Strategic Analysis of Lululemon

Prepared by: Shahnam Taheri

May: 2011

1-The resource-based model assumes that each organization is a collection of resources

and capabilities, which provide the basis for a firm’s strategy and its primary sources of

above- average returns. Use this model to outline Lululemon’s core competencies and how

their capabilities will need to evolve to sustain above-average return.

2-Strategic competitiveness results when the firm is able to satisfy a group of customer by

using competitive advantages in a given market. Describe Lululemon’s relationship with its

customers and how their business level strategy demands they continuously meet and

exceed client expectation (factor client insight, richness and affiliation dimensions in your

response)

“Reach is the degree to which a firm can manage its value chain activities to connect its

customers to an accessible product/service offering” (Wells and Gobeli, 2003). In other words, it

is not only the ability of customers to reach the firm but also the firm’s ability to reach the

customer with its products and services. For example, the music industry has traditionally

marketed, sold and distributed it product offering while ignoring the digital transmission

element.

The second issue is affiliation. Affiliation is a product of Internet culture and the greater

transparency of e‐commerce. For example, book publishers have long promoted particular books

in bookshops and no‐one has raised a murmur.

The third issue is richness. “Richness is the degree to which a firm can facilitate the exchange of

information to deliver products/services that match customers’ exact wants and needs” (Wells

and Gobeli, 2003). For example, the interaction between a local tailoring shop and its customers

is extremely rich as they can easily observe preferences and produce a customised product

accordingly. The challenge is to identify the attributes conducive to the digital medium and lever

them effectively.

3- What can Lululemon do to defend its leadership position in this market and retain its

dominant player status? What threats do competitors like Lotus wear, GAP, etc pose for

Lululemon?

Becoming More Global

Becoming More Innovative

Becoming More

Customer-Focused

Investing in High-Growth

Opportunities

Improving Operating

Efficiency

Greater understanding of local laws and business arrangements

in strategy making

Greater interdependence among leaders to create more

effective collaboration across functions in bringing new

products to market

Need to increase leadership involvement across functions in

gathering consumer insights and translating these into profitable

ideas for new products

Must anticipate capital, space, talent implications of rapidly

expanding product portfolio

Need cultural change to create a spirit of innovation versus a

culture of risk aversion at top levels of the organization

Need to develop and implement new processes for

understanding customer experiences and translating them

into improved business practices

Must create solid linkages across the organization at all

customer touch points, so that the customer experiences a

seamless relationship

Need to understand the needs of different customer segments

and move beyond “one size fits all” approach

Must instill a culture of customer primacy and customer care

Rapid growth requires attention to talent development;

must accelerate the acquisition and development of talent

for key roles to avoid talent becoming the constraint to

continued growth

Must grow number of leaders at every level by 10% per year

over next three years

Must introduce Six-Sigma, lean manufacturing and other

methods to bring costs into line with key competitors;

these must be led from the top and supported by leaders

at every level

Must create a culture of continuous improvement that is led

INTRODUCTION OF LULULEMON

lululemon athletica Inc. (Lululemon), a yoga-inspired athletic apparel and accessories

manufacturer and retailer, was founded in 1998 in Vancouver, Canada.

In 2007, the company owned or franchised 81 stores internationally.

Lululemon’s mission was “to create components for people to live longer, healthier, and more

fun lives”, based on core values of quality, product, integrity, balance, entrepreneurship,

greatness, and fun.

Lululemon produced high-quality, innovative products meant to inspire physical activity in

yogis and athletes. The company created a manifesto to capture the essence of the

Lululemon culture and inspire customers to consider changes to improve their own lifestyle.

The manifesto can be found in Appendix 2. Ideas like “a daily hit of athletic-induced

endorphins gives you the power to make better decisions, helps you be at peace with yourself,

and offsets stress”; “that which matters the most should never give way to that which matters

the least”; and “successful people replace the words “wish”, “should” and “try” with “I will””

were part of the manifesto and part of the Lululemon brand religion.

The company targeted “Super Girls”; the daughters of the 1980s “Power Women”. These

educated, hard-working women lived healthy lifestyles by working out, eating right and taking

care of themselves.

Lululemon opened lines of men’s clothing and accessories, but still remained highly

dedicated to its core market of “Super Girls”. Lululemon’s founder, Dennis “Chip” Wilson,

1-"Who is Lululemon Athletica?." Lululemon Athletica. Lululemon Athletica, Inc., Web. 4 Feb

2010.

<http://lululemon.com/about/>.

2

"Lululemon Athletica, Inc. - Annual Report." www.shareholder.com. 23 Feb 2008.

Shareholder.com a Nasdaq

OMX Company. 13 Mar 2009 <http://investor.lululemon.com/secfiling.cfm?filingID=909567-

08-415>.

3

"Lululemon Athletica Media Kit." Lululemon Athletica Media Site. Oct 2009. Lululemon

Athletica, Web. 4 Feb

2010. <http://lululemon.com/media/press_kit/lulu_media_kit.pdf>.

4

"Lululemon Manifesto". Lululemon Athletica, Inc. June 22, 2008

<http://www.lululemon.com/culture/manifesto/text>.

5

Suppa, Julia. "The Lululemon Love Affair". Digital Journal. June 16, 2008

<http://www.digitaljournal.com/article/78230/The_Lululemon_Love_Affair>.

6

Wilson, Chip. "Lululemon Blog." How Lululemon Came Into Being. 30 Mar 2009. Lululemon

Athletica, Inc.,

Web. 4 Feb 2010. <http://www.lululemon.com/community/blog/how-lululemon-came-into-

being-a-grossgeneralization/>. oikos Global Case Writing Competition 2010 2

Lululemon designed and produced “technical athletic apparel for yoga, running, and

dancing.” The company initially became popular for its well-fitting black workout pants. In

addition to workout pants, the company sold workout bras and tanks, shorts, capri pants, tshirts,

sweatshirts, jackets and other pieces of apparel for men and women. The company

also produced a line of accessories including water bottles, head gear, yoga mats and

accessories, and yoga and gym bags.

Lululemon took pride in using innovative materials to manufacture its products. The company’s

most well-known and often-used fabric was Luon®, a moisture wicking fabric that was used for

most of its pants, shorts, tanks, and bras.

A more innovative fabric the company used was Silverescent®, a fabric made with silver

yarn, designed to eliminate bacteria and remove odor from the fabric.

The average price for a pair of Lululemon pants was $99USD, bra was $48USD, tank was

$52USD, and jacket was $98. Lululemon’s line of accessories ranged from water bottles sold for

$25 to bags as expensive as $88.10 Lululemon declared “Social Responsibility is our DNA” on

its corporate website. The company felt responsible to all stakeholders: employees, customers,

vendors, suppliers, stockholders, and the environment. Lululemon further supported its

commitment to social responsibility on its website: “It is who we are and what we do and we will

continue to further our mission of ‘creating components for people to live longer, healthier and

more fun lives’....both for our guests, our employees, and our manufacturing partners.”

2007 proved to be a financially stellar year for Lululemon. Total Assets had more than

doubled, from $48,492,745 in the beginning of 2007 to $97,906,418 by the end of the 2007

fiscal year. Net Revenue had increased during the same time period by 45.8%, while Net

Income posted a 75.1% increase. A Financial Analysis for the company can be viewed in

Appendix 3. The company continued an aggressive expansion strategy, focuse

LULULEMON’S PLAN FOR SUSTAINABILITY AND

CORPORATE SOCIAL RESPONSIBILITY

From its inception, Lululemon had extensive plans for incorporating sustainability into the

overall strategy of the organization. Corporate Social Responsibility was at the heart of

Lululemon. The company named its Corporate Social Responsibility strategy “Community

Legacy”, and Lululemon’s business processes were centered on the five elements described in

the Community Legacy initiative: community, people, sourcing and manufacturing, efficiency

and waste reduction, and green building and spaces.

14

Lululemon specifically focused on

three elements of the Community Legacy initiative as it related to sustainability: sourcing and

manufacturing, efficiency and waste reduction, and green building and spaces.

Sourcing and Manufacturing was developed around a three year strategy aimed at

working with suppliers that not only shared Lululemon’s vision and values, but that complied

with Lululemon’s Workplace Code of Conduct, developed internally by Lululemon

executives. Lululemon was committed to only work with suppliers that were as concerned

about the environment and human health as Lululemon. The company set a high level of

expectations; therefore, suppliers that wanted to work with Lululemon had to meet specific

requirements, and were continuously audited by Lululemon to identify areas of weakness and

opportunity. Lululemon created a Social Responsibility Compliance ranking to assess

suppliers and manufacturing partners, and evaluated each partner out of a possible score of

100. The scorecard was broken down into four sections: labor practices, environmental

responsibility, and health and safety.Efficiency and Waste Reduction was also at the core of

Lululemon’s Community Legacy initiative and overall strategy. The five year vision for this plan

included a high level of product and process innovation to reduce environmental pollutants in

garment manufacturing and retailing. The company worked on implementing an internal

environmental guide and clause in the Workplace Code of Conduct for compliance by both

Lululemon and its suppliers. In addition to constant innovation of design, packaging and

shipping processes were constantly scrutinized in order to find the best possible way to

decrease the company’s environmental impact. Lululemon also implemented measurement

tactics and benchmarks as indicators of the company’s environmental footprint, and to

identify areas where improvements could be made. Finally, Lululemon set up networks

between itself and environmental experts and NGOs to facilitate idea sharing about process

and product improvements, and to foster ongoing conversations about corporate socia

Green Buildings and Spaces was the final component of Lululemon’s Community Legacy

initiative. The company had a five year vision for LEED (Leadership in Energy and

Environmental Design) designed buildings and spaces for new construction, and motivated

existing departments and retail locations to aim for zero waste and emissions through the

implementation of an internal building guide and the Building Code of Conduct; which

encouraged paperless communication along with recycling and paper reduction programs,

natural building and maintenance materials sourcing, and existing facility retrofitting for

improved energy efficiency. Lululemon set a corporate goal of 95% zero waste efficiency in

operations by 2010.4

INDUSTY ANALYSIS

The main industry in which Lululemon competed was NAICS

INDUSTY ANALYSIS

The main industry in which Lululemon competed was NAICS 315999 - Other Apparel

Accessories and Other Apparel Manufacturing. The industry elasticity, an indication of price

sensitivity within the industry, for 2007 was 3.8%, a 0.4% decrease from 2002, whereas

Lululemon’s own price elasticity in 2007 was 18.2%.

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This observation proved that

consumers of these apparel products had become more sensitive to price adjustments, but

buyers of Lululemon products were not sensitive to price adjustments at all. Although the

industry was extremely competitive, the demand for the Lululemon products was less

sensitive to price increases than the rest of the industry. Perhaps the largest barrier to entry

in this industry was the existence of dominant brand names such as Nike and Under Armour;

however, Lululemon continued to increase its market share, seemingly quarter by quarter.

Lululemon experienced higher gross margin at 51.7%; as compared to the industry’s 37.7%;

quarterly revenue growth at 34.1% versus the industry’s 7.3%; and a price/earnings ratio of

10.3 as compared to the industry’s 8.1,13 indicating that Lululemon was valued higher than

the industry in which it competed. These numbers excited investors and analysts alike, and as

a result, Lululemon became one of NASDAQ’s star performers in 2007.

SMARTFIBER AG, SEACELL®, AND VITASEA

I- CORE COMPETENCIES & COMPETITVE ADVANTAGE 

Competitive advantage is a special edge that allows an organisation to deal with market and environmental forces better than its competitors. Whereas, sustainable competitive advantage is one that is difficult for competitors to imitate. This distinction is essential when evaluating the acquisition and its effects. 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: 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. 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. The fact that Adidas and Reebok control such different aspects of the shoe industry will help to ensure their success. 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 industrial, customer and competitor analyses, as well as a look at the different marketing strategies and changing marketing trends. Adidas Core Competencies –        Technology–        Customer focus–        Brand recognition–        Supply chain–        Collaboratively competitive  Reebok Core Competencies –        Trend Identification–        Ability to market to a niche segment–        Women's shoe design–        Design expertise–        Celebrity relationships 

Combining Core Competencies 

Combine–        Adidas technology with Reebok design–        Adidas sports with Reebok women's   market –        Adidas   shoes  with Reebok apparel–        Adidas global strength & Reebok US strength Implementation 

Blending the two cultures successfully (learning to work together) Protect the strengths of acquired company (keeping development of both organisations separate) Maintaining both brands (keeping established market share) Capitalising on supply chain economies of scale (suppliers, manufacturing, distribution,

channels) Nurturing the partnership between technology and design (growing market share by combining

leadership areas) Sustainable competitive advantage The athletic apparel and footwear industry emphasises branding more than any other competitive advantage. Through the use of advertisements, endorsements, promotions, and licensing 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 danger of cannibalisation 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 "it is important that each of these brands must retain their own identity." Hainer points out that Reebok's focused strategy is on the engagement of youth through 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 presence. As Hainer points out, "Adidas has positioned part of its product range in the lifestyle segment, but thecompany relies on the performance market. Lifestyle success to an authentic company is a bonus." 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.

 The acceleration of both brands is brought about through increased operating cash flows. Along with the increased operating capital, other synergies such as operating   savings  are realised. Catching up to Nike's huge marketing budget is a challenge, but the increased operating costs coupled with the synergies will help promote further brand recognition through marketing. Reebok has an extensive line of men and women's apparel. The new company can combine Reebok's apparel with Adidas' new addition of fashion designer Stella McCartney, who has created an apparel line that integrates both sport and style. This innovative move shows that Adidas continues to look for new opportunities and markets in order to gain a competitive advantage. In the past, Adidas has not been able to expand because it had problems shipping goods to the United States. It takes them about 14 days to ship from their factories in the Far East while Reebok can ship overnight. In the future, Adidas will be able to take advantage of Reebok's existing distribution infrastructure in the U.S., while Reebok will be able to benefit from Adidas' existing distribution infrastructure in Europe. The Reebok brand will also gain sustainable competitive advantage through increased brand recognition. Globally, Reebok will benefit greatly from Adidas' distribution around the world. Coupled with the cost savings and increased cash flow, Reebok's marketing resources could increase.   Combined R&D is helping 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.  II- FROM CORPORATE   TO    MARKETING STRATEGY  Porter's Five Forces Barriers to Entry - LowAdidas and Reebok combined are able to control their costs effectively, giving them an advantage over emerging competitors in the industry. Their web sites are well- prepared and updated promotions attract online   shoppers . There are many exclusive product differences in this industry that gives brand identity an immediate competitive advantage. The Adidas and Reebok brand is well-known globally and plays a major role in consumer decision making. Selling footwear is highly competitive; however, barriers to enter into this industry are quite low. Therefore, the footwear industry is broad with hundreds of retailers. Switching cost is low for the consumer, and may occur frequently depending on consumer preference and other factors affecting consumer buying decision. Bargaining Power of Buyers - High

There are a large number of buyers relative to the number of firms in this industry. Therefore, companies like Adidas, and Reebok must continuously market their product and differentiate their brands against competitors, in order to increase sales and market share. The use of online tools has helped to enhance the accessibility among users. Brand identity plays a critical role in the buying behaviour; strong identity will offer consumers trust and loyalty. Bargaining Power of Suppliers – Low There are many suppliers in this industry. In essence, there is very little differentiation among the suppliers which makes suppliers' bargaining power non-existent. Leather, rubber, and cotton are commodity items and are available abundantly in the market place. Conglomerates such as Adidas, and Reebok have a definite advantage and power over their suppliers. These suppliers become dependent on these firms as their means to survival. Additionally, Adidas, and Reebok have standardised their input procedures pertaining to the materials used, their labour force, supplies, services, and logistics. Firms are able to switch between suppliers quickly and cheaply, due to the globalise networks of cheap labour on various continents. Threats of Substitutes - LowBuyers' propensity to substitute is low. Consumer substitutes for athletic footwear products are low because there are little alternatives to switch, some substitutes for athlete footwear could be boots, sandals, dress shoes or bear feet. Consumers are not likely to substitute due to the performance specification of the product. For instance, a basketball player would not wear boots to play basketball. Therefore, there are no real substitutes for athletic footwear. Rivalry among Existing Competitors - HighThe rivalry among existing competitors in the footwear industry is quite high. Large firms such as Nike, Adidas and Reebok have grown immensely over the last two decades. Their global reach has expanded through all continents; this is evident using the Internet and e-commerce. Online selling has enlarged the reach for these firms allowing them to increase sales while minimising operating costs. Almost every large firm has a web site, and most of these web sites contain virtual stores which provide convenience to consumers. Most individuals in North America have access to high speed Internet and online purchasing has become the new trend for the twenty first century.     Threat of Substitute Products or Services(low)     ↓ 

   Supplier Power(low)  → Rivalry Among Existing Competitors(high) ← Buyer Power(high)    ↑     (low)Threat of New Entrants         Reebok is located in the upper-left portion of the chart, identifying it as employing a cost leadership strategy.  It is concerned with offering affordable shoes to a very broad market. Adidas is located in the upper-right portion of the chart, identifying it as employing a differentiation strategy.  This company is constantly developing new technology and innovation in the industry.  Examples of this include the new microchips Adidas has developed to mechanically adjust the shoe's cushioning.  

SWOT Analysis Adidas-Salomon SWOT Analysis (before the merger) Adidas-Salomon was a leading player in the sports good manufacturing industry. The company had posted a very steady growth in its sales revenues in recent years, essentially as a result of its strong brand image. The   company  had market leading products and strong brand names including Adidas, Salomon, TaylorMade and others which were further strengthened by its strong commitment to product innovations. Furthermore, on the supply-chain side the company's commitment to reduce lead time for manufacturing footwear had enabled the company to avoid the warehousing of products.   Strengths Leading player in the sporting goods industryThe company was amongst the top players in the sporting goods industry due to its strong brands, market-leading products and commitment to sports for meeting consumer expectations. The global sportswear market (Euro 45 billion) was dominated by Adidas-Salomon and Nike and, at a certain distance, Reebok, PUMA and New Balance. Adidas-Salomon's brands include Adidas, Salomon, TaylorMade and others, which had very strong brand name recognition in markets served. The company's products served many markets and include footwear, hardware, apparel, snowboard, golf-related and other products. Steady increase in sales revenuesAdidas-Salomon's revenues from sales have been steadily increasing as reflected in the last five years' sales performance ending 2002. From E5.1 billion of sales in 1998 to E6.5 billion in 2002, the performance has improved by a CAGR of 7%. Though sales declined by 3.9% in 2003 over 2002, it was mainly due to currency translations. The company has been able to achieve this steady growth in revenues due to its strong brand image, continuous commitment to product innovation that is consumer focused. Such a steady growth in the company's revenue performance helped in maintaining a very good image for the company and improved investor confidence. Additionally, the company reported an outstanding operational and financial performance in the first half of fiscal 2004. This underlined the company's momentum, with quarter on quarter sales   improvements  for all brands, and a record gross margin and earnings growth of almost 40%, marking the strongest first half year performance in the company's history. Successful new   product  innovationsThe company had consistently launched new products and this has enabled it to widen its portfolio and also enhanced its competitive position. Each company brand targeted a specific market and new   products  were introduced based on their requirements. This has helped the company achieve a greater degree of success. During 2002-2003, the company launched ClimaCool and a3 in its running shoes category, which were big successes. The company sold over 500,000 pairs in a3 and over one million in ClimaCool. Furthermore, in the basketball shoes

division, the T-MAC and T-MAC were the bestselling in the US market in 2002 which has led to the release of T-MAC 4 lace less footwear for 2004. The company's continuous commitment towards new product innovations not only improved revenues but also helped in strengthening its relationship with its customers and attracts new customers. In May 2004 the company introduced what the company described as the first Intelligent Shoe - called "1", the shoe provided intelligent cushioning by automatically and continuously adjusting itself. Lead time improvementsThe company had considerably improved the lead-time required for footwear manufacturing through lean manufacturing principles. Earlier in 2000, the company used to take 120 days for producing footwear; by 2003, this had been reduced to around 60 days. Such a reduction was made possible as a result of the company's efficient implementation of lean manufacturing principles which helped in removing non-value-adding procedures and activities, improved labelling, special handling and other such activities to reduce time taken. These process improvements have helped the company in avoiding warehousing of its footwear products. Marketing strengthThe company had planned and implemented major advertising campaigns during 2004. The company's immense size and strong position have afforded it the opportunity to undertake global advertising campaigns with focus on TV, print media and outdoor advertising as well as point of sale and PR activities. The campaign "Impossible is Nothing", included top athletes from different disciplines such as Muhammad Ali and his daughter (brand image, boxing and lifestyle), Haile Gebrselassi (brand image, running), David Beckham (brand image, football) and Tracy McGrady (brand image, basketball).

Weaknesses Unfocused strategyThe strategy of Adidas-Salomon was lacking focus. This is because it has a very broad product portfolio, including sport performance products for athletic sports, basketball, golf, tennis, Nordic disciplines, cycling and fashion oriented products. Rival Puma has demonstrated that focus can translate into a high profitability. Over-dependence on Adidas brand segmentWhile the purchase of Salomon, the French maker of ski and golf gear, steered the company into the equipment arena, the company generated 79% ($4.9 billion) of its total revenues of E6.3 billion from the Adidas brand segment in 2003, while the other two contributed to the balance. Despite a strong image for the TaylorMade and Salomon brands, they generated only about 21% of the total revenues. The company's over-dependence on the Adidas brand segment, which mainly serves the athletes' requirements, makes the company's overall revenues susceptible to the market conditions in this segment. High level of long-term borrowingsThough the company reduced its borrowings by E181 million against 2002, the level of borrowings was still very high. At the fiscal year end 2003 the company's long-term borrowings as a percentage of equity were very high at around 146%, which amounted to E1, 574 million.

Such high debt level affected investor confidence in the company and makes low-cost funding of growth plans difficult. By half year fiscal 2004 strong cash flow had enabled more progress in debt reduction has been (net borrowings at June 30, 2004 were E967 million, down 39% or E616 million versus E1, 583 billion in the prior year) made but debt remained high. Order cancellations2003 revenue growth was substantially below the company's first impression from year-end 2002 order backlogs, which were up a strong 14%. As 2003 revenues growth was only 5%, significant order cancellations in the course of the first half of 2003 are evident. The company achieved revenues that totalled E6, 267 million ($7,570.4 million), a decrease of 3.9% against the previous years revenues that totalled E6, 523 million. Opportunities Strategic acquisitions and agreementsThe company made a few strategic acquisitions during 2004. In September Adidas and Stella McCartney announced a long-term partnership in New York, presenting the Adidas by Stella McCartney sport performance collection. For the first time ever a high-end fashion designer had created a functional sport performance range for women. The first collection was available in stores across the US, Japan and Europe in spring/summer 2005. It offered products for running, gym/workout and swimming as well as cover-ups. The Adidas by Stella McCartney range shows the company's willingness to innovate in the women's sportswear market. Adidas-Salomon acquired Valley Apparel Company of Cedar Rapids, Iowa in June 2004, a producer and distributor of collegiate and professional league apparel and accessories. It served small- to mid-size retailers, such as sporting goods stores, department stores, fan shops and college bookstores. It has a reputation of producing and delivering large quantities of apparel and branded accessories within hours of a team's victory. In early 2003, the company acquired the Maxfli brand of accessories and other golf related products from Dunlop Slazenger Group through its TaylorMade-Adidas division. This acquisition has helped the company in offering market leading products in all the golf categories and has improved its global market share to 16% from less than 1% prior to the acquisition. The company also entered into a strategic agreement in June 2003 with the INTERSPORT International Corporation (IIC), a multi-sport retailer, in order to strengthen its sales and distribution network. Specifically, the four year agreement will - in time - strengthen the company's sport performance, casual, Salomon and other products' sales. Supply-chain and manufacturing initiativesThe company's success in reducing footwear manufacturing time was likely to continue in the future also. The company planned to reduce its production time further, which has helped the company achieve faster delivery of its products to the retailers, thereby reducing inventory costs. On the supply-chain side, the industry faces a problem due to longer time to market. The total time taken is about 15 to 18 months of which 12 months are spent in creation of the product, while the balance of the time in arranging for the raw materials, production and delivery to the retail stores. The company also planned to implement a new model for its supply chain, which will considerably reduce the time taken and improve cost efficiency, etc. This initiative helped the company in serving its customers faster, thereby gaining a competitive edge over its peers.  

Sponsoring sporting eventsThe company's sponsorship of major sports events brought great recognition to its products. Adidas supplied more than 1.4 million products to federations, volunteers, officials and others during the 2004 Olympics. Following a successful marketing campaign at the Euro 2004 Soccer Tournament in Portugal, the company once again expected to achieve new record sales in football during 2004. During 2002, the company sponsored FIFA World Cup Championship in Korea and Japan and was acclaimed as the most visible among the brands advertised during the event and was viewed by 44 billion cumulative spectators during the course of the event. Furthermore, in the Winter Olympics of 2002, the company sponsored over 50% of the participating athletes who won about 200 medals. Adidas has a life-time agreement with Kevin Garnett (most valuable player of the NBA 2003/2004). It also signed a six-year cooperative agreement with Chinese Football in June 2003. The company sponsored the World Cup in 2006 held in Germany. Sponsorship of these events helps the company in building its Sport Heritage, Sport Style and other such divisions. For instance, the Sport Heritage division grew into an Euro 900 million businesses and doubled its sales from 2001 to 2003.   Own retail storesIn 2003 Adidas generated 9% of group revenues in own retail outlets. A significant number of new shops did not positively contribute to earnings because the cost for new shops (of hiring of sales people and training costs etc.) exceeded early revenues. This will begin to level out going forward and the company will continue to open own retail shops. Management recently explained that own retail sell-through was positive in the US in 2003 in contrast to external customers. The company is therefore planning to open 15 new US shops in the coming two years and 40 worldwide. Management expects Sport Heritage to grow again from 2004 driven by more own retail stores and no more cutting of external points of sales. Threats CompetitionAdidas operated within a highly competitive market which in many cases overlaps into other markets as sportswear retailers increasingly compete with fashion retailers. The company's traditional competitors like Reebok, Nike and Puma made competitive levels intense, but the addition of casual footwear and apparel manufacturers such as Tommy Hilfiger, adding a designer edge to the market, had increased competitive levels. Companies had come under increasing pressure recently from products designed for the value conscious consumer. Adidas have long been one of the premium brands in sportswear and have charged accordingly, though this strategy is coming under more pressure as cheaper substitute products are bought by consumers adding to problems in terms of customer retention. Foreign exchange fluctuationsThe company's manufacturing activities were mostly concentrated in China and other Southeast Asian countries. Since most of these countries transact in US Dollars, the company incurred about 70% to 80% of its outsourcing expenditure in US Dollars, whereas, the company's revenue generation in US dollar and other non-Euro currencies is comparatively lower. Hence, adverse

changes in the exchange rate between US dollar and Euro had a negative impact on its overall revenues. Weak global economyThe GDP of European countries have grown at a negligible rate and are unlikely to improve in the near future. Similarly, the Latin American markets such as Argentina and Brazil continue to witness weak economic conditions, while the Southeast and Middle-East regions continue to reel from political unrest. Thus, the company's revenues were significantly affected due to these adverse economic conditions. Impact of scandals in the US and GermanyAccounting scandals across industries in Germany and the US have impacted upon the company's stock performance. The weak performance of many companies in the sports goods industry adversely affected the investor confidence in the industry. Thus, external factors can have an adverse impact on the company's stock price performance and might in turn affect its brand's value.  Reebok SWOT Analysis (before the merger) Reebok International was a major player in the sports and fitness products market, with a particular emphasis on footwear. Its main strengths lied in its size and strong brand awareness. While footwear is clearly its core product, concerns were being raised over its comparative disinterest in the associated athletic apparel market, which is over twice the size of the footwear market.    Strengths Growing sales revenueAs part of a strategy to grow quality market share, the company continued to invest in three key product and marketing platforms: Performance, RBK and Classic. Reebok International was the second largest manufacturer of athletic shoes in the US, behind Nike. The Reebok brand continued to drive sales pushing it closer to major competitors, Nike and Adidas. Reebok had become the number two or number three brand in most of its overseas markets. It held around 10% of the global market, compared to Nike's 34% and Adidas' 15%. The company has been able to increase revenues and improve operating margins despite some challenging retail conditions in many key markets around the world in 2004. Excellent marketing strategyThe company employed a strategy of reinventing its brands in order to gain market share. In order to enhance its Reebok brand, the company introduced a new street inspired product collection, RBK, in 2002, followed by an effective marketing strategy which carried into 2003 and 2004. During 2003/2004, the Reebok product offerings generated healthy sell-through

performance at retail. Alongside reinventing brands, the company introduced new marketing campaigns to promote them. To support the RBK product Reebok created a marketing campaign entitled Reebok's "Sounds and Rhythm of Sport," which fuses music and entertainment with sports and performance. The combination of relevant products and a new marketing campaign improved the performance of the Reebok Brand in the athletic specialty channel of distribution. Reebok has achieved positive market share comparisons in the critical athletic specialty and sporting goods channels of distribution (as of October 2004). Celebrity associated sponsorshipsThe company expanded its product offerings into more lifestyle and performance categories, introducing new product segments for both the NBA and NFL, including NBA and NFL footwear, classic lifestyle apparel and performance gear for off-the-field activities. Reebok sponsored many top athletes in tennis; Andy Roddick and Venus Williams; as well as music stars Jay-Z, Pharrell Williams and 50 Cent. Yao Zing's impact in the Asian market is hugely important to Reebok. Affiliating itself to such globally renowned celebrities enhanced the company name among many different customer groups. Strong women's sectorAnother one of Reebok's strengths was its success in the women's sector. The market for women's athletic shoes is larger than that for men, accounting for around 46% and 40% of the sector's value respectively. In volume terms, the women's sector was even more important, 46% compared to 35%. Reebok's market share of women's athletic shoe sales was around 35%, and has been boosted by its 'It's A Woman's World' marketing campaign. Weaknesses 'Classics' under fireThe company had come under fire from its rivals in the classics department. In the past Reebok has controlled this shoe category without much competition, however companies such as Nike and Adidas were coming up with their own 'classic shoes'. Reebok were still the market leaders in that area but the gap kept narrowing. Low market share in apparelsReebok controlled only about 1.4% of the apparel market. This posed a problem when squaring up with its fierce competitor, Nike. The footwear market's growth was slowing. Athletic apparel gives scope for a larger and more diverse range of products, keeping the market fast moving. The apparel market was 2.4 times larger than the footwear market. Nike took charge there, with its innovative designs, and contracts with sports teams and organisations throughout the world. Danger of stockpiling products by retailersFutures, or ordered in advance sales, represented around 60-70% of Reebok's business. This has been valuable to Reebok in the past; however five of the company's brands that represent around 60% global market share could cause problems in the future. Futures growth for these five brands was around 9.5% on a dollar-weighted basis. This growth was alarmingly fast. Reebok had to be careful as retailers may be ordering more than they can sell. This could result in a sudden cut off in orders, leaving the company with large inventories and a decrease in sales.

 Opportunities Increase average shoe priceReebok's average price per shoe in athletic footwear stores, which account for around 15% of the market, was considerably lower than average. Its average price per shoe is $45, compared with an outlet average closer to $60. The company's lower than average shoe price is partly due to the high percentage of basic products sold, which is itself partly attributable to its traditional position in the women's sector. This left plenty of space for the company to muscle in on higher priced sales, as its products and promotional efforts improve. As well as raising brand awareness, Reebok's sponsorship deals helped the company increase its average sales price. Draw attention toward new technological developmentsReebok had started developing its product to make it more modern and has invested heavily in added technology to enhance its shoes. Reebok had a lot to gain from a continued investment in more technologically advanced, premium products. In 2003, the company introduced new fashionable and technologically advanced products tied to new integrated marketing programs. These displayed an enhanced and prominent vector logo which ties back to the Professional athletes wearing the products on the field. This branding created a real point-of-difference for its performance products and should help to generate consumer interest at point-of-purchase. These products are supported at retail with a new performance marketing campaign, which utilises the athletes and the vector logo in new and creative ways. This campaign included television, print and in-store marketing packages. Encourage a strong brand push in EuropeThe company planned to enhance its European market, recruiting new management talent and initiating an aggressive program to regionalise this business utilising a consistent brand image throughout Europe. Reebok executed unified product, marketing, and sales strategies across all borders in Europe, thereby presenting the Reebok Brand in a more relevant and consistent manner. Exploit Nike's lack of high profile sponsorshipNike, the world's most successful sportswear brand and footwear producer struggled to fill the void vacated by Michael Jordan. This was the first time in a long time that Nike did not have an eminent sports star to spearhead their marketing drive. This has left an opening for the likes of Reebok to exploit, particularly in the basketball arena. The company took the Chinese sensation from Nike, Yao Ming, hoping to increase market share by 10% to 30% by 2006. Threats Over reliance on footwear salesFootwear is Reebok's largest division and the company relies fairly heavily on the footwear market. That was a competitive field experiencing much slower growth than in previous years and, like most other producers, Reebok felt that it must do more to increase sales. Reebok had also to be aware that the market for more expensive footwear was slowing. This could ultimately force prices down, should this trend continue for a significant period of time. With the company

so reliant on footwear, it risked losses, whereas other competitors such as Nike can fall back on their apparel division. Diverted from historical marketsReebok's original success stemmed from the women's aerobics market in the 1980s. It has since become apparent that the company has shied away from its roots. Reebok's women's products represent only 25% of its athletic apparel volume. The women's apparel sector actually accounts for around 40% of industry sales, which suggests that Reebok risked losing out in the key market that transformed them into a global company. Potentially expensive new product marketingUntil recently Reebok had not focused on either the men's or the women's apparel market for several years. Before it can build up sales significantly in this area, it had to instil confidence back into consumers that it is good at producing more than just 'classic shoes'. This process could've proven to be both time consuming and costly. Adidas-Reebok SWOT Analysis (After the merger) Strengths

More products for different customers Increase in product line  Acclivity in market share  Now both upper and middle priced markets are covered. Shared R&D, Patents, technology & innovations

 Weaknesses

Differing values among management Complexity of joining two corporate cultures Both companies belong to different countries

 Opportunities

Reduction in costs Decreased competition Cross-over promotion by sponsored athletes Enter to new market/Segments

 Threats

Nike. Nike's possible acquisition of Puma. Danger of cannibalisation between the two separate brands.