Adidas International Market Entry Strategy Analysis

Company Background

Adidas was founded in Herzogenaurach, a town in Mittelfranken, north of Nürnberg and not far from Erlangen, where the company remains headquartered today. It was established by brothers Adi and Rudolf Dassler, who eventually had a falling out — Rudolf went on to found Puma. Adidas has since grown into one of the leading designers and marketers of sports apparel, footballs, and other related items. The company operates globally, posting revenues of nearly €20 billion and profits of €0.72 billion in 2015 (Adidas 2015 Annual Report).

Adidas competes against Nike, Reebok, Puma, and several other brands in this space. Major product lines include footwear, apparel, and footballs. Adidas sponsors a wide range of athletes and athletic clubs as a core part of its marketing strategy. Broadly, this industry is characterized by incremental changes to basic product designs, a strategic emphasis on marketing and distribution spending, and companies that employ a global strategy — selling in essentially the same way in each country where they operate.

There are a few key ways in which this global strategy manifests. When Adidas and its competitors seek endorsement opportunities, they typically target global platforms: football stars and clubs represent the best opportunities, but other major club sports and the Olympics are also prime sponsorship vehicles. Adidas and its competitors seek to differentiate through branding and to win markets through superior marketing and distribution. Consequently, market entry anywhere in the world will necessarily focus on distribution and marketing. Production does not change significantly, but the company must choose between global and local marketing approaches depending on the context.

The Industry

The global athletic footwear and apparel industry is highly competitive and very large. A handful of dominant companies occupy the top tier, but a number of local companies also operate in most markets. In most countries, the typical structure places global brands — Nike, Adidas, Reebok, Puma, and others — at the high end of the market. These companies sell high-quality, well-designed goods at premium prices, and carry with them a degree of prestige derived from marketing investment. The remainder of the market is often filled with discount brands, usually local, that are produced in the same countries but to a lesser standard, lack high-end design, and are sometimes made with cheaper materials. These companies seek to capture share at the low end of the market.

It is worth noting that in the world's major economies there is relatively little room for discount brands, since the vast majority of consumers can afford the premium global offerings. The premium global brands compete intensely around the world. They dominate the developed world, where competition can be severe because the market is essentially a zero-sum game, aside from incremental economic growth. The developing world presents an entirely different competitive dynamic. Premium global brands not only compete with each other for share, but also work to grow the overall size of the market. Success in these countries is therefore not just about winning against other global brands — it is about tapping into the country's underlying economic growth. The economic growth potential of a given market is thus one of the key variables Adidas considers when making a market entry decision. The competitive landscape is also relevant, though less so than in the developed world.

Literature Review

The main framework through which Adidas's decisions will be evaluated is the transnational approach. At its core, this approach describes a company that operates across borders — one that is not fully global but is sufficiently international that it has, in many respects, loosened its ties to the home country (Johns, 1993–1994). Whether Adidas fits this description precisely is a matter of debate. Internally, in terms of how it is run, Adidas remains very much a German company. However, its products, marketing, and production are certainly transnational in nature. Given that these are the key areas in which Adidas operates when entering new markets, a case can be made that the transnational framework is appropriate here.

Alcacer, Dezso, and Zhao (2013) discuss the factors that contribute to multinational enterprise (MNE) location decisions. They begin by noting that most existing literature focuses on firm-level characteristics and location variables, arguing that these may have insufficient explanatory power regarding how transnational enterprises actually make location choices. Since such decisions are inherently marketing decisions, home-country location will certainly play a role, but other factors clearly matter. The authors argue that there are oligopolistic tendencies in industries characterized by transnational competition. This is certainly the case in athletic footwear and apparel — competing at a transnational scale is inherently limiting, and very few companies can do so effectively. This creates a de facto oligopoly, aside from the presence of low-end competitors that occupy an entirely different rung on the competitive ladder.

These authors examine what they consider three primary equilibrium strategies: avoidance, collocation, and stronger-chases-weaker. Avoidance is fairly straightforward — seeking out markets where competition is less intense. In a true oligopoly there are few opportunities for monopoly profits, but a company that finds a market without such competition can extract monopoly rents, at least temporarily. Collocation sees companies entering the same markets at roughly the same time; no particular competitive advantage is gained in this situation, but rather it represents an extension of the pre-existing oligopoly. Stronger-chases-weaker is essentially the natural continuation of the avoidance strategy: a company extracting monopoly rents in a market can expect dominant players to enter that market, restoring oligopoly conditions.

Nachum and Song (2011) make two related arguments. First, they argue that different forces influence expansion versus contraction for MNEs. Second, accepting this proposition, they explore how the different business lines in which a company operates influence its market entry decisions. Applied to the athletic footwear and apparel industry, a company specializing in soccer might prefer to focus on nations where that sport is most popular. For example, such a company might prioritize Brazil among the BRICS nations because soccer is dominant there. It is not a particularly major sport in China or India, so despite those countries being much larger, they would not necessarily be the first-choice market. South Africa might present the weakest opportunity for a soccer-focused company among the BRICS — while soccer is very popular there, it is played mainly among lower-income populations who may prefer cheaper alternatives.

An MNE, Nachum and Song point out, can be viewed as a portfolio of businesses whose components have interdependencies. In this industry, those interdependencies typically manifest on the distribution side. While marketing different products may be siloed, distribution usually is not, so whether there is a good fit with existing businesses — or an opportunity to develop a complementary portfolio — may dictate market entry choices. In the above example, a soccer-forward company choosing between China and India would examine other business lines for interdependencies. If it has significant cricket operations, it would likely enter India first, then perhaps South Africa, before targeting China — capturing synergies in both marketing and distribution along the way.

Tregakis et al. (2010) make a related point, positing that transnational organizations develop particular learning behaviours. The expertise they generate can be applied across many markets, and if there is cultural fit with the home market, so much the better. For a German-based company, it may not be immediately obvious which BRICS market is the best fit, but certain markets around the world will naturally offer stronger cultural compatibility. A company headquartered in a more internationally diverse location might be better positioned to expand into regions with very different cultural norms, while a company based in Bavaria might prefer to start with countries closer to what it knows.

Ciabuschi, Forsgren, and Martin (2011) discuss innovation at MNEs, arguing that the location of MNE headquarters partly influences the degree of innovation at subsidiaries. This is reasonable in the sense that even in a transnational organization, the dominant culture at headquarters is often transferred at least partially to subsidiaries. The paper is highly theoretical and does not study specific companies. Applied to Adidas, it would require an examination of the actual innovations that subsidiaries produce for local markets. Such innovations undoubtedly exist, even where design and marketing functions are guided centrally, because there is frequently a need for local market influences — both on product offerings and on marketing — that reflect the passions of the local population.

The transnational framework can only reasonably be applied to situations where it genuinely fits. Other frameworks for international business decision-making may be more appropriate for Adidas in certain contexts. While Adidas markets transnationally, much of its business remains fairly centralized in Germany — it is a German company that operates internationally, and forcing a fully transnational framework onto a business that only partially fits will inevitably lead to analytical problems. Ultimately, the way Adidas chooses new markets and determines the means by which it enters them comes down to rational analysis of potential return on investment (ROI).

The company weighs the different challenges of a given market — market potential, competitive structure, cultural fit, the learning curve it will face — and assesses how those challenges will influence ROI potential. This rational, systematic approach guides market entry decisions across the portfolio.