Problems of Economic Transition, vol. 57, no. 8, December 2014, pp. 14–33.
q 2014 Taylor & Francis Group, LLC
ISSN: 1061-1991 (print)/ISSN 1557-931X (online)
DOI: 10.1080/10611991.2014.1042313
ALEKSEI BEREZNOI
Business Model Innovation in Corporate
Competitive Strategy
In this analysis of business model innovation, a key competitive instrument
for major corporations, the author explores the concept of the business
model, identifies the features of innovative business models being used as
competitive tools in today’s volatile markets, and describes the challenges
involved in various approaches to implementing innovation. Innovation’s
role as a key driver of game-changing industry shifts is examined, and it is
concluded that business model development and implementation are
becoming a strategic imperative for most global players.
Keywords: Business innovation, business model, competitive strategy,
corporate organization, global competition, large corporations
Jel Classification: D21, F23, L20
Since the beginning of the twenty-first century, change has become the
norm in almost all spheres of economic life, and the pace and scale of
this change have only grown. It can be stated with certainty that future
economic development will see faster and more profound shifts.
English translation q Taylor & Francis Group, LLC, from the Russian text q 2014
NP “Voprosy ekonomiki.” “Innovatsionnye biznes-modeli v konkurentnoi strategii
krupnykh korporatsii,” Voprosy ekonomiki, no. 9, 2014, pp. 65– 81.
Aleksei Bereznoi is a Doctor of Economic Sciences and director of the Center for
Industrial Market Studies and Business Strategies at the Institute of Statistical
Studies and Knowledge Economics, National Research University–Higher School
of Economics in Moscow.
Translated by Nora Favorov.
14
DECEMBER 2014 15
This unprecedented pace and scale of change has highlighted the
importance of a particularly powerful tool: the innovative business
model. Not so long ago a major corporation that had successfully
established itself within a particular market could count on maintaining
its position long term by steadily improving an essentially unchanged
way of interacting with its customers. Today, however, this is rarely
enough. In almost any industry, no matter how mature a company is, it is
likely to be challenged by competitors introducing new business models
that radically change the “rules of the game.” Furthermore, unlike in the
case of innovative products and manufacturing methods, this is not
necessarily a matter of high technology. In business innovation, the
decisive role is played not by scientific discovery, but by an
entrepreneurial idea, by the identification of a new market need and
the skillful joining of ways to satisfy this need with effective demand
based on nonstandard ways and means of creating and delivering
consumer value to the target market.
Under current conditions, where even the most successful business
models are relatively short-lived, the introduction of business
innovation is becoming an important tool in dominating markets and
defending them against competitors for the vast majority of participants
in global competition. Innovative business models were behind the past
decades’ most remarkable corporate ascents: Apple, Walmart, Amazon,
Cisco, FedEx, and Virgin, to name a few. Corporations that have
become business innovation leaders become global leaders in their
industries. From this standpoint, the experience of developing and
introducing new business models is of clear interest for Russian
companies as they increasingly enter the competitive fray of global
markets.
The features of business models as competitive tools
Attempts to identify the features of business innovation that serves as a
competitive weapon for large corporations inevitably leads to the task of
defining the very concept of the business model. Although this concept
is neither new nor rare within the literature of economics and business, it
remains a subject of lively debate (Afuah, 2014; Johnson, Christensen,
and Kagerman, 2008; Kaplan, 2012; Magretta, 2002; Osterwalder,
2004; Osterwalder and Pigneur, 2010; Shafer, Smith, and Linder, 2005;
Teece, 2010).
16 PROBLEMS OF ECONOMIC TRANSITION
One reason for the lack of a clear definition of business models and an
insufficient understanding of the concept overall is its interdisciplinary
nature. “The economics literature has failed to even flag the importance
of the phenomenon, in part because of an implicit assumption that
markets are perfect or very nearly so. The strategy and organizations
literature has done little better. Like other interdisciplinary topics,
business models are frequently mentioned but rarely analyzed:
therefore, they are often poorly understood” (Teece, 2010, p. 192).
Without getting into the details of the debate over defining business
models (a topic in its own right), we should note that in our opinion this
concept amounts to more than an arbitrarily constructed understanding of
the basic mechanism through which a particular company operates (such a
broad interpretation essentially deprives the concept of any meaning). The
concept incorporates a number of specific business characteristics that are
fundamental to any company: (1) a means of creating consumer value and
delivering it to a target group of consumers; (2) a means of generating
profits; and (3) a means of using existing resources and processes to
promote the stable interaction of mechanisms for creating consumer value
and generating profit as well as ensuring enduring competitive advantages.
These fundamental characteristics, which as a system essentially define the
entire “logic of a business,” comprise the business model out of which grow
other, secondary elements of the architecture of the enterprise as a party to
market relationships: competitive tools and possible models of market
behavior, the organization of interactions with suppliers (the supply chain
model), the specific organizational structure and organization of business
processes (the operational model), and so on.
What distinguishes innovative business models (which are essentially
the systematic result of developing a set of business innovations) from
traditional weapons in the competitive arsenal? Large corporations use
three basic elements of the tried-and-true methods to increase sales in a
competitive market: lower prices, the gradual improvement of existing
products, or the release of new products. All of these levers can provide
(and continue to provide) measurable results from the standpoint of
increasing sales. However, when large corporations have been operating
in their industries for many years, these approaches inevitably begin to
yield diminishing returns.
The point of diminishing return comes particularly quickly in the case
of lowering prices (these days, most often through discounts and sales),
which is considered the simplest way to boost sales. However, many
DECEMBER 2014 17
companies that lower prices in the hope of a quick yield have learned
that a straightforward price reduction (or the large-scale use of various
sorts of discounts) without making the right changes to other elements of
the business model can quickly lead to reduced profitability. This is a
trap into which major department stores have often fallen after they
turned to large-scale sales: at first they saw a sharp increase in sales
followed by just as sharp a fall in their sales margin.
A solution was found by the pioneers of discount retailing in the United
States, which back in the 1950s began to apply the logic of the supermarket
to the sale of clothing, appliances, and other mass consumption items. This
new business model presumed a number of systemic departures from the
traditional department store: a sharp reduction in the number of sales
personnel; maximum freedom and self-service for shoppers; a redesign of
the sales environment to accommodate large numbers of shoppers; a move
toward purely functional design of sales floors (doing away with everything
superfluous); and changes to the formula for selecting suppliers that
compelled them to offer generous terms. As Joan Magretta has noted, only
after all these elements of the discount business model had been put to
effective use could discounters “offer low prices and still make money”
(Magretta, 2002, p. 91).
In the case of gradual improvements to existing products already
familiar to the market, the ability to apply this competitive method as a
means of increasing sales is exhausted all the more quickly in that
consumer value is generated not by the product as such, but by the
results associated with its use. Companies that continue to stubbornly
focus on improving the product itself can limit their growth potential,
make investments in innovation that are unlikely to be adequately
appreciated by the customer, and, in the end, wind up squeezed out of
the market by more farsighted competitors. A striking example of this is
Kodak, which recently entered bankruptcy after a history dating back to
the late nineteenth century, when it essentially founded and went on to
dominate the photographic technology industry.1
Beginning with the dawn of the current century, the rapid spread of
digital photography and social networks eliminated the need for the
printing of photographs on a large scale, leading a vast business empire
into financial ruin in 2013. An ironic twist in all this is that the digital
photograph was invented by Kodak engineers (back in 1975). But this
invention was obviously not integrated into the company’s business
model, which was built around the sale of relatively inexpensive
18 PROBLEMS OF ECONOMIC TRANSITION
cameras that generated massive sales of film and services to develop and
print photographs using an extensive network of Kodak photography
shops throughout the world.
For many years, the company’s management was absolutely certain of
the durability of this model and concentrated on improving their cameras
and increasing the quality of their film. They made a classic mistake:
focusing on improving the properties of already available goods and
services and ignoring new business models that would enable radical
industry shifts. Locked into their traditional business model, Kodak
essentially lost its connection to the end user, for whom film and printed
photographs per se were not as important as opportunities to capture
memorable moments in their lives and share them with friends and family
(which in our digital age the Internet and social networks offer on an
unprecedented scale). “Kodak’s business model,” according to an article
in Forbes, “was to make its money selling film, and it made a mint that
way. Digital photography didn’t fit that model so Kodak buried its head in
the sand and ignored the coming tsunami of new technology. When film
went from ‘essential’ to ‘old fashioned’ the company never recovered.”2
When it comes to the release of fundamentally new products, this
classical method of competitive struggle offers greater market
advantages than the usual reduction of prices or improvements to
products already being sold. However in the current era of rapid and
unpredictable change, even this method, in its traditional application,
offers no guarantee of stable long-term growth. The early victories of
Apple—perhaps the most successful corporation of the early twentyfirst century—illustrates this point.
In the late 1990s, Apple was a niche player in the personal computer
market, and it was losing ground to dynamic competitors, old and new
alike. But in 2001, with the release of a new product—the iPod digital
MP3 player—the situation radically changed. In the course of just three
years of sales, a huge, essentially global market worth $10 billion
(approximately half of all Apple sales) was created that paved the way
for other best sellers: the iPhone smartphone and iPad tablet. This story
was covered in many business publications, but one aspect of Apple’s
success went largely unremarked: it was not the first company to release
a digital music player on the market. Diamond Multimedia had begun
selling an analogous product, the Rio, in 1998, and in 2000 the Cabo 64
digital player was released by the Best Data company. Both competing
devices were excellent and considered very stylish by their youthful
DECEMBER 2014 19
target audience. Nevertheless, the iPod won, and the main reason for this
was not the product’s unique features, but the innovative business model
that Apple was able to design and introduce in record time.
Apple’s main achievement was the creation of a unique combination of
software, the device itself, and a service allowing consumers to
inexpensively, easily, and legally download digital music from the
Internet. The sale of the inexpensive (and essentially nonprofit generating)
iTunes software was combined with the sale of the high-margin iPod
device to yield excellent profitability for the business model overall.3
The Apple story strikingly illustrates the main advantages of the
innovative business model over traditional competitive tools. Unlike
classical methods that relied on innovation in one or two areas of a
corporation’s economic mechanism (such as price or technology), the
introduction of new business models inevitably brings essential changes
to most of its elements, including the choice of the potential buyer’s
target need, the mechanism for generating profits, and the means of
reliably combining the two. These numerous innovations provide
multiple “layers of protection” from attempts by competitors to copy a
successful business model.
Furthermore, since such innovations are part of an integrated business
model, by definition they are coordinated with one another, which sets
up a multilayered defensive system against competitors, substantially
improves the competitive durability of innovative business models, and
extends the time over which “the cream can be skimmed” in the form of
elevated profits. It is hardly surprising that analysis of a database created
by global management consulting firm BCG (in collaboration with
Business Week) of the most innovative companies of the year showed
that companies that had introduced innovative business models
generated the greatest return for shareholders compared with
competitors who limited their innovation to the introduction of new
products or processes.4 Furthermore, the success of business model
innovators proved to be more enduring: even ten years out they
continued to lead their competitors by a number of important measures.
The main types of innovation and problems in introducing IT
Since every successful business model is unique, it is hard to identify
a standard algorithm for “correctly” developing prospective business
innovations. It is, however, possible to identify some of the main
20 PROBLEMS OF ECONOMIC TRANSITION
pathways of change that have already brought success to today’s
business model innovators in the marketplace.
The first of these pathways involves rethinking ways to satisfy the
target need underlying a given industry’s dominant traditional business
model (including rethinking just what the target group of consumers
actually needs). The result of this rethinking could be, for example, a
reorientation of the company’s business model from making products to
providing services or achieving certain results important to targeted
consumers. For example, Hilti (based in Liechtenstein), facing
intensifying competitive pressure from Asia (especially China),
radically changed its business model, shifting from the sale of products
to a tool management service for contractors.
After years of working with construction firms in a variety of
countries, Hilti had a good understanding of its clients’ power tool needs
and the problems they faced. First among them was the need to purchase
a wide array of tools in order to have the right tools for every
construction job, a huge expense, especially for start-ups. Second, the
entire fleet of power equipment had to be constantly inspected and
managed to ensure that it is kept in good working condition and in the
right place at the right time. Third, builders were often forced to buy
exceptionally expensive tools that are needed only rarely.
Under Hilti’s new business model, the company does a more effective
job of satisfying its clients’ need for state-of-the art power tools. The
company does this by leasing power tools rather than selling them.
Furthermore, it guarantees clients that they will have as many tools as
they need when they need them and commits to continually update the
collection of tools they lease. This new business model obviously
required that Hilti’s operations be completely restructured and that it
develop the new competencies involved in managing a huge fleet of
equipment and transportation logistics as well as in introducing systems
to manage client power tool fleets, among other challenges. The cost of
this restructuring has been fully recouped: the company’s client base has
greatly expanded and revenues have increased.
Sometimes firms are able to accumulate knowledge about their
customers that reveals problems and needs of which the customers
themselves are not fully aware. For example, the U.S. company
ServiceSource, which specializes in developing cloud technologies for
major software and computer equipment producers, discovered a
potentially huge but often ignored source of revenue for their clients: the
DECEMBER 2014 21
renewal of contracts to keep recurring revenue streams flowing. According
to the company’s estimates, in the U.S. information technology (IT) sector
alone, software producers lose up to $30 billion annually because
approximately 50 percent of their clients are not approached by sales teams
(who are focused on finding new clients) to renew their contracts.
ServiceSource not only discovered this source of unrealized revenue
but also developed an appealing way for clients to compensate them for
their services that convinced them to share a portion of their revenues.
The company proposed that its services be compensated not through
standard fees for time spent (the norm for consulting firms), but based on
results—on a percentage of income generated through the renewals. The
innovation introduced into ServiceSource’s business model was not just
an original compensation model. What they essentially offered was the
outsourcing of a problem in a sensitive area and the sharing of risks in
exchange for a share of revenues.
As executive vice president Christine Eckert has stated, “We offer
clients a set of managed services, where we can solve the problem for
them. We can give them everything they need to outsource this problem
to us. We take it on and deliver them back a result” (Lindgardt and
Hendren, 2014, p. 8). ServiceSource’s innovative business model
achieved rapid market success. During 2007– 12, the company’s
compound annual growth rate was almost 30 percent, and by late 2013
overall client revenue being managed exceeded $14.5 billion.5
Other types of business innovation that have proved themselves by
creating successful models in many markets involve changing the way
consumer value is delivered to target customers and the overall
restructuring of interactions with them. An interesting example is the
business model of Nespresso, a fast-growing international company that
is part of the Swiss food giant, Nestlé.
Ever since it first began operation, this company, which was founded
in 1986 to retail high-quality single-serving coffee, was built around an
innovative idea that combined seemingly incompatible aspects: an
individualized approach to each customer marketed on a large scale.
A major role in this “personalization” was played by the way the
company packaged and sold the product: the single-serving coffee,
prepackaged in special capsules, can be brewed using Nespresso
automatic coffee brewing machines (an easy, convenient way to brew an
excellent beverage), and the huge variety of coffees sold in the capsules
allows coffee drinkers to find the blend that best suits their taste.
22 PROBLEMS OF ECONOMIC TRANSITION
Most important, Nespresso rejected traditional ways of selling its
products through an impersonal network of outside distributors and
created its own two-level sales system featuring, first, a worldwide
network of Nespresso “boutiques” (327 as of May 2014), and second,
Internet sales through the Nespresso Club. An important role in all this
has been played by a global network of call centers offering around-theclock advice on the secrets of espresso making.
This entire system was initially aimed at providing an individualized
approach based on direct contact with all customers (approximately 70
percent of company personnel—more than 5,800 people—work directly
with clients) and involving all customers in the Nespresso Club, through
which they maintain regular contact via e-mail. By late 2012, the club
had more than 7 million members worldwide, and since 2000 the
company has maintained an average annual growth rate of
approximately 30 percent. Such a high rate of growth and the
company’s steady dominance of the coffee capsule market (in 2013, it
had a 31 percent share of the global market, valued at $10.8 billion)
attest to a successful choice of business model.6
A striking example of a radical transformation of a business model
based on a restructuring of interactions with customers is the recent
reform undertaken by the management of Home Depot, a leader in the
U.S. retail building materials market. In the early 1980s, when Home
Depot first put its business model into practice, it represented a sort of
revolution, essentially creating a new do-it-yourself-renovation market
segment.
This model, which involved the creation of huge building-material
supermarkets and achieved great popularity, primarily among young
consumers with relatively modest incomes, bet on consumers’ desire to
renovate their homes themselves, without employing the services of
expensive designers and craftsmen. However, the crisis of 2008 –9 saw
plummeting demand for the materials needed to fix up apartments and
homes and forced Home Depot to seriously rethink its business model.
The main focus of the resulting changes involved interactions with
customers.
Putting the new program into practice meant: (1) bringing the
proportion of time sales consultants are in direct contact with shoppers
to approximately 60 percent of their workday; (2) mobilizing advanced
communication technologies to provide greater convenience and a
positive shopping experience (the use of special iPhone apps allowing
DECEMBER 2014 23
shoppers to virtually see how a renovation would look in their own
home, to instantaneously and precisely calculate the supplies they would
need and compare the prices with those of competitors, and to pay for
and arrange delivery of their purchases through their mobile apps, etc.);
(3) extending “emotional” contact with customers beyond the sales floor
(including by collecting comments from dissatisfied customers from
social networks and applying lessons learned from them and holding
special seminars led by well-known interior designers and renovation
professionals, etc.). This new model, which brought relations with the
target consumer audience to a new level, permitted Home Depot not
only to significantly improve its customer satisfaction index but also, in
2009– 12, to confidently surpass its closest competitor, Lowe’s, in terms
of the rate of annual income growth and EBITDA [earnings before
interest, taxes, depreciation, and amortization].
One important type of innovation that has shaped quite a few
successful business models is the restructuring of income generation
through the introduction of new cost models and new means of
monetizing use value, and the like. For example, for Qantas, the top
Australian airline, the urgent restructuring of profit generation based on
a new cost model proved to be the only solution after the 2001 arrival of
low-cost carriers, led by Virgin Blue (part of Britain’s Virgin Group),
which quickly captured more than 30 percent of that market. The lowcost business model, which applies the same basic idea behind retail
discounters to air travel, stakes its success on a significant increase in
passenger volume achieved through a sharp reduction in ticket prices
made possible by comprehensive cost cutting across a wide spectrum of
the carrier’s operations. The experience of many of the world’s airlines
has shown that attempts to apply individual elements of this model to a
traditional operating scheme usually ends in failure.
Qantas followed a different path. In 2004 it founded a new company,
Jetstar Airways, which from the start was based on the same principles
as low-cost airlines and in many regards was more severe and
uncompromising in its cost cutting than its international competitors.
The new company did not stop at half measures, such as cramming more
seats into the cabin or reducing free in-flight services. It opted for the
ultra-low-cost model, taking advantage of every possible savings:
economizing on airport services (using second-tier airports and
nighttime flights); minimizing ground time (precise planning and
adherence to schedules and optimizing the time spent on boarding and
24 PROBLEMS OF ECONOMIC TRANSITION
refueling); maintaining a new and uniform fleet of planes (which enables
savings on fuel and spare parts and the interchangeability of personnel
and crews); the introduction of a flexible pricing policy (a base price
plus paid options for all sorts of in-flight services, including baggage,
food and beverages, access to audio and video entertainment, etc.);
dispensing with connecting flights (to avoid having to compensate
passengers who miss a connection due to delays); mandatory electronic
reservations and check-in (saving on preflight services); and eliminating
seat assignments for faster boarding.
Consistent application of the new model proved highly successful for
Jetstar. Foreign low-cost airlines lost out and became niche players in
the Australian air travel market.7 Jetstar’s annual income has passed the
US$3 billion mark, and it has become more profitable than its parent
company, which targets higher paying segments. Furthermore, Jetstar
became the first airline in the world to successfully apply the low-cost
business model to transcontinental flights.
In recent years, the importance of the innovative business model in
achieving competitive success has become increasingly clear to the
leaders of major corporations. According to American economists,
more than half of the most successful companies, those included on
lists such as those of Fortune and Forbes ranking the largest
corporations traded on U.S. stock exchanges during the ten-year period
beginning in 1997, achieved this specifically because of their
innovative business models.8 Not surprisingly, a 2005 survey by the
authoritative Economist Intelligence Unit of more than four thousand
top executives of leading corporations from twenty-three countries
showed that a majority of them (55 percent) believe that a new
business model is a more important competitive asset than new
products or services (EIU, 2005, p. 9).
Nevertheless, when corporations set their priorities in the area of
innovation, the development of business models winds up far from the
top of the list. According to a study by the American Management
Association, global corporations spend no more than 10 percent of their
overall investment in innovation on developing new business models
(Johnson, Christensen, and Kagerman, 2008, p. 52). The paradox of the
parallel existence of two contradictory trends—a growing awareness of
the competitive importance of innovative business models and the
persistence of underinvestment in this area—usually has to do with how
major corporations are currently organized.
DECEMBER 2014 25
First of all, unlike other sorts of innovation (those associated with
new products and processes), innovative business models by definition
require coordinated, simultaneous changes in several key areas of a
company’s operations. The risks such large-scale changes entail are
many times greater than for other sorts of changes, and the cost of
getting it wrong can be devastating for the entire business. This means
that launching the development of a new business model, to say nothing
of introducing it, demands not just routine decision making by a
particular central management department (as would be the case for
innovations of products or technologies), but decisive and coordinated
action by the company’s top management. Today, it can be difficult for a
large corporation with a complex management structure, sprawling
bureaucracy, and problematic relationships among various divisions and
services, to overcome inertia and turn its “corporate ship” in another
direction.
Numerous studies have shown that the internal organization of
today’s major corporations, even those adapted to develop and
introduce innovative products and technologies, often does not lend
itself to recognizing and realizing new business models. When
deciding which innovative projects to invest in, they tend to choose
those that fit into the current business model, even if that means
ignoring the ideas that offer the most promise. This tendency is one of
the main reasons for Kodak’s bankruptcy, and it deprived the Xerox
Corporation of an opportunity to make use of a number of interesting
technological innovations (including the first personal computer) that
were developed by its engineers, but later realized with great success
by others.9
Furthermore, a lack of flexibility in decision making at major
corporations often creates insurmountable barriers to experimenting
with and testing new business models—both of which are essential.
In the opinions of Karan Girotra and Serguei Netessine, “Large
companies have the resources and capabilities to create and exploit
business model innovation ideas on an extraordinary scale. But their
failure rate is nonetheless unacceptably high because so far too many
have not shown enough commitment and flexibility in the way they
develop and roll them out.”10 This is why companies that manage to
overcome “built-in” internal corporate barriers and unleash their
innovative potential to create and—just as important—introduce
innovative business models quickly become industry leaders.
26 PROBLEMS OF ECONOMIC TRANSITION
The driving force behind industry revolutions
The importance of innovative business models as a competitive tool for
major corporations is most obvious when they prove to be the main
drivers of radical industry shifts. The unique role of the transformer, a
company that changes the “rules of the game” in a particular industry,
is not a new phenomenon belonging exclusively to business models of
recent years. In fact this role has been an important feature of the bestknown business models throughout the history of capitalism.
In the 1870s, a business model conceived and realized by Swift and
Co. in the United States was built around a new system for storing and
transporting frozen meat and led to a complete restructuring of the meat
processing industry in the United States.11 The razor/razor blade model
(also known as the Gillette model) has long since been included in
business school textbooks. This model—designed around the sale of one
product (the razor) at a low price on the assumption that the sale of an
accompanying, more highly priced product (replaceable razor blades),
would assure a steady revenue stream—launched a revolution in the
razor industry in the early twentieth century. First realized by the
renowned American entrepreneur King Gillette in 1903, it not only
forever changed “the face of the shaving world,”12 but also became a
classic mechanism for generating profit that has been widely emulated in
many business models today, such as by producers of jet engines (the
engine/spare parts model), and in the area of photocopy technology (the
copier/cartridge model), among others. In the 1930s, the new
supermarket business model completely changed the retail landscape
in the United States, and beginning in the 1950s it continued its
triumphant advance across Western Europe. In the 1970s the low-cost
airline model paved the way toward fundamental changes in
international air travel, and in the 1980s, Sweden’s IKEA, with its
innovative “self-assembly” model became a dominant force in
essentially all the main markets for inexpensive furniture.
In recent decades, the world economic environment has changed and
is now even more favorable to innovative business models, which have a
greatly increased potential influence on the fate of any given industry.
Among several causes are this environment’s dynamism and volatility.
This concerns above all the massive spread of an assortment of new
and revolutionary technologies, including information and telecommunication technologies, which create unprecedented opportunities for the
DECEMBER 2014 27
development and introduction of innovative business models and
magnify their impact on an industry (or even across multiple industries).
Second, a huge role is played by globalization processes, which have
permeated virtually all sectors of the modern economy, simultaneously
intensifying the effects of the interdependence and instability of world
and national markets and forcing the development of new business
models that take the economy’s global scale into account. Third, the
heavy involvement of emerging markets in the global economy is of
increasing importance, and the specific nature of these markets forces
major corporations to transform business models that have been
developed over years, adjusting them to adapt to widely varying
circumstances.
When it comes to information and telecommunications technologies,
since the dawn of the new century it has been hard to find a new business
model that does not take advantage of the opportunities they offer.
Attempts to ignore them generally do not end well.
Take the case of Blockbuster. This former U.S. video-rental leader
seemed, as late as in the mid-2000s, not to notice the appearance of the
Internet and was quickly squeezed out of the market by its competitor,
Netflix, which put in place a more efficient and convenient model for
ordering DVDs through the mail via online subscriptions. As a result, a
company with billions in revenues and a huge network of outlets across
the country (more than nine thousand) was forced to file for bankruptcy
protection in 2010, while Netflix rapidly expanded its subscriber base to
more than twenty-six million in the United States and abroad. “Netflix
didn’t invent any new technology,” writes Saul Kaplan, “What Netflix
invented was a new business model—the ability for the customer to
avoid the trip to the video store by delivering the DVD by mail”
(Kaplan, 2012, p. 6).
Naturally, the information and telecommunications technologies that
have taken economic life by storm have led to more than just redesigned
business models that have become industry standards. They have also
led to the creation of fundamentally new industries for which the process
of devising even the first generation of business models is not yet
complete and in and of itself serves as a field for heightened competition
among new industry leaders. A good example is the Internet commerce
sector, which after the dot-com boom of the 1990s and subsequent crash
of most of its participants gradually acquired a rather stable industry
structure with clear business models for the remaining top players. Most
28 PROBLEMS OF ECONOMIC TRANSITION
major Internet companies have striven to create a large user base by
engaging with them through social networks (Facebook, Twitter) or
search engines (Google), games, and so on, and then “monetize” this
base through online advertisements. Others have immediately attempted
to activate e-commerce mechanisms, although as Amazon’s experience
shows, this has not brought big profits.
Recently analysts have taken note of the phenomenal growth of
China’s Tencent, which has succeeded in surpassing Western global ecommerce leaders by introducing an entirely new model for monetizing
its user base. This company started out—like many others in the Chinese
market—by copying Western experience in the area of social networks
and the spread of electronic games, but unlike some global giants (such
as Google and Twitter), for a long time it remained in the shadows,
acquiring weight in the domestic network space, protected against
outside competition. However in September 2013, when Tencent’s
market value exceeded $100 billion, surpassing Facebook (and not only
by this standard but also in terms of revenues and profits), the company
found itself the focus of attention by investment experts. It turned out the
Tencent’s monetization model was fundamentally different from the
models used by its Western competitors.
Tencent energetically developed its social network, WeChat, and its
instant messaging service, QQ, which has hundreds of millions of
Chinese users, while at the same time introducing a fundamentally
different means of generating revenue based on electronic games: as
soon as users get hooked on a new game, the company offers them the
opportunity to pay for additional services that “add value,” such as
flashier clothing or weaponry for their avatars or a chance to visit a
virtual VIP lounge, and so on. Whereas Western leaders of the global
Internet industry earn approximately 80 percent of their revenue through
advertisements, Tencent earns 80 percent by providing services to users
for an extra charge. It is this new business model that prompted the
Economist to say that Tencent has a “better business model than its
Western peers” and that this model has given the company the highest
shareholder total return for 2008 – 12, surpassing even such champions
as Apple.13
As globalization processes become more pervasive, they shape the
design of new business models in a variety of ways. On one hand, the
qualitatively higher level of interpenetration and interdependence
among national economies creates new opportunities for combining the
DECEMBER 2014 29
best resources from various countries to shape business models that
more easily withstand outside competition by relying on global
networks of corporate partners. On the other, under globalization,
business model life cycles have shortened due to heightened
competition among a rapidly growing number of global competitors
(including networks of competitors), and has accelerated the rate at
which destructive effects can spread during economic downturns, which
can quickly become global.
A striking example of a business model resting on the principles of a
global network and aspiring to become an industry standard is the one
behind Boeing’s creation of the Dreamliner (a wide-bodied 787
passenger jet). The design of this innovative airplane and the process
that brought it into commercial operation took international cooperation
(not unusual for civil aircraft construction) to a whole new level, with
first-wave suppliers alone totaling forty-four worldwide. This network
model, according to experts, shifted the industry paradigm. As scholars at
Aalborg University rightly point out in commenting on the consequences
of globalization, “The new environment demands new competitive
parameters, where the focus on internal optimization is no longer
sufficient . . . . The focus has thus changed from businesses competing
against businesses on BMs [business models], to networks competing
against networks on BMs” (Pedersen et al., 2013, pp. 103–4).
The demand for new business models has markedly increased since
the beginning of the current century, when major Western
corporations began accelerating their expansion into developing
markets. Simply transplanting models that work in developed
economies rarely works in these markets (see Bereznoi, 2014,
pp. 7 – 9). The reasons for this usually boil down to a failure to fully
appreciate two essential features of these markets that lead to the
rejection of imported business models.
First, the key characteristics of the group of consumers being
targeted by Western corporations is different. Adapting products and
sales methods in these new markets requires more than cosmetic
adjustments tailored to local tastes and practices. Unless the tiny sliver
of the population whose incomes and consumption standards differ
little from those in the West is being targeted, fundamentally different
approaches are needed to reach the typical consumer in emerging
markets (the segment that the current expansion of Western
corporations is targeting). In the words of experts from Innosight, an
30 PROBLEMS OF ECONOMIC TRANSITION
international consulting firm: “Many multinationals simply import
their domestic models into emerging markets. They may tinker at the
edges, lowering prices . . . . But their fundamental profit formulas and
operating models remain unchanged, consigning these companies to
selling largely in the highest income tiers, which in most emerging
markets aren’t big enough to generate sufficient returns” (Eyring,
Johnson, and Nair, 2014, p. 90). At the same time, Western firms often
need new business models to solve problems such as the absence in
developing markets of reliable suppliers of high-quality materials and
services, adequate transportation, and commercial and financial
infrastructure, among other needs.
For example, the American fast-food giant McDonald’s encountered
a completely unfamiliar situation when it entered the Russian market in
1990. Unlike in Western countries, where the company focused on
running its restaurants, outsourcing the entire supply chain, in Russia at
the time no suppliers could be found that were capable of providing the
necessary level of quality and the required delivery schedule. Attempts
to attract traditional suppliers from Europe to invest with them in the
Russian market met with failure. But McDonald’s persisted and—not
giving up on the strategic decision it had made—decided to make
serious changes to its tried-and-true business model and undertook to
create a fundamentally new vertically integrated structure.14 These
efforts and investments totaling approximately $250 million led to great
success in the huge Russian market, where in an essentially new fastfood industry, McDonald’s became the undisputed leader for many
years (fifteen years after opening its first restaurant, McDonald’s
accounted for approximately 80 percent of fast-food sales).
When it entered the Pakistani market, Telenor, the largest Norwegian
mobile communications company, encountered the situation that most
of the population did not use banks. This meant that the company could
not receive payments using its traditional model. After several years of
preparation, however, Telenor managed to transform this problem into a
competitive advantage and gain a dominant market position. In 2009 the
Norwegian firm launched a service called Easypasia that gave Pakistanis
an easily accessible system of mobile banking that allowed customers to
make payments, get cash, and even open a savings account—all with
their mobile phones. The company even acquired a small local bank in
order to obtain a banking license. By 2010, Easypasia was available at
more than 20,000 retail outlets, offering financial services throughout
DECEMBER 2014 31
Pakistan (the country’s entire banking network consisted of 8,500
branches). Although 89 percent of the country’s adult population did not
use banking services, 62 percent used mobile phones. As a result of this
undertaking, the number of Telenor subscribers in Pakistan grew to
more than 22 million. In essence, the Norwegian mobile operator used a
new technology to compensate for a largely absent banking sector and in
so doing achieved unprecedented growth among the local population
through the use of an unconventional business model.
* *
*
Given the increasing instability and volatility of the economic
environment, the importance of innovative business models has grown
significantly as one of the most powerful tools in competition among
major corporations. Competitive reality unambiguously shows that even
a recognized engine of market success like technological innovation can
achieve much greater power if it is integrated into an innovative business
model. As European Commission experts stress, “Technologies as such
do not have a specific value. Their value is determined by the business
models used to bring them to a market.”15 Given this circumstance, only
corporations that have armed themselves with a business innovation
strategy and mastered the practice of renewing business models that take
into account dynamically changing market demands and ever faster
developing technologies will emerge triumphant in global competition.
The development and implementation of new business models has
become a strategic imperative for most of today’s large corporations.
Notes
1. Until recently this company was still counted among the most respected pillars
of big businesses in the United States. Founded in 1888, for the better part of a century
Kodak was considered one of the most innovative corporations in the world, known
for its commitment to exceptionally advanced technologies and cutting-edge
marketing solutions. By 1976 the company controlled 85 percent of the American
photographic camera market and 90 percent of the photographic film market. Until
the 1990s, it was regularly among the five most expensive international brands.
2. Forbes, August 20, 2013; available at www.forbes.com/sites/avidan/2013/
08/20/the-death-of-scale-is-kodaks-failure-an-omen-of-things-to-come-forcorporate-america/.
3. As American economists Raphael Amit and Christoh Zott have noted,
“Rather than growing by simply bringing innovative new hardware to the market,
32 PROBLEMS OF ECONOMIC TRANSITION
Apple transformed its business model to encompass an ongoing relationship with its
customers . . . . In this way, Apple expanded the locus of its innovation from the
product space into the business model” (Amit and Zott, 2012, p. 43).
4. The BCG analysis showed that although both groups of innovative
companies had an average total shareholder return above their industry’s average,
business model innovators on average earned returns four times greater than
product and process innovators (Lindgardt et al., 2009, pp. 2–3).
5. ServiceSource 2014 investor relations; available at http://ir.servicesource.com.
6. As noted in a special study of the Nespresso business model, “The idea of
selling coffee in capsules has now been copied many times but what is hard to copy
is the entire system—the business model. This non-duplicable business model
provides the foundation for sustained success” (Matzler et al., 2013, p. 36).
7. An expert comparing the day-to-day effectiveness of Virgin Blue’s and
Jetstar’s business models concludes that: “As a low cost carrier, Jetstar is the reality
of flying’s present and a vision of travel’s future” (“Decoding the New Economy,”
April 23, 2013; available at http://paulwallbank.com/2013/04/23/jetstar-vs-virginairline-flying-in-australia/).
8. Forbes, April 10, 2012; available at www.forbes.com/sites/rahimkanani/
2012/10/04/business-model-innovation-is-the-fastest-path-to-greatness/.
9. “Like Xerox, however,” Henry Chesbrough lamented in this regard,
“companies have many more processes, and a much stronger shared sense of how to
innovate technology, than they do about how to innovate business models”
(Chesbrough, 2010, p. 356).
10. HBR Blog Network, September 27, 2013; available at http://blogs.hbr.org/
2013/09/why-large-companies-struggle-with-business-model-innovation/.
11. Until 1870, livestock in the United States destined for processing plants was
sent to East Coast slaughterhouses from the main livestock centers of the Midwest
before being turned into fresh, packaged meats that were then sold to consumers in
major cities. Swift and Co. applied a fundamentally different approach: it set up
slaughterhouses in the main livestock-producing regions, supplying them with
powerful cold storage facilities, and then created a system for transporting frozen
meats in specially equipped train cars to the main centers of consumption. Having
thus sharply reduced costs, the company was able to radically reduce prices and
quickly gained the dominant position in the industry. Its competitors were forced to
follow the same model, which became the industry standard.
12. See http://wiki.badgerandblade.com/History_of_Shaving.
13. Economist, September 21, 2003; available at http://lb-stage.economist.com/
news/business/21586557-chinese-internet-firm-finds-better-way-make-moneytencents-worth.
14. With the help of Moscow’s local government, several farms were found and
given the means to buy modern equipment. A herd of cattle was brought in from the
Netherlands and a special variety of potato from the United States. The company
then built a huge production facility outside Moscow to produce prepackaged beef,
frozen french fries, dairy products, and the company’s hallmark sauces and
ketchups. It also had to put together its own fleet of trucks to ensure on-time
deliveries to restaurants in accordance with a strict timetable.
DECEMBER 2014 33
15. European Commission, New Forms of Innovation, Research and Innovation
portal, December 11, 2013; available at http://ec.europa.eu/research/participants/
portal/desktop/en/opportunities/h2020/topics/2470-inso-2-2014.html.
References
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Amit, R., and C. Zott. 2012. “Creating Value Through Business Model Innovation.” MIT Sloan
Management Review, vol. 53, no. 3, pp. 41– 49.
Bereznoi, A. 2014. “TNK na razvivaiushchikhsia rynkakh: v poiskakh uspeshnoi biznes-modeli.”
Mirovaia ekonomika i mezhdunarodnye otnosheniia, no. 10: 5–17.
Chesbrough, H. 2010. “Business Model Innovation: Opportunities and Barriers.” Long Range
Planning, vol. 43, nos. 2/3, pp. 354–363.
Economist Intelligence Unit (EIU). 2005. Business 2010: Embracing the Challenge of Change.
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Eyring, M. J., M. W. Johnson, and H. Nair. 2011. “New Business Models in Emerging Markets.”
Harvard Business Review, vol. 89, nos. 1/2, pp. 88 –95.
Johnson, M., C. Christensen, and H. Kagerman. 2008. “Reinventing Your Business Model.”
Harvard Business Review, vol. 86, no. 12, pp. 51–59.
Kaplan, S. 2012. The Business Model Innovation Factory: How to Stay Relevant When the World Is
Changing. New York.
Lindgardt, Z., and C. Hendren. 2014. Doing Something New with Something Old: Using Business
Model Innovation to Reinvent the Core. New York.
Lindgardt, Z., et al. 2009. Business Model Innovation: When the Game Gets Tough, Change the
Game. New York.
Magretta, J. 2002. “Why Business Models Matter.” Harvard Business Review, vol. 80, no. 5,
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Matzler, K., et al. 2013. “Business Model Innovation: Coffee Triumphs for Nespresso.” Journal of
Business Strategy, vol. 34, no. 2, pp. 30– 37.
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Approach. Lausanne.
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Hussain A. Ali Mahdi et al | International Journal of Business Management and Economic Research(IJBMER), Vol 6(3),2015,167-177
A Comparative Analysis of Strategies and Business
Models of Nike, Inc. and Adidas Group with special
reference to Competitive Advantage in the context of a
Dynamic and Competitive Environment
Hussain A. Ali Mahdi1, Mohammed Abbas2,
Taher Ilyas Mazar3
1,2,3
MBA Student,
University of Bahrain, Kingdom of Bahrain
Dr. Shaju George4
4
Assistant Professor,
Department of Management & Marketing
College of Business Administration
University of Bahrain
Kingdom of Bahrain
Abstract:
Strategy is about the most crucial and key issues for the future of organizations. Strategy is also important to
explore several strategic options, investigating each one carefully before making strategic choices. The study
incorporates a rigorous and systematic effort to uncover the strategies and its impact on the company’s
performance by analysing case studies, articles and the annual report of Nike Inc. and Adidas Inc. The study
attempts to find out the relevance of the strategies adopted by these companies, which are globally successful
athletic apparel companies in the context of Bahrain. The findings of the study highlight Nike’s strategies which
focus on innovation and emphasis on its research and development department, provision of premium pricing for
its customers, broad differentiation strategy, market Segmentation Strategy and Closed-Loop strategy. The Adidas
strategies focus on the broad differentiation, innovation, trying to produce new products, services and processes in
order to cope up with the competition. It embraces a multi-brand strategy, emphasis on expanding activities in
the emerging markets, continuously improving infrastructure, processes and systems, foster a culture of
challenging convention and embracing change, foster a corporate culture of performance, passion, integrity and
diversity. These strategies coupled with its resources and unique capabilities form the basis of sustainable
competitive advantage for both the companies.
Key words:
Strategy, Sustainable Competitive Advantage, Product Portfolio.
INTRODUCTION:
The strategy is a path towards achieving the optimum goals of individuals, groups and organizations. In
addition, it leads to a best use of companies' available resources and it also guides the company to stay in a
business successfully and continuous improvements for its processes.
The definition of strategy could be differ from one author to another, but the most common definition is that the
strategy is long term plans and approaches towards the intended visions and objectives. It is a general
framework that specified the organizations' plans, policies and approaches to meets its objectives, goals and
end results.
The way an organization used to shape its strategies could be differentiate from other organizations in order to
make its products unique and remarkable. Globally, companies formulate their strategies based on their visions
and reaching the satisfaction of customer's needs, requirements and expectations. Subsequently, they use
those strategies as a baseline to compare their actual performance with planned ones, to evaluate the end
results and ensuring the continuing organizational excellence.
There are many kinds of strategies that are pursued by the companies; Such as cost leadership, differentiation
and the focus strategies (Porter, 1985), services strategies, growth strategies. Based on the goals, the
companies form those strategies and they rank them upon the priorities.
It is more than important for any organization to put strategies and not any strategies; the correct strategies
which are formulated after a long time of studying and after numerous number of brainstorming among the top
management members.
Therefore, those strategies then to be implemented by converting the organization's plans and policies into real
actions through the best use of available resources such as: human resources, budgets and technological
advance; in order to enhance the organization's performance, productivity and sustainability.
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The organization's continuous evaluation and controlling of its strategies is an aid to make ensure that the goals
and objectives have been met and the appropriate strategies have been selected. Therefore, those successful
strategies should be documented and retained to use them in the future's goals. But, since the goals haven't
been met so the current strategies should be revised and corrected by the top management.
LITERATURE REVIEW
Definition of Strategy:
Strategy has been studied for years by business leaders and by business theorists. Yet, there is no definitive
answer about what strategy really is. One reason for this is that people think about strategy in different ways.
The strategy is a configuration and formation of available resources for an organization towards meeting the
needs, requirements and expectations of markets and stakeholders. It is also a long run direction and scope of
an organization that determines the visions and goals (Gerry Johnson & Kevan Scholes, 2008).
In addition, it is a plan leads an organization towards competitive advantage. Further, it is a pattern in actions
over time and it is a position that reflects decisions to offer the organization's products or services in particular
markets (Henry Mintzberg, 1994).
In some cases, the strategy is the pattern of decisions in a company that determines and reveals its objectives,
purposes and goals. Also, strategy produces the principal policies and plans for achieving those goals. It
defines the range of business the company is to pursue, the kind of economic and human organization intend to
be (Kenneth Andrews, 1980).
Strategy is about decisions taken by top management to reach a company's stability and sustainability.
Moreover, it refers to basic directional decisions, that is, to purposes and missions. Strategy consists of the
important actions necessary to realize these directions, and it is also the end that the company wants to reach
after selecting the proper directions (George Steiner, 1979).
In reality, not all business decisions are belong the strategic circle; the strategic decisions are those which
doing something ‘differently’ from competitors and that difference make a sustainable advantage. Even, the
activities that are used to increase productivity are not strategic since they can be easily imitated by others (M.
E. Porter, 1996)
Generally, Strategy is a framework that provides guidance for actions to be taken and, at the same time, is
shaped by the actions taken, and it has nine possible driving forces: Products offered, Market needs,
Technology, Production capability, Method of sale, Method of distribution, Natural resources, Size/growth,
Return/profit (Benjamin Tregoe & John Zimmerman, 1980).
Business Model:
The business model is a new concept in management literature and practice. It describes the logic by which an
organization can makes, keeps up and conveys esteem for its partners (Alexandru & Loan, 2013). This term is
getting to be progressively utilized among scholastics and professionals. It is a rising concept in management
and strategy literature, with fast development after the year 1995 (Ghaziani & Ventresca, 2005; Zott et al.
2011).
In addition, it is a structural layout that depicts the organization of a central company's transactions with all of its
external constituents in factor and product markets. It has been brought to the cutting edge of strategic
management considering, and has turned into an especially essential new possibility figure through recent fast
advances information and communication technologies specifically, Internet and broadband advancements that
have encouraged new sorts of innovation intervened between financial specialists (Geoffrion & Krishnan, 2003).
The study of business model is an important topic for strategic management research because it influences
firms' conceivable outcomes for value creation and value capture (Amit & Zott, 2001). A newly focused business
model together with ahead of schedule section into a business sector has a constructive outcome on execution
(Zott & Amit, 2007).
The contrast between business models and strategy is that business models are a coordination framework,
coordinating the parts of a business, while the strategy organizes the competitive struggle (Magretta, 2002).
Baden-Fuller and Morgan (2010) considered that this concept can furnish managers and researchers with
significant approaches to grow their comprehension of business phenomena by building generic categories and
the advancement of perfect sorts. Subsequently, it helps directors to catch, envision, comprehend, convey and
share the business logic.
Each organized effort in planning and executing a certain business model incorporates the hierarchical, as well
as the departmental level, particularly to those organizational units that are most discriminating to a proper
determination and blend of business components whose relationship and interdependence structures the scope
and depth of the focused capability of any enterprise. In this connection, business modelling is a procedure as
opposed to a state, transcendently because of the required changes, transformational or value-based, that
shape the methodology of overseeing it (Drakulevski & Nakov, 2014).
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Business Strategic Perspective:
Strategy has different perspectives and points of views most of them lies in the concepts of (cost leadership,
differentiation and focus strategies) or a combination of them. Porter (1980) suggested the cost leadership
strategy for the first time. The aim of this strategy is to reduce costs throughout the value chain and reaching
the lowest cost structure possible. A cost minimizing enterprise tends to make products with an acceptable
quality and very few standard features available in order to gain competitive advantage and to maximize its
market share. This kinds of strategy tries to attract a wide group of customers. Cost leadership focus on the
minimization and elimination of costs in fields such as Research and Development and additionally advertising.
Furthermore it emphasis certain concepts such as economies of scale, cost reduction efforts through the
experience curve, strict control over costs and overhead costs (Sumer, 2012).
Differentiation strategy aims to develop and market unique products for different customersegments. Usually
employed where a firm has clear competitive advantages, and can sustain an expensive advertising campaign
(http://www.businessdictionary.com, n.d.).
Because differentiation is a broad concept, this strategy should be discussed with various dimensions. We can
consider the strategies related to differentiation under two groups.
The first group is market differentiation. In this strategy, innovations are carried out in marketing activities
instead of the product. In order to have a positive product image, intense advertising and promotional activities
are so important. The objective is to make a difference in issues such as post-production service and customer
service. Furthermore, it aims to maximize the sales by analyzing, planning, implementing and controlling
Salesforce activities (Sumer, 2012).
Some of the market differentiation strategies mentioned in earlier studies are market penetration and market
development (Ansoff, 1965) market differentiators (Kim & Lim, 1988), differentiation/follower (Chang et al.,
2002), customer service differentiation (Powers & Hahn, 2004).
The second group is innovation differentiation. In this category of differentiation strategy the focus is to enhance
product quality, performance and design. Furthermore, enterprises attempt to operate above the industry
average by manufacturing a product regarded as unprecedented in the sector, charging a premium price that
the customer will agree to pay because the feeling they have that the product worth paying this premium
(Sumer, 2012).
Some of innovation differentiation strategies mentioned in earlier literatures are product development and
diversification (Ansoff, 1965), quality differentiation and design differentiation (Mintzberg, 1988).
The focus strategy differs from the other strategies that in the differentiation and cost strategies the strategy is
applied in a wide range of customers, whereas the firms that follow a focus strategy will apply it to a certain
geographical area or a certain fraction of customers which we call market niche. Focus strategy identifies the
market segments where the company can compete effectively. The strategy matches market characteristics
with the company's competitive advantages to select markets where a focus of the company's resources is
likely to lead to desired sales volumes, revenues and profits. (Chronicle, 2015).
Business Model Perspective:
The term ‘business model’ has become part of everyday language and increasingly used in these days. In spite
of the fact that there is an increasing interest in the term business model by academics and business leaders,
there is no common definition has been accepted by the business community (Shafer et al., 2005).
The business model is “a conceptual tool that contains a set of elements and their relationships and allows
expressing the business logic of a specific firm. It is a description of the value a company offers to one or
several segments of customers and of the architecture of the firm and its network of partners for creating,
marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue
streams”. Because a business model is not restricted to a single firm, it might be also subject to imitation.
Competitive advantage is the exclusive position a firm is able to develop in a market as a consequence of
resource utilization. To have a competitive advantage the development of a successful business model is not
sufficient, as barriers for imitation are often low. (Steininger)
However, most researchers investigate business model in a set of questions such as: How do firms create
value? How are customers made to pay for that value? How are payments transferred into profit through firminternal processes and operations? (Teece, 2010; Morris et al., 2005).
It is clear that the topic of business models led to a lot of publications and literatures. It is discussed from
various dimensions, such as e-business, information systems, strategy, and management. (Osterwalder &
Pigneur, 2005)
Mansfield & Fourie (2004) present the business model as the link between a firm’s resources, functions, and
environment.
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1.
2.
3.
4.
OBJECTIVES OF THE STUDY:
To examine the product portfolio of Nike Inc. and Adidas Group.
To identify the strategies adopted by Nike Inc. and Adidas Group.
To identify the business models of Nike Inc. and Adidas Group.
To compare the strategies of Nike Inc. and Adidas Group.
METHODOLOGY:
The information and secondary data of Nike and Adidas were collected from published books, case studies,
annual reports and academic journals. Further, this exploratory study is based on case studies of Nike Inc. and
Adidas Group. Archival data from company annual reports was also researched to gather information of the
companies.
BACKGROUND OF NIKE & ADIDAS
Nike, Inc. is an American multinational corporation that is engaged in the design, development, manufacturing
and worldwide marketing and selling of footwear, apparel, equipment, accessories and services. The company
is headquartered near Beaverton, Oregon, in the Portland metropolitan area (USA). It is one of the world's
largest suppliers of athletic shoes and apparel and a major manufacturer of sports equipment, with revenue in
excess of US$24.1 billion in its fiscal year 2012 (ending May 31, 2012). As of 2012, it employed more than
44,000 people worldwide. In 2014 the brand alone was valued at $19 billion, making it the most valuable brand
among sports businesses.
Nike produces a wide range of sports equipment. Their first products were track running shoes. They currently
also make shoes, jerseys, shorts, cleats, baselayers, etc. for a wide range of sports, including track and field,
baseball, ice hockey, tennis, association football (soccer), lacrosse, basketball, and cricket. Nike Air Max is a
line of shoes first released by Nike, Inc. in 1987. Additional product lines were introduced later, such as Air
Huarache, which debuted in 1992. The most recent additions to their line are the Nike 6.0, Nike NYX, and Nike
SB shoes, designed for skateboarding. Nike has recently introduced cricket shoes called Air Zoom Yorker,
designed to be 30% lighter than their competitors'. In 2008, Nike introduced the Air Jordan XX3, a highperformance basketball shoe designed with the environment in mind.
Adidas Group, was founded in a small town in Bavaria, Germany after first steps in his mother’s wash kitchen,
Adi Dassler registered the “Gebrüder Dassler Schuhfabrik” in 1924 and embarked on his mission to provide
athletes with the best possible equipment. Gold medals in Amsterdam (1928, Lina Radke) and Berlin (1936,
Jesse Owens) were first rewards and milestones.
On August 18, 1949, Adi Dassler started over again at the age of 49, registered the “Adi Dassler Adidas Sports
chuhfabrik” and set to work with 47 employees in the small town of Herzogenaurach.
Today, Adidas is a global public company and is one of the largest sports brands in the world. It is a household
brand name with its three stripes logo recognized in markets across the world.
The company’s product portfolio is vast, ranging from state-of-the-art sports footwear and clothing to
accessories such as bags, watches, eyewear and other sports-related goods and equipment. Employing over
46,000 people worldwide, the Adidas Group consists of around 170 subsidiaries including Reebok, TaylorMadeAdidas Golf, Rockport and CCM-Hockey. The Group's headquarters are in Herzogenaurach, Germany. In the
third quarter of 2014 the Group’s revenue was €4.118 billion.
Competitive environment of the Nike & Adidas
In order to scan the competitive environment of Nike and Adidas we will go through Porter’s forces. The main
competitors include Nike, Adidas-Reebok, Puma, and Fila where all of them operate in the athletic footwear
industry. They also need to be aware of newer competitors such as Under Armour which founded in 1996 and
that might give an indicator of the difficulty to enter the footwear industry where no major entrants during the
last two decades. However, some companies might be considered as threat of substitutes such as Crocs
company when they are formed an alliance to sell Crocs shoes in professional teams colours
(http://www.studymode.com, 2014).
Adidas and Nike uses private contractors as suppliers in low wages countries such as Indonesia and Thailand
and China, and therefore, they have a great deal of power over these factories and can easily switch between
them. For example, Nike does not produce its own sneakers but they use private contractors in Vietnam to
produce the sneakers. On the other hand, customers in the footwear industry have power because they can
switch between brands easily for several reasons such as (better price, higher quality, new style etc.). However,
the consumer may loss this power when they are loyal to a certain company and want only to buy their products
(KINETICS, 2015).
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STRATEGIES OF NIKE & ADIDAS
Strategies of Nike:
Nike follows many strategies in order to become the world’s leading designer, marketer and distributor of
athletic footwear, apparel and accessories. One of its strategies is continuous focus on innovation and
emphasis on its research and development department and they do their best to produce footwear, apparel and
athletic equipment that reduce or eliminate injury, help in athletic performance and maximize comfort and
enjoyment. (Dermesropia et al., 2004).
According to Nike, Innovation is at the heart of Nike’s business growth strategy and it uses this innovation in
order to become more sustainable company and to keep up with the competition and customer demands
(nikeandunderarmour.com, 2015).
The second strategy is Nike’s premium pricing strategy (Best cost provider strategy) which targets the
customers who develop a special kind of intimacy with the product that ultimately leads to the development of
loyalty. Since the loyalty has been established between the company and consumers; Nike takes the advantage
to associate their consumers with their price. Therefore, Nike knows that consumers will be ready to pay for the
product that bears the Nike Logo (sales-management-slides.com, 2007).
At the same time, Nike pays a noticeable concern towards a broad differentiation strategy. Based on that
strategy, Nike produces its products for athletics in three ways. Firstly, it manufactures for three different
segments of people: men, women and children. Secondly, differentiates its products by offering a variety of
accessories and apparels like shoes, gym bags, gloves and skates. Thirdly, Nike has the licensees to
manufacture and sell Nike brand products aside from athletic products like school supplies, electronic media
devices and timepieces (Dermesropia et al., 2004).
Similarly, Nike follows Market Segmentation Strategy, which assists Nike in advertisement of its products by
entering into the sponsorship agreements with celebrity athletes, professional teams, and apart from the college
athletic teams. It was in the year 1982 that Nike for the first time came live for national television ads during
broadcast of the New York Marathon. As a result, Nike attracts many consumers to pay their attention towards
buying Nike's products (nikeandunderarmour.com, 2015). In addition, Nike hires the famous basketball players,
some of popular football scorers and golf superstars in order to make an emphasizing campaign for its products
around the world (bizjournals.com, 2015)
A worthily strategy pursued by Nike called Closed-Loop Business Model which aims to move closer to
achieving zero waste by completely reusing, recycling and composting all materials. In such strategies, the
products can be manufactured using materials reclaimed throughout the manufacturing process and at the end
of a product's life. Thus, Innovators will create new ways to recycle and reuse waste and turn that into new
products in order to become environmentally friendly. (Nikebiz.com, 2009).
Strategies of Adidas:
Adidas focuses more on the broad differentiation strategy. The corporate level strategy of Adidas focuses on
innovation, trying to produce new products, services and processes in order to cope up with the competition. In
2014 centralised Sales Strategy & Excellency team was created to support all market across the globe and
managed by the Global Sales function. The group's multi-brand portfolio gives them an important competitive
advantage. This created a global sales function which were responsible for commercial activities and a global
brands function which were responsible for the marketing of both brands. The global sales function was also
split into two departments, wholesale and retail, which catered to the various needs of both these business
models. This was done in order to sustain their corporate level strategy for the long run so that these divisions
could emphasize and work hard in their respective departments in order to make the most of their efforts. (AG
Strategy-overview, n.d.)
They implemented a multi-brand strategy by having a diverse brand portfolio which allowed them to cater all
segments of the market from players to almost everyone. This helped them to keep a unique identity and
concentrate on their core competencies.
Adidas focused their investments in the best marketing and distribution channels in different countries by
critically evaluating the consumer buying behaviours and their constant struggle to secure prime shelf space.
They have also embraced e-commerce in order to become more efficient and appeal to more customers and
make purchasing much more easily accessible for them. Their supply chain is closely communicated and hence
it helps them to customize their products which appeal to a wide range of customers. The organizational
culture of Adidas group obligates employees to be innovative. This culture forces them to produce goods which
are highly innovative and with the use of the latest technology their products have a very good quality. To
become a sustainable company they find the right balance between shareholder interests and the needs and
concerns of their employees, the workers in their suppliers’ factories as well as the environment.
Based on information in Adidas-Salomon (2004a) with the use of latest technologies they produce products
which enhances performances of players and they focus on sports such as football, tennis, basketball and even
training shoes which are used by anyone with the ability to run. They updated the running shoes with
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ClimaCool, a system designed to ventilate, and a3, an energy management technology for footwear that guides
and drives an athlete’s foot through each stride.
[IMAGE SOURCE : http://www.adidas-group.com/media/filer_public/2b/2f/2b2fd619-5444-4ee8-9c07baa878d658c4/2014_gb_en.pdf ]
(Adidas Group FINANCIAL REPORTS, 2015)
BUSINESS MODEL OF NIKE & ADIDAS
Nike Business Model:
Nike has been the dominant leader in sports apparel industry for several decades. They achieved this position
by taking an aggressive approach towards building relationships with celebrity athletes. Most notably, the
company secured an exclusive contract with Michael Jordan, which generated a rapid growth in sales for their
core product line of sneakers and apparel. The success of this campaign has resulted in increased demand for
common stock ownership. (Nike's New Business Model, 2010) Nike shifted from traditional media and spending
more money into social media. For athletes, Nike is heading off to focus in on athletes who can show a high
ROI as measured by the quantity of Facebook fans and Twitter followers they have. For teams, Nike is
concentrating on those that show the most activation and engagement with the most number of core fans via
social media. The FuelBand, a $150 electronic bracelet that measures your movements throughout the day,
whether you play tennis, jog, or just walk to work. The device won raves for its elegant design and a clean
interface that lets users track activity with simple colour cues (red for inactive; green if you have achieved your
daily goal). The FuelBand is the clearest sign that Nike has transformed itself into a digital force. The other
innovation is the Flyknit Racer, feather light shoes vibe more like a sock on a sole. Made from knit threading
rather than multiple layers of fabric, it required a complete rethink of Nike's manufacturing process. The result is
a shoe that is more environmentally friendly and could reduce long-term production costs (CARR, 2013).
Adidas Business Model:
Adidas business model is highly focused on creating innovative products designed to meet consumer needs.
Rather than investing in product endorsements, the company attempts to demonstrate its value by creating a
high performance product line based on the specific needs of athletes and consumers. Further it focuses on
faster product creation and production by continuously improving the infrastructure, processes and systems.
Additionally they also emphasize on significantly reduced complexity on a group level by streamlining the global
product range, consolidating the warehouse base as well as harmonising above market-service. The ambition
to deliver the best branded shopping experiences at all consumer touch points. Innovative speed models in
supply chain to respond quickly to consumer needs. This strategy has motivated investors from around the
world to purchase Adidas common stock and the company has shown consistent growth for many years. The
public ownership structure of each company has been an integral part of sustaining growth over the long run.
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COMPARISON AND ANALYSIS OF STRATEGIES AND BUSINESS MODELS OF NIKE & ADIDAS
Nike and Adidas are the two most popular companies that deal with sporting equipment in the world. Nike and
Adidas are the largest sellers of sports and athletic footwear in the world. Adidas is the second largest sporting
goods manufacturer after Nike all over the world (Joachimsthaler, 2000).
Nike is more popular than Adidas because of its various celebrity sponsorships, with main target being
basketball players. Thus, their main market is in the States, but it has recently expanded globally. Adidas
targets people involved in football and tennis. They have a major market in European countries, while being
represented internationally (Joachimsthaler, 2000)
Over a period of several years, Nike has shifted its focus to football with the aim of gaining the international
recognition, just as Adidas dominates the world football market. The football market is usually considered to be
the “World Sport” (Marketing Strategy for Adidas vs. Nike, 2015).
The products of Adidas and Nike are divided into categories. Adidas sports products are divided into three main
categories, with the first involving Adidas performance shoes, eye wear and perfume. The next category
includes Adidas original superstar sneakers, and Vintage clothing. The third category has bags, belts, hand
gloves and style caps (Hollister, 2008). On the other hand, Nike products have the first category that includes
sport shoes and sunglasses by Nike. The second category includes products for body care, clothes, caps,
bags, perfumes (wikivs.com, 2015).
Prices of products of both Nike and Adidas are high, and Nike products’ price are overall higher than Adidas.
Pricing strategy used by Adidas is that of market skimming strategy. Adidas products’ prices are dependent on
looks and color. An example is where a pair of Adidas white color shoes is usually more expensive comparing
with another pair of shoes of the same quality, but in a different color (Hollister, 2008).
Nike use it uses the value based pricing and price leadership strategies, where the price of the product is based
on the value that is placed on that particular product by the consumer. In order to remain relevant in the market,
Nike uses the competitive and different pricing strategy from those of Adidas. Pricing strategies of Nike are
based on premium segments as their target customers (Aaker & Joachimsthaler, 2000).
The placing distribution strategy that is used by Adidas is that of concentrating most of its products and
resources in places, where there are clusters of customers. This explains why it has opened many of its shops
in various parts of the world. A trend developed by Adidas is where its products sold online. The company is
concerned with offering the customer a satisfying service at a place, where the customer cans buy the product
(Joachimsthaler, 2000).
Nike, on the other hand, employs distribution strategies similar to Adidas. It explores new and developing
markets around the world and sets up its shops in different countries all around the world. Distributors of the
company are independent, as well as subsidiaries and licenses. It also offers online shopping for its products.
However, although there is intense competition, both Adidas and Nike have continued to experience a
substantial growth over the last two decades. Furthermore, the growth of these two companies is being
attributed to the e-commerce and Internet. Online selling have boosted the performance of these firms, resulting
in the increased sales and at the same time reducing the operational cost.
Promotional strategies used by both companies are aimed at promoting their products as there is adoption of
endorsement, use of magazines. Both Adidas and Nike have a unique brand promotion. Customers have in
their minds that if they want to wear light weight sporting shoes, they need to go for Adidas. This explains why
most basketball shoes are manufactured by Adidas. Generally, basketball players wear shoes that are of
unique design and also light (Hollister, 2008).
Customers view Nike as being innovator and creative, since the company comes up with new innovations and
designs of new shoes styles. Therefore, the major target audience is the football players and athletes, who are
instilled with the competitive idea to improve their performance.
For the companies to place barriers for entry of new competitors in the market they are able to control the cost
of their products; therefore, they can have a competitive advantage over the potential rivals tending to enter to
the industry. They use enticing promotional programs such as making their online websites attractive for online
shoppers. Both companies offer a wide range of products, including footwear, sporting equipment and apparel.
They also have strong distributions channels that they control. Furthermore, both companies are creative in the
design of their products. (theguardian.com, 2015)
Sometimes, the two companies charge high prices associated with the provision of technological services.
Strong competition is another challenge that the companies are forced to bear (Fisk, 2010). Nike and Adidas
use celebrity advertisement, which can sometimes lead to the creation of negative images, especially when the
celebrity engaged in unethical behaviors. It may also lead to distress, when the company grows beyond
expectations and capabilities.
In conclusion, Nike and Adidas brand images are outstanding, but Nike has a slightly higher competitive
advantage when compared to Adidas. The competitive advantage enjoyed by Nike is related to its innovation
and reputation for quality. When it comes to footwear, both companies promise their customers products that
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will provide them with the durability and comfort. Nonetheless, the difference is that the products created by
Nike have higher cost, while those of Adidas cost less (Marketing Strategy for Adidas vs. Nike, 2015).
Financial Comparison
The profitability indicators show that Nike is performing better than Adidas. The net profit margin and return on
equity of Nike is higher than Adidas.
Earnings per share for both companies reach $3 by 2014. Although for the previous periods in 2013 and 2012
Nike has higher Earnings per share than Adidas.
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Additionally, Nike shows better liquidity than Adidas. The current ratios of Nike over the last 3 years are about
the double of Adidas.
Adidas has higher financial leverage than Adidas, which indicates that Adidas depends in debts more than
Nike. Nike depends on Internal funding more than external funding. The chart below summarize the comparison
of three years ( FactSet Fundamentals, 2014).
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The graph above shows a comparison of the movement of stock prices for Adidas and Nike from the period
from 2010 onward. As shown in the graph both stock were moving in same direction from 2010 to 2014 where
Nike moves upward drastically and there was a negative movement in Adidas during this period which means
the stockholders of Nike was rewarded positively in comparison to Adidas which has a negative movement of
25% (Yahoo Finance, 2015).
RESEARCH FINDINGS, COMMENTS & RECOMMENDATIONS
Strategy is fundamental to the success and sustainability of any organisation it helps the organizations to
understand their core capabilities, identify and address weaknesses, mitigate risks and understand the trends
going to impact on their business and their industry, and how they are going to respond to them. It streamlines
their business and ensures every dollar and minute they spend on the business is in the direction of their
sustained success. Therefore the success or failure of the organization depends on the strategies its follows. To
survive in today’s competitive business environment it is must to plan innovative and differentiation strategies.
Nike and Adidas strategies helped them to survive and sustain their positions in the market. Both of companies
have quite similar strategies. Adidas always challenges the world market leader Nike in sports championships.
Nike strategies focus on design innovation and marketing, whereas Adidas strategies focus on reducing the
production cost and time, expand its market, enhance attractiveness in terms of sports shoes and equipment.
Nike is the market leader in sport footwear and apparel.
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