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New Balance is one of the world's five largest manufacturers of athletic shoes. It is considering if it should respond to Adidas' planned acquisition of Reebok. The acquisition would result in the consolidation of the second- and third-largest companies in the footwear industry. This case study discusses the unique sides of New Balance's strategy which highlights fit and performance. Now, New Balance is facing the challenge of whether to change strategy in light of the recent development in its competitors' consolidation move.
H. Kent Bowen; Robert S. Huckman; Carin-Isabel Knoop
Harvard Business Review (606094-PDF-ENG)
April 20, 2006
Case questions answered:
- What are the key elements of New Balance Athletic Shoe, Inc.’s current operations strategy? What are the key assumptions and decisions implicit in this strategy? Please be specific.
- What key OMT philosophies, concepts, frameworks, tools, and insights can be used to analyze the situation at New Balance? Please be precise and remember to use the appropriate terminology and related case references.
- What is your assessment of the implications (financial and strategic) of the decision to keep 25% manufacturing in US? Assume that the US market for athletic footwear was 400 million in 2005.
- What should New Balance do about Adidas planned acquisition of Reebok and the NB2E initiative? What aspects of operations strategy may need to change and why?
- What would be needed to implement your recommendations? How would you handle the related risks?
- Evaluate New Balance’s current operations strategy. What are the key decisions implicit in this strategy?
- Assuming that the total U.S. market for athletic footwear was 400 million pairs in 2005, how costly was New Balance's decision to maintain 25% of its manufacturing in the United States? What is your assessment of that decision?
- How should Davises react to Adidas’ planned acquisition of Reebok? What aspects of New Balance’s operations strategy should they change?
- Moving forward, how important is the NB2E initiative for New Balance?
- How should New Balance respond to the Adidas/Reebok transaction?
- How has New Balance’s operations strategy supported its competitive objectives?
- What is your assessment of the company’s objectives for the NB Executional Excellence initiative?
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New Balance Athletic Shoe, Inc. Case Answers
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1. What are the key elements of New Balance Athletic Shoe, Inc.’s current operations strategy? What are the key assumptions and decisions implicit in this strategy? Please be specific.
We know that an operations strategy is a framework/plan for utilizing the available resources that will drive the business execution. It basically is a way to align your resources according to your strategy. New Balance Athletic Shoe, Inc. was committed to delivering high-quality products that meet the demands of the performance-oriented runners, unlike the industry norm, which was more focused on the fashion trend of the shoes.
Thus, they align their operations accordingly by committing towards and operations and manufactured based strategy to deliver high-quality products that the performance-oriented individuals can rely on and use reliably for a longer time.
Some of the key elements and the inherent assumptions and decisions in their operations strategy are as follows:
1. Unlike their competitors (Nike and Adidas), New Balance Athletic Shoe, Inc. was spending very little on marketing its products and more focused on the cutting edge R&D and manufacturing aspects of its products.
Because it believed (assumption) that its customers were performance-oriented and would want high-quality products and less focused on the fashion aspects of the shoes.
This is also why it did not endorse sports personalities. It did not want to spend extra money on advertising the product rather than deliver a high product to its distributors and retailers, who can then have a loyal customer base because of the high-quality product.
2. New Balance Athletic Shoe, Inc. acquires 75% of its finished goods from China, and the remaining 25% are assembled in its USA based factories. However, the raw material for in-house shoes was also procured from china but were assembled here.
The two variants that were made in-house were much more expensive than those procured from China ( $13 and $0.5). We believe that reason for this is that New Balance wanted some control over a certain portion of its finished goods. Also, the lead times associated with in-house products were much lower than the ones sourced from China.
Furthermore, New Balance Athletic Shoe, Inc. was also constantly updating its foreign vendors with the learnings that it got by producing in-house, thus enhancing its suppliers’ capabilities.
3. Although one must have lower inventories for low costs, but at times, a business can lose out on a significant portion of its sales, it does have a certain product in stock when it is in high demand.
Thus catering to this aspect, New Balance Athletic Shoe, Inc. stocked huge inventories to meet the retailers’ uncertain demands. We also believe that this strategy is also enhancing the relationship between retailers and New Balance, as they rely on them for providing products anytime.
New Balance Athletic Shoe, Inc. was also looking to further improve its value proposition by reducing the overall lead times.
4. NB had an entrepreneurial culture and wanted to improve and innovate continuously, thus keeping this in view. They outsourced a network of expert Salesforce, with an entrepreneurial mindset to improve their sales and distribution processes.
2. What key OMT philosophies, concepts, frameworks, tools, and insights can be used to analyze the situation at New Balance? Please be precise and remember to use the appropriate terminology and related case references.
If we analyze the sense of purpose, i.e., their objectives, Vision, and Mission, we note that they want to deliver high-quality products by emphasizing R&D and meeting the needs of performance-oriented runners. Their product strategy was clear that they would not cater to fashion trends of the industry but rather focus on the product’s performance aspect.
Although we do notice that in the shoe market, customers value “Time to market” very high because they want up to date trendy products, this is unlike Sports Obermeyer, where we saw that it was more focused on meeting the fashion trends of the market on time by managing the production of its products in several stages to get more information about the demand.
New Balance Athletic Shoe, Inc. has differentiated itself from competitors (Nike and Adidas) by focusing on the shoe business’s manufacturing and operations aspect and not on the marketing side.
Because they believe that they cannot overtake these marketing giants by following a marketing-based strategy as these big players possess more financial resources than New Balance.
Thus they have focused on their core competencies to achieve differentiation through manufacturing and operations based strategy. Thus, through this focused strategy, New Balance Athletic Shoe, Inc. can achieve process efficiencies and learn by limiting its scope and thus leading to specialization.
From Toyota Production Systems’ philosophy, we have learned that “People (workforce) are the most important assets.” It is important to inculcate a problem-solving mindset in your employees to not rely on individual heroics when a problem arises. Rather, every employee should be prepared to deal with contingencies and resolve the problem’s root cause.
New Balance Athletic Shoe, Inc. has instilled an entrepreneurial culture and empowered its employees, ultimately resulting in quick decision making. They have also developed a “Teamwork” culture because they have cross-functional teams. Thus, people with different skills must be able to solve problems together and add to every other individual’s overall learning on the team.
They also believe in the “continuous improvement” mantra, which is kaizen, as they want to take risks and build upon what they have already done and performed.
On analyzing their “Product design and development ” strategy, we noticed that they worked along two dimensions. One was further to enhance the quality aspects of the existing models. The second effort was made towards incorporating new technologies and features in the upcoming products.
Thus, New Balance Athletic Shoe, Inc. was trying to
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