New Balance Athletic Shoes

New Balance Athletic Shoes

Prof M G Korgaonker


Market / Competition

• In early 1978, the running shoe market was in the midst of very rapid growth

• The key to success was the development of innovative, high performance, high quality products

• The highest ranked shoes in the Runners World rankings for 1978 ( Oct 1977 ) are new shoes, developed within the last year ( table A )


• Shoes that rated highly two years previously are nowhere to be found

• Many of last year’s top models did not keep up

• New balance products did well in Oct 1976, but have come upon hard times

– 320 is down to 7 th ( still a very competitive shoe )– 305 has gone from 3 rd ranked to unranked– New entry ( Trail ) only made it to 24 th


Product Development Process

• PDP at new Balance is informal and little haphazard

• Although forecasts indicate that new models are being planned, only one ( 355 Trail ) has been developed. Others still on the drawing board

• New balance is planning on a 4 year model life for the 320, and the Trail 355 ( Ex 5 ). This seems unrealistic


• The rankings suggest that after two years a model has to be revamped or replaced

• New Balance’s own experience with the 305 confirms the point

• The issue for New Balance is how the capacity expansion will affect the development of a solid product development effort


The Company / Jim Davis / Organization

• The management of NB is thin. Everyone is young and inexperienced. Jim Davis is the engine. He is involved in everything :

– Product development ( design, sourcing )– Facilities planning ( site selection, cost estimates )– Market planning ( market research in Europe )– Workforce management ( meeting with employees, visits

production depts )


• The capacity decision puts NB on the verge of a very different production set up, requiring different management tasks

• Mr Davis will not be able to meet with employees and watch over production with company offices at Everett St and facilities at Texas, Ireland or even Lawrence

• Management control and the allocation of Davis’ time are key issues.

• Can NB maintain quality without Jim Davis ? What is required to make a multi site set up work ? Is now the right time ?


The Forecast

• The prediction in ex 5 are not pure predictions of demand, in the sense of “ What NB could sell if it had the capacity ? ”

• The numbers are a mix of demand forecast ( what they think market is going to do ) and a supply forecast ( What they NB can feasibly produce given current capacity )

• NB treats forecasts as sales targets. There is tremendous uncertainty


The Forecast

• NB does not develop scenarios. NB implicitly expects recent trends to continue for about two years

• In 1980 and 1981,the trends predict substantially more demand than NB expects

• With daily capacity of around 1650 pairs ( exb 3 ), the Everett St plant could produce 412500 pairs per year


The Forecast

• Need for another 1250 – 1300 pairs / day to meet expected 1978 demand

• In addition another 400 pairs per day are needed to eliminate the backlog


1977

Actual

1978 1979 1980 1981

Total Pairs , millions

NB share of 7 % 1978 - 1981

0.25 0.730 0.970 1.200 1.402

( a ) Market demand 6.5 10.4 13.9 17.1 20.0

New Balance Forecast


( a ) Number of serious runners , total in millions

2.0 2.8 4.0 5.8 8.3

Men 1.7 2.3 3.1 4.2 5.6

Women 0.3 0.5 0.9 1.6 2.7

Number of pairs, millions* 5.0 7.0 10.0 14.5 20.8

Serious overall Market** 7.1 10.0 14.3 20.7 29.7

Alternative Forecast Based On Case Information


a. Shares of Direct Costs

Total Direct

Materials

Labour

Mfg Overhead

Amount, $

2.85

1.35

0.81

0.70

Share of Cost

1.00

0.47

0.28

0.25

Share of Sales

0.254

0.151

0.135

b. COGS

Unit Sales

0.541 * sales

255 000 + 36140 = 291 140

Analysis Of Options - Financial


Unit Costs and Profits

( using shares calculated )

Amount, $

Average revenue

Materials Cost

Labour Cost

Mfg Overhead

Selling & administration

Total Cost

16.0

4.07

2.42

2.16

4.76

13.41

Profit BT

Effective Tax Rate

Profit AT

2.59

0.355

1.66

Analysis Of Options - Financial


2 nd shift,$ Lawrence,$ Texas,$ Ireland,$

Average revenue 18.00 18.00 18.00 18.00

Materials 4.57 4.57 4.68 4.73

Labour 3.02 2.45 2.04 1.94

Mfg Overhead 2.16 2.43 2.49 2.43

COGS 9.75 9.45 9.21 9.10

Selling / Admin 5.36 5.35 5.36 5.36

PBT 2.89 3.19 3.43 3.54

Tax Rate 0.355 0.355 0.300 -

PAT 1.86 (0.104) 2.06 (0.114) 2.40 (0.133) 3.54 (2.54 in US Mkt )

(0.197)

Analysis of Options Using Everett As Base Case


1. At capacity 1978,$ 1979,$ 1980,$ 1981,$ Total $ Discounted Value ( 20 % )

Lawrence

( 3000 pairs / day )

1.545 1.667 1.838 1.967 3.54

Texas


1.800 1.945 2.145 2.294 4.157

Ireland


2.514 2.721 2.992 3.115 5.790

2 nd shift

( 1650 / day )

0.772 0.837 0.922 0.987 1.786

Comparison of PAT Over 4 Year Horzon, Millions


Based on NB Forecast

1978,$ 1979,$ 1980,$ 1981,$ Total $ Discounted Value ( 20 % )

Lawrence


0.667 1.253 1.838 1.967 2.546

Texas


0.777 1.462 2.145 2.294 2.969

Ireland


1.226 2.246 2.992 3.115 4.387

2 nd shift

( 1650 / day )

0.594 0.837 0.922 0.987 1.638

Comparison of PAT Over 4 Year Horzon, Millions


Western US

Texas North

East

Other Total

NB sales ( pairs )

% of Total NB sales

73.9

29.0

29.0

11.4

74.8

29.3

77.3

30.3

255

100

Share of Region in Total market Sales ( fn 1 , p 4 )

40.0 12.0 20.0 28.0 100

NB Sales as % of regional sales ( NB overall share = 3.9 % )

2.8 3.7 5.7 4.2 3.9

Analysis Of New Balance Market Share By Region


Criteria 2 nd Shift Lawrence Texas Ireland

Investment / Commitment

Very little $ 100000 equipment ( 3 yr lease )

$ 100000 equipment ( 8 -10 yr lease )

$ 252000 ( net, after gov grant

Economics

PAT / pair

( 1978 prices )

Discounted PAT 1978 – 1981 ( 20% )

At capacity

At Forecast

$ 1.86

$ 1.786 million

$ 1.638 million

$ 2.06

$ 3.564 million

$ 2.546 million

$ 2.40

$ 4.157 million

$ 2.969 million

$ 3.54 ( $ 2.54 in US mkt after freight )

Non US Sales

$ 5.790 million

$ 4.387 million

Summary Of Major Options


Criteria 2 nd Shift Lawrence Texas Ireland

Capacity

Total ( pairs / day )

Hits capacity in year

1650

1979 ( early )

3000

1980

3000

1980

2500 – 3000

1979 ( late )

Control Some supervision problem, easy to manage

Close to Boston, familiar area, workforce similar

Less access, unfamiliar workforce

Less access, unfamiliar culture, workforce & institutions

Marketing / Competition

Little difference

Little difference

Access to West Coast, some mkt share adv

Big adv in Euro mkt, increase risk of too much at once

Summary Of Major Options


The Options

• All options provide a substantial ROI

• Ireland dominates, but if Ireland produces for export to US, it is only slightly more profitable tha Texas

• If product is sold in Europe or rest of the world, additional cost of marketing and distribution should be added

• Still Ireland is very attractive


• In the US, Texas is a more profitable location. Analysis does not include any effects on regional market share

• Location of facilities may have some impact on local market share. If so, Texas would be even more profitable

• There is some apples / oranges problem in comparisons :

– Two involve facilities lease ( Texas, Lawrence ), one involves purchase ( Ireland )of a plant

– 3 require equipment ( Texas, Lawrence, Ireland ), one requires very little investment ( 2 nd shift )


The problem is of timing – how much to do and when ?

The Low Risk Go Slow Approach

• If product development is key to success, NB should be sre of its capability and not risk future expanding into far away places

• A multi site operation requires management skills which are in short supply


The Low Risk Go Slow Approach

• These considerations argue for a low risk, go slow approach, perhaps a second shift with a start up in Lawrence later in 1979

• This will Davis time to set up an organization to deal with future growth


The Aggressive, “ Take It While You Can Get It ” Approach

• The market is growing rapidly and NB cannot take several months to organize. Opportunities have to be seized and exploited

• Europe appears very promising and NB could achieve a significant edge by entering at this stage in the market’s development

• West Coast is the market in US and even a moderate increase in market share in western areas could have a major impact on NB’s overall position


The Aggressive, “ Take It While You Can Get It ” Approach

• By 1981, capacity of 5610 pairs per day will be required to meet even NB’s cautious projections

• Thinking along these lines implies that NB must be aggressive while taking steps to minimize risks of loss of control


What The Company Did

• Jim Davis went with both with Lawrence and Ireland. Lawrence came on stream in the fall 1978, and Ireland was opened in December 1978

• Unfortunately, demand for 320 in the US declined sharply in the last three months of 1978. When 320 died in the market, NB did not have a new shoe to take its place

• For the first few months of 1979, the company struggled to come up with a new model, and sell the inventory of 320’s



• The Lawrence facility was shut down after few months of operation. A new model, the 620, was introduced in the spring of 1979 and was very successful.

• Everett St received regular one shift operators, and Lawrence began to do some cutting and sewing in summer 1979

• Since 1979, NB became the Mercedes Benx of the running shoe industry. NB concentrated on advanced product development ( a new R & group established )



• NB offered high performance shoes at very high prices, being the first to offer a $ 70 shoe and later introduced a $ 100 shoe

• Jim Davis brought a whole new management team, including an experienced production manager to be VP of manufacturing, a former Gillette VP to head marketing

• The market became very competitive, as growth slowed. A major competitor, Brooks went bankrupt in 1981, due to major quality problems



• Nike and Adidas remained as the top companies in the market share

• The Ireland plant performed very well. NB able to find an experienced shoe industry manager in Britain who was able to get the plant into operation with few problems

• The 320 continued to sell well in Europe even after it died in the US. In general, European market could extend the overall life of a shoe model by 1 – 2 years


Thank You

New Balance Athletic Shoes

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