Assignment

Of
Organization Change &
Development

Submitted to:- Submitted

by:-
Lect, Maneet kaur Mam, Ravish Kr. Bajra
BBA 6th SEM
Roll No: - RT1809A09
Reg.no:- 10808077

Merger
Definition
The combining of two or more entities into one, through a purchase or a pooling of interests.
Differs from a consolidation in that no new entity is created from a merger.

Air India and Indian Airlines Merger eg of

“Kurt Lewin Model “

INTRODUCTION AIR INDIA

Air India is India’s national Airline. Air India’s history can be traced to October 15, 1932. On
this day J.R.D. Tata, the father of Civil Aviation in India and founder of Air India, took off from
Drigh Road Airport, Karachi, in a tiny, light single-engine de Havilland Puss Moth on his flight
to Mumbai via Ahmedabad. Air India was earlier known as Tata Airlines. At the time of its
commencement, Tata Airlines consisted of one Puss Moth, one Leopard Moth, one palm-
thatched shed, one whole time pilot, one part-time engineer, and two apprentice-mechanics. Tata
Airlines was converted into a Public Company under the name of Air India in August 1946. On
March 8, 1948, Air India International Limited was formed to start Air India’s international
operations. On June 8, 1948, Air India started its international services with a weekly flight from
Mumbai to London via Cairo and Geneva with a Lockheed Constellation aircraft. In early 1950s
due to deteriorating financial condition of various airlines, the Government decided to
nationalize air transport. On August 1, 1953 two autonomous corporations were created. Indian
Airlines was formed with merger of eight domestic airlines to operate domestic services, while
Air India International was established to operate the overseas services. The word 'International'
was dropped in 1962. With effect from March 1, 1994, the airline has been functioning as Air
India Limited. Air India's worldwide network today covers 44 destinations by operating services
with its own aircraft and through code-shared flights. Important destinations covered by Air
India are Bangkok, Hong Kong, Jakarta, Kuala Lumpur, Osaka, Singapore, Tokyo, Seoul, Dar-
es-Salam, Nairobi, Frankfurt, London, Paris, Birmingham, Abu Dhabi, Al Ain, Bahrain,
Dammam, Doha, Dubai, Jeddah, Muscat, Riyadh, Kuwait, Los Angeles, Chicago, Newark, New
York, and Toronto. Air India’s fleet consists of 38 aircrafts. These include 12 Boeing 747-400, 1
Boeing 747-400 COMBI, 2 Boeing 747-300 COMBI, 19 Airbus 310-300, and 4 Boeing 777-200
Incorporation • Established in 1953 under Air Corporations Act • Became Public Limited
Company in 1994 • Registered Office: New Delhi • Head Office: Mumbai • Authorized Capital:
Rs 500.00 Crores • Paid-up Capital: Rs 153.84 Crores Subsidiary Companies HCI Hotel
Corporation of India Ltd  Centaur Hotels at Juhu, Mumbai Airport and Rajgir Sold 
Centaur Hotel at Delhi, Chefair-New Delhi and Chefair-Mumbai Under Disinvestment
AICL Air India Charters Ltd  New Airline Air India Express set-up under AICL  All AI
Express operations carried out on B-737-800 with a current fleet strength of 12. AIATSL Air
India Air Transport Services Ltd  Incorporated in June 2003  set up to undertake ground
handling & other allied activities  being operational at all domestic airports AIESL Air India
Engineering Services Ltd  Incorporated to undertake engineering and other allied activities
 To be operational  Cabinet approval required INDIAN AIRLINES The erstwhile Indian
Airlines Limited or currently known as Indian, was India’s first state owned domestic airline.
Indian Airlines was set up under the aegis of federal Union Ministry of Civil Aviation and based
in New Delhi. Its main bases were the international airports in Chennai, Mumbai, Kolkata and
New Delhi. It has now been merged with Air India for corporate purposes, though for now,
continues to issue its own tickets. .Indian Airlines came into being with the enactment of the Air
Corporations Act, 1953. It was renamed "Indian" on December 7, 2005. Indian Airlines started
its operations from 1st August, 1953, with a fleet of 99 aircraft and was the outcome of the
merger of seven former independent airlines, namely Deccan Airways, Airways-India, Bharat
Airways, Himalayan Aviation, Kalinga Air Lines, Indian National Airways and Air Services of
India. The year 1964 saw the Indian Airlines moving into the jet era with the introduction of
Caravelle aircraft into its fleet followed by Boeing 737-200 in the early 1970. Along with its
wholly owned subsidiary Alliance Air, it flies a fleet of 70 aircraft including Airbus A300,
Airbus A320, Airbus A319, Boeing 737, Dornier Do-228, ATR-4, Airbus A319, A320 & A321.
Along with Indian cities, it flies to many foreign destinations which include Kuwait, Singapore,
Oman, UAE, Qatar, Bahrain, Thailand, Singapore, Malaysia, and Myanmar besides Pakistan,
Afghanistan, Nepal, Bangladesh, Sri Lanka and Maldives.

Indian Airlines Flight free run over the Indian skies ended with the entry of private carriers after
the liberalization of the Indian economy in the early 1990's when many private airlines like Jet
Airways, Air Sahara, East-West Airlines and ModiLuft entered the fray. The entry of low-cost
airlines like Air Deccan, Kingfisher Airlines and Spice Jet has revolutionized the Indian aviation
scenario. Indian has been a pioneer in the aviation scene in India. It was the first airline in India
to introduce the wide-bodied A300 aircraft on the domestic network, the fly-by-wire A320, walk
in flights and easy fares. It flies to 76 destinations - 58 within India and 18 abroad. It has a total
employee strength of around 19,300 employees along with Alliance Air and carries over 7.5
million passengers annually, along with Alliance Air. The main base of the Indian airlines are
Chatrapati Shivaji International Airport, Mumbai; Indira Gandhi International Airport, Delhi;
Netaji Subhash Chandra Bose International Airport, Kolkata; Chennai International Airport,
Chennai. After being granted permission from the Government of India, on 15 July 2007, Indian
Airlines and Air India merged and started to operate as a single entity. Post-merger the new
airline will be renamed as Air India. This new airline is also a member of the Star Alliance, the
largest airline alliance. The government allowed the formation of a few new limited service
airlines in the 1970s: Air Works India, Huns Air, and Golden sun Aviation. None of them had
long life spans. Around 1979, IAC dropped the word "Corporation" from its name. Britain's
Financial Times described Indian Airlines as the world's third largest domestic carrier in the
mid-1980s. With business growing at better than ten percent a year, it was increasing its capacity
as part of a plan to merge Indian Airlines with Air-India, the state's international carrier, two
leading young industrialists were appointed to chair the boards of the two companies in autumn
1986. Neither these plans nor the new chairmen lasted very long. In 1987, Indian Airlines carried
10 million passengers and earned a profit of Rs630 million ($48 million). However, the quality
of its service was facing criticism, to be heightened by the coming entry of new carriers into the
market. Amalgamation of Air India Limited and Indian Airlines Limited with National
Aviation Company of India Limited The Government of India, on 1 March 2007, approved the
merger of Air India and Indian Airlines. Consequent to the above, a new Company viz National
Aviation Company of India Limited (NACIL) was incorporated under the Companies Act, 1956
on 30 March 2007 with its Registered Office at Airlines House, 113 Gurudwara Rakabganj
Road, New Delhi. The Certificate to Commence Business was obtained on 14 May 2007.

SCHEME OF AMALGAMATION UNDER SECTIONS 391-394 OF THE COMPANIES

ACT 1956 For the amalgamation of AIR INDIA Ltd. (Transferor No 1 Company) and INDIAN
AIRLINES Ltd. (Transferor No 2 Company) with NATIONAL AVIATION COMPANY of
India ltd. (Transferee Company) whereas, National Aviation Company of India Limited (the
Transferee Company) is a Company incorporated under the Companies Act 1956, having its
registered office at Airlines House, 113 Gurudwara Rakabganj Road, New Delhi 110 001.
National Aviation Company of India Limited is a Government Company within the meaning of
Section 617 of the Companies Act, 1956 and is under the administrative control of the Ministry
of Civil Aviation. National Aviation Company of India Limited has been established as a
Government Company to be engaged in the business as an airline for providing air transport and
allied services. This Scheme proposes the amalgamation of AI and IA in the Transferee
Company, which would result in consolidation of the business of all in one entity (i.e. National
Aviation Company of India Limited, the Transferee Company). (a) The Scheme proposes to
amalgamate each of the Transferor Companies (viz AI and IA ) with the Transferee Company
(viz. National Aviation Company of India Limited). SHARE CAPITAL 2.1.1 As per the latest
audited accounts on March 31, 2006 the capital structure of the Transferor Companies is as
under: A. Transferor Company No 1 – AIR INDIA AUTHORIZED SHARE CAPITAL
AMOUNT 42, 56, 36,820 Equity Shares of Rs. 10 each Rs. 425, 66, 38,200/- 74, 36,318
Redeemable Preference Shares Rs. 100 each Rs. 74, 36, 31,800/- Total Rs. 500, 00, 00,000/-
ISSUED, SUBSCRIBED & PAID-UP SHARE CAPITAL AMOUNT
15, 38, 36,427 Equity shares of Rs. 10 each fully paid Rs. 153, 83, 64,270/-

As on April 1, 2007 the Authorized Capital, the Issued, Subscribed and Paid up Share Capital of
AI remains the same. B. Transferor Company No 2 – INDIAN AIRLINES AUTHORIZED
SHARE CAPITAL AMOUNT 94, 99, 58,200 Equity Shares of Rs. 10 each Rs. 949, 95,
82,000/- 50, 04,180 Redeemable Preference Shares Rs.100 each Rs. 50, 04, 18,000/- Total Rs.
1000, 00, 00,000/- ISSUED, SUBSCRIBED&PAID-UP SHARE CAPITALAMOUNT 43,
21, 36,489 Equity shares of Rs. 10 each fully paid Rs. 432, 13, 64,890/- As on April 1, 2007 the
Authorized Capital, the Issued Subscribed and Paid up Share Capital of IA remains the same As
on April 1, 2007 the capital structure of the Transferee Company is as under: Transferee
Company – National Aviation Company of India Limited (NACIL) AUTHORIZED
SHARE CAPITAL AMOUNT 50,000 Equity Shares of Rs. 10 each Rs. 5, 00,000/- ISSUED,
SUBSCRIBED & PAID-UP SHARE CAPITAL AMOUNT 50,000 Equity Shares of Rs. 10
each Rs. 5, 00,000/- Transfer of Assets With effect from the Appointed Date and upon the
Scheme becoming effective, the Transferor Companies shall be transferred to and be vested in
and/or be deemed to have been transferred to and be vested in and managed by the Transferee
Company, as a going concern, without any further deed or act, together with all its properties,
assets, rights, benefits and interest therein, subject to existing charges thereon in favor of banks
and financial institutions or otherwise, as the case may be and as may be modified by them,
subject to the provisions of this Scheme, in accordance with Sections 391-394 of the Act and all
other applicable provisions of law, if any.

Without prejudice to Clause 3.1 above in respect of such of the assets of the Transferor
Companies as are movable in nature or intangible property or are otherwise capable of transfer
by manual delivery or by endorsement and delivery including plant, aircraft, machinery and
equipments, the same shall be so transferred or shall be deemed to be so transferred to the
Transferee Company and shall upon such transfer become the property and an integral part of the
Transferee Company. In respect of such of the said assets other than those referred hereinabove,
the same shall, without any further act, instrument or deed, be vested in and / or be deemed to be
vested in the Transferee Company in accordance with the provisions of Section 394 of the Act.
Transfer of Liabilities (a) With effect from the Appointed Date and upon the Scheme becoming
effective, all debts, liabilities, duties and obligations, secured or unsecured, and whether or not
provided for in the books of accounts of the Transferor Companies, whether disclosed or
undisclosed in the balance sheet, shall be the debts, liabilities, duties and obligations of the
Transferee Company and the Transferee Company undertakes to meet, discharge and satisfy the
same. (b) Where any of the liabilities and obligations attributed to the Transferor Companies on
the Appointed Date has been discharged by the Transferor Companies after the Appointed Date
and prior to the Effective Date, such discharge shall be deemed to have been for and on behalf of
the Transferee Company. All loans raised and used and liabilities incurred by the Transferor
Companies after the Appointed Date but before the Effective Date for operations of the
Transferor Companies shall be loans and liabilities of the Transferee Company. Any
guarantee/letter of comfort/commitment letter given by the Government or any agency or bank in
favor of the Transferor Companies with regard to any loan or lease finance shall continue to be
operative in relation to the Transferee Company Contracts, Deeds, Approvals, Exemptions etc
(a) With effect from the Appointed Date and upon the Scheme becoming effective, all contracts,
deeds, bonds, agreements, schemes arrangements, insurance policies, indemnities, guarantees
and other instruments of whatsoever nature in relation to the Transferor Companies, or to the
benefit of which the Transferor Companies may be eligible, and which are subsisting or having
effect immediately before the Effective Date, shall be in full force and effect on or against or in
favor of the Transferee Company and may be enforced as fully and effectually as if, instead of
the Transferor Companies, the Transferee Company had been a party or beneficiary or oblige
thereto. (b) With effect from the Appointed Date and upon the Scheme becoming effective, all
rights and licenses relating to trademarks, know-how, technical know-how, trade names,
descriptions, trading style, franchises, labels, label designs, logos, emblems, and items of such
nature, color schemes, utility models, holograms, bar codes, designs, patents, copyrights,
privileges and any rights, title or interest in intellectual property rights in relation to the
Transferor Companies to which the Transferor Companies are a party or to the benefit of which
the Transferor Companies may be entitled /eligible shall be in full force and effect on, or against,
or in favor of, the Transferee Company as the case may be, and may be enforced as fully and
effectually as if, instead of the Transferor Companies, the Transferee Company had been a party
or beneficiary or oblige thereto. (c)The Transferee Company shall be entitled to the benefit of all
insurance policies which have been issued in respect of the Transferor Companies and the name
of the Transferee Company shall be substituted as “Insured” in the policies as if the Transferee
Company was initially a party (d) With effect from the Appointed Date and upon the Scheme
becoming effective the Transferee Company shall replace the Transferor Companies in the
respective Air Services Agreements as the designated carrier of India. With effect from the
Appointed Date and upon the Scheme becoming effective, all permits including operating
permits, quotas, rights, entitlements, licenses including those relating to tenancies, time slots
(including those at foreign airports trademarks, patents, copy rights, privileges, powers, facilities
of every kind and description of whatsoever nature in relation to the Transferor Companies,
including specifically ,licenses and permits for operating as airlines and carriers of passengers,
cargo and mail ,and all rights relating thereto to the benefit of which the Transferor Companies
may be eligible and which are subsisting or having effect immediately before the Effective Date,
shall be and remain in full force and effect in favor of or against the Transferee Company, and
may be enforced fully and effectually as if, instead of the Transferor Companies, the Transferee
Company had been a beneficiary or oblige thereto.
With effect from the Appointed Date and upon the Scheme becoming effective, any statutory
licenses, permissions, approvals, exemption schemes, or consents required to carry on operations
in the Transferor Companies, respectively, shall stand vested in or transferred to the Transferee
Company without any further act or deed, and shall be appropriately mutated by the statutory
authorities concerned therewith in favor of the Transferee Company. The benefit of all statutory
and regulatory permissions, licenses, environmental approvals and consents including the
statutory licenses, permissions or approvals or consents required to carry on the operations of the
Transferor Companies shall vest in and become available to the Transferee Company pursuant to
the Scheme. The Transferee Company, at any time after the Scheme becoming effective in
accordance with the provisions hereof, if so required under any law or otherwise, will execute
deeds of confirmation or other writings or arrangements with any party to any contract or
arrangement in relation to the Transferor Companies to which the Transferor Companies are a
party in order to give formal effect to the above provisions. The Transferee Company shall,
under the provisions of this Scheme, be deemed to be authorized to execute any such writings on
behalf of the Transferor Companies and to carry out or perform all such formalities or
compliances, referred to above, on behalf of the Transferor Companies. Reasons of Merger
Merger of the Transferor Companies with the Transferee Company, along with a comprehensive
transformation program, is imperative to improve competitiveness. It will provide an opportunity
to leverage combined assets and capital better and build a stronger sustainable business.
Specifically, the merger will -
• Create the largest airline in India and comparable to other airlines in Asia. The merger between
the two state-run carriers will see the beginning of the process of consolidation in the Indian
aviation space - the fastest growing in the world followed by China, Indonesia and Thailand.
• Provide an Integrated international/ domestic footprint which will significantly enhance
customer proposition and allow easy entry into one of the three global airline alliances, mostly
Star Alliance with global consortium of 21 airlines.
• Enable optimal utilization of existing resources through improvement in load factors and yields
on commonly serviced routes as well as deploy ‘freed up’ aircraft capacity on alternate routes.
The merger had created a mega company with combined revenue of Rs 150 billion ($3.7billion)
and an estimated fleet size of 150. It had a diverse mix of aircraft for short and long haul
resulting in better fleet utilization.
• Provide an opportunity to fully leverage strong assets, capabilities and infrastructure.
• Provide an opportunity to leverage skilled and experienced manpower available with both the
Transferor Companies to the optimum potential.
• Provide a larger and growth oriented company for the people and the same shall be in larger
public interest.

Potential to launch high growth & profitability businesses (Ground Handling Services,
Maintenance Repair and Overhaul etc.)
• Provide maximum flexibility to achieve financial and capital restructuring through revaluation
of assets.
• Provide an increased thrust and focus on airline support businesses.
• Economies of scale enabled routes rationalization and elimination of route duplication. This
resulted in a saving of Rs1.86 billion, ($0.04 billion) and the new airlines will be offering more
competitive fares, flying seven different types of aircraft and thus being more versatile and
utilizing assets like real estate, human resources and aircraft better. However the merger had also
brought close to $10 billion (Rs 440 billion) of debt.
• The new entity was in a better position to bargain while buying fuel, spares and other materials.
There were also major operational benefits as between the two they occupied a large number of
parking bays and hangers, facilities which were usually in acute short supply, at several large
airports in the country. This worked out to be a major advantage to plan new flights at most
convenient times.
• Traffic rights - The protectionism enjoyed by the national carriers with regard to the traffic
right entitlements is likely to continue even after the merger. This will ensure that the merged
Airlines will have enough scope for continued expansion, necessitated due to their combined
fleet strength. The protectionism on traffic rights have another angle, which is aimed at ensuring
higher intrinsic value , since the Government is likely to divest certain percentage of its holding
in the near future.
Revenue synergies will be driven by integration of the ‘complementary’ networks of the
Transferor Companies. Cost and capital productivity synergies will be driven by opportunities
for leveraging economies of scale and opportunities for rationalizing overlapping facilities and
infrastructure. In addition to these synergies, the amalgamation will also provide an opportunity
to initiate a comprehensive transformation program to improve the overall competitiveness of the
merged airline i.e. the Transferee Company. This, while improving the financial position would
help position and equip the merged entity to better face the current and future challenges arising
out of intense competition and declining industry profitability.

Integration is incomplete Accenture, the consultant that inked the blueprint of Air India-Indian
merger in 2006, had advised the Centre to integrate 748 officials up to the level of deputy general
manager (DGM) within nine months of the Cabinet clearance, to ensure that the merger pays off.
Twenty-five months later, NACIL has been able to integrate 44 officials up to the level of
executive director (ED), according to two board members of NACIL. Hit by recession NACIL,
like other air carriers, is hit hard by the slowdown crimping passenger and cargo traffic. Air
passenger traffic fell for the seventh month in a row by 11 per cent year-on-year in January 2009.
In that month, NACIL's load factor, the number of tickets sold in proportion to the total number
of available seats, was the lowest (domestically) at 60.2 per cent. The core cost drivers -
including line maintenance, ground handling, terminal services, flight operations/ dispatches and
ticket sales - should have been merged first for synergies to translate into actual benefits.
NACIL's employee-to-aircraft ratio, a gauge of efficiency, is the highest among its peers at 222:1
(the global average is 150:1), resulting in a surplus employee strength of almost 10,000. The
wage bill of the merged company, which was 23 per cent of total expenditure at the time of
incorporation, is expected to rise sharply due to a grade re-alignment. Fleet Expansion NACIL's
fleet expansion seems out of sync with the times, as most airlines are actually rounding their fleet
and cancelling orders for new planes. While other Indian airlines have withdrawn over a third of
their aircraft orders slated for delivery in 2009, NACIL plans to induct 30 aircraft in this fiscal
and another 45 by March-end 2012. This means NACIL would face a wall of debt going
forward. A NACIL board member informed that the company's total debt in the medium term is
estimated at Rs 79,000 crore. "It will need Rs 44,000 crore for plane purchases. It has Rs 22,000
crore in long term loans and another Rs 13,000 crore as working capital loans," he said.

Mutual Distrust and strong unions The distrust between the two sides of Air India and Indian
Airlines is almost palpable. For sure, many jobs will become redundant when functions are
unified. Many of those appointed are from Indian Airlines, fuelling resentment among Air India
employees. Integration has become a tightrope walk for the management. Strong opposition from
unions against management’s cost-cutting decisions through their salaries have led to strikes by
the employees/ Increased Competition The flux at the top has led to delays in decision-making
at a time when demand for air travel has dropped around 8-10% over the last year and
competition has heated up in the sector. The national carrier’s domestic market share has been
under pressure ever since budget carriers and new private airlines took wing. Air India’s
domestic market share dropped from 19.8% in August 2007, when the merger took place, to
13.9% in January 2008 before rising to 17.2% in February 2009. Lower load factor Though the
overall operating performance has been steady, Air India passenger load factor of 63.2%, which
was the company’s record, lags the industry average of 75% in 2006-07.The load factor
difference is even greater when compared to other low fares carriers such as Air Deccan. The
company’s load factor is decreasing year by year, in 2005- 06 load factor is 66.2% which is more
than present load factor. Air India load factor is likely to be low because of the much higher
frequency operated on each route. Lower load factor could decrease the company’s margins.

Conclusion The merger of Air India and Indian is the most significant recent development
for India’s aviation sector. Managed correctly, the combined entity has huge potential as the
largest airline in one of the world’s largest and fastest growing economies. Global alliances will
be attracted by its extensive network in an untapped part of the world (and indeed Star Alliance
is due to vote on Air India’s membership later this week). However, the complexity of
overseeing a merger taking place against such a challenging environment cannot be overstated,
albeit there was no other option. Ultimately, Air India will need to be privatized over the next 3-
5 years to introduce commercial disciplines. A partial IPO, scheduled for 2008/09 would be the
first step, although the value that can be achieved will be highly dependent on the results from
the integration process over the next 12-18 months. A Heavily debt-laden ledger will not make
that process easy, unless profitability is strong. Introducing a strategic partner would ideally
precede this first step, but would probably follow. Yet an Indian partner might raise competition
concerns, and an overseas partner would require changes in the regulations which currently
prohibit foreign airlines from holding a stake in Indian carriers. If Air India can successfully
navigate through the next couple of years, it has the potential to become a major Asian airline,
but 2008 will be critical.

Merger of Addidas And Reebok (pure example of “Burk

Litwin” model of change)

INTRODUCTION

On August 3, 2005, Adidas-Salomon AG announced its plans to buy all outstanding shares of
Reebok International Ltd.'s stock at $59.00 per share, for a total of $3.8 billion. Upon
announcement, Reebok stock rose 30% while Adidas climbed 7%. As stated by Herbert Hainer,
CEO of Adidas, "This is a once-in-a-lifetime opportunity to combine two of the most respected
and well-known companies in the worldwide sporting goods industry. Together, we will expand
our geographic reach, particularly in North America, and create a footwear, apparel and
hardware offering that addresses a broader spectrum of consumers and demographics"
(Adidas.com). A primary goal of the acquisition has been to challenge industry leader Nike for a
higher share of the United States sporting goods market as well as the global sporting goods
market. The acquisition has prompted much discussion as to what the future holds for the
sporting goods industry and its major players.

Athletic Wear Market Share

I- CORE COMPETENCIES & COMPETITVE ADVANTAGE

Competitive advantage is a special edge that allows an organisation to deal with market and
environmental forces better than its competitors. Whereas, sustainable competitive advantage is
one that is difficult for competitors to imitate. This distinction is essential when evaluating the
acquisition and its effects. A merger of this scale is inherently complex, dealing with issues such
as global positioning of companies, corporate cultures, and the allocation of resources. To better
understand the advantages gained from the Adidas-Reebok merger, we have examined the
following: Through these various analyses, we have discovered that the importance of branding
is paramount for success in this industry. Our research also identifies the specific danger of
competition between Adidas and Reebok. Our analysis of the Adidas-Reebok merger shows how
it will gain a sustainable competitive advantage that may one day dominate the footwear industry
both domestically and internationally. The fact that Adidas and Reebok control such different
aspects of the shoe industry will help to ensure their success. To fully understand how Adidas-
Reebok will gain a sustainable competitive advantage over Nike, the situation must be looked at
from several different points. These include industrial, customer and competitor analyses, as
well as a look at the different marketing strategies and changing marketing trends.

Adidas Core Competencies

– Technology

– Customer focus

– Brand recognition

– Supply chain

– Collaboratively competitive

Reebok Core Competencies

– Trend Identification

– Ability to market to a niche segment

– Women's shoe design

– Design expertise

– Celebrity relationships
Combining Core Competencies

• Combine
– Adidas technology with Reebok design

– Adidas sports with Reebok women's market

– Adidas shoes with Reebok apparel

– Adidas global strength & Reebok US strength

Implementation

• Blending the two cultures successfully (learning to work together)

• Protect the strengths of acquired company (keeping development of both organisations
separate)
• Maintaining both brands (keeping established market share)
• Capitalising on supply chain economies of scale (suppliers, manufacturing, distribution,
channels)
• Nurturing the partnership between technology and design (growing market share by
combining leadership areas)

Sustainable competitive advantage

The athletic apparel and footwear industry emphasises branding more than any other competitive
advantage. Through the use of advertisements, endorsements, promotions, and licensing
agreements, the top companies in this industry have devoted much of their resources to brand
recognition and loyalty. Adidas' acquisition of Reebok will develop increased opportunities to
achieve competitive advantage through branding. Furthermore, extended licensing agreements
and contracts will allow the Adidas Group to sustain this advantage.

Sustainable competitive advantage cannot be reached without the successful merging of Adidas
and Reebok. The key to this success is how well they identify themselves. There is a very real
danger of cannibalisation to occur between the two separate brands, where one brand takes away
the others consumer base. However, Adidas Chairman and CEO Herbert Hainer made clear that
"it is important that each of these brands must retain their own identity."

Hainer points out that Reebok's focused strategy is on the engagement of youth through sports,
music, and technology. Reebok, he points out, is a lifestyle brand. On the other hand, Adidas'
focus is on superior technology and performance, coupled with a large international presence. As
Hainer points out, "Adidas has positioned part of its product range in the lifestyle segment, but
the company relies on the performance market. Lifestyle success to an authentic company is a
bonus."

Adidas will benefit from increased distribution in North America, where Reebok already has a
significant presence. The addition of Reebok will enhance not only its position among the top US
distributors like Foot Locker and Dick's, but will also give Adidas-Reebok more power over
promotions and in-store displays. Increasing its presence is the key to achieving sustainable
competitive advantage, because the increased presence further engrains the most important
advantage in this industry, brand name.

The acceleration of both brands is brought about through increased operating cash flows. Along
with the increased operating capital, other synergies such as operating savings are realised.
Catching up to Nike's huge marketing budget is a challenge, but the increased operating costs
coupled with the synergies will help promote further brand recognition through marketing.

Reebok has an extensive line of men and women's apparel. The new company can combine
Reebok's apparel with Adidas' new addition of fashion designer Stella McCartney, who has
created an apparel line that integrates both sport and style. This innovative move shows that
Adidas continues to look for new opportunities and markets in order to gain a competitive
advantage.

In the past, Adidas has not been able to expand because it had problems shipping goods to the
United States. It takes them about 14 days to ship from their factories in the Far East while
Reebok can ship overnight. In the future, Adidas will be able to take advantage of Reebok's
existing distribution infrastructure in the U.S., while Reebok will be able to benefit from Adidas'
existing distribution infrastructure in Europe.

The Reebok brand will also gain sustainable competitive advantage through increased brand
recognition. Globally, Reebok will benefit greatly from Adidas' distribution around the world.
Coupled with the cost savings and increased cash flow, Reebok's marketing resources could
increase.

Combined R&D is helping speed development of cutting edge technologies, an important

feature of the increasingly fast paced industry. Expedited research will develop higher consumer
demand for innovation across all brands, putting pressure on Nike's R&D capabilities.

SWOT Analysis

Adidas-Salomon SWOT Analysis (before the merger)

Adidas-Salomon was a leading player in the sports good manufacturing industry. The company
had posted a very steady growth in its sales revenues in recent years, essentially as a result of its
strong brand image. The company had market leading products and strong brand names
including Adidas, Salomon, TaylorMade and others which were further strengthened by its
strong commitment to product innovations. Furthermore, on the supply-chain side the company's
commitment to reduce lead time for manufacturing footwear had enabled the company to avoid
the warehousing of products.

Strengths

Leading player in the sporting goods industry

The company was amongst the top players in the sporting goods industry due to its strong
brands, market-leading products and commitment to sports for meeting consumer expectations.
The global sportswear market (Euro 45 billion) was dominated by Adidas-Salomon and Nike
and, at a certain distance, Reebok, PUMA and New Balance. Adidas-Salomon's brands include
Adidas, Salomon, TaylorMade and others, which had very strong brand name recognition in
markets served. The company's products served many markets and include footwear, hardware,
apparel, snowboard, golf-related and other products.

Steady increase in sales revenues

Adidas-Salomon's revenues from sales have been steadily increasing as reflected in the last five
years' sales performance ending 2002. From E5.1 billion of sales in 1998 to E6.5 billion in 2002,
the performance has improved by a CAGR of 7%. Though sales declined by 3.9% in 2003 over
2002, it was mainly due to currency translations. The company has been able to achieve this
steady growth in revenues due to its strong brand image, continuous commitment to product
innovation that is consumer focused. Such a steady growth in the company's revenue
performance helped in maintaining a very good image for the company and improved investor
confidence. Additionally, the company reported an outstanding operational and financial
performance in the first half of fiscal 2004. This underlined the company's momentum, with
quarter on quarter sales improvements for all brands, and a record gross margin and earnings
growth of almost 40%, marking the strongest first half year performance in the company's
history.

Successful new product innovations

The company had consistently launched new products and this has enabled it to widen its
portfolio and also enhanced its competitive position. Each company brand targeted a specific
market and new products were introduced based on their requirements. This has helped the
company achieve a greater degree of success. During 2002-2003, the company launched
ClimaCool and a3 in its running shoes category, which were big successes. The company sold
over 500,000 pairs in a3 and over one million in ClimaCool. Furthermore, in the basketball shoes
division, the T-MAC and T-MAC were the bestselling in the US market in 2002 which has led to
the release of T-MAC 4 lace less footwear for 2004. The company's continuous commitment
towards new product innovations not only improved revenues but also helped in strengthening its
relationship with its customers and attracts new customers. In May 2004 the company introduced
what the company described as the first Intelligent Shoe - called "1", the shoe provided
intelligent cushioning by automatically and continuously adjusting itself.

Lead time improvements

The company had considerably improved the lead-time required for footwear manufacturing
through lean manufacturing principles. Earlier in 2000, the company used to take 120 days for
producing footwear; by 2003, this had been reduced to around 60 days. Such a reduction was
made possible as a result of the company's efficient implementation of lean manufacturing
principles which helped in removing non-value-adding procedures and activities, improved
labelling, special handling and other such activities to reduce time taken. These process
improvements have helped the company in avoiding warehousing of its footwear products.

Marketing strength

The company had planned and implemented major advertising campaigns during 2004. The
company's immense size and strong position have afforded it the opportunity to undertake global
advertising campaigns with focus on TV, print media and outdoor advertising as well as point of
sale and PR activities. The campaign "Impossible is Nothing", included top athletes from
different disciplines such as Muhammad Ali and his daughter (brand image, boxing and
lifestyle), Haile Gebrselassi (brand image, running), David Beckham (brand image, football) and
Tracy McGrady (brand image, basketball).

Weaknesses

Unfocused strategy

The strategy of Adidas-Salomon was lacking focus. This is because it has a very broad product
portfolio, including sport performance products for athletic sports, basketball, golf, tennis,
Nordic disciplines, cycling and fashion oriented products. Rival Puma has demonstrated that
focus can translate into a high profitability.

Over-dependence on Adidas brand segment

While the purchase of Salomon, the French maker of ski and golf gear, steered the company into
the equipment arena, the company generated 79% ($4.9 billion) of its total revenues of E6.3
billion from the Adidas brand segment in 2003, while the other two contributed to the balance.
Despite a strong image for the TaylorMade and Salomon brands, they generated only about 21%
of the total revenues. The company's over-dependence on the Adidas brand segment, which
mainly serves the athletes' requirements, makes the company's overall revenues susceptible to the
market conditions in this segment.

High level of long-term borrowings

Though the company reduced its borrowings by E181 million against 2002, the level of
borrowings was still very high. At the fiscal year end 2003 the company's long-term borrowings
as a percentage of equity were very high at around 146%, which amounted to E1, 574 million.
Such high debt level affected investor confidence in the company and makes low-cost funding of
growth plans difficult. By half year fiscal 2004 strong cash flow had enabled more progress in
debt reduction has been (net borrowings at June 30, 2004 were E967 million, down 39% or E616
million versus E1, 583 billion in the prior year) made but debt remained high.

Order cancellations

2003 revenue growth was substantially below the company's first impression from year-end 2002
order backlogs, which were up a strong 14%. As 2003 revenues growth was only 5%, significant
order cancellations in the course of the first half of 2003 are evident. The company achieved
revenues that totalled E6, 267 million ($7,570.4 million), a decrease of 3.9% against the previous
years revenues that totalled E6, 523 million.

Opportunities
Strategic acquisitions and agreements
The company made a few strategic acquisitions during 2004. In September Adidas and Stella
McCartney announced a long-term partnership in New York, presenting the Adidas by Stella
McCartney sport performance collection. For the first time ever a high-end fashion designer had
created a functional sport performance range for women. The first collection was available in
stores across the US, Japan and Europe in spring/summer 2005. It offered products for running,
gym/workout and swimming as well as cover-ups. The Adidas by Stella McCartney range shows
the company's willingness to innovate in the women's sportswear market. Adidas-Salomon
acquired Valley Apparel Company of Cedar Rapids, Iowa in June 2004, a producer and
distributor of collegiate and professional league apparel and accessories. It served small- to mid-
size retailers, such as sporting goods stores, department stores, fan shops and college bookstores.
It has a reputation of producing and delivering large quantities of apparel and branded
accessories within hours of a team's victory. In early 2003, the company acquired the Maxfli
brand of accessories and other golf related products from Dunlop Slazenger Group through its
TaylorMade-Adidas division. This acquisition has helped the company in offering market
leading products in all the golf categories and has improved its global market share to 16% from
less than 1% prior to the acquisition. The company also entered into a strategic agreement in
June 2003 with the INTERSPORT International Corporation (IIC), a multi-sport retailer, in order
to strengthen its sales and distribution network. Specifically, the four year agreement will - in
time - strengthen the company's sport performance, casual, Salomon and other products' sales.
Supply-chain and manufacturing initiatives

The company's success in reducing footwear manufacturing time was likely to continue in the
future also. The company planned to reduce its production time further, which has helped the
company achieve faster delivery of its products to the retailers, thereby reducing inventory costs.
On the supply-chain side, the industry faces a problem due to longer time to market. The total
time taken is about 15 to 18 months of which 12 months are spent in creation of the product,
while the balance of the time in arranging for the raw materials, production and delivery to the
retail stores. The company also planned to implement a new model for its supply chain, which
will considerably reduce the time taken and improve cost efficiency, etc. This initiative helped
the company in serving its customers faster, thereby gaining a competitive edge over its peers.

Sponsoring sporting events

The company's sponsorship of major sports events brought great recognition to its products.
Adidas supplied more than 1.4 million products to federations, volunteers, officials and others
during the 2004 Olympics. Following a successful marketing campaign at the Euro 2004 Soccer
Tournament in Portugal, the company once again expected to achieve new record sales in
football during 2004. During 2002, the company sponsored FIFA World Cup Championship in
Korea and Japan and was acclaimed as the most visible among the brands advertised during the
event and was viewed by 44 billion cumulative spectators during the course of the event.
Furthermore, in the Winter Olympics of 2002, the company sponsored over 50% of the
participating athletes who won about 200 medals. Adidas has a life-time agreement with Kevin
Garnett (most valuable player of the NBA 2003/2004). It also signed a six-year cooperative
agreement with Chinese Football in June 2003. The company sponsored the World Cup in 2006
held in Germany. Sponsorship of these events helps the company in building its Sport Heritage,
Sport Style and other such divisions. For instance, the Sport Heritage division grew into an Euro
900 million businesses and doubled its sales from 2001 to 2003.

Own retail stores

In 2003 Adidas generated 9% of group revenues in own retail outlets. A significant number of
new shops did not positively contribute to earnings because the cost for new shops (of hiring of
sales people and training costs etc.) exceeded early revenues. This will begin to level out going
forward and the company will continue to open own retail shops. Management recently
explained that own retail sell-through was positive in the US in 2003 in contrast to external
customers. The company is therefore planning to open 15 new US shops in the coming two years
and 40 worldwide. Management expects Sport Heritage to grow again from 2004 driven by more
own retail stores and no more cutting of external points of sales.
Threats
Competition

Adidas operated within a highly competitive market which in many cases overlaps into other
markets as sportswear retailers increasingly compete with fashion retailers. The company's
traditional competitors like Reebok, Nike and Puma made competitive levels intense, but the
addition of casual footwear and apparel manufacturers such as Tommy Hilfiger, adding a
designer edge to the market, had increased competitive levels. Companies had come under
increasing pressure recently from products designed for the value conscious consumer. Adidas
have long been one of the premium brands in sportswear and have charged accordingly, though
this strategy is coming under more pressure as cheaper substitute products are bought by
consumers adding to problems in terms of customer retention.

Foreign exchange fluctuations

The company's manufacturing activities were mostly concentrated in China and other Southeast
Asian countries. Since most of these countries transact in US Dollars, the company incurred
about 70% to 80% of its outsourcing expenditure in US Dollars, whereas, the company's revenue
generation in US dollar and other non-Euro currencies is comparatively lower. Hence, adverse
changes in the exchange rate between US dollar and Euro had a negative impact on its overall
revenues.

Weak global economy

The GDP of European countries have grown at a negligible rate and are unlikely to improve in
the near future. Similarly, the Latin American markets such as Argentina and Brazil continue to
witness weak economic conditions, while the Southeast and Middle-East regions continue to reel
from political unrest. Thus, the company's revenues were significantly affected due to these
adverse economic conditions.

Impact of scandals in the US and Germany

Accounting scandals across industries in Germany and the US have impacted upon the
company's stock performance. The weak performance of many companies in the sports goods
industry adversely affected the investor confidence in the industry. Thus, external factors can
have an adverse impact on the company's stock price performance and might in turn affect its
brand's value.

Reebok SWOT Analysis (before the merger)

Reebok International was a major player in the sports and fitness products market, with a
particular emphasis on footwear. Its main strengths lied in its size and strong brand awareness.
While footwear is clearly its core product, concerns were being raised over its comparative
disinterest in the associated athletic apparel market, which is over twice the size of the footwear
market.

Strengths

Growing sales revenue

As part of a strategy to grow quality market share, the company continued to invest in three key
product and marketing platforms: Performance, RBK and Classic. Reebok International was the
second largest manufacturer of athletic shoes in the US, behind Nike. The Reebok brand
continued to drive sales pushing it closer to major competitors, Nike and Adidas. Reebok had
become the number two or number three brand in most of its overseas markets. It held around
10% of the global market, compared to Nike's 34% and Adidas' 15%. The company has been
able to increase revenues and improve operating margins despite some challenging retail
conditions in many key markets around the world in 2004.

Excellent marketing strategy

The company employed a strategy of reinventing its brands in order to gain market share. In
order to enhance its Reebok brand, the company introduced a new street inspired product
collection, RBK, in 2002, followed by an effective marketing strategy which carried into 2003
and 2004. During 2003/2004, the Reebok product offerings generated healthy sell-through
performance at retail. Alongside reinventing brands, the company introduced new marketing
campaigns to promote them. To support the RBK product Reebok created a marketing campaign
entitled Reebok's "Sounds and Rhythm of Sport," which fuses music and entertainment with
sports and performance. The combination of relevant products and a new marketing campaign
improved the performance of the Reebok Brand in the athletic specialty channel of distribution.
Reebok has achieved positive market share comparisons in the critical athletic specialty and
sporting goods channels of distribution (as of October 2004).

Celebrity associated sponsorships

The company expanded its product offerings into more lifestyle and performance categories,
introducing new product segments for both the NBA and NFL, including NBA and NFL
footwear, classic lifestyle apparel and performance gear for off-the-field activities. Reebok
sponsored many top athletes in tennis; Andy Roddick and Venus Williams; as well as music stars
Jay-Z, Pharrell Williams and 50 Cent. Yao Zing's impact in the Asian market is hugely important
to Reebok. Affiliating itself to such globally renowned celebrities enhanced the company name
among many different customer groups.

Strong women's sector

Another one of Reebok's strengths was its success in the women's sector. The market for
women's athletic shoes is larger than that for men, accounting for around 46% and 40% of the
sector's value respectively. In volume terms, the women's sector was even more important, 46%
compared to 35%. Reebok's market share of women's athletic shoe sales was around 35%, and
has been boosted by its 'It's A Woman's World' marketing campaign.

Weaknesses

'Classics' under fire

The company had come under fire from its rivals in the classics department. In the past Reebok
has controlled this shoe category without much competition, however companies such as Nike
and Adidas were coming up with their own 'classic shoes'. Reebok were still the market leaders
in that area but the gap kept narrowing.

Low market share in apparels

Reebok controlled only about 1.4% of the apparel market. This posed a problem when squaring
up with its fierce competitor, Nike. The footwear market's growth was slowing. Athletic apparel
gives scope for a larger and more diverse range of products, keeping the market fast moving. The
apparel market was 2.4 times larger than the footwear market. Nike took charge there, with its
innovative designs, and contracts with sports teams and organisations throughout the world.

Danger of stockpiling products by retailers

Futures, or ordered in advance sales, represented around 60-70% of Reebok's business. This has
been valuable to Reebok in the past; however five of the company's brands that represent around
60% global market share could cause problems in the future. Futures growth for these five
brands was around 9.5% on a dollar-weighted basis. This growth was alarmingly fast. Reebok
had to be careful as retailers may be ordering more than they can sell. This could result in a
sudden cut off in orders, leaving the company with large inventories and a decrease in sales.

Opportunities

Increase average shoe price

Reebok's average price per shoe in athletic footwear stores, which account for around 15% of the
market, was considerably lower than average. Its average price per shoe is $45, compared with
an outlet average closer to $60. The company's lower than average shoe price is partly due to the
high percentage of basic products sold, which is itself partly attributable to its traditional position
in the women's sector. This left plenty of space for the company to muscle in on higher priced
sales, as its products and promotional efforts improve. As well as raising brand awareness,
Reebok's sponsorship deals helped the company increase its average sales price.

Draw attention toward new technological developments

Reebok had started developing its product to make it more modern and has invested heavily in
added technology to enhance its shoes. Reebok had a lot to gain from a continued investment in
more technologically advanced, premium products. In 2003, the company introduced new
fashionable and technologically advanced products tied to new integrated marketing programs.
These displayed an enhanced and prominent vector logo which ties back to the Professional
athletes wearing the products on the field. This branding created a real point-of-difference for its
performance products and should help to generate consumer interest at point-of-purchase. These
products are supported at retail with a new performance marketing campaign, which utilises the
athletes and the vector logo in new and creative ways. This campaign included television, print
and in-store marketing packages.

Encourage a strong brand push in Europe

The company planned to enhance its European market, recruiting new management talent and
initiating an aggressive program to regionalise this business utilising a consistent brand image
throughout Europe. Reebok executed unified product, marketing, and sales strategies across all
borders in Europe, thereby presenting the Reebok Brand in a more relevant and consistent
manner.

Exploit Nike's lack of high profile sponsorship

Nike, the world's most successful sportswear brand and footwear producer struggled to fill the
void vacated by Michael Jordan. This was the first time in a long time that Nike did not have an
eminent sports star to spearhead their marketing drive. This has left an opening for the likes of
Reebok to exploit, particularly in the basketball arena. The company took the Chinese sensation
from Nike, Yao Ming, hoping to increase market share by 10% to 30% by 2006.

Threats

Over reliance on footwear sales

Footwear is Reebok's largest division and the company relies fairly heavily on the footwear
market. That was a competitive field experiencing much slower growth than in previous years
and, like most other producers, Reebok felt that it must do more to increase sales. Reebok had
also to be aware that the market for more expensive footwear was slowing. This could ultimately
force prices down, should this trend continue for a significant period of time. With the company
so reliant on footwear, it risked losses, whereas other competitors such as Nike can fall back on
their apparel division.

Diverted from historical markets

Reebok's original success stemmed from the women's aerobics market in the 1980s. It has since
become apparent that the company has shied away from its roots. Reebok's women's products
represent only 25% of its athletic apparel volume. The women's apparel sector actually accounts
for around 40% of industry sales, which suggests that Reebok risked losing out in the key market
that transformed them into a global company.

Potentially expensive new product marketing

Until recently Reebok had not focused on either the men's or the women's apparel market for
several years. Before it can build up sales significantly in this area, it had to instil confidence
back into consumers that it is good at producing more than just 'classic shoes'. This process
could've proven to be both time consuming and costly.

Adidas-Reebok SWOT Analysis (After the merger)

Strengths
• More products for different customers
• Increase in product line
• Acclivity in market share
• Now both upper and middle priced markets are covered.
• Shared R&D, Patents, technology & innovations

Weaknesses
• Differing values among management
• Complexity of joining two corporate cultures
• Both companies belong to different countries

Opportunities
• Reduction in costs
• Decreased competition
• Cross-over promotion by sponsored athletes
• Enter to new market/Segments

Threats
 • Nike.
• Nike's possible acquisition of Puma.
• Danger of cannibalisation between the two separate brands.

Post merger performance

• 7th March, 2007 -Adidas Group's motto is "Impossible Is Nothing." But since the No. 2
sporting-goods maker announced in August, 2005, that it would snap up rival Reebok for
$3.8 billion to gain a firmer footing in the U.S. and challenge market leader Nike (NKE),
the company has yet to prove that the combo will work.
• True to its mantra, however, Adidas says it's racing flat-out to make its tie-up with
Reebok a winner. The company has closed factories in Indonesia and is repositioning the
Reebok brand to widen its appeal. "Our focus this year will be on getting Reebok back
onto a growth track," Adidas Chief Executive Herbert Hainer said in a statement. "It's
going to take time, but we're moving in the right direction."
• As part of that move, the company is ramping up its sales and marketing efforts. It's
reducing reliance on low-traffic, shopping-mall-based outlets and placing Reebok apparel
and footwear in higher-end department stores and larger sporting-goods ventures. Adidas
has also enlisted star NFL quarterback and Super Bowl MVP Peyton Manning, actress
Scarlett Johansson, and other famous faces to help launch a series of new products
planned in the second quarter.
• The company says it expects these efforts to increase sales of the Reebok brand this year
in the "low-single-digit" range. Adidas expects its gross margin in 2007 to be between
45% and 47%, thanks to "improvements in all three brand segments." For the group, the
company expects sales in 2007 to grow in the "mid-single-digit" range.

III. CREATING CUSTOMER VALUE, SATISFACTION

An annual report produced by Interbrand (2006), in cooperation with BusinessWeek, ranking the
top 100 global brands shows that Adidas was ranked 71st and Nike 31st. The ranking is based on
brand value, which is defined as "the dollar value of a brand, calculated as net present value, or
today's value of the earnings the brand is expected to generate in the future". Given that this puts
both brands ahead of corporations such as Shell, Porsche, and fashion brands such as Armani,
Burberry and Levis, it signifies the strength of the two brands. Indeed, Adidas and Nike are the
only sportswear companies in the top 100 global brands. The positions of the two companies
during the previous five years had been relatively stable, with Adidas ranked at 70th, 68th, 67th,
69th, and 71st between 2001 and 2005 respectively, and Nike ranked at 34th, 35th, 33rd, 31st
and 30th over the same period.
 Customer loyalty has been a major focus of strategic marketing planning and offers an important
basis for developing a sustainable competitive advantage – an advantage that can be realised
through marketing efforts. It is reported that academic research on loyalty has largely focused on
measurement issues and correlations of loyalty with consumer property in a segmentation
context.
Many studies have been conducted on brand loyalty. However, in these entire studies brand
loyalty (e.g. repeat purchase) has been measured from the behavioural aspect without
considering the cognitive aspects. However, brand loyalty is not a simple uni-dimensional
concept, but a very complex multi-dimensional concept. However, it does not clarify the
intensity of brand loyalty, because it excludes the possibility that a consumer's attitude may be
unfavourable, even if he/she is making repeat purchases. In such a case, the consumer's brand
loyalty would be superficial and shallow – rooted.

After careful examination consumer non-durables report (based on the ASQ Analysis of Quality
& Customer Satisfaction With Manufacturing Non-Durable Goods), we anticipate that the
acquisition of Reebok by Adidas and the challenge for Adidas/Reebok—a combination of very
different business cultures—would be to maintain quality as it attempts to go toe-to-toe with
sales leader Nike. The acquisition was completed at the end of January 2006 without a hitch as
far as Reebok's perceived quality. The 2.4% gain by Reebok that quarter, coupled with a similar
drop by Nike, puts Adidas-Reebok perceived quality firmly ahead of Nike.

Nike also stumbles in comparison to Adidas-Reebok in terms of value. Consumers are much
more likely to believe they get value for the money spent on Adidas-Reebok compared to Nike.
And although Adidas-Reebok captures a significantly higher customer loyalty score than Nike,
both companies are vulnerable on this score — with Nike posting the lowest and Adidas-Reebok
the second lowest customer loyalty marks of any of the manufacturing non-durables companies.

Unlike the food processing segment, where manufacturing skills represent core competencies of
the business, the athletic shoes segment's core competencies are creating, marketing and
distributing global brands. Manufacturing is almost entirely done by subcontractors operating
primarily in countries where labour costs are low.

In this business environment, in addition to the usual challenges of supply chain management (at
which Adidas and Reebok both excel), there is the added complication of addressing social
responsibility issues such as fair labour practices and safe working conditions in cultures very
different from the United States. A company's performance in the area of social responsibility
may also affect how consumers perceive the quality of the company's products, since these issues
are of growing concern to many consumers. While both companies have made strides in this
area, they have been consistent targets of critics, and the high visibility of these issues may
contribute to the fact that the athletic shoes category has the lowest perceived quality score
among all manufacturing non-durables.
Nike, the market leader, on the other hand, has programs in place to provide oversight of
working conditions and human rights issues in addition to managing supplier production quality
at its contract manufacturers. Originally using third-party monitors, Nike now handles these
functions internally. The company measures its overall performance with a balanced scorecard
that includes compliance measures in addition to cost, delivery, and quality measures. The
company has become an advocate for bringing into better alignment the codes of conduct of
various compliance and monitoring organisations.

For companies the size of Adidas and Reebok, monitoring can be a major undertaking. Adidas-
Reebok new company contracts with 41 footwear manufacturing plants and another 543 apparel
manufacturing plants. Adidas-Reebok was the first footwear program to be accredited by the Fair
Labour Association.

The athletic shoes industry falls 1 percent to 76, dragged down mostly by the performance of
Nike. Reebok and Nike were tied in last year's measurement, but they have moved in opposite
directions by equal amounts this year. Reebok climbs 4 percent to 78, while Nike slipped to 72.
The six point advantage Reebok enjoys over its nearest competitor is unusually large in any
industry, surpassed only by Google in search engines, eBay in Internet auctions, and Wachovia
in banks.

Reebok's acquisition by Adidas may have contributed to Reebok's increase in satisfaction. The
combined brands led to a near doubling of U.S. sales, rivalling Nike in market share. Price
increases eroded satisfaction across the industry last year, but this year Reebok has a large
advantage in value for the money as perceived by its customers.

Adidas-Reebok Customer Relationship Management (CRM)

Adidas-Reebok new company is driving future success by engaging consumers with unique
interactive product approaches and rewarding point-of-sale experiences. Adidas and Reebok
brands must be competitive in this environment where consumers make their final purchase
decisions based on availability, convenience and breadth of product offering.

There are examples what Adidas-Reebok has done:

• Product performance excellence

Adidas Group website gives their potential customer possibility to zoom in on the product and
also to see full information even its technology. Consumer also can choose colour and size
easily, the website also offer product preferences by consumer behaviour.

• Price performance excellence

Adidas-Reebok has offered discount for specific product or promotional in their website.
 • Transactional excellence
Process of buying is quite easy and easy to understand by customer. Adidas-Reebok also provide
their websites with product tracking and account managing, so that customer cans easily tracking
their order and or review their cart.

• Relationship excellence
In managing their relationship with consumer, Adidas-Reebok gives them services to subscribe
their newsletter. Customer can contact Adidas-Reebok through easy steps and if they aren't
satisfied with the product, they can refund it and the procedure of refund is explained in their
website.

To manage their relation with small retailer, Adidas-Reebok offer "Affiliate Program" by
giving them procedure to get commission in sales.

The Adidas Group, with its wide assortment of product lines, is challenged by an increasing
individualisation of demand. There is a tendency towards an experience economy, a design
orientation, and, most importantly, a new awareness of quality and functionality that demands
durable and reliable products corresponding exactly to the needs of the buyer. Consumers with
increasing purchasing power are increasingly attempting to express their personality by means of
individual product choice. As a result, Adidas was forced to create product programmes with an
increasing number of variants. This development makes forecasting and planning for Adidas
more difficult than ever. The result? High overstocks, an increasing fashion risk, an enormous
supply chain complexity, and the necessity to provide often large discounts to get rid of
unwanted products. Adidas realised that implementing made-to-order manufacturing, instead of
made-to-stock variant production, could become a promising option to manage the costs of
variant explosion and broad product assortments. Adidas' management board decided to head
towards mass customisation (MC). The programme development started in the mid- 1990s,
resulting in the mass customisation product range mi Adidas. It was launched in test markets in
2001, and introduced, on a wider scale, in 2002. The programme provides consumers with the
opportunity to create unique footwear to their exact personal specifications in terms of fit,
function and design in specialised retail stores or at selected events. The shoes are offered in
selected markets MC can be seen from the Adidas perspective as an approach to improve both its
operational performance and its competitive position by providing higher customer value. From
market research studies and customer surveys we know that consumers love the system, and
even make appointments to buy shoes. Other benefits to Adidas are outlined in the box below.
However, these benefits come at a cost, as MC also brings a number of challenges. This process
is called the elicitation of a mass customisation system. The supplier has to interact with the
customer to obtain specific information to define and translate the customers' needs and desires
into a concrete product specification. However, instead of just listening to the customer, in many
cases customers are performing this design (configuration) activity by themselves on a tool
supplied by the manufacturer. The selling process turns into a co-design process.
 ANALYSING BUYING BEHAVIOUR

The sportswear market can be split into two separate markets: sports clothing and sports
footwear. The mass-market for sportswear initially developed in the 1980's with the growth of
the training shoe market. This was initially passed off as a fad. However, during the late 1980's
and in the 1990's, the sportswear market grew rapidly. In the early 1990's, the sports clothing
market overtook sports footwear, and since the early 2000's, there has been a steady sales ratio of
70% clothing to 30% footwear in the overall sportswear market. Between 2000 and 2004, the
overall sportswear market grew by 16.2%. However, during this period, sales of sports clothing
grew 18.9% in contrast to sports footwear, which grew by 10.4%. One of the reasons for this is
that price deflation of 13% occurred between 2000 and 2004, which encouraged consumers to
increase the number of garments and pairs of footwear they buy each year.

Consumers of sports apparel in the US and their socio-demographic profiles

The Keynote Report on the Clothing and Footwear Industry (2006) revealed that an important
characteristic of sportswear consumers is the bias towards men, in contrast to most clothing and
footwear markets where women spend more and buy more frequently. A survey undertaken by
NEMS Market Research survey on behalf of Keynote (2006: 93) found that the most widely used
outlet for buying sports, leisure or casual clothing or footwear was a sports shop, with 55% of
consumers stating this. The survey also found that sports shops were used by 72% of 16-19 years
olds, 49% of 20-24 year olds, and 72% of 25-34 year olds.

Buying behaviour
A survey of consumer attitudes towards sportswear was undertaken by BMRB Access, for
Keynote, in June 2007. Based upon a representative sample of 1,016 adults, the key findings
were:

• 36% of respondents believed that sports brands like Nike or Adidas offer better quality than
most other clothing or footwear;

• 58% of respondents in the 25 – 34 age group believed that sports brands like Nike or Adidas
offer better quality than most other clothing or footwear;

• In 2006, when asked which brands consumers had bought in the last year, 36% had bought
Adidas, 39% had bought Nike, and 31% had bought Reebok;

• In 2004, when asked which brands consumers had bought in the last year, 40% had bought
Adidas, 44% had bought Nike, and 36% had bought Reebok;
• In 1998, when asked which brands consumers had bought in the last year, 48% had bought
Adidas, 37% had bought Nike, and 35% had bought Reebok.

Adidas-Reebok strategy towards consumer buying behaviour

In an effort to distinguish itself from the competition, each company has developed exclusive
relationships with highly recognisable organisations and individuals. Reebok had the exclusive
rights to market its products for the NBA, NHL, NFL, and the WNBA. Similarly, Adidas had
obtained contracts with professional European soccer clubs such as Chelsea, Bayern Munich,
Real Madrid, and AC Milan. On the other hand, without an established superstar, Nike's current
endorsements lack the influence they once held with the likes of Michael Jordan. "At the
moment, virtually none of the current NBA stars wear Nike. In my eyes, this is the reason Nike
was prepared to spend an outrageous amount of money for an 18-year-old," claims Adidas CEO
Herbert Hainer.

While there are many possible avenues to exploit in terms of sales opportunities for these
companies, the market is highly segmented in such a way that it is important for the three to
engage in target marketing. For example, in this market of athletic shoes, a firm can either offer
an all-purpose cross-trainer shoe or a running shoe and a basketball shoe. While the cross-trainer
shoe has broad appeal for all consumers it does not satisfy any consumer's needs in particular. In
contrast, the running shoe and basketball shoe combination will each satisfy a particular market
segment but will have modest appeal to the other segment. This is the point where the particular
companies must decide whether they will individually follow a niche market or a full-line
strategy. In order to make this decision, the firms must weigh the cost of offering an additional
product and the revenue generated by doing so.

By utilising Porter's generic strategies framework (previously discussed), the methods employed
by Adidas-Reebok to compete for customers in the industry become easily apparent. While both
Nike and Adidas make use of a differentiation strategy to attract its customers, Reebok
concentrates its efforts on a broad cost strategy approach. The differentiation strategy of the two
companies, Nike and Adidas, can be seen in action by examining the various productions of both
these companies.

Nike currently incorporates its Shox technology in many of the athletic shoes it produces. All of
Nike's past Shox shoes have had the same basic platform: a four-column Shox unit in the heel for
cushioning and a mesh/synthetic upper. In addition to the Shox technology, Nike has innovated
online purchasing by allowing customers to customise their own shoes through NIKEiD.com.
These methods can be seen as an attempt by Nike to differentiate itself from the completion.
Acquisition
Definition: The purchase of one corporation by another, through either the purchase of
its shares, or the purchase of its assets
There's only one real way to achieve massive growth literally overnight, and that's by
buying somebody else's company. Acquisition has become one of the most popular
ways to grow today. Since 1990, the annual number of mergersand acquisitions has
doubled, meaning that this is the most popular era ever for growth by acquisition.
Companies choose to grow by acquiring others to increase market share, to gain
access to promising new technologies, to achieve synergies in their operations, to tap
well-developed distribution channels, to obtain control of undervalued assets, and a
myriad of other reasons. But acquisition can be risky because many things can go
wrong with even a well-laid plan to grow by acquiring: Cultures may clash, key
employees may leave, synergies may fail to emerge, assets may be less valuable than
perceived, and costs may skyrocket rather than fall. Still, perhaps because of the appeal
of instant growth, acquisition is an increasingly common way to expand.

IBM to Acquire Cognos to Accelerate Information on Demand

Business Initiative

IBM (NYSE: IBM) and Cognos® (NASDAQ: COGN) (TSX: CSN) the two companies have
entered into a definitive agreement for IBM to acquire Cognos, a publicly-held company based
in Ottawa, Ontario, Canada, in an all-cash transaction at a price of approximately $5 billion USD
or $58 USD per share, with a net transaction value of $4.9 billion USD. The acquisition is
subject to Cognos shareholder approval, regulatory approvals and other customary closing
conditions. It is expected to close in the first quarter of 2008.
The acquisition of Cognos supports IBM's Information on Demand strategy, a cross-company
initiative announced on February 16, 2006 that combines IBM's strength in information
integration, content and data management and business consulting services to unlock the
business value of information. Integrating Cognos, the 23rd IBM acquisition in support of its
Information on Demand strategy, will enable new business insights to be delivered to a broader
set of people across an organization, beyond the traditional users of business intelligence.
IBM said the acquisition fits squarely within both its acquisition strategy and capital allocation
model, and that it will contribute to the achievement of the company’s objective for earnings-
per-share growth through 2010.
“Customers are demanding complete solutions, not piece parts, to enable real-time decision
making," said Steve Mills, senior vice president and group executive, IBM Software Group.
"IBM has been providing Business Intelligence solutions for decades. Our broad set of
capabilities– from data warehousing to information integration and analytics – together with
Cognos, position us well for the changing Business Intelligence and Performance Management
industry. We chose Cognos because of its industry-leading technology that is based on open
standards, which complements IBM's Service Oriented Architecture strategy.”
Together, IBM and Cognos will become the leading provider of technology and services for
Business Intelligence (BI) and Performance Management, delivering the industry’s most
complete, open standards-based platform with the broadest range of expertise to help companies
expand the value of their information, optimize their business processes and maximize
performance across their enterprises.
The acquisition of Cognos accelerates IBM’s global Information on Demand initiative to unlock
the business value of information for our customers. IBM will provide broader reach for Cognos
solutions across multiple industries and geographies with a more complete set of offerings,
including consulting services, hardware, and other middleware software.
Cognos provides the only complete BI and performance management platform, fully integrated
on an open-standards-based service oriented architecture (SOA), and has a strong history of
supporting heterogeneous application environments, consistent with IBM’s approach. With
Cognos, customers can turn data into actionable insight for coordinated, information-driven
decision-making to improve overall performance. Cognos will also extend IBM’s reach further
into the CFO office with powerful financial planning and consolidation capabilities.
“This is an exciting combination for our customers, partners, and employees. It provides us with
the ability to expand our vision as the leading BI and Performance Management provider,” said
Rob Ashe, president and chief executive officer, Cognos. “IBM is a perfect complement to our
strategy, with minimal overlap in products, a broad range of technology synergies, and the
resources, reach, and world-class services to accelerate this vision. Furthermore, this
combination allows Cognos customers to leverage a broader set of solutions from IBM to
advance their information management driven initiatives.”
Together, IBM and Cognos will expand IBM’s ability to provide customers with the right
information they need when they need it, to optimize operational performance, and to quickly
respond to changing market demands. The combination of IBM’s information management
technology and Cognos will also help organizations discover new ways to use trusted
information spread across their enterprises to identify new business opportunities and
significantly reduce the expense and time required to address industry-specific business
challenges.
Following completion of the acquisition, IBM intends to integrate Cognos as a group within
IBM's Information Management Software division, focused on Business Intelligence and
Performance Management. IBM also will appoint current Cognos President and CEO, Rob Ashe,
to lead the group, reporting directly to General Manager, Ambuj Goyal.
Cognos has approximately 4,000 employees worldwide and serves more than 25,000 customers.
IBM and Cognos have partnered for more than 15 years, with extensive technical integrations
and eight pre-integrated joint solutions already supporting many joint customers, such as New
York City Police Department, Blue Cross and Blue Shield of Tennessee, Canadian Tire,
MetLife, and Bayer UK.
Other strategic acquisitions in support of IBM’s Information on Demand initiative include
Princeton Softech (data archiving and compliance), FileNet (enterprise content management),
Ascential Software (information integration), DataMirror (changed data capture), SRD (entity
analytics), Trigo (product information management), DWL (customer information management)
and Alphablox (analytics).
.
Information About the Transaction
The transaction will be completed through a plan of arrangement, which will require the
approval of shareholders representing two thirds of the shares cast. Shareholders will be asked to
vote on the transaction at a special meeting, the details of which will be announced in due
course.
The transaction has been unanimously approved by the board of directors of Cognos following
delivery of a fairness opinion, which will be included in a proxy circular to be prepared and
mailed to Cognos shareholders over the coming weeks providing shareholders with important
information about the transaction. A material change report, which provides more details on the
transaction, will be filed with the Canadian provincial securities regulatory authorities and with
the U.S. Securities and Exchange Commission and will be available at www.sedar.com and
atwww.sec.gov.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this communication regarding the proposed transaction between IBM and
Cognos, the expected timetable for completing the transaction, benefits and synergies of the
transaction, future opportunities for the combined company and products and any other
statements regarding IBM and Cognos’s future expectations, beliefs, goals or prospects
constitute forward-looking statements made within the meaning of Section 21E of the Securities
Exchange Act of 1934 and forward-looking information within the meaning of Section 138.4(9)
of the Ontario Securities Act (collectively, forward-looking statements). Any statements that are
not statements of historical fact (including statements containing the words “believes,” “plans,”
“anticipates,” “expects,” “estimates” and similar expressions) should also be considered forward-
looking statements. A number of important factors could cause actual results or events to differ
materially from those indicated by such forward-looking statements, including the parties’ ability
to consummate the transaction; the conditions to the completion of the transaction, including the
receipt of shareholder approval, court approval or the regulatory approvals required for the
transaction may not be obtained on the terms expected or on the anticipated schedule; the parties’
ability to meet expectations regarding the timing, completion and accounting and tax treatments
of the transaction; the possibility that the parties may be unable to achieve expected synergies
and operating efficiencies in the arrangement within the expected time-frames or at all and to
successfully integrate Cognos’s operations into those of IBM; such integration may be more
difficult, time-consuming or costly than expected; operating costs, customer loss and business
disruption (including, without limitation, difficulties in maintaining relationships with
employees, customers, clients or suppliers) may be greater than expected following the
transaction; the retention of certain key employees of Cognos may be difficult; IBM and Cognos
are subject to intense competition and increased competition is expected in the future;
fluctuations in foreign currencies could result in transaction losses and increased expenses; the
volatility of the international marketplace; and the other factors described in IBM’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2006 and in its most recent
quarterly report filed with the SEC, and Cognos’s Annual Report on Form 10-K for the fiscal
year ended February 28, 2007 and in its most recent quarterly report filed with the SEC. IBM
and Cognos assume no obligation to update the information in this communication, except as
otherwise required by law. Readers are cautioned not to place undue reliance on these forward-
looking statements that speak only as of the date hereof.

Participants in Solicitation

IBM and its directors and executive officers, and Cognos and its directors and executive officers,
may be deemed to be participants in the solicitation of proxies from the holders of Cognos
common shares in respect of the proposed transaction. Information about the directors and
executive officers of IBM is set forth in the proxy statement for IBM’s 2007 Annual Meeting of
Stockholders, which was filed with the SEC on April 2, 2007. Information about the directors
and executive officers of Cognos is set forth in the proxy statement for Cognos’s 2007 Annual
and Special Meeting of Shareholders, which was filed with the SEC on May 24, 2007. Investors
may obtain additional information regarding the interest of such participants by reading the
proxy circular regarding the acquisition when it becomes available.