The Sole Train is a leading manufacturing firm with over $100 Bn in revenue in 2014. It has grown steadily over the last decade, which is mainly via the successful acquisitions in the shoe sole manufacturing space. This segments now produces around 20% of the organizational revenues.Now the management is increasingly under pressure to maintain the historical growth and thus it wants to increase its growth through entry to new attractive markets.
The running shoe sole market is large and is growing rapidly throughout the world. It is expected to have generated over $47.9 Bn in revenue in 2014 and around $62.2 Bn by 2019, with an annualized growth rate of 5.4%. A total of 11.1 Bn pairs of running shoes are expected to be sold in 2014. The majority of the pairs are expected to be basic running shoe soles, followed by casual, high-tech, and finally specialty. Running shoe soles are a growing market and is expected to grow in the long run.
Around 50% of the share is captured by 6 firms in the industry. Sole Train has the option to buy Bouncy Bottoms, a Chinese company, Cloud Walkers, a Ukraine based company, Dash and Dodgers, a small Japanese firm and Pure Soles, a Korean company. After a detailed internal review of growth opportunities, the management has identified the fast growing running shoe sole space as an area of interest that would also compliment the current dress-shoe sole business of the Sole Train.
Q1) What is the revenue and total operating profit in dollars for each segment (basic, casual, high-tech, and specialty) of the running shoe sole market in 2014?
Answer: Revenue per segment and operating profit margins is as follows,
Q2) Given a choice between acquiring Bouncy Bottoms, Cloud Walkers, Dash and Dodgers, and Pure Soles, which would be most beneficial to Sole Train as an entry point into the running shoe sole market?
Answer: Given a choice between acquiring Bouncy Bottoms, Cloud Walkers, Dash and Dodgers, and Pure Soles, Cloud walkers would be most beneficial to acquire. This is mainly because it is operating in the industry segment that has highest sales as well as highest operating margin (37.2% that is also lower than the industry average of 39%).
It has medium production capacity and considering he factor that it is quite new to the market, its plant and machinery would also be in a good shape and the acquiring company would not need to invest much in near future until unless sales are improved greatly. Even if the growth in these segments are lower but still the margin and sales level are very high to compensate the lower growth in the segments. Also, major business of the Cloud Walkers is in India (It should be due to its huge population size) and high growth is predicted in this region, so it would also mean long term growth for the company. Moreover, Ukraine is in Europe which is also expected to see high growth in near future.
Then, once the company grasp the necessary how know of the industry, it could also expand into other segments. But for now, Cloud Walkers with basic, casual and other rubber shoe soles seems the best option.
Q3) Assuming they go through with their acquisition plans, what additional steps could Sole Train take to try and strengthen its position in the running shoe sole market and ensure its long-term success?
Answer: The Sole Train needs to consider a number of factors in order to formulate a strategy for long term success. Asia and Eastern Europe are expected to have major growth in consumption of running shoes because of the rapid growth of the disposable incomes of the middle classes in these regions. Moreover, research and development and technological leadership are expected to become increasingly important in the running shoe sole space. A number of industry experts believe that high-tech running shoe soles, which combine numerous functions, technologies and capabilities, will gain popularity for their cost efficiency and superior performance, and will be highly valued by running shoe manufacturers in the coming years. Vertical integration and investments in key value chain relationships are also expected to be crucial in growing and maintaining market share.
Hence, the company should first consolidate its position after acquiring Cloud Walkers. Then, it should also focus on research and development, a key success factor in the industry. This is also necessary for instilling competitive advantage into the product offerings. This would help Sole Train building its brand. It can then venture into specialty and high tech segments as well. It is important to go into these segments because they are expected to go more rapidly than the basic and casual segments.
Then the company should focus on cost cutting through vertical integration and having better relationships with its suppliers. Lower cost not only allows increased profitability but also gives lower cost advantage and in the highly competitive market, company can focus on cost leadership strategy, particularly in basic and casual segments. Whereas, in high-tech and specialty segments, the company should mainly market itself on the basis of superior products based on its research and development capabilities.