BUS349:AdvancedSeminarinStrategicManagement

Amer Sports
PerformanceProductsforSports&OutdoorActivities
MadaArslan;NadineMhanna;AtefSinno

2013

AMERICANUNIVERSITYOFBEIRUT

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Part 1: Introduction Amer Tobacco was founded in 1950 as a manufacturer and distributor of tobacco. In 1990, the company shifted its main line of operations to manufacturing sporting goods. In 2005, the company changed its name to Amer Sports after dropping all sports-unrelated segments. Headquartered in Finland, Amer Sports manufactures and sells sports equipment, footwear, and apparel in 33 countries around the world. Its specialty is winter sports equipment and apparel (skis, bindings, boots, and snowboards). Its brands include Salomon and Atomic for winter equipment and apparel, Arcteryx for outdoor apparel, Wilson for teams and individual sports (tennis, golf etc.), Mavic for cycling, Suunto for diving, and Precor for fitness equipment. Organic growth for Amer has been slow over the last 5 years (2007-2011) with sales growing at a mere CAGR of 3.3%. The industry by nature is susceptible to seasonality and climate change. In 2012 sales for Amer declined due to the winter season coming in later than usual (Interim report 2012) as a result of global warming and 2012 being the 10th warmest year on record sine 1880. Amer Sports segments its geographical presence into 3 regions: EMEA (Europe and the middle east that generate 80% of sales), the Americas (16% sales), and Asia Pacific (4% of sales). This widespread geographical presence exposes Amer Sports to currency fluctuations leading it to substantially use hedging through various types of derivatives. Amer Sports profit margin in 2011 was 4.83% which is not within industry practice especially that Adidas (the German sports company and one of 30 major companies of Germany) reported a profit margin for 2011 of 5.02%. We pull special attention to Amers debt where we believe they are having difficulties in handling debt: from 2009 till 2011 Amer executed a series of transactions to manage short-term and long-term debt. The objective of Amer Sports value chain is to conduct efficient and timely operations. The company outsources 65% of its production in order to focus on its core competency which is R&D. The companys capability is to market products as part of the sporting experience. This

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capability is generated by Amers own competency and those of its partners (suppliers, manufacturers, and retailers). Amer Sports vision is to be the sports industrys leader by developing authentic brands that inspire sporting enjoyment and achievement. Amer Sports strategy is explicitly stated on its website and consisted of five strategic cornerstones: 1. Clear portfolio roles and business synergies 2. Faster growth in softgoods 3. Winning with consumers 4. Winning in go-to-market 5. Operational excellence. An analysis of these targets reveals that while Amer Sports is on track to accomplishing most of them, there are concerns about the long term sustainability of the company especially amid its vulnerability to economic and climate change, the intense competition it faces in the areas its planning to expand in, and its involvement in price wars leading to low profit margins. Part 2: Data Presentation As the world plunged into recession in 2008, Amer Sports stock took a hit given its sensitivity to the market with systematic risk measured by its beta of 1.04 (Reuters) declining from an average of 17.37 in 2007 to an average of 11.58 and 6.45 in 2009. Share price have been recovering steadily during 2010 and 2011 to averages of 17.37 and 17.37 respectively, and closing at 11.25 in 2012 (Annual reports and company website). In comparison to Adidas stock and the DAX 30 (the stock index grouping the 30 major German companies including Adidas), Amer Sports falls short (refer to Appendix 2 for stock highlights). Even comparing Amer Sports stock to the OMX Helsinki Cap index (the stock index that lists 129 Finnish companies), it still falls short (company website). It is worthy to mention that 8 out of the top 10 shareholders of Amer Sports holding 58.48% of the outstanding share are banks and pension insurance companies and institutions (company website) since a beta close to 1 with a ROE of 10.96% in 2011 present a logical diversification option (refer to Appendix 1 for financial highlights). In 2011, Amer Sports repurchases 36.7 million of its share to implement share-based incentive plans for 2011 and 2012 for the Groups key personnel (Annual report 2011).

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Amer Sports return on equity in 2011 was 10.96% (8.72% in 2010). Using DuPonts equation to segment ROE we find that the increase is driven by the increase in both profit margins from 3.96% in 2010 to 4.83% in 2011 and in leverage of the company as indicated by its equity multiplier of 54.38% in 2011 up from 52.22% in 2010. Asset turnover did not change significantly. Sales for Amer picked up in 2011 however the cumulative average growth rate (CAGR) of sales from 2007-2011 is low at 3.3% (half of Adidas sales CAGR of 6.69% for the same period). Looking at this increase in sales in parallel with some asset management ratios, we raise a concern over the health of this organic growth: inventory turnover in 2011 decreased to 2.96 from 3.3 in 2012 and it is taking 13 days longer to sell them (days sales in inventory increased from 110.44 to 123.46). This decline is due to increased levels of inventories which is translated into a 57.5 million charge to operating cash flows. In addition, and in spite of the sales increase in 2011, accounts receivables turnover declined from 3.76 to 3.63 and the collection period increased by 3.6 days translating into a 63.8 million charge to operating cash flows. It is possible that Amer has relaxed its credit policy to increase sales. Despite positive operating cash flows both in 2010 and 2011, Amer experienced declining cash balances due to their investing and financing needs. A closer look at Amers financing cash flow activities from 2009 to 2011 reveals that Amer issued 151.5 million shares to finance the repayment of a 225.2 million long-term debt in 2009 while in 2010 Amer withdrew a 180 million long-term debt to repay both short-term and long-term liabilities totaling 228.7 million; and in 2011 Amer withdrew a 73.5 million long-term and increased short-term borrowings by 193.4 million to repay 174.5 million long-term debt and financing the repurchasing of their own stock for 36.7 million and dividend distribution of 36.4 million. This shows that Amer is having difficulties managing their debt although they can easily cover their interest expenses (Times interest earned in 2011 was 6.36). It is possible that since Amers ROE in 2007 was the lowest amongst the 5 years spanning from 2007 to 2011 caused by the lowest profit margin of 1.12% in 2007 due to a 47.2 million reorganization of Winter Sports Equipment business area expense; management sought to increase ROE through capital restructuring. Head NV is a direct competitor of Amer Sports given Heads focus on winter sports and tennis equipment and apparels and on diving equipment. However Head is performing poorly. Its share price closed in 2012 at 1.16 (0.71 in 2011), its ROE is a mere 0.19% primarily due to a very

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low profit margin of 0.1% caused by very high interest expense: interest expense for Head was 122% of its EBT leading to a 0.82 times interest earned ratio in 2011 while Amers interest expense was 16% of their EBT. EPS for Head in 2011 was nil. In addition, Heads sales grew from 2007 to 2011 at a CAGR of -1.57%. Head NV spent 2.57% of their sales on R&D in 2011 allowing them to increase their technologies portfolio to 34 covering Skis (5), Binding (7), Boots (9), and Helmets (13). Amer on the other hand devotes 8% of their personnel (583 people) and spent 3.41% of their 2011 sales on R&D. Adidas outperforms both companies and it is one of the major 30 German companies indexed within the DAX 30. It serves different sport segments with a focus on footwear (47%) and apparel (43%) that generated 90% of Adidas 13.3 billion 2011 sales. The 2,401 retail stores in 2011 sold merchandise worth 2,793 million and with an average store size of 200-250m (Annual report 2011), Adidas had generated in 2011 an average of 5,170 per m. Adidas ROE in 2011 increased slightly from 12.29% in 2010 to 12.57% mainly driven by the increase in the profit margin (5.02% from 4.74%). The three companies: Amer, Head, and Adidas, have healthy current ratios yet the quick ratio decreases to less than one for Amer and Adidas which is reflects inventory levels. The Cash ratio of Amer is very low at 0.11 in 2011 which mirrors our earlier analysis of inventories and receivables. Adidas also has a low cash ratio of 0.21 in 2011 which is also caused by increased inventory and receivables, however Adidas improved its collection period by 4 days which was offset by the increase in days sales in inventory by 5.87 days. Amer Sports core business is its winter and outdoor segment generating 60% of 2011s sales (refer to Appendix 5) and quarters 3 and 4 represent the highest sales volumes for Amer (60% in 2011- refer to Appendix 3). the Americas and Asia-Pacific generate 51% of sales (refer to Appendix 4). In addition, 70% of Amers manufacturing is produced in the USA (10%) and Asia (60%- Annual report 2011). This seasonality and geographic presence expose the company to currency risks (notably the US dollar) that have been amplified by the ongoing Euro-Zone crisis. Therefore the company engages in hedging its currency and interest rates smooth its cash flow stream and meeting its cyclical increase in net working capital. Seasonality for Amer is amplified

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by global warming (refer to Part 3: Macro-Environment), sports tournaments do not add to sales fluctuations: the Winter Olympics that are played once every 4 years (the last one being in Vancouver, Canada 2010 and the next being in Sochi, Russia 2014) did not affect the companys share price in 2010. Other companies and groups that directly compete with Amer Sports are mostly privately held such as The North Face company (footwear and apparel)1, Tecnica Group owning Nordica and Blizzard (skis)2, and K2 Sports owning K2 skis and snowboarding, Line, Full Tilt, Tubss etc. (skis, footwear and apparel, etc.)3.

Part 3: Macro- and Micro- Environments Macro-Environment The World Bank segments the world market into 6 regions: East Asia and Pacific, Europe and Central Asia, High-income economies ($12,479 or more), Latin America and the Caribbean, Middle East and North Africa, South Asia, and Sub-Saharan Africa. Appendix 8 highlights some significant world indicators for each of those 6 regions. Some of these indicators are not observable in the aggregate region as for example the countries composing Latin America are heterogeneous in their government and societal structure and lifestyles: Brazil is more open to foreign direct investment while Cuba is not due to the political sanctions. Amer Sports operates under the leisure industry. Its core business segment is winter and outdoor sports and its main target market is limited and caters to individuals with disposable income that allows them to afford purchasing the required gear for such activities as skiing or snowboarding or hiking. On average, purchasing a full ski gear from Salomon (one of Amer Sports brands) that includes the skis, the bindings, the boots, the poles, a jacket and a pair of pants would cost on average $1,983 or 1,5374. GDP per capita is a key indicator. In 2011, it is highest for the High-Income economies (a group of 70 countries including the USA, Canada, Australia, Finland

1 2

www.thenorthface.com www.tecnicagroup.com 3 www.k2sports.com 4 As there are a variety of prices we selected a few from www.evo.com and computed an average: price range for Binding $100-500, Skis $400-750, Boots $300-630, Jacket $160-480, Pants $150-360, Poles $25-110. We used an exchange rate of 1.29/$ (Head NVs annual report 2011).

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etc.) at $27,645 or 21,430, next is Europe & Central Asia at $12,872 (9,978) and East Asia & Pacific at $5,391 (4,179). Amer Sports focuses on these key regions with a geographical presence in the Americas (16% of global sales), EMEA (80% of global sales), and Asia Pacific (4% of global sales). Those economies with highest GDP per capita have the lowest population growth rates (HIE 0.63%, ECA 0.41%, and EAP 0.65%). As disposable income increases, people re-evaluate the quality of life they want to have which usually entails spending more time and money on leisure activities. However, the low population growth rate in these key markets may offset the benefit from increased disposable income when the population age structure shift from a young generation to an older one: Japan a key market in Amers Asia Pacific geographical segmentation has 23% of its population aged 65 and above (World Bank). In this global market, when developed economies develop a social-economic trend, other countries follow suit as relevant structural factors become available. Online shopping began in the early 90s in the US, the UK, and Germany and as the internet infrastructure improved and more businesses offered online platforms for safe online purchases, the societies adopted online shopping into their daily lives and lifestyle. Amers key markets EMEA and the Americas have been moving increasingly into e-commerce given the convenience and flexibility it offers; yet some of these markets within these two broad segments have yet to fully develop: Latin America only has 39% of its population using the internet, the Middle East has 31% and even Europe, the biggest market (80% sales) has only 60% of its population using the internet. As the society adopts even further this trend, online sales for Amer Sports will increase; a strategic choice have been made my Amers management to develop the online platform (Annual report 2011) which will enable the company to reduce its fixed costs (opening their own retail shops) and reduce its inventory levels that accounted for 19.79% of its total assets in 2011. Other societal lifestyle trends are eco-tourisms and outdoor activities that contribute to Amers organic growth especially as societies face health issues that require a change in habits to become healthier: worldwide overweight and obesity5- or as the World Health Organization (WHO) termed it globesity- more than double since 1980 and it is the fifth leading risk for deaths. Appendix 6 shows that in Amers key markets, overweight and obesity are an issue with a slight difference

The WHO defines overweight as having a Body Mass Index (BMI) 25Kg/m and obesity as having a BMI 30 Kg/m. http://www.who.int/mediacentre/factsheets/fs311/en/

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between gender: women in China are predominately within range: only 20-25% of women aged 15+ are overweight while 35-50% of men aged 15+ in China are overweight. A very high percentage of men and women in North America are obese and a lower percentage face this issue in Europe. There are no significant rules and regulations that prevent Amer Sports from penetrating new markets or grow in existing ones. Governments can actually help the sports industry by raising awareness for a balanced lifestyle and the importance of sports. However, global warming is taking its toll on the winter sporting industry with the year 2012 being the 10th warmest year on record since 1880 according to the National Climatic Data Center6. Appendix 7 shows how Amers key markets are within the warmest regions in the world. The warmer climate is already affecting the Canadian economy where the ski sector contributes $839 million (650 million) yearly (Bruce, 2009). Even the USs $12.2 billion (9,457 million) ski and snowmobile industry is feeling the heat according to the Natural Resources Defense Council (NRDC)7. Some of the repercussions of global warming according to the National Geographic are receding glaciers, reduction in sea ice, decreased snowpack, rising sea levels, flooding, drought, severe storms (hurricane Sandy damaged New York and New Jersey in 2012), loss of biodiversity, unsustainable development etc. (refer to Appendix 7). Governments must take big proactive measures to protect the environment: global warming is the 7th most likely scenario for erths demise (Dove, 2012). Communication infrastructure around the world is developed enough for Amer Sports to reach its target markets from its production facilities and receive its raw materials required for production (steel, rubber, oil-based raw material- Annual report 2011). Nevertheless there are always risks of failed deliveries were it input supplies or output production due to physical infrastructure hindrances. In 2012, Japans tsunami and the catastrophic nuclear outfall adversely affected Amers East Asia sales.

6 7

http://www.ncdc.noaa.gov/sotc/global/2012/13 http://www.nrdc.org/globalwarming/climate-impacts-winter-tourism.asp

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Micro-Environment History The company was formed in 1950 in Finland as Amer Tobacco to manufacture and distribute tobacco and acquired the right to sell Philip Morris cigarettes in 1961. In the 1960s and 1970s, it expanded into an industrial conglomerate with interests in shipping, publishing, textiles, and plastics. It went public in 1977 on the Helsinki Stock Exchange and was listed on the London Stock Exchange in 1984. Its growth was made possible through several acquisitions and, in 1984, it acquired Korpivaara, Finland's oldest and largest automobile importer. In 1986, Amer established a sports division by acquiring a major share in Jack Nicklaus' MacGregor Golf Company (Hoovers) and in 1989 it bought Wilson Sporting Goods. It was in the 1990s that Amer's identity as a major manufacturer of sporting goods began to emerge. In late 1994, the company acquired Atomic, a maker of winter sports equipment. During that time, it was divesting its nonsports-related businesses and undertaking a restructuring plan that focused on introducing innovative sporting products and enhancing operations. In 1999, it acquired Suunto, a maker of diving instruments and, in the 2000s, it continued purchasing sporting goods manufactures and integrating brands. It also continued to divest its other businesses and in 2004 left the tobacco industry, even though it had 75% of Finland's tobacco market, in order to focus on Sports. The company changed its name to Amer Sports Corporation in 2005 to reflect its strong sports equipment brand portfolio. In that same year it bought Salomon from Adidas for 485 million and, in 2011, it acquired Nikita, an Action Sports company targeting women, to further diversify its portfolio. Industry Amer Sports, in its Annual Review, identifies itself as belonging to the Sporting Goods industry. Companies in this industry manufacture sporting and athletic goods including sports and fitness equipment. The sporting goods industry is highly competitive and includes many national, regional, and global companies. Although Amer Sports does not have a competitor that challenges it across all of its product categories, the company faces competition from several companies in most of its categories (Annual Review, 2011). According to Hoovers and Yahoo! Finance, the major competitors of Amer Sports are Head N.V, Callaway Golf Company, and Adidas AG. Other

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competitors include NIKE, Inc., Quiksilver, Inc., Tecnica S.p.A, Prince Sports, Inc., and Nautilus, Inc. The sporting goods industry is concentrated. As a matter of fact, the 50 largest companies account for about 70 percent of industry revenue (Source: Hoover). Moreover, this industry is highly fragmented. It includes companies that manufacture a wide variety of products for tennis, golfing, camping, winter sports, fitness and other sports. Moreover, because there are few barriers to entry, the industry is characterized by many companies that differ in size and product specialization. Companies differ in size, ranging from small specialized companies to large diversified corporations. The common aspect though is that brand loyalty plays an important role in their success. Porters Five Forces
ThreatofSubstitutes:High Differentkindsofsportsandalternatives to sports for recreation / entertainment

BargainingPowerofSuppliers: Low Majorclientsbuyinlarge quantitiesandhavelongterm relationshipssocandrive supplierspricesdown.

Rivalryamongexisting competition:High Severalstrongcompetitors, severepricecompetition, andhighindustry consolidation

BargainingPowerofBuyers: High Bothretailersandcustomers haveseveraloptionsto choosefromandthereexist lowswitchingcosts

Threatofnewentrants:Moderate Lowbarrierstoentryexceptovercoming consumers loyalty to existing brands.

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Rivalry among existing competition The industry is well established and full of a high number of recognized brands. Rivalry is strong with companies continuously being involved in severe price competition and industry consolidation (mergers and acquisitions). Threat of New Entrants There are low barriers to entry especially for small companies focusing on one or two product categories. The main obstacle to overcome is changing consumers' current buying habits and breaking their loyalty to existing brands. Companies seeking to obtain a market share in the industry need to spend more on research and development and marketing in order to survive and be successful in the competition for market share and consumer base. Threat of Substitutes Sports can be substituted with different activities for recreation and entertainment. For example, consumers who are trying to decide whether to use their free time to play tennis, watch a movie, get enrolled in a class, or play video games especially with the rise of exercise video games, such as Nintendo's Wii Sports, Sony's Move and Microsoft's Kinect. Another form of substitutes lies in choosing different sports to practice. A consumer can chose to play basketball rather than golf thus affecting the sales of golf equipment manufacturers. Bargaining Power of Suppliers Most suppliers are firms in foreign countries, namely China, Taiwan, Canada, and Mexico. The bargaining power they have is relatively low due to the fact that manufacturers can chose which country they want to import from and which company, in addition to the fact that major clients engage in large quantity long-term purchases. Bargaining Power of Buyers Buyers in this industry are both companies and customers. They have relatively high bargaining power due to the availability of several competitors and the highly fragmented nature of the industry. Although, the buyer may have more of the bargaining power, the manufacturer has

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security in the fact that the retailers has to purchase for a number of years due to existing contracts between the two parties. Value Chain Primary Activities
R&D Raw Materials Manufacturing (outsourcing andinhouse) Distribution and transportation Marketing andSales Customer Service

Secondary Activities
InformationTechnology Infrastructure QualityControl Peoplemanagement

The main strategy behind the value chain of Amer Sports is to conduct reliable, efficient and timely operations. The primary activities of the value chain include R&D, raw materials, product manufacturing (sourcing and outsourcing), outbound logistics, marketing and sales and customer service. On the other hand, secondary activities include quality control, IT and HR. The sourcing in Asia is headquartered in Hong Kong. On the other hand, other functions such as Global IT, manufacturing, and distribution and transportation are managed from the European offices. Main Secondary activities: IT: Currently, all business functions are integrated under one IT platform. In 2011, Amer Sports shifted from several legacy systems to SAP which is the market and technology leader in business solutions software. The role of information technology is to support the geographical expansion and to provide channels of communication throughout the supply chain.

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Quality control: Injuries caused by defective products can expose the company to serious lawsuits and liability claims. Due to this critical nature of the products, quality control is a primary activity of Amer Sports value chain. Products are tested for deficiencies during the whole production process and before being sold to buyers. Generally, quality test is executed by the companys control team. As well, Amer Sports require its third-party suppliers to conduct extensive inspection to make sure that quality requirements are met. As mentioned above, the Hon Kong office supervises the quality of the outsourced production. In case a defective product was recalled, the company analyzes the items and work with the third-party suppliers to avoid the repetition of the same problems in future. Primary Activities: R&D: In order to bring innovative products, Amer Sports conducts continuous market research and product development. The company seeks to be global and, at the same time, satisfy the local demands and preferences. As well, AMEAS needs to develop products that appeal to both professional and amateur athletes. Raw Materials: Amer Sports purchases the raw materials from many suppliers. The main raw materials include steel, rubber and oil-based parts. These materials are mainly used to manufacture the plastic parts, carbon fibers and metal parts of the final products. Manufacturing and sourcing: The main strategy of sourcing is to locate production in low labor costs countries that are close to main markets. Amer Sports production value is distributed as follows: 10% in America, 30% in Europe, Middle East and Africa and 60% in Asia (China representing 30% of the total). Recently, Amer Sports shifted some of its production to countries such as Vietnam and Cambodia that are witnessing a growing importance. Amer Sports has 12 manufacturing facilities across the globe. The most important ones are located in Austria, Finland, Canada, France and the United States. About 20% of the final products are manufactured by own factories and about 15% are partially outsourced mainly by Eastern EU plants.

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Outsourcing: About 65% of total Amer Sports production is outsourced. The outsourced products include all golf and racquet sports products, and most team products, winter sports equipment, fitness and footwear. The outsourcing of production is handled by the Hong Kong office. Its main duties include ensuring that subcontractors are working in accordance with the companys ethics. Distribution and Transportation: The company has two main distribution hubs. The berherrn hub in Germany supplies the EMEA region, and the Nashville hub in Tennessee supplies the United States. Amer Sports has warehouses that are factory-specific and others that are country or regionspecific. Final products are transported from the two distribution hubs to both trade customers and Amer Sports stores. All kinds of transportation (land, sea and air) are carried out by thirdparty transportation companies. Production and distribution are very critical parts of Amer Sports value chain. The company should be alert and able to react quickly to market changes. For example, Amer Sports must adjust production according to changes in snow conditions. Simultaneously, since sales are seasonal, AMEAS must deliver the products on time. Any delay in delivery will drop sales by a huge amount. Marketing and Sales functions: Amer Sports has two sales channels: Business-to-Business and Business-to-Customer. Some products are sold directly from the companys website or own stores to end users and other are sold to retailers and distributors. Also, Amer Sports provides warranties in accordance with domestic legislation. Amer Sports continuously seeks to integrate and synergize its supply chain functions to achieve a globally-managed supply chain. The goal behind this strategy is to decrease inventory levels and production costs and improve customer service. The continuous integration process encompasses several activities such as: Additional integration of distribution and transportation management, Expansion of Amer Sports Global sourcing operations to benefit from economies of scale and enhance negotiating power

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Bringing together of talent

Core competencies: The sporting goods industry is consumer-centric and innovation oriented. Therefore, Amer Sports invests heavily in research and development and market analysis. R&D constitutes the core competency of Amer sports. The company seeks to continuously develop new and improved sporting goods given the short life cycle of products. The importance of innovation is clearly shown in sale. Actually, a significant amount of sales is generated by products that are introduced to the market in the same year. In order to serve different business areas, the company has seven R&D sites around the world working on continuous development of products, operational efficiency and collaboration. The following table shows R&D expenditures as a percentage of total operating expenditure.
Q32012 R&D expenses as a % operating expenses 9.17% Year 2011 9.22% Year 2010 8.60% Year 2009 8.83% Year 2008 9.47% Year 2007 9.65%

It is evident that R&D expenses account for a high percentage of Amer Sports total expenses. In the last years, those R&D expenses were allocated as follows: 66% for winter and outdoor segment, 21% for fitness segment, and 13% for the Ball sports segment. Amer Sports R&D departments collaborate with top athletes, universities and research group for the development of optimal products. The resulting innovations are safeguarded by the companys intellectual property portfolio which includes patent, trade secret, design, and trademark legislation. Those property rights support the companys business mainly in US and Europe. Additionally, Amer Sports uses the competencies of other company throughout its value chain. First, the company outsources 65% of its manufacturing process. Outsourcing gives the company access to skilled expertise and a wide range of raw materials and resources. As well, Amer Sports depends on other manufacturers to increase productivity and efficiency. As a result, outsourcing allows the company to focus on its core competency and know-how.

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Secondly, the company collaborates with transportation companies to deliver its products worldwide. Those companies transport the final products to other businesses such as retailers, sporting chains, mass merchants, gyms, and distributors. Simultaneously, the transportation companies deliver the products to Amer Sports stores, outlets and ecommerce consumers. As for the marketing and sales part of the value chain, a substantial percentage of Amer Sports sales is generated by retailers and not own stores. Therefore, the partnership with transportation companies and retailers allows the company to tap new markets and to expand geographic presence. We can conclude that Amer Sports is using a combination of its own competency (R&D) and the competencies of third parties (suppliers, manufacturers, transportation companies, and retailers) to build its own capability. This combination reduces the business risk of the company and provides additional revenue generating opportunities. So, the capability of Amer Sports is being able to market its products as an indispensible part of the sporting experience.

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SWOT Strengths: Strong brand trusted by consumers worldwide Focus on Innovation through research and development function Global presence Diversified products portfolio related to three business segments: Fitness, Ball sports, and Winter and Outdoor Strong Profitability Indicators in the recent years Endorsement partnerships with leagues, teams and many of the top athletes Opportunities: Growth Prospects: ecommerce and web shops Strategic acquisitions of other sporting brands to tap new markets Expanding core growth brands Selling unprofitable subsidiaries Growth prospects in the fitness industry due to increased health and fitness awareness High appeal for the premium sports equipment and clothing market Sport promotion by nutrition and functional drinks Strong growth in emerging economies accompanied by an increase in retail sales Collaboration with athletes and retailers Weaknesses: Product recalls: disrupting brand image and profitability Deficiency in Quality control Highly leveraged company

Threats: Maturing markets in developed countries Climate change and severe weather conditions Stiff competition Pressures to reduce prices: negative effects on revenues Global Economic slowdown (mainly in Europe and US) and uncertainty about economic recovery Foreign Exchange Risk and Derivatives risk due to global operations Increase in counterfeit products Social pressure to be environmental friendly (higher costs) Substitutes (e.g. Exercise video games)

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Part 4: Strategic Analysis Amer Sports stated mission is to provide everyone from first-time participants to professional athletes with the worlds best sports and fitness equipment, footwear and apparel (amersports.com). This mission is both focused since it positions the company in the sports industry and general since it includes different sports and target segments. In fact, Amer Sportss vision is to be the sports industrys leader. The company seeks to develop authentic brands that inspire sporting enjoyment and achievement. It is interesting how clear the idea behind Amer Sports is considering it is a 60 year old company that started as a tobacco manufacturer and has been only been focusing on sports for 15 years. All its acquisitions, disinvestments, consolidations, and name changes were tools to accomplish the companys strategic intent of being a leader in the sporting goods industry. Actually, Amer Sports strategy is explicitly stated on its website and consisted of five strategic cornerstones. The below includes a description and analysis of these cornerstones. Clear portfolio roles and business synergies Amer Sports target is to develop business units with clear portfolio roles. Each unit has specific growth and profitability targets with goals to increase the companys scope and create synergy (Annual Review 2011). Indeed, Amer Sports has clearly defined business segments and Cash Generating Units:

The company has been working on consolidating its brands and continuing to expand its product portfolio in a way to avoid overlap and achieve synergies.

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Faster growth in softgoods Amer Sports has made clear its intent to pursue growth in softgoods like apparel and footwear. Its Apparel sales increased 29% in 2012 (Q3). The company is actively studying opportunities to launch further softgoods lines under different Amer Sports brands. This seems to be an appropriate strategy since it fits Amer Sports identity and it helps hedge against fluctuations in sale for seasonal products such as winter sports. However, this means that the company would have to deal with more established competitors like Nike and Adidas that have prominent brand loyalty and heavy marketing expenditure.

Winning with consumers The company realizes the need to respond to constantly changing consumer needs and build excellence in consumer-centric product creation. Innovation is thus a key part of its strategy as The Group has seven R&D and design sites globally and R&D staff constitutes 8% of the total number of people employed by Amer Sports. Through continuous research and development, Amer Sports seeks to develop new and better sporting goods that appeal to consumers and its trade customers. (Amersports.com) This will be a challenging task for Amer Sport considering that it does not have a database of customer information as large as its competitors who have been in the industry longer and operate more retail shops.

Winning in go-to-market This target includes expanding in geographic areas and increasing of own retail presence as well as expansion of e-commerce platform. The company is focusing on Russia, China and Latin America, and these markets now account for 7% of the Groups net sales, compared to 5% last year. In addition, in the past year Amer Sports opened 18 new brand stores and the number of its e-commerce stores reached 23. Although it is healthy to cut dependency on retailers, growing the number of Amer Sports own retail stores requires large investments and more fixed costs for the maintenance of the stores and employing personnel. This presents increasing risks especially when there is recession and thus the company must be careful in maintain a well-balanced multichannel sales strategy.

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Operational excellence Cost-cutting is a priority for Amer Sports and so are integrations to achieve scale and synergies and to sustain the growth. In fact, they announced plans to launch a "group-wide" cost-cutting program which it hopes will save 20 million ($26 million) a year by the end of 2014 (Fox News). While operational excellence is important in this industry, it should not be a strategic cornerstone since it does not guarantee long term sustainability. Cost-cutting can only reach a certain limit and if the company continues to engage in price wars then its profit margins will not improve even if the costs are going down.

Financial Targets In addition to these cornerstones, Amer Sports has a long-term financial target of delivering organic, currency-neutral annual growth of 5% (Annual Review 2011). In 2011, it achieved 11% growth in net sales and in Q3 2012 it has a 7.6% increase from Q3 2011. However the companys CAGR from 2007 to 2011 was 3.3% mainly due to the recession in 2008 and 2009. Indeed, Amer Sports growth is subject to severe fluctuations resulting mainly from economic situation and seasonality. Another financial target is to improve its profitability and have EBIT of at least 10 % of net sales. Although Amer Sports aim is to improve profitability, it has not been able to implement it during the last years as seen in the low profit margins mentioned above and the EBIT/Net Sales ratio which peaked in 2011 at only 7.2%. Profitability is crucial in this industry especially in the winter sports equipments which are supposed to be high-margin low-volume products. Generating more profits would enable the company to invest in R&D and marketing of its brands that are both essential in maintaining its position as a leader in the industry. Part 5: Recommendations This section offers many recommendations to Amer Sports to help the company maintain a sustainable competitive advantage. First, Amer Sports should take many measures to improve its efficiency. The company has currently a high number of raw material suppliers. Having a small level of suppliers will enable AMEAS to develop partnership agreements with those selected suppliers. Thus, since Amer Sports will increase its demands per supplier, the suppliers can provide more customized items. This will enable suppliers to benefit from the economies of scale

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and decrease their prices accordingly. However, this step can be tricky since it may increase the bargaining power of the fewer suppliers. On the other hand, since Amer Sports will be buying in large quantities, its bargaining power will still be high. Moreover, the company can outsource a higher percentage of its production. This way, AMEAS can focus on its core competencies and know-how and delegate the production part to skilled expertise. This will reduce the cost incurred by the company. As well, the company will be able to locate manufacturing facilities across continents to serve a higher number of markets. As well, outsourcing will reduce the business risk. Amer Sports will distribute or give away the risk of the outsourced functions. Additionally, deliveries and transports need to be further improved. Amer Sports has to raise delivery speed and decrease manufacturing time in order to improve customer service and react fast to change in demands. This will allow the company to react fast in case of extra demands during the season. At the same time, Amer Sports should adjust its supply change model to have minimum inventory at all times. The cost associated with storage cost of sporting goods is very high. It is highly recommended that the company uses the just-in-time model to eliminate inventory and quickly react to market changes. In addition, Amer Sports needs to improve its quality control process. This will allow the company to avoid products recalls which could seriously hurt the companys image and profitability. For example, in 2009, Mavic recalled its R-Sys front wheels and replaced them with enhanced items. This was followed by a sales decline of 13% which was partially due to the recall disruption. Moreover, Amer Sports should avoid the price war with its competitors through continuous differentiation of its product. In order to survive the severe competition, the company needs to distinguish its products by offering a unique value proposition. As well, AMEAS should be able to effectively market the distinctive value to customers. Also, Amer Sports need to spend more on marketing its less recognizable brands in order to boost their sales and profitability. As well, Amer Sports need to build consumer loyalty in order to increase switching costs. The company can sponsor more teams, athletes, and sports events. This will boost sales up since sport amateurs look up to their sports idols and purchase the same sport brands of those athletes. As

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well, the company should sell complements for its products to avoid being replaced by substitute products. Another important strategic recommendation for Amer Sports is to develop a database about its customers. The company is at a competitive disadvantage at this particular area for many reasons. First, the company is relatively new to the industry compared to its main rivals. Secondly, transportation and most of retailing are made by third parties that prevent the company from collecting information about its customers preferences and trends. Information is the most critical way to develop sustainable advantage since it allows the company to predict changes in the market and be proactive. One interesting turn of events in the industry is the introduction of technology to sporting goods. As well, exercise video games are becoming increasingly popular. Amer Sports should detect those signals and create products that comply with those changes. Also, Amer sports should further develop its internet sales. E-commerce is growing at a huge speed around the world and the online shops are becoming more and more popular. Since the business is highly dependent on weather, Amer sports can enter into weather derivatives contracts. This will allow them to reduce the risk associated with weather changes. However, the company needs to be very careful when dealing with derivatives. It is recommended that they hire skilled consultant to manage the derivatives portfolio. On top, according to the companys annual reports, Amer Sports has to better serve the market of action sports. This is a very dynamic and growing market constituted mainly of young people. This age group is the most active and, thus, profitable among other market segments. Another recommendation for Amer Sports is to strengthen its presence in emerging economies. In 2011, the growth in Russia, Latin America, and China reached approximately 40%. Yet, the companys revenues from these areas remain low. Therefore, there is growth potential for Amer Sports to explore by tapping those developing markets. One final recommendation is to grow the ball sports and fitness segments since they provide more steady incomes. Unlike winter sports, those two segments are not dependent on the weather.

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Part 6: Lessons Learned Companies should avoid product recalls at all cost. The products in the markets reflect the companys image in consumers heads. In case this image gets disrupted, it will be hard and costly for companies to restore it. Building a successful brand image takes many years, but destroying it takes one single mistake. As well, short-term profits will not lead to sustainable competitive advantages. Companies need to focus on the long-term goals while being profitable in the short-run. In order to achieve longterm profitability, companies need to stay innovative. Since the only constant in the market place is change, companies should anticipate that change and act preemptively. The profit resulted by innovative products will be generated by first movers. Once the change has occurred, it will be too late for followers to position themselves in the market and generate profit. Moreover, companies can develop new products and create demands at the end consumers. This can be done by extensive marketing that shows consumers that they need this new product. Innovation can be measured by the number of patents and other intellectual property the company owns. Therefore, it is very important for companies to invest in R&D in order to stay advanced. Instead of fighting in red oceans, companies need to open up new blue oceans and benefit from the substantial profit. Another lesson learned is that companies need to focus on their core competencies and knowhow. This means that they should outsource other activities that require capital investment, experience and expertise.

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Appendix 1: Financial Highlights

Note: Ratios of Amer Sports and Adidas have been computed based on financial data obtained from their annual reports while those of Head NV have been computed based on financial data extracted from the Compustat database.

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Appendix 2: Stocks Highlights

AmerSports
18 16 14 12 10 8 6 4 2 0 16/01/2013 11/04/2012 13/07/2011 07/10/2010 07/01/2010 01/04/2009 30/06/2008 21/09/2007 15/12/2006 14/03/2006 14/06/2005 09/09/2004 03/12/2003 04/03/2003 29/05/2002 17/08/2001 09/11/2000 09/02/2000 10/05/1999 04/08/1998 23/10/1997

Price

Source: Company website (http://www.amersports.com/investors/stock_information/stock_tools/historical_price_lookup/)

Amer Sports beta 1.04; Head NVs beta is 0.59; Adidas beta is 0.92.
Source: Reuters (www.reteurs.com)

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Appendix 3: Seasonality

Seasonality AmerSports
700 600 500 400 300 200 100 0 2007 2008 Q1 Source: Annual report 2011 2009 Q2 2010 Q3 Q4 2011 2012

Appendix 4: Geographic Distribution 2011

GeographicalDistributionofSales AmerSports
EMEA Americas AsiaPacific

12% 49% 39%

Source: Annual report 2011

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Appendix 5: Cash Generating Units

Sales Q32012 millions 221.8 253.7 171.6 97.2 74.1 818.40 257 185 442 185.1 1,445.50 Sales 2011 millions 448.4 287.7 191.6 120.5 89.4 1,137.60 283 228.0 511.0 232.2 1,880.80 Sales 2010 millions 438.4 219.6 156.6 106.4 94.0 1,015.00 308.5 212.1 520.6 204.8 1,740.40 Sales 2012 % 15% 18% 12% 7% 5% 57% 18% 13% 31% 13% Sales 2011 % 24% 15% 10% 6% 5% 60% 15% 12% 27% 12% Sales 2010 % 25% 13% 9% 6% 5% 58% 18% 12% 30% 12%

Cash Generating Units (CGUs) Winter Sports Equipment Footwear Apparel Cycling Sports Instruments Sales of Winter & Outdoor Individual Sports: Racquet & Golf Team Sports Sales of Ball Sports Fitness Total

CashGeneratingUnits Salesin millions

1200 1000 800 600 400 200 0

SalesQ3 2012 millions

Sales2011 millions

Sales2010 millions

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Appendix 5: Cash Generating Units (continued)

CashGeneratingUnits %ofSales
70% 60% 50% 40% 30% 20% 10% 0%

Sales2012 %

Sales2011 %

Sales2010 %

Source: Interim report September 2012, annual reports 2011 and 2010

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Appendix 6: Globesity

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Appendix 6: Globesity (continued)

Source: World Health Organization (https://apps.who.int/infobase/)

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Appendix 7: Global Warming

Source: National Oceanic And Atmospheric Administration http://www.ncdc.noaa.gov/sotc/global/2012/13

Source: National Geographic (http://environment.nationalgeographic.com/environment/global-warming/gwimpacts-interactive/)

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Appendix 8: World Indicators (Source: World Bank)

latest numbers available from 2005 to 2011 East Asia and Pacific General Economics GDP (constant 2000 US$) year 2011 in billions GDP growth (annual %) GDP per capita (constant 2000 US$) Inflation, consumer prices (annual %) Unemployment, total (% of total labor force) Exports of goods and services (% of GDP) Imports of goods and services (% of GDP) Population & Demographics Total Population in millions Population Growth Rate Age Structure: 0-14 15-64 65+ Rural population as % from total Urban population as % from total Government- Laws and Regulation Total tax rate (% of commercial profits) Foreign direct investment, net inflows (% of GDP) Communication: IT Internet users (per 100 people) 2,216 895 1,135 595 390 1,656 876 Europe and Central Asia High-income economies Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa

South Asia

11,946 3.37% 5,391 5.23% 4.72% 32.17% 29.58%

11,516 1.95% 12,872 3.90% 9.43% 40.98% 39.97%

31,377 1.54% 27,645 3.33% 8.45% 27.88% 28.03%

3,081 4.63% 5,176 5.13% 8.00% 22.61% 22.92%

1,502 5.19% 3,854 4.39% 9.76% 45.49% 38.72%

1,296 6.42% 782 10.13% 4.49% 22.79% 28.48%

574 4.15% 655 5.67%

n/a

33.11% 34.70%

0.65% 20.92% 70.44% 8.64% 47.33%

52.67%

0.41% 17.37% 68.10% 14.53% 29.76%

70.24%

0.63% 17.26% 66.90% 15.84% 19.50%

80.50%

1.11% 27.49% 65.49% 7.02% 20.90%

79.10%

1.85% 30.21% 65.21% 4.58% 37.48%

62.52%

1.44% 31.12% 64.02% 4.86% 69.07%

30.93%

2.53% 42.28% 54.49% 3.23% 63.53%

36.47%

35.33% 2.32%

42.31% 3.98%

37.65% 2.63%

47.21% 2.42%

32.26% 2.86%

40.20% 1.36%

57.82% 2.33%

38.55

59.65

75.60

39.39

30.72

9.43

12.31

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References:
Amer Sports. (2013). Corporate Website. Retrieved January, 2013, from http://www.amersports.com

Bruce, I. (2009). On Thin Ice: Winter Sports and Climate Change. David Suzuki Foundation. Retrieved from: http://www.davidsuzuki.org/publications/downloads/2009/DSFOnThinIce-Web.pdf

Company website: www.amersports.com Datamonitor (2011). Amer sports corporation, company profile. 1-11. Retrieved from: www.datamonitor.com Datamonitor (2008). Sports equipment in europe, industry profile. 1-24. doi: 0201-0218.

Doomsday: Dove, L. (2012). Top 20 Ways The World Might End. Discovery Channel. Retrieved from: http://dsc.discovery.com/tv-shows/curiosity/topics/20-ways-world-mightend.htm Finland's amer sports reports more or less flat profits for q3. (2012, Oct 25). Retrieved from: http://www.foxnews.com/world/2012/10/25/finland-amer-sports-reports-more-or-less-flatprofits-in-q3-to-launch-cost/ Hoover's. (2012, September 16). Amer Sports Corporation. Hoover's Company Records In-Depth Records. Retrieved from LexisNexis Academic database, 10 Jan 2013-01-18. Priit Pihl, P. P. (2006). An analysis of the sports equipment industry and one of its leading companies, head, n.v. (Unpublished master's thesis).