New Balance Athletic Shoe Inc-Company Analysis

University of South Australia

Division of Business

School of Management

BUSS 3023 Strategic Management

ASSIGNMENT 2: Case Study

New Balance Athletic Shoe Inc

Contents

TOC o “1-3” h z u HYPERLINK l “_Toc243677409″Introduction PAGEREF _Toc243677409 h 2

HYPERLINK l “_Toc243677410″Macro-Environment Analysis Summary PAGEREF _Toc243677410 h 2

HYPERLINK l “_Toc243677411″Political/Legal Issues: PAGEREF _Toc243677411 h 3

HYPERLINK l “_Toc243677412″Economic: PAGEREF _Toc243677412 h 3

HYPERLINK l “_Toc243677413″Social: PAGEREF _Toc243677413 h 3

HYPERLINK l “_Toc243677414″Technological: PAGEREF _Toc243677414 h 4

HYPERLINK l “_Toc243677415″Environmental: PAGEREF _Toc243677415 h 4

HYPERLINK l “_Toc243677416″Industry-Environment Analysis Summary PAGEREF _Toc243677416 h 4

HYPERLINK l “_Toc243677417″Threats of New Entrants (Barriers): PAGEREF _Toc243677417 h 5

HYPERLINK l “_Toc243677418″Bargaining Powers of Suppliers: PAGEREF _Toc243677418 h 5

HYPERLINK l “_Toc243677419″Bargaining Powers of Customers: PAGEREF _Toc243677419 h 5

HYPERLINK l “_Toc243677420″Threats of Substitutes: PAGEREF _Toc243677420 h 5

HYPERLINK l “_Toc243677421″Rivalry amongst Competitors: PAGEREF _Toc243677421 h 6

HYPERLINK l “_Toc243677422″Internal Analysis Summary PAGEREF _Toc243677422 h 6

HYPERLINK l “_Toc243677423″Tangible Resources: PAGEREF _Toc243677423 h 6

HYPERLINK l “_Toc243677424″Intangible Resources: PAGEREF _Toc243677424 h 7

HYPERLINK l “_Toc243677425″Gap and Current Strategy Analysis PAGEREF _Toc243677425 h 7

HYPERLINK l “_Toc243677426″Macro Environment: PAGEREF _Toc243677426 h 7

HYPERLINK l “_Toc243677427″Industry Environment: PAGEREF _Toc243677427 h 8

HYPERLINK l “_Toc243677428″Internal Environment: PAGEREF _Toc243677428 h 8

HYPERLINK l “_Toc243677429″Other Impacting Issues: PAGEREF _Toc243677429 h 9

HYPERLINK l “_Toc243677430″Recommendations PAGEREF _Toc243677430 h 10

HYPERLINK l “_Toc243677431″References PAGEREF _Toc243677431 h 11

HYPERLINK l “_Toc243677432″Appendices PAGEREF _Toc243677432 h 12

HYPERLINK l “_Toc243677433″Appendix 1: Macro-Environment Analysis of New Balance PAGEREF _Toc243677433 h 12

HYPERLINK l “_Toc243677434″Appendix 2: Industry-Environment Analysis of New Balance PAGEREF _Toc243677434 h 13

HYPERLINK l “_Toc243677435″Appendix 3: Internal Core-Competency Analysis of New Balance PAGEREF _Toc243677435 h 17

HYPERLINK l “_Toc243677436″Appendix 4: Gap Analysis of New Balance PAGEREF _Toc243677436 h 22

IntroductionCurrent standings of many industries in the world have been greatly affected due to the recent Global Financial Crises (GFC), yet few industries have been affected or exhibit certain properties that lessen the impact of such influences. In particular the post-mature stage of growth that the clothing industry, in particular the shoe industry in the USA has left little to be desired with a steadily increasing sales line in USA and worldwide. It is extremely valuable to note that whilst the larger industry is noted as fitness and lifestyle, the lifestyle and shoe industries are expressed to be subsets in this discussion. To an extent the USA industry of clothing and shoes has been affected extremely due to the large number of amalgamations, alliances and joint ventures between many global corporations such as Nike, Adidas, Reebok, Converse and so forth. Currently as these large organizations diversify their products, innovate, create, downsize and perform all the various functions of normal large enterprises do, this leaves gaps open in the industry for other more steady players such as Asics and New Balance to serve consumer needs.

As a result of the discussed gaps and take-over’s represented by such exhibited organizations the industry globally has become extremely large and diverse. Current market leaders such as Nike represent a $19.2 billion revenue in 2009 which is 2.9% above the 2008 revenue which by no means shows a strong and still steady growth in a time where many other companies and industries are collapsing (E-Trade Securities, 2009).

Homogeneously to fashion and technology industries, the shoe and clothing industry is extremely difficult to envisage due to the high volatility of society and innovation. Predicting who the future leader of the industry will be or what direction the industry is headed to is just as difficult as the socio-cultural, technological (innovation) and economic issues all contribute huge influences. Such influences are slightly less profound within USA however on a global scale additional influences that affect the industry also arise including trade barriers affecting costs and global competitors. To an extent much of the global trade now is welcomed and has been used to its full advantage of cheaper labor, cheaper materials and wider distribution of products and services. The global field for this reason is a multibillion dollar industry. Multiple synergies have been felt as a result of such globalization movements including the merger between Reebok and Adidas exhibiting an ability to rival Nike on both the American and European markets. Such movements within the industry is indeed quite perplexing and when viewed on a global scale the issues presented extend far beyond the immediate obvious complexities.

Another factor within the industry is the broad background of each organization. Whilst many large conglomerates are made of many alliances or formed from past mergers others such as New Balance still remain privately run entities. Each corporation also exhibits their own culture, whilst some focus towards the more fashion oriented individual others appeal to the family lifestyle and others towards the health conscious individual.

Consumers of the industry in particular the sports shoe segment are just as diverse as the industry itself exhibiting; a highly diverse, broadly educated but conscious to health implications minded individuals and not entirely gender specific. Particular for organizations such as New Balance consumers are specifically targeted individuals middle aged between 25 and 49 (Thompson et al. 2008).

To predict what the next movement of the industry will be will require in-depth environmental analysis which will utilize Porters 5 forces model (Porter, 2008) focusing upon the Macro and Industry environment issues. As a result of such an analysis the issues that affect and shape the industry will be explored to determine if the industry is; favorable to be in, profitable and sustainable.

Macro-Environment Analysis SummaryA PESTEL (Political, Economic, Social, Technological, Environmental, Legal) analysis was executed upon the Macro-Environment of New Balance with a globally focused perspective in conjunction with Appendix 1. The PESTEL type of analysis utilized expressed various issues relating to the positive and negative effects of each category associated with the industry that New Balance resides in. Such an analysis reveals the major trends that will affect the growth of the industry, the growth rates of the industry and how successful the organization will be within the immediate long term length of 3 to 5 years.

Political/Legal Issues:Bringing forth a wealth of positive influences the political and legal trends appear to be extremely promising for a long term sustainable industry environment in short. Various trade agreements such as the North American Free Trade Agreement (NAFTA) has enabled the industry to bring down many of the restrictions that come forth when dealing internationally which is especially important in today’s now globalized world. Trade Liberalization has also opened up a wealth of opportunities in economies such as the BRIC (Brazil, Russia, India, China) markets with un-entered and new target markets to take advantage of. Largely the most additional benefit is the removal of tariffs and introduction of free trade agreements between previously disjointed nations feeding industry growth.

Other frequent movements perhaps more socially and culturally influenced is the Government trends frequently up taking various subsidizations for gym and health club memberships, although this is commonly seen as a proactive measure for Governments to reduce the amount of investment they make into the public health system and health cover. Health cover funds globally are also making a move supporting and providing bonuses to people who sign up for gym memberships or buy certain products, particularly HCF and Rebel Sports offer deals in conjunction with Fitness First memberships for additional member benefits (Fitness First, 2009). Schemes implemented by Governments will most undoubtedly have a long-term lifespan if they are to remain effective; as a result the macro-environment will see additional synergies developed from external factors providing supplementary markets and avenues for future growth.

Economic:Presenting tough economic times mainly attributed to the GFC and many of its lead on effects the clothing and shoe industry may find it difficult to continue currently on the same large increasing volume of sales it has done in the past. As the primary reason of unemployment the GFC has presented a wealth of anti-synergic issues and primarily as a result many luxury or items that are not of necessity are out of reach for many consumers or prestige or luxury target markets. Currently the unemployment levels within the US are at 9.8% and are set to rise. This could mean for those that discretionary spending effects the 1% or 2% of population that an industry specifically targets may be consumed entirely by the unemployment rise (BLS, 2009). Interest rates not only affect the public consumers but also the wholesalers, suppliers and a wealth of stakeholders and shareholders with any given industry which also means increased costs for everyone involved and as a result the final products price is inflated meaning that the short term profitability of the industry suffers greatly. Similarly to interest rates the exchange rates involved in international trading means that for a majority of manufacturers in the USA will be confronted with additional overhead when sourcing, supply and distributing globally decreasing the potential profits short term.

Despite many of the negative connotations associated with the current GFC long term beyond the immediate issues of the GFC there is positive outlook for the macro environment, including many of the negatives previously discussed alternating their polarity to become positive. Increased globalization and expansion of dominate economies has meant that the amount of purchasing power especially to large corporations has increased allowing for the sourcing and distribution of products, substitutes and alternative solutions to be minimized greatly. Looking forward and long term the future prospects for the industry however are conversely positive that is assuming all factors such as interest rates, exchange rates, wage rates and general economic conditions improve to become a positive influence.

Social:Generally, representing a positive influence for the long term growth of the industry the influences range from a variety of industry influenced outlooks such as sponsorships, media and promotion of sports to other softer skilled influences such as green consumerism and social trends. Social influences are perhaps the most powerful influence upon this industry against all others. An aging population for first world countries is also an extreme positive for the industry and most certainly organizations such as New Balance who’s main target market is the older demographic of the public. Quality expectations in recent years for products have also risen dramatically however when this could be seen as a negative, but with the added convenience of economic, globalization and political factors the ability to source quality products is much easier and will be able to sustain industry growth longer. Also is the sudden uptake and focus with many micro-industries appearing within the general ‘health’ industry beyond the now mature gyms, is fast-healthy-foods and many industries are benefiting from this around the world and in the long term there is an extreme amount of growth predicted. Media coverage promoting sports, well being, healthy lifestyles, sponsorships also artificially increase the industries growth in the short term attracting younger audiences which means there will be a long-term and most likely sustainable market for the industry.

Moving beyond the positive contemporary issues are the negative socio-cultural effects of childhood obesity and time poor both affecting the growth dramatically; possible younger target markets will not sustain industry growth as the industry will not appeal to their needs or wants. Other influences upon the socio-cultural aspects such as peer pressure, fads and ‘coolness’ factors also will affect the industry’s growth, however this is expected to be more short term as a majority of these affects target younger generations and upon maturity many of these issues are negligible.

Technological:Representing a strong positive influence the technical aspects of the macro-environment on the industry brings issues such as increased efficiency of; production methods and systems, materials and compounds, energy and Supply Chain Management (SCM). All of these aspects allows for the industry to ultimate cut costs and provide better quality, design and suited products to selected target markets and essentially producing more profits further sustaining the growth of the industry. These go hand in hand with socio-cultural and environmental attributes that means if such an macro-environment can supply this to the industry then the industry itself can benefit from these and ensure continual growth. Organizations are also adopting in a proactive measure similarly to Governments to reduce health cover overheads by installing gyms into basements of offices and increasing health awareness campaigns.

Despite such technological improvements bringing a wealth of positive promotions to industry growth, employee redundancy may seem to be an issue as many mechanized tasks take the role of their human counterparts. Such redundant situations however are strongly negated due to the growth of the industry and the requirement for more staff to manage and oversee the entire process.

Environmental:Environmental issues have greatly affected the modern macro-environment for many industries negatively overall, having a great impact upon the financial areas such as profit decreases for green and carbon compliance schemes deployed by Governments. Such environmental issues relating to the industry are set to be extremely long term and most likely permanent having a sustained long term negative effect on industry growth. Costs of resources are also set to rise as common resources such as oil continually rise and increase wholesale and supplier costs to industries minimizing the potential profit and growth felt by associated organizations. Increased attention by Governments and publics have meant that industries require to be more innovative in retrospect creating green, clean and pollution free products usually of organic origin and utilizing energy efficient manufacturing techniques. Implementing such actions however have meant that the industry is much more sustainable long term by utilizing renewable resources and producing friendlier products.

By far the most influential aspect of the macro-analysis has been the economic and social issues that are present in today’s world. However it is worth noting that a variety of the negative connotations associated with the economic analysis are only short-term and are predicated to last no more than 3 years. Overall the outlook for the industry is generally positive with much growth to be had within the long term, and this is aided by the sustainable influence that the environment and Governments have made mandatory in many countries of the world. Short-term the industry is not expected to see a large growth, in fact it will most likely remain steady and in the long-term it will see a post-maturity increase in growth.

Industry-Environment Analysis SummaryIn order to analyse the Industry Environment Porters five forces model was applied in conjunction with the details of Appendix 2. Based on the finding of the analysis the profitability of the industry can be determined and a clearer understanding of the forces in the industry are gained. Estimations can be made with consideration attributed from Porters five forces to determine what strategic factors should be made by an organisation if they are to remain competitive and have a sustainable strategy. Along with sustainable strategy the discover of how hard it is to get into the industry, how suppliers affect the industry, and what the overall complexities in the industry are discovered.

Porter suggests that Men’s and Boys Clothing, which is assumed to include shoes as well, has an average industry profit margin of 19.5% compared to average industry average of 14.9% (Porter, 2008). This shows strong promising profit margins for organisations in this industry, it should also be noted New Balance has diversified into the lifestyle and clothing industries to include sports clothing.

Threats of New Entrants (Barriers):Threat of new entrants in this segment of the industry are rather low to moderate at best in terms of threats compared to many other attributes affecting the industry. The primary reason for such a low-moderate threat is the amount of organizational preparedness required to startup, this is mainly attributed to the economies of scale and initial startup monetary support to create logistic supply and supplier networks. Another factor to consider of low threat is absolute cost advantages with current competitors such as Nike, Adidas and Puma having a large degree of acquisitions and mergers controlling and dictating a large degree of costs within the industry, including a large degree of the retail segment costs. This by no means suggests that forward integration is possible or an external competitor in a semi-related industry could move in, it simply expresses that for a new entrant to come in there is an extremely large amount of factors to consider. If a new entrant does express interest there is also a large degree of expected retaliation from current players within the industry exhibiting price cut offers or other promotional activities to ensure that securing a target market and securing the market is difficult.

Bargaining Powers of Suppliers:Difficult to discuss the bargaining power of suppliers is a complicated issue as a large degree of factors are deterministic upon the type of organization involved within the industry. However the fact cannot be ignored that it generally poses a medium threat and indeed the size alone of many manufacturers or suppliers within the industry can rival that of the very organizations they supply, giving a severe advantage to suppliers in terms of forward integration into the industry. To a degree the differentiation of inputs is not entirely important however it does pose a medium threat for those organizations that require certain components to be used in the manufacturing process. There is however a large supplier concentration and large volume, especially in developing countries such as China and Brazil with heavy focus on textile and clothing industries. For these reasons the substitutes available to the industry are great thus alleviating many of the potential bargaining power of suppliers to be quite minimal. Potentially the greatest threat to the industry is that of forward integration from suppliers as they do maintain similar distribution networks and supply chain management characteristics.

Bargaining Powers of Customers:Due to the large amount of competitors within the industry having an extremely like demographic of a target market the threat to the industry and industry competitors is quite high. Buyers within this industry have a medium-high degree of power over suppliers and manufacturers due to the somewhat medium supply of outputs combined with a high amount of substitutes with low switching costs. Focusing upon these offerings we can express the industry does exhibit a high degree of outputs originating from a variety of sources and covering the entire public market range from low cost to prestigious high cost luxury goods, coupled with the modest amount of buyer concentration the industry does now have power in this circumstance. The industry itself also have a variety of differing outputs whilst organizations such as New Balance are said to be a niche player with generally more expensive products than their counterparts; players such as Nike and Adidas-Reebok have the power to contend and again for this reason the customer has the ability to select from a variety of competitors different substitutes. However that being said, brand and brand appeal is extremely strong within this industry and even if a customer has a large selection of different outputs they still may be attracted to a certain brand and opt for this regardless of the output attributes (cost, quality, size).

Threats of Substitutes:Maintaining itself as the strongest threat to the industry the threat of substitutes is incredibly high and has the ability to affect the industry the most profoundly out of all of Porters five forces. There is a huge array of substitute products within the industry including those offered by competitors such as Nike, Adidas-Reebok, Asics, New Balance and Puma all exhibiting the abilities to produce products that can compete for the same target market segments. Within the industry currently there are already a large amount of alternative products to choose from exhibiting differences in cost, availability, materials, quality and convenience. Externally to the shoe industry are also other industries such as things and slippers which also can compete for the same target market even though the product presents vastly different concepts of what they are designed for. For this matter it can still be argued that it is entirely dependent upon the use of the product, however given whatever the use of the product is within the shoe industry there is a vast amount of substitutes with little or no switching costs involved to obtain. Propensity of buyers to switch to alternative substitutes is also extremely high as generally brands do not make a difference as all represent very similar concepts in a relatively uniform field. Examining further the link between the socio-cultural and substitute attributes it can be noted that the mind of the target market can have a large effect on the substitute of success due to a brand name even if the alternative is of superior quality. Therefore the threat of substitutes within the industry is an extremely high property of importance that can affect the growth of the given industry.

Rivalry amongst Competitors:Intensity of rivalry amongst competitors is rated a medium level property that may affect the growth within the industry. The degree to which the rivalry ranges is proportional almost to that of current economic conditions where the potential target market decreases in size the rivalry will increase where as in times of growth the ferocity will decrease. There is a steadily increasing industry growth rate however competitors within the industry are strongly fixated on securing more market coverage. To a reasonable extend this property links with the demographic, socio-cultural and substitute issues explored previously. Indeed there is growth within the market of about 3% for companies such as Nike however as the GFC is prolonged this steady increase may flat line introducing potentially fierce competition and affecting the longevity of the industry severely.

Executing a strategy effectively within this industry is extremely difficult as there are a plethora of alternative substitutes, competitors and products to choose from and this includes external industries as well. Indeed it is noted that suppliers do have a moderate power within this industry but none is greater than that of the buyer and customers presenting the strongest threat to the industry, this also includes the everyday public, specialist retailers and large discount outlet stores. Currently it is difficult to express the stage of growth within the industry due to the GFC however it could be said that the industry since the 1980’s and early 1990’s has reached a maturity stage and now is requiring additional innovation to preserve the increased growth of sales rates, indeed if the GFC does continue then there will be a rapid increase in rivalry.

Internal Analysis SummaryExamining the issue of immediate attention we recognize that New Balance is amongst the top competitors worldwide with average sales topping more than US $1 billion, in 2004 the company saw a US $1.5 billion of sales, likewise in 2005 US %1.54 billion, 2006 US $1.55 billion, and in 2007 US $1.63 billion (New Balance, 2009). Respectively these sales figures saw on average saw a 2.6% rise in 2005, 3% rise in 2006 and a 8% rise in 2007 respectively to that of 2004 signifying that indeed steady economic growth is within New Balance. Competitors such as Nike saw the supportively similar growth within the same period from 2004 to 2007 with a 18% increase in global sales (SEC, 2008). Where New Balance is at an advantage since it does not diversify as much in terms of product scope and target market it does not require the extensive amount of research and development that Nike invests in across its entire range. It is exhibited that the current performance of New Balance is positive although slightly lower than that of the most stronger competitor globally, it does have the lowest employee count of all current major competitors (Thompson, 2008).

Tangible Resources:Extracting the key results from Appendix 3 it is demonstrated that New Balance posses a wide range of physical resources that it has at its disposal; namely plants, logistic distribution channels, exceptional management, innovative manufacturing processes, solid supply chain management and family oriented owners to name a few. All of these factors contribute strongly towards the organisations core competencies that enables it to maintain a strong strategic vision for continual success. It is noteworthy that without many of these physical resources the competitive advantages that New Balance expresses would not be possible. The acquisition of many of these physical attributes have been proactive moves by New Balance to ensure that future demand will be met efficiently by manufacturing and effectively by delivering on time through an arrangement of logistic networks, such networks expanding as far as the Asia-Pacific region.

Organizational infrastructure has also been continually optimized by New Balances impressive management hierarchy. Specifically the introduction of the New Balance Executional Excellence (NB2E) processes similar to that of the Toyota production methods have been adopted and most profoundly it appears that New Balance is taking on a Toyota like stance within the industry focusing particularly on quality with their products and management methodologies. Manufacturing is also consistently being recreated to deliver the most efficient and effective techniques at production of various concerns of New Balance, particular methods such as cut-through manufacturing processes. These improved processes have meant that New Balance is able to deliver better quality products, more cheaper and efficiently than it would have done so in the past.

Financially New Balance has quite a wealth of resources to support itself. It represents an extremely strong balance sheet with a ratio of 7:1 expressing that it is extremely liquid and has minimal finances involved with debts as it is able to repay its debtors quickly (Thompson, 2008). It also has amongst the highest sales in the USA and globally. Unlike many other organizations its size it is a privately owned entity signifying that if it requires additional capital it cannot seek public investors to support its ventures. Such financial properties give New Balance an unrivalled amount of flexibility and responsiveness that many large organizations of its nature are unable to do giving it an unmatchable competency over its financial successors.

Technological factors are one of New Balance’s most advantageous resources that it posses. Manufacturing processes is perhaps the most refined resource that New Balance maintains however could also be seen as its greatest downfall as if another company produces something equal or better then a huge portion of its competitive resource capabilities are reduced. Amongst other competitors such as Nike, and Adidas who have opted for an entirely outsourced manufacturing approach, New Balance possesses the capabilities to design and manufacture its own goods entirely giving complete control, security, quality and scalability of its abilities. New Balance also presents strong innovation and development with large amounts of its human resources devoted to improving these competitive advantages.

Intangible Resources:Human Resources (HR) within New Balance is also rated equally to that of its renowned manufacturing process. Extremely good worker rapport between many departments of New Balance is exhibited with consistent methodology across all departments supported by its rigorous training regime installed for any new employee in the organization. The workforce is also completely unionized allowing transplantation of worker skills entirely throughout the organization eliminating many of the overheads that common organizations incur from unproductive employees. Long relationships such as 15 years between sales managers also reinforce the organizations strong worker rapport and rewarding employee experience.

Such capabilities presented has meant that the reputation over time of New Balance has increased dramatically. Quality and performance of the organization is well known in the industry and in the public view strengthening the brand further. The organization has also artificially increased its positive public image by having ‘no sponsorship’ policies and considerable charity donations. Furthermore the organization is family owned where perhaps many of the values and ethics the company portrays are derived from.

Amongst all aspects is again one of New Balance’s core capabilities which is its innovation. New Balances innovative spirit has been exhibited strongly throughout its physical implementations of its manufacturing processes right through to its soft skilled management infrastructure. Product design also benefits greatly from this capability. Another competitive aspect is the ability for the organization to have an extremely good rapport with knowledge management and human resources with workers now suggesting how they can contribute to the company’s success. New Balance has not only been able to manage the physical asset it controls but also the employee expectations to make them feel rewarded for the work they do thus creating a strong community and culture within the organization further reinforcing the core capabilities of the organization.

Gap and Current Strategy AnalysisMacro Environment:Major trends in the Macro-Environment mainly evolve from socio-cultural needs and wants, primarily what is seen to be ‘cool’ by younger generations and what is ‘fashionable’ by older generations. Other trends include the amount of finances available subject to discretionary spending by the target market if the product is seen to be a non-essential item.