as obtained
from Adidas
100
See Fischermann and Rohwetter (2005, p. 23).
101
See Balzer et al. (2006) and Steinkirchner and Henry (2007, pp. 75–76).
102
103
See Kletter and Conti (2006, p. 9).
104
See Steinkirchner and Henry (2007, p. 75).
105
See Adidas (2006, p. 55).
106
2005. While the Swiss consultancy Interbrand did not rate Reebok’s brand value at
all, the U.S. magazine Forbes calculated a value of US$ 900 million.107
3.2 The Brand Positioning After the Acquisition
After the acquisition of Reebok, Adidas faced the challenge of managing two very
different brands, Adidas and Reebok, within one company. How did the Adidas
management meet this challenge? It soon became clear that the Reebok brand would
not be abandoned. Despite the shortcomings described above, the Adidas management
appreciated the value and especially the potential of the Reebok brand. Merging both
brands into a new brand called “Adidas-Reebok” was not a feasible option because
of Adidas’ high brand value and the significant differences between the two
brands.108 Instead, Adidas decided to maintain both brands and to keep them strictly
separate in order to minimize the risk of cannibalization between them.109 However,
instead of distinguishing the two brands by concentrating on different product
segments or regions, Adidas and Reebok chose to position the two brands for
different target groups.110 This strategy required a very thoughtful brand management
strategy to avoid brand dilution.
According to its image prior to the acquisition, Adidas was positioned in a
globally standardized way as a leading sporting goods brand with European origins
and with a strong focus on quality and technological innovation. It primarily targeted
performance-oriented male athletes but also increasingly women. Furthermore, the
management planned to evolve Adidas into the leading brand for team sports.111 The
product range was focused on sporting goods for soccer, basketball and athletics in
the medium-price and upscale segment. Distribution was based on small specialized
retailers, large sporting goods retail chains, shoe stores, superior department stores,
fashion-oriented providers of lifestyle products and Adidas-branded stores, with the
latter accounting for about 15% of total Adidas sales.112 After the acquisition, the
three Adidas sub-brands, shown in Figure 6, were maintained. The sub-brand Adidas
Sport Performance was still intended to generate about 80% of the Adidas brand
sales.113
In the wake of the acquisition, Adidas took several measures to implement the
positioning described above. The sponsoring contract with the German soccer
association (Deutscher Fußball-Bund, DFB) was extended until 2018. In addition,
the sponsoring rights for the professional soccer club FC Liverpool were transferred
107
See Ozanian and Schwartz (2007).
108
See Anonymous (2005h).
109
See Heeg and Meck (2005, p. 31).
110
See Hirn (2007, pp. 79–80).
111
See Hirn (2007, pp. 79–80).
112
See Adidas (2007c, pp. 52–54).
113
See Hirn (2007, pp. 79–80).
44 S. Schmid et al.
from Reebok to Adidas to enhance Adidas’ European image with focus on soccer
and team sports.114 Furthermore, Reebok’s exclusive sponsoring contracts for
jerseys and trunks in the professional U.S. basketball league NBA were assigned
to Adidas. As another measure, Adidas enhanced its sponsoring efforts in the sports
shoe business of the professional U.S. football league NFL to position itself as the
leading brand for team sports in the important U.S. market.115
In its attempt to separate the two brands Adidas and Reebok, the Adidas management
never seriously considered positioning Reebok as a low-quality brand or as a mere
provider of lifestyle articles. The risk of brand dilution, resulting in a decrease in
sales or even in a loss of profit, was too high.116 Instead, Reebok was supposed to
target medium to high quality and price segments and to generate about 50% of its
sales with pure sporting goods. Consequently, Reebok’s sponsoring of stars in the
music and entertainment business was reduced.117 As Reebok’s new positioning
showed an orientation towards athletics, the management planned to align the
distribution channels for Reebok and Adidas products.118 However, this strategy
again increased the risk of cannibalization between the brands. Therefore, the plan
for Reebok was to position the brand in a globally standardized way as one of the
leading sporting goods brands with U.S. attributes, aiming at wellness- and lifestyle-
oriented female and male athletes.119 Reebok should still target the Afro-American
“urban street kids” community that was out of reach for Adidas with its European
brand image and its lack of “street credibility”.120 Concurrently, Reebok’s presence
outside the U.S.A., particularly in Europe and Asia, should be strengthened, espe-
cially by focusing on running shoes as well as on sports and lifestyle apparel for
female customers.121 The sporting goods for team sports (mainly basketball, foot-
ball, soccer and cricket) represented only regionally focused extensions of the
Reebok product range.122 The professionalization of Reebok’s brand management
after the acquisition led to a rigorous reduction of the number of logos. As displayed
in Figure 8, only three logos were used, with each of them constituting a sub-brand.
The sub-brand Reebok Classics stood for the white sneakers that evolved from the
former fitness shoe “Freestyle”.123
The implementation of Reebok’s basically new positioning required various
measures. First, Reebok started to repurchase the brand’s selling rights from foreign
distributors. This move was intended to enable higher profit margins and integrated
114
See Kramer (2007, p. 147) and Milne (2006a, p. 18).
115
See Anonymous (2006f).
116
See Hirn (2006).
117
See Hirn (2007, pp. 79–80).
118
119
See Anonymous (2007b, p. 18) and Hirn (2007, pp. 79–80).
120
See Steinkirchner (2006, p. 68).
121
See Barrand (2006, p. 24).
122
See Adidas (2007c, pp. 55–57) and Hirn (2007, pp. 79–80).
123
See Kletter and Conti (2006, p. 9).
Reebok Performance Reebok Lifestyle Reebok Classics
Figure 8 Logos of the three Reebok sub-brands after the takeover by Adidas. Source: Information
as obtained from Adidas
brand management outside the U.S. home market.124 Regarding communications,

Reebok transferred the sponsoring rights for the professional U.S. basketball league
NBA and the professional British soccer club FC Liverpool to Adidas, as mentioned
above.125 In return, Reebok signed an advertising contract with professional French
soccer player Thierry Henry to strengthen its image as the leading sports brand with
individualistic orientation.126 Reebok also invested in a powerful advertising cam-
paign to anchor its new positioning as a wellness- and lifestyle-oriented sports brand
in customers’ minds.
4 The Integration of Reebok
4.1 Setting the Scene: A Rough Start
Several experts and analysts in the sporting goods industry expected the integration
of Reebok to be troublesome.127 Some even prophesied yet another failed acquisi-
tion, as the rather dissatisfying “endeavour” with Salomon in 1997 did not live up to
investors’ and management’s high expectations.128
Reebok lacked a clear brand image as well as innovative products in 2006 and
little changed in the first years after the acquisition.129 The company was unprofit-
able with declining sales and its market position further weakened even in North
America, Reebok’s homeland.130 For example, instead of supporting Adidas in
closing the gap to market leader Nike, Reebok’s market shares in the competitive
U.S. sports footwear market halved over 3 years to 2.5% in 2008.131 Many retailers
were reluctant to put both Adidas and Reebok shoes on their shelves, as both had
124
See Anonymous (2006g).
125
See Anonymous (2006f) and Milne (2006a, p. 18).
126
127
See Anonymous (2006a, p. 14, 2006h, p.1), Eberle (2007 p. 10), Esterl and Kang (2006), Hofer
(2005b, p. 27), Milne (2006b) and Moody (2005).
128
See Anonymous (2005g, p. 14, 2005i, p. 14, 2005j, p. 1), Eberle (2010a, p. 35) and Hofer (2008,
p. 13).
129
See Anonymous (2005g, p. 14, 2006h, p. 1), Ritzer (2009, p. 20) and Williams (2010).
130
See Milne (2006b) and Williams (2010).
131
See Anonymous (2006i, p. 14) and Lefton (2009).
46 S. Schmid et al.
basketball and running shoes in their product range. Additionally, retailers were
overstocked with Reebok products and thus sold them off at high discounts, thereby
reinforcing the brand’s “low-price low-quality” image.132 To many customers, it
remained unclear what the brand stood for, as Reebok’s roots had been partially
neglected over many years. Sporting goods industry expert Jack Smith noted: “Their
[Reebok’s] roots are a fashion and women aerobics brand. That’s what they need to
get back to.”133
Indeed, the intended brand positioning of Reebok proved to be difficult. What had
been planned as a complement strengthening of Adidas’ market position especially
in the U.S.A., turned out as a severe impediment.134 Inconsistent marketing
campaigns like “Run Easy” (2007) or “Your move” (2008), often starring alternating
sports stars, added to the impression of a somewhat diffuse brand.135 Moreover, the
frequent change of marketing agencies certainly did not support brand consistency.
However, despite serious concerns of sporting goods industry experts, analysts and
investors alike, Adidas was still committed to putting its struggling subsidiary back
on track.136 The company started to address the challenges ahead by changing
Reebok’s top management. Hainer’s intimate Uli Becker became responsible for
Reebok, succeeding former President and CEO Paul Harrington in 2008.137
This shift initiated several further organizational changes. In 2009, Adidas opted for
greater consistency by centralizing marketing functions and long-term brand develop-
ment under a new Global Brands function responsible for the marketing activities of
the divisions Adidas Sport Performance, Adidas Sport Style and Reebok (see also
Figure 6).138 At the same time, product development and production planning for
Adidas and Reebok were merged into a Global Operations function. Marketing and
operations activities were thus synchronized to improve brand coordination and to
guide go-to-market strategies with particular emphasis on brand development.139
Furthermore, Adidas CEO Herbert Hainer and Reebok President Uli Becker
announced that Reebok would return to its roots of focusing on women’s fitness,
men’s fitness and training as well as its classics product line.140 It was expected that
this would also allow a better fit with the dominant market segments addressed by
Adidas’ brands, such as sports fashion (e.g., Adidas Originals) and competitive sports
(e.g., Adidas Sport Performance; see also Figure 9).141
132
See Anonymous (2006a, p. 14, 2006i, p. 14), Jahn (2010, pp. 86–90), Lefton (2009) and
Williams (2010).
133
Lefton (2009).
134
See Anonymous (2006a, p. 14, 2006h, p. 1, 2006i, p. 14, 2007a, p. 12), Hofer (2008, p. 13) and
Williams (2010).
135
See Hofer (2010, pp. 20–21), Lefton (2009).
136
See Hofer (2009, p. 16).
137
See Hofer (2008, p. 13, 2011, p. 63), Jahn (2010, pp. 86–90) and Ram (2008).
138
See Anonymous (2009b) and Schäfer (2009).
139
See Anonymous (2009a, p. 15), Hofer (2010, pp. 20–21) and Schäfer (2009).
140
See Eberle (2010a, p. 35), Hofer (2010, pp. 20–21), Jahn (2010, pp. 86–90) and Lefton (2009).
141
See Adidas (2010) and Eberle (2010a, p. 35).
“Route 2015”, presented in 2010, formulates a comprehensive and aligned five-year plan for the entire
Adidas Group after the economic downturn between 2008 and 2009. It sets several financial and non-
financial objectives for the Adidas Group to be reached by 2015, including the following:
- Group-wide revenues of € 17 billion/US$ 22.5 billion (42% increase)1),
- Adidas revenues of € 8.5 billion/US$ 11.3 billion (37% increase)1),
- Reebok revenues of € 3 billion/US$ 4 billion (58% increase)1),
- 11% operating margin (3.5% increase),
- Greater brand coordination and sharpened brand positioning for Adidas and Reebok.
The following image illustrates the desired brand positioning of Adidas and Reebok as outlined by
“Route 2015”. Adidas Sport Performance ideally targets “Pure Performers” in competitive sports,
whereas Adidas Sport Heritage and Adidas Sport Style focus on “Style Setters” in sports fashion. While
the Adidas brands also address customers in active and casual sports, “Athletic Classic”, “Brand
Driven” and “Sport Inspired” customers are the main target of Reebok. This is in line with the idea of
positioning Adidas as a “performance brand and multi-sports specialist” and Reebok as the “fitness and
training brand” (Adidas, 2010, p. 13).
1) Translation based on exchange rates as of December 31, 2010.
Figure 9 Adidas “Route 2015”. Source: Based on Adidas (2010)
In the wake of this organizational shift and in line with the “new old” brand focus,
Reebok launched a new type of shoe that was supposed to help tone leg muscles
while walking, developed by a former NASA engineer.142 Adidas was convinced
that the so-called toning shoes would strengthen Reebok’s brand image as a fitness
specialist. The shoes primarily targeted female customers, which was once again in
line with the brand’s history.143 Reebok’s slight increase in the U.S. sports footwear
142
See Anonymous (2009b), Eberle (2010a, p. 35), Hofer (2011, p. 63), Jahn (2010, pp. 86–90) and
Zmuda (2011).
143
See Anonymous (2009b), Jahn (2010, pp. 86–90) and Zmuda (2011).
48 S. Schmid et al.
market share to 3.1% in 2010 initially fuelled the company’s hopes that toning shoes
were indeed the long-sought innovation.144 Herbert Hainer already fulsomely
rejoiced: “The most exciting thing for me is the turnaround of Reebok”.145 Through
this belated alleged turnaround, he hoped to finally close the widening gap to sports
industry leader Nike, which had been one of the acquisition’s major motives.
4.2 Ambitious Plans: “Route 2015”
Incited by the small improvements, Hainer proudly presented the ambitious

mid-term strategic plan “Route 2015” for the Adidas group in 2010 that outlined
the strategic way forward and formalized the already initiated repositioning of
Reebok (see Figure 9).146 By 2015, Adidas aimed to increase its sales to € 17 billion
(US$ 22.5 billion),147 of which Reebok was supposed to account for € 3 billion (US$
4 billion), calling for a 42% increase for the Adidas group and even a 58% increase
for Reebok over 2010.148 This reflected the high expectations towards Reebok, as
current sales were € 1.9 billion (US$ 2.6 billion) in 2010 (see also Figure 10).149
Route 2015 defined Reebok as a fitness and training brand with the vision of
“fulfilling potential” by challenging and leading the fitness world through the
creativity that Reebok was once famous for.150 The aim was to make people perceive
fitness as a sport, with Reebok being the prime outfitter in the fitness segment, just as
Uli Becker stated: “Reebok has a heritage of empowering people to get fit”.151 This
heritage was emphasized by “Route 2015”.
Adidas was on track towards its sales objective of US$ 22.5 billion by 2015 with
sales of approx. US$ 17.5 billion in 2012, marking an increase of nearly 30%.
However, Reebok’s sales declined by 18% to a post-acquisition all-time low of US$
2.2 billion compared with 2010, which was far below its goals.152 Figure 10
illustrates the development of sales and net income between 2010 and 2016.
Reebok’s ongoing struggle hit the headlines again, with newspapers titling “Prob-
lem-child Reebok”,153 “The Problem of Adidas is Reebok”154 and “If It Were Not
For Reebok”,155 also illustrating that the brand’s repositioning initiated by “Route
144
See Cheng (2010).
145
Cheng (2010); see also Eberle (2010b, pp. 22–23).
146
See Adidas (2010) and Köhn (2010, p. 14).
147
Translation of US$ values for “Route 2015” based on exchange rates as of December 31, 2010.
148
See Adidas (2010).
149
See Adidas (2011) and Statista (2017).
150
See Adidas (2010) and Anonymous (2012a).
151
Anonymous (2012a).
152
See Adidas (2011, 2012, 2013) and Statista (2017).
153
Hofer (2012, p. 26).
154
Hofer and Metzger (2012, p. 26).
155
Hofer (2013, p. 24).
1) 1) 1) 1)
2010 2012 2014 2016
Net Net Net Net
Company Sales Sales Sales Sales
income income income income
(bn (bn (bn (bn
(bn (bn (bn (bn
US$) US$) US$) US$)
US$) US$) US$) US$)
1 Nike 19.0 1.9 23.3 2.2 27.8 2.7 32.4 3.8
Adidas 13.5 17.4 15.7 18.5

2 0.8 0.7 0.6 1.1
Reebok 2.6 2.2 1.9 1.9
3 Under Armour 1.1 0.1 1.8 0.1 3.1 0.2 4.8 0.3
4 Puma 3.6 0.3 4.3 0.1 3.6 0.1 3.8 0.1
1) For Adidas and Puma: translation based on the respective €-US$ exchange rates as of
December 31 of the respective year.
Figure 10 Sales and net incomes of the world’s four largest sporting goods manufacturers from
2010 to 2016. Source: S&P Capital IQ (2017a) and Statista (2017)
2015” was not yet well perceived by consumers. In the course of this ongoing
struggle, Reebok’s CEO Uli Becker had to step down and became responsible for
the North American market only.156 Instead, Reebok’s Marketing Officer Matt
O’Toole, responsible for Reebok’s acclaimed “The Sport of Fitness Has Arrived”
campaign and Adidas Global Brands executive Erich Stamminger took command of
Reebok’s strategic repositioning.157
In line with its desired brand image, Reebok intensified its endeavours of
promoting fitness as sports.158 While fitness was traditionally rather an individual
activity, O’Toole recognized an important fitness trend by stating that “more and
more people are coming together to experience fitness in a community environ-
ment”.159 Reebok tried to promote and capitalize on this trend by forming a strategic
partnership with CrossFit, a fast-growing community-based provider of strength and
conditioning programs combining several forms of exercise, such as aerobics,
calisthenics and weightlifting.160 While some analysts, such as Morningstar’s sports
industry expert Paul Swinand, perceived CrossFit as yet another short-term trend that
was expected to “abate fast” just like toning shoes, Reebok seized the opportunity of
exclusively offering equipment and gear designed for CrossFit exercises (see
Figure 11).161 This time, Reebok backed the right horse, as the CrossFit community
has constantly grown over the past few years. More than 13,000 CrossFit gyms with
roughly 4 million members worldwide were promoting the Reebok brand in 2016.162
156
See Anonymous (2012c, p. 16) and Steinkirchner (2012, p. 11).
157
See Anonymous (2012a, b, pp. 4–5, 2012c, p. 16) and Steinkirchner (2012, p. 11).
158
See Anonymous (2012a, b, pp. 4–5), Dörner and Hofer (2011, p. 28) and Hage (2013, p. 40).
159
Anonymous (2012a).
160
See Dörner and Hofer (2011, p. 28), Hage (2013, p. 40) and Steinkirchner (2013, p. 12).
161
See Anonymous (2012a, b, pp. 4–5), Dörner and Hofer (2011, p. 28) and Hage (2013, p. 40).
162
See Wang (2016).
50 S. Schmid et al.
Figure 11 New Reebok brand logo and various applications. Source: Information as obtained
from Reebok
In 2012, O’Toole had already stated that “together Reebok and CrossFit will change
fitness and help make people physically, mentally and socially fit for life”.163 The
partnership helped Reebok towards sharpening its brand image as a fitness specialist.
A change of the brand logo further visualized Reebok’s transition when
Stamminger announced in 2013 that the world-famous Reebok “vector” would be
substituted by a new “delta” in 2014 (see Figure 11).164 The new “delta”
logo—successfully tested on some CrossFit products previously—was supposed to
signify positive, transformative change through fitness in a physical, social and
mental respect already emphasized in former marketing campaigns.165 The new
logo visualized the brand’s repositioning 8 years after the acquisition and was
perceived favourably by the fitness community. Along with the visual change,
Stamminger presented a new store concept that would heavily rely on so-called
FitHubs, stores selling Reebok products with integrated gyms (see Figure 11).166
163
Anonymous (2012a).
164
See Reebok (2014) and Steinkirchner (2013, p. 12).
165
See Anonymous (2014a), Reebok (2014) and Steinkirchner (2013, p. 12).
166
See Steinkirchner (2013, p. 12).
Still, markets and consumers needed more time to fully appreciate Reebok’s
changes, as sales dropped again from US$ 2.2 billion in 2012 to US$ 1.9 billion in
2014 (see Figure 10).167 Some investors and experts in the sporting goods industry,
having been waiting 8 years for a turnaround, even expected Adidas selling
Reebok.168
Reebok’s sales further declined in 2014. Additionally, Adidas lost sight of its
“Route 2015” goals with a sales drop from US$ 17.4 billion in 2012 to US$ 15.7
billion in 2014.169 Three developments mainly caused this sales decline. First, and
perhaps most importantly, Adidas was still struggling in the U.S. market.170 Second,
Adidas’ golf brand TaylorMade performed weakly.171 Some analysts expected a sale
of the struggling division.172 Third, political unrest in the important Russian market
and the weak Russian currency had a negative impact on financial results.173 Despite
being the global number 2, Adidas was only third in the U.S.A., as it also suffered
from a “too-European image” with traditional designs especially in comparison to
Nike and the new competitor Under Armour, which attacked Adidas not only in the
U.S.A. but also in its European homeland.174 As opposed to Adidas, both
U.S. competitors managed to increase their sales between 2010 and 2014 (see
Figure 10). Under Armour was particularly strong in the sports apparel segment,
surpassing Adidas in the U.S.A. by 2015.175 After a disappointing year in 2014 with
two profit warnings, Adidas’ stock price was temporarily listed at US$ 69.12, 40%
below its all-time high, whereas Nike’s and Under Armour’s stock prices and
enterprise values soared to new highs (see Figures 12 and 13).176 Even Adidas’s
top management acknowledged that the goals of “Route 2015” were beyond reach. It
was time for yet another change: Mark King was appointed new President for
Adidas’ North American business.177
167
See Germano (2015) and Statista (2017).
168
See Anonymous (2014b, p. 25) and Hofer (2014a, p. 18, 2014b, p. 15).
169
See Adidas (2015a), Hofer (2014c, pp. 28–29) and Jervell (2015c).
170
See Anonymous (2014c), Germano (2015), Hofer (2014c, pp. 28–29, 2015, pp. 24–27, 2016a,
pp. 20–23) and Jervell (2015c).
171
See Anonymous (2014c), Hofer (2014b, p. 15, 2014c, pp. 28–29, 2015, pp. 24–27, 2016a,
pp. 20–23) and Jervell (2015c).
172
173
See Hofer (2014c, pp. 28–29, 2015, pp. 24–27, 2016a, pp. 20–23) and Jervell (2015c).
174
See Anonymous (2014c), Germano (2015), Hofer (2015, pp. 24–27, 2016b, p. 24) and Jervell
(2015c).
175
See Anonymous (2014c), Germano (2015), Hofer (2015, pp. 24–27, 2016a, pp. 20–23, 2016b,
p. 24) and Jervell (2015c).
176
See Hofer (2015, pp. 24–27) and Jervell (2015a).
177
See Adidas (2014).
52 S. Schmid et al.
200
180
160
140
120
100
80
60
40
20
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Adidas Nike Under Armour
Figure 12 Stock prices of Adidas, Nike and Under Armour since 2008 (in US$). (For Adidas,
translation is based on historical daily exchange rate). Source: S&P Capital IQ (2017b)
120
100
80
60
40
20
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Adidas Nike Under Armour
Figure 13 Enterprise values of Adidas, Nike and Under Armour since 2008 (in bn US$). (For
Adidas, translation is based on historical daily exchange rate). Source: S&P Capital IQ (2017c)
4.3 Next Steps: Adding “American Flavour”
On top of King’s agenda was the objective to improve Adidas’ brand image in the
U.S.A. by adding some “American flavor” to the company’s products.178 Adidas
increased the marketing budget, signing contracts with several professional basket-
ball, baseball and football players. Additionally, Adidas opened new design studios
in Los Angeles and Brooklyn, the heartland of the U.S. running community, as
Roland Auschel, Head of Global Sales, noted: “If we win running in New York and
Los Angeles, we will win running in the U.S.”.179 The position of a Global Design
Director was created in the U.S.A. to make Adidas’ products more appealing to
U.S. customers.180 Adidas also addressed another technological trend. Nike and
Under Armour had recognized the growing significance of wearable tracking
devices that measure running distance and monitor fitness metrics.181 Offering
such devices also supported their increase in sales between 2010 and 2016. Initially,
Adidas had missed this market opportunity. In August 2015, however, Adidas
acquired Runtastic, a European company specialized in developing fitness
applications and devices to track activities with roughly 70 million registered users
in 2015 (110 million users as of 2017).182 Besides strengthening Adidas’ position in
comparison to Nike and Under Armour, the acquisition also supported Reebok with
tracking tools for fitness activities.
The measures seemed to take effect by 2016. Adidas’ sales increased to an all-time
high of US$ 18.5 billion and its share price soared to US$ 174 in September 2015 (see
Figures 10 and 12).183 Investors also perceived the appointment of former Henkel
CEO Kasper Rorsted as Hainer’s successor favourably, as share prices jumped by
10% upon the announcement in January 2016.184 As Rorsted had spent some time in
the U.S.A. at Compaq and Hewlett Packard, he was seen as a more American CEO
than Hainer, capable of further modernizing the Adidas brand and making it more
appealing to customers, especially in the important North American market.185
During Hainer’s tenure, not all challenges were addressed successfully. Instead of
closing the gap to industry leader Nike, US$ 13.9 billion in revenues separated
the two companies by the end of 2016 (see Figure 10).186 Furthermore, Nike’s market
value was more than two times higher than that of Adidas, with US$ 82.2 billion
as opposed US$ 32.2 billion in December 2016 (see Figure 13). At present, Adidas
is also facing increasing competition from Under Armour, especially in the
178
See Jervell (2015b) and Peterson (2015a, b).
179
Adidas (2015a); see also Jervell (2015b), Jones (2015) and Peterson (2015a, b).
180
See Guyot (2014).
181
See Comstock (2014), Pathak (2015) and Vogel (2010).
182
See Adidas (2015b), Lamkin (2015) and Runtastic (2017).
183
See Adidas (2017).
184
See Hofer and Tuma (2016, pp. 4–5), Jervell (2016) and Steinkirchner (2016, pp. 38–41).
185
See Hofer and Tuma (2016, pp. 4–5), Jervell (2016) and Steinkirchner (2016, pp. 38–41).
186
See Adidas (2017) and Nike (2016, 2017).
54 S. Schmid et al.
sports apparel market segment.187 Thus, there certainly remains some work ahead of
Rorsted to make Adidas “the best sports brand” and Reebok “the best fitness brand” in
the world, as rooted in the Adidas Group’s latest mission statement.188
Questions
1. Adidas’ acquisition of U.S. competitor Reebok represents a major cross-border

transaction.
(a) Please discuss the main advantages and disadvantages that may gener-
ally exist when acquiring a foreign company.
(b) Which of these advantages and disadvantages were particularly relevant
for Adidas’ decision to acquire Reebok? Can you think of other, unmen-
tioned advantages and disadvantages that might have been related to the
Reebok acquisition? Please back up your statements with appropriate
reasoning.
2. In 2005, Herbert Hainer said: “The acquisition is a unique opportunity. Retailers

will be delighted” (Hofer 2014a, p. 18). At the same time, only some analysts and
sporting goods industry experts agreed, whereas others raised doubts regarding
the acquisition. In your opinion, were retailers as “delighted about the acquisi-
tion” as Hainer expected? And which concerns of analysts and sporting goods
industry experts were justified or proved wrong? In your answer, please also take
account of the motives and concerns mentioned in the case study.
3. The brand positioning of Adidas and Reebok shows several similarities and
differences.
(a) Please outline and contrast the global brand positioning of Adidas and
Reebok after the acquisition.
(b) Comment on the strengths and weaknesses of the positioning after the
acquisition with special emphasis on the measures taken by Adidas and
Reebok from 2006 onwards. Do you think Adidas and Reebok represent
suitable brand complements?
4. Please imagine you are a sporting goods industry expert and your task is to
evaluate the integration of Reebok.
(a) Based on a strategic analysis of the internal situation and the external
environment, was the integration of Reebok a success story? Please
include examples from the case study in your answer.
187
See Germano (2015), Hofer (2016b, p. 24).
188
See Adidas (2017).
(b) What recommendations would you give to CEO Kasper Rorsted with
respect to future steps to integrate (or not integrate) Reebok into the
Adidas Group? Please make sure to back up your suggestions with
reasonable arguments derived from your strategic analysis.
5. If you were CEO Kasper Rorsted, which strategic decisions would you take over
the next 3 years? Please elaborate in detail on corporate, business unit (e.g., for
Adidas, Reebok and TaylorMade-Adidas Golf) and selected functional strategies
(for instance marketing and purchasing).
Please note that, for some of the questions, the case study is only a starting point.
You will have to search for additional information to answer the questions.
References
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Airbus: Managing the Legacy of a Complex
International Merger
Stefan Schmid and Frederic Altfeld
Abstract
When two or more firms engage in a merger, it is usually a highly complex and
challenging transaction. It is common wisdom that approximately 50% of all
mergers are considered failures. In an international merger, the potential
difficulties are often even greater, and they can be due to, for instance, cultural,
geographic, or economic differences. The case of Airbus represents a cross-border
merger with additional complexity mainly because of idiosyncrasies in the indus-
try environment, such as the strong involvement of political and governmental
actors. Therefore, since its inception, Airbus has not only faced fierce competition
with its powerful U.S. rival, Boeing, but also constantly struggled with the legacy
of being the result of an international merger. The present case will outline some
antecedents and consequences of the Airbus merger and discuss the major
challenges of Airbus’ international configuration and coordination strategies.
1 Airbus’ Starting Years
1.1 Airbus’ Foundation as Europe’s Response to U.S. Dominance

in the Aviation Industry
In the late 1960s, the worldwide commercial aircraft industry was dominated by large
U.S. manufacturers, such as McDonnell Douglas, Lockheed and, most important,
Boeing. Founded in 1916, Boeing was active in both civil and military aviation.
Before and during World War II, the company was able to benefit from immense
Parts of this case are based on Schmid et al. (2013).

S. Schmid (*) · F. Altfeld
e-mail: sschmid@escpeurope.eu; faltfeld@escpeurope.eu

https://doi.org/10.1007/978-3-319-74089-8_3
64 S. Schmid and F. Altfeld
U.S. government spending on military aircraft.1 Leveraging its experience in military

R&D and manufacturing, the company led the technological progress in commercial
aircraft manufacturing. Examples of its landmark developments are the B707, the first
commercially successful airliner with jet engine propulsion, and the so-called “jumbo
jet” B747. The B747, with its development starting in 1965, was designed to carry
more than twice the number of passengers compared to the largest airliner operating
at that time.2 The size and technological capabilities of Boeing and other
U.S. manufacturers gave these companies an advantage with which European
companies could not compete by themselves.
At that time, the European aviation industry comprised several small, national
manufacturers, such as Hawker Siddeley Aviation (U.K.), Sud Aviation (France)
and Hamburger Flugzeugbau GmbH (Germany). Each of them alone lacked the
resources necessary to develop a large aircraft that could compete with U.S.-made
jets.3 The European aviation industry’s share in the worldwide aviation market had
fallen to 10% in the late 1960s, and European manufacturers were in danger of
becoming little more than sub-contractors to the leading U.S. companies.4 Given this
situation, European politicians and industry leaders acknowledged the need for
international collaboration to break U.S. dominance. They envisioned a joint
programme of aircraft development and production that would combine the
resources and expertise of various companies. In 1969, after several years of
negotiations, French transport minister Jean Chamant and German economics
minister Karl Schiller signed an agreement officially launching the A300 project, a
twin engine mid-range aircraft.5 It was to be developed and produced by Airbus,
which was formally established in December 1970 as a consortium of Aérospatiale
from France and Deutsche Airbus from Germany. In 1971, CASA from Spain joined
the consortium, and it was followed by British Aerospace from the U.K. in 1979.6
1.2 Specific Characteristics of the Aviation Industry
The early days of Airbus portray two specific characteristics of the commercial
aviation industry. First, companies need to produce on a large scale. The design and
development of a new aircraft requires very high, mostly irreversible up-front
investments. Firms need to sell vast numbers of the new aircraft to recoup the
billions spent during this phase. Before any profit can be made, it may take about
1
See Harrison (2011, p. 373).
2
See Braunberger (2006, p. 43).
3
See Airbus Group (2015b) and Braunberger (2006, p. 22).
4
See Airbus Group (2015b) and Enders (2009, p. 15).
5
6
See Airbus Group (2015b).
Airbus: Managing the Legacy of a Complex International Merger 65
ten years to amortize the initial costs.7 Manufacturers need to produce aircraft in
great quantities not only because the up-front investments are high but also because
economies of scale and learning curve effects are of vital importance in the aviation
industry. Learning curve effects are especially significant because the production of
a large aircraft is a highly complex process that involves millions of components and
thousands of activities. As the cumulative number of aircraft manufactured
increases, learning effects occur because the workforce gains experience in these
processes. Economies of scope are also crucial. Major aircraft companies produce
not just a single type of aircraft but a whole fleet of different models. If several
models share certain production stages, learning effects achieved in the production
of one model also reduce the production costs of other models. In addition,
economies of scope also arise because newly developed innovations can have
fleet-wide application and because the cost of materials can be lowered through
centralized procurement of common components.8
A second specific feature of the commercial aviation industry is the strong
involvement of political and governmental actors. Traditionally, governments in
America and Europe have considered the commercial aviation industry to be
strategically important for their respective home countries. One reason for this is
the close link between commercial and military aviation. Technology transfer
between both industry segments accelerates technological progress. Furthermore,
as companies typically produce both civil and military aircraft, cyclical fluctuations
in demand in one segment can be offset by those in another segment. Another reason
why a well-functioning commercial aircraft industry is of great relevance is that it
provides high-technology, high-skill jobs in a specific country.9 Furthermore, as a
symbol of military, economic and technological strength, the commercial aviation
industry is often considered important in terms of national prestige. Given the
strategic importance of the industry, it comes as no surprise that European
governments were eager to form a counterweight to U.S. hegemony that already
existed and was potentially even increasing. A milestone in the genesis of Airbus
was an agreement signed by ministers from France, Germany and Britain in 1967. In
this agreement, the countries committed “for the purpose of strengthening European
co-operation in the field of aviation technology and thereby promoting economic and
technological progress in Europe to take appropriate measures for the joint develop-
ment and production of an airbus”.10 Clearly, the European partners’ decision to
cooperate was driven by not only a commercial and economic rationale but also
by political reasons.
7
8
See Braunberger (2006, p. 17) and Klepper (1990, pp. 777–778).
9
See Wright (1994, p. 6).
10
Airbus Group (2015b), see also Gordon (2014).
2 The Merger: Airbus as Part of EADS
2.1 The Foundation of EADS
It took some time for Airbus’ first aircraft, the A300, to succeed in the market. A
breakthrough came in 1978 when Airbus managed to enter the U.S. market by
signing a deal for 23 aircraft and nine options with Eastern Airlines. By the end of
that decade, the European consortium had delivered 81 A300 aircraft to 14 airlines.11
In doing so, Airbus had proved its ability to compete in the world aviation market,
and the success encouraged the European partners to expand the Airbus product line.
Over the years that followed, Airbus developed and manufactured a range of aircraft
of different sizes to cover a greater number of market segments. Although it was not
until 1990 that Airbus made its first operating profit, the European consortium
continued to gain market share. In 1997, Airbus held a 30% share of the market
for large passenger aircraft, while its main rival Boeing, after a merger with its
former U.S. competitor McDonnell Douglas, held 60%.12 One of the main
advantages of Boeing was its monopoly position in fulfilling the demand for very
large aircraft. In Airbus’ product portfolio, no aircraft matched the size of the B747.
As a result, Airbus could not offer the complete range of aircraft that many airlines
needed. Even airlines that relied on Airbus for most of their fleet still had to turn to
Boeing’s jumbo jet if they wanted to have a very large aircraft. To break Boeing’s
monopoly in this market segment, Airbus took on the boldest project in its history:
the development of the A380, the world’s largest airliner.13
Over the years, Airbus’ set-up as a consortium reached its limits. The organiza-
tional structure was opaque and complex, and decision-making concerning strategy,
cost reduction or profit distribution grew lengthy and complicated. To form a single
integrated company, the German, French and Spanish partners agreed on a merger.
As a result, EADS (European Aeronautic Defence and Space Company) was created
in 2000, and it bundled not only civil aviation but also the defence and aerospace
activities of the partnering firms. Airbus became a subsidiary of EADS, contributing
64% of total revenue.14 Because of the size of French Aérospatiale and German
DASA (compared with Spanish CASA), the merger was largely a Franco-German
undertaking.15 EADS was promoted as a symbol of European cooperation and
integration. The merger would be “good for France, good for Germany and good
for Europe”, German chancellor Gerhard Schröder stated when the contracts were
signed.16 However, behind the scenes there were tough negotiations between the
partners about the distribution of power. To secure control and equal influence on the
11
12
13
See Cole (1999, p. A1) and Morgenstern and Plath (2005, p. 103).
14
See EADS (2001, pp. 2–3).
15
See Barmeyer and Mayrhofer (2010, p. 3).
16
Deckstein and Hawranek (1999, p. 129), translated from German.
Public, incl. EADS

SOGEADE
SEPI employees and
(Lagardère &
DaimlerChrysler (Spanish state about 3% held by
SOGEPA (French
holding) DaimlerChrysler and
state holding))
the French State
30.2% 30.2% 5.5% 34.1%
EADS
Revenues: 31.8
Airbus Military Aeronautics Defence & Civil Space

Transport Systems
Aircraft
Revenues: 20.5 Revenues: 0.5 Revenues: 5.1 Revenues: 3.3 Revenues: 2.4
% of total: 64 % of total: 2 % of total: 16 % of total: 10 % of total: 8
Revenues in € billion.
All numbers for fiscal year 2001.
Figure 1 Organizational structure and shareholder structure of EADS. Source: Based on EADS
(2001, pp. 2–3, 58); Schmid et al. (2013, p. 77)
company, France and Germany agreed on shareholder parity, with both countries
holding 30.2% of EADS’ capital. The German shares were held by the German
company DaimlerChrysler, and the French shares were held by SOGEADE, a
holding company controlled by French conglomerate Lagardère and the French
state.17 Figure 1 provides an overview of the organizational structure and the
shareholder structure as of 2001.
2.2 EADS’ Top Management Structure
The equality of the German and French partners was to be guaranteed not only by
parity in shareholdings but also through EADS’ top management structure. The
company adopted a “principle of symmetry”, meaning that top management
positions were staffed with an equal number of German and French nationals. This
principle was obvious in the composition of the Board of Directors and the Execu-
tive Committee. The Board of Directors was led by two chairmen, Jean-Luc
Lagardère from France and Manfred Bischoff from Germany. The remaining nine
seats on the Board of Directors were held by four German and four French
representatives; additionally, there was one director of Spanish nationality. Simi-
larly, the Executive Committee was headed by two CEOs: Philippe Camus from
17
France and Rainer Hertrich from Germany. The rest of the Executive Committee
comprised the directors of the operating divisions and major functional departments.
Again, four positions were held by Germans, four by Frenchmen, and one by a
Spaniard.18 While there was parity in the number of seats, the balance of power was
tilted in favour of France because Airbus, the most important division, was led by a
Frenchman. Figure 2 shows the composition of the Board of Directors and the
Executive Committee.
A careful equilibrium of power was arranged between the partners. EADS had its
official head office in the Netherlands, where tax laws were favourable.19 However,
the top managers continued to be based in their respective country and company of
origin.20
EADS Board of Directors
Jean-L. Lagardère (F) Manfred Bischoff (D)

Philippe Camus (F) Axel Arendt (D)
(Chairman) (Chairman)
Michael Rogowski (D) Rainer Hertrich (D) Eckhard Cordes (D) Louis Gallois (F)
Pedro Ferreras (E) Jean-R. Fourtou (F) Noël Forgeard (F)
EADS Executive Committee
Philippe Camus (F) Rainer Hertrich (D) Noël Forgeard (F)

Dietrich Russell (D)
Chief Executive Chief Executive President
Aeronautics Division
Officer Officer and CEO of Airbus
Jean-Paul Gut (F) Jean-L. Gergorin (F) Thomas Enders (D) Gustav Humbert (D)
EADS Strategic Defence and Civil Airbus Chief
International Coordination Systems Division Operating Officer
Axel Arendt (D) Alberto Fernández (E)

François Auque (F)
Chief Financial Military Transport
Space Division
Officer Aircraft Division
As of December 2001.
Figure 2 Board of Directors and Executive Committee of EADS. Source: Based on Barmeyer and
Mayrhofer (2010, pp. 5–6); EADS (2001, pp. 30, 59)
18
See Barmeyer and Mayrhofer (2010, pp. 4–7).
19
See Deckstein and Hawranek (1999, p. 130).
20
See Barmeyer and Mayrhofer (2010, p. 5).
Because the initial top management contracts were signed for five years, new
contracts had to be negotiated in 2005. Once again, lengthy discussions involving
top managers and governments followed. In particular, Noël Forgeard, the powerful
president of Airbus, tried to increase French influence. His plans to install a single
leadership structure (with him as the sole CEO of EADS) that would replace the dual
leadership structure failed because of strong opposition from the German side. As a
result, Airbus maintained the dual structure with two chairmen and two CEOs of
EADS. To monitor the equal distribution of power, the German side even imposed a
system of “cross-reporting”. This meant that a French director of an EADS subsidi-
ary was obliged to report to the German CEO of EADS; the same was true for a
German director and the French CEO.21
2.3 Airbus’ Configuration of Production Activities
The legacy of the merger was visible not only in EADS’ complicated management
structure but also in the configuration of its value chain activities.22 The company
sought to keep the highly decentralized cross-border structures that had grown since
the foundation of the initial consortium. The configuration of Airbus’ activities in the
production of the A380 is one very illustrative outcome of this tradition.23
Similar to previous models, the A380 was produced in 16 different plants dis-
persed across Germany, France, Spain and the U.K. Apart from the availability of
resources and capabilities, political interests played a major role in the allocation of
production activities.24 Each of the 16 plants was responsible for the manufacturing or
assembly of certain components. For example, fuselage sections were manufactured
in Hamburg (Germany), nose and cockpit were manufactured in Saint-Nazaire and
Méaulte (France), wings were manufactured in Broughton (U.K.), and the horizontal
tail plane was manufactured in Getafe (Spain).25 In addition to the 16 Airbus plants,
120 suppliers and additional partnering companies in Europe and in other parts of the
world were involved in producing the A380.26
The dispersion of production plants resulted in highly complex logistics.
Components and pre-assembled sections of the A380 had to be transported between
21
See Barmeyer and Mayrhofer (2010, pp. 7–8) and Braunberger (2006, pp. 126–127).
22
For this paragraph, see Schmid et al. (2013, pp. 75–82).
23
While we focus on the configuration of production activities, other value chain activities are also
dispersed within MNCs in general and within Airbus in particular. See Grosche (2012), Kutschker
and Schmid (2011, pp. 998–1008) or Schmid and Grosche (2009). Dispersed R&D activities have
been investigated, for instance, by Gerybadze (1997).
24
See Noack (2007, p. 13).
25
See Gordon (2014) and Spaeth (2005, p. 59).
26
See Noack (2007, p. 13).
the plants and, ultimately, to Toulouse (France), where the final assembly took place.
Larger parts were transported by sea, river and road; smaller components were
carried by Airbus’ fleet of so-called “Beluga” aircraft, which were designed specifi-
cally for oversized cargo. Figure 3 provides an overview of some of the transporta-
tion routes. For transport by water, Airbus ordered the construction of a new type of
ship carrier, the “Ville de Bordeaux”, which was 154 m in length and designed
specifically for the A380 logistics. After collecting parts of the aircraft at different
plants in Europe, the “Ville de Bordeaux” would head for Toulouse, but because of
its size, it could only reach the port of Pauillac. From there, the parts were loaded on
to smaller ships or trucks. To facilitate transport by road from Pauillac to Toulouse,
Airbus and the French government invested 170 million euros in infrastructure.
Although the transportation of components seems excessive, it accounted for only
2% of the overall costs of the A380.27
Transport by water
Transport by air GREAT BRITAIN
Transport by road
Broughton
Mostyn Hamburg
GERMANY
St-Nazaire
FRANCE
Pauillac
Langon
Toulouse
Getafe
SPAIN
Puerto Real
Cadiz
As of March 2006.
Figure 3 Means of transport for A380 components. Source: Based on Schmid et al. (2013, p. 80);
Spaeth (2005, pp. 58–65)
27
See Deckstein et al. (2004, p. 90).
3 The Crisis and Airbus’ Response
3.1 Airbus in Crisis
In the years following the merger, Airbus managed to increase its market share. The
European company and its arch-rival Boeing dominated the global market for large
commercial aircraft and fought for supremacy. In 2003, Airbus managed for the first
time to deliver more planes than Boeing, thus becoming the world’s largest supplier
of commercial aircraft, as measured by plane deliveries.28 However, despite its
success in sales and deliveries, in 2006, Airbus entered the worst crisis in its history.
On the evening of 13 June 2006, after the close of trading, the company shocked its
stakeholders by announcing a six-month delay in the launch of the A380 aircraft. It
was estimated that the delay would cost Airbus 500 million euros in lost annual profit
for the period between 2007 and 2010. On the day following the announcement, the
share price of parent company EADS plummeted by 26%, which slashed the
company’s value by 5.5 billion euros.29 Airbus explained that technical difficulties
with the electrical wiring were the main cause for the delay. The market reaction was
particularly negative because in the previous year, Airbus had already postponed
the delivery deadline by six months. With the latest, unexpected announcement,
investors and customers lost confidence in Airbus’ capabilities to handle the
complexities of the A380 project. Singapore Airlines, the first customer of the
A380, reacted immediately: after the delay was announced, it ordered 20 of Boeing’s
new 787 “Dreamliner” aircraft, which were worth $ 4.5 billion at list price.30 In
addition to difficulties with the A380, Airbus was confronted with another challenge:
the dollar’s weakness against the euro. Planes are usually bought and sold in dollars,
yet Airbus’ costs were mostly in euros. Thus, Airbus faced higher costs and lower
revenues, a situation that Airbus’ CEO at that time referred to as “life-threatening”.31
In this severe crisis, the weaknesses in Airbus’ configuration of production activities
and of its top management structure were exposed. The company would have to
adopt swift and drastic measures to regain the confidence of its stakeholders.
3.2 Reshaping the Top Management Structure
During the crisis, EADS’ top management was accused of spending too much time
and energy caring about the fragile balance of power instead of managing, monitor-
ing and controlling the firm’s business activities.32 The crisis also revealed the vast
divide between the German and French partners. Only days after the announcement
28
See Gordon (2014).
29
See Anonymous (2006a).
30
See Anonymous (2006a, b).
31
32
See Mönninger (2006, p. 33).
of the delay, Noël Forgeard, the French Co-CEO of EADS at the time, blamed the
Hamburg plant for the technical difficulties that led to the delay. This was widely
considered an attempt to place blame on the German CEO of Airbus, Gustav
Humbert.33
The major shareholders of EADS reasoned that the crisis should not only bring
changes in personnel but also should justify a far-reaching reshaping of the complex
top management structure.34 Once again, tedious and difficult negotiations were
necessary to implement changes while leaving the power equilibrium intact. Even-
tually, Forgeard and Humbert left the company, illustrating that even resignations
should be balanced by nationalities. Both top managers were replaced by
Frenchmen: Louis Gallois as Co-CEO of EADS and Christian Streiff as CEO of
Airbus. EADS continued to have two CEOs and two chairmen, even though the
German side advocated a single structure.35
EADS struggled to streamline its “absurd management structure that maintained
an uneasy balance of power”, as a report in The Economist described it.36 Meddle-
some governments and national mindsets continued to hinder the effective manage-
ment of the company. In October 2006, Airbus’ CEO Christian Streiff resigned after
just three months on the job. He stated, “[t]he organisation and management of
EADS have as their main objective the delicate balancing of people, of power and of
positions. This formula could be efficient during a normal time. But it is no longer
appropriate for a company that is going through a serious crisis”.37
In addition to deficiencies in the top management structure, cultural differences
between the German and French partners were likely to complicate management-
related questions. One such aspect is the differing conception of leadership and
authority between the French and Germans. While authority is primarily based on
status and acceptance of hierarchy in France, authority is oriented towards profes-
sional expertise and technical competence in Germany.38 Furthermore, the German
and French partners have contrasting views on the role of the state in business. In
France, the state plays an active part in the business world, and strong political
support is vital for many companies and top managers’ careers. In Germany, on the
other hand, the corporate and political spheres are not as intertwined as they are on
the other side of the river Rhine.39
It took EADS until July 2007 to finally abandon its dual management structure in
favour of a single CEO and a single chairman. Louis Gallois, a Frenchman, became
CEO of EADS, while German Rüdiger Grube was appointed chairman of the board.
Another German, Thomas Enders, took over as head of Airbus. The partners agreed
33
See Alich (2006, p. 11).
34
See Braunberger (2006, p. 214) and Mönninger (2006, p. 33).
35
36
Anonymous (2007a).
37
See Daly (2006).
38
See Barmeyer and Mayrhofer (2008, p. 34) and Barmeyer and Mayrhofer (2010, pp. 28–29).
39
See Mönninger (2006, p. 33)
on the rotation of the top positions between German and French nationals after every
five years.
3.3 Streamlining Production Activities
The decentralized configuration of Airbus’ production activities has been cited by

many experts as a major cause of the wiring problems that led to the delay of the
A380.40 The German engineers in Hamburg used a version of a computer-aided
design software that was incompatible with the one employed by their French
counterparts in Toulouse. When the electrical harnesses manufactured in Hamburg
arrived in Toulouse for final assembly, they did not fit into parts designed by French
engineers.41 The decentralized nature of Airbus’ production activities, which were
scattered across 16 sites in four countries, was once considered a competitive
advantage of Airbus because each location could develop a high level of specializa-
tion.42 After the A380 delay, however, many industry observers viewed it as a
liability instead.
In response to the crisis, Airbus launched the Power8 programme, a far-reaching
restructuring plan that included the reorganization of its manufacturing across Europe.
The goal was to make Airbus “more efficient and competitive, so as to produce the
most advanced and profitable products, and to serve its customers better in the
future”.43 Although many perceived Power8 mainly as a cost-cutting programme,
Airbus’ deputy CEO emphasized that it was more than that: “It is nothing less than the
reinvention of Airbus”.44 Figure 4 details the modules of Power8.
Although the crisis gave EADS’ management legitimacy for taking profound
measures, political meddling restrained their implementation. Power8 proposed a
headcount reduction of 10,000 overhead positions, and this burden had to be
distributed quite evenly among the national partners. Political quarrels regarding
where the cuts should be made climaxed when Power8 became an issue in France’s
2007 presidential election campaign. With thousands of French Airbus employees
protesting against job cuts, no presidential candidate wanted to miss the opportunity
to present himself as a guardian of French industry.45 Once again, EADS’ top
management had to fight hard to resist political attempts to dictate the course of
the company.
40
See Noack (2007, p. 13).
41
See Anonymous (2007b).
42
See Gordon (2014).
43
Airbus Group (2007).
44
Kiani-Kress and Bläske (2009, p. 61).
45
See Schubert (2007, p. 12).
1. Develop Faster
• Reduce development time for new aircraft from 7.5 years to 6 years
• Establish robust development processes with risk-sharing partners to secure
these cycle time reductions and required aircraft maturity at entry into service
• Improve engineering productivity by 15%
2. Smart Buying
• Reduce the supply cost base
• Reshape and consolidate the supply base by building a network of risk-sharing
partners and streamlining its logistics organization
3. Lean Manufacturing
Focus on • Integrate manufacturing and associated engineering and ensure the deployment
Operations of consistent, lean production principles across all plants
• Target: Increase productivity by 16% by 2010
4. Reduce Overhead Costs

• Impose a progressive headcount reduction of 10,000 positions over four years,
comprising 3200 in France, 3700 in Germany, 400 in Spain, 1600 in the United
Kingdom and 1100 in the Airbus central entity in Toulouse
• Approximately 5000 of these positions are temporary or on-site sub-contractors,
and the remaining 5000 are Airbus employees
5. Maximize Cash
• Achieve a reduction of financial working capital and tight control of cash in all
operations
6. Restructure Industrial Set-up

• Industrial partnerships at plants in Filton, Méaulte and Nordenham are considered
to facilitate their transition from metallic to composite design and manufacturing
technology
• Several options with respect to the sites in Laupheim, St. Nazaire-Ville and Varel
are considered, including their sale to key suppliers, management buyouts or
combinations with nearby sites
7. Streamline Final Assembly Lines

• Increase the efficiency of the Final Assembly Lines (FAL)
• Enhance the capacity of the long-range FAL in Toulouse
Focus on • Set-up a third A320 Family FAL and perform final assembly of the New Single-
Structure Aisle Family in Hamburg
• To allow parts to be fitted in the most logical place in order to optimize the overall
cycle time, transfer some upstream preparatory cabin installation work for the
A380 and the A320 assembled in Toulouse from Hamburg to Toulouse
• Maintain cabin installation in Hamburg, and have A380 deliveries performed from
both Hamburg and Toulouse
8. Focus on Core Business Activities
• On the engineering and manufacturing side, focus on business activities that are
either critical for the integrity and safety of the aircraft or vital for technological and
commercial differentiation
• These activities include overall aircraft and cabin architecture, systems
integration, as well as the design, assembly, installation, equipping, customization
and testing of major and complex components, or manufacturing of new
technology parts
Figure 4 Modules of the Power8 programme. Source: Based on EADS (2006, pp. 38–39)
4 The Future of Airbus: Expanding the Global Footprint?
Over the years, Airbus managed to navigate out of the crisis and get the difficulties
involving the production of the A380 under control. As part of a new strategic
roadmap called Vision 2020, the company set out to increase its global presence, just
as Boeing had done years before, albeit only with partial success. One aim was to
achieve low-cost and multi-currency-based sourcing. Furthermore, Airbus wanted to
gain access to new markets and technology resources. Already in 2008, Airbus
declared a target to have 20% of employees and 40% of sourcing outside Europe.46
As an outcome of this strategic roadmap, Airbus opened its first assembly line
outside Europe in September 2008. In Tianjin, China, the A320 final assembly line
was established as a joint venture between Airbus and a consortium comprising the
Chinese firms Tianjin Free Trade Zone Investment Company (TJFTZ) and Aviation
Industry Corporation of China (AVIC). Airbus controlled 51% of the joint venture.47
Initially, there were some concerns about job cuts in Europe and a loss of technology
to the Chinese.48 However, Airbus was able to benefit from the strong growth in
demand from Chinese airlines. While the company’s market share in China was at
6% in 1995, it grew to 50% in 2013. That year, Airbus sold 20% of its global aircraft
production to China, and a total of 1000 Airbus jets were in service for Chinese
operators. By then, the Tianjin plant had delivered 125 aircraft.49 Especially at the
beginning of operations, production costs were higher in Tianjin than in Airbus’
European facilities owing to factors such as more difficult logistics, lower production
volumes and the employment of costly expatriates. The employment of expatriates
was necessary to ensure that company-wide quality standards were met. Some of
these costs, however, were bound to decrease over time as learning effects were
achieved and as expatriates were replaced by Airbus-trained Chinese personnel.50
In 2014, the European and Chinese partners of the joint venture agreed to extend
their cooperation for an additional ten years and to increase the plant’s capabilities.
The following year saw a further expansion of Airbus’ production activities in
China. With French Prime Minister Manuel Valls and Chinese Premier Li Keqiang
present at the meeting, the partners of the joint venture signed an agreement to
establish a completion and delivery centre in Tianjin for Airbus’ A330 aircraft.51
Already a region of major significance to Airbus, China is likely to become even
more important in the future. Forecasts by the International Air Transport Associa-
tion (IATA), among others, see the country poised to overtake the U.S. as the
world’s largest market for passenger air traffic by 2030.52
46
See EADS (2008).
47
See Airbus Group (2015c) and Erling (2012).
48
See Mack (2009).
49
50
See Anonymous (2014), Erling (2012), and Flottau and Perrett (2012).
51
See Airbus Group (2015d).
52
See IATA (2014).
Airbus’ portfolio of production sites was further internationalized when, in July

2015, the manufacturer opened a new final assembly line for A320 aircraft in
Mobile, Alabama. With the first delivery of aircraft scheduled for 2016, it is Airbus’
first production facility in the U.S.53 The move could help the company protect itself
against foreign exchange risk. An even more important motive might be Airbus’
intention to attack Boeing on its own turf. While the two arch-rivals each hold about
half of the worldwide market for large aircraft, Airbus’ market share in the U.S. is
only 20% (as of 2013).54 With its U.S. manufacturing presence, the European
company hopes to increase its sales in the U.S. and get closer to market share parity
in Boeing’s home country.55 Although final assembly of an aircraft accounts for only
approximately 5% of its value, the location has a disproportionate impact on public
perceptions of the aircraft.56 In this regard, the new facility in Alabama might
mitigate political opposition in the U.S. and improve sales to local airlines once
Airbus’ jets are perceived as “Made in the U.S.A.”.57
Over the years, the commercial aircraft segment has become ever more important
for Airbus’ parent company EADS. In 2012, a proposed merger of EADS with
Britain’s BAE Systems, Europe’s largest defence company, would have strength-
ened the military side of EADS’ business; it failed, however, mainly because of
political opposition.58 In the following year, EADS was renamed and rebranded
“Airbus Group”, thus reflecting the overwhelming importance of the commercial
aviation segment for the parent company.59 At year-end 2014, after several years of
strong order intake, Airbus’ backlog stood at 6,386 aircraft. This volume is equiva-
lent to the output of approximately ten years of production at current rates. In the
years to come, one challenge Airbus will have to face is to increase production rates
in order to clear its order book and build up capacities to meet future demand.60 In its
20-year market forecast, Airbus expects global market demand for 31,800 new
passenger aircraft over the period 2015–2034. Figure 5 shows not only Airbus’
forecasted market demand for new passenger aircraft broken down by region but
also Airbus’ order backlog.
Airbus, as well as its parent company Airbus Group, continue to adapt to a more
global world while keeping their European heritage in mind. With the new facility in
Alabama, Airbus is now manufacturing aircraft in Europe, Asia and America. The
Alabama plant “. . . represents the real transformation of Airbus into a truly global
company,” Airbus’ CEO Fabrice Brégier stated. “While Airbus has deep European
roots, we have always seen ourselves as citizens of the world”.61
53
See Mester (2015).
54
See Anonymous (2013).
55
See Maaß et al. (2012) and Michaels et al. (2012).
56
See Michaels et al. (2012).
57
See Michaels et al. (2012).
58
See Anonymous (2012a, b).
59
See Airbus Group (2014a, p. 54).
60
See Clark (2015) and Hollinger (2015).
61
Airbus Group (2013).
Europe &
CIS
North 17%
America
12% 24% Middle
17% East 7%
Asia/Pacific
7%
27%
40%
1%
Africa
4%
5% Latin
America
8%
Airbus’ order book by region at end December 2014 (% of units)*

Forecasted global market demand for new passenger aircraft over the period 2015 – 2034 (% of units)
* Does not include orders from lessors (20%) and orders from undisclosed customers.
Figure 5 Airbus’ order backlog and forecasted global market demand by region. Source: Based on
Airbus Group (2015a, p. 47, 2014b, p. 5, 2015e, p. 10)
Questions
1. To compete with the powerful U.S. rival Boeing, the companies Aérospatiale,
DASA and CASA merged to EADS, with Airbus as a subsidiary.
(a) Please discuss the advantages and disadvantages of an international
merger in general.
(b) Which of these advantages and disadvantages are particularly important
in the specific case of EADS/Airbus? Please back up your statements
with appropriate reasoning.
2. EADS’ initial top management structure was very different from conventional
management structures in large, stock-market oriented firms.
(a) What are the advantages and disadvantages of a dual structure with two
chairmen and two CEOs in a merged company?
(b) In 2006, EADS’ top management had to respond to a sudden crisis in the
wake of the A380 delay. Do you think the dual leadership structure
hindered an effective crisis management? Please back up your reasoning
by appropriate arguments.
3. In 2008, Airbus opened a production site in Tianjin, China.

(a) What might have been the reasons for Airbus to choose China for its first
final assembly line outside Europe? Please find several potential reasons
and try to present them in a structured way by using established
categories on internationalization motives/objectives.
(b) Airbus has vast experience in the manufacturing of aircraft. However,
the Tianjin plant was set up as a joint venture between Airbus and
Chinese partners. What could have been the rationale for this approach,
and what are the risks associated with this approach?
4. Please imagine that you are a consultant for Airbus and that your task is to
develop Airbus’ future internationalization strategies. Based on a strategic analy-
sis, which internationalization strategies would you recommend for the next
ten years? Please make sure to back up your recommendations with reasonable
arguments derived from your strategic analysis.
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Aldi and Lidl: From Germany to the Rest
of the World
Stefan Schmid, Tobias Dauth, Thomas Kotulla, and Fabienne Orban
Abstract
Within the retail industry, the grocery discount segment has grown in importance
during the last decades. Aldi and Lidl are the two leading grocery discounters
worldwide. The present case study outlines the internationalization of Aldi and
Lidl. Not only market entry strategies but also target market and timing strategies
as well as the standardization-differentiation controversy are addressed.
1 Aldi and Lidl Within the Grocery Discount Industry
With a worldwide annual sales volume of € 994.9 billion in 2014 for the top
10 grocery retailers and an average annual sales growth rate of approximately 3%
between 2010 and 2014,1 the grocery retailing industry can be considered one of the
1
S. Schmid (*)
e-mail: sschmid@escpeurope.eu
T. Dauth
HHL Leipzig Graduate School of Management, Fraunhofer Center for International Management
and Knowledge Economy, Leipzig, Germany
e-mail: tobias.dauth@hhl.de
T. Kotulla
University of Applied Sciences Europe, Berlin, Germany
e-mail: tkotulla@escpeurope.eu
F. Orban
HHL Leipzig Graduate School of Management, Leipzig, Germany
e-mail: fabienne.orban@hhl.de

https://doi.org/10.1007/978-3-319-74089-8_4
82 S. Schmid et al.
Worldwide top 10 grocery retailers 2014 European top 10 grocery retailers 2014
Worldwide European
Home Home
Company sales volume Company sales volume
country country
in € bn in € bn
1 Wal-Mart US 363.4 1 Schwarz3 Germany 72.9
2 Costco US 83.0 2 Carrefour France 54.4
3 Kroger1 US 81.7 3 Tesco UK 52.2
4 Schwarz2 Germany 79.3 4 Aldi Germany 48.3
5 Tesco UK 76.5 5 Edeka Germany 45.9
6 Carrefour France 74.7 6 Rewe Germany 40.2
7 Aldi Germany 65.1 7 Auchan France 34.5
8 Metro Germany 63.0 8 Leclerc France 30.2
9 Target US 54.7 9 ITM France 28.8
10 Auchan France 53.5 10 Metro Germany 26.8
1
Kroger includes Harris Teeter, which was taken over by Kroger in 2014.
2
Approximately 79.1% of Schwarz’s sales can be assigned to Lidl (€ 62.7 bn). On a worldwide
level, Lidl would be ranked 9th.
3
Approximately 86.0% of Schwarz’s sales can be assigned to Lidl (€ 62.7 bn). On a European
level, Lidl would be ranked 1st.
The data only cover sales in the food and near-food segment; food services are excluded.
Figure 1 Leading grocery retailers in the world and in Europe. Source: Based on Lebensmittel
Zeitung (2015a, b)
world’s key economic sectors. Over the last decades, grocery discounters such as Aldi
and Lidl have strengthened their position in the grocery retailing industry—especially
in Germany and Europe.2 With their no-frills approach, they have led to significant
changes in the industry and have challenged many companies which operate other
store formats, such as supermarkets or hypermarkets. In this context, a Financial
Times report on international retailing noted, already in 1995: “The spread of the
discount format has been particularly disruptive to Europe’s grocery retail industry
and has driven retailers to examine cross-border markets.”3 Figure 1 illustrates the
leading grocery retailing companies in the world and on a European level. During the
last decades, Aldi and Lidl have climbed in the rankings; in 2014, Aldi reached 4th
and Lidl even ranked 1st in Europe (in terms of sales volume).4
1.1 Characteristics of the Grocery Discount Format
The key terms that describe a grocery discounter are minimalism and efficiency,
which are integrated into all business areas.5 Indeed, the ambition of grocery
discounters is to sell quality products at the lowest price possible. To realize profits
in spite of the low prices, grocery discounters reduce their costs to a minimum and
2
3
White (1995).
4
See Lebensmittel Zeitung (2015a).
5
See Warschun and Schmidt (2011, p. 4).
Aldi and Lidl: From Germany to the Rest of the World 83
attempt to generate high volumes of sales through a limited product range of fast-
moving items. The approach of cost reduction especially affects the spending on
store design, customer service and advertising: grocery discounters try to save
money by building up their stores in suburban areas and remote districts, where
the rental fees or purchase prices for properties and buildings are low.6 Furthermore,
all companies have a basic outlet format that is similar to that of a warehouse, with
merchandise sold directly from cardboard boxes. In the stores, customers only have
limited possibilities to contact service personnel in case of product-related questions
because there is no dedicated customer service department.7 Additionally, with
regard to advertising, at least in the past, grocery discounters did not launch costly
TV ads or image campaigns—oftentimes, they only used flyers and newspaper ads
as promotion material.
Experts distinguish between so-called hard discounters and soft discounters:
today, the product range of a hard discounter covers some 1500 items—and almost
all of these are store brands. The product range of a soft discounter, however, covers
a range of 4000 goods and includes store brands as well as branded products.8
1.2 Development of the Grocery Discount in Germany
In the early 1960s, Karl and Theo Albrecht opened the first Aldi (Aldi ¼ Albrecht
Discount) grocery discount stores in Germany. At that time, many industry experts
questioned the potential success of the hard discounter’s business model. However,
within a few years, the two brothers built up several hundred stores in Germany and
started their international expansion in Europe. Their new store format, which was
highly competitive and successful, proved many experts wrong. Based on the
national and international success of Aldi, the German grocery discount industry
became an important segment within the worldwide grocery retailing industry. By
2014, Germany was the home base of four major grocery discounters (Aldi, Lidl,
Netto and Penny) with an annual sales volume of more than € 68.6 billion in
Germany9 and more than € 155.2 billion globally.10
However, for some time now, the success stories of the four major grocery
discounters originating from Germany have been jeopardised: although the companies
were able to expand their market share in Germany to approximately 40%,11 they now
increasingly face signs of market saturation and stagnating growth in their home
market.12 Today, the market share of grocery discounters in Germany is at a level of
6
See Colla (2003, pp. 58–59).
7
See Roth (2016, p. 36).
8
See Institute of Grocery Distribution (2011).
9
See Lebensmittel Zeitung (2015c).
10
See Borger (2015, p. 9).
11
12
See Nielsen (2002, 2008) and Planet Retail (2008).
84 S. Schmid et al.
approximately 38.5%, and experts assume that this market share will remain
unchanged in the coming years.13 Figure 2 provides a detailed illustration of the
sales volume distribution in the German retailing industry.
As a result, German grocery discounters have had to adjust their strategies to fuel
further growth. In this context, they have faced two key options for developing
further.14 They could:
• try to identify and target new customer segments within their home market (i.e.,
Germany), and/or,
• continue their growth through expansion in foreign markets.15
The two leading grocery discounters in Germany—Aldi and Lidl—started their

international expansion well in advance of any other competitor.16 Today, both Aldi
and Lidl generate more than 50% of their revenues in foreign markets. Furthermore,
the two belong to the top ten companies of the pan-European and worldwide food
retailing industry and are regarded as the world’s largest food discounters by sales
volume (see also Figure 1).
Others
8.1%
Supermarkets
11.2%
Hypermarkets
42.2%
Discounters
38.5%
Hypermarkets: large product range at high, medium & low prices; size: min. 1,000 m² up to 2,500 m²
Discounters: limited product range at low prices; size: about 1,000 m²
Supermarkets: medium product range at high, medium & low prices; size: min. 100 m² up to 999 m²
Others: limited product range at high, medium & low prices; size: less than 400 m²
Figure 2 Sales volume distribution in Germany’s grocery retailing industry by store format (as of
2014, total sales volume € 170.9 billion). Source: Based on Anonymous (2015b), Nielsen (2015,
p. 16) and Schmid et al. (2013, p. 536)
13
See Lingenfelder (1995, p. 298) and Twardawa (2006, pp. 381–383).
14
See Anonymous (2003) and Peitsmeier and Heeg (2004, p. 35).
15
See Dawson (2000, pp. 123–127) and Liebmann and Zentes (2001, p. 259).
16
See Olbrich and Peisert (2004, p. 52).
1.3 Aldi’s History
Aldi was founded by the two Albrecht brothers in 1946, when Karl and Theo took
over the grocery business from their parents.17 At that time, they faced a severe
shortage of goods and groceries in post-war Germany. As a result, the two brothers
were forced to narrow the product range in their stores.18 Even in the 1950s, when the
German economy prospered again, they did not modify their product offerings. In the
early 1960s, the Albrecht brothers realized that their limited product range was by no
means a disadvantage for them. Karl and Theo recognized that their stores were
highly profitable, and they saw no need to implement the characteristic store concept
of a supermarket, where shoppers could choose from a wide range of goods.19 Dieter
Brandes, a former Aldi manager, states that the two brothers initially planned to
convert their grocery stores into typical supermarkets before they incidentally
observed that their minimalistic business model was highly successful.20 Brandes
describes the hands-on mentality at Aldi by claiming that the company did not set
any financial targets: “Some have called budgets toys for chief executive officers.
They replace chance with error. Everyone does it. So it has to be right, doesn’t it?
ALDI gets along without it.”21
In 1961, the two brothers divided their company into two separate organisations.
According to their agreement, Theo Albrecht was responsible for the northern part of
Germany and founded the Aldi Nord GmbH & Co. OHG based in Essen, Germany.
Karl Albrecht took charge for the southern part of Germany and established the Aldi
Süd GmbH & Co. OHG based in Mülheim, Germany.22 Today, both companies
operate independently, except on strategic decisions such as price promotions and
purchasing conditions, where they consult each other.23
During all market entries in foreign countries, the company followed the initial
territorial agreement from 1961. Thus, Theo Albrecht focused his expansion on the
north-eastern, western and south-western countries in Europe. Karl Albrecht
addressed the southern and south-eastern regions. Additionally, Karl was responsi-
ble for the market entries in Anglophone countries such as Australia, Ireland, the
U.K. and the U.S.24
17
See Lebensmittel Zeitung (2008).
18
See Brandes and Brandes (2015, p. 16).
19
See Brandes and Brandes (2015, p. 11 and p. 16).
20
21
22
23
See Brandes (2001, p. 28) and Lebensmittel Zeitung (2007, p. 33). In this case study, there will be
no further distinction between Aldi Nord and Aldi Süd. Both entities are considered as one
company.
24
See Planet Retail (2008).
86 S. Schmid et al.
In 2014, Aldi operated more than 10,000 stores in 17 countries and generated
sales revenues of approximately € 65.1 billion worldwide.25 Further statistics show
that approximately 42% of the worldwide sales could be assigned to Germany,
nearly 32% were generated in other European markets, and approximately 26%
were achieved outside Europe.26
1.4 Lidl’s History
In 1973, 12 years after the Albrecht brothers opened their first Aldi stores, Dieter
Schwarz established the grocery discount retailer Lidl in Ludwigshafen, Germany.27
Similar to Karl and Theo Albrecht, Schwarz had worked in a small family-owned
retail business before he launched his own discount retailer business. Today, the Lidl
Stiftung GmbH & Co. KG is a part of the “Unternehmensgruppe Schwarz”, a group
that owns the Lidl and Kaufland companies.28
At first glance, it seems that Dieter Schwarz has successfully copied Aldi’s
business model for his own grocery discount stores. However, a closer examination
reveals that Lidl follows a so-called soft discount strategy, where the product
assortment in the stores is enlarged to almost 4000 items and customers are offered
branded products and store brands.29 Statistics show that Lidl’s soft discount
concept has been successfully expanded: in 2014, Lidl operated more than 10,000
stores in 26 countries and generated sales of approximately € 62.7 billion globally.30
Approximately 32% of the sales were achieved in Germany, and approximately 68%
of the sales were generated in other European markets.31 Figure 3 presents a
comparison of Aldi’s and Lidl’s key operating figures.
Nevertheless, with regard to sales volume and the number of stores both in
Germany and globally, today, Lidl remains in number two behind its rival, Aldi.
However, on a European level, the company has already taken the lead with regard to
the number of stores: Lidl operates approximately 10,000 stores, whereas Aldi
operates only 8100 stores.32
25
26
See Keuchel and Kolf (2016, p. 6).
27
28
See Lebensmittel Zeitung (2007, p. 28).
29
See Anonymous (2005, p. 17, 2014b)
30
See Kolf and Ludowig (2015, p. 1).
31
See Seidel (2015, p. 6.)
32
See Anonymous (2005, p. 17) and Jensen and Schwarzer (2014a, p. 30).
Aldi Lidl
Founding year 1962 1973
Business model hard discount soft discount
Sales volume (bn €) in 2014 65.1 62.7
- thereof Germany 27.6 (~ 42%) 20.3 (~ 32%)
- thereof European foreign markets 20.7 (~ 32%) 42.4 (~ 68%)
- thereof non-European foreign markets 16.8 (~ 26%) 0 (0%)
Number of stores in 2014 10,343 10,084
- thereof Germany 4,215 (~ 41%) 3,277 (~ 32%)
- thereof European foreign markets 3,951 (~ 38%) 6,807 (~ 68%)
- thereof non-European foreign markets 2,177 (~ 21%) 0 (0%)
Number of foreign markets in 2014 16 25
- thereof European foreign markets 14 (~ 88%) 25 (100%)
- thereof non-European foreign markets 2 (~ 12%) 0 (0%)
Figure 3 Comparison of Aldi’s and Lidl’s key operating figures. Source: Based on Lebensmittel
Zeitung (2015c, d, e) and Schmid et al. (2013, p. 544)
2 Internationalization Strategies of Aldi and Lidl
2.1 International Market Entry and Target Market Strategies
Aldi realized early that international expansion could be a key lever in enhancing
the company’s further growth. In 1967, the management decided to enter Austria by
acquiring the local grocery retailer Hofer.33 Then, from 1976 to 2014, Aldi
expanded into another 16 foreign markets.34 The expansion was not limited only
to Europe—10 years after the market entry into Austria, Aldi began to make gains in
the U.S. market, and in 2000, the grocery discounter extended its operations to
Australia.35
Unlike Aldi, Lidl limited its expansion to the German market first. Thereafter, in
the period from 1989 to 2014, the company entered 26 foreign markets and impressed
experts with its astonishing speed of internationalization. Additionally, Lidl seized
the opportunity to expand into a number of developing European markets, where no
competitor had previously been present. Aldi—in most cases—preferred to wait for a
retail sector to mature, whereas Lidl has been far more adventurous and began its
Eastern European expansion with the market entry into Poland in 2002. Figure 4
illustrates the international market presence and the number of stores in each country
of Aldi and Lidl.
33
34
See Lebensmittel Zeitung (2008) and Schmid et al. (2013, p. 549).
35
88
144
173
225
98
113
1,810(1) 145 501
557 396
450
658
293
13 85
7 4,215 543
3,277
233
125
910
450(2)
1,529 175 100
204
101 166
= Number of Aldi Stores 75(2) 190
= Number of Lidl Stores 47
48
(1) In the U.S.A. about 435 of the 1,705 367
242 249 88
566 90
Aldi stores are operated by the 529
grocery retailer „Trader Joe’s”.
(2) In Austria and Slovenia Aldi stores
are labelled „Hofer“.
220
Reference date for all data and 6 16
information is end of 2014.
Figure 4 Aldi’s and Lidl’s market presence and number of stores in 2014. Source: Based on Lebensmittel Zeitung (2015d), Schmid et al. (2013, p. 546) and
S. Schmid et al.
Seidel (2015, p. 7)
Lidl’s rapid expansion into Poland seems to have paid off: only 5 years later, in
2007, the company achieved sales of approximately € 759 million and was ranked
among the top three grocery discounters in the country. With this well-established
position, Lidl has a clear advantage over its rival, Aldi, which entered the Polish
market in 2008 and had to build up consumer trust and market share first. In 2014,
with 543 stores, Lidl generated sales of € 2854 million in Poland, whereas Aldi, with
85 stores, reached sales of only € 285 million.
Some of Aldi’s and Lidl’s market entries were a result of simple trial and error:36
oftentimes, the grocery retailers declined support from market research companies or
management consultancies and judged the attractiveness of a foreign market based
on their own managers’ gut feeling.
In 2008, Lidl was forced to realize the flaws of this strategy: after 4 years of
unsatisfactory sales, the company withdrew from the Norwegian market and sold its
50 stores to a local competitor, Rema.37 Norway’s unique geographic structure and
the distribution of its population were key factors that led to Lidl’s failure.38 The
thinly distributed population density in Norway required Lidl to build up several
central warehouses to ensure smooth supplies for each discount store in the country.
Consequently, logistics became more expensive, and the additional costs threatened
the profitability of Lidl’s stores.39 Werner Evertsen, head of Lidl Norway, explained
that the stores were closed because they offered no further development potential,
and he indicated that store location was a key issue that should have been checked
more carefully: “It can simply be a case of wrong location or too low population
density. Of course, we want to be where the population is.”40 In addition to these
mistakes, Lidl Norway had to cope with a high level of turnover among its top
managers. One of the country managers left the company 20 months after he had
signed his employment contract. The frequent change in Lidl’s top management and
the resulting uncertainty among the employees also negatively affected the long-
term strategic planning of the company.41
In 2010, for the first time in its history, Aldi decided to stop its operations in one
market it had entered before—Greece. Aldi sold all 38 stores, including 12 to Lidl,
which was an unexpected move for industry experts. Aldi announced that the
company wanted to strengthen its business in other European markets. Ever since,
Aldi has stayed away from the Greek market.42
36
See Brandes (2001, p. 123).
37
See von Schlautmann (2008).
38
See Dagens Næringsliv (2008).
39
See Biehl (2006).
40
Translated quotation that appeared in VG (2007).
41
See Jensen and Schwarzer (2009, p. 64).
42
See Anonymous (2010) and Jensen and Schwarzer (2012).
90 S. Schmid et al.
2.2 International Timing Strategies
Aldi’s internationalization pattern is characterized by phases of “action” and “recov-

ery”. In the past, the company entered one or more markets within a short period of
time and then paused its market entry activities for approximately 10 years.43 Since
2000, Aldi has accelerated the internationalization process and has entered approxi-
mately one new market per year until 2007. Between 2007 and 2014, Aldi entered
only three new markets—all of them in 2008: Greece, Hungary and Poland. In 2010,
Aldi withdrew from Greece. By contrast, Lidl acts much faster: although the
company started its internationalization very late in 1989, it entered 26 foreign
markets in the period between 1989 and 2014. On a country-wide level, the two
companies also pursued different strategies: Lidl opened up many stores in different
regions simultaneously, whereas Aldi entered foreign markets more carefully and
slowly—it began to build up stores by entering one region after another. In
Switzerland, for example, the grocery discounter started its operations in the
German-speaking regions first. Other districts followed successively. Figure 5
provides detailed information on the timing strategies of both firms.
2.3 Adaption to Local Needs
Aldi and Lidl decided to implement their grocery discount strategies not only in their
home country but also in all foreign markets. Nevertheless, both companies allow
local managers to adapt the product range according to country-specific demands. In
an attempt to increase consumer acceptance, Aldi, for example, re-labelled its
German products in Switzerland so that formerly German-branded items became
Swiss-branded goods.44 Additionally, in the U.S.A., Aldi stores typically do not sell
any German products at all. Only the famous German “Christstollen” and almond
paste are offered during the Christmas season.45 In the U.K., Lidl offers regional
products as well: approximately 90% of its meat and poultry are from the U.K. and
Ireland, and when in season, lots of the fruit and vegetables are British. Lidl
U.K. director Martin Bailie explains: “It’s not all pan-European buying; we have
to look at what U.K. customers want.”46
At first glance, this customer focus seems to conflict with the standardized
grocery discount concept. However, Aldi and Lidl realized that this adaptation to
local needs can help the grocery discounters to successfully develop a foreign
market. In Switzerland and in the U.K., where Aldi faced stiff competition from
local retailers,47 the company departed from the rigorous hard discount concept and
43
44
See Brestel (2005, p. 24).
45
46
Martin Bailie as cited in Creevy (2008).
47
See Hickmann (2008); Stock (2004); Van Den Steen and Lane (2014, p. 2).
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
L
Aldi and Lidl: From Germany to the Rest of the World
6 S
5 CZ
USA DK GR
H
4 B FIN H
L PL PL
3 DK E B AUS N P CYP
NL UK P IRL SK SLO BGR
2
A F F UK I NL A GR IRL E CH HR SLO M N CH GR ROU
1
0 \\ \\
1963
1964
1965
1966
1967
1974
1975
1976
1977
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Number of new market entries from Aldi Number of new market entries from Aldi accumulated Number of market exits from Aldi
Number of new market entries from Lidl Number of new market entries from Lidl accumulated Number of market exits from Lidl
A = Austria; AUS = Australia; B = Belgium; BGR = Bulgaria; CH = Switzerland; CYP = Cyprus; CZ = Czech Republic; DK = Denmark; E = Spain; F = France; GR = Greece; H =
Hungary; HR = Croatia; I = Italy; IRL = Ireland; L = Luxemburg; M = Malta; N = Norway; NL = Netherlands; P = Portugal; PL = Poland; ROU = Romania; S = Sweden; SK =
Slovakia; SLO = Slovenia; UK = United Kingdom.
91
Figure 5 Aldi’s and Lidl’s international market expansion until 2014. Source: Based on Anonymous (2010), Hecking (2014), Jensen and Schwarzer (2014a,
p. 30) and Schmid et al. (2009, 2010, 2013, p. 549)
92 S. Schmid et al.
launched advertising campaigns to convince customers to shop at Aldi.48 In addition

to the advertising campaigns, stores in Switzerland and in the U.K. were stocked
with a broader selection of meat and seafood products, more upscale frozen meals
and a new “food to go” counter.49 As Aldi adjusted its product assortment in the
U.K., it managed to overcome the reputation of an “underclass discounter”. It also
started to attract savvy middle-class customers shopping at Aldi in the U.K.50
3 Outlook and Future Trends
Aldi’s and Lidl’s success in their home market of Germany is beyond dispute.
However, both companies realized that, if they insisted on maintaining their original
discount format, they might have limited growth prospects abroad. With their altered
product and service strategies in the U.K. and in Switzerland, Lidl and Aldi are
trying to meet the requirements of their demanding local customers. Aldi managers
also retain their pricing strategy in those countries where Aldi heads upmarket,
whereas Lidl has slightly increased the sales price for some of its products. It will
be interesting to observe whether the grocery retailers will implement these
strategies in other foreign markets as well. Market entries that may follow in the
future could serve as an indicator for the strategic development of the two rivals.
In 2011/12, Aldi extended its existing store network in Poland and Hungary.
Furthermore, Aldi announced plans to enter Romania and the Czech Republic in the
years to come.51 Among the countries for potential future market entry are Turkey,
Russia, New Zealand and South Africa. Taking a closer look at the market potential
of selected foreign countries, it must be noted that, in general, Brazil, Russia, India
and China (i.e., the BRIC countries) offer the most promising opportunities for
growth. Despite some recent economic volatility, India and China may play a central
role because of their strong economic development, rising population and increasing
prices in the grocery retail industry.52 For instance, forecasts estimate that there will
be more than 200 Chinese cities with a population of more than one million people
by 2025. As of 2014, neither Aldi nor Lidl is present in the Chinese market, whereas
competitors, such as Wal-Mart, Carrefour and Tesco, have already entered China.53
In 2014, Auchan was the largest foreign grocery retail chain operating in China, with
a sales volume of € 7.1 billion, followed by Wal-Mart with a sales volume of € 6.5
billion.54 Wal-Mart runs a wide range of different store formats in China such as
48
See Comtesse (2017) and Heilmann (2008).
49
See Aldi (2016) and Ough (2016).
50
See BBC (2014).
51
See Rudolph and Meise (2012, p. 147).
52
See Anonymous (2011a), Hein (2012, p. 14), Jensen and Schwarzer (2014b) and PwC (2012,
p. 21).
53
54
Wal-Mart Supercenter and Sam’s Club.55 Similar to many foreign markets the
Chinese market is challenging: first, the growth of the Chinese economy is slowing
down; second, Chinese brands dominate the retail industry; and third, the market is
highly fragmented, especially in smaller cities.56 India seems to be even more
difficult for foreign companies; for instance, in 2014, Carrefour left India only
4 years after having opened some cash and carry stores.57
Currently, Aldi is investigating the Chinese market with regard to possible market
entry strategies. However, experts are very sceptical whether the Chinese population
will accept Aldi because Chinese grocery shopping culture is strongly driven by
customer preferences for branded goods.58 In 2010, discounters accounted for only
0.1% of China’s total grocery retail sales59; and sales in the discount segment are
expected to grow by almost 1% per year between 2015 and 2020.60
Lidl is not holding off and is preparing to enter the U.S. market with more than
100 stores in the Washington area.61 This plan is a reaction to Aldi, which is heavily
investing in the U.S. to increase the number of stores to 2000 by 2018. In addition,
Lidl intends to start operations in Lithuania and Serbia to strengthen its European
position.62
In addition to their expansion into new foreign markets, Aldi and Lidl have begun
to extend their grocery store driven business model. For instance, Aldi offers mobile
phone contracts and hosts travel websites and online flower shops.63 Lidl has started
to sell high-quality wines, technical equipment, and “home and living” articles.
Additionally, Lidl provides a “weekly special” in its online shop to advertise both
in-store products and items that are only available online.64
It is likely that the consumer trend of shopping online will require retailers to adjust
their sales and distribution strategies. In 2014, Lidl generated € 163.6 million in
online sales. In the discount segment, online advertising is also increasingly impor-
tant.65 In 2011, Aldi cut its investments in print advertisement by € 130 million;
traditional print advertisement has been partially replaced by online advertisement.66
Industry experts expect that the “grocery discount stores of the future” will have to be
more connected to online shopping technologies. It may also be possible that the
grocery discounters will face competition from new (or recent) entrants such as
55
56
See Euromonitor (2016).
57
58
See Jensen and Schwarzer (2014a).
59
60
61
62
See Seidel (2015).
63
See Anonymous (2014d), Hielscher (2015) and Louven (2005).
64
See Anonymous (2014e, p. 18).
65
66
See Kontio (2013).
94 S. Schmid et al.
Amazon and eBay or even Google. These firms are well established in the
e-commerce business or in the internet industry in general and may have the power
to establish new rules in the grocery retail industry.67
Questions
1. Mintzberg states that, in addition to planned strategies, we can also find emergent
strategies.
(a) What evidence do you observe for the emergent character of strategies in
the case of Aldi and Lidl? What reasons may be behind the fact that not
all of Aldi’s and Lidl’s strategies were carefully planned?
(b) Do you believe that Aldi and Lidl would have been equally or even more
successful if they had planned their strategies more carefully? Please
justify your reasoning.
2. Porter distinguishes between cost leadership, differentiation and focus strategies.

(a) How would you characterize Aldi’s and Lidl’s strategies in terms of
Porter’s strategy options?
(b) What are the advantages and disadvantages of Aldi’s and Lidl’s
strategies compared to other strategic alternatives (in terms of Porter’s
strategy options)?
3. One option within internationalization strategies is greenfield investment.

Although Aldi and Lidl entered some foreign markets via acquisitions (see, for
instance, the acquisition of Hofer by Aldi in Austria in 1967), they mostly opt for
greenfield investments.
(a) Please discuss the reasons why Aldi and Lidl are choosing greenfield
investments as their primary market entry strategy.
(b) If you were a member of the Aldi or Lidl top management team, would
you recommend alternative market entry strategies in the future? Please
justify your reasoning.
4. Both Aldi and Lidl are active in the discounter segment of the retail market.
Simultaneously, there are similarities and differences between the two firms.
(a) Please establish an international SWOT analysis for Aldi and Lidl. To
simplify your analysis, please focus on the home market of Germany and
two other foreign markets. You are invited to use the information from
the case and additional sources.
67
See Preuß (2017, p. 2).
(b) Please illustrate the similarities and differences of the two firms based on
your SWOT analysis.
(c) Based on your SWOT analysis, which company (i.e., Aldi or Lidl) will,
in your opinion, be more successful over the next 10 years? Please use
several criteria that help you define and operationalize success.
(d) What recommendations would you give Aldi and Lidl with regard to
their strategic development for the next 10 years? Please elaborate in
detail on corporate, business and selected functional strategies.
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KTM and Bajaj: An Austrian-Indian
Partnership in the Motorcycle Industry
Stefan Schmid and Simon Mitterreiter
Abstract
Austria-based motorcycle manufacturer KTM has managed to become the num-
ber one European seller of motorcycles. To achieve this goal, the company has
chosen to engage in a joint venture with Indian motorcycle manufacturer Bajaj
Auto Limited (BAL). The present case study provides an overview of KTM’s
internationalization path and highlights the main motives, objectives and
outcomes of the Austrian-Indian partnership. The case study outlines the interna-
tionalization of KTM in the context of an overview of India’s economy, the
Indian motorcycle industry and India’s key players in the industry.
1 The Motorcycle Industry
For some people, riding a motorcycle is a great fascination. Driving dynamics and
permanent feedback of forces require constant interaction between the rider and
motorcycle. This is one of the reasons why motorbikes1 have enjoyed great popu-
larity over the last decades. In some countries, however, it is not so much of a
fascination but rather a very basic need, for instance, in terms of transportation and
commuting that underlies the demand for motorcycles.2
In the motorcycle industry, we differentiate between on-road and off-road
models. On-road motorbikes are used for both transportation/commuting (especially
in emerging economies) and recreation (primarily in developed economies). It is not
just a stereotype that the typical on-road rider is often either an urban young male
1
In the present case study, the authors use the terms motorbike and motorcycle synonymously.
2
See Ihle (2013, pp. 7–9).
S. Schmid (*) · S. Mitterreiter
e-mail: sschmid@escpeurope.eu; smitterreiter@escpeurope.eu

https://doi.org/10.1007/978-3-319-74089-8_5
100 S. Schmid and S. Mitterreiter
(transportation/commuting) or a middle-aged male (recreation).3 Middle-aged males

are frequently part of the so-called “motorcycle lifestyle community”. Planning and
riding trips together, sharing their riding experiences together in (e-)communities
and promoting freedom are their core activities and values.4 By contrast, the average
off-road rider is young, adventurous, edgy and willing to take risks while riding
off-road.5
Another criterion that segments the motorcycle industry is the displacement size of
the engine. There are small engines with a displacement of up to 400 ccm, medium-
sized engines up to 750 ccm and large engines up to 1400 ccm.6 On-road bikes can be
equipped with engines of all displacement sizes, whereas off-road bikes’ engines
usually do not exceed 400 ccm. Because of the lower speed on bumpy surfaces, less
power and therefore less displacement are required.7 Industry experts believe that on a
global scale, the small engine on-road models will gain importance and show substan-
tial growth potential, predominantly in emerging market economies. This is mainly due
to the rise of buying power among the lower middle class living in these countries. This
consumer group mainly uses small engine models for (urban) transportation for two
main reasons: on the one hand, motorcycles are cheaper than cars; on the other hand,
motorbikes permit time savings in commuting and parking.8
Together with scooters, motorcycles compose the two-wheeler industry. Scooters
represent a subcategory of motorcycles with a step-through frame, and they are
frequently used for short-haul transportation and commuting. They are cheap and
easy to park and store. Owing to their light motorization, scooters do not reach high
speeds. The popularity of scooters dates from the introduction of the most famous
scooter model, the “Vespa”, manufactured by Italy’s Piaggio shortly after World
War II. Since then, scooters have spread globally, with many different models
available in various markets.9
For many decades, the “big four”10 from Japan, i.e., Honda, Yamaha, Suzuki and
Kawasaki, have been the dominating companies in the motorcycle industry in terms
of not only major technical developments but also sales. Leading European
manufacturers in terms of sales are KTM, BMW, Ducati and Aprilia.11 The motor-
cycle industry in Europe has a long tradition, and there are also many other smaller
players in Europe, such as Triumph, MV Agusta and Moto Guzzi.12 Of course, the
3
See Chung and Turpin (2004).
4
See Sapp et al. (2007).
5
See Zietsma and Wong (2005).
6
See Stoffregen (2012, p. 9).
7
See Schäfer (2002, p. 9).
8
See Pierer as cited in Anonymous (2015).
9
See Naganathan and Gunupudi (2010).
10
Although Suzuki and Kawasaki lag far behind Honda and Yamaha, the term “big four” is
commonly used in the industry. See, for instance, Pashley (2008) or Zühlke (2007).
11
See Sapp et al. (2007).
12
KTM and Bajaj: An Austrian-Indian Partnership in the Motorcycle Industry 101
U.S. cult brand Harley Davidson, whose motorbikes are the symbol of the American
way of life, is also on the list of top manufacturers.13 While Honda, Yamaha and
KTM offer both on-road and off-road models, Suzuki, Kawasaki, BMW, Ducati,
Harley Davidson and Aprilia rather focus on on-road motorbikes.14 Figure 1 shows
the sales development in the worldwide two-wheeler industry (numbers refer to the
entire two-wheeler industry, because manufacturers do not disclose motorcycle
figures separately): over the last 10 years, a considerable increase in sales can be
observed, in particular from 2010 onwards. As can be seen from Figure 1, the world
two-wheeler market is characterized by an oligopolistic structure, with the Japanese
“big four” (Honda, Yamaha, Suzuki and Kawasaki) accounting for a 46% share in
2016.15 European manufacturers, being relatively small, compose another 1% of the
market, while the remaining 53% comprise other manufacturers. These
60
55
50
45
40
Million units
35 Overall
30 Others
25 Japanese big four
20 European manufacturers
15
10
5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Honda 10,271 10,369 9,320 10,114 9,639 18,331* 15,061 15,494 17,021 17,765 17,661
Yamaha 4,419 4,997 5,865 5,841 6,960 6,982 6,090 6,014 5,799 5,218 5,154
Suzuki - 1,770 1,825 1,261 1,334 1,406 1,363 1,405 1,192 1,032 1,047
Kawasaki 0,528 0,502 0,519 0,523 0,397 0,471 0,501 - 0,581 0,524 0,540
European
0,720 0,742 0,693 0,590 0,586 0,625 0,647 0,635 0,662 0,697 0,748
Manufacturers**
Others** - 12,929 9,956 12,385 10,262 14,880 22,037 - 27,025 26,521 28,168
∑*** - 31,309 28,178 30,714 29,178 42,695 45,699 - 52,280 51,757 53,318
* From 2011 onwards, Honda accounted the total unit of sales of completed products, its consolidated subsidiaries and its affiliates under the
Equity Method (Honda Group unit sales).
** These numbers are estimated by the authors based on data published in manufacturers’ annual reports 2006-2016.
*** These numbers are estimated by the authors based on data published in Anonymous (2017d) and Yamaha (2016).
Figure 1 Manufacturers’ sales development within the global two-wheeler industry, 2006–2016.
Source: Based on Anonymous (2017d), Audi (2017), Honda (2007, 2017), Kawasaki (2007, 2008,
2009, 2010, 2011, 2012, 2013, 2017), KTM Industries (2017c), Piaggio (2007, 2009, 2011, 2013,
2015, 2017), Suzuki (2009, 2011, 2013, 2015, 2017), Yamaha (2010, 2014, 2016)
13
See Lindner (2015).
14
15
manufacturers are predominantly based in emerging market economies (for instance,

Hero and TVS in India or Lifan and Loncin in China) and make up most of the
growth over the last 10 years.16
Industry experts state that motorcycle manufacturers will face some challenges in
the future.17 First, manufacturers will be confronted with a stagnation of demand in
well-established markets, leading to a shift towards emerging markets where demand
is growing. Second, in many countries, regulations in terms of stricter legal
frameworks for CO2 emissions are expected. Therefore, a trend towards alternative
power units, especially electric engines, can be identified. Third, ownership of
vehicles is becoming less important, particularly in established markets. Business
models that emphasize motorcycle-sharing and motorcycle-pooling are likely to be
established—not only in the car industry but also in the two-wheeler industry. Fourth,
connectivity in terms of electronic systems on-board and via inter-vehicle-communi-
cation has also affected the motorcycle industry. Manufacturers will have to integrate
IT interfaces and electronic components more in the future than in the past.18
Despite stagnation in established markets, manufacturers expect further growth in
demand in the global motorcycle and two-wheeler market from 2017 onwards (see
Figure 1).19 This is due to the significant increase in demand that has been observed
over the last 10 years and that is still predicted for emerging markets such as India,
ASEAN20 and South American countries. According to industry experts, these
regions will see the highest growth in demand, as smaller on-road motorbikes
(up to 400 ccm) are the models that are sold heavily in these markets.21
2 KTM’s Development
2.1 KTM’s Origins and Growth
In an interview in 2015, Stefan Pierer, CEO (“Vorstandsvorsitzender”) of KTM,

stated: “From 2020 onwards, we want to be the third largest sport motorcycle
manufacturer worldwide, overtaking at least two of the Japanese big four”.22 But
what are the roots of KTM—a company that mainly industry insiders have heard of?
KTM (Kronreif Trunkenpolz Mattighofen) was founded by Hans Trunkenpolz.
He opened a fitter’s workshop in 1934, and in 1953, together with his partner Ernst
Kronreif, he started to produce motorcycles. The company was set up in Mattighofen
16
See Hamilton (2013).
17
See ACEM (2015).
18
See Fournier and Donada (2016), Götze and Rehme (2014).
19
See Kawasaki (2017), KTM (2017a).
20
These countries include: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand and Vietnam [see Kutschker and Schmid (2011), p. 188].
21
See KTM (2017a).
22
Pierer as cited in Anonymous (2015).
in Upper Austria. Mattighofen is a small town, part of the “Innviertel” region, near
the German-Austrian border.23 During the following three decades, KTM grew
quickly and diversified its product range. The company reached notable success in
selling motorcycles. In the 1960s, scooters and bicycles were also introduced into the
market. Finally, in 1984, the company started to produce engine coolers for both
motorcycles and cars. After the sudden death of the 58-year old founder’s son and
owner, Erich Trunkenpolz, in 1989, the company was sold to an Austrian holding
company controlled by Dr. Josef Taus, an Austrian industrialist. As reported by
industry observers, the following two aspects led to a severe crisis after the take-
over: on the one hand, high capital investments needed for diversification were the
cause of a decreasing equity base (especially the cooler business was never really
profitable). On the other hand, ongoing poor decision making by the inexperienced,
newly installed management staff of the new owners misled the company’s business.
For instance, a bloated organizational structure caused long decision-making paths
and inflexibility.24 In August 1991, creditor banks claimed an increase of equity
capital by the owners, which was no more possible for KTM. Therefore, in
December 1991, KTM had to file for bankruptcy proceedings.25
In January 1992, Stefan Pierer and his company, CROSS Industries AG (from
July 2016 onward: KTM Industries AG), took over KTM. CROSS Industries AG
(now: KTM Industries AG) was founded in 1987 as a holding company by Stefan
Pierer and his partner Dr. Rudolf Knünz in Austria. CROSS Industries AG’s
business model was to invest in companies that were in financial trouble, to
restructure them and to finally sell them at a profit. The holding company succeeded
in turning around several mid-sized Austrian companies from various industries,
such as heating or ski equipment, but it had no experience in the automotive sector.26
By the end of 1991, former KTM motorcycle world champion Heinz Kinigadner
became aware that KTM needed a new investor and established contact with Pierer
and Dr. Knünz. In contrast to former investment deals, this time, the two
businessmen were taken by entrepreneurial spirit. They recognized the growth
potential of KTM’s motorcycle division and stayed at the top of the company even
after the reorganization.27 In retrospect, Pierer, Dr. Knünz and their management
team emphasized the strengths of the motorcycle division: highly skilled engineering
staff with experience in motorcycle engine R&D, availability of innovative engine
concepts, know-how of assembling motorcycles, and a famous brand in the industry.
The new owners focused on this set of strengths and tried to develop them continu-
ously in the years after the takeover. As they did not see any further growth potential
in the scooter, bicycle and cooler segment, related assets were sold in 1992 by a
liquidator.28 Since then, over the past 25 years, the new owners have led the Austrian
23
See Pierer et al. (2009).
24
See Gach (2014).
25
See Cathcart (1992), Pierer et al. (2009).
26
See Pleininger (2003).
27
See Delekat (2015).
28
brand to new levels of success. Between 1999 and 2004, BC Partners, a British
private equity firm, purchased a 49% stake of KTM. Being a venture capitalist
company, the British firm invested heavily during KTM’s growth phase. After
having earned considerable returns, BC Partners sold its stake completely in 2004,
and Pierer’s and Dr. Knünz’s CROSS Industries AG (now: KTM Industries AG)
bought back the stake.29
In the fiscal year 1992, the first one under Stefan Pierer’s direction, the company
disclosed € 26 million of revenue and an EBIT of € 1 million, which resulted in an
EBIT margin of 3.6% (see Figure 2).30 By comparison, in 2016, KTM reported
€ 1142 million of revenue with a recorded EBIT of € 103 million, leading to an EBIT
margin of approximately 9% (see Figure 2).31 With regard to sales, in the fiscal year
1992, sales did not surpass 7000 units. By 2008, when the financial crisis hit Europe,
sales increased to 92,385 motorcycles. After a serious downward slope in 2009 with
only 64,080 units sold, sales figures went up to 203,340 motorbikes sold in 2016,
equating to a 200% increase in 7 years and a 2800% increase since the re-start of
KTM in 1992.32
KTM’s 2017 model range incorporates 15 on-road and 15 off-road models with
internal combustion engines as well as three off-road motorbikes with electric
engines.33 Historically grown in the off-road range, the company calls itself the
global market leader in this segment. However, in 2014, for the first time in the
company’s history, more on-road than off-road motorcycles were sold.34 Figure 3
shows two KTM motorcycles from both the on-road and off-road segment: on the
1992 1993 1994 1995 (…) 2013 2014 2015 2016
Revenue
26 38 59 78 (…) 716 865 1,022 1,142
(million €)
EBIT
1 1 6 8 (…) 55 75 95 103
(million €)
EBIT
3.6% 3.7% 9.8% 10.4% (…) 7.7% 8.7% 9.3% 9.0 %
Margin
Units sold
6,978 8,488 14,177 17,257 (…) 123,909 158,760 183,170 203,340
(thousand)
Figure 2 KTM’s revenue, EBIT, EBIT margin and sales, 1992–2016. Source: Based on KTM
Industries (2017c), Pierer et al. (2009)
29
See Buchholz (2005), Möller (2005).
30
31
See Atzesberger (2017), KTM (2017a).
32
See KTM Industries (2017c).
33
See KTM (2017b).
34
KTM 125 Duke KTM 250 SX-F
Figure 3 KTM 125 Duke and KTM 250 SX-F. Source: Based on KTM (2017b)
left side, the KTM 125 Duke, the top-selling on-road model within its displacement
category in European markets; on the right side, the KTM 250 SX-F, a well-known
model in the off-road segment.
2.2 KTM’s Internationalization Process
Since its beginnings, KTM did not limit its activities to Austria. Direct exports
already started soon after the beginning of the production of motorbikes in 1953. The
first sales subsidiary was established in 1978 in Lorain/Ohio, U.S.A. By the end of
the 1980s, KTM motorcycles were directly exported to 13 countries via exclusive
importers.35 During the first 40 years of business, KTM’s management focused
rather on market entry strategies with low resource transfer and a low level of
control.36 After Stefan Pierer’s takeover in 1992, foreign market entry strategies
quickly evolved into high-control entry modes. Since 1996, KTM has established
18 fully owned sales subsidiaries in five continents. In addition, KTM created joint
venture units with partner companies in Dubai, New Zealand and the Philippines.37
Figure 4 shows the establishment of foreign sales subsidiaries over time.
KTM also opted for a major acquisition: in 2013, the Austrians acquired the Swedish
motorcycle manufacturer Husqvarna, at the time owned by BMW Motorrad. Being famous
for its off-road niche motorcycles (about 10,000 unit sales output per annum), the Swedish
manufacturer was never really compatible with BMW’s focus on street motorbikes.
With both KTM and Husqvarna having a strong presence in the off-road sector, there
was great potential for synergies in the fields of R&D, purchasing and production. To
avoid brand dilution, KTM’s management decided not to consolidate the marketing and
sales activities of the two brands.38 The acquisition relates to the following situation: in
35
36
See Fuchs and Apfelthaler (2009, pp. 342–343).
37
See KTM (2017a), Pierer et al. (2009).
38
See Gluschitsch (2013).
Time
Year 1978 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
CAN
GER ITA HUN NOR
Country/ies USA - UK ESP FRA JAP - NZL UAE MEX -
CH NED SLO DIC
BE
Year 2010 2011 2012 2013 2014 2015 2016 2017
Country/ies GRE - - - SIN RSA PHL -
BE = Belgium; CAN = Canada; CH = Switzerland; ESP = Spain; FRA = France; GER = Germany; GRE = Greece;
HUN = Hungary; ITA = Italy; JAP = Japan; MEX = Mexico; NED = Netherlands; NORDIC = Denmark, Finland, Norway
and Sweden; NZL = New Zealand; PHL = Philippines; RSA = South Africa; SIN = Singapore; SLO = Slovenia; UAE =
United Arab Emirates; UK = United Kingdom; USA = United States of America
Figure 4 KTM’s establishment of foreign sales subsidiaries. Source: Based on KTM (2017a),
Pierer et al. (2009)
1987, Italy’s MV Agusta had bought Husqvarna. At this time, Husqvarna had moved
from Sweden to the Biandronno-based facilities in the North of Italy. BMW had acquired
Husqvarna in 2007. During the ownership of BMW Motorrad, Husqvarna’s operations
continued to be carried out in Italy. After the takeover of KTM, by the end of September
2013, manufacturing facilities in Biandronno were shut down, and the majority of the
manufacturing staff was laid off. Shortly afterwards, KTM’s board announced the
integration all of Husqvarna’s operations at its headquarters in Mattighofen. Philipp
Habsburg, head of R&D at KTM, described the integration within his department: “The
Husqvarna R&D staff works in a separate office in the same building of KTM R&D in
Mattighofen. However, we work closely together, share know-how and use synergies
during development processes”.39 Since 2014, the facilities in Biandronno have served
as spare parts storage for KTM and Husqvarna.40 This turned out to be a smart decision,
as the logistics hub of DHL at Milano’s Malpensa airport is only a few kilometres away.
As of 2017, R&D and manufacturing for Husqvarna are completely carried out in
Upper Austria. R&D activities for KTM motorcycles are also primarily located in
Mattighofen, but some development activities do exist in India. The same situation
can be found for manufacturing: production of KTM motorcycles takes place in both
Mattighofen and Indian Pune. In addition, in Argentina, Brazil, China, Columbia
and the Philippines, exclusive importers assemble completely knocked down (CKD)
kits for local demand.41
In 2016, 95% of the group’s (KTM and Husqvarna motorcycles) global sales were
generated abroad. Europe is the most important region with a 42% share of global sales,
followed by Asia with 22% of global sales, North America (Canada and U.S.A.)
accounting for 21% of global sales, Australia/Oceania with 7% of global sales, Latin
39
Habsburg as cited in Wheeler (2013).
40
See Bayer and Doll (2013), Jandrasits (2013).
41
See KTM (2017a).
Sales Revenue
6% 2% 3% 1%
4%
7% Europe Europe
10%
Asia incl. India North America
42% North America Asia incl. India
21% Australia/Oceania Australia/Oceania
Latin America Latin America
Africa/Middle East Africa/ Middle East

29%
53%
22%
Europe Asia incl. North Australia/ Latin Africa/

India America Oceania America Middle East
Units sold FY 2016 (thousand) 85,633 42,987 42,920 14,023 13,198 4,579
Revenue by region FY 2016 (million €) 604 120* 328 40* 38* 12*
* These numbers are estimated by the authors based on data published in KTM’s annual report 2016.
Figure 5 KTM’s global sales in 2016. Source: Based on KTM (2017a), KTM Industries (2017c)
America with 6% of global sales and Africa and the Middle East with 2% of global sales
(Figure 5: circle on the left showing shares of units sold, circle on the right illustrating
shares of revenue). European markets are still the most important for KTM’s business.
However, over the last 5 years, Europe’s share of global sales has decreased 13% points
from 55% in 2011 to 42% in 2016. The Indian market seems to be the market with the
strongest increase: the subcontinent accounted for 18% of KTM’s global sales in 2016.
Thus, since 2014, there has been an increase of 11% points in only 2 years.42
3 India as a Promising Market for the Motorcycle Industry
3.1 The Indian Economy
Between 1950 and 1990, average growth rates in the Indian economy amounted to
approx. 4%, while over the last 10 years (2006–2016), GDP growth of 7% per
annum can be observed.43 Among other things, this has led to the rise of disposable
income for the middle class.44 Domestic demand driven by the purchase of consumer
goods, automobiles and two-wheelers, inter alia, has proven to be a key accelerator
for growth (in 2014, household consumption accounted for 60% of GDP).45
Economists predict an additional increase in GDP and buying power over the next
42
See KTM (2012), KTM Industries (2017c).
43
See Neff (2017), Zingel (2014).
44
See Banerjee (2013).
45
See Kale and Anand (2006), UNCTAD (2016b).
10 years, particularly owing to the demographic situation in India. By 2026, 70% of

the population will be at employable age. Consequently, a further increase in
domestic demand is forecasted.46
Since the 1990s, MNCs have been allowed to enter a broad range of industries in
India. At first, they needed to have a local partner, but as deregulation evolved, from a
legal point of view, fully owned and fully controlled entities for MNCs were also
permitted in some industries. For instance, as of 2010, UNCTAD data shows 61 affiliates
of foreign MNCs with a revenue of more than US$ 100 million.47 As Figure 6 illustrates,
since the beginning of the 1990s, India’s inward foreign direct investment (FDI) stock
first increased exponentially owing to the liberalization of the Indian economy before
growth rates flattened from 2010 onwards. Although important, the level of FDI stock in
India is far below the level of FDI stock in China.48 The Indian market environment for
foreign investors remains complex. For instance, business practices are often considered
very different, bureaucracy is regarded as inflated and decision making (in both the
public sphere and firms) is, in many cases, not transparent for foreign companies.49
Therefore, in most industries, joint venture cooperation is still more common than wholly
India
1200
China
1000
800
bnUS$
600
400
200
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Figure 6 Inward FDI stock in China and India in billion US$, 1991–2015. Source: Based on
UNCTAD (2016a)
46
See Auswärtiges Amt (2017).
47
Examples include Bosch, Samsung and Siemens. See Kale and Anand (2006), McKinsey and
Company (2016), UNCTAD (2013).
48
See UNCTAD (2016a).
49
See RSM Consulting (2016).
owned subsidiaries. On a general level, India’s society remains confronted with long-
term challenges in terms of, e.g., extensive poverty, deficient infrastructure, far too
difficult access to basic and higher education and finite employment opportunities.50
3.2 The Indian Motorcycle Industry and Market
The liberalization of the Indian economy and the growth potential of the country
induced various international motorcycle manufacturers to enter the market. Not
only the big four from Japan but also European manufacturers have started to operate
in the Indian market. Most of them have used the “traditional” sequence of entry
modes: first, they entered India via joint venture, mainly because of legal restrictions.
In this way, foreign manufacturers “got in touch” with local manufacturers. Then,
after the beginning of the “ongoing liberalization period” in 1997, some foreign
manufacturers terminated their joint venture and began to run their own sales and/or
production subsidiaries in India.51
Until about 2005, most of the motorcycles manufactured in India were only for
domestic sale; Indian factories had poor quality standards compared to Western
manufacturing facilities. By contrast, statistics show that in 2013, already about
one-sixth of Indian manufactured motorbikes were exported.52 What are the reasons
for this increase in terms of exports?53 Owing to cooperation with foreign firms,
some transfer of know-how, capabilities and skills occurred. Foreign manufacturers
introduced or improved quality management, process orientation and qualification
levels for local staff.54 By 2017, some management consultants stress that India’s
motorcycle industry not only has low labour costs but also high technical standards
and highly skilled staff.55
These improvements have had a positive impact on the Indian market for
two-wheelers (motorcycles and scooters). India’s two-wheeler production and domes-
tic sales (in this context, defined as “sales that come from domestic manufacturing”)
have increased steadily over the past 6 years (see Figure 7). The average growth rate
during this period was about 7% per annum, for both manufacturing and domestic sales.
It has to be mentioned that by the turn of the millennium, consumer preferences
shifted firmly from scooters to motorcycles. Back in 1990, motorcycles had a market
share of only 25% in India’s two-wheeler market. In 2000, the share rose to 49%,
with a further increase to 78% in 2010.56 The strong preference for two-wheelers
compared to cars among Indian consumers is illustrated by the following fact: in
50
See Auswärtiges Amt (2017).
51
See IBEF (2017), Peermohamed (2013).
52
See SIAM (2017).
53
See Richter (2014).
54
See Bergthaler (2017), Fuchs and Apfelthaler (2009, p. 370).
55
See Richter (2014).
56
See George et al. (2006), Naganathan and Gunupudi (2010).
25
20
15
Million
Units sold
10 Units produced
0
2010 2011 2012 2013 2014 2015 2016
2010 2011 2012 2013 2014 2015 2016
Units sold (million) 11,769 13,409 13,797 14,807 15,976 16,456 17,590
Units produced (million) 13,349 15,428 15,744 16,883 18,489 18,830 19,929
Figure 7 Two-wheeler production and domestic sales in India, 2010–2016. Source: Based on
SIAM (2017)
100
90
25%
29%
80 20%
49%
70
72%
60 78%
Motorcycles Two-wheelers
50
Scooters Cars and trucks
40
75%
71%
30
51% 80%
20
28%
10 22%
Pie chart illustrates market share as of 2016, based on units sold.
0
1990 1995 2000 2005 2010
Figure 8 India’s two-wheeler market between 1990 and 2010 and automotive market share in
2016. Source: Based on Naganathan and Gunupudi (2010), SIAM (2017)
2016, the overall market share of two-wheelers in the automotive industry (i.e.,
motorcycles, scooters, cars and trucks) amounted to 80%, while cars and trucks
accounted for only 20% (see Figure 8).57 This reveals the strong preference of Indian
consumers for two-wheelers.
57
See SIAM (2017).
3.3 Indian Manufacturers
India’s top three two-wheeler manufacturers, Hero MotoCorp., TVS Motor Com-
pany and Bajaj Auto Limited, accounted for a 63% domestic market share in sales in
financial year 2016. The other 37% of the domestic market share predominantly
relates to sales by joint ventures between international manufacturers and local
partners as well as competitors, such as Honda, Yamaha and Suzuki (see Figure 9).58
Hero MotoCorp: in 1984, Indian bicycle manufacturer Hero and Japanese manu-
facturer Honda created a joint venture in India. Since its inception, the joint venture has
focused on motorcycles and scooters with an engine displacement lower than 250 ccm.
The motorcycles that were introduced to the Indian market in the 1980s were famous
for their efficient fuel consumption and low cost. The “high-tech” bikes constitute one
of the reasons why business has grown by double digits since the start of the collabora-
tion. By the turn of the millennium, Hero MotoCorp became India’s largest manufac-
turer of two-wheelers (in terms of turnover).59 In about 2005, tensions arose between
the two business partners: Honda did not want to share its technology for free anymore,
whereas Hero was not ready to pay fees for technological input. Finally, the cooperation
came to an end in December 2010. Hero bought the stakes of Honda, and the joint
37% 37% Hero Moto Corporation

TVS Motor Company
Bajaj Auto Limited
Other
12% 14%
Pie chart illustrates market share as of 2016, based on units sold.
Hero Moto TVS Motor Bajaj Auto

Other ∑
Corp. Comp. Ltd.
Units sold FY 2015 (million) 6,297 2,145 1,808 5,865 16,115
Units sold FY 2016 (million) 6,580 2,484 2,057 6,563 17,684
Year-over-year growth 4.5% 15.8% 13.8% 12.0% 9.7%
Figure 9 Key players in India’s two-wheeler market. Source: Based on Shah (2017), SIAM (2017)
58
See Shah (2017).
59
See Doval (2010).
venture was terminated.60 After the breakup with Honda in 2011, Hero expanded its
business over various emerging markets, and it has become one of the most successful
players in ASEAN, Latin American and even African markets.61
TVS Motor Company: India’s number two motorcycle and scooter manufac-
turer (in terms of turnover) was founded at the beginning of the twentieth century as
a bus service company. Over the years, the company has diversified, and the
manufacturing of two-wheelers started in 1978. Together with Suzuki, TVS founded
a joint venture in 1982. The two partners manufactured Suzuki motorcycles that
were customized for the Indian market. For instance, because of the bumpy roads in
India, several components had to be adapted to ensure a more durable performance.
The joint venture came to a planned end by the turn of the millennium. The TVS
motorcycle division became independent, and Suzuki signed an agreement not to
enter the Indian market with its own subsidiary until 2 years after the breakup of the
joint venture. Today, TVS offers scooters, motorcycles and three-wheelers.62 In
early 2017, TVS and BMW Motorrad announced a future collaboration: the German
manufacturer decided to enter the small engine segment and to develop a new model
to be manufactured at TVS’s Bengaluru production plant.63
Bajaj Auto Limited (BAL): In 1926, India’s number three motorcycle and
scooter manufacturer (in terms of turnover) was established as an industrial con-
glomerate by Jamnalal Bajaj. The production of scooters started in the 1960s via a
licensing arrangement with Italy’s Piaggio. In 1974, Bajaj did not renew the agree-
ment and commenced the production of its own scooters. Over the years, BAL
became India’s number one scooter manufacturer.64 In about 2000, motorcycles
became an increasingly more dominant category of two-wheelers in India, and BAL
shifted its business focus away from scooters. By this time, Rajiv Bajaj, the great-
grandson of the founder, had been promoted CEO and had oriented the business
towards motorbikes. BAL’s new CEO concentrated on improving R&D, operations
and strategy with his “performance-consistency-pricing” programme.65 Soon after
the installation, BAL’s products featured better technology and styling. As a smart
businessman, Rajiv Bajaj was aware of the large growth potential of India’s motor-
cycle industry. The first result of the implemented changes in BAL’s business could
be observed in 2001: the introduction of a newly developed small engine on-road
family called Pulsar.66 In 2007, BAL agreed to a joint venture collaboration with
Austrian manufacturer KTM. The plan was to jointly develop small on-road
motorcycles that would be manufactured at Bajaj’s production plant in Pune. Over
60
See Baggonkar (2015), Sen Gupta (2011).
61
See Hero MotoCorp. (2016).
62
See TVS Motors (2017).
63
64
65
See Sharma (2011).
66
the last few years, Bajaj has expanded its businesses, and as of 2017, it is present in
over 50 countries, predominantly in emerging market economies.67
4 KTM’s and Bajaj’s Cooperation
KTM considered entering the Indian market in the middle of the 2000s, slightly more
than 10 years after the re-start of the company in 1992. Dr. Rudolf Knünz, KTM’s CFO
at the time, was reflecting on various options for expansion.68 Back then, KTM offered
on-road motorbikes only in the engine range between 600 and 1200 ccm of displace-
ment. To offer a full on-road model range, KTM had to introduce motorcycles with
engine displacement of up to 400 ccm. As industry experts believed that these models
had considerable growth potential, especially in emerging market economies, KTM
made the decision to enter this segment. KTM intended to create synergies while
developing and assembling new products. In addition, the plan was to reduce costs
(for instance, in purchasing or manufacturing) while expanding into a new segment.69
KTM opted for a partnership with India’s Bajaj Auto Limited: on the one hand, BAL
had experience in the field of developing and manufacturing small engine motorcycles,
mainly based on their successful Pulsar series. On the other hand, India seemed to be
one of the most promising markets for the motorcycle industry.
On November 5th 2007, KTM and Bajaj Auto Limited announced a bilateral joint
venture collaboration on forthcoming projects: it was agreed that KTM would provide the
R&D know-how for new on-road motorcycles with up to 400 ccm engine displacement.
Joint developments would also be available for Bajaj’s small engine Pulsar series.
Furthermore, it was declared that the Indian partner would provide an assembly line
for new KTM models. The entire business was housed under Bajaj’s production plant
based in Pune/India. The joint venture agreement stated that KTM motorcycles
manufactured in India were to be exported and sold all over the world via KTM sales
subsidiaries. An exception was Bajaj’s domestic market in India: the joint venture
partners decided that BAL would take over KTM’s sales via its own dealer network,
but to avoid brand dilution, they would be spatially separated from KTM showrooms in
KTM design.70 The joint venture was signed without specifying any ending date.71
During the press conference announcing the joint venture, KTM’s CEO said, that the
cooperation was considered a “win-win situation”: KTM brings technological know-
how; the Indian partner provides low-cost production facilities and access to the emerging
market region.72 Bajaj Auto Limited’s CEO Rajiv Bajaj added that the Austrian
company’s brand, design and performance had inspired the Indian company to invest
67
See Bajaj Auto Limited (2016), KTM (2007).
68
69
See Philip (2012).
70
See KTM (2016).
71
See KTM (2007).
72
See Reiter (2015).
in this cooperation.73 BAL strived for brand spill-over effects: KTM with its “ready to
race” brand slogan emphasizes the young, sporty, high-tech character of its products, and
Bajaj counted on an augmented number of young clients for their products.74
The ownership structure of the joint venture was as follows: in October 2007, Bajaj
Auto Limited established a fully owned and Dutch-based holding, called Bajaj Interna-
tional Holding BV. Via this holding, BAL acquired 14.5% of KTM’s shares on
November 5th 2007. KTM pays its annual dividends into the holding to contribute to
the joint venture.75 Over the years, BAL increased its ownership from 20% in 2009 up to
47.99% in 2012. Since then, via its Dutch holding, Bajaj has become the second largest
shareholder of the Austrian company, with Stefan Pierer and KTM Industries AG still
owning 51.67%. The remaining 0.34% of shares are free floating on the Vienna Stock
Exchange.76 Figure 10 provides an overview of the shareholder structure as of 2016.
In 2011, 4 years after the beginning of the partnership, the KTM 125 ccm Duke
model was launched, as the first model jointly developed and manufactured by the joint
venture partners. In 2011, 11,000 units were manufactured on the new assembly line at
Bajaj’s plant in Pune. In the early stages of the cooperation, R&D for the KTM 125 ccm
Duke took place in Mattighofen only. However, from 2011 onwards, R&D for the
Duke model and later also for other jointly developed models was relocated to the
facilities in Pune (as of 2016, the KTM 125 ccm Duke has become the top-selling
model in European markets within its displacement category of motorcycles up to
125 ccm).77 In the following years in 2012 and 2013, the Duke series was extended to
also offer 200, 250 and 390 ccm displacement engines. The introduction of the KTM
RC model in 2013 was another result of the joint venture cooperation. The RC model is
Bajaj Auto Limited Pierer Industrie AG Free float
100% 74,89% 25,11%
Bajaj Auto International Holding BV KTM Industries AG
KTM AG
47,99% 51,67%
0,34%
Free float
Figure 10 Shareholder structure between KTM and Bajaj as of 2016. Source: Based on Bajaj Auto
Limited (2016), KTM (2017a), KTM Industries (2017a)
73
See KTM (2007).
74
See Naganathan and Gunupudi (2010).
75
See KTM (2007).
76
See Haider (2014), KTM (2017a).
77
See Anonymous (2011), Bergthaler (2016).
available with engines with a displacement of 125, 200 and 390 ccm. Both the Duke
and RC series use the same engine platform.78 However, the 250 ccm version is
available only for the Duke series. Bajaj’s members of the board highlight that
90–95% of the parts used to assemble the Duke and RC series are sourced locally.
They are proud to have a high-quality network of suppliers in the Pune region.79
Almost 10 years after the starting point of the joint venture, the main outcome is
as follows: two KTM model platforms and one engine platform for KTM and Bajaj
with four displacement categories. While KTM assembles the engines in their Duke
and RC series, the Indian company equips its Pulsar series with the engine platform
that they had developed jointly.80 In 2016, approximately 70,000 KTM motorcycles
were assembled in the joint venture facilities in Pune. While the majority of KTM
bikes are still produced in KTM’s production plant in Mattighofen, one-third of total
sales now result from the joint venture production in Pune.81
The collaboration had some advantages for both companies. To improve
motorcycles in terms of the technical reliability and durability of wear parts, Bajaj
received additional technological input from its Austrian partner. Moreover, both sides
realized cost efficiencies: KTM benefited from lower labour costs in India, and Bajaj
achieved higher capacity utilization for its production plant and economies of scale.82 As
a further advantage, not only did KTM benefit from outsourcing of manufacturing, but
BAL also served and serves as the door opener for sales in India and Southeast Asia.
Originally, the Bajaj distribution of KTM motorbikes was planned for the Indian market
only.83 As the entire ASEAN region has become a region with increasing demand,
additional sales agreements were arranged, using the already existing Bajaj dealership
networks. The most important one was announced in 2016, when the partners disclosed
KTM’s market entry to Indonesia, utilizing the existing Bajaj dealer network there.84
KTM’s Chief Sales Officer, Hubert Trunkenpolz, confirmed the relevance of the cooper-
ation with Bajaj for KTM’s emerging markets sales: “Only via the joint cooperation with
BAL we can offer a full on-road motorcycle model range from 125 ccm to 1200 ccm. All
these newly developed rookie models up to 400 ccm highly conform to the requirements
and needs of our clients in the growth markets of Asia and Latin America”.85
Considering possible disadvantages, which may emerge from such collaboration,
KTM’s CEO, Stefan Pierer, rejects them in his usual straight-forward Austrian
78
A platform in the automotive industry refers to a common set of design, engineering and
production over a number of various models. It is used to reduce costs and allows manufacturers
to create different models from a design point of view with similar technical components [see
Braess and Seifert (2013), pp. 155–158; Schmid and Grosche (2008), p. 153].
79
See Anonymous (2017a), Niyogi (2014).
80
See Philip (2012).
81
82
See Philip (2012).
83
84
See KTM (2016).
85
Trunkenpolz as cited in Wheeler (2014).
manner: “I appeal to the gumption of my staff. We don’t outsource anything. We just

develop and manufacture something jointly which at the beginning did not exist in
KTM’s product portfolio”.86 He dismisses accusations regarding possible job losses
at headquarters in Upper Austria or know-how leakage to the Indian partner.87
5 Outlook
In 2017, the partnership between Austrian KTM and Indian Bajaj Auto Limited
celebrated its 10th anniversary. Bajaj is not only a joint venture partner for KTM but
also, since 2012, KTM’s second largest shareholder: hence both companies are
strategic partners with possibilities for engaging in additional ambitious projects.
In an interview in January 2017, Rajiv Bajaj, CEO of BAL, stated: “Yesterday,
Stefan Pierer spent the whole day in my office. We discussed what has to be done in
the next 10 years. If we both come to an agreement, there could be joint development
of KTM motorcycles in the range of 500–800 ccm.”88 In July 2017, both partners
announced that, by the end of 2018, manufacturing of two Husqvarna models will
also be transferred from Mattighofen to the Pune-based facilities.89
According to media reports, some of the next steps in the field of sales could be
the entry of KTM into other ASEAN markets.90 With Bajaj being present in all
important markets and having its own dealer network, KTM could benefit from these
existing sales points. However, as already stated above, to avoid brand dilution, both
brands will be spatially separated, i.e., KTM motorcycles will be sold in
KTM-branded showrooms, as is common in all previously arranged sales
agreements between KTM and Bajaj.91 Amir Nandi, BAL Senior Vice President,
also noted that marketing activities regarding brand awareness and brand experience
for the KTM models Duke and RC would be strengthened in ASEAN markets.
These include track days at local racetracks, such as the circuits in Noida/India,
Sentul/Indonesia and Sepang/Malaysia. Owners and possible clients of KTM
motorcycles can test the motorbikes in a closed-circuit environment and enjoy riding
KTM motorcycles in line with the “ready to race” slogan of the company.92
The Japanese “big four” motorcycle giants should keep a close eye on “the
Innviertler”, as KTM is called at home in Upper Austria. Together with the strong
Indian partner, the words of Stefan Pierer in his interview back in 2015 (“By the end
of 2020, we want to be the third largest sport motorcycle manufacturer in the world”)
could be more than just an empty threat.
86
Pierer as cited in Reiter (2015).
87
See Kolar (2007).
88
Bajaj as cited in Anonymous (2017e).
89
See KTM Industries (2017b).
90
See Kshirsagar (2016).
91
See Suchde (2017).
92
See Niyogi (2014).
Questions
1. In International Business literature, the Uppsala approach is one of the most cited
approaches for describing internationalization patterns. Please argue how far
KTM’s internationalization corresponds to the Uppsala approach of internation-
alization, in terms of both the psychic distance chain and the establishment chain.
2. Joint ventures can be categorized in various ways. The following table illustrates
an overview of possible types of joint ventures.
(a) Please classify the joint venture between KTM and Bajaj according to
the categories below.
Differentiation criteria Characteristics

Number of cooperation partners • Joint venture with one partner
• Joint venture with several partners
Field of cooperation • Joint venture within one value chain activity
• Joint venture within several value chain activities
• Joint venture regarding all value chain activities
Location • Joint venture established in the country of a partner
• Joint venture in a third country
Geographical field of • Local joint venture for a specific country
cooperation • Joint venture for a specific region or the global
market
Direction of cooperation • Horizontal joint venture
• Vertical joint venture
• Concentric joint venture
• Conglomerate joint venture
Equity stake/voting share • Equal share of partners
• Unequal share of partners
Duration of cooperation • Joint venture with limited duration
• Joint venture without limited duration
Source: translated from Kutschker and Schmid (2011), p. 889
(b) From the perspective of KTM, please discuss the advantages and
disadvantages of a joint venture compared to a fully owned subsidiary
in a foreign country.
3. Joint ventures as a market entry strategy require careful planning and preparation.
Among other things, the macro and the micro environment of the host country
and the possible partners have to be assessed with due diligence.
(a) Why did KTM choose India as a target market and especially Bajaj as a
partner for joint venture cooperation? Please provide a coherent argu-
mentation using tools (e.g., PESTEL Analysis, Porter’s Five Forces or
the strength/weakness profiles of both partners) as a basis for your
statements.
(b) During the first 5 years of the joint venture, Indian Bajaj increased its
financial commitment within the joint venture. Bearing in mind the
macro environmental situation at this time, please argue what might
have been the reasons and objectives for this decision.
4. After having established the joint venture with Bajaj in India, KTM’s manage-
ment had to decide on future allocation strategies, i.e., opt for the centralization or
decentralization of value chain activities.
(a) Please analyse in general (i.e., independently from the KTM case) the
coordination requirements that result from a (partial) decentralization of
value chain activities.
(b) Imagine you are a consultant working for the KTM executive board
(“Vorstand”). Please prepare an executive presentation that offers the
board concrete actions to efficiently deal with the partial decentralization
of R&D and manufacturing from 2011 onwards. Please ensure to pro-
vide support for your recommendations with reasonable arguments
derived from your knowledge about the motorcycle industry and the
companies KTM and Bajaj.
5. Imagine that you are back in 2007/2008 and that you are member of the board
responsible for production in KTM. Rumours within your staff stoke fears of
massive job losses at headquarters in Upper Austria owing to the recently signed
joint venture contract with Bajaj. Employees and trade unions fear the partial
outsourcing of motorcycle production to Bajaj’s production plant in Pune/India.
Please prepare a convincing speech to your local employees to reduce their fears
of job losses.
6. Having recently graduated, you are the new personal assistant to Stefan Pierer,
CEO of KTM (“Vorstandsvorsitzender”). He asks you for an outlook of South-
east Asia’s motorcycle markets until 2027 and the implications for KTM. Please
develop a first draft of the new strategy “KTM in ASEAN markets until 2027”.
Please focus not only on target market strategies but also on market entry
strategies, timing strategies, allocation strategies and coordination strategies.
Please provide a consistent, well-structured proposal for the future.
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Lenovo: From Chinese Origins to a Global
Player
Stefan Schmid and Cigdem Polat
Abstract
China-based Lenovo has managed to become the number-one seller of personal
computers (PCs) in five major PC markets. To achieve this goal, the company has
repeatedly chosen to grow via acquisitions, joint ventures and strategic alliances.
The present case study provides an overview of Lenovo’s internationalization path
and highlights the objectives and motives underlying the firm’s expansion strat-
egy. It shows why Lenovo embarked on an inorganic growth strategy, although it
had successfully established itself through organic growth on the Chinese market
in previous years. The case study also outlines the company’s approach in meeting
some of the major challenges in post-acquisition management.
Within a period of 10 years after its first international acquisition in March 2005,
China-based Lenovo has managed to become the number-one seller of personal
computers (PCs) in five major PC markets, namely in its home market of China, as
well as in Japan, India, Russia and Germany.1 The company is also operating in the
server and workstation business and is striving to expand its market reach in the
PC-plus market, including mobile internet devices, such as tablets and smartphones,
and other smart connected devices, such as smart TVs and smartwatches.
When starting its expansion abroad, Lenovo’s major goal was to become the number
one PC maker in the world.2 To achieve this goal, the company has repeatedly chosen
to grow via acquisitions, joint ventures and strategic alliances, as illustrated in Figure 1.
1
See Anonymous (2016), Flannery (2015), IDC (2015), Srivastava (2016) and Yamazaki and
Murai (2015).
2
See Finsterbusch (2012b, p. 17).
S. Schmid (*) · C. Polat
e-mail: sschmid@escpeurope.eu; cpolat@escpeurope.eu

https://doi.org/10.1007/978-3-319-74089-8_6
126 S. Schmid and C. Polat
Transactions
IBM’s PC IBM’s server

Medion CCE
branch branch
(Germany) (Brazil)
(U.S.A.) (U.S.A.)
Acquisition
Motorola
Mobility
(U.S.A.)
Joint NEC EMC

Venture (Japan) (U.S.A.)
Strategic IBM NEC EMC IBM Nutanix

Alliance (U.S.A.) (Japan) (U.S.A.) (U.S.A.) (U.S.A.)
CCE
Divestment (Brazil)
2005 2011 2012 2013 2014 2015
Figure 1 Milestones of Lenovo’s internationalization. Source: Based on Anonymous (2014),

Hutchinson (2013), Lenovo (2013a, 2014a, 2015b), Ozores (2015), Schmid and Grosche (2013,
p. 147)
1 A Computer Giant in Its Infancy
1.1 Lenovo’s Rise in China
In the early 1980s, the Chinese government began to accelerate the formation of a
high-tech industry in China. With the aim of promoting future technologies, it allowed
research institutions to set up their own businesses.3 In 1984, eleven computer experts
from the technology unit of the Chinese Academy of Sciences took advantage of this
opportunity and established the computer firm “New Technology Developer, Inc.”
(NTD), the precursor of today’s Lenovo.4 Initially, the company operated as a
distributor of PCs for two U.S.-headquartered firms: AST and Hewlett-Packard
(HP).5 In 1987, the company developed and launched its first original product, namely
the “Legend Chinese-character card”. This piece of hardware translates English-
language operating systems into Chinese, and it helped the computer firm secure
several new contracts. In addition, it provided its PC distribution business with a major
boost.6 Two years later, the company renamed itself after its first original product,
3
See Accenture (2005, p. 5), Kraemer and Dedrick (2002, pp. 30–31) and Xie and White (2004,
pp. 409–410).
4
See Vidal and Meschi (2013, p. 3).
5
See Xie and White (2004, p. 410).
6
See Faheem (2014, p. 4).
Lenovo: From Chinese Origins to a Global Player 127
namely Legend Computer Company. In 1991, after receiving a manufacturing license

from the government, it started to produce its own personal computers.7
Three years later, Legend set the course for its dominant position in the Chinese
market. It went public and took a turn with the help of the newly appointed general
manager of its PC division, Yang Yuanqing. The 29-year-old Yuanqing replaced the
firm’s direct retail concept with a broad network of local distributors and promoted a
strategy of strict cost leadership.8 These steps, along with the firm’s efforts in
collaborating with well-established software and hardware firms, such as Microsoft
and Intel, enabled Legend to outpace Compaq and IBM. In 1996, it became China’s
leading PC maker by PC shipments—a position it has held ever since.9 In 1997,
Legend signed a software licensing agreement with Microsoft enabling the company
to pre-install the Windows 95 operating system on its computers.10 One year later,
Legend attained a share of 17.9% in China’s PC market, only to become the largest
PC seller of the Asia-Pacific region (excluding Japan) in 1999. By that time, its
market share in China had risen to 27.3%.11 In contrast to its competitors, which
focused on business customers, Legend aimed to provide functional and affordable
technology to the average Chinese private customer.12
1.2 A First Glimpse of the Wide World
In 1999, the Chinese government launched an initiative called “Go Global” aimed at
fostering Chinese firms’ foreign expansion. To achieve this goal, it gradually
removed constraints related to foreign exchange and fiscal and administrative
transactions.13 Particularly after China’s entry into the World Trade Organisation
(WTO) in 2001, Legend felt the pressure to internationalize beyond its already
existing partnerships with Western firms.14 Although, with its 30% market share,
the company outpaced domestic competitors by far, it was exposed to potential
threats in its home market of China. On the one hand, increasing numbers of
domestic manufacturing firms, such as the home appliances firm Haier, entered the
PC business with their own brands. On the other hand, Dell launched a direct sales
network in China.15 Legend’s own initiatives beyond the Chinese borders were
7
See Legend Holdings Co., Ltd (2015) and Vidal and Meschi (2013, p. 3).
8
See Xie and White (2004, p. 409).
9
See Schmid and Grosche (2013, p. 143).
10
11
See Pan and Sethi (2005, pp. 7–8).
12
See Quelch and Knoop (2006, p. 4).
13
See Davies (2013, p. 8).
14
See Ahrens and Zhou (2013, p. 8).
15
See Yigang (2005, p. 9).
limited to the international distribution of motherboards by Quantum Design Inc.

(QDI), Legend’s subsidiary located in Hong Kong, in which it held an 80% share.
Since 1994, QDI had established an extensive network of 21 distribution units across
North America, the Asia-Pacific region and Europe that Legend could use for
expansion.16 The major challenge, however, was to replicate the firm’s success on
the Chinese market on a global scale. Hence, in 2002, Legend made a first attempt to
sell its own PCs outside of China, although under the label QDI and not under the
Legend brand. However, fierce competition from international market leaders like
Dell and HP, and a loss in market share to global competitors on the Chinese market
forced Legend to withdraw from its expansion plans and to refocus on strengthening
its position in the home market.17
2 Lenovo Spreading Its Wings
2.1 The Acquisition of IBM’s PC Division
In 2004, 2 years later, the company was renamed Lenovo because international
trademark protection laws would have prohibited the international commercializa-
tion of products under the brand name of “Legend”.18 This step heralded Lenovo’s
second attempt to expand abroad, and in late 2004, the company announced its
acquisition of IBM’s loss-making PC division. The transaction worth US$ 1.25
billion was paid in a combination of cash and stock. IBM received US$ 650 million
in cash on hand and borrowings and obtained an 18.9% equity stake in Lenovo.19
Lenovo raised US$ 350 million of strategic investment for the takeover of IBM’s PC
business from three leading private equity investors, namely Texas Pacific Group,
General Atlantic LLC and Newbridge Capital LLC.20 After the deal, 42.2% of the
new company were owned by the Chinese government. One year later, private
investors including the private equity firms obtained a 10% share in the company,
reducing the ownership stakes of the remaining investors. The transaction was
initiated by IBM, marking the firm’s second attempt to close a deal with Lenovo.
Lenovo had declined IBM’s first request a few years earlier due to the poor
performance of IBM’s PC branch at that time.21
The acquisition of IBM’s PC business enabled Lenovo to strengthen its position in
the commercial PC business by selling laptops under the successful IBM “Think”
brand. Furthermore, the takeover provided Lenovo with the opportunity to extend its
16
17
See Pan and Sethi (2005, p. 10).
18
See Pan and Sethi (2005, p. 9).
19
See Ramstadt and Linebaugh (2004).
20
See Schmid and Grosche (2013, pp. 144–145).
21
offerings to include financial and after-sales services. Not only did Lenovo triple its
worldwide share in the PC market to become the third largest PC maker in the world,
but it also gained access to a globally renowned brand and a huge distribution network
spanning across 150 countries.22 IBM’s PC division featured a strong position in the
enterprise business, primarily in the segment for high-quality laptop PCs. Moreover,
by providing services in the leasing, financing and after-sales business, the company
had established a renowned reputation as a global service provider. In contrast to IBM,
Lenovo was offering desktop PCs to small businesses and private customers, mainly
targeting the Chinese mass market.23 Although both firms were active in the same
industry, they differed with regard to the value chain activities they undertook, the
products they offered and the customers they mainly targeted. More importantly,
compared to IBM’s “Think” brand, Lenovo PCs were largely unknown outside of
China. In addition, Lenovo lacked international experience because its distribution and
marketing activities were mainly focused on the needs of its Chinese customers.
As part of the transaction, Lenovo and IBM entered a 5-year strategic alliance that
specified IBM as the preferred provider of leasing, financing and after-sales services
for Lenovo products. In return, IBM granted Lenovo exclusive access to its distri-
bution network, i.e., it agreed to supply Lenovo PCs exclusively via its boundary-
crossing network of 150 countries and 30,000 employees.24 Furthermore, the strate-
gic alliance granted Lenovo the right to use the IBM brand name in marketing IBM’s
ThinkPad-products for a period of 5 years to penetrate the U.S. and European
markets. After this period, Lenovo marketed the products under its own label.
Hence, the acquisition of IBM’s PC branch gave Lenovo a kick-start in positioning
itself globally, both in terms of establishing a global distribution network and in
terms of gaining rapid brand awareness.25
After the close of the deal, IBM’s PC division underwent an intensive restructuring
phase. Cost cuts, redundancies, job relocations and the implementation of flatter
hierarchies were all part of the firm’s post-acquisition integration. In March 2006,
i.e., about 1 year after the completion of the transaction, Lenovo announced that it
would lay off approximately 5% of its global work force, equalling roughly 1000
employees. Approximately 350 of these lay-offs occurred in a division in North
Carolina that Lenovo had acquired from IBM. The remaining 650 posts were cut in
divisions worldwide with the exception of China.26 Despite Lenovo’s strict course of
cost-cutting measures, less than 2% of the remaining IBM employees who had joined
Lenovo in the process of the acquisition resigned from their positions.
Changes also took place at the management level. Yang Yuanqing ceased to be
the CEO of Lenovo and was appointed chairman of the board. The former head of
IBM’s PC division, Stephen Ward, assumed Yuanqing’s former position as CEO.
Ward had the challenging task of creating a single PC company without losing
22
See Roy et al. (2009, p. 4).
23
24
25
See Stahl and Köster (2013, p. 5).
26
IBM’s potential and existing customers and without compromising on product

quality or after-sales service. Eight months later, Ward was succeeded by William
Amelio who had formerly held several senior executive positions at Dell, where he
had been in charge of emerging markets.27 Ward stepped down more quickly than
anticipated, said Stephen Baker, analyst at NPD Techworld. “It is disappointing to
see him leave at this point,” the analyst noted. “There is a lot of integration work left
to do. This will be a real tough sell for some people.”28 In December 2004, Lenovo
and IBM had estimated the integration phase to last 18 months. Only 1 year later,
Yuanqing announced that Lenovo had attained the relevant stability in the initial
phase of integration and was ready to strive for growth in profitability and efficiency
with Amelio as the right growth accelerator.29
A major reason for the successful integration of IBM’s PC division was the
guidance and support provided by the three leading private equity investors that
had financed the deal: Texas Pacific Group, General Atlantic LLC and Newbridge
Capital LLC.30 The investors offered Lenovo their insight and experience, ensuring
“a smooth transition period and stable development in the future”, as Yuanqing
noted.31 Moreover, they provided confidence in the Chinese PC maker that had been
largely unknown to foreign investors until the acquisition. According to William
Grabe, a managing director of General Atlantic LLC, the “acquisition of IBM's PC
business provides Lenovo with significant new opportunities through both synergies
and by expanding the market for its desktop and laptop PCs globally.”32
Despite this vote of confidence, 6 years after it took over IBM’s PC branch,
Lenovo still struggled to attract private customers and firms from the small and
medium sized segment outside of the Chinese home market. With a market share of
27% in the Chinese PC market and a number four position globally, Lenovo lagged
behind market leaders, such as Dell, HP and Acer.33 In May 2009, shortly after it
reappointed Liu Chuanzhi, Lenovo’s co-founder, as chairman, the company replaced
William Amelio with his predecessor Yang Yuanqing. To increase its competitive-
ness and to expand its global reach, the company undertook two major market entries
in 2011: it formed a strategic alliance and joint venture with the Japanese electronics
giant NEC, and it acquired German PC maker Medion.
2.2 Cooperation with NEC
In 2011, despite a market share of 18% in the Japanese PC market, NEC was
suffering from fierce price competition and limited growth perspectives.
27
See Lenovo (2005a).
28
Baker as cited in Kanellos (2005).
29
See Kanellos (2005).
30
See Orr and Xing (2007, p. 22).
31
Yuanqing as cited in Lenovo (2005b).
32
Grabe as cited in Lenovo (2005b).
33
See Germis (2011, p. 15).
Furthermore, the electronics company struggled to obtain a foothold on an interna-

tional scale, yielding a global market share of less than 1%.34 By partnering with the
world’s fourth largest PC maker in the form of a strategic alliance, NEC intended to
benefit from Lenovo’s considerable buyer power and its efficient global supply
chain. Moreover, the cooperation was a major attempt to attain product and market
expansion. For Lenovo, the strategic alliance was similarly desirable. The company
gained extended access to a highly isolated market. In Japan, it surpassed the
threshold of 5% in market share that it had reached until the formation of the
deal.35 When the deal was announced, Yuanqing described the strategic alliance
with NEC as “a perfect fit”. “It reinforces our commitment to our core PC business
while, at the same time, providing important new opportunities for growth in Japan”,
Yuanqing further noted.36 Moreover, NEC has a strong brand name in Japan and
high technical standards, which is why Lenovo decided to retain the brand name and
to continue offering NEC’s services to PC customers in the Japanese market.37
As part of the strategic alliance, NEC and Lenovo founded a joint venture called
NEC Lenovo Japan Group, in which Lenovo held (and still holds) a majority stake of
51%. Under the formation of this joint venture, NEC and Lenovo established three
individual 100% subsidiaries. Two of them, namely NEC Personal Computers Ltd.
and Lenovo Japan Ltd., originally belonged to NEC and Lenovo, respectively. The
other subsidiary, Lenovo NEC Holdings B.V., is a holding company that was newly
founded. NEC Personal Computers Ltd. provided support to customers in Japan,
while Lenovo Japan Ltd. developed, produced and sold PCs, mobile handsets38 and
related products. The newly created holding company mainly sold and developed
PCs. Hideyo Takasu, the former president of NEC Personal Products Ltd., was
assigned the position of president and CEO of the newly built joint venture, while
Roderick Lappin, the former president of Lenovo Japan Ltd., was appointed execu-
tive chairman.39 Figure 2 provides an overview of the organizational structure and
the shareholder structure as of 2011.
As part of the strategic alliance, Lenovo and NEC consolidated their customer
service and support activities in Japan. When the strategic alliance was announced,
the two companies already planned future collaborations to sell PCs and to offer
support to Japanese firms abroad. Moreover, they discussed the possibility of jointly
34
See Hofer (2011, p. 21).
35
See Germis (2011, p. 15).
36
Yuanqing as cited in Lenovo (2011a).
37
See Alabaster (2012) and Lenovo (2011b).
38
Lenovo entered the mobile phone business in 2002 through a joint venture with Xiamen Overseas
Chinese Electronics Co Ltd., a Chinese electronic appliance company. Six years later, in 2008,
Lenovo sold its loss-making mobile phone unit “Lenovo Mobile” to several private equity funds led
by Hony Capital. After Lenovo Mobile had improved its financial performance and market presence
in China, Lenovo bought back the business in late 2010. See Gregson (2002).
39
See Lenovo (2011b).
51% 49%
Lenovo NEC
Joint Venture
NEC Lenovo Japan Group
100%
Subsidiaries
NEC Personal Computers Ltd.

Lenovo Japan Ltd.
Lenovo NEC Holdings B.V.
Figure 2 Organizational structure and shareholder structure of the cooperation between Lenovo
and NEC. Source: Based on Lenovo (2011b)
developing, producing and selling smart devices and IT platform products in the
future.40 In October 2014, the two parties agreed to extend their joint venture for
another 12 years until 2026.41
2.3 The Acquisition of Medion
The same day on which the joint venture with NEC was completed, Lenovo
announced its largest acquisition since the takeover of IBM’s PC division: the
acquisition of Medion. The German consumer electronics firm Medion had mainly
become known as a supplier of the German grocery discounter Aldi. The transaction
was initiated by Medion; the company was searching for a partner to collaborate with
to reposition itself strategically in the PC market. The purchasing price of US$ 629.4
million was paid in a combination of stock and cash, whereby Medion was trans-
ferred 20% of the purchasing price in Lenovo shares and received the remaining
amount in cash.42 Lenovo financed the transaction from its cash resources and did
not have to seek additional sources. The acquisition was examined and approved by
the European Commission in July 2011.43
At the time of the Medion deal, Lenovo had already gained some international
experience and had enhanced its technological expertise and management skills
through the strategic alliance with IBM. The acquisition of IBM’s PC division had
provided Lenovo with immediate access to a broad base of commercial PC
customers. However, with commercial clients coming to the centre of Lenovo’s
40
See Kurane (2012).
41
See Lenovo (2014b).
42
See Lenovo (2011c).
43
See European Commission (2011).
attention, the firm had neglected its private PC business outside its home market.
Consequently, the takeover of Medion was part of Lenovo’s intensive effort to
rebalance its business and to reduce over-reliance on its home market. This step
became even more urgent with the effects of the financial crisis in 2008, including a
decrease in demand, particularly for commercial products.44 To accelerate this shift
in strategy, Lenovo chose to enter a large PC market outside of China by acquiring a
locally successful firm. The takeover of Medion raised Lenovo’s market share in
Germany—Europe’s largest PC market—to 14%. Due to the acquisition, Lenovo
became the third largest PC maker in Europe.45 Figure 3 provides an overview of
100%
90%
80%
70% Others
Market share
60% Asus
Acer
50%
Dell
40%
HP
30% Lenovo
20%
10%
0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Lenovo HP Dell Acer Asus Other

2005 6.9% 14.6% 16.8% 4.6% - 57.1%
2006 7.0% 15.9% 15.9% 7.6% - 53.6%
2007 7.4% 18.1% 14.2% 9.7% - 51.5%
2008 7.5% 18.2% 14.1% 10.6% - 49.5%
2009 8.0% 19.1% 12.1% 12.9% - 47.8%
2010 10.9% 17.9% 12.0% 13.9% 5.4% 40.0%
2011 12.5% 16.6% 11.7% 10.8% 5.7% 42.8%
2012 14.9% 16.1% 10.7% 10.2% 6.9% 41.2%
2013 16.9% 16.2% 11.6% 8.0% 6.6% 40.7%
2014 18.8% 17.5% 12.8% 7.9% 7.2% 35.7%
2015 19.9% 17.8% 14.0% 6.5% 6.8% 35.0%
Figure 3 Market shares (by units) of the largest PC vendors in the world. Source: Based on
Gartner (2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014a, b, 2015, 2016a)
44
See Hille and Pearson (2012).
45
See Hille and Kwong (2011).
how the market shares of the largest PC vendors in the world developed between
2005 and 2015.
As Milko van Duijl, the president of Lenovo’s “Mature Markets Group” stated,
Medion’s market position was perceived as “fit[ting] perfectly” into Lenovo’s
corporate strategy.46 For instance, Medion features a similar brand strategy to that
of Lenovo in that it offers highly functional products of good value-for-money with
an attractive design and good quality to mass market customers. As a consumer
electronics firm and full-service provider, however, Medion supplements Lenovo’s
offerings through after-sales services and a full range of mobile and smart connected
devices for private customers. The acquisition of Medion thus enabled Lenovo to
execute its PC-plus vision abroad.47
Hence, the acquisition united Medion’s expertise in marketing, sales, services and
retail activities with Lenovo’s manufacturing and supply chain capabilities.48
According to Yang Yuanqing, Lenovo’s chief executive officer, “bringing together
this ‘front end’ with Lenovo’s ‘back end’ [. . .] will make both companies even more
successful and competitive.”49 Moreover, the deal “will complement both Lenovo’s
core PC business and new businesses which are key areas for development”,
Yuanqing announced.50
To support the integration of Medion into Lenovo’s existing business, both
parties agreed that Medion’s CEO Gerd Brachmann and Medion’s CFO Christian
Eigen were to remain in their positions for at least 5 years post-acquisition. In
addition, the business combination agreement specified that Brachmann and Eigen
were to join Lenovo’s management “to further develop the European business
activities of both companies”.51 After the transaction, Medion was left largely
autonomous. All former employees and sites were retained, and Medion continued
to be listed on the German stock market (XETRA and all German stock exchanges).
Due to a share purchase agreement with Gerd Brachmann, Medion’s largest share-
holder, and the purchase of Medion shares from Orbis, Medion’s second largest
46
van Duijl as cited in Lenovo (2011c).
47
The “PC-plus” era is a term that was coined by Lenovo’s current CEO Yang Yuanqing in early
2013. According to Yuanqing, PCs will not become obsolete anytime soon, despite a continuous
decrease in PC demand. Rather, Yuanqing believed that companies need to innovate in PCs to add
extra features beyond those offered by traditional computers. In this context, Yuanqing often points
to Lenovo’s Yoga convertible PC line that enables its customers to convert their computer into a
tablet. According to the CEO, Yoga and other innovative PC products of Lenovo are show cases of
how the company is redefining the traditional PC market and is entering the “PC-plus” era. See
Gupta and Rigby (2013).
48
See Koch (2011).
49
Backend and frontend are terms used in software engineering to describe software applications
that either run in the background of the user’s computer (backend) or directly on the user’s com-
puter (frontend), i.e., on the client-side. Yuanqing uses these terms figuratively. With frontend, he
refers to downstream supply chain activities, such as sales and marketing, whereas by backend, he
refers to upstream activities, such as development and manufacturing.
50
Yuanqing as cited in Lenovo (2011c).
51
Medion AG (2011, p. 23).
shareholder, Lenovo held 51% of Medion’s shares by August 2011.52 In 2012,

Lenovo increased its stake in Medion to 80%. A dual-brand strategy was
implemented, whereby Medion continued to offer Medion products under its own
brand name and simultaneously sold Lenovo products to its customers.53
2.4 Cooperation with EMC
Since the acquisition of IBM’s PC division, Lenovo has continuously pursued a

strategy of growth by gaining market share. With the Chinese PC market operating
as the company’s growth engine, Lenovo was able to ensure the required scale.54 In
contrast to Lenovo, Dell aimed to achieve growth by earning a high rate of return
from personalized PC devices. According to Jonathan Ng, an analyst at CIMB
Research, this difference in the strategies pursued by Dell and Lenovo enabled the
latter to outperform Dell in worldwide PC shipments in 2011 (again, see Figure 3).55
To strengthen its position vis-à-vis its rivals in other product areas as well, Lenovo
formed a strategic alliance with the U.S.-based data storage systems company EMC
in August 2012. The alliance enabled the two companies to leverage their strengths
in the development of enterprise server and storage systems. As part of the strategic
alliance, Lenovo and EMC agreed to develop server technology jointly that was to
be marketed by Lenovo and to be embedded into EMC’s storage systems. Lenovo’s
primary purpose in doing so was to improve and globally expand its server offerings.
Moreover, the companies signed an original equipment manufacturer (OEM) and
reselling agreement; according to this agreement, Lenovo was to provide EMC’s
networked storage solutions to its customers in China and later also to its customers
in other markets. Prior to the deal with EMC, Lenovo did not have a data storage
portfolio. Because storage and servers are commonly purchased together, adding
EMC storage products to its portfolio enabled Lenovo to offer its customers com-
plete server-plus-storage solutions.56 Finally, the two companies announced that
they were planning to form a joint venture named LenovoEMC Ltd, which was
officially established in early January 2013.
Lenovo mainly contributed cash to the joint venture. EMC, in turn, brought in
intellectual property and employees from its subsidiary Iomega. The partners agreed
to offer co-branded network-attached storage systems to small and medium-sized
firms, as well as distributed company units.57 Holding a majority stake of 51% in the
joint firm, Lenovo aimed to strengthen its position in the backend business through
product innovations in industry standard servers and networked storage solutions.
52
See Anonymous (2011) and Lenovo (2011d).
53
See Levine and Roantree (2012).
54
See Gonela (2009, p. 7).
55
56
See Hutchinson (2013).
57
See EMC (2012) and Hille (2012a).
With these innovations, Lenovo primarily targeted the Chinese business and private
PC market.58 EMC’s storage portfolio provided storage technology for Lenovo’s
ThinkServer and ThinkStation server and workstation products.59 The deal fostered
Lenovo’s capabilities in the PC-plus business, including mobile internet devices,
servers and storage solutions. Moreover, according to Lenovo’s top management, it
fitted into the firm’s strategy of vertical integration.60 “Today’s announcement with
industry leader EMC is another solid step in our journey to build on our foundation
in PCs and become a leader in the new PC-plus era,” Yuanqing said on the day of the
announcement of their cooperation in August 2012.61 For EMC, the joint venture
represented a powerful opportunity to extend its reach to China and other important
markets worldwide. LenovoEMC’s initial target was China’s server and storage
market. At the time the joint venture was completed, Lenovo had a 15% market share
for servers in China, and demand for storage products in China was solid.62 Today,
Lenovo manufactures storage area network solutions developed by EMC and
delivers them to China and to other markets.63
2.5 The Acquisition of CCE
Lenovo’s latest expansion in the PC business dates back to 2013, when it purchased
CCE, Brazil’s second largest consumer electronics firm, for US$ 147 million.64 In
2008, Lenovo had already considered entering the Brazilian market by taking over
Positivo, the largest PC seller by shipments in Brazil. However, this plan was soon
abandoned due to economic turmoil and slowing demand.65 CCE is considerably
smaller than Positivo and produces a broad range of consumer electronics goods
beyond PCs, such as TVs and smartphones.66 It comprised three firms, which
together generated revenue of US$ 783 million in 2011: Digibrás Indústria do Brasil
SA, Digiboard Eletrônica da Amazônia LTDA and Dual Mix Comércio de
Eletrônicos LTDA from Digibrás Participações. As part of the deal, Lenovo and
CCE agreed to retain CCE’s management team, including Roberto Sverner, the CEO
and founder of CCE. Moreover, the partners announced that no restructuring or
lay-offs would occur in the post-acquisition phase.67 Lenovo financed the
58
See Finsterbusch (2012a, p. 15).
59
60
See EMC (2012) and Hille (2012a).
61
Yuanqing as cited in EMC (2012).
62
See Mozur (2012).
63
See Perez (2014).
64
See Wendel (2013, p. 80).
65
See Chien (2008).
66
See Hille (2012b).
67
See Lenovo (2012a).
transaction mainly from its existing cash resources. The company paid US$ 43.331
million of the purchasing price to CCE in shares. The remaining amount was
compensated in cash.68
The transaction heaved Lenovo into the number three position in the Brazilian PC
market, while previously it had ranked seventh. The deal was part of Lenovo’s
aggressive expansion plan, with the then fast growing BRIC (Brazil, Russia, India,
and China) markets amongst the number one targets of the company. By producing
its PCs, mobile phones and televisions for the Brazilian market in local factories, the
company avoided paying high import taxes.69 Beyond realizing synergies in
manufacturing operations, Lenovo sought to integrate with CCE to benefit from its
experience in the smartphone and TV business. According to Dan Stone, the
president and general manager of Lenovo Brazil, “Brazilian customers will see
immediate benefit from this acquisition with products that embody Lenovo’s heri-
tage of innovation, quality and global supply chain efficiency, while building upon
CCE’s knowledge of Brazilian consumer needs and strong retail presence.”70 The
deal, which was closed in January 2013, enabled Lenovo to pursue its PC-plus
agenda with a full range of consumer products tailored to Brazilian consumers’
needs.71 CCE itself was left largely autonomous after the transaction was finalized.
Hence, as agreed, Lenovo retained CCE’s management team including its founder
and CEO Roberto Sverner, as well as all former employees and sites. Furthermore,
CCE products continued to be offered under their own brand name.72 Lenovo used
CCE’s distribution and retail channel to diffuse products additionally under the
Lenovo brand in foreign markets.
In spring 2013, Lenovo ended HP’s 7-year legacy as the world’s largest PC maker
by outselling its largest rival and achieving a global market share of nearly 17%.73
One year later, Lenovo was the fasted growing PC company, yielding double-digit
growth rates in a shrinking global PC business.74
In August 2015, Lenovo sold CCE back to the Sverner family, its former owners
and the controllers of CCE’s former holding group, the Digibrás Group. Two months
later, Lenovo made its decision public, stating that it had decided to refocus on its
smartphone business and its premium range PC and server products. In doing so, it
hoped to improve efficiency and to achieve profitability gains in the Brazilian and
global PC business.75 As part of the deal, Lenovo returned the CCE brand and a
68
See Lenovo (2013b).
69
70
Stone as cited in Lenovo (2013c).
71
See Perez (2013).
72
73
See Nusca (2012) and Rogers (2013).
74
See Bora (2014) and Gartner (2014b).
75
See Ozores (2015).
production site in Manaus to the Sverner family, while it kept a production site and
distribution centre in São Paulo.76 Further details regarding the deal have not been
released.
2.6 The Acquisition of IBM’s Server Business
Lenovo’s competitors HP and Dell have continuously pushed their presence in the
server and storage segment in the light of fierce competition by their Asian
counterparts in the PC business. In 2013, HP and Dell together controlled 40% of
revenues in the global server business.77 Therefore, it was particularly important to
Lenovo to obtain a foothold in this segment. Keen to foster its position in the
PC-plus era, Lenovo reached out for another acquisition target in 2014. It took
over IBM’s struggling x86 server business for US$ 2.3 billion. As part of the
transaction, the two companies entered into a strategic alliance, according to
which Lenovo operates as an original equipment manufacturer (OEM) of IBM and
resells selected storage and software products by IBM.78 Lenovo committed to
bringing in all employees of IBM’s server division, doubling its staff located in
North Carolina to more than 4000. When the deal was finally closed in October
2014, Jay Parker, president of Lenovo North America, said “we’re committed to
ultimately winning and becoming number one in the server market worldwide, just
as we have worldwide in PCs.”79 To capitalize on IBM’s server products, Lenovo
decided to consolidate the new products into a single channel program with its PCs
and tablets. Dividing product-oriented channels often leads to inconsistencies.
Offering products with complementary characteristics, such as servers and PCs,
enables Lenovo to sell its entire portfolio through one channel. While in the fourth
quarter of 2013, Lenovo had a market share (by shipment) of only 0.4% in the server
market of Europe, the Middle East, and Africa (EMEA), the IBM deal boosted its
market share to 8.9% one year later. Similarly, Lenovo’s global market share rose
from 1% in the fourth quarter of 2013 to 7.9% at the end of 2014. Worldwide server
demand increased in shipments by 4.8% year over year.80 This development
demonstrates the importance of the server market to Lenovo’s future growth per-
spective. Because competition in the server business is fierce, “the pressure is on to
improve efficiencies now or be left behind in the race for future enterprise business”,
said Adrian O’Connell, research director at Gartner.81
76
See Mari (2015).
77
78
79
Parker as cited in Ohnesorge (2014).
80
See Gartner (2015).
81
O’Connell as cited in Worth (2015).
2.7 The Strategic Alliance with Nutanix
Just as determined to take the lead in the growing global server and storage industry,
Lenovo’s rival Dell announced a buyout of EMC, Lenovo’s joint venture and
strategic alliance partner since 2012. After the largest deal ever proclaimed in the
technology sector was publicly announced in October 2015, Lenovo spokesperson
Milanka Muecke said, “we prefer not to speculate on what this acquisition means to
our business relationship going forward, though it is likely to change.”82 Analysts
suspect that the acquisition worth US$ 67 billion could jeopardize the partnership
between Lenovo and EMC. Shortly thereafter, in December 2015, Lenovo
responded to Dell by announcing that it had entered into a strategic alliance entailing
an OEM agreement with the Silicon Valley-based start-up Nutanix. The partners will
develop, market and sell turnkey hyperconverged appliances by merging Lenovo’s
branded hardware with storage software powered by Nutanix. The joint solution,
which features the latest Intel technologies, is delivered via Lenovo and its channel
partners worldwide.83 As demand for hyperconvergence platforms84 is rapidly
growing, Lenovo is planning substantial investments in skilled global sales staff.
Moreover, both companies will make sizeable investments in platform engineering
and development.85 By bringing a new family of appliances to global firms, Lenovo
and Nutanix aim to help IT organizations simplify their datacentre management and
reduce their IT costs.86
The strategic alliance has already gained industry endorsement. Matt Eastwood,
senior vice president at IDC Enterprise Infrastructure and Datacenter Group, for
instance, commented on the deal as follows: “This Lenovo OEM partnership with
Nutanix goes well beyond typical alliances, embracing joint engineering, marketing
and a dedicated sales team. Combined with the global reach of Lenovo, this
partnership with Nutanix will accelerate the reach of hyperconverged infrastructure
into new markets.”87 Interestingly, Nutanix not only competes with VMware, an
EMC subsidiary, but it also has an ongoing partnership with Dell. In February 2016,
Dell’s acquisition of EMC was formally cleared by the European Commission. It
remains to be seen how these overlaps among Lenovo, its partners and its
competitors will affect Lenovo’s partnership with EMC and its position in the global
server and storage industry.
82
Muecke as cited in Ohnesorge (2015).
83
See Lenovo (2015a) and Ohnesorge (2016).
84
A hyperconverged platform is an IT infrastructure framework that allows for the integration of
different technologies, such as storage, networking and virtualization resources, into one single
commodity hardware by one provider. See Gartner (2016b).
85
86
87
Eastwood as cited in Anonymous (2015b).
2.8 The Acquisition of Motorola Mobility
Another area of the PC-plus segment in which Lenovo has been keen to foster its
position is the smartphone business, which can be seen from its acquisition of
Motorola Mobility, Google’s flagging smartphone branch, for US$ 2.91 billion in
2014. Lenovo announced this deal only one week after it had completed the takeover
of IBM’s server business.88 Lenovo paid US$ 660 million of the purchasing price in
cash and US$ 750 million in Lenovo shares, and it signed a 3-year promissory note
with Google to pay the remaining US$ 1.5 billion.89 In 2008, Lenovo’s former CEO
William Amelio sold the firm’s newly established smartphone branch to focus on its
PC business.90 The acquisition of Motorola in 2014 resembles a comeback, pursued
to rebalance the firm’s sales distribution by products and markets.91 Furthermore, the
deal might provide Lenovo with a solid starting position to compete against Apple,
Samsung Electronics and highly ambitious Chinese smartphone makers in the
U.S. handset market, such as Huawei and ZTE Corporation. Similar to its takeover
of IBM’s PC division and its server business, Lenovo once again built upon the
strategy of entering an established and highly competitive market by acquiring the
distressed assets of a recognized brand. “Using Motorola, just as Lenovo used the
IBM ThinkPad brand, to gain quick credibility and access to desirable markets and
build critical mass makes a lot of sense,” analyst Frank Gillett explained.92
3 Lenovo Encountering Headwind
Lenovo has repeatedly proved its ability to execute cross-border acquisitions, joint
ventures and strategic alliances successfully. In addition to the various deals
described in this case study Lenovo undertook several other transactions along its
path of expansion, such as the acquisition of Stoneware in 2012 and the strategic
alliance with Juniper Networks in early 2016. Its strategy of inorganic international
growth, coupled with the support of the Chinese government and a large Chinese
home market, has enabled it to complement its existing advantages with foreign
expertise, established technology and the strategic assets of successful non-Chinese
brands.93
Lenovo’s continuous development towards offering customers an end-to-end
solution has made it the number one company in the PC market. The company
exceeded analyst estimates in the third quarter of 2014, reporting a net income of
US$ 253 million. In early 2015, however, it began to struggle to translate its success in
88
See Gelles and Pfanner (2014).
89
See Lenovo (2014a).
90
See Mattheis (2014).
91
See Geinitz (2014).
92
Gillett as cited in Damouni et al. (2014).
93
See Gugler and Boie (2009, p. 52).
the PC segment into its mobile phone business.94 Hence, spring 2015 marked “the
toughest market environment in recent years” for Lenovo, as CEO Yuanqing stated in
an earnings call in August 2015.95 Due to a saturated and highly competitive market
environment in China and Brazil, Lenovo’s mobile division suffered losses of nearly
US$ 300 million in the first quarter of 2015. Particularly in its home market, Lenovo
was greatly affected by declining sales which accounted for more than one third of its
global sales. Figure 4 displays the growth dynamics of Lenovo, both in terms of its
share price performance and its profitability indicated by return on equity (ROE) over
time. It shows that Lenovo’s profitability slightly decreased in 2015, after it had
quickly recovered and gradually increased from a substantial decrease due to the
financial crisis and faltering demand in 2009.
Similar to its rivals, Lenovo had to initiate a cost-cutting programme. Hence,
Yuanqing announced that Lenovo would cut 3200 non-manufacturing jobs, equal-
ling 5% of its workforce, to reduce costs by US$ 650 million. In addition, he
reported that the company would restructure its mobile business segment in a
manner that empowered the Motorola unit in the design, development and produc-
tion of smartphones.96 Nevertheless, CEO Yang Yuanqing was clear that Lenovo
did not regret the takeover of Motorola Mobility. “I still believe this acquisition
(Motorola) was the right decision. [. . .] Except Apple and Samsung there is no third
strong (global) player. I believe that will be Lenovo,” he said.97
Stock price ROE

(in US$) (in %)
1,8 40%
1,6
30%
1,4
1,2 20%
1
10%
0,8
0,6 0%
0,4
-10%
0,2
0 -20%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Return on equity Stock price
Figure 4 Lenovo’s stock price and return on equity (ROE), 2001–2015. Source: Based on S&P
Capital IQ (2016a, b)
94
95
Yuanqing as cited in Shih (2015).
96
See Clover (2015a).
97
Yuanqing as cited in Shih (2015).
As part of the restructuring plan, Yuanqing communicated Lenovo’s decision to

shift its focus in the smartphone business, away from its home market of China and
towards emerging markets, such as India and Russia. Once Lenovo managed to
stabilize its business in China, it would also attempt to pick up speed in mature
markets, such as the U.S. and Europe, the following year, Yuanqing commented.
However, the Chinese PC market remains the company’s “profit pool”, as Yuanqing
emphasized in November 2015.98 However, it is also the firm’s weak spot because
growth perspectives are almost saturated in China. Figure 5 presents Lenovo’s
revenue distribution by region from 2007 to 2014.
By the end of 2015, Lenovo’s restructuring measures began to pay off. Around
the second half of the year, smartphone sales in India and Russia increased by 70%
and 160%, respectively.99 Although in early 2016 Lenovo met its forecast and broke
even within one and a half years after the acquisition of Motorola Mobility,
Yuanqing warned of “market challenges”.100 While global smartphone shipments
recorded 80% growth in 2010, in 2015 growth in global smartphone sales slumped to
m US$
50,000
45,000
40,000
35,000
30,000 Foreign revenue

25,000 Domestic revenue
20,000
15,000
10,000
5,000
2007 2008 2009 2010 2011 2012 2013 2014 2015
2007 2008 2009 2010 2011 2012 2013 2014 2015

Domestic
5,544 6,126 6,434 7,892 10,020 12,421 14,565 14,709 14,700
revenue
Foreign
9,046 10,226 8,557 8,713 11,574 17,153 19,308 23,998 31,595
revenue
Total
14,590 16,352 14,991 16,605 21,594 29,574 33,873 38,707 46,295
revenue
Figure 5 Lenovo’s revenue by domestic and foreign markets (in US$ million) from 2007 to 2015.
Source: Based on Lenovo (2007, 2008, 2009, 2010, 2011e, 2012b, 2013d, 2014e, 2015b)
98
Yuanqing as cited in Clover (2015b).
99
See Clover (2015b).
100
Dou (2016a)
11%.101 According to Zhou Hao, an economist at Commerzbank AG, “the golden

years have passed”. “We maybe have to wait for the next generation of products that
can trigger new consumption”, Zhou added.102
The slowdown in PC and smartphone sales poses a particular threat to Lenovo
because the company’s everlasting challenge lies in its overdependence on PC sales.
In 2014, PC shipments accounted for more than three quarters of the firm’s revenue,
as demonstrated in Figure 6. Therefore, Lenovo is increasingly leveraging its
“multimode” PC product range. In 2013, for instance, Lenovo launched Yoga, a
laptop that can be converted into a tablet PC.
Moreover, the integration of Motorola Mobility and IBM’s server business already
delivers more balance to Lenovo’s revenue structure, with PCs accounting for 65% of
the firm’s revenue in 2015, while mobile devices account for 24%.103 To achieve a
market leading and long-term position in the PC-plus era, Lenovo seems to be
committed to fostering a more diversified strategy across products, markets and cus-
tomer segments. Competitive advantage in the PC business is particularly dependent on
volume, scale and cost savings because profit margins tend to be low.104 Acquisitions,
particularly of large-sized firms, are a rapid means of immediately attaining high sales
2007 2014
Servers,
Mobile Other Services &
handsets 1% Software
4% 6%
Smart-
phones &
Notebook Tablets Notebook
48% 14% 51%
Desktop Desktop
47% 29%
Smart- Servers,
Notebook Desktop Mobile
phones & Services & Other Total
PCs PCs handsets
Tablets Software
2007 7,653 6,115 612 - - 210 14,590
2014 19,705 11,039 - 5,657 2,305 - 38,707
Figure 6 Lenovo’s revenue by product categories (in US$ million) in 2007 and 2014. Source:
Based on Lenovo (2007, 2014d)
101
See Dou (2016a).
102
Zhou as cited in Dou (2016a).
103
104
See Stahl and Köster (2013, p. 5).
volumes in foreign markets. Hence, each time Lenovo entered a new market, its primary
goal was to increase its market share based on a competitive cost structure. Once the firm
reached certain market growth, Yuanqing focused on generating a new long-term “profit
pool”, as he says.105 While the company’s low-cost, high-volume strategy has proved
successful in the PC segment, Lenovo is struggling to replicate its growth model with
smartphones, the demand of which is slowing and the competition for which is fierce. To
maintain a leading and lasting position in the PC-plus era, Lenovo might have to change
its focus from low-cost mass-market applications to more innovative technologies that
increase variety.106 So far, the company has mainly created innovation by adapting
products to consumers’ preferences and by refining the trends set by other successful
firms. To gain access to mature markets and to raise its brand awareness, however,
Lenovo might have to move away from its cost-conscious R&D culture and dare to
invest in innovative products.107 As Yuanqing conceded in early 2016: “If you want to
access the mature markets you need two things: innovative products and a premium
brand. So far we haven’t done very well on both things.” With the launch of its new
smartphone offering augmented reality features in July 2016, Lenovo is “ready to attack
that market”, Yuanqing said.108
Questions
1. Acquisitions can be categorized in various ways. One of the possible

categorizations is the following:
Differentiation criteria Characteristics

Direction of acquisition • Horizontal acquisition
• Vertical acquisition
• Concentric acquisition
• Conglomerate acquisition
Evaluation by the acquired firm • Friendly takeover
• Hostile takeover
Ultimate goal of the acquisition • Builder acquisition
• Raider acquisition
Payment of the purchasing price • Cash payment
• Swap payment
Source: translated from Kutschker and Schmid (2011, p. 914)
105
Yuanqing as cited in Lenovo (2014c).
106
Dou (2016b).
107
Ahrens and Zhou (2013, p. 21).
108
Yuanqing as cited in Wolde (2016).
Please characterize the following acquisitions of Lenovo according to the

categories illustrated above:
(a) acquisition of IBM’s PC branch
(b) acquisition of Medion
(c) acquisition of CCE
(d) acquisition of Motorola Mobility
2. There are many reasons why firms undertake cross-border acquisitions.

(a) Please summarize the reasons stated in the case study that led Lenovo to
acquire IBM’s PC branch, Medion, CCE and Motorola Mobility.
(b) John Dunning distinguishes between the following four motives under-
lying foreign direct investment: resource-seeking, market-seeking,
efficiency-seeking and strategic asset-seeking. Which of these dominated
when Lenovo took over IBM’s PC branch? Which motives influenced
Lenovo’s subsequent acquisitions beyond Chinese borders?
(c) Are there other motives beyond those outlined in the text and those
stated by Dunning that might have been relevant to Lenovo?
3. While Lenovo has mainly expanded through international acquisitions, strategic

alliances and joint ventures have also contributed to its growth strategy. Please
argue why Lenovo did not restrict its growth to acquisitions.
4. Acquisitions are characterized by a mutual transfer of knowledge and skills. MNCs

from emerging economies that expand into developed markets via acquisitions to
benefit from local knowledge and skills often face aggressive outward expansion of
competitors from developed markets in their home countries.
(a) How did Lenovo’s acquisition of IBM’s PC branch influence its
subsequent entries into foreign markets in terms of the knowledge and
skills it gained?
(b) In more general terms, in what manner do the motivations for emerging
market companies to expand abroad via acquisitions differ from those of
Western MNCs?
5. In contrast to IBM’s PC branch, Medion and CCE were left largely autonomous
after the two transactions were completed.
(a) Why did Lenovo’s top management team decide to leave the two
consumer electronics firms, Medion and CCE, comparably independent
during their post-acquisition integration?
(b) Do you see problems and risks associated with granting an acquired firm
the right to maintain its distinct autonomy and identity?
(c) What are the advantages and disadvantages of assigning the task of post-
acquisition integration to the former management team of a purchased
firm?
6. Please imagine that you are a consultant for Lenovo and that your task is to
develop Lenovo’s future internationalization strategies. Based on a strategic
analysis, which internationalization strategies would you recommend for the
next 10 years? Please be sure to provide support for your recommendations
with reasonable arguments derived from your strategic analysis.
7. Please read the following two extracts. One extract is from an interview that
Harvard Business Review editor in chief Adi Ignatius conducted with Yang
Yuanqing, the head of Lenovo in 2014. The other extract is from the book “The
Lenovo Way: Managing a Diverse Global Company for Optimal Performance”
(as cited in Conyers and Qiao 2014), which was written by Yolanda Conyers, vice
president for global human resources operations and chief diversity officer at
Lenovo, and Gina Qiao, the senior vice president, human resources, at Lenovo.
Please reflect upon Lenovo’s orientation according to the four states of mind of
international managers proposed by Howard Perlmutter (1969). Is Lenovo mostly
ethnocentric, polycentric, regiocentric, or geocentric? Has Lenovo’s orientation
changed over time?
Harvard Business Review, July–August 2014: The HBR Interview:

“I came back because the company needed me”, p. 6.
HBR: What can U.S. companies learn from how Chinese companies do
business, and vice versa?
Yuanqing: I think both can learn from us, because we’re not a U.S. or a
Chinese company but a global company. Our top ten executives come from six
different countries.
HBR: I understand that Lenovo doesn’t employ many expats.
Yuanqing: It’s true. We don’t assign people to other countries; we rely on
local talent. That helps build a culture of trust and helps us understand different
markets and industries. Throughout the company we employ only about
50 expatriates among our 54,000 employees.
Conyers, Y., & Qiao, G. (2014). The Lenovo Way: Managing a Diverse
Global Company for Optimal Performance. McGrawHill Education,
pp. 25–27, p. 51.
“After bursting onto the global stage with our acquisition of the IBM PC
business in 2005, Lenovo’s top leaders wisely concluded that the company
needed to hire people with experience in multinational corporations. In the
process of transforming ourselves from a completely homogeneous Chinese
(continued)
organization into a corporate and cultural mosaic, with employees from more
than 50 countries, we were experiencing a series of missteps, misfires,
misunderstandings and, on top of that, we were losing money.
Rightly so, the leadership team decided that we needed people who knew
how to operate in overseas markets. Certainly that strategy would enable
Lenovo to become a world leader in the competitive high-tech industry.
But the result of this recruiting effort was a mix of three distinct cultures
that didn’t get very well. We called them the “three rivers,” referring to
Lenovo, IBM, and Dell, the corporate backgrounds of the majority of our
employees.
Redefining Diversity
We needed to figure out a way to get the three rivers to flow together as one
powerful force. Herein lay my diversity challenge, which came on top of the
huge language barrier we faced.
We had to learn to leverage the strengths and styles from all the business
cultures, thinking styles, national cultures and perspectives—blending both
Eastern and Western—to create a world-class global enterprise. Our leaders
wanted nothing less than to reconstruct Lenovo’s entire cultural DNA. We
wanted to create a new way of thinking inside one unified Lenovo company.
At Lenovo, we were redefining diversity as something that was much more
global and effective as a business strategy: how do you work together across
cultures to create something that hasn’t existed before? We were going beyond
the statistical, compliance level of diversity—we wanted to integrate the
diverse cultural experiences and points of view of all our employees, starting
at the very top with our executive committee, to create something trailblazing
that would drive business results.
It was pure genius, and I was relishing the opportunity to try something that
had never been done before. This was our chance to be real change agents and
prove to the world what could be accomplished in a culture of inclusiveness,
compromise, and understanding. Until then, most leaders in my field had
focused only on the compliance aspect of diversity: adhering to government
regulations concerning demographics and making sure that women and
minorities in the workplace felt mentored and had equal employment
opportunities.
Fits and Starts
Following the IBM PC acquisition, the excitement was palpable on both
sides of the globe. Of course, no one knew exactly just how bad a case of
indigestion we were about to face, with one analyst referring to the acquisition
as a case of “the snake swallowing the elephant.” At the time of the acquisi-
tion, naysayers predicted failure. There was also some resentment and fear that
a Chinese company had acquired an American icon.
But the public had no idea what we had planned. Lenovo was trying to do
something truly bold. Our chairman at the inception of the acquisition, Yang
(continued)
Yuanqing (known to all as simply “YY”), insisted on fully integrating all of

us. Putting himself at a tactical disadvantage in the short term by relinquishing
his CEO position in the company, he personally dedicated himself to learning
both Eastern and Western best practices in business as well as the English
language.
Usually, when a foreign company takes over another business, the acquired
company gets absorbed into the national culture of the acquirer’s home
country. This isn’t always the best way to do things, but it’s the easiest way.
For years, the Koreans and the Japanese did business according to their own
customs, even when they were operating on North American shores. That’s
how most global companies have operated, with the culture of the company’s
home base calling all the shots.
Lenovo was working towards a global-local model, where we would hire
the best talent locally and challenge them to think and act globally. But at this
point, it was all just a little too new. . .”
Source: Conyers and Qiao (2014)
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McDonald’s: Is the Fast Food Icon Reaching
the Limits of Growth?
Stefan Schmid and Adrian Gombert
Abstract
McDonald’s is often considered the archetype of an American company. The
present case study outlines how McDonald’s started its business in the United
States before expanding abroad. It shows how the company stuck to its core ideas
while being responsive to local differences and to changing environmental trends
over time. The case study also discusses major challenges that McDonald’s faced
and how the company reacted to them.
1 An All-American Restaurant
The story of McDonald’s starts in the 1940s, when Richard and Maurice McDonald,
two brothers from Manchester, California, created a new concept for a fast food
restaurant.1 Their idea was to place simplicity and speed above everything else. The
menu consisting of only nine items (hamburger, cheeseburger, chips, five different
drinks and a pie) was not only easy to remember, but it also allowed rapid and
low-priced production.2 Neither dishes nor cutlery were required for the meal, which
saved costs for purchasing and washing, and the facilities used the most modern
technologies to enable fast production.3 In terms of distribution, the McDonald
brothers combined current trends (like the drive-in concept) with their own ideas
(self-service).4 In short, they reduced ‘dining-out’ to its very core.
1
See Love (1986, p. 24).
2
See Love (1986, p. 28).
3
See Love (1986, p. 32) and Schneider (2015, p. 24).
4
See Love (1986, p. 22) and Schneider (2015, p. 10).
S. Schmid (*) · A. Gombert
e-mail: sschmid@escpeurope.eu; agombert@escpeurope.eu

https://doi.org/10.1007/978-3-319-74089-8_7
156 S. Schmid and A. Gombert
The new concept struck a chord with American customers. Attracted by the
brothers’ success, the milkshake seller Ray Kroc saw an opportunity for expansion
and persuaded the McDonalds to open additional restaurants with him.5 He
negotiated an agreement with them that granted him the exclusive right to sign
franchisees throughout the United States.6 In 1955, the three men founded the
McDonald’s System, Inc., and the McDonald’s concept soon began to spread around
the country.7 The use of a franchise system enabled rapid growth without the burden
of major risks. All franchisees had to adhere to a detailed catalogue of routines,
which restrained their own initiative but created an impression of uniformity in the
customers’ eyes.8 Kroc valued quality and demanded hard work and strict obedience
to the rules from the franchisees.9 McDonald’s image thus became an archetype of
bureaucratic organization and even Taylorism.10 Like the franchisees, the suppliers
also had to adhere to strict principles. All ingredients from vegetables to beef had to
meet a detailed catalogue of criteria.11 Suppliers who did well in Kroc’s eyes were
granted long-lasting contracts and given advice on technological improvements.12
Those who did not, however, were relentlessly dislodged from the McDonald’s
system.13
An interesting feature that distinguished McDonald’s from other franchise
operators was the practice of renting real estate to the franchisees. This measure
allowed McDonald’s to impose higher rents on its franchisees, as legislation gave
landlords more rights than franchisees.14 In its financially restricted beginnings,
McDonald’s rented the properties only to sublet them to the franchisees. Later, the
company could easily afford to buy real estate, which made it one of the world’s
biggest landlords.15
The expansion was accompanied by an extensive marketing campaign, making
the brand of McDonald’s famous throughout the country. The concept was deemed
lucrative by many potential franchisees. By 1956, one year after the company was
established, 14 McDonald’s restaurants were in service, after five years over
100, and after 10 years more than 700.16 However, the successful development did
not occur without internal struggles. In 1961, the McDonald brothers and Kroc
5
See Love (1986, p. 44).
6
See Love (1986, p. 53).
7
See Schneider (2015, p. 21).
8
9
See Kroc (1977, p. 59).
10
See Ritzer (1995, p. 48); Taylorism, a term named after Frederick Winslow Taylor, refers to a set
of standardization, planning and measurement techniques aimed at controlling employee behaviour
in the workplace. See also Sheldrake (2003, p. 14).
11
See Love (1986, p. 136) and McDonald’s (2016).
12
See Love (1986, p. 120).
13
See Love (1986, p. 120).
14
See Love (1986, p. 159).
15
16
See Gross (1996) and Schneider (2015, p. 26).
McDonald’s: Is the Fast Food Icon Reaching the Limits of Growth? 157
parted company, because the founders had less ambitious plans for expansion than
Kroc.17 Kroc bought the brothers out for a sum of $ 2.7 million and was solely in
charge of the company from there on.18
2 McDonald’s Internationalization
Having achieved remarkable and ongoing growth within the United States,
McDonald’s soon started to consider going abroad. Pursuing the idea that ‘what
works in their home country would also be profitable in other countries’, the company
entered Canada and opened its first restaurant outside the United States in a suburb of
Vancouver in 1967.19 The next country to be targeted was Costa Rica, where
McDonald’s proved in 1970 that its American meal was also popular in countries
that were culturally more distant.20 Only 10 years later, McDonald’s was present in
24 countries, including Germany, Australia and Japan.21 After continuous expansion
with only a few withdrawals (namely, in the markets of Bermuda in 1995, Bolivia in
2002, Barbados in 2005, Jamaica in 2005, and Iceland in 2009), McDonald’s now has
approximately 36,000 restaurants in 118 countries worldwide, 81% of which are
operated by franchisees.22 The ubiquity of McDonald’s even inspired the British
Economist to measure a country’s purchasing power parity based on the price of its
Big Mac.23 Figure 1 shows the most important countries in numbers of restaurants as
well as the year of entry for each of the countries.
Despite its massive expansion, the company strove to maintain the core principles
which ensured success in the first place. All procedures were standardized, the menu
offered only a limited number of items and the speed of delivery was considered
vital. This is especially remarkable as the ingredients which McDonald’s used were
always bought from local suppliers.24 However, the international expansion did not
always allow an exact replication of the American model. In some markets,
customers disapproved of McDonald’s because of different flavour preferences or
simply a negative feeling towards ‘American’ products.25 The company attempted to
bridge these differences by offering burgers that were adapted to local preferences;
for example, McDonald’s took religious demands, such as meat needing to be kosher
or halal, into account.
17
See Love (1986, p. 198).
18
19
20
See Bundeszentrale für politische Bildung (2010, p. 4).
21
See Bundeszentrale für politische Bildung (2010, p. 4).
22
See Peterson (2015) and Schneider (2015, pp. 40–41).
23
See Munshi (2014).
24
25
United States (*1954) 14,157

Japan (*1971) 3,279
China (*1990) 1,705
Germany (*1971) 1,440
Canada (*1967) 1,417
France (*1972) 1,258
United Kingdom (*1974) 1,208
Australia (*1971) 896
Brazil (*1979) 731
Italy (*1985) 456
Spain (*1981) 439
Mexico (*1985) 402
Taiwan (*1984) 387
Philippines (*1981) 376
Russia (*1990) 356
Poland (*1992) 301
India (*1996) 300
South Korea (*1988) 292
Malaysia (*1982) 245
Rest of the World 4,847
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000
* Year of entry in the respective market.

The number to the right of each bar indicates the number of McDonald’s restaurants in the respective market.
Figure 1 McDonald’s most important target markets in 2013. Source: Based on Chalabi and
Burn-Murdoch (2013) and Schneider (2015, pp. 40–41)
3 McDonald’s and the Fast Food Industry
McDonald’s was at no time the only burger brand in the United States, nor was it the
only one seeking efficiency and rapid expansion. In the 1950s, the market already
consisted of many small and individual restaurants courting guests in their respective
regions.26 But soon enough, the rapid expansion of fast food chains like
McDonald’s, Burger King and later Wendy’s led to a situation of few but powerful
actors. During the 1980s, the increasingly intense competition between these chains
culminated in a confrontation, which was later called the ‘Burger Wars’.27 Expen-
sive marketing campaigns were launched, and price reductions took place to under-
cut competitors. While all the burger chains were hurt, the damage was greater for
Burger King and Wendy’s than for McDonald’s. In 1987, when Burger King had to
lay off employees and Wendy’s publicly announced its first loss, the ‘Burger Wars’
were declared to be over with McDonald’s as the winner.28
This outcome may be considered an indicator for competition in international
markets as well. Especially Burger King set foot in many countries—reaching a total
26
See Kroc (1977, p. 69).
27
See Fryar (1991), Helmer (1992) and Rindova et al. (2004).
28
See Shiver (1987).
of about 14,000 restaurants in 97 countries as of today29—yet it scarcely approached

the size and popularity of McDonald’s. Figure 2 provides an overview of different
international fast food chains, including not only burger restaurants, but also other
types of fast food outlets (such as pizza and taco restaurants).
The symbolic value of the ‘Burger Wars’ in the United States may have prevented
battles of comparable intensity in other country markets. However, the competition
between McDonald’s and other restaurants in markets around the world has been
fierce ever since. In some countries, regional fast food chains became serious
competitors, such as Quick in Belgium and France, Joey’s and Nordsee in Germany
and Yoshinoya in Japan.30 But other competitors have also proven to be challenging
to McDonald’s. In countries like Germany and France, McDonald’s is competing
with bakeries, increasingly offering snacks or salads, as well as with butcher shops
that provide dishes of the day. Furthermore, Turkish or Arabic kebab outlets or
individual Italian, Thai or Chinese fast food outlets are very popular, especially in
bigger cities like Berlin and Paris. In Japan, McDonald’s is suffering from rivalry
with convenience stores like 7-Eleven, which sell ready-to-eat meals, lunch boxes
Operating
No. of Restaurants Revenue Profit
Chain Countries Worldwide (m US$) Employees
(m US$)
Yum!
Brands* 128 40,000 13,084 1,798 539,000
McDonald's 119 35,429 28,106 8,764 440,000
Subway 110 44,384 19,800** n.a.** 400,000
Burger King 97 13,667 1,146 522 > 400,000***
Starbucks 62 19,767 14,892 - 325 182,000

Wendy's 30 6,557 2,487 135 37,000
n.a. = not available
* Yum! Brands, Inc. is the parent company of restaurant chains like KFC, Pizza Hut and Taco Bell.
Yum! Brands does not provide information on the revenue, operating profit and employee count of
each of its single brands. However, it publishes information on the number of countries and worldwide
restaurants run by all brands. In 2013, KFC operated in 118 countries, Pizza Hut in 91 countries and
Taco Bell in 21 countries. See Yum (2013).
** Subway has a strict information policy concerning revenues and profits. The given revenues are
estimated by Forbes (2016). There is no comparable estimation for the operating profit.
*** The exact number of Burger King employees is not available.
Figure 2 International fast food chains as of 2013, sorted by the number of countries in which they
operate. Source: Based on Burger King (2014, 2016a), Forbes (2016), McDonald’s (2013),
Starbucks (2014), Subway (2015a, b), Wendy’s (2014) and Yum (2013)
29
See Burger King (2016b) and Statista (2015a).
30
See Anonymous (2015a), Euromonitor International (2015), Euteneuer (2014) and
Zagdoun (2015).
and cheap coffee, as well as from the rising popularity of pizza restaurants such as
Napoli’s Pizza. In some countries, like Japan and China, McDonald’s image suffered
during recent food scandals.31 While McDonald’s did a lot to regain trust by
improving its supply chain management, the bad publicity benefited local firms in
these countries.32
4 An Unforeseen Change of Expectations
Despite the immense success McDonald’s has experienced for several decades, the
company was hit by harsh criticism at the beginning of the twenty-first century.
Aside from other allegations about its exploitation of employees and the environ-
mental damage the company causes, health concerns have been raised and publicly
addressed.33 In the context of alarmingly high rates of obesity and other nutrition-
related diseases, the world’s most famous producer of burgers and chips was quickly
forced on the defensive. In the United States, the company was sued over obesity34
and the documentary ‘Supersize Me’ (2004) underscored the unflattering associa-
tion.35 In addition, customers complained about diminishing standards of cleanliness
in McDonald’s restaurants. The basic restaurant interior, which had long been
considered humble and economical, now appeared uneasy and cheap to many
customers in the United States and elsewhere.36
Some of the former strengths of McDonald’s had turned into weaknesses. As
times changed, customers not only demanded tasty meals but also wholesome food,
and the experience of dining quickly lost its attraction compared with dining
comfortably.37 Owing to the massive loss of popularity, McDonald’s fell behind
competitors like Subway, which promised healthy and fresh products, and
Starbucks, which offered a relaxed and cosy atmosphere. This situation was not
only the case in the U.S. market, but also in many foreign markets, especially in
Europe. In 2003, the McDonald’s Corporation had to report a company loss of over
$340 million—the first loss ever in its history.38
With such extensive changes in the company’s environment, it was obvious to
many observers that the McDonald’s business model would have to undergo major
reforms. The rigor of these reforms, however, surprised even the experts.39 The new
concept initiated a remarkable comeback story which is fascinating to managers and
31
See Schroter (2015) and Team (2014).
32
See Schroter (2015) and Team (2014).
33
34
See Frank (2006).
35
See Sheehan (2005, p. 67).
36
See Kotler (2011, p. 61).
37
38
See Hage (2014).
39
business scholars alike.40 In a fundamental rethinking of its core model, the com-
pany decided to directly address its weaknesses by adapting to environmental trends
in several ways. In order to respond to the criticism of poor nutrition, McDonald’s
broadened its product range and included several new products, such as lower-fat
burgers, salads and fruit.41 The company also engaged in marketing campaigns
promoting sports and a healthy lifestyle.42 While burgers or french fries remained
unquestioned, some of the rather conspicuous products—like the controversial
‘Supersize Menu’ in the United States—were taken off the menu.43
Another major step for McDonald’s was the renewal of its interior design. In the
U.S. market, customers had complained about the lack of hygiene in the restaurants.
Introducing the new motto ‘Being better, not just bigger’, McDonald’s changed its
focus from expansion to improvement of the existing restaurants. The endeavour
included a noticeable effort to meet hygiene standards and a major redesign of the
outlet. An entirely new interior, designed to make customers feel more comfortable,
was introduced in the restaurants.44 Furthermore, a new slogan (‘I’m lovin‘ it’),
partially adapted in foreign countries and accompanied by a musical jingle by
pop-singer Justin Timberlake, was intended to make the brand appear more
youthful.45
An even more direct response to its competitors’ success was the launch of
McCafé. In aiming to provide a comfortable environment, McDonald’s not only
began offering Premium Roast Coffee, but it also set up convenient seating
accommodations just like Starbucks.46 Interestingly, each of these measures
originated from different parts of the world. While the initiative to improve cleanli-
ness was mainly based on criticism in the U.S. market, the concept of McCafé was
mostly supported by countries far from home, such as Australia and Germany.47 The
implementation, however, was carried out worldwide, which led to different forms
of competition in different countries. In Germany, for example, Starbucks was not a
major player at that time and the newly introduced McCafés soon exceeded the
number of Starbucks stores. In the United States, in contrast, Starbucks and
McDonald’s engaged in an extensive fight for market predominance often referred
to as ‘Coffee Wars’.48
40
See Hage (2012).
41
See Schneider (2015, p. 138). It should be noted that, while some healthy products had already
been part of the menu before the makeover, this was to negligible amount.
42
43
See Kaufmann (2004).
44
45
See Rowley (2004).
46
See Wright et al. (2007).
47
See Wright et al. (2007).
48
See Hage (2014).
Most of the above-mentioned measures can be assigned to the ‘Plan to Win’

concept. This strategic concept from the year 2003 was created by then-CEO Jim
Cantalupo and refined by his successors.49 Even though not all steps were sketched
from the beginning, they all fit into the general approach of reinventing McDonald’s
by offering higher quality in terms of convenience and healthfulness. The company
maintained its new course despite several incidences such as the sudden death of
Cantalupo and the withdrawal of his successor Charlie Bell, who was diagnosed with
cancer shortly after taking over as CEO. It also managed to settle internal quarrels,
for example, when several franchisees balked at installing the new interior because
they had to finance it themselves for the most part.50
The success that followed this strategic manoeuvre is more than remarkable. The
new offerings were widely accepted among customers, and McDonald’s soon found
itself on a winning streak which exceeded the expectations of experts by far. Within
9 years, the market value quintupled, and competitors such as Burger King or
Wendy’s fell further behind.51 But even though the new strategy yielded success,
McDonald’s still generated most of its turnover by selling its original burgers and
french fries.52 For instance, salads account for a marginal part of the restaurants’
sales –and it is unlikely that this number will ever increase significantly.53 It might
have been healthier products that changed the public’s perception of the company,
but it was the classics that yet again nurtured the company.
5 Coping with New Challenges
McDonald’s renewed success continued for nearly a decade. It was not until
2011–2012 that the first signs of a new crisis became visible. Profits and guest
numbers declined in Europe and the United States alike, and new product offers
found scant approval.54 The decline was by far less dramatic than the fall-off at the
beginning of the century, and yet, it caused concern,55 especially as competitors
were not experiencing the same difficulties.56 Figures 3 and 4 illustrate the develop-
ment of McDonald’s stock price and guest numbers in recent years, and Figure 5
gives an overview of the financial results. As Figure 4 shows, McDonald’s lost
customers all over the world in a year-to-year comparison in 2013 and 2014. The
49
50
See First (2009) and Schneider (2015, p. 193 and p. 209).
51
See Hage (2014).
52
See Rajakumari John (2014).
53
See Patton (2013).
54
See McDonald’s (2015a, p. 13).
55
56
This becomes obvious if we compare McDonald’s to the main competitor Yum! Brands, which is the
mother company of restaurant chains like Burger King, KFC and Pizza Hut. See Yum (2013, 2014).
McDonald's
200
180
160
140
120
100
80
60
40
20
McDonald's
Figure 3 Stock price of McDonald’s corporation (in US$), 1990–2016. Source: Based on S&P
Capital IQ (2017)
2011 2012 2013 2014

6%
4.3% 4.5%
4% 3.7%
3.3% 3.4% 3.0%
1.9% 2.2%
1.6%
2%
0.4%
0%
–0.5%
–2%
–1.6% –1.5% –1.5% –1.9%
–2.2%
–4%
–3.8% –3.6%
–4.1%
–4.7%
–6%
U.S.A. Europe Asia/Pacific/ Other Total
Middle East
Figure 4 Development of guest numbers in McDonald’s restaurants, 2011–2014. Source: Based

on Statista (2015b)
decline in guest numbers was particularly striking in the United States, but also gave
managers in other regions reason for concern. As displayed in Figure 5, both
McDonald’s company-owned and franchised restaurants had slight, yet continuous
increases in revenues from 2009 to 2013 onwards. In 2014, however, the company’s
revenue dropped compared to the previous year.
6-Year Summary 2014 2013 2012 2011 2010 2009

Company-operated sales $ 18,169 18,875 18,603 18,293 16,233 15,459
Franchised revenues* $ 9,272 9,231 8,964 8,713 7,842 7,286
Total revenues $ 27,441 28,106 27,567 27,006 24,075 22,745
Operating Income $ 7,949 8,764 8,605 8,530 7,473 6,841
Net Income $ 4,758 5,586 5,465 5,503 4,946 4,551
Cash provided by operations $ 6,730 7,121 6,966 7,150 6,342 5,751
Cash used for investing
activities $ 2,305 2,674 3,167 2,571 2,056 1,655
Capital expenditures $ 2,583 2,825 3,049 2,730 2,135 1,952
Cash used for financing
activities $ 4,618 4,043 3,850 4,533 3,729 4,421
Treasury stock purchases $ 3,175 1,810 2,605 3,373 2,648 2,854
Common stock cash dividends $ 3,216 3,115 2,897 2,610 2,408 2,235
Financial position at year
end
Total assets $ 34,281 36,626 35,386 32,990 31,975 30,225
Total debt $ 14,990 14,130 13,633 12,500 11,505 10,578
Total shareholders’ equity $ 12,853 16,010 15,294 14,390 14,634 14,034
Shares outstanding in millions 963 990 1,003 1,021 1,054 1,077
Per common share
Earnings-diluted $ 4.82 5.55 5.36 5.27 4.58 4.11
Dividends declared $ 3.28 3.12 2.87 2.53 2.26 2.05
Market price at year end $ 93.70 97.03 88.21 100.33 76.76 62.44
Company-operated 6,714 6,738 6,598 6,435 6,399 6,262
restaurants
Franchised restaurants 29,544 28,691 27,882 27,075 26,338 26,216
Total Systemwide 36,258 35,429 34,480 33,510 32,737 32,478
Restaurants
Franchised sales** $ 69,617 70,251 69,687 67,648 61,147 56,928
Dollars in millions, except per share data.
* Franchised revenues refer to the franchisees’ contribution to the company’s revenue “through the
payment of rent and royalties based upon a percent of sales, with specified minimum rent payments,
along with initial fees paid upon opening of a new restaurant or grant of a new franchise”. See
McDonald’s (2015a), p. 1.
** Franchised sales refer to the revenues recorded at all franchised restaurants. McDonald’s does not
register franchised sales as company-operated sales. Nevertheless, the company publishes franchised
sales figures as they “are the basis on which the company calculates and records franchised revenues
and are indicative of the financial health of the franchisee base”. See McDonald’s (2015a), p. 11.
Figure 5 Financial data of McDonald’s corporation, 2009–2014. Source: Based on McDonald’s

(2015a, p.11)
In contrast to the last crisis, the reasons were more difficult to identify. There were
no public campaigns blaming McDonald’s for bad nutrition, at least no more than
there had been in the years before. Nor were there dramatic changes in the market as
had been the case with the rise of Starbucks. Instead, an array of rather diverse
developments accounted for the new situation.
One reason was the worsening situation in the U.S. market. Increasing material
costs have made competition even fiercer and have also caused McDonald’s to
noticeably raise its prices.57 This move was especially risky as even small increases
57
See Patton (2014).
damaged the reputation of McDonald’s as a low-priced restaurant.58 Recently,

Burger King launched an offer comparable to the standard McDonald’s menu for a
lower price, successfully luring customers away.59
Another reason for McDonald’s poor performance was the extension of the
product range. In contrast to the founding idea of a radically efficient production
system, the menu now has a striking number of additional offers. The primary nine
items were soon complemented by further products, reaching a total number of
33 items in 1990 and 121 items in 2004.60 The latter number was heavily influenced
by the addition of new, healthier products at the beginning of the century. But it did
not stop there. Counting on the excitement that new products might spark in
customers, the managers in charge continued extending the menu. It took until
2014 (when several new product launches in the United States failed) that the
growing complexity in product offerings was questioned. A common problem
with variety is a lack of efficiency in operations.61 The problem is compounded
when some products—like the healthy wraps—take considerably more time to
prepare than burgers. In some locations, the time it takes to deliver an order via
drive-in has reached over 3 min.62 Ten years ago, customers queuing up in the drive-
through lane had to wait about two and a half minutes for their order to be ready.63
Furthermore, one may also ask whether McDonald’s has simply reached the
limits of successfully developing its business model. The ‘Plan to Win’ aimed to
dispel any doubts about the food’s dangers but the business model hardly changed.64
Despite studies proving that the products of other fast food chains, such as Subway,
hardly differ in terms of their calorie content, people still link McDonald’s to highly
unhealthy nutrition.65 Figure 6 compares the calories of typical meals at McDonald’s
and Subway. The recent success of burger chains offering premium quality and table
service such as ‘Five Guys’ in the United States or ‘Hans im Glück’ in Germany also
seems to demonstrate that customers’ dining behaviour is about to change—at least
in some segments of the market.66 In addition, McDonald’s capacity to change is not
only limited by the rigid public image of McDonald’s, but also by its sheer size.
“Even if they wanted to go organic”, says restaurant expert Aaron Allen, “they
just wouldn’t be able to.”67 In May 2015, the new CEO Steve Easterbrook held a
58
See Kowitt (2014).
59
60
See Kowitt (2014).
61
See Huddlestone (2015).
62
See Fritz (2015).
63
See Wick (2015).
64
See Patton (2013).
65
See Lesser et al. (2013).
66
See Neate (2015) and Olbermann (2014).
67
Allen as cited in Neate (2015).
Difference of
McDonald’s, Subway, McDonald’s -
Variable* p Value
mean (SEM**) mean (SEM**) Subway, mean
(SEM**)
Calories (kcal) 1,038 (41) 955 (39) 83 (53) .11

(primary outcome)
Cost of meal ($) 4.46 (.20) 6.14 (.17) -1.67 (.24) <.01
Origin of calories
Main dishes 572 (28) 784 (31) -212 (39) <.01
Drinks 151 (16) 61 (11) 90 (18) <.01
Sides 201 (20) 35 (8.2) 166 (19) <.01
Condiments 63 (9.5) 46 (12) 17 (13) .19
Desserts 51 (16) 28 (13) 23 (21) .28
Nutrients
Carbohydrates (g) 128 (5.7) 102 (4.6) 26 (6.9) <.01
Fibre (g) 5.9 (.32) 6.7 (.35) -.84 (.44) .06
Sugar (g) 54 (3.9) 36 (3.3) 18 (4.6) <.01
Fat (g) 45 (2.1) 42 (2.5) 3.9 (2.9) .18
Saturated Fat (g) 12.6 (.65) 13.5 (.80) -.87 (.95) .36
Protein (g) 32 (1.4) 41 (1.8) -9.8 (2.1) <.01
Sodium (mg) 1,829 (99) 2,149 (93) -320 (120) .01
Types of food
Fruit (cups) .01 (.01) .01 (.01) 0 (.01) .95
Vegetables (cups) .15 (.02) .57 (.04) -.42 (.04) <.01
Drinks 64% (4.9) 28% (4.6) 36% (6.7) <.01
(% who purchased)
Sides purchased 58% (5.0) 13% (3.5) 44% (7.1) <.01
(% who purchased) (Fries) (Chips)
* The study observed “97 adolescents who purchased a meal at both restaurants on different days” and
“compared the difference in calories purchased by adolescents at McDonald’s and Subway”. As a result,
the researchers “found that, despite being marketed as ‘healthy’” adolescents purchasing a meal at
Subway order just as many calories as at McDonald’s. Although Subway meals had more vegetables, meals
from both restaurants are likely to contribute to overeating.” See Lesser et al. (2013), p. 441.
** SEM = standard error of the mean.
Figure 6 Calories of typical purchases by adolescents at McDonald’s and Subway. Source: Based
on Lesser et al. (2013, p. 443)
23-min presentation primarily addressed to the business community and

McDonald’s franchisees on how he plans to deal with the problems. “No business
or brand has a divine right to succeed. And the reality is: Our recent performance has
been poor,” said Easterbrook in a sincere manner.68 To deal with the crisis, he
announced a restructuring of the organization, a further increase in the percentage of
franchise-operated restaurants and a stronger focus on customer demands (see
Figure 7 for selected statements by Steve Easterbrook).69 It will be interesting to
see if McDonald’s is yet again able to find an appropriate way of meeting customers’
expectations and expanding even further.
68
Easterbrook as cited in McDonald’s (2015b).
69
See McDonald’s (2015b).
“There is no doubt in my mind that McDonald's has built a powerful and enduring
economic advantage over the decades since Ray Kroc started the journey. We
have scale and reach like no other, more talent, more capital, more firepower
than any other rational business in the world by far. Franchising shares risk and
reward, it fuels the entrepreneurial spirit that is our engine.”
“But no business or brand has a divine right to succeed. And the reality is: Our
recent performance has been poor. The numbers don't lie. Which is why, as we
celebrate 60 years of McDonald’s, I will not shy away from the urgent need to
reset this business.”
“Our structures are too cumbersome, decision making too slow. We must make our
scale count by simplifying and getting closer to markets.”
“Reduce complexity for customers and crew! Focus hard on the fundamentals of
running great restaurants! Execute fewer things better!"
“We will be accelerating our franchising moving from our current state of 81%
franchise to about 90% franchise globally.”
Figure 7 Extract from Steve Easterbrook’s company presentation in May 2015. Source: Based on
McDonald’s (2015b)
Questions
1. A firm’s strategy is always linked in some way to its culture; and it is sometimes
also shaped by its home country (culture).
(a) Please describe the McDonald’s culture by referring to both elements of
the concepta and the percepta level of culture.
(b) Many people perceive McDonald’s as the archetype of an American
firm. In your view, what are the typical characteristics of an American
firm? How far does McDonald’s fulfil these characteristics?
2. Before developing a strategy, firms have to analyse their situation.

(a) What are the strengths, weaknesses, opportunities and threats for
McDonald’s in today’s U.S. market? Please use tools and frameworks
that help you to analyse a firm as well as the macro environment and the
micro environment.
(b) How much may the strengths, weaknesses, opportunities and threats
differ in comparison to other countries? In a first step, please argue in
general. In a second step, choose one country (other than the United
States) to provide examples and back up your arguments.
3. Which recommendations would you give to McDonald’s for its future strategic
development
(a) in terms of the Ansoff strategies?
(b) in terms of Porter’s competitive strategies?
(c) in terms of internationalization strategies?
4. At the beginning of the century, McDonald’s solved its severe crisis by offering
healthy food. However, salads and wraps never accounted for a large share of the
revenues.
(a) Do you find the changes that McDonald’s undertook in terms of offering
healthier food as part of the ‘Plan to Win’ convincing? If so, do you think
customers were convinced by them at the beginning of the century? Do
they believe in the firm’s health consciousness nowadays?
(b) If you think that the ‘Plan to Win’ was not convincing in the first place,
why did it save the company?
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MIR Series in International Business

More information about this series at http://www.springer.com/series/13480

ISSN 2511-2244 ISSN 2511-2252 (electronic)

Library of Congress Control Number: 2018940646

# Springer International Publishing AG, part of Springer Nature 2018

Printed on acid-free paper

Firm (Industry) Main topics of the case study

Firm (Industry) Main topics of the case study

I am grateful to the members of my team at the Department of International

Berlin, Germany Stefan Schmid

Strategies of Internationalization: An Overview . . . . . . . . . . . . . . . . . . . 1

This contribution is based on Schmid (2009, 2013).

# Springer International Publishing AG, part of Springer Nature 2018 1

2 Internationalization Philosophy and Internationalization

Admittedly, the distinction between ethnocentric, polycentric, regiocentric and

Ethnocentric Orientation Polycentric Orientation

Regiocentric Orientation Geocentric Orientation

Figure 1 The difference between ethnocentric, polycentric, regiocentric and geocentric

The distinction between these internationalization objectives is important, as it is

3 Strategic Analysis in the Context of the International Firm

• ﬁrst, at the level of headquarters and the home country,

Analysis of the Analysis of the

Firm Environment Firm Environment

Figure 2 The SWOT analysis in international ﬁrms

4 The Five Dimensions of Internationalization Strategies

Coordination Target Market

Figure 3 Dimensions of internationalization strategies

• Which market entry modes are to be used to internationalize (market entry

(Almost) every internationalization step that a ﬁrm takes should constitute an

so-called competitive strategy (cost leadership, differentiation and focus), technol-

4.2 Market Entry Strategy

Licensing Contract Manufacturing

Merger Strategic Alliance

Figure 4 Market entry strategies of international ﬁrms

4.3 Target Market Strategy

International market entry strategies

Market Presence Strategy Three countries in Western Europe

Market Segmentation Strategy

Integral Identical promising market

Figure 6 Target market strategies of international ﬁrms

• the attractiveness of the foreign market and market segments,

4.4 Timing Strategy

Figure 7 Timing strategies of international ﬁrms

Moreover, cross-border activity continually raises the question of which value

4.5 Allocation Strategy

Regarding allocation, cross-border activity calls for decisions regarding the

Strategy of Concentration/ Strategy of Dispersion/

Research & Development Procurement

Figure 8 Centralization and decentralization of activities. Source: Based on Kutschker and

4.6 Coordination Strategy

Coordination strategies constitute a further dimension of internationalization

Market Entry Target Market Timing Allocation Coordination

Figure 9 Dimensions of internationalization strategy

5 Internationalization Strategies and Utilizing Foreign Units

• have particular resources and capabilities related to speciﬁc functions, products

A central element of successful internationalization strategies is to accord greater

Figure 10 The international ﬁrm as a network ﬁrm

Dülfer, E., & Jöstingmeier, B. (2008). Internationales Management in unterschiedlichen

Pues, C. (1994). Markterschließungsstrategien bundesdeutscher Unternehmen in Osteuropa:

Stefan Schmid, Tobias Dauth, Thomas Kotulla, and Philipp Leding

This case study is based on Schmid et al. (2011).

# Springer International Publishing AG, part of Springer Nature 2018 27

1 The Industry and Company Background