Internal Analysis Current Mission Reebok?s mission is to offer a high quality line of sports products and fitness apparel and accessories.
Goals and Objectives Reebok?s objectives, in line with its mission, can be classified into seven areas : i. To increase market share of which it has lost in the past year.
ii. To re-establish the Reebok product with customers.
iii. To increase efficiencies in the near future.
iv. To manage inventories during this period of so called ?customer revolt?.
v. To globally restructure activities and manage the current product glut in the market.
vi. To increase sales and profits.
vii. To regain the number one market share position.
Performance Reebok?s gross margin declined from 38.4% in 1996 to 37.0% in 1997. Margins had been negatively impacted by both start up costs and initially higher manufacturing costs on the companys new technology products. Sales had also been impacted in the first quarter of 1998 due primarily to the foreign exchange effect of the strong US dollar.
In this respect, sales were down 5.4% from the same period last year. Reebok was also losing market share to Nike and had its amrekt share eroded from 20.6% in 1993 to 16.0% in 1997. Sales were also flat from 1995 through 1997. Although the company has good positive cash flow, there are severe pressures on its business and Reebok is facing many financial challenges in the area os revenue growth and net margins.
Corporate Level Strategies Growth Strategy ? In the late 1980s, after 5 years of phenomenal growth, made aggressive expansion plans to pursue oversea markets and achieve an objective of 50% sales internationally. By 1997, Reebok?s products were available in 140 countries and about 45.1% from total sales were generated from international sales. Throughout this period Reebok continued to solidify its presence overseas by setting up manufacturing facilities and vendor bases in a variety of international locations including China, Philippines, India, Taiwan, Thailand and other lower labor wage rate nations.
Horizontal Integration and Concentric Diversification ? Beginning in 1986, Reebok pursued a strategy of line extensions and acquisitions. Reebok moved from just an atheletic shoe company to one which manufactured casual or ?brown shoes? with the acquisition of Rockport Company. Under the Rockport division, Reebok set-up the Ralph Lauren line which was acquired in 1996. This line showcased mens?s English dress shoes as well as man?s and women?s refined casual shoes. The company?s Greg Norman division produced a collection of apparel and sccessories marketed under the Greg Norman name and logo. This division had grown from just a golf apparel line to the broader line of men?s casual sportswear. Reebok?s strategy is to challenge the men?s super brands. In 1997, Reebok continued its promotional efforts into the fitness area. Through an agreement with Channel One Communications, and its 24 hour cable network Fit-TV, Reebok started to air its fit ness program ?P.E?. Reebok had also developed numerious fitness programs such as its ?Versa-Training, Walk Reebok and Reebok Flexible Strength? programs.
Competitive Strategy Marketing Strategy ? One of Reebok?s forte is its variety of marketing strategies. Reebok employs a multi-brand, multi-customer target strategy. Its besides its flagship brand, its Rockport, Ralph Lauren and Greg Norman brand market products that appeal to a wide variety of age groups. Reebok also emphasizes its quality and value for its products throughout its marketing campaign. Reebok also is known for its first to market strategy. With its employment of technology to come up with creative and useful products, Reebok?s marketing strategy to be first to market has allowed it to win market share from 1981.
The company had sought to increase Reebok?s on-field presence and establish itself as an authentic sports brand. Through such efforts, Reebok gained increased visibility through worldwide endorsements with prominent athletes as well as sponsoring various sporting events most notably the upcoming 2000 Olympics in which Reebok has been designated the official footwear and apparel sponsor. In 1997 Rockport introduced an integrated marketing campaign using the directive, ?Be Comfortable, Uncompromise, Start with your Feet?. Reebok devoted significant resources to advertising, print and media, as described earlier it also used its significant relationship with major sports figures to enhance its image. It had endorsements with well known sports figures such as Shaquile O? Neal, Shawn Kemp, Emmitt Smith, Mark McGwuire as well as purchased the rights to produce and market uniforms, and apparel, for the NFL, worldwide soccer leagues and other sport leagues. Reebok has also embarked on its ?Try on the future? campaign in which vans and kiosk are being used to take the products to the consumers. The premise is that when consumers try on the product, they will be much more likely to buy the product.
Technology Strategy ? Reebok placed strong emphasis on its research and development. It wanted the consumer to know the quality and value of the product and not the hype which surrounded the industry. Reebok constantly came up wth proprietary technologies from the DMX technology which provided superb cushioning using a 2 pod systems that would allow air to flow from heel to forefoot. This later culminated in 1997 with the DMX 10 which used a 10 pod system. Its 3D Ultralite technology was Reebok?s answer to a lightweight performance shoe that was formed from a 1 piece injection molded midsole and outsole. Reebok also invented Hexalie, a honeycombed shaped material which provided stability and cushioning in many of its shoes. Reebok also used its Hydromove technology in its apparel products. The invention allows the apparel to keep the athlete warm during cold weather and dry and cool during hot weather.
Develop New Products for the ?Y? Generation Strategy ? A new change is underway, consumers appear to be moving away from tough, in-your-face urban culture to a more clean-cut, all American style. Upscale, casual lifestyle brands are surging. Sleek running shoes are back in vogue and classic styles have re-emerged. Outdoor and adventure shoes are hot as are cheaper shoes which were simpler colors and design. Reebok is pursuing this market with the multiple brand strategy in Rockport, Ralph Lauren Footwear and Greg Norman lines. This ?Y? generation movement to ?brown shoes? and fashionable sportswear is placing Reebok in good stead for the FY1998 - FY1999 period. It is using the DMX and 3D Ultralite product in more of its products and recognizes that it needs to conform to the designs for the skateboarders, stunt bikers and the like.
Reduce Costs and Manage Inventories Strategy ? Reebok has begun to look into how it can manage inventory and credit better, have improved customer service and reduce general and administrative type expenses. Reebok is currently undertaking global restructuring activities designed to achieve operating efficiencies, improve logistics and reduce expenses. Reebok is also in the process of eliminating or restructuring certain under-performing marketing contracts.
Functional Analysis A SWOT analysis is detailed in the appendix. In this section the various functional areas are analyzed and the various aspects of the SWOT are recalled and explained in the appropriate areas.
Marketing ? Reebok has a very strong marketing program. Its multiple brand and muliple customer target strategy is a strong feature of its brand equity. Its many campaigns on team and sport sponsorship has given Reebok high quality visibility throughout the world. Its strong presence has made it a household name in virtually every country visited in the world today.
Of important mention is the strategic campaigns it has undertaken with well known sports athletes such as Shaquille O? Neal, Emmitt Smith, Dennis Bergkamp, Venus Williams and other sport icons. Its technological edge has also given it a string marketing angle. That of differentiation. Its marketing emphasis on the quality, usability and value of its shoe as a stand alone product is a strong sales pitch. Reebok spends a significant amount of money on its promotion campaigns and its ultimate sponsorship of the upcoming 2000 Olympic games in Sydney has clinched it the honor of being the official footwear and apparel of many national Olympic teams participating in the games. Reebok distributed its goods through retail stores throughout the US as well as 150 factory direct stores, including Reebok, Rockport and Greg Norman stores. Internationally, it distributed its products through wholly and majority owned subsidiaries all over the world, including 29 distributors and joint ventures. The company is present in 170 countries and territories.
Financial ? The company?s sales had been flat from 1995 through 1997, it was losing market share to Nike and had its market share eroded from 20.6% in 1993 to 16.0% in 1997. Its 1997 restructuring charges and high interest expense as a result of debt taken on to finance the stock repurchase hurt its net income significantly. In this regard, profit margin were 3.71% in 1997 while it was 3.99% in 1996. In effect from 1994 onwards net income had been falling consistently. While the industry net income also took a big hit in 1997, it did grow from 6.14% in 1995 to 7.05% in 1996. The effect on net income and sales was particularly profound when considered against the backdrop of the change in valuation of the US dollar. In effect the strengthening of the dollar had caused a disproportionate impact on Reebok?s bottom line due to the significant contribution foreign sales had on its net revenue.
With respect to the liquidity ratios, Reebok had superior Current and Quick rations when compared to the industry. It however had very disturbing debt and debt to equity ratios. Its debt to equity ratio was nearly 247% in 1997 and was in the 368% range in 1996. This was very different from industry measurements where the pooled industry data showed that in 1996 D/E was about 105% in 1996 and 99.6% in 1997. In line with this trend, Reebok?s debt ratio was 71.12% in 1997 while the industry showed a debt ratio of 49.9%. This clearly shows that Reebok is in an over leveraged position and may need to reconcile its debt situation very quickly. While still a positive cash flow company, there are severe pressures on its business and Reebok is facing many financial challenges in the area of debt control, revenue growth and net margins.
Production/Operations ? The manufacturing of its product is a very labor intensive process, in order to be competitive, Reebok is forced t have many of its production facilities in low wage paying countries. For this reason, it has operations in China, Taiwan, Indonesia, Thailand, India and the Philippines, apart from others. Due to the child labor and human rights publicity surrounding labor in this industry, Reebok has instituted strict human right production standards in its international operations. Reebok is currently embarking on a restructuring program to reduced the number of European warehouse operations from 19 to 3, establishing a shared services company to centralize European administrative services and implement a global management information system.. It is hope that this effort will allow it to reduce costs by achieving more operational efficiencies.
Technology ? One of Reebok significant strengths is the investment it make in research and development to develop proprietary technologies. Reebok?s successes in DMX and DMX 10 technology provided the competitive edge it needed to showcase a more comfortable and supportive athletic shoe by using airflow technology. Its lightweight running, walking and fitness shoes were made possible by the invention of the 3D Ultralite which made use of injection molding the mid and out soles in a one piece mould. The Hydromove technology was used in many of its sports apparel, this technology allowed moisture management to keep the athlete warn during cold weather and cool during hot climates. Reebok has affirmed its position as a quality footwear and apparel supplier and not just the hype that goes with the industry.
Organizational ? Paul Fireman is Chairman and CEO of Reebok. In the past, Fireman has been criticized for micro managing and has been said to have a problem in delegating tasks. This is claimed to have caused management turnover. It is quite disturbing to note that executive compensation continued to increased, from 1995 through 1997, despite the fact that sales were flat and net margins were decreasing. In 1995 both joint presidents resigned triggering an institutional sell off of Reebok?s shares.
Analysis of the External Environment A Porter?s five force model was used to analyze the industry and the factors that affect Reebok?s industry. In this section, I will touch on the key forces that affect both the competitive and general environment.
Competitive Environment There is significant internal rivalry in Reebok?s industry. The Oligopolistic industry is showing with signs of overcapacity and a definite change in consumer taste. A trademark of retail Oligopolies is the intense pricing and marketing competition. Reebok make good use of its technology to differentiate its product and emphasizes that its markets a quality product that has value. This differentiation takes the form of many features such as comfort, lightweight, support, methods for securing the shoe etc. While this is important, other players similarly invent similar type products in their R&D efforts and keep the competition healthy. Players also attempt to differentiate their products through endorsements of renowned athletes in which the subliminal message relayed is that, buying the footwear associates the consumer with the endorser. Since switching costs between one brand to another is virtually non-existent, pricing is intense. In this regard, many producers have moved their production off shore to lower wage paying countries in order to be competitive. Since labor is non-unionized and majority of which comes from third world countries, the power of labor as a supplier is generally weak. However, since the players rely on one or two sources of supply for some of the components that go into the products, these suppliers may be able to have a stronger bargaining position if they desire to do so. This may extract profits from the players in the industry. In addition, the maturing industry and the shift in market demand has caused the industry to cope with inventories and rejuvenation of lines in tandem with market demand.
Reebok has been losing market share to Nike, its number one competitor. Key success factors for Reebok to regain market share is how accurately it can align its new products with the market taste, innovative marketing techniques, value proposition with the consumer using its new proprietary products and its cost reduction efforts.
General Environment Reebok's net sales and profit margins were severely impacted as a result of the Asian Crisis in 1997. Although, Asian currency devaluation meant that labor costs in the countries where its products were produced, it also meant that due to tougher times in Asia, Reebok lost many of its customers during this period. Moreover, the stronger US dollar now meant that net revenues and margins were significantly diminished when foreign exchange conversions took place.
However the US economy is very strong and economists expect another stellar year with the technology sector leading the way. The two family income will bring about greater disposable dollars for purchases of more expensive shoes where quality will be emphasized. This trend bodes well for Reebok and the industry leaders.
The industry requires labor intensive process for manufacturing its products. This is why the majority of the players have resorted to having their manufacturing operations in lower wage paying countries such as India, Pakistan, China, Thailand, Philippines and the like. Over the past year, several western countries have voiced growing concern about the issue of human rights and cheap labor. Many players in the industry have been somewhat impacted by the negative press this has produced on the industry.
The US and EU have also resorted to threatening countries like China with higher tariffs on imports of footwear due to concerns over trade policies, foreign weapon sales practices and human rights issues. The EU has, in 1994, imposed quotas on certain footwear from China. In addition, the EU also imposed antidumping duties against certain textiled fotwear from China and Indonesia. Various other countries had taken or were considering steps to restrict footwear imports or impose additional custom duties which may have a variety of impact on Reebok's industry.
Critical Issues The detailed SWOT analysis is included in the appendix. The SWOT table reveals that Reebok does have a strong and internationally renowned company. However, it is clear that the current times are tough ones for Reebok. There are several weakness and threats that loom over the company as it undergoes its restructuring process. Here I will delineate what I believe are the critical issues facing Reebok today.
Critical Issue # 1 Loss in market share.
Reebok has consistently loss market share, not only to Nike, but to the rest of the players. In 1993, Reebok controlled 20.6% of the market, while in 1997 Reebok?s share had diminished to 16.0% in 1997 Critical Issue # 2 : Flat sales and decreasing profits for the last 4 years.
Reebok has had flat sales from 1994 where sales have languished in the $3.4 billion range. More alarmingly, net profits have had sequential decline from 7.8% in 1994 to 3.7% in 1997.
Critical Issue # 3 : Reebok has a highly leverage position In 1996 Reebok?s debt to equity position was a staggering 368% and that only went down to 247% in 1997. the industry recorded a 1997 debt to equity ratio of 99%. Clearly it has taken on an overly large sum of debt which can be traced to the large amount of money need to purchase its own stock which occurred in 1996. The sum of approximately $612 million was used to purchase 17 million shares at $36.00 each. The company is still burdened with this debt today despite its high positive cash inflow.
Available Alternative Strategies Alternative Corporate Level Strategies Developing Products for Generation ?Y? Strategy ? Reebok?s current plans to develop new lines for a changing consumer demand is a good strategy. However, it is unclear which types of footwear this new breed of consumers wants. While there are indications that casual, upscale brands are surging, so are there indications that sleek running shoes, outdoor and adventure shoes and classic styles have re-emerged. Reebok may want to look at a more imbalance parenting strategy whereby a determination of which type of shoes have the greatest market potential. Reebok can then consider placing greater resources and emphasis into producing greater quantities and types of these products in its aggressive campaigns worldwide. On the other hand such a strategy may not be totally full proof as the market may shift again to a type of shoe that Reebok has placed less resources on.
Downsizing Strategy ? Reebok may also want to consider some consolidation to markets where it has the greatest market share. Such a strategy will allow Reebok to strengthen its market position in nations where Reebok products outsell its competitors. In this way Reebok can then concentrate its valuable marketing resources in countries where it is already in the lead, in an effort to further solidify its position. Such a strategy may allow Reebok to improve its financial position in the short term. This will then place it in good stead to once again move into the other nations where its competitors are stronger.
The drawback to such a strategy is that Reebok may lose more market share to its main rival Nike. It may also place Reebok in too much of a disadvantage later on should Reebok intend to once again move into the markets it relinquished earlier.
Hedging Strategy ? Reebok may want to consider hedging the foreign currency that it has in its international operations and subsidiaries. This strategy can help Reebok mitigate the fluctuations of both the US and foreign currencies in which Reebok?s bottom line is so sensitively dependent. Hedging will likely flatten or smoothen out earnings. The drawback of such a strategy is that Reebok may lose much bigger gains of foreign currencies strengthen against the US dollar.
Available Competitive Level Strategies Technology Implementation Strategy ? In line with developing the types of product that Generation ?Y? wants, Reebok may also want to look at how it can implement its proprietary technologies into more than just its athletic type footwear and apparel. Since a major growth market that has been identified is the ?brown shoe? and casual type footwear, the DMX and Hexalite technologies may make a sensible implementation into this type of footwear as well. It would be logical to expect that consumers may also want to have good comfort for these casual wear shoes as well as having them made lighter to support a less strenuous walk. Reebok may also want to consider how its Hydromove technology can be implemented into higher end Ralph Lauren type apparel and possibly accessories. Its climate control type features would make this type of fabric an excellent implementation for any type of shirt. This material may also be very useful in thermal type accessories such as coolers or thermal mugs. This strategy has certain drawbacks. Primarily, it does not take into account the type of pricing that may be involved to implement such a strategy into other types of footwear, apparel and accessories. It may effectively price the products out of a competitive price range in the market.
Marketing Strategy ? Reebok may want to focus its marketing effort by carefully monitoring Nike and beating them by playing their own game. Reebok may want to consider a more heightened presence in the US. It should look at endorsing the top caliber players in each sports field. For example, while its did not get Michael Jordan, it may want to look at the hot talent that are present in the NCAA today that are about to enter the draft. Reebok may want to align itself with these athletes so that, once they bloom to their full potential in the NBA or NFL, Reebok can cash in on their endorsements. This should be done likewise for the international arena in soccer, golf, rugby, swimming etc. Reebok should also look at its advertising campaigns and may want to consider changing advertising firms. Reebok should look into revitalizing its advertisements it should consider advertising manager that can lead Reebok to a new bolder, fresher set of advertisements, both here and around the world.
Recommendations and Implementations Corporate Level My recommendation is for Reebok to properly assess this shift in market taste and find out with some precise measure what types of products are really in demand. In this way by directing the resources to produce products that are in demand both locally and internationally, Reebok will be able to increase sales and with the demand for its product on the rise, it can support a higher price so that its declining margin trend can be arrested. Reebok should support a quick market research study by use of questionnaire and generation ?y? focus groups to understand the trends being set by the consumers today. A team of creative designers, technology representatives and program managers should be set-up to support this effort. Based on the feedback, Reebok should then design a few prototype ideas in the categories of footwear and apparel and again convene focus groups to test out the prototypes. With clear results in hand, Reebok should then disseminate its findings to its creative designers, technology implementers and marketing managers to start developing lines of product that match the current demand. By producing and placing the correct products in the correct markets, Reebok can then align resources to be more efficient and also charge a higher price for a product in demand. The higher margins attained will allow it to generate the needed cash flow to pay back the debts created by the financing taken out in 1996.
I would also recommend that Reebok set up a hedging department in its Corporate Finance. These professionals should come from hedge funds and foreign exchange market specialist. The task of this department will be to be in constant contact with Reebok?s financial managers internationally and get a grasp of the amount of money and types of currency that Reebok holds at any one time. This department will then be responsible for hedging the money to ensure that the day to day fluctuations of the various international currency will not cause undue damage to Reebok?s net sales and profit margins. By controlling this variable of the equation, Reebok will be able to concentrate on its other efforts to support a healthy growth back to an upward moving revenue and profit margin picture.
The above corporate level recommendations addresses critical issues number 1,2 and 3.
Competitive Level On the competitive front, Reebok should employ a combination of technology and marketing This competitive recommendation addresses critical issues number 1, 2 and 3.
APPENDIX SWOT Analysis In the SWOT analysis, a Reebok perspective is used to look within and without the company.
Strengths i. Reebok has a worldwide reputation and thus has a strong and recognizable brand image.
ii. Its R&D produced Proprietary Technologies such as DMX, Hexalite and Hydromove.
iii. Its Multiple-Brand and Spectrum of Products appeal to a wide range of consumers.
iv. It produces a quality product.
v. International presence and appeal.
vi. Strong marketing campaigns in a variety of platforms and sports.
Weaknesses i. Losing market share.
ii. Loss in profits.
iii. Highly over leveraged position with 247% debt to equity in 1997.
iv. Paul Fireman?s management.
v. Has only one or two sources of supply for some of its raw materials.
Opportunities i. Shifting consumer preference for quality shoes are returning. Sleek running shoes are in vogue. Classic styles have re-emerged, outdoor adventure shoes are hot as are many alternative sports products.
ii. Strong US economy.
iii. Labor rates in the countries of manufacture are cheaper due to the strength of the US dollar.
Threats i. Worldwide product glut.
ii. Human Rights issue is big in politics at the moment.
iii. Strong US dollar causes sales and profits to be negatively skewed.
iv. Importing of footwear from China have been threatened with higher tariffs.
v. European Union imposing quotas on the footwear industry.
vi. Protectionistic actions by other countries in terms of quota for footwear and apparel imports.
vii. Threat of production interference and halt due to political instability and labor unrest in the countries manufacturing Reebok?s products.
Porter's 5 Forces Analysis Internal Rivalry (HIGH) Reebok International Ltd. is a global company engaged primarily in the design and marketing of sports and fitness products, including footwear and apparel, as well as the design and marketing of footwear and apparel for non-athletic casual use. The industry is an Oligopoly with about 8 major players and several smaller competitors. The players include, Nike, Adidas, Fila, Converse, New Balance, Airwalk and Keds. There is intense pricing and marketing competition. The athletic shoe wear industry is unique in that it is market driven instead of product driven. Markets have to be created and so do demand for the products. The industry is virtually controlled by fads, which are nearly impossible to predict. The athletic shoe industry must be able to quickly react to new market demands, and quickly develop product variations that will "satisfy fad-hungry customers". Furthermore, the characteristics of the shoe-business can be identified with the entertainment industry, where the products have short-life cycles, and success depends on the fact that what is flashy and "hot" will sell. Today's athletic shoe market is a mixture between fashion and technology. Some competitive distinction has to be created together with a fashionable image.
Players in the industry attempt to differentiate their products through the attachment of endorsements of renowned athletes in which the subliminal message is that buying the footwear associate the consumer with the endorser. Players also differentiate through the use of many features such as comfort, lightweight, support, methods for securing the shoe etc. In many of these cases genuine technological breakthroughs in the materials are made and this is leveraged to the fullest. Since switching costs betweenone brand to another is virtually non-existent, pricing is intense. In this regard, many producers have moved their production off shore to lower wage paying countries in order to be competitive. In addition, the maturing industry has resulted in the competitors being more savvy in their marketing efforts. The industry has recently faced an overcapacity situation with consumers changing their taste for the types of shoes and apparel that they are interested in. This shift in market demand has caused the industry to cope with inventories and rejuvenation of lines in tandem with market demand.
Potential Threat of New Entrants (WEAK) The threat of new entrants into the industry is low. The entrance barriers are high in that the capital requirements are high due to up-front advertising, research and development. Also, economies of scale in production will be difficult to reach due to the difficulties of penetrating the market which is dominated by the large and niche players such as; Nike, Reebok, Coverse, LA Gear, and Stride-Rite. Furthermore, it will be almost impossible to achieve product differentiation in terms of brand identification and product difference, since the larger players set the trends. Also, distribution channels, and dealers are in many cases tied-up by existing competitors.
Substitutes (WEAK) The threat of substitute products is low. The industry is upgrading the products frequently to cope with flashy fads and the "hottest" fashion. With respect to athletic shoes, there are not too many close substitute products. What else would you wear when you run? In the case of apparel, there are other substitutes to athletic or casual sportswear in the form of formal or dress wear. However, its substitution viability is weak.
Power of Buyers (WEAK) Power of buyers are generally low. Since the industry not only covers many types of athletic and casual shoes, the lack of a viable substitute will force consumers to look within the industry. Even though switching costs from one brand to another is low, the alternatives to the players in the industry are limited to dress or formal type wear which is not practical for most consumers daily use.
Power of Suppliers (MODERATE) Since labor is non-unionized and majority of which come from third world countries, the power of labor as a supplier is generally weak. However, since the players rely on one or two sources of supply for some of the components that go into the products, these suppliers may be able to have a stronger bargaining position if they desire to do so. This may extract profits from the players in the industry.