Abstract
Adidas AG is a multinational company founded in 1949 with its headquarters in Herzogenaurach, Germany involved in the designing, manufacturing, and sale of sports shoes and clothing among other accessories (Motion, Leitch, & Brodie, 2003). The company has become one of the leading brands in the global consumer market attributed to its performance structure attributed to the position that it seeks to maintain with regard to its market share. Currently, Adidas is the largest manufacturer of sportswear in both Europe and America with a market share of over 40% within both markets (Chaudhuri, & Puri, 2013). To help establish the company’s performance within these markets, it is important to evaluate the how the company has been engaged in pricing its revenue and costs, as this determines the overall profitability margins. On the other hand, it is essential to evaluate some of the international operations that the company has been involved with an aim of determining their contribution to the profit margins of the parent company.
Pricing of Revenue and Costs
Adidas has bee able to position itself as a leading brand within the consumer market attributed to its ability to maintain an even pricing margin with regard to its revenue and costs. The main raw material that the company utilizes in the production and delivery of its products to consumers is rubber and packaging all of which are designed by The Adidas brand with an aim of positioning the company with regard to expectation of the consumer markets. On the other hand, the company also utilizes textile considering that it engages in the production of clothing under the Adidas brand as part of ensuring that consumers identify themselves with this brand.
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The company has been able to maintain some form of profit margin attributed to its ability to weigh the percentage that it would achieve with regard to its would gain by outsourcing the raw materials within the local and international markets. However, one of the key aspects to note is that the company finds itself in a better position for enhanced performance by outsourcing these raw materials from the international market. For instance, Adidas has been involved in the importation of textile from some of the leading markets such as Mexico and Brazil at a cheaper rate when compared to the rates within the United States market (Aboulian, Charnley & Watkins, 2008). In comparison, the cost of importing these raw materials varies significantly when compared to the costs associated with sourcing the raw materials locally. The company believes that outsourcing not only paves the way for better performance but also helps in reducing operational costs for the company, which is an important element in building confidence among individual investors.
The key drivers of the costs associated with the products are market pricing and local availability considering that the company needs to take into consideration these elements when making its decision for outsourcing raw materials. When focusing on the raw material, rubber, the company, has entered into contractual agreements with some of the leading producers in international markets including Ghana (Klingmann, 1999). The idea of engaging in these contractual agreements with producers ensures that the company not only maintains low costs in the production of sports shoes but also has a constant flow of the raw material. Ultimately, this means that the company is able to position itself effectively in meeting the expected consumer demands, as well as, reducing the costs associated with its performance within clothing and sportswear industry.
Alternatively, it is important to take note of the fact that Adidas also engages in the production of its packaging, as part of building its brand within the consumer market. To help in reducing costs of production of the packaging equipment, Adidas has been involved in agreement with some of the leading manufacturers in consumer markets in Asia. Asia offers lower cost margins in the production of these packaging when compared to the cost margins associated with other leading countries including the United States. That means that the company is able to save approximately 50% of the production costs when outsourcing the production of such packages in Asia. However, it is important to consider the fact that the company also seeks to maintain a positive structure of performance while outsourcing by ensuring that the companies it deals with confine themselves within the respective business laws.
Multiple Foreign Operations
As an international brand, Adidas has established its operations within different consumer markets around the world, which contribute immensely to the performance of the parent company. Reinartz, & Imschloβ (2017)indicates that Adidas, being one of the leading sportswear companies in the world, receives more than 40% of its profits from the international consumer markets attributed to the fact that the company has positioned itself effectively. However, the company faces increased competition from some of its key competitors including Nike, which has also expanded its operations into the international markets as part of increasing its market share. To deal with such competition, Adidas has focused much of its attention towards creating new strategies that seek to project performance outcomes while ensuring that the company achieves a successive growth pattern.
A review of the company’s current positioning indicates that it operates in 5 key regions around the world, which are North America, Africa, Asia, Europe, and Middle East (Wohlfeil, Whelan, 2006). The company separates these regions into business segments, which makes it much easier for its performance outlook with regard to ensuring that it determines performance within the different markets. These segments are Africa, Eurasia, Latin America, North America, and Middle East. The main idea of having to create these market segments is to ensure that the company is able to weigh in on the performance structures of each business segment, which would determine the need for a new strategic approach to business performance. Ultimately, this plays a key role in ensuring that the company achieves positive performance considering that the management is able to make effective decisions for each business segment depending on its performance and contribution to the profit of the parent company.
Africa’s performance in 2016 when compared to the other business segments ranked fourth with a sales revenue of $ 2.7 Billion. According to the company’s statistics, Africa contributed approximately 6.75 % of Adidas’s total revenue . However, these revenue streams from the African consumer markers are much lower than expected considering that some of the leading markets such as America and Asia operations account for almost half of the revenue. The North American business segment, ranked second in terms of business performance, contributed $ 5.8 Billion of the total revenue for Adidas’s parent company. The contribution by North America accounts for 14.22% of the total revenue streams into the company. The performance of this market has been attributed solely to increased advertisement and strategic approaches for endorsements.
Exchange Rate Risk
As indicated above, Adidas operates within different consumer markets separated into business segments representing different regions around the world. Although its performance within the different regions has been of value in meeting expected business performance outcomes, it has also exposed the company to foreign exchange risks. The foreign exchange risk arises from the fact that the company finds itself experiencing notable fluctuations in the global currencies, which include Euro and USD. However, their fluctuations impact performance of other non-UERO and non-USD currencies, which, in turn, impacts on the profit margins that the company would gain within the different consumer markets. For example, in regions such as Africa, the company has experienced notable challenges attributed to the weakening of the currencies in Africa.
Additionally, the company finds itself in a position where the exposures result in negative performance considering that the company experiences significant challenge in its translation of different functional and reporting currencies. Ultimately, this has played a key role in defining the need for Adidas to come up with a comprehensive plan from which to ensure that it maintains positive performance regardless of the fact that it operates within the different consumer markets. Adidas implemented a treasury policy that sought to ensure that the company would engage in hedging of a 12-month forecasted transactional exposure. The defined rate of hedging for the company during this period was defined as minimum (25%) and maximum (80%) focusing on the coverage costs (Aubert, Saunders, Wiener, Denk, Wolfermann, 2016). In the long-term, this means that the company operates within these levels, thus, minimizing its exposure to exchange rate risks.
Alternatively, the company has also been involved in hedging of minimum and maximum levels beyond the 12 month period during which time the key aspect to consider is the fact that it maintains a structured approach towards ensuring that it defines business performance. That means that although the company finds itself exposed to some of the exchange risks within different markets, the utilization of hedging of minimum and maximum levels helps in reducing such exposure. Thus, this creates a position where the company achieves higher profit margins within different consumer markets through implementation and utilization of effective hedging strategies. Ultimately, this has been of value in maintaining an effective position from which the company achieves better performance outlooks regardless of the varied exchange rates within the different consumer markets, as well as, the fluctuations of the Euro and USD, which are the key currencies in the world.
Increases or Decreases in the Dollar’s Exchange Value
Using the information presented, the main aspect to note is that the dollar’s exchange value has contributed to a drop of approximately 2% with regard to the company’s profit margins, which has had a major impact on the company (Frenkel & Scott, 2002). The earnings within the first quarter of 2016 was recorded at $770 million, which was a slight drop of approximately 4.5% when compared to the performance within the previous year. That means that a decrease in the value of the dollar has a significant challenge on the performance of the company considering that it translates to a decrease in its profitability margins. Ultimately, this seeks to support the position that the dollar is one of the key aspects that the company would need to consider in its approach towards maintaining performance.
The information also seeks to suggest that when the international currencies increase of decrease in any way, the company experiences significant effects with regard to its profitability, which impacts on its performance significantly. When the value of the dollar decreases, the profit margins for the company increase significantly, as it finds itself exposed to a higher exchange rate to the dollar. That seeks to suggest that the exchange rate is one of the key elements that defines performance for Adidas especially within the international market.
Conclusion
In summary, Adidas AG is a multinational company founded in 1949 with its headquarters in Herzogenaurach, Germany. The company has become one of the leading brands in the global consumer market attributed to its performance structure. Adidas has bee able to position itself as a leading brand within the consumer market attributed to its ability to maintain an even pricing margin with regard to its revenue and costs. Adidas has been involved in the importation of textile from some of the leading markets such as Mexico and Brazil at a cheaper rate. The key drivers of the costs associated with the products are market pricing and local availability. To help in reducing costs of production of the packaging equipment, Adidas has been involved in agreement with some of the leading manufacturers in consumer markets in Asia.A review of the company’s current positioning indicates that it operates in 5 key regions around the world, which are North America, Africa, Asia, Europe, and Middle East. Africa’s performance in 2016 when compared to the other business segments ranked fourth with a sales revenue of $ 2.7 Billion. The North American business segment, ranked second in terms of business performance, contributed $ 5.8 Billion of the total revenue.
References
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