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    Impossible Is Nothing

    A Look At How the Adidas Reebok Merger Will Achieve Sustainable Competitive

    Advantage over Nike

    Prepared for

    Tod Brokaw

    Dr. John Kiger Arthur Marinelli Dr. John Schermerhorn

    Ohio University Athens, OH 45701

    Prepared by

    Ryan Eberhart Anza Hutchinson

    Robert Marvin Stephanie Przygocki

    Jason Simon Ohio University Athens, OH 45701

September 20, 2005

    Table of Contents

    Executive Summary .............................................................................................................................. ii

    Introduction ........................................................................................................................................... 1

    Situational Analysis .............................................................................................................................. 1

    Financial Analysis .................................................................................................................... 1

    Industry Analysis...................................................................................................................... 2

    Marketing Strategies and Trends............................................................................................. 2

    Competitor Analysis ................................................................................................................ 3

    Customer Analysis ................................................................................................................... 4

    Sustainable Competitive Advantage ....................................................................................... 5

    Impact of Laws on the Merger ............................................................................................................. 6

    Challenges Ahead for the Merger ........................................................................................................ 6

    Corporate Culture ..................................................................................................................... 6

    Global Location ........................................................................................................................ 7

    Conclusion............................................................................................................................................. 7

    Notes ...................................................................................................................................................... 8

    Bibliography........................................................................................................................................ 10

    Appendix A: Financial Highlights ..................................................................................................... 12 Appendix B: Increased Consumer Spending in the Apparel and Footwear Industry..................... 36

    Appendix C: Changing Supply-Demand Economic Model ............................................................. 37

    Appendix D: Innovation NIKEiD.com .......................................................................................... 38

    Appendix E: Porter’s Five Forces...................................................................................................... 39

    Appendix F: Market Graphs .............................................................................................................. 41 Appendix G: Advertisements ............................................................................................................. 42 Appendix H: Magazines ..................................................................................................................... 43 Appendix I: Industry Leaders in Total Market Share ....................................................................... 44

    Appendix J: Nike SWOT Analysis .................................................................................................... 45 Appendix K: Porter’s Generic Strategies Framework ...................................................................... 50

    Appendix L: Reebok SWOT Analysis .............................................................................................. 51 Appendix M: Adidas-Salomon SWOT Analysis .............................................................................. 55

    Appendix N: Business Law in the US and Europe ........................................................................... 60

    Appendix O: The Cartel Office.......................................................................................................... 63 Appendix P: The Sherman Act of 1890 ............................................................................................ 64 Appendix Q: Factory Profiles ............................................................................................................ 65

    i

    Executive Summary

The purpose of this report is to provide an analysis of the newest merger in the footwear and

    apparel industry between Adidas and Reebok. It is also to identify and further examine the ways

    in which the Adidas Group will achieve a sustainable competitive advantage relative to Nike. We

    inform the reader about the nature of current market standings in the industry and identify

    specific synergies developed through the acquisition.

    Acquisition Analysis

A merger of this scale is inherently complex, dealing with issues such as global positioning of

    companies, corporate cultures, and the allocation of resources. To better understand the

    advantages gained from the Adidas-Reebok merger, we have examined the following:

    ? S.W.O.T. analysis (Strengths, Weaknesses, Opportunities and Threats)

    ? Analysis of Porter’s Five Forces (Barriers to Entry, Bargaining Power of Suppliers,

    Bargaining Power of Buyers, Threat of Substitutes, Rivalry Among Existing Competitors)

    ? Industry analysis

    ? Customer analysis

    ? Marketing strategy analysis

    ? Economic model analysis

    ? Financial analysis

Through these various analyses, we have discovered that the importance of branding is

    paramount for success in this industry. Our research also identifies the specific danger of

    competition between Adidas and Reebok.

    Conclusion

We conclude sustainable competitive advantage will be achieved relative to Nike, especially in

    regards to increased branding. However, Adidas-Reebok will not achieve a higher market share

    over Nike immediately, due to the length of time branding requires. After analyzing financial

    statements from all three companies, as well as conducting several analyses, including the

    industry, customers, competitors, and marketing strategies, it is clear to us that Adidas-Reebok

    strategically will be positioned better than Nike.

    ii

    Adidas-Reebok Competitive Advantage 1

    Introduction

    Current Adidas CEO and Chairman Herbert Hainer recently stated, "We will expand our

    geographic reach, particularly in North America, and create a footwear, apparel and hardware

    offering that addresses a broader spectrum of consumers and demographics. With Reebok, we

    are advancing our position on the playing field of the sporting goods industry and are improving 1 Throughout recent years, Adidas our financial strength to drive increased shareholder value."

    and Reebok have seen its competitors, particularly Nike, dominate the footwear industry.

    Our analysis of the Adidas-Reebok merger shows how it will gain a sustainable competitive advantage that may one day dominate the footwear industry both domestically and internationally. A sustainable competitive advantage is an advantage that one company has over another, but to be sustainable, the advantage must usually be rare, valuable and unique. The fact that Adidas and Reebok control such different aspects of the shoe industry will help to ensure their success.

    This analysis includes information on the industry, consumers, competitors, marketing strategies, and changing market trends. It also includes information on possible pitfalls for the merger, including antitrust laws that could prevent the merger from happening, as well as problems Adidas-Reebok could face if the merger does go through.

    All three companies focus more on the athletic shoe industry than their other athletic products. Therefore, our report focuses more on the shoe industry than the athletic apparel industry as a whole.

    Situational Analysis

    To fully understand how Adidas-Reebok will gain a sustainable competitive advantage over Nike, the situation must be looked at from several different points. These include financial, industrial, customer and competitor analyses, as well as a look at the different marketing strategies and changing marketing trends.

Financial Analysis

    Financial ratios draw complete picture as to where a company stands financially. Nike, Adidas, and Reebok all have a very good ability to pay current liabilities. This was evident in the current ratio and the acid test. Nike has an excellent ability to pay short term and long-term debt. This was proven in the debt ratio and times-interest-earned ratio. They are all solid companies from a profitability stand point. This was apparent in the Rates of Return on sales, assets, and common stockholder equity. I would recommend Nike, and after the merger Reebok and Adidas to a potential investor because of these reasons. Refer to Appendix A for financial statements, and further clarification of the ratios.

    Adidas-Reebok Competitive Advantage 2

    Industry Analysis

    Our outlook for the athletic apparel and footwear industry is positive. The improved customer

    spending in this industry has supported impressive growth of top footwear companies like Nike

    Inc., Adidas-Solomon AG, and Reebok International Ltd. (See Appendix B). Another change

    prompted by healthy consumer spending is a shift in focus from a “supply-push” economic 2 model, to a “demand-pull” model (See Appendix C).

This new strategic trend in the athletic apparel and footwear industry places more importance on

    market research and consumer wants. It also demands greater supply chain management (SCM)

    technology, creating a competitive advantage for those companies who have successfully met

    this demand. Companies that lack the integration of good SCM will find it hard to effectively

    listen to the consumers, decreasing their ability to perform well. This new strategic trend also

    adds to the barrier of entry for the athletic apparel and footwear industry.

    Another trend in the industry relating to the “demand-pull” economic model is the customizability of products (See Appendix D). Sites like NIKEiD.com offer substantial

    customization options, letting consumers develop their sneaker of choice.3 For the companies

    that can meet this demand for customized footwear and apparel, competitive advantage is

    achieved by increasing customer loyalty and by creating turnover costs to companies who do not

    offer such services.

    Branding remains the largest source of competitive advantage in the apparel and footwear

    industry. Over 75% of the industry is controlled by branded items. In the footwear sub-industry

    specifically, 80% of sales are brand names.4 The competitive advantage gained from high brand

    recognition heavily permeates four of the five forces in Porters Five Forces Model (See

    Appendix E). This competitive advantage is realized through increased brand loyalty, increased

    switching costs, rivalry advantage, and increased barrier to entry.

    Marketing Strategies and Trends

    Adidas, Reebok, and Nike have all engaged in a variety of marketing. Although the shoe industry

    has performed slower than others, both Internet marketing and e-commerce have recently helped

    the industry flourish. For example, Nike, Adidas, and Reebok have constructed websites which

    allow customers to purchase products directly from the respective company. Such websites add

    to a strong marketing mix.5

Its advertisements on television (See Appendices F-H) and the web, as well as its partnership

    with UPS both support Nike’s strategic marketing strategy. Adidas is promoting its website with

    6a variety of contests involving its endorsed athletes.

    In today’s society, the individuals of the world have become extremely responsive to brand

    names. Although Reebok and Adidas still have popular apparel and footwear, fierce competition

    7exists. Reebok and Adidas offer competitive products, but Nike holds the most market share

    from successfully targeting a larger audience. Leading the market requires high capital

    8 The

    Adidas-Reebok Competitive Advantage 3 Adidas-Reebok merger will create operating synergies, allowing them opportunities for

    competitive advantage. Adidas must focus on new trends and key concepts in order to keep up

    with their competitors and to begin to gain market share on Nike. expenditures, aggressive sales and marketing strategies, and a strong brand identity.

    Competitor Analysis

    The Adidas acquisition of Reebok will create a company with 2004 revenues of $11.1 billion.

    Comprising a major part of the increasingly consolidated industry, the new Adidas Group faces

    primary competition from industry leader Nike Inc. and German neighbor Puma AG.

    Nike has a global market share in athletic-footwear of 33.2%, a market share greater than the

    25% held by Adidas-Solomon and Reebok combined (See Appendix I).9 Nike’s most favorable

    attribute and the source of its strongest sustainable competitive advantage is its brand name (See

    Appendix J). Nike’s brand name consists of 20% of the branded market for sportswear. That is

    107% higher than the leading competitor, Adidas. However, Nike’s diminishing endorsements could pose future problems.

Puma has a global market share of 6.8%, the third largest when compared to Nike Inc. and

    Adidas-Reebok. Puma’s focused strategy and self image have been one of its most successful

    11forms of competitive advantage.

Customer Analysis

    In order to further investigate whether or not Adidas’ acquisition of Reebok will result in a sustainable competitive advantage over rival and current industry leader, Nike, a customer

    analysis must be formulated. One way in which the merger will lead to a sustainable competitive

    advantage is by increasing the amount of exposure of the two brands globally. This increase in

    exposure will occur through a larger distribution chain created from combined resources of the

    two companies.

In an effort to distinguish itself from the competition, each company has developed exclusive

    relationships with highly recognizable organizations and individuals. Currently, Reebok has the

    exclusive rights to market its products for the NBA, NHL, NFL, and the WNBA. Similarly,

    Adidas has obtained contracts with professional European soccer clubs such as Chelsea, Bayern

    Munich, Real Madrid, and AC Milan. Without an established superstar, Nike’s current endorsements lack the influence they once held with the likes of Michael Jordan. “At the

    moment, virtually none of the current NBA stars wear Nike. In my eyes, this is the reason Nike

    was prepared to spend an outrageous amount of money for an 18-year-old,” claims Adidas CEO

    Herbert Hainer.

    12

While there are many possible avenues to exploit in terms of sales opportunities for these

    companies, the market is highly segmented in such a way that it is important for the three to

    Adidas-Reebok Competitive Advantage 4 engage in target marketing. For example, in this market of athletic shoes, a firm can either offer

    an all-purpose cross-trainer shoe or a running shoe and a basketball shoe.

While the cross-trainer shoe has broad appeal for all consumers it does not satisfy any

    consumer’s needs in particular. In contrast, the running shoe and basketball shoe combination

    13will each satisfy a particular market segment but will have modest appeal to the other segment. In order to This is the point where the particular companies must decide whether they will individually understand this more fully we will examine Porter’s generic strategies framework. follow a niche market or a full-line strategy. In order to make this decision, the firms must weigh the cost of offering an additional product and the revenue generated by doing so.By utilizing Porter’s generic strategies framework, the methods employed by Adidas, Reebok,

    and Nike to compete for customers in the industry become easily apparent. While both Nike and

    Adidas make use of a differentiation strategy to attract its customers, Reebok concentrates its

    efforts on a broad cost strategy approach. The differentiation strategy of the two companies, Nike

    and Adidas, can be seen in action by examining the various productions of both these companies.

Nike currently incorporates its Shox technology in many of the athletic shoes it produces. All of

    Nike’s past Shox shoes have had the same basic platform: a four-column Shox unit in the heel for cushioning and a mesh/synthetic upper.14 In addition to the Shox technology, Nike has innovated online purchasing by allowing customers to customize their own shoes through

    NIKEiD.com. These methods can be seen as an attempt by Nike to differentiate itself from the

    competition by supplying the market with new types of technology.

    In response to Nike’s recent innovations, Adidas has spurred its differentiation strategy by offering a product that is truly unique. Their new product, the Adidas_1, is known as the world’s

    first intelligent shoe, offering the optimal amount of cushioning for just about every runner by

    mechanically adjusting the sole every four steps.15 This is only one of Adidas’ many new

    innovative creations in terms of footwear, further differentiating the company from its

    competition.

While Adidas is focused on differentiating itself from the competition in terms of uniqueness, the

    company’s new half, gained from the merger with Reebok, has maintained itself as a corporation

    with a cost leadership strategy in mind. They aim to offer an affordable shoe endorsed by rappers

    and various athletes, targeting the urban youth demographic. In order to see Porter’s generic

    strategy framework visually, please note Appendix K.16

In looking towards the future, the merger seems to place Adidas and Reebok into a position to

    steadily increase its market share and brand value to better compete in the various market

    segments of the athletic apparel and footwear industries.

Sustainable Competitive Advantage

The athletic apparel and footwear industry emphasizes branding more than any other competitive

    advantage. Through the use of advertisements, endorsements, promotions, and licensing

    Adidas-Reebok Competitive Advantage 5 agreements, the top companies in this industry have devoted much of their resources to brand

    recognition and loyalty. Adidas’ acquisition of Reebok will develop increased opportunities to

    achieve competitive advantage through branding. Furthermore, extended licensing agreements

    and contracts will allow the Adidas Group to sustain this advantage.

Sustainable competitive advantage cannot be reached without the successful merging of Adidas

    and Reebok. The key to this success is how well they identify themselves. There is a very real 17 danger of cannibalization to occur between the two separate brands, where one brand takes away

     the others consumer base. However, Adidas Chairman and CEO Herbert Hainer made clear that

    Hainer points out that Reebok’s focused strategy will be on the engagement of youth through it is important that each of these brands must retain their own identity.”

    sports, music, and technology. Reebok, he points out, is a lifestyle brand. On the other hand,

    Adidas’ focus is on superior technology and performance, coupled with a large international

    18presence. As Hainer points out, “Adidas has positioned part of its product range in the lifestyle

    segment, but the company relies on the performance market. Lifestyle success to an authentic 19company is a bonus.”

The first half of 2005 showed the highest first half year gross margin ever for Adidas, at 48.5%.

    20There were increased sales in every region, including North America. It is in this region that

    Adidas will more than double its market share from the acquisition. North America will prove to 21be the fiercest battleground, as it consists of about 50% of the global footwear consumption.

Adidas will benefit from increased distribution in North America, where Reebok already has a

    significant presence. The addition of Reebok will enhance not only its position among the top US

    distributors like Foot Locker and Dick’s, but will also give Adidas-Reebok more power over

    promotions and in-store displays. Increasing its presence is the key to achieving sustainable

    competitive advantage, because the increased presence further engrains the most important

    advantage in this industry, brand name. See Appendices L and M for more information on the

    strengths and weaknesses of Adidas and Reebok.

The acceleration of both brands will be brought about through increased operating cash flows.

    Combined 2004 pro forma cash flows equaled $835 million. Along with the increased operating

    capital, other synergies such as operating savings will be realized. Adidas expects about $150

    million of annual savings by the third year.22 Catching up to Nike’s huge marketing budget of

    $213 million in 2004 will be a challenge, but the increased operating costs coupled with the

    synergies will help promote further brand recognition through marketing. Adidas and Reebok

    23combined spent $121 million in 2004 on marketing.

Globally, Adidas will greatly benefit from China’s “most valuable spokesperson”, Yao Ming.

    Reebok signed an endorsement deal with Yao to begin developing in the Asian market. Adidas

    has been in the market for 20 years, and with the 2008 Olympics in Beijing, the spotlight will be

    24on China.

    Adidas-Reebok Competitive Advantage 6

    25

     Reebok is also involved in a multi-title sponsorship with Electronic Arts Inc, and entertainment

    The Reebok brand will also gain sustainable competitive advantage through increased brand software firm. The deal will give Reebok advertisement rights in video games such as NFL

    recognition. Globally, Reebok will benefit greatly from Adidas’ distribution around the world. Street 2 and NBA Street V3.

    Coupled with the cost savings and increased cash flow, Reebok’s marketing resources could

    increase.

Combined R&D will help speed development of cutting edge technologies, an important feature

    of the increasingly fast paced industry. Expedited research will develop higher consumer demand

    for innovation across all brands, putting pressure on Nike’s R&D capabilities. Traditionally,

    Adidas has been the award winning technological leader in the industry with innovations like the

    Adidas_1, ClimaCool? and a3?26.

    Impact of Laws on the Merger

We have found that antitrust laws within both the United States and Europe will not prevent the

    merger from going through. In 2003, Nike bought Converse. This merger was allowed to

    continue. Since the combined company controls a greater share of the market than the Adidas-

    Reebok merger will control, we conclude that antitrust laws will not be an issue for the merger

    (See Appendix N).

    Challenges Ahead for the Merger

Besides the possibility of antitrust laws hindering the completion of the merger, the new Adidas-

    Reebok company will face greater challenges once it has combined. These include differences in

    their corporate cultures and their different locations globally.

Corporate Culture

Adidas and Reebok have decidedly different corporate cultures. Adidas’ corporate culture is

    very similar to their view on athletics; they are very serious and rigid in their attitudes.

    27 Reebok,

    although serious in their rivalry against Nike, is much more laid back. Even though their

    employees work long hours, tension is reduced by the laid back atmosphere and company fitness

    28center.

The two companies have already been inadvertently enacting a system to help prevent merger

    failure due to differences in management structure. In July of 2004, Reebok hired a former

    Adidas marketer Roy Gardner as the European marketing director for its Rbk sub-brand.

    Gardner joined another former Adidas employee, Andy Towne, who had begun working for

    Reebok in March 2004.29 At present, Adidas has stated that both companies will continue to run

    30Adidas-Reebok Competitive Advantage 7

We predict that corporate culture will not lead the Adidas-Reebok merger to fail. It seems their own brands and campaigns, and neither is dwelling on the issue of corporate culture logical at this point that management styles will differ considering that both companies target clashes.different segments of the athletic industry. If both companies were to try to merge management

    styles or collaborate on a new line, it is also unlikely that there would be a large enough clash for

    the company to fail considering that Reebok has already taken on old Adidas executives.

    Therefore, Reebok employees will not experience a complete shock at the new management of

    Adidas.

Global Location

Aside from the possible clash of corporate cultures between the two companies, one potentially

    major issue for the merger could be their respective global locations; Reebok is located in

    Canton, Massachusetts,3132 while Adidas’ headquarters are located in Herzogenaurach, Germany.

    However, we conclude that while the companies’ locations are on opposite ends of the globe,

    this should not present a problem because of their respective popularities within Europe and

    America.

    If the merger is permitted to stand, Adidas will continue to be more popular in Europe than in

    America, while at the same time Reebok will continue to have greater popularity in America than

    in Europe. As the newly merged company grows, and as Adidas grows in popularity in the US,

    Adidas may eventually decide to move one of the headquarters, or to open up a new US

    headquarters for the merged company.

    Conclusion

    We conclude that the Adidas and Reebok merger will gain a sustainable competitive advantage

    over Nike. This does not necessarily mean that the new company will gain a greater market share

    of the athletic shoe industry than Nike; however, having a sustainable competitive advantage

    does not require this. After analyzing financial statements from all three companies, as well as

    conducting several analyses, including the industry, customers, competitors, and marketing

    strategies, it is clear to us that Adidas-Reebok has enough diversification within the industry to

    be a serious competitor to Nike.

    However, a merger may also fail before it has begun through US and European antitrust laws, as

    well as through differences in corporate culture. We conclude that Adidas-Reebok will not be

    violating any antitrust laws by continuing the merger; Adidas, Reebok and Nike were at the top

    of the athletic shoe industry before the merger, and continuing the merger will not give all three

    companies a greater share of the market. Although Adidas and Reebok have very different

    corporate cultures, we conclude that these differences will not have a significant effect on the

    success of the merger since both companies will continue to run different advertising campaigns.

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