International Business Environment Adidas Case Study

Executive Summary

This study was commissioned foster understanding of the international business environment. To realize this goal, the international business environment was broken down into the social-cultural environment, political-legal environment, economic environment, and economic environment. Each segment was examined to show the opportunities and risks associated with international business. The opportunities and risks affecting international business are discussed and strategies applied by international businesses to address the environmental forces showcased.

Introduction

Globalization has caused far-reaching changes in the business environment. It is easier than ever for businesses to conduct business activities beyond their mother country. The scope of internationalization of business activities varies from one company to the other. Some companies get raw materials from other countries, sell their products in international markets, while others take production activities in the global environment (Ghemawat 2003). The diversity in the distribution of resources, skills, purchasing power has given globalization of business an impetus. Also, the varying comparative advantage across countries has motivated businesses to take operations to other countries with the aim of exploiting the opportunities presented by comparative advantage diversity.

Adidas is a German apparel company that specializes in the manufacturing and design of shoes, and clothes. The company is the world’s second largest sportswear vendor and controls the lion’s share in the European sportswear market. Adidas was formed in the year 1924 and has been registering an attractive growth in the global sportswear market (Brunner 2004). The company’s total revenue for the year 2016 was €19.291 billion with an operating income of €1.5 billion (Morningstar 2017). Its total asset base is €13.34 billion and employs over 50000 people (Morningstar 2017).  The company is influenced by global business environment forces and has in the past implemented effective strategies in line with globalization that has enhanced its position in its global apparel sector.  The company sells its products in the international market that expose it to the global market forces.   The company engages international suppliers especially from developing Asian countries.

International Business Environment

The international business environment is comprised of factors that have a major impact on business success. These forces present opportunities and threats that must be put into consideration when implementing corporate strategies. The usefulness of a strategy is evaluated based on the extent to which it enables a company to address environmental forces. The global business environment is made of broad factors that cannot be influenced by a company or group of firms. This environment is also dynamic making it a necessity to create flexible strategies that enable a company to take advantage of the new opportunities and at the same time enhancing the capacity to confront emerging threats.  The global business environment affecting Adidas and other companies is divided into specific segments. These segments include social-cultural environment, political-legal environment, economic environment, and economic environment (Ghemawat 2003). These cells of the global business environment have unique features that have direct impacts on a business.

Social-cultural Environment

The social-cultural environment is made of factors such as social institutions, population, languages, level of education, religion, and value system among other factors (Hill 2008). These factors vary from one country to the other implying that international firms deal with different segments of the social-cultural environment. Population trends are a feature of the social factor environment that influences corporate strategies.  Population size is directly related to the value of a market.  Adidas has in the past one decade intensified its marketing in China and India. These countries house almost half of the world’s population and this translates into a huge market potential. The diversity of languages in the global business environment influence human resource strategies. Being a German company, Adidas employees in the home market are native German speakers implying that they are not conversant with other languages. This feature makes multinational companies create diverse workforces to support confronting the complex social-cultural environment presented by the global business environment.

Political-legal Environment

The political environment is made of factors emanating from political activities in a country. It is also influenced by geopolitics and relationships among countries. The political environment is closely linked to the legal environment since laws are formed by political institutions(Hill 2008). The global business environment is made of small political units in the name of a country, state, or regional block. Each unit has unique laws governing business operations. The level of political stability and other political features influence international businesses.  Moving operations in a specific country require multinational companies to invest in understanding the political and legal dynamics in these countries. Failure to understand the legal-political environment leads to non-compliance that in turn exposes the company to fines.  Being a German company, Adidas is required to comply with the regulations of the European Union (EU). The EU has a comprehensive regulatory environment aimed at promoting economic activities among the member states as well as ensuring sustainable trade between the EU and other countries. The level of political stability has direct impacts on the on the activities of international companies. Germany has enjoyed a relatively calm political environment since the end of the Cold War. This environment has enabled German multinational companies to increase operations in the global environment. Germany is friendly to other countries, and this relationship has supported seamless transactions between Adidas and other global entities. It is difficult for Adidas and other international firms to conduct activities in war torn regions such as the Horn of Africa and the Middle East.

Economic Environment

The economic environment is made of factors such as tariffs, taxation, level of income, purchasing power, exchange rate and interest rate.  These factors have direct impacts on profitability and should, therefore, be put into consideration when formulating international strategies. The exchange rate is one of the critical factors in international businesses.  Businesses operating in the global business environment transact in many currencies, and this creates a risk emanating from the fluctuation of currency exchange rates.  Adidas financial statements are denominated in Euro implying that foreign transactions denominated in other currencies must be translated into Euro.  Strengthening of the Euro implies less value for international sales from non-Euro zones. The same makes raw materials acquired from other countries cheaper.  The level of income and the purchasing power of a host country determine the viability of a market. Adidas and Nike products are priced relatively high compared to other small brands (Brunner 2004). These products are therefore more viable in high-end markets such as Europe, America and other markets characterized by high purchasing power.  Taxation level import duty in host countries influence operations of multinational companies. The elimination of tariffs among EU countries has made it easy for Adidas to sell its products in the EU member states and this translates to higher profits.

Technological Environment

Technology refers to methods and machines used in the business process. The level of technological developments varies across countries that make it necessary for international firms to respond to local technological forces.  Germany is one of the world’s leading technology powerhouses, and this gives German companies an advantage in the global business. Adidas has been using state of the art technology in its design and manufacturing activities that have resulted in products of high quality. Technology also supports cost reduction through process automation and the application of innovative ways of cutting costs. Operating in less developed countries would require Adidas to adapt to inferior technology. Most of the company’s production activities are concentrated in Germany, and this enables Adidas to address technological risks.

Opportunities in International Business

The international business provides many opportunities to businesses. In the past one century, the company has been seeking to exploit these opportunities leading to a large market share, increasing profit, and revenue, as well as a strong capital base. Improvements in these aspects have made the company one of the most successful apparel companies. Companies that globalize production operations seek to exploit operations advantage stemming from production globalization. There are also specific opportunities associated internationalizing markets.  Adidas has in the past positioned itself strategically to reap the benefits of globalizing markets and operations.

According to Kennerley & Neely 2003, cost cutting is one of the major opportunities presented by international business. The diversity in comparative advantage makes it cheaper to produce some goods or services in one country than another. Understanding the comparative advantage of different countries enables international businesses to identify the ideal country to establish production units. Adidas contracts some manufacturers in countries such as Indonesia to lower input costs. These contract manufacturers produce input components that are used by the company‘s main factory in Germany.  It is a common trend for multinational companies to take labour intensive operations to developing and third world countries. According to Hill 2008, in some third world countries, the minimum wage rate is as little as $2.5 a day, and this attracts multinational companies to operate in these countries(Ghemawat 2003). Apart from labour cost, multinational companies can control raw material costs. Going global helps multinational companies to access cheaper raw materials and this aid in reducing operating costs. The ability to keep cost low is a source of competitive advantage in the international business environment that is characterized by stiff competition.

The international business provides an opportunity to diversify market risk. Many factors affect the saleability of a product and change in these factors exposes the company to the threat o failure to meet sales targets. For instance, Adidas segments its market into regions, and political instability in one region reduces regional sales.  Globalization of market helps international firms to leverage market risk as poor performance of one segment is covered by good performance in another region (Cavusgil, Knight & Riesenberger 2009).  Globalizing production helps to protect the company from interference with production activities. A natural disaster in one country can hinder production. Taking production activities in other countries ensures business continuity in case production activities in the home country is stopped.

Profit maximization is another opportunity presented by international business.  Profit is increased by reducing costs, increasing sales, or increasing prices. According to Cavusgil, Knight & Riesenberger 2009  increasing prices is not a sustainable profit maximization strategy in a competitive environment. The sportswear market is characterized by stiff competition and increasing the prices can threaten the company’s ‘market share. International business creates cost-cutting and sales growth opportunities that aid profit maximization.

Risks in International Business

The international business environment is associated with risks that discourage small companies. Some companies operations in the international business environment have been affected by these risks leading to huge losses.  Dynamics in the legal-political expose international businesses to a risk.   The current changes in the EU regarding Brexit will in the future affect Adidas performance in the in the UK marker.  The company will be required to comply with the UK’s laws when serving its UK customers. Non-compliance in the complex international regulatory environment poses a serious risk to multinational companies. Multinational companies face challenges when complying with diverse regulatory frameworks (Kennerley & Neely 2003).   Non-compliance has led to costly fines and legal fees that threaten the survival of businesses in the international environment.

Multinational companies are faced with financial and currency risks. The 2008 global financial crisis had an impact on businesses worldwide due to the globalization of businesses. International business has led to the creation of a global financial system that is comprised of many subsystems representing countries and unions.  Spreading operations in different countries imply that financial difficulties in one country can affect business performance (Kennerley & Neely 2003).  Currency risk affects Adidas and other international business due to engaging in transactions that are denominated in different currencies.  Currency exchange risks are a threat to profitability compelling businesses to implement costly hedging practices.

Managing International Business Environment

International businesses implement strategies aimed at positioning them favourably in the global environment. These strategies are aimed at enabling them to exploit opportunities presented by the international business environment as well.  These strategies also enable businesses to address the risks emanating from the same environment. Forming strategic alliance is one of the valuable strategies of addressing the environmental forces confronting international businesses.  According to Cavusgil, Knight & Riesenberger 2009, forming alliances gives a multinational company access to vast resources that increase their capacity to deal with the environmental forces. Adidas has alliances with retailers in specific markets that ensure the company serves its clients with fewer restrictions.  Liaising with partners who are conversant with the foreign markets increases the effectiveness of marketing strategies as these partners are familiar with the local needs.

Business offshoring and contract manufacturing are a common practice in today’s business environment.  Offshoring involves taking work to another country due to some advantages associated with producing in that country (Lewin & Peeters 2006). Contract manufacturing involves entering into an agreement with an external entity to manufacture products on the company’s behalf.  These practices are common in different sectors and firms in developed countries offshore to developing countries or subcontract entities in developing countries.  Adidas contracts manufacturers in Indonesia and China to exploit the low-cost opportunity associated with producing in these countries.    Offshoring and contract manufacturing leads to the establishment of complex supply chains spanning the globe.

Conclusions

International businesses are faced with environmental factors that create opportunities and threats.  Successful companies position themselves in the environment by creating effective strategies.  The international business environment is divided into segments such as social-cultural environment, political-legal environment, economic environment, and economic environment.  Businesses are attracted by the vast opportunities presented by the international business environment to go global. These opportunities include cost-cutting and profit maximization. The international business environment is faced with threats such as the currency risk and legal-political risks. International businesses form alliances and also practice offshoring and contract manufacturing to add

List of References

Benito, G.R., 2005. ‘Divestment and international business strategy.’ Journal of Economic Geography, 5(2), pp.235-251.

Brunner, C.2004, All day I dream about sport: the story of the Adidas brand. London, Cyan.

Cavusgil, S. T., Knight, G., & Riesenberger, J. R. 2009, International business: strategy, management, and the new realities. New Delhi, Pearson Education.

Ghemawat, P., 2003, ‘Semiglobalization and international business strategy.’ Journal of International Business Studies, 34(2), pp.138-152.

Hill, C., 2008. ‘International business: Competing in the global market place.’ Strategic Direction, 24(9), pp45-69

Kennerley, M. & Neely, A., 2003, ‘Measuring performance in a changing business environment.’ International Journal of Operations & Production Management, 23(2), pp.213-229.

Lewin, A.Y. &  Peeters, C., 2006, ‘Offshoring work: business hype or the onset of fundamental transformation?’. Long Range Planning, 39(3), pp.221-239.

Morningstar 2017, ‘adidas AG ADR’ key ratios. Available at. http://financials.morningstar.com/ratios/r.html?t=ADDYY.[23 February 2018]

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This Post Has 2 Comments

  1. Its like you read my mind! You appear to know so much about this, like you wrote the book in it or something. I think that you could do with some pics to drive the message home a little bit, but other than that, this is excellent blog. A fantastic read. I’ll certainly be back.

    1. welcome

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