1A – Adidas' (Adidas AG) home country, Germany, is a nation with a low power distance level. Hofstede (2010) gave Germany a 35 out of 100, where 0 defines the closest and 100 the furthest possible distance. Due to the low power distance level, it can be considered that direct communication and cross-level meetings are important in Germany. Also, management is constantly challenged and is solely accepted when it consistently demonstrates expertise (Hofstede, 2010). Therefore, only the best become and remain in management.
The German society, with a score of 67, is individualistic according to Hofstede (2010). Germans strongly believe in the ideal of self-actualization, meaning individuals should fulfil their talents and potential. In addition, in the family environment, parents play a substantial role, while the extended family does not. According to Chow et al. (1991), an individualistic culture expresses itself especially in the effectiveness of individual based incentives, such as bonuses system related to person bound targets.
Germany is considered a masculine country with a score of 66, according to Hofstede (2010). Masculinity is reflected in business practices by the drive to compete and achieve success. Germans therefore often strive to perfection, to be the best on an international level. Adidas, as a premium sportswear brand focused on offering the best quality (Adidas 2017), is a good example of how masculine culture is reflected in business practice.
According to Hofstede (2010), Germany prefers to avoid uncertainty, with a score of 65. This is reflected in a schematic and deductive approach to new business ventures. Germans, to avoid uncertainty, estimate and plan well ahead (Hofstede 2010).
Germany scores high on long term orientation according to Hofstede (2010). Germany's score of 83 reflects that they “encourage thrift and efforts in modern education as a way to prepare for the future” (Hofstede 2001). Also, Germans believe that truth depends on situation, context and time. They can adapt traditions easily, which, in business, enables them to take advantage of current opportunities efficiently and rapidly.
1B – Considering the excerpt from Adidas's 2016 annual report presented in Appendix # and calculations performed in Appendix #, we determined that Adidas is a global firm. Adidas made 30%, 21% and 22% of their sales in Western Europe, North America, and Japan and NIC respectively. According to Rugman and Verbeke (2004), a global firm should have sales of 20% or more, but less than 50% in each of the three regions of the Triad. Accordingly, Adidas meets the criteria of a global firm. Adidas' global orientation is justified by the nature of their products, since sportswear experiences global demand.
2A - Adidas competes on a global scale, and consistently enters new markets successfully benefitting from its strong ownership advantages.
One main ownership advantage is the company's widely-recognizable trademark that differentiates Adidas products from those of competitors (Bhasin, 2017). The “three stripes” trademark that was bought and introduced in 1949, still decorates most of Adidas products and adds corporate value to its product line (Bhasin, 2017). The importance of the trademark is highlighted by the “trademark war” that Adidas has engaged in over the years in an effort to maintain the logo, and use it to promote its products and identity to customers (Bhasin, 2017).
The value of the trademark lays in the brand recognition and awareness that it brings for the company on a global scale (Welty, 2014). Adidas uses the trademark to successfully enter new markets without experiencing any otherwise expected adverse liability of outsidership as customers are already familiar with the company's products or their good reputation. In fact, the trademark plays a crucial role in achieving a substantial market share as it links brand name with product quality and authenticity, thus generating large demand (Welty, 2014).
The second ownership advantage of Adidas is the renovated supply chain management that it has introduced to its factories across different countries. The new system focuses on improving production efficiency and lead times between operations (Mishra, 2011). Specifically, through consistent investment on infrastructure, Adidas can now quickly respond and meet new fashion trends and customer demands (Mishra, 2011).
The new supply chain management of the company also creates a geopolitical ownership advantage as it connects factories with suppliers and retailers, thus increasing internal efficiency (Mishra, 2011). This key advantage allows the company to enter new markets systematically since the flexible operations structure is highly adaptable to different customer demand and preferences (Mishra, 2011).
Furthermore, the new system is constantly monitored by 65 professionals who ensure that the supply chain management system is applied consistently and that factories and suppliers comply with the sustainable codes of conduct introduced by the system (Kayne, 2013). Ultimately, this close supervision helps Adidas to secure brand quality and loyalty (Kayne, 2013).
2B - The main theories of international business are the OLI paradigm and the Uppsala model. The OLI paradigm proposes that companies should engage in international business once they possess ownership, location, and internalization advantages (Peng and Meyer, 2016). On the other hand, the Uppsala model focuses on a commitment-building framework that encourages firms to enter new markets and incrementally increase international engagement and involvement (Peng and Meyer, 2016).
One aspect that is shared between the two frameworks is that they have a common aim. In both models, the goal of the firm is to decrease the liability of outsidership that would otherwise prevent it from dominating a foreign market. Specifically, the OLI model stresses the importance of ownership advantages that allow the firm to overcome challenges such as low market share, scarce network and, or cultural differences that amount to the liability of outsidership. Similarly, the Uppsala model focuses on consistently building and expanding the firm's network, thus eliminating the liability of outsidership faced by the company.
Despite the common aim, the two frameworks use a different timespan in which firms engage in internationalization. Although the OLI paradigm is seen as a single expansion decision, the Uppsala model focuses on a gradual process in which the firm commits more resources once it completes an incremental experiential and learning process (Peng and Meyer, 2016)
Adidas undertakes FDI operations in numerous countries and at a different pace. One of the main locations in which Adidas operates is China. At the moment, the German multinational owns manufacturing factories and direct retailers that sell the company's products. If Adidas' operations in China were to be examined, the company would be at the highest commitment decision point within the Uppsala model. Adidas owns 181 primary suppliers (factories) and is planning to open 3000 retailers across the country by 2020 (Burkitt, 2016). Therefore, the company has invested in extensive network building within China and is committing an extraordinary amount of resources in the market. Specifically, the company's commitment shows that it has managed to decrease the liability of outsidership and has gained sufficient learning and experiential knowledge in the area.
3A - The new production facility for Adidas should be situated in Albania. The country is a potential candidate for the European Union[i] and had remarkable changes within the last decade improving its position for a potential new production plant.
The infrastructure in Albania has had millions of investments, in roads, hospitals, schools, and factories. The government introduced a capital investment in the infrastructure to obtain more tourism and investment from other countries.[ii]This is beneficial for the country's productiveness which Adidas can benefit from if they build a facility there.
Furthermore, the manufacturing industry is consisting 25.6%[iii] of the textile industry which portrays the experience and expertise the country has in manufacturing clothes. Moreover, around 90% of clothes produced in Albania is sold in Europe.[iv] Selling such a large percentage to European countries is a result of their prime geographical location being in Europe and at the sea-side.
Production costs are relatively low in Albania, with the minimum wage set at 176$ a month, cost of land and office space are also inexpensive in comparison to other European countries. This minimises the costs of Adidas and can increase profits.[v]
3B - Albania's political and economic factors are important to determine how successful setting up a production plant will be.
Firstly, the economic situation of Albania is improving, yet needs structural changes to increase facilitation for foreign firms. Albania went from a command economy ruled by the communist party to a mixed economy. This transition is difficult, however, provides opportunities for private owned firms. Therefore, the investments nowadays are cheaper, competition is small and state-owned firms tend to be inefficient which creates an opportunity for business to operate in Albania.
Secondly, the political situation of Albania is important to look at as it isn't stable yet, it is a parliamentary democracy. Corruption prevails within the government and freedom for workers, protection for consumers and environmental development was classified as “early stage” by the European commission. These political risks hamper economic activities.[vi]
Albania has the ‘Civil code of the Republic of Albania”, which is a type of civil law, meaning that business ventures have less autonomy in making contracts and allows for more detailed negotiations contracts influenced by law.[vii][viii] Adidas has a disadvantage by the system as common law helps firms with greater negotiating power, while civil law as a codified set of rules where companies can't go around laws but have to apply them.
The Netherlands and Albania, likewise, have civil law and an increasingly liberalizing market. The political system, however, is different and Albania is not yet part of the EU. Regulations in the Netherlands are also stricter than in Albania. This means that Albania can have an advantage in manufacturing investments. However, the systems in the country do not protect the employees or the environment.
4A - The largest quandary Adidas will face operating a production plant in Albania is the lack of employee protection rules, it is easy to fire workers and by law Adidas will not be required to state a reason for the sacking of an employee. This causes people to lose their job due to pregnancy, sickness, or not willing to work more than 5 and half days a week. Furthermore, are contracts set with hiring firms meaning that employees get paid below the minimum and don't get a holiday. Even though, this is not allowed by law to fire someone for these reasons contract negotiations are allowed causing these problems.[ix] It is an issue as it creates an environment for workers to keep on working even though they don't want or a not in a good state to work and often workers will get paid below minimum wage. This might decrease costs however, is not socially fair.
The government is an important stakeholder, as it wants to attract economic investments by reducing labour rigidities creating more jobs and revenue. However, should take into account the well-being of the employees within the country. This has specific relevance as they can through legislation change the low protection for workers. By lowering the protection system other countries will follow giving it a global impact as countries would race to the bottom, by raising it the country might miss revenue. Another stakeholder are the workers, as they are affected specifically by rules of the country and how firms operate ethically. They cannot change its position easily unless strikes or long negotiations take place. Lastly, are the firms a stakeholder as these rules affect them. They can have a global impact by leaving Albania for lower market rules of contrastingly invest in Albania in order to increase profits. By choosing to invest or leave it impacts the way legislative laws will be determined.
4B - The largest company in the textile industry in Albania is Nike, another MNE and a direct competitor of Adidas. However, the firm's interference is relatively small and not a dominate player. Nike only has 4% of the market share. Therefore, Adidas with investments can surpass Nike and local competitors. Local competitors are not as large nor efficient as Adidas which gives a competitive advantage to Adidas. Adidas has production plants in countries with a similar situation and therefore has the expertise to be successful. A disadvantage however is the existent local competitors do not have the ‘not invented here syndrome' and could be more trusted than a large MNE. This would strengthen competitiveness within the industry of the country.
5A - Adidas, recently introduced a new strategy titled: “Creating the New”; with the intention to increase revenues and raise the company's market share globally (Adidas Group, 2017).
This strategy is currently ongoing. At inception, Adidas aimed at increasing revenues by 12-15% yearly during the period of 2015-2020 (Adidas Group, 2017). In order to achieve such growth rates, Adidas would focus its marketing operation in the largest cities of the USA, including Los Angeles and New York City (Adidas Group, 2017). According to Adidas, these cities are trend-setters in the sportswear fashion industry and play a vital role in customer demand and preferences globally (Adidas Group, 2017). Consequently, an increase of brand awareness in these markets would translate to an increase in sales at a global scale (Adidas Group, 2017).
The other objective of Adidas is to capture a larger market share in Asia (Sarkar, 2015). In order to achieve this, the company recently established its first fully-owned Adidas retail network in India (Sarkar, 2015). This move will enhance brand awareness in the country, resulting to a greater market share (Sarkar, 2015). Furthermore, Adidas will be able to gain a better understanding of the market and the customer demand as it will engage in core FDI and value adding activities in the area. The introduction of fully-owned stores in India will allow the company to dominate the market and develop an extensive customer base by 2020 (Sarkar, 2015). In return, India will become a top-five revenue-generating country for the company (Adidas Group, 2017).
5B - Adidas has employed different modes of entry in counties with various institutional frameworks. In the last years, Adidas has used three different methods to enter new markets.
The first mode of entry has been licensing. In 2010, Adidas signed a license agreement with the Italian company, Italia Independent SpA which allowed Adidas to enter the industry of eyewear (Mesco, 2015). The four-year agreement allowed Adidas to increase its presence in Italy, but also enter an industry where it had no presence before (Mesco, 2015).
The second mode was Foreign Direct Investment, mainly used in the United States. Adidas under the aforementioned strategy “Creating the New”, engaged in upward integration by establishing a fully-owned production plant in Atlanta (Fibre2Fashion News Desk, 2016). The factory focused on the production of running shoes targeting to capture a substantial market share in that sector (Fibre2Fashion News Desk, 2016). The operation of the factory allowed Adidas to enhance brand awareness, thus generating greater revenues. Furthermore, the company reduced the potential liability of outsidership by running a more effective marketing research in the country (Fibre2Fashion News Desk, 2016).
The third mode of entry used was offshore outsourcing that was applied in China. This case will be discussed in detail below because it led to short-term positive, but long-term negative results for the company: Until 2010, Adidas had been outsourcing production in China due to the low labour costs and loose environmental laws. At first, this strategy was considered successful as it contributed vastly to Adidas' success in production and innovation (Grahame, 2015). Yet, more recently the strategy was reviewed as reflected by the recent close down of one of the largest Adidas factories in Suzhou (Yang, 2012).
Originally, the idea of outsourcing in China proved to be an effective solution to a policy of cost cutting to enhance profitability (Yang, 2012). Nonetheless, the production plants in China have recently sparked trouble and have disoriented Adidas manufacturing (Yang, 2012). Specifically, wages in China have seen a substantial increase due to rising concerns about human rights (Yang, 2012). This has resulted to an increase in production costs. More recently, Adidas also attempted to shift modes of production from manual manufacturing to automated which proved not suitable for the Chinese factories despite evidence from the new robot-based factories in Germany showing this shift as an effective cost-cutting solution (The Economist, 2017).
Comparing the “Creating the New” strategy followed in the US with this of outsourcing production followed in China, it becomes apparent that the first stressed the importance of sustainable and ethical supply chain management within the company and around the globe. China case on the other hand, posed numerous problems to the company's supply chain as the codes of conduct in Chinese factories often deviate from ethical means of production and resulted in harming the internal consistency and structure of Adidas.
Nonetheless, the evaluation above does not reflect the fact that in the more recent years the Chinese income per capita has been increasing and the consumer base in China has been rising revealing a new great potential market and possible source for revenues. Therefore, Adidas could shift its overall China market policy from offshore outsourcing to direct FDI focusing on marketing research and sales in the area.
I have not answered the second part of the 2nd question because I am not sure to which theories the document was referring. Once we clarify this I will proceed doing it.
Also, at the moment some of my answers are lengthier than required. I guess once we put everything together and discuss the material, we can then cut it to to match the page requirements.
6A - By operating globally, firms can attain important competitive advantages. As for Adidas, the MNE's value chain extends across the world. Adidas operates in 61 countries, with over 1000 independent suppliers (Adidas Group, 2016). This means that Adidas has competitive advantages in global sourcing, providing access to a wider range of inputs. Most of the MNE's suppliers are located in emerging markets like China, Vietnam and India (Peng and Meyer, 2016). Adidas aims at optimizing supply chain efficiencies and thus, the labour-intensive parts of shoes and clothing manufacturing have been moved to areas with lower labour costs (Peng and Meyer, 2016). According to Adidas' annual report (2015), almost 100% of the production is outsourced to independent third-parties suppliers, of which 94% located in Asia. The suppliers possess excellent expertise in cost-efficient and high-volume production. Nevertheless, Adidas enforces strict control on the entire supply chain, in order to ensure high quality of the products.
The outsourcing has been going on since 1980 and has resulted in a significant reduction of costs, enabling a more extended focus on product quality (Adidas Group, 2016). Since almost the entire production is outsourced, Adidas would lose its competitive advantage without it. Producing everything in its home country, Germany, would substantially increase costs and harm product quality, what the company stands for. In addition, the distribution of products would be constrained due to logistical reasons. The size of market would drastically decrease, and in turn the size of the company.
Another important competitive advantage that Adidas possesses is the risk diversification which reduces the risk profile. Since Adidas operates on every continent in the world, the sales are highly dispersed. This means that risks – for example economic recessions – in certain markets can be overcome by focusing on markets that are doing relatively well. This compensates for the profit loss in the risky areas. In addition, Adidas' risk management has increased the focus on long-term risks which ensures risk-aware, opportunity-oriented and informed actions that guarantee sustainable success of the company (Adidas Group, 2015). The risk management is highly important in combating unexpected disruptions in the global trade, and therefore forms a competitive advantage.
Needless to say, operating locally would eliminate the risk diversification and thereby the competitive advantage. In case Adidas only operates in Germany, the operations would only be focused on a single market and thus, recessions, natural disasters or other external risks would affect the entire market. Depending on the nature of the risk, this could have major consequences for Adidas. In the worst case, the company could go bankrupt in the long run, due to a dramatic decrease of demand in Germany.
6B - Back to the value chain of the company, an important policy associated with the success of the company is corporate social responsibility. The company strictly controls the value chain as customers and other stakeholders take an interest in where and how the products were made. In 1998, Adidas built its first code of conduct, now called Workplace Standards, which was based on already existing initiatives. This code consists of a wide range of issues covering forced labour, discrimination, hours of work etc. (Adidas, 2017) In 2000, the company published its first Sustainability Report and is nowadays the only MNE that publishes such report annually (Adidas, 2017). The report was created after an initial audit found that there were many incidences of standards not being kept. Adidas was the first MNE to go public with such information (Peng and Meyer, 2016). The reason that they did this was to emphasize their willingness to combat the violations of their codes of conduct, for example by identifying suppliers further down the supply chain (Adidas-Salomon, 2000).
7A – Adidas's latest acquisition was the app developer Runtastic in 2015, yet we decided to elaborate on Adidas's more significant acquisition of Reebok in 2005. We chose to do so, because the acquisition of Reebok fits the definition of an international acquisition better.
According to Adidas-Salomon Chairman and CEO Herbert Hainer (2005) the motive for Adidas to acquire Reebok was to ”-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 our financial strength to drive increased shareholder value.” Also, even though not officially stated by Adidas, an additional motive of the acquisition was a strategic move against Nike's large market share in North America (Financial Times 2005).
After the acquisition of Reebok, Adidas benefitted from an Extended Geographical reach (Adidas 2006). Net Sales in North America increased from $1,593 Million in 2005 (Adidas 2005) to $3,234 Million in 2006 (Adidas 2006). Which is mainly due to a broader Portfolio of Brands. After the acquisition Adidas owned 9 brands (Adidas 2005). As a result, they could sell a more complete offering in key sport categories. Furthermore, after the acquisition, inventions by reebok such as Pump 2.0 and DMX can now be applied to the Adidas line-up and Adidas's inventions can be applied to Reebok products (Adidas 2006).
7B – Adidas's strategy is most closely resembled by the home replication strategy. Adidas uses its strong brand, globally viewed as innovative and being of high quality, to enter and expand foreign markets. Adidas also ‘exports' their high European retail and online store standards, without being influenced by often lower local standards. Furthermore, Adidas's products are equal all over the world, allowing Adidas to take advantage of scale production. Adidas can successfully implement this strategy since sports and its equipment requirements do not differ across countries. It should, lastly, be noted that product availability does differ per country. For example, in the Netherlands, more hockey and soccer gear will be offered in store than American Football equipment.
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