Power of Organizational Mechanisms – through a study on Adidas/Reebok PMI

March 20, 2013 Group 8Sec D

Key Takeaways Importance of Formal Mechanisms in an organizationto

implement strategic intent

Also, we look at: Value based leadership and its positive impact Importance of stakeholders during decision making Impact of a decision on organization based on the impact of

stakeholders

Agenda

Adidas & Reebok Background

Context for acquisition

Problems in acquisition

Steps taken – Learnings

Post Merger Performance

Analysis

Conclusion

AdidasFounded in 1926

World leader in soccer shoes

#2 behind Nike worldwide - #4 in the US

Three acquisitions before Reebok:Company Sports Inc in 1993 Salomon in 1997 Arc'Teryxin 2002

Culture of control, engineering, and production

ReebokFounded in 1895

First athletic shoe for woman

#2 in US - #4 in Europe

Unique portfolio of long term league licenses

Creative marketing-driven culture

Context for Acquisition Industry factors

Organizational factors at Adidas

Organizational factors at Reebok

Industry Factors

Source: http://www.global-production.com/footwear/trendstudy/index.htm

• The market was slowing down in 2004 as a result of slight economic slump

US Footwear Market

Other Industry FactorsRetail rationalization is important

Global supply chains i.e. manufacturing hubs at several locations would give better margins

Endorsements with sports clubs, events etc are important to earn customer base

Adidas Specific factorsAdidas- Salomon failure

Access to U.S. markets with a local brand and retail chain

Reebok Specific factorsStruggling to remain in number 2 in U.S.

market

Too many competitors coming up with cost leadership strategy

Strategic aims from the synergyFace their biggest competitor – Nike

Achieve economies of scale and scope by extending their global supply chains

Access to markets

Broader portfolio of products

Worldwide recognition through licenses

Enhanced R & D

Context in briefEconomic slowdown

Fierce competition at various segments

Aspiration to be No.1 at adidas

Nature of industry which demands Global footprint in retail Global supply chains Global recognition through endorsements of

sporting clubs, events etc

Result In the above Context top management of both

companies approved acquisition

Announcement was made on 31st Aug

Deal closed on January 2006

Price: $3.52 billion

Problems in AcquisitionDifferences in Culture

Employees fears about the following: Layoffs Major Relocation Career Growth

Customer Confusion about brand equity

Structural Complexity

Decision DilemmaHow to handle the integration process

smoothly

How to design a structure and processes that would create greater benefits than costs

Future of both the brands keeping customers in mind

Steps taken - LearningsCreation of Clean team

Communication Strategy with employees

Integration Mechanism

Strategies to drive uniform culture

New Structure

Creation of Clean teamAppointment of adidas managers at Reebok soon after the

deal

This team (Clean team) analysed top management at Reebok

This analysis aided decision making of top management

Clean team members were given strong targets by CEO to immediately leverage the potential of synergy

Learning: the integrative structures should be created from the day one to avoid unfortunate fireworks during merger

Communication StrategyHainer visited HQ and personally stated that it wouldn’t be

shifted

A new intranet site was created for employees to know about the acquisition process immediately

Hainer also stated that there would be no layoffs and adidas is planning to invest more in reebok

Videoconferences of CEOs of adidas and reebok are made available for download

Learning: Hainer’s value based leadership created a sense of belonging for reebok employees and the acquisition was received positively

Mechanisms for Interactive CommunicationEvery person involved in acquisition was asked to give his/her

expertise

Pulse check Surveys to understand feelings of employees about decisions taken The relevant sample was chosen at various hierarchies Each employee is given eight questions The survey was used to determine the overall pulse about the

integration process

BCG was appointed to hire candidates unbiasedly to potential positions

Mechanisms for Interactive CommunicationDedicated HR answers to interested employees about the

integration process

Global PEP (Performance Evaluation and Planning) was implemented

Results:

All this created a strong positive mood and a sense of belonging among employees at every level in the organization about the adidas group.

LearningHainer’s team did not stop at communication of ideas

They created strong mechanisms of interactive communication

If the employee morale failed, Reebok performance would have shattered and the underlying logic of acquisition would become meaningless

Integration ProcessEight “integration teams” were formed with adidas and

Reebok managers in a parity proportion

Teams reflected regional and functional structure of each company

Task is to develop blueprint about how to leverage the synergy

Verification of these blueprints with subteams at regional levels

A dedicated PMO to steer the implementation of approved blueprints

ResultManagers at various levels felt that they are involved in the

process of integration

This mechanism gave a sense of ownership and created sustainable business processes

The power of this mechanism is Integration process can be easily adopted as several subteams were involved

Learnings: A well designed process of Integration that involves its various stakeholders made the implementation very easy

Adoption of Unified Culture

Unified Mission: to be the leading sports brand in the world

Communication about culture: “Diversity is key to success”

Beyond communication, the following processes are adopted Strong communication mechanism through periodic pulse check

surveys Managers at adidas were relocated to reebok (ex: clean team) to

adopt the culture

Learning: Creation of an unified mission and implementing strong mechanisms helped adidas easily adopt its culture in reebok without deliberation

Restructured OrganizationKey Decisions:

With Customers in mind, brands were to remain independent Supply chains are united: To achieve economies of scale and

scope Retail chains are united: To gain access to markets Keep R & D separated: To design products that appeal to the

brand loyalists Sales & Marketing is separated: to competitively promote each

brand Integrated Marketing Dept: To clearly position the individual

brands without overlap

Learning:Corporate Umbrella makes sense only when the benefits from

synergy are greater than costs

Adidas would have easily lost to Nike if their R & D or Sales & Marketing are combined

Customer being an important stakeholder, his perception has significant influence on the design of organization

Redesigned OrganizationCEO & Chairman Adidas AG

Herbert Hainer

Global OperationsGlenn Bennett

FinanceRobin Stalker

President & CEO- Adidas

Erich Stamminger

R &D

Sales & Marketing

President & CEO - Reebok Paul Harrington

R & D

Sales & Marketing

Post Merger PerformanceFinancial Performance:

Sales revenue increases by 52 percent i.e. from € 6.636 billion in 2005 to € 10.084 billion

In 2006, representing the highest organic growth of the Adidas group within last eight years.

It was the first time in the group’s history that it crossed the benchmark of € 10 billion

Post Merger PerformanceEstablishing Global Footprint:

In 2005 sales from Asia contributed 22.95 percent of the group total revenue which increased to 24.65 percent in 2008

Sale has increased significantly in Latin America which had contributed only 4.88 percent of total revenue in 2005, increased to 8.26 percent in 2008

Beat Nike’s rankings: adidas only remained a close competitor but couldn’t beat its rankings

The major reason for this is reebok’s declined sales revenue

Some views exist that reebok had cannibalization from adidas

Analysis Integration of adidas and reebok is not a overnight process

It takes years for a structure to work and adidas group is consistently reinventing its organization structure to achieve the unmet goals 2007 – Reorganized from brand based to product category based

structure 2009 – functional structure at board level by having separate units

for brand and marketing

There was no mass exodus from reebok. It shows the integration process was efficiently executed

AnalysisThe merger boosted the revenues to a record level within six

months

ConclusionBeyond communication, implementation of strong

mechanisms helped the top management to easily implement a complex process of integration of two global organizations

These mechanisms also helped in inducing culture, values, goals and strategies of top management within an organization even in short time

The importance of various stakeholders while implementing these mechanisms should be considered

The affect on several stakeholders would impact the organization significantly

Q&A

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