New-Balance-Athletic-Shoe,-Inc.

9-606-094REV:JUNE30,2008________________________________________________________________________________________________________________ProfessorsH.KentBowenandRobertS.HuckmanandGlobalResearchGroupExecutiveDirectorCarin-IsabelKnooppreparedthiscase.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2006–2008PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.H.KENTBOWENROBERTS.HUCKMANCARIN-ISABELKNOOPNewBalanceAthleticShoe,Inc.OnapleasantAugusteveningin2005,JimandAnneDavisenjoyedwhatwasmeanttobearelaxingdinnerathome.Astheyfinishedtheirmeal,however,theycouldnothelpbutturntheirattentiontoaheadlineinthatmorning’sBostonGlobe,acopyofwhichsatontheirkitchentable:“AdidastobuyReebok.”Forover30years,theDaviseshadbeenthesoleownersofNewBalanceAthleticShoe,Inc.,oneofthetopfiveproducersofathleticfootwearintheworld.Giventheirexperienceintheindustry,theyhadsuspectedforsometimethatanAdidas-Reeboktransactionmightbeintheworks.Nevertheless,theformalannouncementcausedthemtowonderabouttheimplicationsofthisdealforNewBalance.BybringingtogetherAdidasandReebok—thesecond-andthird-largestproducersofathleticfootwear,respectively—thistransactionwouldcreateajuggernautthatwouldrivalNike,thelargestcompetitorintheindustry.AlthoughtheDavisesdidnothavetoanswertoWallStreetconcerningtheircompetitiveplans,theyknewthatmanyintheindustry—includingtheirownemployees—wouldsoonbeaskingfortheirresponse.Overthepastyear,theDaviseshadfocusedsignificantattentiononaninitiativecalledNewBalanceExecutionalExcellence(NB2E),thegoalofwhichwastoincreasethequalityandefficiencyofthecompany’soperationalprocessesthroughtheapplicationofleanmanufacturing.NB2Ealreadyhadprovidedevidenceofimprovement,andtheDavisesdidnotwanttolosethegrowingenthusiasmforthisinitiativeamongNewBalance’s2,600associates.Further,theyrealizedtheimportanceofstayingtruetotheprivatecompany’suniqueoperatingphilosophy,strategy,culture,andhistory.Nonetheless,theycouldnothelpbutwonderwhetherNewBalance’sprioritiesneededtobeadjustedinlightoftheshiftingcompetitivelandscape.TheU.S.AthleticShoeIndustry*TheUnitedStateswastheworld’slargestmarketforathleticshoesandapparel,accountingforroughly50%ofthe$32billionspentgloballyeachyear.Between2004and2009,thenumberofpairsofathleticfootwearsoldintheUnitedStateswasexpectedtogrowata6.3%annualgrowthrate(8.4%growthamongwomenwhoaccountedfor58%ofallpairspurchased),reaching530millionpairsin2009.IndustrytradegroupSportingGoodsIntelligenceprojectedthatthe$9billionbranded-shoemarketintheUnitedStateswouldgrowby8%in2005.Growthwasslowinginpartbecauseofamaturationofconsumerinterestinsportsandfitnessactivities.*Drawnfrom“IndustryOverview:FreedoniaFocusOnAthleticFootwear,”TheFredoniaGroup,April1,2005,availableon([e-mail])onSeptember12,2011-CampusBox90911834WakeForestRoadWinstonSalem,NC27109606-094NewBalanceAthleticShoe,Inc.2Inresponse,manufacturershadmovedtocombinefashionandcomforttoappealtoabroaderrangeofconsumers,namelythosewhoworeathleticshoesforcasualpurposes.Concurrently,acombinationoftechnologicaldevelopmentsandstyleimprovementsinathleticfootwearhelpeddrivegrowth.Nikemaintainedacomfortableleadwith43%ofthetotalglobalmarketforathleticshoesandapparel(seeExhibit1).WithintheU.S.footwearmarket,Nikeaccountedfor36%ofthemarket,whileAdidas,ReebokandNewBalanceeachheldavariable8%-12%shareofthemarket(Exhibit2).TheAppendixbrieflydescribeseachofthetopcompetitorsintheindustry.TheacquisitionofReebokbyAdidaswouldcreateafirmthatrivaledNikeinsizeandwouldboostAdidas’ssharetoroughly20%oftheU.S.footwearmarket.TheAdidas-Reeboktransactionwouldalsoreflectthebroadertrendtowardconsolidationintheathleticfootwearindustry.InJuly2003,NikeacquiredConverse,aMassachusetts-basedmanufacturerofcourtandcasualshoes,for$305million.InJune2005,StrideRite—themakerofcasualfootwearbrandsKedsandSperryTopSider—announceditsintentiontoacquireSaucony,a$170millionmanufacturerofspecialtyrunningshoesandapparelbasedinPeabody,Massachusetts.Withrespecttoworldwidemarketing,Nikespent$213millioninmeasuredmediain2004,comparedtoAdidas’$89millionandReebok’s$42million.1Incontrast,NewBalance’stotaladvertisingexpenditurewas$17.3millionforthefirst10monthsof2005.2Forallcompanies,mostofthisexpenditurewasgearedtowardthemarketingoffootwearbrandsintheUnitedStates(Exhibit2).UnlikeNewBalance,mostleadingcompetitorsproducedtheirshoesoutsideoftheUnitedStates,largelybecausethemanufacturingofathleticfootwearwashighlylaborintensiveandrequiredrelativelylowlevelsofworkerskill.C