Short Term Liquidity
Short term liquidity position of Adidas Company has been analyzed below. A number of ratios were calculated during the last 5 years for analysis purpose. The current ratio from year 2003 to year 2006 remains almost the same. However this ratio increases substantially during 2007. This increase is due to rise in investment in debt securities and decrease in accrual expenses. The acid test ratio of the company also depicts the same picture. Overall short term liquidity as shown by current and acid ratio improves substantially during 2006 and 2007 compared to previous years. Receivable turnover ratio remains fluctuate slightly during the past five years. It saw its highest turnover during the years 2007 which result in day sales in receivable of 32 days only. Inventory turnover fluctuate widely during this period which remained as high as 4.87 during year 2004 and then drop substantially and again picked up during year 2007 to 3.48. This figure when converted into days shows 70 days conversion period for year 2007 falling from as high as 280 days during year 2004. It shows that company improves its performance in terms of converting its inventory into sales resulting in higher sales figure during the year 2007. Overall conversion period shows improvement and stand at 102 days during the year 2007. Cash to current assets and cash to current liabilities stand at 1.09 and 4.4 percent respectively. Cash is not major part of current assets of the company. The improvement in current ratio during the year 2007 is due to substantial investment in debt securities. During the year 2004, these two ratios were as high as 17.1 and 27.9 respectively. The reason why these are so high during this year is due low investment in debt security which the company then increases steadily in the subsequent years. Working capital amount is quite adequate which increase consistently during the past five years. It shows that company is in good position to finance its short term financial needs. Company’s day purchase in account payable show a steady increase. It shows that company is paying to its trade debtor at a faster pace during the last four years. During the year 2007, this ratio decrease to 48 days from a high of 95 day during 2004. Overall conversion period stood at 53 days during 2007 which is a very remarkable performance over the previous four years. It shows that company is converting its inventory into receivables and receivable into cash quite efficiently ( Bragg S; 2003). This operational efficiency of the company is evident as cash provided by operations to current liabilities ratio is very impressive at 1.26 during 2007, a major improvement over the last four years (Largay, James A III and Clyde P. Stickney, 1980).
Capital Structure and Solvency
Capital structure of the company show how much of the company assets are financed by the company through debt and how much from equity. The analysis below shows that company is decreasing its reliance on creditor financing steadily starting from 37.4% from 2003 to 26.73 percent during 2007. At the same time company is building equity finance during the same last five years. This increase in equity finance came mostly from increase in retained earning of the company. The company paid no dividend to its outside shareholders. Instead it has decided to reinvest its annual profit into the business instead of relying on outside financing. The decrease in total liabilities seems to be due to equal decrease in current liabilities of the company. This decrease in current liabilities of the company, therefore, results in improved current and acid test ratio for the year 2007.
Return on Invested Capital
Return on invested capital analysis shows that this return fluctuated widely during the past five years. The company posted very high performance as far as RNOA is concerned during the year 2006. This performance is due to high NOPAT during the year because of less operating expenses on account of asset impairment and restructuring charges, coupled with higher NOA turnover. These two expense items increase substantially during 2007 resulting in low NOPAT. Also the company increases the size of its sales force and marketing cost associated with launching of new products. Due to high operating expenses during 2004, company showed negative operating profit resulting in negative RNOA. Adidas company ROE during 2006 was highest at 12.37 percent among these five years. This increase is primarily due to high RNOA and high spread during that year. NOA turnover fluctuate during these five years under analysis. However it is the NOPAT margin during 2006 which was the highest at 14.35% resulting in high RNOA and ROE for the company.
Return on Invested Capital
Asset utilization of the company has been shown in below. Sales to cash equivalent varied very widely from as low as 6.77 during 2004 to 107 during 2007. This increase is due to increase in sales of the company during these years couples with company’s policy of investment in debt securities. Sales to account receivable is increasing over the years showing that company is rapidly converting its receivable into cash. Same is the case with inventory. Company is converting its inventory into sales rapidly over these years resulting in higher sales. Sales to fixed asset and other assets show the same increasing trend during the past five years. Company has been quite effective in utilizing its assets quite efficiently as evident from the sales to total asset ratio. Sales to long term liabilities indicate trend of relying more on equity financing. This has been accomplished through retaining the net income within of the company. This ratio was 87 times during the year 2005 because during that year Company decided to retire its long term debt (Eisen, P. 2003).
Operating Performance and Profitability
Gross profit margin remains almost at the same level during the five years showing that there is no major change in trading expenses. However operating margin was very high at 21.1 during 2006 compared to remaining years. And because of this higher operating margin that year saw a substantial increase in ROC and RNOA. Net profit margin followed the same trend. 2003 was the only year that witness negative operating profit margin due to increase in operating expenses during that year.
The analysis of depreciation data shows that accumulated depreciation remained almost the same during these five years. Because of this there is no evidence that earning quality is affected due to change in depreciation amount. Discretionary expenditure analysis shows that net sales of the company are increasing gradually every year due to aggressive marketing of product. Research and development expenditure were higher during 2006 and 2005 due launching of new products during that period (Davis, H.Z,. and Y.C Peles, 1993).
Operating Performance and Profitability
- Positioning – Adidas has created a niche in offering a wider array of sports related products in the world market. Adidas has been the official world cup football maker for many years. This helped them become one of a well connected and respected company in the world.
- Promotion: – use of internet, television adverts, promoting social activities, fliers, sponsoring sports and much other promotional activity. Since we are involved in providing wider sports products choices, Adidas is inclined for product differentiation, which is essential in positioning. The products are positioned so it can stand apart from competitive products. Their unique combinations that differentiate their products from other competitive offerings will enable customers to define the important attributes of the business.
- Place – Adidas is situated in Germany with distribution all over the world.
- Pricing – Adidas will make all the prices of their goods to match the prices of their competitors like but will have a hedge because they are unique.
Adidas products are sports products like shoes, balls, clothes and other sports related targeting the growing market of wealth youths and growing number of yearning for sports in the world. It should also plan to venture in producing other products. Since there is large market for sports products, the success will definitely rely on quality and standards.
The goals and objectives of Adidas are as follows:
- To remain the market leader in the industry.
- To provide affordable and high quality products in the world.
- To constantly guide and inform wellness consumers about their products they offer;
- To continuously strive to make service fast, accommodating and excellent towards all consumers in all parts of the world..
The mission statement of Adidas would be:
The low content of environmental hazard products to their consumers is the main prime concern. This means they produce worldwide respected products.
Adidas is committed to the development and economical growth of people across different cultural boundaries. Culture is all about expectations, desires and lifestyles. The company’s website has a lot of information regarding their different brands of products. Customers can even purchase products that best suit their sports needs through their outlets. Through the web, they can also air their views on what new modifications they deem suitable for them. Language is another cultural factor the company has well catered for. Its brochures, magazines and blueprints are all written in several languages to enhance communication. In their different branches globally, is an integration of human resources from different cultural backgrounds.
Adidas adopted a value chain that has resulted into the maximization of value while maintaining the costs to their minimal levels.
Activities where value has been created and costs reduced include procurement of raw materials, Human Resource Management and Technology development. Other areas include Research & Development, Sales, and Marketing.
In procurement, Adidas Management has ensured that the raw materials and other supplies are close to their proximity to reduce transportation costs. Production is done using high technology while ensuring that their products cannot suffer from impurities and obsolescence hence low obsolescence costs. They incur a significant cost in research and development but this cost is countered by the value generated there from i.e. products that cannot have substitutes.
Adidas tries to reduce the costs associated with recruitment and hiring of staff like for instance doing the exercise online. The benefits/value of the exercise is enhanced by recruiting and hiring staff of high integrity, professionalism and expertise.
Porter’s Five Forces Analysis for the Sector
The company faces the threat of buyers shifting their loyalty to other rival companies. This phenomenon according to porter is referred to as backward integration. To curb this threat, Adidas has come up with three generic strategies to counter this threat.
- Cost leadership: – It has reduced the price of some its products including the cost of offering services.
- Differentiation strategy: – The Company has come up with alternative products that are differentiated from the rival firms. These products should be economical and are environmentally friendly in terms of pollution (Saunders, Anthony,1997).
Among the customers of the industry manufacturing firms, FIFA world cup organizers, other sports bodies worldwide.
Supplier Power Adidas is faced with the threat of the suppliers being able to control the price of some of the materials they supply. The labor laws are also stringent and the workers are so unionized that treating of employees in a fair and equitable manner is inevitable. To counter this force, the company extends its supplier chain making the prices to come down. The generic strategies adopted by the company against supplier power are by increasing the price of their products. In essence, the extra prices charged for the raw materials are borne by the customers. This is the differentiation strategy. Another strategy to insulate itself from this force is that of focus. Because of the higher material prices, Adidas has taken on the differentiation-focused strategy. In this strategy, the methodology has been improving the quality of their products. By so doing, the prices can be increased without harm being made to the customers (Saunders, Anthony,1997).
Barriers to Entry
The other force challenging the industry is entry of new companies with similar. This would pose the threat of neutralizing the company’s profits as well as its market share. The generic position that the company has taken has been cost leadership. Through lowering its production costs and increasing operational efficiencies, the company has been able to lower its products prices while maintaining its profitability. This has deterred potential investors/ entrants into the industry.
This force emanates from other companies within the same industry like Nike and Reebok. The threat here is that these companies capturing the market. However, the company’s framework/ strategy have been reducing prices whenever faced with such a threat. Prices are then reverted to normal after the exit of that company the specific market segment.
Consequently, Adidas products have been adopted to reduce rivalry. Focus has also been used as the generic strategy to solve these problems- rival companies cannot effectively meet differentiated as well as focused needs of the customers.
Threat of Substitutes
From the economist point of view, threat of substitutes arises when the demand of that good is likely to be affected when the price of the substitute changes. This elasticity of price has formed a real force that the company has to fight if it has to be sustained in the near future. To reduce the strength and danger of this force, the company has strengthened its differentiation generic strategy as its framework. Customers would then be loyal to the uniqueness of their products (Saunders, Anthony,1997).
Nearly half of the world’s populations have access television and Internet connections in their homes In the USA nearly half of the populations have access to internet in their homes, according to the annual survey by the Pew Internet & American Life Project in July 2007. The number of home broadband users nationwide now equals the total number of Americans with any type of Internet connection in 2000, the first year the survey was conducted.
The company is very competitive; Adidas is balancing its e commitment to communities they operate in through its corporate responsibility. They assist in environmental activities. Manufacturing cause environmental damage, the company is trying to use modern methods of environmental cleaning (Saunders, Anthony,1997).
The company is operating all over the world. Each country have the own laws to complied with. The head finds it difficult to for example convert financial statements prepared in different accounting standards and procedures. These is one of legal constrain facing this company, although accounting standards board are solving this problem though convergence of accounting standards (Saunders, Anthony, 1997).
- Unique Product Offerings; the company is offering Unique products with strong brand name.
- They have strong presence in Africa market, strategic position in US and Europe and a commandeering share in the European market.
- They have carried successful sponsorship of FIFA world cup
- Owning the technological know how that is, they are able to sports.
- Large number of working staff equipped with technology and based in and outside the Germany
- Strong financial base.
- Too Many competitors and they includes Nike and Reebok.
- Most consumers had now access to variety products from different companies.
- Fluctuating financial performance: this is shown from the financial statements.
- there is increase in demand of sports and related products
- Enlarging of the Target Market
- Increasing Awareness of People About physical development
- Entry of companies from china, Africa and Asia
- The threat of new entrants
In order to achieve better future results, better or higher to industrial average, the Adidas needs to cut down its operating expenses, enter to new markets through vertical integration, geographical expansion and product differentiation (Atril, P.F. and McLaney, E. J. , 2002). This would considerably improve the profitability which is declining recently. They also have to review their policy on capital management and keep optimal levels of various items of current assets. This would improve the firm’s liquidity position. In order to improve the return on owner’s equity ratio, the management should invest in viable projects that would yield positive NPV’s (Henderson, S., Peirson, G. and Herbohn, K., 2008).
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