REEBOK OF AMERICA INC.

Reebok started in the 1890's by Joseph William Foster in England. The original mission
of the company was to enhance performance in long-distance track events by improving
equipment. The business started on a very low-scale, where all shoes were hand-made.
The ever increasing demand for athletic apparel and shoes has made the company grow
into a highly diversified operation with its products distributed in 28 countries.

Reebok USA., Ltd was formed in 1979 by Paul Fireman. The original marketing strategy
was aimed at prestige and at high prices. In the beginning, the company had little luck in
penetrating the market, and in 1981, PLC, a British wholesaler of footwear acquired 56
percent of the common stock in exchange for $77,500 in cash. Fireman and PLC agreed
that neither party would sell its stock to third parties.

A few years later, Reebok's sales exceeded $1.5 million and the company contracted with
a South Korean firm to manufacture the shoes. In 1982, the company introduces the first
woman's athletic shoe. Sales rose to $3.5 million in 1982, and in 1983 the sales increased
to $12.8 million. By 1985, Reebok's sales reached $307 million. The same year, Reebok
International and Reebok USA., Ltd merged and Reebok International, Ltd was formed.
Stock was issued to the public at $6, and in 1986 the price of one share rose to stunning
$38.

In 1986, Reebok gave PLC the exclusive right to control, inspection and shipment of
finished goods from South East Asia. Reebok pays the subsidiary 4% on the first sales of
$100 million, 3% on the second, 2% on the second and finally 1% on of all purchases
exceeding $300. At the same time, Fireman was elected chairman of the company.

In 1987, Fireman set the goal of becoming a $2 billion dollar multinational firm by the
year 1990. This was to be achieved by acquisitions, internal development, and
international expansion. The company puts heavy emphasis on consumer research, and
on research and development activities.

Several horizontal acquisitions have been made by Reebok. Rockport company, a

manufacturer of high-performance walking shoes was acquired in 1986. Rockport would
become the most dominant name in the walking shoe industry. In April 1987, Reebok
purchased Avia Group International, an Oregon-based athletic shoe company. This
acquisition effectively combined two of the fastest-growing athletic footwear makers.
Furthermore, in September 1987, Reebok purchased Ellesse International S.p.A., and
Italian sportswear manufacturer for its shaky apparel division which was not doing too
well.

Presently. Reebok characterizes itself a "marketing-type company", dealing mainly in

sporting goods and leisure products with an upper-scale image.

 SWOT Analysis.
The internal strengths of Reebok relative to its competitions is all of the following. First,
the company's financial position is extremely strong. The financial growth of Reebok has
been phenomenal. According to Forbes, the company enjoyed the highest growth rates
from 1983-1987, and sales has continued to increase since that. With very few
manufacturing facilities, Reebok has a high level of liquidity (current ratios exceeding
2.0). Furthermore, earnings per share has increased, and revenues increased from $12.8
million in 1983 to more than $1.8 billion in 1989. Furthermore, the company has
operated with minimal long-term debt, and has the financial resources to invest in new
market niches.

Secondly, Reebok International is more diversified than the competition. The company
markets a wide array of show-wear, which has been possible by early strategic
acquisitions of reputable companies. For instance, Rockport is the most dominant brand
in the walking shoe industry. Also, Reebok is a clear market leader in the tennis shoe
market.

In addition, Reebok's brand image stands for quality, the latest technology and prestige.
The company has been in business for a longer time than any of the competition, and the
company has been able to create favorable brand recognition. Moreover, Reebok's top
management is highly marketing oriented, and most of the key personnel come from a
marketing background. This is a strength in this business, since the industry is market
driven instead of product driven. Also, an increase in demand is the expected market
trend.

The weaknesses of Reebok International includes all of the following. First, the
management. After that Joseph Labonte and Mark Goldston both reigned, Fireman is the
chairman, president, and the CEO of Reebok. The company is highly dependent on one
single person, who will not be able to effectively handle all of the required tasks. Also, in
the new reorganization, AVIA is no longer represented in group of four operating
corporate officers. This could cause internal tensions within the corporation. I believe that
there is a conflict of interest in the top management, between the entrepreneurial like
character Fireman and "the spirit of his company." The resignations of Labonete and
Goldston came as a result of their management styles conflicting with those of Fireman.
Moreover, Reebok's main product-line weakness is in its apparel division.

The opportunities of Reebok are the following. Continue market diversification and
expansion into international markets in search for new potential customers. Furthermore,
by diversifying into multinational markets it may be possible to pro-long the very short
product life cycles in the industry by manipulating the marketing of different product
niches in different nations. For instance, if the sale of one product-line is declining in the
USA, the same product may be launched in South East Asia, and vice versa. The
financial strength of the company makes it possible for Reebok to continue to ensure
market leadership with effective research and development strategies. It is very important
in this industry t make sure that you are on top-of-the-line in all products. Moreover, I
still believe that there is potential for growth in the apparel industry, and that Reebok
should focus on merging or purchasing a well-known apparel manufacturer. Reebok's
strong product name should do well on clothes and accessories.

The external threats that are impacting on the company's operations are concentrated to
competitive threats, litigation's, and in the manufacturing arena. First, the harsh
competition from the main competitors in the industry is significant. To keep-up with the
competition's penetrating efforts will cost a lot of money and put a lot of pressure on
marketing and research and development. Also, the short product life cycles play an
important role in the return on investment in a particular product line. Furthermore,
weakening markets may be a serious threat to Reebok. Are people willing to invest
hundreds of dollars into a pair of jogging shoes? In a weakening economy that is highly
questionable.

The most serious threat however is NAFTA. Since Reebok is manufacturing most of its
products in South East Asia, local content laws of production may seriously impact on
the company's profitability. High tariffs and other non tariff regulations may be imposed
on the company foreign manufactured goods. In 1991, the USA alone accounted for 69
percent of Reebok's total sales. (Please refer to graph #1) Also, manufacturing and labor
costs will increase in South East Asia, and Reebok will confront higher costs of goods
sold accounts, which will directly impact on the net income.

 Main characteristics of the athletic shoe industry

The athletic shoe wear industry is unique in the way it is market driven instead of product
driven. Markets have to be created and so does demand for the products. The industry is
vertially controlled by fads, which are nearly impossible to predict. The athletic shoe
industry must be able to quickly react to new market demands, and quickly develop
product variations that will "satisfy fad-hungry customers".

Furthermore, the characteristics of the shoe-business can be identified with the

entertainment industry, where the products have short-life cycles, and success depends on
the fact that what is flashy and "hot" will sell. Today's athletic shoe market is a mixture
between fashion and technology. Some competitive distinction has to be created together
with a fashionable image.

As new product lines are invented and introduced, the overall sale in the market will
increase. Presently, Reebok and Nike are the principal players in the industry, which sold
200 million pairs of brand-name athletic shoes a year.

 Porter's Five Forces analysis of the industry.

Porter's Five Forces model focuses on the external environment, and how it may impact
on the operations of the businesses in a particular industry.

The threat of new entrants into the industry is low. The entrance barriers are high in that
the capital requirements are high due to up-front advertising and research and
development. Also, economies of scale in production will be difficult to reach due to the
difficulties of penetrating the market which is dominated by the large five; Nike, Reebok,
Coverse, LA Gear, and Stride-Rite. Furthermore, it will be almost impossible to achieve
product differentiation in terms of brand identification and product difference, since the
"big five" set the trends. Also, distribution channels, and dealers are in many cases tied-
up by existing competitors. The bargaining power of consumers is medium to low. The
purchases of the buyer group is not concentrated in large volumes, and the products that
the consumer purchases are not standardized. Furthermore, the industry sets and creates
the fags and determines what is "hot".

The bargaining power of suppliers is medium to high since it is dominated by relatively

few companies. The product is unique, and the switching costs are high. It is also possible
for the suppliers (especially in foreign manufacturing) to integrate forwards into the
industry's business (in overseas markets) and become a rival to the industry.

The threat of substitute products is low. The industry is upgrading the products frequently
to cope with flashy fads and the "hottest" fashion. There are not too many close substitute
products to athletic shoes. What else would you wear when you run? Of course,
multipurpose shoes such as "cross trainers" may impose a possible substitute threat to the
current highly diversified range of athletic shoes on the market.

Jockeying among existing competitors is extremely high. Competitors are numerous and
are roughly equal in size and in power (Reebok versus Nike). Many of the product lines
lack differentiation (most of the shoes look different, but they are basically the same).
The products are highly "perishable", and the product life cycles are extremely short.
Lastly, the rivals are diverse in strategies, origins and personalities. Each one of the major
players are identified with a certain marketing approach, symbolized by the paid support
of famous sport stars.

 Strategies chosen by Paul Fireman that led to the amazing

performance of Reebok during the 1980's.

First, Fireman chose to apply a concentrated growth strategy. He chose to introduce only
three styles of running shoes for men, in a single market (USA). He directed
organizational resources to the profitable growth of one single product line, by utilizing
excellent marketing techniques and effective promotion programs. Following the initial
strategy, Fireman started to apply a product development strategy by the implementation
of women's aerobic shoes. Later, he decided to launch a product line of tennis shoes. By
applying a product development strategy, Reebok was to take advantage of a favorable
reputation/brand name, pro-long product life-cycles of current products, and finally the
company was able to attract satisfied customers to new products. The strategy following
the product development strategy was a market development strategy. Fireman now
concentrated growth on national and international expansion. Also, he started to attract
other market segments. Finally, Fireman focused on horizontal integration. Reebok's long
term strategy of growth was predominantly based on acquisition of similar firms
operating in the same market. This would eliminate potential competitors, provide access
to new markets, greatly expand operations, and finally improve the company's
diversification of its product line.

Reebok has made several horizontal acquisitions. Rockport company, a manufacturer of

high-performance walking shoes was acquired in 1986. Rockport would become the most
dominant name in the walking shoe industry. In April 1987, Reebok purchased Avia
Group International, an Oregon-based athletic shoe company. This acquisition effectively
combined two of the fastest-growing athletic footwear makers. Furthermore, in
September 1987, Reebok purchased Ellesse International S.p.A., and Italian sportswear
manufacturer for its shaky apparel division which was not doing too well.

I strongly believe that the horizontal integration strategy greatly attributed to Reebok's
success. There are many advantages directly related to this strategy. Reebok was able to
acquire distribution channels, technical knowledge, enhance profits, and finally create a
favorable brand image of existing goods. However, I find it difficult to understand why
the AVIA division was allowed to pursue its own strategies including aggressive
competition with Reebok brands. That is unhealthy predatory competition of market
shares within the same company!

 Principal diversifications of Reebok.

Since Reebok has diversified into so many different show lines, it has a large number of
competitors with whom to contend. However, diversification is also leverage, as if one
market segment is facing a decline in sales, other segments are able to make-up for the
losses. Rebok decided to diversify its shoe line to avoid becoming too dependent on a few
lines of sneakers. The company has diversified into international markets and into several
product niches. First, Reebok diversified into women's aerobic shoes. This was highly
successful, since the company was able to get into a new market segment which was yet
unexplored. Secondly, Reebok diversified into high performance walking and causal
footwear. I believe that this was a good deal, since the profitability of Rockport remained
high, and the company now had another product in its product mix.

The acquisition of Avia in 1987 effectively combined two of the fastest-growing athletic
footwear makers in the USA. Furthermore, Reebok was able to add yet another product, a
product which could satisfy the most serious athlete. This represented an excellent
opportunity for Reebok to directly compete with its worst rival, Nike. I believe that this
was a very good diversification. Brand image is crucial in this industry, and the quality
products associated with Avia would enhance Reebok's brand image.

The fourth diversification occurred when Reebok's subsidiary, Rockport company,

acquired the John A, Frye Company, which produced high-quality leather boots. These
high-class, high-priced and high-quality boots would add another line of footwear to
Reebok's product mix.

The fifth diversification occurred in 1987, when Rebok decided to purchase Ellesse
International S.p.A., an Italian upscale sportswear manufacturer. Reebok used the
company as a distributor in Italy. This diversification would aide Reeboks struggling
apparel division. Nike did a similar acquisition in 1989 of Cole-Haan in order to improve
styling of products. I believe that this diversification could increase the profitability of the
apparel division, in which Reebok has very little experience in.

The final diversification was made in 1989, when the company acquired CMI's Boston
Whaler unit, which manufactures and sells power boats for the US government and for
recreational use. Since Reebok characterizes itself as a "marketing-type company",
dealing mainly in sporting goods and leisure products with an upper-scale image, I
believe that this diversification is questionable, but still within Reebok's product mix.
Boston Whaler would become Reebok's first manufacturing operation, which could be a
challenge for the marketing-oriented company. I believe that this is the most questionable
diversification that Reebok made, since power boats have very little to do with foot-ware
and apparel.

 Differences in the strategies of Reebok and Nike.

The main difference in the strategies of Nike and Reebok is that Reebok has focused on
more diversification, while Nike has focused on strict product development. Nike's long-
term strategy is identical to Reebok's in the way that both companies are focusing at the
high end of the market and maintain relatively high prices. Furthermore, both of the
companies invest large amounts of money into marketing programs and into
technological research and development in purpose to maintain combativeness in the
highly competitive athletic shoe market.

In addition, Reebok has focused on a horizontal integration strategy, while Nike has only
acquired Cole-Haan, a manufacturer of men's upscale dress and casual shoes. In contrast,
Reebok has acquired over five companies since the beginning of the 1980's, including a
wide array of shoe-product-lines including a apparel manufacturer.

To summarize, Nike focuses on the marketing of athletic footwear and apparel and has
little activities outside these areas. Reebok, is diversified to a much larger extent, and is
focusing on continuous expansion of its product lines. Both of the companies places
heavy emphasis on consumer research, research and development, and on product/brand
name image.

 Major problems facing Reebok in 1989-1990.

The major problems that are facing Reebok in 1989-1990 are solely related to the
organization and to the top management in particular. Virtually all indicators of financial
performance for Reebok in recent years show strongly positive results, and sales are
increasing.

In August 1989, two of the key personnel in the top management of Reebok resigned.
The loss of these two personalities would be the main cause to the problems that are now
facing the company. Joseph Labonte, the former president and operating officer who
joined the company in 1987 and Mark Goldston, the former chief-marketing officer were
great assets to the organization. Furthermore, they held key-positions in a marketing-
oriented company operating in a highly competitive market. Both of the persons had
managerial experience in multibillion-dollar organizations, and they had both extensive
experience in heavy marketing and advertising of consumer brand names. However, none
in the whole top-management team had any experience in the footwear industry.

The loss of these key personalities caused a managerial vacuum in top-management.

Fireman, took the positions of chairman, president, and CEO. That is an impossible task.
Fireman is trying to centralize the organization, and thereby divert responsibility to other
key personnel. Still, each executive manager is responsible for too many jobs. For
instance, John Duerden is the senior vice president and president, and CEO, Reebok
Brands Division Worldwide.

The first thing I would do to improve the top-management of Reebok would be to get a
"head-hunter" and find somebody who can take the President position, and the CEO
position for Reebok International, Inc. In addition, I would ask Fireman to get back to his
chairman position. (Please refer to the proposed layout of the new organization.) The
President/CEO position and the Vice Chairman positions are now open.

Since Reebok is looking into international expansion, the complexity of the organization
will increase. International subsidiaries have to be effectively managed and
communication channels must be improved throughout the corporate structure. Fireman
must realize that he cannot alone control all of the operations of the company anymore.
He must start to delegate responsibility and start to trust people.