Financial Strategy Analysis: Adidas Company - Research Proposal Example

Financial strategy analysis: A case study on ADIDAS BY YOU YOUR SCHOOL INFO HERE HERE A Case Study on Adidas 1 Introduction The German-based sportswear manufacturer, Adidas, is the second largest sportswear producer in the world (Brandt and Hippin 2008). The company specialises in the manufacture of top quality sports-related products, inclusive of running shoes, clothing and other sporting accessories. Founded in 1948, Adidas is currently in the maturity phase along the corporate life cycle, a phase in which the business identity has been strengthened among consumer segments with considerable brand recognition and high demand for its products as a result of promotion, consistent strategy development, and new market entry in many different international markets. Unlike companies in the growth stage, a phase in which a company is able to attract new customer segments and improve its market share competitively among a saturated market, Adidas has experienced a plateau in revenue production, with sales achieved at €14.8 billion in 2012 and €14.5 billion in 2013 (Adidas 2014). Because Adidas produces sportswear products related to specific sporting recreation, inclusive of football, rugby, tennis, and many other international sports, the company has attracted a relevant market interested in these products as a lifestyle dimension and the ability to create demand with new market segments is difficult as a result of its specialisation. Hence, the company cannot return the business to a growth phase without creating the ability to build demand with new and disparate market segments. As a result of being in a mature phase along the corporate life cycle, there is a need for more emphasis on financial strategy analysis and changing corporate governance activities in a fashion that is relevant in relation to the corporate life cycle theory. Corporate life cycle theory indicates that as a company evolves through growth phases, it experiences unique challenges in the effort of sustaining continued growth and profitability. The Greiner Curve, a respected corporate life cycle model, illustrates that these challenges are inclusive of the need for formal communications systems, lack of managerial autonomy in decision-making, delegation challenges, coordinating once-disparate business units, and improving cross-functional teams’ efficiency and productivity. Financial strategy analysis is determining the most viable method of examining and evaluating financial data to improve profitability, corporate productivity, build more effective strategic activities, and aligning internal operations to recognise cost controls and cost reductions to achieve competitive advantages (to name only a few scenarios). It is using financial information to improve effective decision-making so as to sustain a more positive market position against competition and also achieve a greater net income by examining costs of production, administration, labour, and even procurement. 1.2 Research objectives Having defined the importance and relevancy of financial strategy analysis and corporate life cycle issues, this research project aims to understand what specific strategies are in place with a firm that has reached a stagnant period of revenue growth. The company being spotlighted and evaluated will be Adidas, a company that has overcome challenges and risks along earlier stages of the corporate life cycle model, yet continues to achieve a plateau in revenue production as a company, theoretically, in Phase 6 where challenges are establishing relevant and meaningful alliances. The research project maintains four distinct objectives: Determine what methods of financial analysis would be most viable for Adidas to improve its company equity, cost controls, and build effective strategic policy. Examine, in more depth, the extent of potential challenges for a company that is in the Growth through Alliances stage of the corporate life cycle model, which is representative of Adidas. Uncover the extent to which Adidas has been successful in overcoming the challenges of corporate stagnation (the maturity phase) to potentially achieve further growth as an outcome of financial analyses of company financial data. Determine the relationship between financial position of the firm during a specified period and strategic developments that occurred concurrently with these periods to uncover how Adidas has managed to evolve through differing periods of growth. Several research questions relevant to the examination of Adidas include: 1. What financial strategy analysis tools are currently being utilised at Adidas to improve its market and competitive positions? 2. How has corporate strategic intention and policies changed to re-inject growth into a company that has reached a plateau of revenue growth? 3. How does Adidas effectively align strategic alliances to build a better brand that captures the attention of new markets to regain a growth status along the corporate life cycle model? 2.0 Literature Review This section explores, more in-depth, the concepts of financial strategy analysis and corporate life cycle challenges to illustrate why companies such as Adidas must be considerate of financial investigation and overcoming challenges to avoid continued growth stagnation and re-achieve a growth factor in a rapidly maturing business model. 2.1 Financial strategy analysis Financial strategy analysis is critical to a company in the maturity phase as these analyses determine the company’s long-term stability, dictate new methods of building profitability and determine how to align management with human resources to maximise financial efficiency and cost controls (Kaplan and Anderson 2007). Financial strategy analysis will assist a corporation in determining whether to continue or discontinue certain business units, alter procurement methodology, determine whether asset accumulation is viable, change stock issuance strategy, and generally provide valuable information for managerial practice (Ehrhardt and Brigham 2011). What is financial strategy analysis? There appears to be no singular definition that concretely defines the methodology, however generically speaking, financial strategy analysis provides a tool for aligning internal operations and executive practices with tangible resources available internally. It is a method of performance measurement that is profitability-linked, allowing companies to decompose profitability changes that occur over time and transform this data and knowledge into constructs that achieve greater productivity and alter business strategy (Banker, Chang and Majumdar 1993). There are widespread methods of financial strategy analysis. Which method is more effective for a corporation depends on their current phase along the corporate life cycle model, their competitive position in a market, the relevancy and success factors of the company’s brand identity, and economies of scale that inject more financial efficiency into the business model. One method is referred to as a horizontal financial analysis, which allows strategy executives to examine performance data and scrutinise the historical financial performance of the firm. As an example, corporate strategies may select to examine the net income levels over a four-year period to determine whether new business strategies have favourably impacted total business performance or whether long-standing strategies have been more viable and relevant (Berk and DeMarzo 2014). Such analyses can help a business management team to conclude that new strategies assisted the business improve its revenues under this review period of four years, indicating increases in net income year-by-year which would allow the company to maintain the strategy rather than altering strategic intentions to compensate in the event of decreases in net income. Yet another financial strategy analysis tool is vertical analysis, in which strategies compare pre-determined performance items that have been assigned a numerical standard. For example, the business may conduct comparisons of sales volumes with known period net incomes and discover that net income is equal to 30 percent of total sales revenues. Vertical analysis is effective as it allows the business to recognise what specific resources, such as plant equipment and real estate, have financial impact in the entire corporate operations. Vertical analysis conducted in this fashion gives planners the important knowledge required to make effective decisions in asset procurement and financial policy development most viable for long-term profitability. There is also a growing trend in strategic management accounting, a system of financial analysis that aligns financial data with strategy. For instance, managers are assigned the task of examining cost structures in the firm, costs to competitors, examination of cost drivers in the operational model, and other holistic elements of strategic activities that have costs and profit opportunities (Wu 2007). Strategic management accounting is a complex system which recognises the known inter-dependencies between external market characteristics and internal operations which gives managers a holistic examination of the entire organisation that emphasises cost trends, market share, pricing models and cash flows as it relates specifically to strategic market positioning (Collier and Gregory 1995). This method allows the manager to view all elements related to the entire value chain to determine a more efficient and productive costing system or how to better structure the organisation to improve its market position (Cagwin and Bouwman 2002). The goal of strategic management accounting is to examine a variety of different ratios, inclusive of such equations as return on equity, operating margin and profit margin (to name only a few) in order to examine, holistically, the financial health of the firm. As another example of strategic management accounting as a viable financial strategy tool, one can imagine a scenario where a competitor is able to achieve lower costs than others, with costs consistently 15 percent lower in the market. This is referred to as a cost leader. If the cost leader, as an example, has per unit costs (fixed and variable) at £15 whilst competition has costs at £18 per unit, the cost leader has a guaranteed advantage in profitability if pricing structures on the market are relatively homogenous among competitors. By examining the costs related to competitor manufacturing, strategic financial strategists can be able to use competitor activities and expenditures as a benchmark to align operations with competitive activity to achieve the same cost advantages (Chapman 2005). There are many other financial analysis tools available for organisations, however the aforementioned strategies illustrate how companies utilise financial data with internal operational strategy or even investment strategy to maximise their ability to compete effectively in external markets. The achievement of economies of scale, as a corporate objective, is often an outcome of careful and insightful financial investigations which is imperative for cost controls and financial efficiency within an organisation. Financial strategy analysis allows an organisation to better utilise its resources more efficiently, both tangible and human capital-related, so as to improve equity which not only improves cost control systems, but also improves investment potential in the minds of shareholders who provide highly valuable capital to the organisation. 2.2 Corporate life cycle The model of corporate life cycle indicates the different phases of growth that a firm experiences over time and the levels of potential crisis that occur at each phase. The most respected model, known as the Greiner Curve, illustrates these phases. Figure 1: The Greiner Curve Model of Corporate Life Cycle Source: ETAL. (2010). Controlling Growth and Managing Uncertainty, Exponential Training and Assessment Ltd. [online] Available at: http://www.exponentialtraining.com/Downloads/Resources/Example%20Module%20-%20CBS/page_12.htm For example, Adidas has already gone through the phases of growth through creativity (a rather entrepreneurial phase) and all other phases, currently experiencing Phase 6 which is a growth crisis phase. In this phase, the company has already deconstructed problems with bureaucratic red tape that complicate collaboration, creating a more decentralised model that produces incentives for managers and subordinates in key support positions to coordinate their talents, knowledge and expertise. Adidas now struggles to re-attain growth in Phase 6 and attempts to build growth through acquisition and through marketing alliances (Thomas 2012; Oldale 2011; Howard 2005). Adidas has managed to establish effective solutions to the crisis occurring in the previous five phases of growth, inclusive of bureaucracy, problems with lack of managerial autonomy that is constructed through formal systems of control, and even lack of communications channels in earlier phases of growth. Being in Phase 6 along the Greiner Curve Model of corporate life cycle now puts more emphasis on developing important alliances which would theoretically alter the governance systems and executive-level strategic intentions for this company that is experiencing stagnant growth by being unable to capture new consumer market interest and demand. Companies that are reliant on the development of strategic alliances now have sophisticated systems internally that have achieved their pinnacle of success and efficiency, such as information technologies, production of knowledge management practices, effective communications channels and even emphasis on human resources practices to motivate employees to meet the mission goals of the organisation. Businesses must realise that all corporations have a determined life cycle, a start and an eventual end. At each stage along this life cycle model, the business and the external market begin exhibiting characteristics that alter challenges, risks, and goals which are unique from other stages of growth. It is the responsibility of effective governance teams, managers and executives to recognise these distinct characteristics and then alter financial strategy and strategic policy development as related to mission in order to return the organisation to a more efficient growth period and thereby align internal responsibilities and operations to meet these challenges. 3.0 Methodology To gain a richness of understanding about the financial health of Adidas as it evolved through its various growth periods, the study will take a quantitative approach to research. It will be necessary to understand the financial position of the company, over a specific period of time, to serve as a foundation for the creation of a series of conclusions and recommendations about how the company has built profitability, how to improve profitability, and to maximise financial efficiency and control costs (Kaplan and Anderson 2007). To gain this knowledge, the study will be conducting a variety of ratio analyses founded on Adidas’ historical financial information. Financial ratio analysis assists in quantifying many different segments of a business. For instance, the use of liquidity ratios ensures that strategists are able to discern the availability of important capital that is available for debt repayment (Groppelli and Nikbakht 2006). Profitability ratios are a quantitative measurement of the company’s ability to properly utilise assets whilst also controlling expenditures to create a better return rate (Weygandt, Kieso and Kell 1996). Market ratios are also valuable as it pertains to stock issuance, thus determining the ROI for investors by illustrating the relationship between an investment value related to the capital markets and total return. The research study will be examining seven years worth of financial information publicised by Adidas to determine what has potentially posed a challenge or opportunity for Adidas during this time period. The researcher will consult with company annual reports and financial statements, addressing also the CEO and Board chairman’s discussion of the financial challenges that may have complicated business profitability during this examination period. The types of ratios that will be used to quantify Adidas’ financial position will include Asset Turnover, Debt to Equity Ratios, Earnings per Share, Gross Margin, and other relevant ratio analyses. Furthermore, ratios assist managers in understanding the entire financial health of the organisation, providing the foundation for decision-making regarding viability of potential investments and whether to adopt new projects, such as acquisitions; which has been determined the current phase of growth that Adidas is operating under. The qualitative portion of the study will be to examine the findings from all ratio analyses and then determine, using inference, whether certain corporate decisions had been made as a result of the financial position of the company year-on-year as reported in their annual reports. The annual reports and other relevant reports issued by Adidas over the seven year examination time period will also provide valuable information about decentralisation activities, cross functional team development, or other internal strategies that might have contributed to Adidas’ market position or competitive position. Qualitative analysis is a more viable tool for understanding the relationship between financial stability and internal policy developments, especially when the researcher is not entirely certain the specific criteria or variables that need to be measured (Miles, Huberman and Saldana 2013; Miles and Huberman 1994). Through analysis of company data regarding strategic developments over the seven year examination period, it will provide more breadth of understanding of the potential inter-linkages between financial strength and new corporate strategy development. The research study will also utilise a time series data analysis. This will allow the study to understand potential volatility in the stock market, an important capital producing method for Adidas, to determine the potential relationship between financial strength of the firm during a period, shareholder sentiment about the business, and correlating strategic developments that occurred during these periods. 4.0 Results Results of the ratio analyses and time series data will be compared with the qualitative findings of consultation and evaluation of corporate reports, providing an in-depth understanding of what is currently driving attitude and tangible financial analysis activities in Phase 6 of Greiner’s Curve. These results will be presented in table or graphic format with a qualitative (subjective) interpretation of findings as compared with the statistical results returned from the in-depth financial analyses. Any potential correlations between financial health during a period and new strategy developments will be highlighted and discussed using support from secondary literature sources on best practices in governance, strategic management, and strategic management accounting. 5.0 Recommendations To supplement these findings, a SWOT analysis that examines the internal strengths and weaknesses of Adidas, along with external opportunities and threats will enhance a full comprehension of corporate activity and provide an opportunity to present a series of recommendations on how best to re-inject growth into Adidas’ business model. The SWOT analysis will provide knowledge on how Adidas could develop the established best practices of other firms that might have been forced to operate in a stagnant growth period and recommend new benchmarks by which to re-attain growth. The SWOT analysis will also be compared to relevant secondary literature on corporate best practices in financial strategy analyses and overcoming challenges of the final phase of the corporate life cycle model. 6.0 Conclusion It is uncertain as to what constitutes best practice for a major corporation that has reached a revenue production stagnation along the corporate life cycle model. This investigation and case study of Adidas will provide a new type of understanding in an area that currently has a gap in research knowledge. It is anticipated that this research project can identify how to return a company to growth when it is unable to produce demand and consumer interest (gaining new market segment loyalty). The report has many positive implications for establishing benchmarks and helping organisations understand how to return to a more positive growth phase, hence avoiding an eventual decline that could seriously jeopardise corporate financial health and competitive advantage. References Adidas. (2014). For the love of sport: Adidas Group Annual Report 2013. [online] Available at: http://www.adidas-group.com/media/filer_public/2014/03/05/adidas-group_gb_2013_en.pdf (accessed 17 March 2014). Banker, R.D., Chang, H. and Majumdar, S.K. (1993). Analysing the underlying dimensions of firm profitability, Managerial and Decision Economics, 14(1), pp.25-36. Berk, J. and DeMarzo, P. (2014). Corporate finance, 3rd edn. Essex: Pearson Education. Brandt, N. and Hippin, A. (2008). Adidas, Deutsche Telecom, Infineon: German equity preview, Bloomberg. [online] Available at: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ah3ZhaeNWMdM&refer=germany (accessed 15 March 2014). 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Chichester: John Wiley & Sons, Inc. Wu, G.H. (2007). The cost drivers, revenue drivers and value chain analysis in strategic management accounting, International Journal of Knowledge, Culture and Change Management, 9(2), pp.69-78. Read More