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Case Analysis: New Balance Athletic Shoe Inc. Essay

Case Analysis: New Balance Athletic Shoe Inc.

Introduction

Aside from the three basic requirements for food, shelter and clothing, footwear belongs to a sub-group of necessity. Footwear is not just a typical product but an indispensable need to protect the feet. The footwear manufacturing accompanies the setting of global economic scale where huge consumer demands revolutionized the footwear industry and market.

The production of footwear as a basic commodity enables the significant subsistence of many poor and developing markets, and a stronghold of international investments in raw materials and labor generations. Footwear industry continues to flourish and remains a major segment of the market consistent in the flow of supply chain within the export and import cycles. Therefore, footwear manufacturing is an essential business with a stable and continuing market.

Today, footwear manufacturers compete in developing their products and market lines. Innovative production adopts and integrates the newest technologies and creativity in fashion design of footwear that suits the variety of consumers’ needs, lifestyles and interests. Thus, this could be one of the reasons why leading footwear manufacturers diversify their investments through merging ventures or business partnerships, and acquisition of potential business lines.

In the present globalization of footwear industry, merging and acquisition within the

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manufacturing sector becomes a trend to enhance competitiveness and capture the best market with the precise consumers. In which case, what could be the strategic moves of footwear manufacturing firms to subsist in gaining the competitive edge at the global scale of competition? On the other hand, how could the seasoned manufacturers reinvent their business lines on top of the emerging numbers of competitors? These questions hypothesize the situations of footwear manufacturing firms who have been part in establishing the industry. Thus, this paper will discuss the business environment in the footwear industry, relating the case analysis of New Balance Athletic Shoe (NBAS), Incorporated.

Discussions

Brief Background

Firstly known in 1906 as the New Balance Arch Company of Boston Massachusetts which was founded by William Riley, the company is presently the New Balance Athletic Shoe (NBAS) Incorporated or widely known as “New Balance”. The early beginnings of New Balance traces from its innovative manufacturing of “arch support and orthopedic shoes”,  and became famous from 1950s towards the 1960s when many athletes patronizes the company for custom-shoe manufacturing. The custom-shoe manufacturing has tagged New Balance as the manufacturer that fits handcrafted shoes, not only for the athletes but those with selective needs for comfort and distinctive lifestyle.

In 1956, Paul Kidd purchased the company and increased the level of production, in which the handcrafted shoes were introduced to market as “trackster”. The new product brand was popularly stylish New Balance footwear that brought in huge sales revenues. However, the downturn of sales volume in the early 1970s has seemed to discourage Paul Kidd to manage the company and sold it to James Davis in 1972.

Subsequently, James Davis has continuously developed the craftsmanship in athletic shoe manufacturing and expanded the product brands by acquiring several subsidiaries, namely Dunham, PF Flyers, Aravon, Warrior Lacrosse, Innovative Hockey, Brine Inc., and Vital Apparel Group. The subsidiaries operate in the United Kingdom, France, Germany, Sweden, Hong Kong, Singapore, Australia, New Zealand, Mexico, Canada, Japan, Brazil and South Africa (NBAS, 2009).

The year 2007 gross sales revenue of New Balance has indicated its consistent growth, wherein the company has achieved domestic gross sales of USD $995 million while USD $1.63 billion from international gross sales. To cite, James Davis owes his concurrent corporate responsibilities [as owner and chairman of the company] to the ancestral philosophies of New Balance that adheres for maintaining “superior customer service, commitment to domestic manufacturing, and leadership in technological innovation” (NBAS, 2009).

            Key Questions and Issues

            This sub-section situates the discussions on key questions or issues affecting the status of New Balance to the industry and market. The discussions will also describe key responses relating an analysis to a case study presented by Bowen et al (2006) of the Harvard Business School.

            In ‘Case 27: New Balance Athletic Shoe Inc.’ depicts the mixed-emotion of NBAS owner-chairman James Davis to the year 2005 news headlines on the Adidas planned acquisition of Reebok. One of the apprehensions of James Davis was what could be the repercussions of the Adidas-Reebok tandem to the industry. Could New Balance able to compete?  How New Balance can regain its competitiveness? These questions posed a challenge to James Davis.

            Reflective of the year 2005 planned merging of Adidas-Reebok, James Davis has also thought of the impending competition to which Adidas-Reebok compete with Nike. The after-thought would mean that New Balance can still obtain a competitive edge while Adidas-Reebok competes with Nike being the biggest competitor. With James Davis’ initial reflections on the issue, he held on to his above questions that can be the basis to formulate some plans and resolutions.

            With the given developments in the year 2005 business environment, James Davis has refocused on product improvement, wherein NBAS has innovated a product brand dubbed as the “New Balance Executional Excellence or NB2E” to compete with the prevailing product competitors. At this juncture, the succeeding discussions will relate the analysis on how James Davis tries to find the best possible answer to his questions to resolve the issue at hand.

            Situational Analysis

            Based on the case study by Bowen et al (2006), New Balance has indicated redefining its status to the industry and market, wherein James Davis strategically position its product line by developing the NB2E brand. Additionally, New Balance standstill in retaining its 2,600 stakeholders or associates and keep hold of the company’s philosophy, cultures and strategies. To cite, New Balance will prioritize its market positioning in order to strategically and flexibly adapt to the prevailing trend of competition.

            Accordingly, one of the indicators to analyze the situation was the industry estimates from 2004 to 2009 that indicates the vast opportunities of market, although competition might be tightened as exemplified by merging and acquisition of footwear manufacturers, like the Adidas-Reebok plans of merging. The industry estimates for 50 percent of the USD $32 Billion consumer spending for footwear which closely increases at 6.3 percent annually can be a significant data which the New Balance links its competitiveness to fast-changing competition in the marketplace.

            To sum up, New Balance perceives its “footing” to the industry and market by improving its internal capabilities to innovate the product lines. On the other hand, New Balance situates its internal capabilities to the at large business environment where the competition can still be a normal phenomenon in the continuing upsurge of market demands. In which case, it can be said that more suppliers take advantage their market positioning to the “currents” of the market equated to the growing demands in footwear. What the New Balance can strategically position then in the middle of competition was to maintaining its established business character to the industry, market and consumers. Likewise, innovating or improving the product lines would promote its competitive advancements.

External Analysis

As indicated in the case study, the macro-environmental factors correlate on the status of New Balance to the industry. This status indicates the demographic location of New Balance in the leveling of leadership in competition. The illustration below shows the leveling:

Source: Bowen et al (2006)

With the above illustration, the leveling of leadership in competition shows New Balance as rank number five. The 2004 comparative data indicates the macro-environmental factor where New Balance must maintain its “stance” in the level of competitive leadership being at rank number five. On the other hand, it may not only the 2004 ranking of New Balance which it wished to maintain, but to rise above the level of competition.

            In relation to the discussions above, it is also important to examine the “five competitive forces” attributing to New Balance. This model which was developed by Michael Porter (1980) substantiates the organizational examination of New Balance, referring to establishing competitive strategies. To demonstrate the model, the illustration below shows the components:

            Source: Chapman, A. (2005)

As illustrated above, New Balance seek to address the challenge of competition regardless of the Adidas-Reebok tandem, in which could be just circumstantial to the ongoing competition of  footwear companies within the top ten roster. The 2005 creation of the NB2E product brand can be perceived as “new market entrants” of New Balance to withstand the competition in terms of product innovation, wherein it consolidates the aspect of “supply (supplier) and buying (buyer) power”, pertaining to creating a new product brand that can uniquely capture the market lines. At this instance, New Balance strategizes in “product and technology development” that will earmark its position in the market competition.

            Moreover, we may summarize the external analysis that New Balance tried to redefine the “driving forces” of the industry and market by maintaining its product lines within the reach of targeted consumers together with “value-adding” technologies in athletic footwear manufacturing.

Therefore, New Balance reinvents the external capability of its organization according to the perceived environmental changes within the industry and trends of the market competition. From which James Davis has quoted that “remaining aware of the industry setting and New Balance’ place in the market enables financial flexibilities not only in the domestic market competition” (12), referring to consolidating the stakeholders as partly a “key success factor” of New Balance to compete not only in the domestic but international markets as well.

      Internal Analysis

In order to analyze the internal capabilities of New Balance, we may again use the marketing model of Michael Porter (1980) as the fundamental guideline.  As a brief background, Porter (1980) has introduced the “four P’s of marketing model” referring to product, price, place and promotion as the strategic components in determining the “internal capabilities” of an organization responding to “external factors”. In other words, the internal capabilities must be aligned to the “effects” of business environment that creates the “patterns and pulse” of the industry and market. Thus, the table below illustrates the “sample marketing strategies” of New Balance:

Source: Author’s own (2009)

The “sample marketing strategies”, as illustrated above, indicates on how New Balance manages its marketing activities, relating the “four P’s marketing model”. It may be noted that the strategic components of New Balance are integral to the “key result areas and indicators”, in which the company focuses its business operation.

It may be analyzed that New Balance was aware in the year 2005 business environment. On the contrary, it may be observed that New Balance has its own promotional strategies, generally relying on word-mouth advertisements, such as consumer feedback and public endorsement.

Correspondingly, the value-chain position and scope of New Balance in terms of product-market positioning was derived in establishing sales and distribution networks. To cite, New Balance sells it products through an estimated 3,500 retailers from more than 12,000 outlets (Bowen et al, 2006).

Through the abovementioned marketing approach, James Davis has quoted that “New Balance focuses on dealing and assisting the small-type service-oriented clienteles who believe in the success of retail business” (16).  Accordingly, the retailing is partly a corporate responsibility that emphasizes the importance of value-chain position and scope of New Balance market, from which retailing contributes 25 percent to annual gross sales (Bowen et al, 2006).

To thoroughly provide the internal analysis, it is also worth examining the financial viability of New Balance. In this particular discussion, we may use the works of Bruce L. Jones (1996) in guiding the financial analysis of New Balance. According to Jones (1996), ratios and other financial measures is the “barometer” in determining how successful the capital budget of an enterprise. To cite, the financial viability and objective must relate the financial performance in three basic components, such as (1) maximization of profit, (2) minimization of risks, and (3) status of liquidity (Jones, 1996).

Relating the conceptual framework of Jones (1996) to the financial performance of New Balance, an overview on the 2005 sales summary of New Balance can be demonstrated as shown below:

            Source: Bowen et al (2006)

Based on the above illustration, New Balance “maximizes” its financial performance as indicated by the results of sales composing of specialty retailers and key retailers. The “minimization” of risks is also indicated by the significant sales contribution of specialty retailers which are considerably “at large outlets” which New Balance has established. The financial performance likewise indicates the “rolling-over” of financing as equated by its liquidity.

Overall, the ratios and financial measures of New Balance in dealing with its capital budget also transpire in achieving the number of accounts and outlets which can be attributed as the key market lines that generate viable financial performance as indicated in the 2005 sales summary. To further elaborate the financial performance of New Balance, it may be found that establishing the specialty and key retailers form part of efficient and effective marketing strategies, expanding the modality of “sales input-output” from consumers that becomes patron and retailers or franchisees. It is noteworthy to mention that New Balance operates its “supply chain and manufacturing” within and outside the United States. Meaning, capital budgeting is “spread out” within the domestic and international production and marketing areas, from which the specialty and key retailers also come from.

SWOT Analysis

            Based on the case study, the assumed “strengths” of New Balance is adherent to the philosophy, culture and strategy of the company in maintaining “superior customer service, commitment to domestic manufacturing, and leadership in technological innovation” (NBAS, 2009). The strength of New Balance can be also attributed to its strategic prioritization of product-brands that consistently and substantially compete with the leading footwear manufacturers, like Adidas, Reebok and Nike to name a few. In terms of product-brand positioning, it may be compared that the leading competitors continuously innovate their products and even diversify market operations or business lines, as exemplified by the impending merging of Adidas-Reebok.

On the other hand, retail markets have been also worked out in the domestic supply chain, comparing the same strategies of Nike and Reebok which are US-based manufacturers. With the available data from the case study, it was also highlighted that the financial performance of New Balance consistently “absorb” the domestic market competition, and even strengthened the “market clout” in international supply chain management as indicated by the export and import orientation in manufacturing, product supplying and foreign trade investments.

            On the contrary, the assumed “weakness” of New Balance is central to its minimal promotional strategies, dealing with the product endorsements of famous celebrities. Although given the assumptions that New Balance prospers in “word-mouth” promotions [as pumped-primed by the direct selling in retail marketing], the marketing model can be the basis in assuming the weakness of New Balance in providing “weights” to position its product at the “upper ladder” of the industry and market. To compare, the leading competitors, like Adidas, Nike and Reebok, are pulling up their marketing ventures in selective national events that features the “athletic legacy” of its product brands, exemplifying the lead-sponsorships in Olympic games and other athletic competitions.

            However, the assumed “opportunity” in the increasing domestic and international market demands, the previously indicated industry estimates for 50 percent of the USD $32 Billion consumer spending for footwear with an average increase of 6.3 percent annually (Bowen, 2006), can be the advantage of New Balance to strategically explore the vast marketing potentials.

For this particular assumptions, New Balance can posses the variability of options in dealing with its competitors in terms of the product lines, brands, market segment and scope on the types of consumers. Likewise, the vast marketing coverage [translated by the continuing consumption or spending in footwear purchasing] is relatively the essential opportunity amidst tightened competition in the market share.

Comparably, what Adidas-Reebok tandem wanting to position to compete with Nike may result “market spill-over” that New Balance can take an opportunity to venture out. In other words, the “market spill-over” may refer to the purchasing options of buyers, from which New Balance may position its products in terms of “alternative purchasing” or selective consumptions.

With regard to the assumed “threats”, it may be predicted that merging and acquisition could be the “over exhaustion” of the market segments and industry sub-sector in footwear manufacturing. For example is the consolidation of leading manufacturers in order to organize and mobilize a business cartel, wherein the monopoly may constrain the single proprietorship of a company to operate in retail and wholesale market.

Another critical assumption is the controlling of the supply chain in raw materials, in which the production cost may abruptly increase and therefore hamper the production level of other manufacturers, pointing the scenario of derailed capital budgeting in both production and marketing. This situation can be a remote consideration, but manifests in the globalization of industries.

In retrospection, the consequence of Adidas-Reebok merging may encourage Nike to do the same alliance or shareholding with other firms which are below the competition. In which case, the shareholding may pattern the evolution of strength in the context of subsequent market partitioning or division. It may be perceived that once the market would be fully divided by numbers of competitors, New Balance may find its difficulty in managing its retail ventures.

Findings and conclusions

            It is found that James Davis is unperturbed on the seeming effect of impending Adidas-Reebok merging, on his thoughts; New Balance would remain stable in its business line, as well as the confidence of its associates, stakeholders and patrons. The situation of Adidas-Reebok merging was attributed to compete with Nike, being the closest competitor and leading over New Balance. Besides, New Balance measures its internal capabilities by clinging on its business culture, committing to domestic manufacturing and leadership in technological innovation.

In addition, New Balance has a consistent financial performance that leads its way in expanding within a diverse business environment, redefining the modality of its business operation as quantified by the retail-franchise partnerships. In conclusion, New Balance has able to redefine and describe its position or placement in the industry and the overall segment of the market.

Recommendations

            Based on the strategic analysis of internal and external capabilities of New Balance, the “four P’s of marketing model” suggests critical reconsiderations. Thus, the following bulleted lists of recommendations should be reconsidered:

§  Continuing innovation of product-brands that will provide or create “purchasing alternatives” to consumers. The key result area in the “strategic product positioning” must be objectively realized at all times, such as the usefulness, quality, practicality, craftsmanship, customers’ service and product warranty.

§  Conduct of regular product-market assessment to determine the relevance of product-brands in the acceptance and “taste” of the consumers. Like determining the marketability of the “New Balance Executional Excellence or NB2E”.

§  Conduct of strategic promotional activities to compete with the leading competitors’ use of celebrity endorsements, in which doing the same would provide New Balance the “edge” of consistent market presence.

§  Explore the situational perspectives of merging and acquisition, being the “newest craze” of the business environment with regard to competition. New Balance may look at the situation of the emerging entrepreneurs to the industry and examine its capabilities for potential partnerships.

§  Redefine the position of retail outlets in the global competition. Redefining the retail outlets may provide New Balance with conceptual framework to strategically broaden its marketing outlets to determine expansive modalities or areas for diversification.

§  Examine the product-brands and market lines from the lower segment of producers to enable tapping of potential products and technologies.

References

Bowen, H.K., Huckman, R.S. and Knoop, C.I. (2006). ‘Case 27: New Balance Athletic Shoe

            Inc.’. Harvard Business School. Retrieved April 14 2009.

Chapman, A. (2005). ‘Michael Porter’s Five Forces of Competitive Position Model’.

            BusinesBalls.Com. Retrieved 14 April 2009 from

            http://www.businessballs.com/portersfiveforcesofcompetition.htm.

Jones, B.L. (1996). ‘Financial Analysis: Ratios and Other Financial Measures’. University

            of  Wisconsin Press. Retrieved 14 April 2009 from

            http://www.aae.wisc.edu/jones/aae320hand/finanal.pdf.

New Balance Athletic Shoe Incorporated (2009). ‘New Balance Fact Sheet’. Retrieved 14

            April 2009 from

            http://www.newbalance.com/corporate/pressroom/corporate_docs/NB_Factsheet.pdf.

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