amer sports - strategic analysis

A M E R I C A N U N I V E R S I T Y O F B E I R U T

2013

AmerSportsPerformance Products for Sports & Outdoor Activities

Mada Arslan; Nadine Mhanna; Atef Sinno

BUS 349: Advanced Seminar in Strategic Management

Group 2: Mada Arslan, Nadine Mhanna, Atef Sinno 1

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, Arc’teryx 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 Amer’s 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 company’s capability is to market products as part of the sporting experience. This


capability is generated by Amer’s own competency and those of its partners (suppliers,

manufacturers, and retailers).

Amer Sports’ vision is to be the sports industry’s 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 Group’s key personnel” (Annual report 2011).


Amer Sports’ return on equity in 2011 was 10.96% (8.72% in 2010). Using DuPont’s 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 Amer’s 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 Amer’s 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 Head’s 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


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 Amer’s interest

expense was 16% of their EBT. EPS for Head in 2011 was nil. In addition, Head’s 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 200-250m²

(Annual report 2011), Adidas had generated in 2011 an average of €5,170 per m². 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 2011’s 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 Amer’s 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


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 company’s

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 www.thenorthface.com 2 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 NV’s annual report 2011).


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 Amer’s 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. Amer’s 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 Amer’s 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 Amer’s 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 Amer’s key markets, overweight and obesity are an issue with a slight difference

5 The WHO defines overweight as having a Body Mass Index (BMI) ≥25Kg/m² and obesity as having a BMI ≥30 Kg/m². http://www.who.int/mediacentre/factsheets/fs311/en/


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

Amer’s 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 US’s $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 erth’s

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, Japan’s tsunami and the catastrophic nuclear outfall adversely

affected Amer’s East Asia sales.

6 http://www.ncdc.noaa.gov/sotc/global/2012/13 7 http://www.nrdc.org/globalwarming/climate-impacts-winter-tourism.asp


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 (Hoover’s) 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 Hoover’s and Yahoo! Finance, the major

competitors of Amer Sports are Head N.V, Callaway Golf Company, and Adidas AG. Other


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.

Porter’s Five Forces

Threat of Substitutes: High

Different kinds of sports and alternatives

to sports for recreation / entertainment

Rivalry among existing

competition: High

Several strong competitors,

severe price competition,

and high industry

consolidation

Threat of new entrants: Moderate

Low barriers to entry except overcoming

consumers’ loyalty to existing brands.

Bargaining Power of Suppliers:

Low

Major clients buy in large

quantities and have long‐term

relationships so can drive

suppliers’ prices down.

Bargaining Power of Buyers:

High

Both retailers and customers

have several options to

choose from and there exist

low switching costs


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


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

Secondary Activities

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.

R&D Manufacturing (outsourcing and in‐house)

Raw

Materials

Distribution

and

transportation

Marketing

and Sales

Customer

Service

Information Technology

Quality Control

People management

Infrastructure


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 company’s 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.


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 company’s ethics.

Distribution and Transportation: The company has two main distribution hubs. The Überherrn

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 region-

specific. 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 third-

party 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 company’s 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


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.

Q3-2012

Year2011

Year2010

Year2009

Year 2008

Year 2007

R&D expenses as a % operating expenses 9.17% 9.22% 8.60% 8.83% 9.47% 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

company’s intellectual property portfolio which includes patent, trade secret, design, and

trademark legislation. Those property rights support the company’s 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.


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.


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

Weaknesses:

• Product recalls: disrupting brand image and profitability

• Deficiency in Quality control • Highly leveraged company

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

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)


Part 4: Strategic Analysis

Amer Sports stated mission is to “provide everyone from first-time participants to professional

athletes with the world’s 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 Sports’s

vision is to be the sports industry’s 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 company’s 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 company’s 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.


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 Group’s 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 multi-

channel sales strategy.


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

company’s 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


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 company’s 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


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 company’s 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

company’s 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.


Part 6: Lessons Learned

Companies should avoid product recalls at all cost. The products in the markets reflect the

company’s 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 long-

term 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 know-

how. This means that they should outsource other activities that require capital investment,

experience and expertise.


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.


Appendix 2: Stocks Highlights Source: Company website (http://www.amersports.com/investors/stock_information/stock_tools/historical_price_lookup/)

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

0

2

4

6

8

10

12

14

1618

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

Amer Sports

Price


Appendix 3: Seasonality Source: Annual report 2011 Appendix 4: Geographic Distribution 2011 Source: Annual report 2011

0

100

200

300

400

500

600

700

2007 2008 2009 2010 2011 2012

SeasonalityAmer Sports

Q1 Q2 Q3 Q4

49%

39%

12%

Geographical Distribution of SalesAmer Sports

EMEA Americas Asia‐Pacific


Appendix 5: Cash Generating Units

Cash Generating Units (CGUs)

Sales Q3- 2012

€ millions

Sales 2011

€ millions

Sales 2010

€ millions

Sales 2012

%

Sales 2011

%

Sales2010

% Winter Sports Equipment 221.8 448.4 438.4 15% 24% 25% Footwear 253.7 287.7 219.6 18% 15% 13% Apparel 171.6 191.6 156.6 12% 10% 9% Cycling 97.2 120.5 106.4 7% 6% 6% Sports Instruments 74.1 89.4 94.0 5% 5% 5%

Sales of Winter & Outdoor 818.40 1,137.60 1,015.00 57% 60% 58% Individual Sports: Racquet & Golf 257 283 308.5 18% 15% 18% Team Sports 185 228.0 212.1 13% 12% 12%

Sales of Ball Sports 442 511.0 520.6 31% 27% 30% Fitness 185.1 232.2 204.8 13% 12% 12%

Total 1,445.50 1,880.80 1,740.40

0

200

400

600

800

1000

1200

Cash Generating UnitsSales in € millions

Sales Q3‐ 2012€ millions

Sales 2011€ millions

Sales 2010€ millions


Appendix 5: Cash Generating Units (continued)

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

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

Cash Generating Units% of Sales

Sales 2012%

Sales 2011%

Sales 2010%


Appendix 6: Globesity


Appendix 6: Globesity (continued) Source: World Health Organization (https://apps.who.int/infobase/)


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/gw-impacts-interactive/)


Appendix 8: World Indicators (Source: World Bank) latest numbers available from 2005 to 2011

East Asia and Pacific

Europe and Central Asia

High-income economies

Latin America and the Caribbean

Middle East and North

Africa South Asia Sub-Saharan

Africa General Economics

GDP (constant 2000 US$) year 2011 in billions

11,946

11,516

31,377

3,081

1,502

1,296

574 GDP growth (annual %) 3.37% 1.95% 1.54% 4.63% 5.19% 6.42% 4.15%

GDP per capita (constant 2000 US$)

5,391 12,872 27,645 5,176 3,854 782 655 Inflation, consumer prices (annual %) 5.23% 3.90% 3.33% 5.13% 4.39% 10.13% 5.67% Unemployment, total (% of total labor force) 4.72% 9.43% 8.45% 8.00% 9.76% 4.49% n/a

Exports of goods and services (% of GDP) 32.17% 40.98% 27.88% 22.61% 45.49% 22.79% 33.11% Imports of goods and services (% of GDP) 29.58% 39.97% 28.03% 22.92% 38.72% 28.48% 34.70%

Population & Demographics

Total Population in millions

2,216

895

1,135

595

390

1,656

876

Population Growth Rate 0.65% 0.41% 0.63% 1.11% 1.85% 1.44% 2.53% Age Structure:

0-14 20.92% 17.37% 17.26% 27.49% 30.21% 31.12% 42.28% 15-64 70.44% 68.10% 66.90% 65.49% 65.21% 64.02% 54.49% 65+ 8.64% 14.53% 15.84% 7.02% 4.58% 4.86% 3.23% Rural population as % from total 47.33% 29.76% 19.50% 20.90% 37.48% 69.07% 63.53% Urban population as % from total 52.67% 70.24% 80.50% 79.10% 62.52% 30.93% 36.47%

Government- Laws and Regulation

Total tax rate (% of commercial profits) 35.33% 42.31% 37.65% 47.21% 32.26% 40.20% 57.82% Foreign direct investment, net inflows (% of GDP) 2.32% 3.98% 2.63% 2.42% 2.86% 1.36% 2.33%

Communication: IT

Internet users (per 100 people)

38.55

59.65

75.60

39.39

30.72

9.43

12.31


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/DSF-OnThinIce-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-might-end.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-flat-profits-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).

amer sports - strategic analysis

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