International operations decisions - Adidas trainers for $1?

This makes an ideal example for students considering the challenges of international location in operations management for which they must consider global markets, cost reduction and avoidance of trade barriers. Here is my plan for the case study and questions which could be set on it:

Could Adidas make a profit from selling branded trainers for $1? Certainly not in any of their developed markets – but since 2008 they have been working on a market development (Ansoff!) strategy which would give them access to the vast market in rural India with a social enterprise venture at a price that local people can afford. The goal of the project, the firm says, is not to maximise profits but to “tackle social issues” by creating jobs.

The trainers will be sold under the Reebok brand label. Reebok’s will normally cost at least £30 in the developed markets, and even though we all know that there is a hefty mark-up associated with the brand label, cannot be produced, marketed and distributed for less than $1 a pair. So the business model under consideration here is very different, and in some ways represents a move from globalisation to ‘glocalisation’ - a means of combining the idea of globalisation with that of local considerations.

Consider Adidas’s likely objectives. India represents an unimaginably large opportunity for consumer products companies – with a population of around 1.2 trillion people and an economy worth seven trillion dollars a year, and fast growth meaning that the demand for consumer goods is blossoming. However, most of that population still lives in rural communities which have little access to the goods provided to the mass market via retail distribution. As market research consultant Rama Bijapurkar says “Two-thirds of India is on a very modest income so if you waited for incomes to rise to levels where they could buy Adidas shoes at Adidas prices, you would have to wait a very long time.” Introducing the global brand to this market at an accessible price may seem impossible given their normal price structure.
1. Devise a SMART corporate objective for Adidas which addresses this opportunity. You may want to consider why Adidas are concerned to include an aspect of ‘social enterprise’ in their market development.

Adidas have continued to look for ways to solve the problem. Analysis of the local market will show that people in rural areas currently either wear flip-flops, locally made leather shoes or no shoes at all, so the light, comfortable durable shoes that Adidas can offer will represent an improvement, making them “functionally superior and aspirationally superior”. Therefore the local market conditions are not the same as those that their products normally face, which highlights one of the main reasons why market development can be so risky – attempting to use their normal marketing mix will not work here, but that doesn’t necessarily mean that there can’t be another way to achieve their objective. The requirements of the product itself are quite different here as the main use will be for constant daily use, not for exercising.
2. Can you devise a suitable marketing objective, given these circumstances?

Test marketing in Bangladesh last year, Adidas sold 5,000 Reebok shoes in three Bangladeshi villages, reportedly for the equivalent of between $1.14 and $1.70. However they lost money on this venture, because they were importing the shoes ready-made at $3 per pair, and also had to pay $3.50 import duty so that each pair was sold at a loss of around $5. Clearly not sustainable – but if the abundant cheap local labour and materials can be used instead, the business model may start to work. If your potential market is up to a billion sales, you don’t need to make very much profit margin on each sale to have a viable business.
3. Please consider a financial objective for this project. This should include some reference to sales volumes and profit margins for the product.

The Operations and Human Resource strategies for such a product will clearly be driven by the financial constraints and the local conditions, as will distribution. There may be similarities here with Unilever’s Project Shakti – in which Hindustan Lever Ltd offers local people the chance to become very local, small-scale sellers of its products, and which is also important to the parent company’s social responsibility objectives.
4. Please read these reports about Adidas and Project Shakti and suggest suitable operations, HR and distribution strategies for the $1 trainers project.
BBC news: How could Reebok sell trainers for $1?
Daily Telegraph: Adidas launches $1 trainers in India
Business Studies blog: CSR - Project Shakti

5. Finally, discuss the likely success of the project – what is that success likely to depend on?