SCOPE OF THE FIRM
VERTICAL INTEGRATION STRATEGIES (EXISTING MARKET/ DIFFERENT STAGE OF PRODUCTION) A vertical integration strategy describes “The degree to which a firm owns its upstream suppliers and its downstream buyers” (Blackwell Reference Online, Vertical Integration Strategy). The purpose of vertical integration is to increase the control of the stages of development. In the early beginnings Adidas produced all the shoes and apparel on its own. Through the huge expansion in the last decades Adidas does not produce all their apparel on its own. Today Adidas owns 9 own factories where it produces some of its products. Further, it has around 615 main suppliers from all over the world. Production is in Europe (27%), Asia (51%) and America (22%). Adidas has now switched from its past vertical integration strategy to the outsourcing in production and manufacturing. Most of the products of the company like sports shoes, apparels, accessories and equipment are manufactured in the Asian countries. The reason for outsourcing the manufacturing is the lower cost of raw material and labor in Asian countries. In 1993, Adidas moved its production overseas to Asia in order stay competitive in the industry. Even though Adidas has outsourced its production and manufacturing but the design and development process of all the products is still based in Germany. The Challenge due to Outsourcing
The Adidas product line includes more than 20,000 items, from soccer and inline skates to outdoor jackets and snowboards, with thousands of product variations. To keep up with market demand and competition, the company changes its product range twice a year. The change in the product range depends more often on the availability of the new technologies and the also on the product range and technology of the competitors. Adidas also designs products for local, vertical and niche markets. Developing this complex mixture of products means the design studios and development departments are working at full capacity and under enormous competitive pressure. Once the designs of the products are created, managing the production is the next significant and often more complex step. The design and development process of all the products is based in Germany. Adidas has 900 active suppliers worldwide and more than 90 percent of the company’s products are produced in outsourced manufacturing locations around the world, especially in Asia. With such a large amount of manufacturing outsourced, communication between designers, suppliers and manufacturers is critical.
Layout of outsourcing process at Adidas Group
Product Development Process at Adidas Group
Benefits and Concerns of Outsourcing
Cost Saving: There can be significant cost savings when the business functions are outsourced. Raw material cost, labor cost, employee compensation costs, office space expenses and other costs associated with work space or manufacturing are eliminated. Focus on Core Business: Outsourcing allows firms to focus on their expertise and core business. When organizations go outside their expertise, they get into business functions and processes that they may not be as well-informed and educated about .This could potentially take away the firms from their main focus resulting in low value creation. Utilization of new Resources and Capability: Outsourcing helps the firms to utilize the new resources and capabilities of country they are trading in. Sometime the firms learn and adapt to the new core competencies. Operational Efficiency: Outsourcing gives an organization exposure to vendor specialized systems.
Product Quality or Service Risk: Outsourcing can lead to compromises in product /service quality due to lack of necessary resources and competencies. Organizational Knowledge: An outsourced employee may not have the same understanding and passion for an organization as a regular employee. Labor laws &...
References: 1. Adidas Group Annual Report 2009
2. Adidas Group Annual Report 2010
3. Nike Inc. Annual Report 2009
4. Nike Inc. Annual Report 2010
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