Adidas Global Strategy Analysis

Table of Content

Chapter 3- The structure and outlook for the Industry ................................................................... 3

3.0 Introduction ............................................................................................................................... 3

3.1 Industrial outlook ...................................................................................................................... 3

3.2 Pricing and production policies in the industry ........................................................................ 6

3.3 Life-cycle stage of the industry ................................................................................................. 9

3.4 Takeover bids .......................................................................................................................... 10

3.5 PESTLE analysis .................................................................................................................... 11

3.6 Summary ................................................................................................................................. 16

Chapter 4- Review of Relevant Topic .......................................................................................... 17

4.0 Introduction ............................................................................................................................. 17

4.1 Takeover and acquisitions ....................................................................................................... 17

4.2 Hedging and Risk management .............................................................................................. 19

4.3 Creative accounting ................................................................................................................ 21

4.4 Valuation of intangibles .......................................................................................................... 21

4.5 Summary ................................................................................................................................. 23

Reference list ................................................................................. Error! Bookmark not defined.

Chapter 3- The structure and outlook for the Industry

3.0 Introduction

The basic intention of this chapter is to provide an industrial outlook in which the selected

organization for the assignment is operating. However, Adidas is the organization that is studied

in the dissertation to analyze the global strategy. For this purpose, the chapter will effectively

highlight the industrial outlook, pricing, and production policies, takeover bids, lifecycle stage of

the industry and the macro-environment analysis.

3.1 Industrial outlook

Adidas is a German-based multinational company that falls under the industrial category of

Sportswear manufacturer and is headquartered at Herzogenaurach, Germany (Anon, 2019). The

sportswear industry is basically involved in manufacturing of sports apparel, footwear and

accessories and hence caters to the specific requirements of sports professionals. According to

the industrial report, the market for sportswear in 2018 was valued at US$ 108.7 billion and it is

expected that by the end of 2025, the industry will expand at a CAGR of 3.3% (Research, 2019).

Figure 1: Growth of Sportswear industry globally

Source: (Research, 2019)

Moreover, it is evident from the global market reports that the sportswear industry effectively

falls under the category of a growth industry. A growth industry is an industrial sector that

effectively experiences a higher growth rate as compared to the other sectors in the economy.

The sports-inspired category especially the sportswear industry is leading the economy in terms

of market size. However, the sportswear sector comprised of sports-inspired apparel and

footwear which is growing rapidly by registering an extension rate of 6% and 10% respectively

(Reuters.com, 2019). Despite the reputation as the performance-oriented market, India, Thailand,

and the US are significantly manufacturing sports-inspired apparel and accessories.

Figure 2: Growth rate of sportswear industry

Source: (Reuters.com, 2019)

The intended audiences of the sportswear industry are professional athletes and amateur sport.

However, the market competition in the global sportswear industry is intense and the market

players like UNDER ARMOUR, Nike, Adidas, Columbia, Puma, and others hold the leading

position in the industry with the key technological features and patents (Technavio.com, 2018).

The high-end customer base of these companies formed a monopoly in the industry which

creates a barrier for small sportswear companies to enter the industry (Market Research Blog,

2019).

Figure 3: Market position of the sportswear giants

Source: (Technavio.com, 2018)

3.2 Pricing and production policies in the industry

The global sportswear industry is expected to have a product revenue of US$ 184.6 billion by

2020 due to the involvement of women in the fitness and sports industry (Market Research Blog,

2019). The product policies or strategies for the sportswear industry are devised likewise that can

cater to the needs of the professional athletes and other sports or fitness freaked customers

(Pádua et al., 2018). Basically, the industry embraces four product policies namely the market

leader strategy, the niche strategy, the challenger strategy, and the follower strategy.

Market leader strategy

Under this product policy, the market leader evolves innovative products in order to grab the

market share. The sportswear manufacturer companies under this category basically invest large

scale amounts in research and development activities in order to seek market opportunities (Ko et

al., 2016). Nike embraces this product policy and the organization effectively invest in its

research and development activities to commercialize new products or adding enhanced features

to its current products.

Challenger strategy

The challenger product policy is very much similar to the market leader strategy and hence the

only difference is that the company embracing the market leader product policy holds number

one position in the global sportswear market and the company adopting the challenger strategy

desires to seek that particular position (Cole, 2015). Adidas basically embrace this policy while

manufacturing the sportswear.

Follower strategy

Sportswear manufacturing companies utilizing this particular product policy do not invest lump

sum amount on research and development for each product segment rather they follow the

market trends (Prabh and Srividhya, 2016). However, Adidas apart from challenging product

policy, also embrace this particular policy for certain segments. The company observes its

competitors for developing sportswear products.

Niche strategy

This particular product policy involves the evolution of sportswear for a particular segment of

the customer groups. The small sportswear manufacturing companies operating on the national

level adopt this policy to penetrate in the market (Genç, and Benedetto, 2018).

The varied pricing options in the sportswear industry enabled the companies that are operating in

this sector to develop pricing policies effectively. Basic pricing policies that are particularly

followed in this sportswear manufacturing sector are value based pricing policy, premium

pricing policy and skimming pricing policy.

Value based pricing strategy

The core intention of this pricing policy in the sportswear industry is to balance the quality and

cost of the products. It is however assumed in the sportswear market, that the consumers will not

sacrifice the quality of the product for a lower price range, rather; they will pay more for the

branded sportswear item (Shin and Zeevi, 2017). Nike, apart from premium pricing policy, also

embraces value based pricing considering the perception of the customers regarding the

products.

Skimming pricing strategy

The sportswear customers often seek an affordable range of products from particular brands

(Fard et al., 2016). The companies like Adidas assume this pricing policy as well as competitive

pricing policy considering the market penetration rate.

Premium pricing strategy

In the sportswear market, the brand images are correlated with the price sensitivity rather than

the market value. The high-end customers of this sector are more concerned with the social status

and hence, in this context; premium pricing policy is a strategy to establish or position a brand in

this market (Bahçıvanoğlu, 2019). Nike basically follows up this pricing strategy as a part of

their exclusive brand strategy.

3.3 Life-cycle stage of the industry

Generally, the industrial life-cycle stage is comprised of four prominent phases namely

introduction, growth, maturity and decline. The industrial life-cycle stage also varies when the

sector is influenced by seasonal and non-seasonal factors (Wang and Shen, 2017). To put this

another way, sports is a seasonal activity that is the sales of sportswear are seasonal in nature and

the graph is steeper due to the short term growth. The sportswear industry is on the maturity

stage of the industrial life cycle wherein the growth in the sales margin is stagnant and will be

maintained for a period (Codini, 2015). The sector has intensified growth across the world and

due to its continuous innovations and modernization, the industry has managed to persist in the

industrial cycle. However, the market specialists state that the industry is involved with

continuous improvement, commercialization, and innovation even after reaching this stage to

maintain their market position (Cantù et al., 2015).

Figure 4: Industrial lifecycle stage

Source: (Codini, 2015)

3.4 Takeover bids

The companies operating under sportswear industry are likely to target takeover bids which is

viewed as an action of acquiring a corporation by offering an amount to the shareholders of the

target company in order to gain control over it. Under laid are some essential takeovers in the

industry:

 In the year of 2005, Adidas successfully acquired Reebok with a purchase consideration

of $3.8 billion. The duo market players in the sportswear market are operating globally

under their brand names under a single parent company (Tran, 2005).

 In the year of 2011, Amer Sports a Finnish sportswear company acquired Nikita, an

Iceland based company for US$ 10 million (Amer Sports, 2019).

 In 2012, a US based sports motor apparel manufacturing company Teton Outfitters was

acquired by US based Polaris industries at a purchase consideration of US$ 46 million.

 In 2013, Under Armour which is a US based sportswear manufacturing company took

control over MapMyFitness with a consideration of $150 million (TechCrunch, 2013).

 In 2015, Adidas acquired fitness app Runtastic at a deal value of $240 million

3.5 PESTLE analysis

The macro-environmental analysis of the sportswear industry with relevance to Adidas is

summarized below in the table:

Factors

Analysis

Relevance to Adidas

Political

 Political instability in

Asian sportswear market

due to possible tariffs in

China.

 The governmental policies

including the taxation

policies can impact the

growth of the industry

(Siegmann et al., 2017).

 The sportswear companies

basically operates

internationally and

therefore the industry

needs to consider the

international policies

before entering into the

emerging markets.

The political factors are relevant to

Adidas and hence the company

should take into account the

following factors in order to

operate in the global market:

 International trade

agreements

 Consumer safety and

product regulations

 Product safety laws

 Tax laws

Economical

 It is important for the

sportswear industry to

consider the economic

growth such as loan

structure, purchasing

power, economic

development and many

more (Su and Tong,

2015)

 Due to the increase in the

price of supply of raw

materials and labor the

industrial pricing policy

for sportswear are set at

premium range.

 European Union has

lowered the cost of

borrowing that is the

interest rates and hence

has encouraged the

production of such sports

inspired wearable

Adidas contributes to the industrial

revenue and hence the company is

involved in creating leisure

sportswear items. The company

had set up their manufacturing

units in China because of the

availability of the workforce at

lowered rates (Dickson, 2017).

products.

Social

 Presently, people are more

inclined towards fitness

and increased engagement

with the fitness clubs has

increased the demand for

sportswear.

 Female athletic Movement

 Healthy lifestyle

movement

 Adidas has extended its

product range in order to

respond to the health and

fitness trends of the

customers.

 Adidas modified their

designs and included

designs in their products

which match the interest of

the female athletes

(Dryuchenko, 2017).

 Adidas supports the health

volunteered programs that

foster fitness of the

individuals to cater the

healthy lifestyle

movement.

Technological

 Technological

advancements in the

sportswear sector are the

trending opportunities for

 Adidas examine the quality

and technology of their

products because they cater

to the professional athletes.

the market players in the

industry wherein the

companies commercialize

wearable technology such

as smart fit watches,

technology system that

would effectively

eliminate the risk related

to the injuries, or the

smart shoes hat will

reduce the stress on the

back, knees and legs while

jogging (Pang, 2017).

 Leveraging the health

apps with the sportswear

manufacturing companies

 The company has utilized

technological advancement

in their products as well as

in their distribution

strategy and for that reason

organization has utilized

digital platform for selling

their products through

websites and social media

platform (Monteiro, 2016).

 Adidas has already

incorporated smart

sportswear technology and

offers technologically

updated products like Fitbit

in order to hold the

competitive position in the

market.

Legal

 The sportswear industry

should consider the

pertinent legal issues

while distributing and

 Adidas as a market player

in the sportswear industry

has ownership of IP system

and patents serves legal

manufacturing the sports

inspired apparels and

accessories. The

companies operating

under this industry should

adhere with the consumer

protection laws,

employment laws and

competition laws.

 International trade

protection laws

 Laws related to the

intellectual properties that

is advertisement lawsuit

(Bryant, 2019).

protection to the business.

 Due to the advertisement

lawsuits, the company

basically relies on celebrity

endorsements as a form of

promotional activity.

 Adidas complies with local

as well as international

laws.

Environmental

 Currently, customers are

more inclined towards

ecofriendly products that

are biodegradable and

recyclable products. In

sportswear industry the

environmental concerns

are related to the

 Adidas is concerned about

the impact of their business

on the4 environment and as

a result of that the

company is involved with

monitoring the elimination

of hazardous element in

their production process.

manufacturing and

distributing the products,

reduction of waste

disposal and green

labeling.

 Extension of the

environmental protection

policies

 The company ensures

ethical business practices

wherein the suppliers are

committed with following

the environmental

regulations in the country

where the sportswear

products are manufactured.

Table 1: PESTLE analysis

Source: Learner

3.6 Summary

Based on the above discussion it can be summarized that Adidas falls under the category of

Sportswear industry and hence the chapter outlined the general characteristics of the industry.

The industry falls under the category of growth industry which holds a monopoly position in the

economy creating strict entry barriers. However, the industrial lifecycle is also discussed in this

chapter and it is evident from the above mentioned facts that the industry is in the maturity stage.

Thereafter, the takeover bids in the industry are also discussed in the chapter. The last section of

the chapter effectively discussed the macro-environmental analysis of the sportswear industry

along with the relevance to Adidas. The next chapter will review the relevant topic in the context

of accounting and finance.

Chapter 4- Review of Relevant Topic

4.0 Introduction

The core intention of this chapter is to discuss the review of accounting and finance in the

organizational context of Adidas which is a German-based sportswear manufacturing company.

The chapter will highlight the effectual takeovers and acquisitions of Adidas, thereafter will shed

light on the hedging activities. The study will also effectively shed light on the efficacy of risk

management in Adidas, creative accounting and valuation of intangibles.

4.1 Takeover and acquisitions

Adidas combined with Reebok in august 2005 in order to create a footprint in the global

sportswear market with a transaction value of US$ 3.8 billion (Tran, 2005). However, the

intention of this strategic combination was to acquire the global business platform with well-

established and reciprocal brand identities. To put this another way, Adidas took control over

Reebok as a parent company but allowed the organization to operate under its own brand name.

The strategic combination of these two market players in the sportswear industry had allowed the

group to widen its product range and apart from that, it had offered a competitive advantage in

the market in terms of brand presence.

Figure 5: Sales after merger of Adidas and Reebok

Source: (Tran, 2005)

In August 2015, Adidas acquired fitness app Runtastic at a deal value of $240 million. It is

firmly presumed by both the companies that the business combination will benefit in terms of

creating a unique product portfolio through which the health conscious customers would be

catered. The main intention of Adidas behind this strategic combination was to widen the

customer market through cross selling other fitness products along with the sportswear (Anon,

2013). Digital fitness is considered as the latest legacy in the sportswear industry and for that

reason, the companies under this industry are merging with fitness app companies to widen the

scope of their target audience.

Figure 6: Adidas acquired Runtastic

Source: (Anon, 2013)

4.2 Hedging and Risk management

The Executive board or top management of Adidas is responsible to organize an operative risk as

well as opportunity management system that ensures compatible and comprehensive strategies or

solutions to mitigate the material risks. The risk management department of Adidas basically

controls and operates the risk and opportunity management system on behalf of the executive

board. Risks and uncertainties are considered as the counterpart of the business and hence

Adidas endeavored to hedge the risk and uncertainties related to the organizational activities by

exploiting the possible opportunities. Under laid are certain risks are discussed which Adidas has

managed successfully.

Marketing risks

Intense competition in the international sportswear industry is viewed as a marketing risk and

hence companies can operate successfully under this condition only when the future challenges

and recent trends are determined exclusively (Anon, 2018). In this context, Adidas continuously

gather information by employing business intelligence which involves qualitative assessment of

the business environment which enables the organization to craft risk aversion strategies.

Operations risks

Companies involved in the manufacturing of sportswear are encountered with operational risks

and Adidas is not an exception. The independent manufacturing setups of the organization are

involved with the production of sportswear and hence inferior quality and delayed delivery of

item hamper the revenue margin of the company. Thus, to deal with such instance Adidas

employed a TQM system wherein 100 quality controller officers are appointed to examine the

performance of the factory (Anon, 2018).

Social and environmental risks

The social and environmental affairs (SEA) team of Adidas observe the organizational activities

and suppliers of the company to assure the compliance with environmental, social, health and

safety standards and accordingly executing the action plans in the area of improvements.

Legal risks

As Adidas is operating internationally, the company confronts several risks and uncertainties

related to the regulatory and legal frameworks and in such a scenario the company is involved in

entering into several contracts to resolve the corporate legal issues and accordingly devising

legal action plan (Fournier and Srinivasan, 2018).

Information technology risks

Adidas employs a complex communication networking system and applications in its

organizational activities and hence is encountered with several IT mismanagement risks that

have a consequential impact on the business. Adidas in this case mitigate the issues through

technological advanced business process.

4.3 Creative accounting

The consolidated financial statements, as well as the management report of Adidas, are prepared

considering the principles of International Financial Reporting Standards (IFRS) as embraced by

the EU and in addition to that, the requirements of the German Commercial Code are also

followed. The Internal Control over Financial Reporting (ICoFR) ensures the reliability and

validity of financial reporting and also assures that the compliance with the applicable

regulations and laws (Report.adidas-group.com, 2018). However, for the accounting related

practices and policies of Adidas are continuously reviewed for the purpose of enhancing the

effectiveness of ICoFR. KPMG audited the financial statements of Adidas in the year of 2018

which reflects the true and fair information related to the organization.

4.4 Valuation of intangibles

Intangible assets

December, 2018

December, 2017

Reebok

1353

1292

Runtastic

Other

Less: Impairment losses and

accumulated amortization

(550)

(526)

Trademarks

844

806

Software, licenses and patents

912

839

Less: Impairment losses and

accumulated amortization

(712)

(685)

Other intangible assets

196

154

Trademarks and other

intangible assets

1039

960

Table 2: Valuation of intangible Assets

Source: Learner

The intangible assets are impaired and thereafter the recoverable amount is calculated (higher of

the following: fair value less disposable cost or value in use). Notwithstanding, whether there is

an indication for impairment, the intangible assets and goodwill are examined on an annual basis

on September 30 for the purpose of impairment (Report.adidas-group.com, 2018).

4.5 Summary

Based on the above discussion, it is evident that the accounting and financial related topics has

relevant impact on Adidas. The takeovers and acquisitions by Adidas reflects some strategic

intentions of the organization in attaining the economies of scale in production and thus it widens

the target market of the sportswear giant. However, the risk management and hedging capability

of Adidas is thoroughly discussed in this chapter. The creative accounting and valuation of the

intangible assets of Adidas are highlighted in the last section of the chapter.

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