Operations of the Transnational Corporation of Adidas AG: Transnational Corporation Research and Report

Executive summary:

This report will focus on the operations of the transnational corporation of Adidas AG. The purpose of this report is to consider the following aspects of this business: features, operational processes, human resource issues, management issues, ethical issues and competitive advantage.

1. Features of Adidas AG

Adidas is a global transnational corporation, founded and based in Germany, by Adolf Dassler in 1994. The global headquarters of Adidas is located in Herzogenaurach, Germany. This business, which is a household name with its well recognised logo of three stripes, has a variety of several different stores all over the world, with key locations including; Amsterdam, Portland, Boston, Shanghai, Hong Kong and Panama. This transnational corporation sells a variety of product types e.g. clothing apparel, shoes. It started with athletic shoes but expanded its product line in 1963 to include sporting clothes and soccer balls. In the 1970’s, it achieved the status of producing the world’s most popular running shoe. Overall, the company has 1342 concept stores, 933 factory outlets and 130 other stores. In 2018, Adidas employed 57,016 people worldwide. The net sales in 2018, worldwide was 21,915 billion euros, or 35,858 billion Australian dollars. It is the company’s mission to be the best sports company in the world (Annual Report 2018). Their strategy for achieving this goal is as follows:[image: ]

The company will be celebrating 70 years of operations in 2019.

2. Operations of this business

a. Overview of process

The operations processes are those involved directly with transforming inputs into outputs. The transformation process adds value when resources are converted into goods. Resources can be either transformed (materials, information, customers) or transforming (labour, facilities). Outputs are the business’ final good delivered to the customer, e.g. running shoes, clothing items. An important part of the business’ operational processes is managing its supply chain. This means that the business needs to focus on planning both the production and customer demand of its various products. Involving over 1200 factories across the world (Adidas Group 2017), this can be a complex process for the business. It requires the coordination of factories, warehouses, transport and cashflow.

b. Ultraboost Example

For example, in producing the Adidas Ultraboost running shoe which is considered to be the world’s best running shoe, the business uses key inputs such as; labour, energy, raw materials as well as machinery and technology to transform these resources into the completed product (output). After choosing three colours for the shoe, they are combined to create the primeknit upper, using specialized machines. Following a manual inspection of the finished upper, the tongue and lining are then cut using a stencil, machinery and labour. After adding labels to the shoe part, the uppers are then fully assembled by a sewing machinist. There is then a quality check before the uppers are lasted (set in the shoe shape using a heating machine). This is then followed by the attachment of the lower part of the shoe to the upper. A key component of the Ultraboost is the thermoplastic polyurethane sole of the shoe which is created as a result of the transformation of multiple pellets of this material being heated and compacted. The output product is then inspected and packaged, ready for distribution to customers via warehouses.

Adidas has just celebrated 5 years of successful sales with the Boost shoe (Annual Report 2018).

3. Human Resource Issues

Three human resources issues Adidas is facing are; forced labour and modern slavery, wages to workers in the supply chain and workplace discrimination.

a. Forced Labour & Modern Slavery

[image: ]The operational processes used by Adidas rely heavily on outsourcing production to countries which have cheaper production costs e.g. China. The graph below from the Annual Report 2018 shows apparel production by region, highlighting the fact that forced labour and modern slavery are human resource issues which Adidas must be aware of and adequately address. Adidas has publicly spoken out about forced labour and modern slavery, saying that they ‘treat forced labor, human trafficking and slavery as zero-tolerance issues,’ (Adidas Policy on Modern Slavery) and that their ‘focus continues to be on ensuring fair, safe and healthy working conditions for the workers who make our products in alignment with international standards and norms.’ This issue has been highly significant throughout many activewear brands, though Adidas has been lauded for its high standard in managing forced labour and slavery in the supply chain, a network between a company and its suppliers to produce and distribute a specific product to the final buyer (Investopedia), being given 92/100 in the 2018 Apparel and Footwear Benchmark Findings Report, published by the organisation, Know the Chain. This report states that ‘Adidas and Lululemon achieve a significantly higher score than their peers due to their strong approaches to addressing risks associated with recruitment and migrant workers as well as risks in lower tiers of their supply chains.’ Consequently, Adidas would appear to be managing this human resource issue successfully but it will require ongoing management attention.

b. Wages to Supply Chain Workers

Another issue facing Adidas is wages to workers in the supply chain. Many workers in the supply chain are not payed a living wage, therefore trapping them in poverty and making them unable to supply for their family or sustain a steady flow of reliable income. A living wage, defined as a wage ‘that allows a family to meet its basic needs, and provides it with some ability to deal with emergencies, without resorting to welfare or other public assistance,’ (Business Dictionary), is often not paid to workers who work in factories, manufacturing products for businesses who outsource their labour. This is common in countries such as China, Thailand and Indonesia where regulatory requirements relating to wages are less restrictive than in more developed nations.

Unfortunately, despite Adidas’ growing profits, the company still does not pay the workers in the supply chain what they need to survive.

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c. Workplace discrimination

The final human resource issue facing Adidas is workplace discrimination. Workplace discrimination claims have occurred mainly in the Adidas facility in the USA. Most claims of discrimination have come from the North American Headquarters, in Portland, Oregon. These claims entail racial discriminatory behaviour, such as isolation from social groups on campus, neglection of input and ideas by higher positions and inability to be promoted compared to other ethnicities. Since these claims have come out, Adidas has replied and stated that ‘While we have made progress in these areas, we recognize there is much more to be done, and we are committed to doing it’ (Footwear News) in regard to the issue. This is important as it shows a willingness by Adidas to tackle this significant human resource issue. Unsatisfied workers are less productive and can be disruptive to the efficiency of the business so it is important that Adidas continues to focus on this issue. Importantly, Adidas has adopted a People Strategy, as set out

4. Management issues – Financial, marketing and legal

One management issue that affects Adidas through financial, marketing and legal aspects is outsourcing labour from countries that have different laws and regulations.

a. Financial

The financial aspect of the outsourcing labour is that it is cheaper for the company to outsource labour in countries that have a lower minimum wage. This means that it is cheaper for the country to manufacture the products in that country as opposed to manufacturing the product in the final country of sale. Adidas is liable to tariffs on its products, making it harder to outsource labour. Adidas is also at risk of exchange rates spiking. This means that there is a risk in outsourcing labour, and the exchange rate cannot always be stable, therefore making the expense of manufacturing the product somewhat unpredictable.

b. Marketing

The marketing aspect of the management issue is that outsourcing labour in countries with a lower minimum wage can be seen as exploitation and can damage the company’s image. If the outsourcing involves labour usage in conditions where basic human rights are not met, for example sweatshops, then it has the potential to impact the marketing of the product and the overall reputation of the business with consumers. This is because the outsourcing could negatively impact Adidas marketing efforts if it were exposed for not adequately meeting its corporate social responsibility, which is where a business goes beyond the minimum legal requirements, such as paying a fair living wage rather than the minimum wage.

c. Legal

The legal aspect of the management issue is that the legal requirements which the business much comply with differ in each country. This complicates the running of the business because it requires detailed knowledge and understanding of the laws within each jurisdiction. To help understand the laws, Adidas would have a compliance team reporting to management to ensure that it meets all legal requirements when operating in all countries.

5. Ethical issues affecting this business

Two ethical issues affecting this business are; the controversy surrounding animal welfare, and the environmental impact of manufacturing the clothes.

a. Animal welfare

Adidas has recently stopped using rare and exotic animal products, such as angora or cashmere, though the business still uses leather and other animal materials which are unsourced (the origins of the materials are unknown or unreleased by the company), making it unclear as to whether the animals are being treated well and ethically. In the past Adidas has used materials that are not environmentally friendly, such as PVC. Since 1998, Adidas has phased out PVC and several other unsustainable materials. Adidas has also made a pledge to not use raw materials from any endangered or threatened species specified by the International Union for the Conservation of Nature and Natural Resources. Overall, animal welfare has a significant impact on the marketing and ethical view of a business.

b. Environmental Impact

Adidas recognizes the importance of being an environmentally aware corporate citizen. In tracking its organizational footprint (Annual Report 2018), the company is able to monitor and control its environmental impact and set revised targets for future years.

Adidas has also made steps, and collaborated with the charity, Parley for the Oceans, producing over 5 million pairs of shoes in 2018 made of ocean plastic. In addition to the collaboration with Parley for the Oceans, Adidas has also produced clothing made from recycled plastic such as the Champions League jersey for Bayern Munich. Additionally, the company has reduced the production of CO2 emissions. In 2018 alone, Adidas saved more than 40 tonnes of plastic worldwide, replacing it with environmentally friendly solutions. Though Adidas Overall, Adidas is rated an A on the 2019 Ethical Fashion Report (Baptist World Aid Australia). As set out in the 2018 Annual Report, Adidas ‘believes that acting as a responsible company will contribute to lasting economic success’. It is making good progress towards achieving the goals outlined within the United Nations Sustainable Development Goals. Overall, the environmental impact of manufacturing clothes is significant, and Adidas is making large steps to make sure the environment is one of their main concerns when manufacturing clothes.

6. Strategy used to maintain or increase competitive advantage

A strategy that Adidas uses to maintain the competitive advantage of the business is the use of celebrity partnerships. This helps differentiate the product from other brands, if associated with a public figure. For example, one of the biggest celebrity endorsements of Adidas, the partnership with Kanye West to produce the ‘Yeezy’ line, is one of the most valuable assets to the business. The Yeezy line is to reach 1.5 million dollars’ worth of sales in 2019. The use of celebrity endorsements promotes the features of the business that makes it unique. Other strategies that maintain competitive advantage is the customization of shoes tailor made to buyers, environmental awareness, sustainability and transparency of the products origins.

Outcomes:

This report highlights the various complex aspects of the transnational corporation of Adidas AG. Operating in a globalized and technically advanced environment poses many challenges for this business. However, as highlighted in this report, Adidas AG has successfully and profitably addressed these challenges as a part of its continued focus on enhancing the performance of the business.

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